[Title 17 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2017 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 17
Commodity and Securities Exchanges
________________________
Parts 1 to 40
Revised as of April 1, 2017
Containing a codification of documents of general
applicability and future effect
As of April 1, 2017
Published by the Office of the Federal Register
National Archives and Records Administration as 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........................ 891
Alphabetical List of Agencies Appearing in the CFR...... 911
List of CFR Sections Affected........................... 921
[[Page iv]]
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 17 CFR 1.2 refers to
title 17, part 1, section
2.
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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
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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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LEGAL STATUS
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collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
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[[Page vii]]
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Oliver A. Potts,
Director,
Office of the Federal Register.
April 1, 2017.
[[Page ix]]
THIS TITLE
Title 17--Commodity and Securities Exchanges is composed of four
volumes. The first two volumes containing parts 1--40, and 41--199
comprise Chapter I--Commodity Futures Trading Commission. The third
volume contains Chapter II--Securities and Exchange Commission, parts
200--239. The fourth 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, 2017.
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, Ann Worley was Chief Editor. The Code of Federal
Regulations publication program is under the direction of John Hyrum
Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 17--COMMODITY AND SECURITIES EXCHANGES
(This book contains parts 1 to 40)
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Part
chapter i--Commodity Futures Trading Commission............. 1
[[Page 3]]
CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
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Part Page
1 General regulations under the Commodity
Exchange Act............................ 5
2 Official seal............................... 180
3 Registration................................ 181
4 Commodity pool operators and commodity
trading advisors........................ 227
5 Off-exchange foreign currency transactions.. 343
7 Registered entity rules altered or
supplemented by the Commission.......... 373
8
[Reserved]
9 Rules relating to review of exchange
disciplinary, access denial or other
adverse actions......................... 373
10 Rules of practice........................... 384
11 Rules relating to investigations............ 416
12 Rules relating to reparations............... 420
13 Public rulemaking procedures................ 460
14 Rules relating to suspension or disbarment
from appearance and practice............ 461
15 Reports--general provisions................. 464
16 Reports by contract markets and swap
execution facilities.................... 472
17 Reports by reporting markets, futures
commission merchants, clearing members,
and foreign brokers..................... 475
18 Reports by traders.......................... 509
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....................... 520
20 Large trader reporting for physical
commodity swaps......................... 522
21 Special calls............................... 543
22 Cleared swaps............................... 546
23 Swap dealers and major swap participants.... 562
30 Foreign futures and foreign options
transactions............................ 628
31 Leverage transactions....................... 658
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32 Regulation of commodity option transactions. 691
33 Regulation of commodity option transactions
that are options on contracts of sale of
a commodity for future delivery......... 693
34 Regulation of hybrid instruments............ 702
35 Swaps in an agricultural commodity
(agricultural swaps).................... 703
36
[Reserved]
37 Derivatives transaction execution facilities 703
38 Designated contract markets................. 743
39 Derivatives clearing organizations.......... 795
40 Provisions common to registered entities.... 870
[[Page 5]]
PART 1_GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of Contents
Definitions
Sec.
1.1 [Reserved]
1.2 Liability of principal for act of agent.
1.3 Definitions.
1.4 Use of electronic signatures.
1.6 Anti-evasion.
1.7 Books and records requirements for security-based swap agreements.
1.8 Requests for interpretation of swaps, security-based swaps, and
mixed swaps.
1.9 Regulation of mixed swaps.
Minimum Financial and Related Reporting Requirements
1.10 Financial reports of futures commission merchants and introducing
brokers.
1.11 Risk Management Program for futures commission merchants.
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 Reporting of segregated account computation and details regarding
the holding of futures customer funds
1.33 Monthly and confirmation statements.
1.34 Monthly record, ``point balance''.
1.35 Records of commodity interest and related cash or forward
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.
1.41-1.44 [Reserved]
1.45 [Reserved]
1.46 Application and closing out of offsetting long and short positions.
1.47-1.48 [Reserved]
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 [Reserved]
1.54 Contract market rules submitted to and approved or not disapproved
by the Secretary of Agriculture.
1.55 Public disclosures by futures commission merchants.
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.
1.61-1.62 [Reserved]
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.
[[Page 6]]
1.67 Notification of final disciplinary action involving financial harm
to a customer.
1.68 [Reserved]
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.
1.71 Conflicts of interest policies and procedures by futures commission
merchants and introducing brokers.
1.72 Restrictions on customer clearing arrangements.
1.73 Clearing futures commission merchant risk management.
1.74 Futures commission merchant acceptance for clearing.
1.75 Delegation of authority to the Director of the Division of Clearing
and Risk to establish an alternative compliance schedule to
comply with futures commission merchant acceptance for
clearing.
Appendix A to Part 1 [Reserved]
Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews
and Financial Reviews
Appendix C to Part 1 [Reserved]
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i,
6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 10a, 12,
12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).
Source: 41 FR 3194, Jan. 21, 1976, unless otherwise noted.
Definitions
Sec. 1.1 [Reserved]
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 an organized exchange or other
trading facility.
(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 that has clearing
privileges such that it can process, clear and settle trades through a
derivatives clearing organization on behalf of itself or others. The
derivatives clearing organization need not be organized as a membership
organization.
(d) Clearing organization or derivatives clearing organization. This
term means a clearinghouse, clearing association, clearing corporation,
or similar entity, facility, system, or organization that, with respect
to an agreement, contract, or transaction--
(1) Enables each party to the agreement, contract, or transaction to
substitute, through novation or otherwise, the credit of the derivatives
clearing organization for the credit of the parties;
(2) Arranges or provides, on a multilateral basis, for the
settlement or netting of obligations resulting from such agreements,
contracts, or transactions executed by participants in the derivatives
clearing organization; or
(3) Otherwise provides clearing services or arrangements that
mutualize or transfer among participants in the derivatives clearing
organization the credit risk arising from such agreements, contracts, or
transactions executed by the participants.
(4) Exclusions. The terms clearing organization and derivatives
clearing organization do not include an entity, facility, system, or
organization solely because it arranges or provides for--
(i) Settlement, netting, or novation of obligations resulting from
agreements, contracts or transactions, on a bilateral basis and without
a central counterparty;
[[Page 7]]
(ii) Settlement or netting of cash payments through an interbank
payment system; or
(iii) Settlement, netting, or novation of obligations resulting from
a sale of a commodity in a transaction in the spot market for the
commodity.
(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 by the first
section of Pub. L. 85-839) and motion picture box office receipts (or
any index, measure, value or data related to such receipts), and all
services, rights and interests (except motion picture box office
receipts, or any index, measure, value or data related to such receipts)
in which contracts for future delivery are presently or in the future
dealt in.
(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(18) of the
Act.
(h) Contract market; designated contract market. These terms mean a
board of trade designated by the Commission as a contract market under
the Act and in accordance with the provisions of part 38 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. This term means any person who uses a futures
commission merchant, introducing broker, commodity trading advisor, or
commodity pool operator as an agent in connection with trading in any
commodity interest; 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 of the
Act.
(l) Delivery month. This term means the month of delivery specified
in a contract of sale of any commodity for future delivery.
(m) Eligible contract participant. This term has the meaning set
forth in Section 1a(18) of the Act, except that:
(1) A major swap participant, as defined in Section 1a(33) of the
Act and paragraph (hhh) of this section, is an eligible contract
participant;
(2) A swap dealer, as defined in Section 1a(49) of the Act and
paragraph (ggg) of this section, is an eligible contract participant;
(3) A major security-based swap participant, as defined in Section
3(a)(67) of the Securities Exchange Act of 1934 and Sec. 240.3a67-1 of
this title, is an eligible contract participant;
(4) A security-based swap dealer, as defined in Section 3(a)(71) of
the Securities Exchange Act of 1934 and Sec. 240.3a71-1 of this title,
is an eligible contract participant;
(5)(i) A transaction-level commodity pool with one or more direct
participants that is not an eligible contract participant is not itself
an eligible contract participant under either Section 1a(18)(A)(iv) or
Section 1a(18)(A)(v) of the Act for purposes of entering into
transactions described in Sections 2(c)(2)(B)(vi) and 2(c)(2)(C)(vii) of
the Act; and
(ii) In determining whether a commodity pool that is a direct
participant in a transaction-level commodity pool is an eligible
contract participant for purposes of paragraph (m)(5)(i) of this
section, the participants in the commodity pool that is a direct
participant in the transaction-level commodity pool shall not be
considered unless the transaction-level commodity pool, any
[[Page 8]]
commodity pool holding a direct or indirect interest in such
transaction-level commodity pool, or any commodity pool in which such
transaction-level commodity pool holds a direct or indirect interest,
has been structured to evade subtitle A of Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act by permitting persons
that are not eligible contract participants to participate in
agreements, contracts, or transactions described in Section
2(c)(2)(B)(i) or Section 2(c)(2)(C)(i) of the Act;
(6) A commodity pool that does not have total assets exceeding
$5,000,000 or that is not operated by a person described in subclause
(A)(iv)(II) of Section 1a(18) of the Act is not an eligible contract
participant pursuant to clause (A)(v) of such Section;
(7)(i) For purposes of a swap (but not a security-based swap,
security-based swap agreement or mixed swap) used to hedge or mitigate
commercial risk, an entity may, in determining its net worth for
purposes of Section 1a(18)(A)(v)(III) of the Act, include the net worth
of any owner of such entity, provided that all the owners of such entity
are eligible contract participants;
(ii)(A) For purposes of identifying the owners of an entity under
paragraph (m)(7)(i) of this section, any person holding a direct
ownership interest in such entity shall be considered to be an owner of
such entity; provided, however, that any shell company shall be
disregarded, and the owners of such shell company shall be considered to
be the owners of any entity owned by such shell company;
(B) For purposes of paragraph (m)(7)(ii)(A) of this section, the
term shell company means any entity that limits its holdings to direct
or indirect interests in entities that are relying on this paragraph
(m)(7); and
(C) In determining whether an owner of an entity is an eligible
contract participant for purposes of paragraph (m)(7)(i) of this
section, an individual may be considered to be a proprietorship eligible
contract participant only if the individual--
(1) Has an active role in operating a business other than an entity;
(2) Directly owns all of the assets of the business;
(3) Directly is responsible for all of the liabilities of the
business; and
(4) Acquires its interest in the entity seeking to qualify as an
eligible contract participant under paragraph (m)(7)(i) of this section
in connection with the operation of the individual's proprietorship or
to manage the risk associated with an asset or liability owned or
incurred or reasonably likely to be owned or incurred by the individual
in the operation of the individual's proprietorship; and
(iii) For purposes of paragraph (m)(7)(i) of this section, a swap is
used to hedge or mitigate commercial risk if the swap complies with the
conditions in paragraph (kkk) of this section; and
(8) Notwithstanding Section 1a(18)(A)(iv) of the Act and paragraph
(m)(5) of this section, a commodity pool that enters into an agreement,
contract, or transaction described in Section 2(c)(2)(B)(i) or Section
2(c)(2)(C)(i)(I) of the Act is an eligible contract participant with
respect to such agreement, contract, or transaction, regardless of
whether each participant in such commodity pool is an eligible contract
participant, if all of the following conditions are satisfied:
(i) The commodity pool is not formed for the purpose of evading
regulation under Section 2(c)(2)(B) or Section 2(c)(2)(C) of the Act or
related Commission rules, regulations or orders;
(ii) The commodity pool has total assets exceeding $10,000,000; and
(iii) The commodity pool is formed and operated by a registered
commodity pool operator or by a commodity pool operator who is exempt
from registration as such pursuant to Sec. 4.13(a)(3) of this chapter.
(n) Floor broker. This term means any person:
(1) 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--
(i) Any commodity for future delivery, security futures product, or
swap; or
(ii) Any commodity option authorized under section 4c of the Act; or
(2) Who is registered with the Commission as a floor broker.
[[Page 9]]
(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) Any individual, association, partnership, corporation, or
trust--
(i) Who is engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery; a security
futures product; a swap; any agreement, contract, or transaction
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act;
a commodity option authorized under section 4c of the Act; a leverage
transaction authorized under section 19 of the Act; or acting as a
counterparty in any agreement, contract or transaction described in
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; and
(ii) Who, in connection with any of these activities 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) Any person that is registered as a futures commission merchant.
(q) Member. This term means:
(1) An individual, association, partnership, corporation, or trust--
(i) Owning or holding membership in, or admitted to membership
representation on, a registered entity; or
(ii) Having trading privileges on a registered entity.
(2) A participant in an alternative trading system that is
designated as a contract market pursuant to section 5f of the Act is
deemed a member of the contract market for purposes of transactions in
security futures products through the contract market.
(r) Net equity. (1) For futures and commodity option positions, this
term means the credit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open futures or commodity option positions of such
person.
(2) For swap positions other than commodity option positions, this
term means the credit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open swap positions of such person.
(s) Net deficit. (1) For futures and commodity option positions,
this term means the debit balance which would be obtained by combining
the margin balance of any person with the net profit or loss, if any,
accruing on the open futures or commodity option positions of such
person.
(2) For swap positions other than commodity option positions, this
term means the debit balance which would be obtained by combining the
margin balance of any person with the net profit or loss, if any,
accruing on the open swap positions of such person.
(t) Open contracts. This term means:
(1) Positions in 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 that have
neither been fulfilled by delivery nor been offset by other contracts of
purchase or sale in the same commodity and delivery month;
(2) Positions in commodity option transactions that have not
expired, been exercised, or offset; and
(3) Positions in Cleared Swaps, as Sec. 22.1 of this chapter
defines that term, that have not been fulfilled by delivery; not been
offset; not expired; and not been terminated.
(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:
(1) Who, in or 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--
(i) Any commodity for future delivery, security futures product, or
swap; or
(ii) Any commodity option authorized under section 4c of the Act; or
[[Page 10]]
(2) Who is registered with the Commission as a floor trader.
(y) Proprietary account. This term means a commodity futures,
commodity option, or swap trading account carried on the books and
records of an individual, a partnership, corporation or other type of
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 of customers or customer funds of
such partnership,
(C) The keeping of records pertaining to the trades of customers or
customer funds 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 of customers or customer funds of
such individual, partnership, corporation or association,
(C) The keeping of records pertaining to the trades of customers or
customer funds 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; or
(viii) A business affiliate that, directly or indirectly is
controlled by or 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 section 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 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 for excluded
commodities--(1) General definition. Bona fide hedging transactions and
positions shall mean any agreement, contract or transaction in an
excluded commodity on a designated contract market or swap execution
facility that is a trading facility, 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.
(iv) Notwithstanding the foregoing, no transactions or positions
shall be classified as bona fide hedging unless
[[Page 11]]
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 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 agreement, contract, or transaction in an excluded
commodity on a designated contract market or swap execution facility
that is a trading facility 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 agreement, contract or transaction during the five
last trading days.
(ii) Purchases of any agreement, contract or transaction in an
excluded commodity on a designated contract market or swap execution
facility that is a trading facility 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 agreement, contract or transaction 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 in any agreement, contract or
transaction in an excluded commodity on a designated contract market or
swap execution facility that is a trading facility 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 agreement, contract or transaction during the five
last trading days.
(iv) Purchases or sales by an agent who does not own or has not
contracted to sell or purchase the offsetting cash commodity at a fixed
price, provided that the agent is responsible for the merchandising of
the cash position that is being offset, and the agent has a contractual
arrangement with the person who owns the commodity or has the cash
market commitment being offset.
(v) Sales and purchases described in paragraphs (z)(2)(i) through
(iv) 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 in any agreement, contract or transaction are
substantially related to the fluctuations in value of the actual or
anticipated cash position, and provided that the positions in any
agreement, contract or transaction shall not be maintained during the
five last trading days.
(3) Non-Enumerated cases. A designated contract market or swap
execution facility that is a trading facility may recognize, consistent
with the purposes of this section, transactions and positions other than
those enumerated in paragraph (2) of this section as bona fide hedging.
Prior to recognizing such non-enumerated transactions and positions, the
designated contract market or swap execution facility that is a trading
facility shall submit such rules for Commission review under section 5c
of the Act and part 40 of this chapter.
(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
[[Page 12]]
(i) The solicitation or acceptance of 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' 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.
(6) A swap dealer or major swap participant as a partner, officer,
employee, agent (or any natural person occupying a similar status or
performing similar functions), in any capacity that involves:
(i) The solicitation or acceptance of swaps (other than in a
clerical or ministerial capacity); 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, security futures product, or
swap; any agreement, contract or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option
authorized under section 4c of the Act; any leverage transaction
authorized under section 19 of the Act; any person registered with the
Commission as a commodity trading advisor; or any person, who, for
compensation or profit, and as part of a regular business, issues or
promulgates analyses or reports concerning any of the foregoing. The
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; and
(vii) Such other persons not within the intent of this definition as
the Commission may specify by rule, 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.
[[Page 13]]
(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,
security futures product or swap; any agreement, contract or transaction
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act;
any commodity option authorized under section 4c of the Act; 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 a commodity pool, 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 commodity interests, including
any commodity for future delivery, security futures product, or swap;
any agreement, contract or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option
authorized under section 4c of the Act; any leverage transaction
authorized under section 19 of the Act; or any person who is registered
with the Commission as a commodity pool operator, 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)), a swap execution facility (as defined in
Sec. 1.3(rrrr)), 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, a leverage transaction merchant, a
retail foreign exchange dealer, a swap dealer, or a major swap
participant is a member; or
(2) If a Commission registrant other than a leverage transaction
merchant is a member of more than one self-regulatory organization and
such registrant is the subject of an approved plan under Sec. 1.52,
then a self-regulatory organization delegated the responsibility by such
a plan for monitoring and auditing such registrant for compliance with
the minimum financial and related reporting requirements of the self-
regulatory organizations of which the registrant is a member, and for
receiving the financial reports necessitated by such minimum financial
and related reporting requirements from such registrant; 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, collectively, Cleared Swaps
Customer Collateral and futures customer funds.
(hh) Commodity option transaction; commodity option. These terms
each mean any transaction or agreement in interstate commerce which is
or is held
[[Page 14]]
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.
(jj) [Reserved]
(kk) Strike price. This term means the price, per unit, at which a
person may purchase or sell the commodity, swap, or contract of sale of
a commodity for future delivery that 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
commodity, swap, or contract of sale of a commodity for future delivery
that is the subject of a commodity option (i.e., price per unit times
the number of units).
(ll) [Reserved]
(mm) Introducing broker. This term means:
(1) Any person who, for compensation or profit, whether direct or
indirect:
(i) 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, security futures product, or swap; any agreement, contract or
transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i)
of the Act; any commodity option transaction authorized under section
4c; or any leverage transaction authorized under section 19; or who is
registered with the Commission as an introducing broker; and
(ii) 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.
(2) The term introducing broker shall not include:
(i) Any futures commission merchant, floor broker, associated
person, or associated person of a swap dealer or major swap participant
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 guarantee
in the form set forth in part B or C of Form 1-FR, executed by a
registered futures commission merchant or retail foreign exchange
dealer, as appropriate, 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)(1)(iii).
(oo) Leverage transaction merchant. This term 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. This term 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
[[Page 15]]
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 received by a futures
commission merchant from, for, or on behalf of 30.7 customers as defined
in Sec. 30.1 of this chapter:
(1) To margin, guarantee, or secure foreign futures contracts and
all money accruing to such 30.7 customers as the result of such
contracts;
(2) In connection with foreign options transactions representing
premiums payable or premiums received, or to guarantee or secure
performance on such transactions; and
(3) All money accruing to such 30.7 customers as the result of
trading in foreign futures contracts or foreign options.
(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.
(tt) Electronic signature. This term means an electronic sounds,
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) [Reserved]
(vv) Futures account. This term means an account that is maintained
in accordance with the segregation requirements of sections 4d(a) and
4d(b) of the 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 swap 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;
(2) Any contract, agreement or transaction subject to a Commission
regulation under section 4c or 19 of the Act;
(3) Any contract, agreement or transaction subject to Commission
jurisdiction under section 2(c)(2) of the Act; and
(4) Any swap as defined in the Act, by the Commission, or jointly by
the Commission and the Securities and Exchange Commission.
(zz) Agricultural commodity. This term means:
(1) The following commodities specifically enumerated in the
definition of a ``commodity'' found in section 1a of the Act: 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, but not onions;
(2) All other commodities that are, or once were, or are derived
from, living organisms, including plant, animal and aquatic life, which
are generally fungible, within their respective classes, and are used
primarily for human food, shelter, animal feed or natural fiber;
(3) Tobacco, products of horticulture, and such other commodities
used or consumed by animals or humans as the Commission may by rule,
regulation or
[[Page 16]]
order designate after notice and opportunity for hearing; and
(4) Commodity-based indexes based wholly or principally on
underlying agricultural commodities.
(aaa) Clearing initial margin. This term means initial margin posted
by a clearing member with a derivatives clearing organization.
(bbb) Customer initial margin. This term means initial margin posted
by a customer with a futures commission merchant, or by a non-clearing
member futures commission merchant with a clearing member.
(ccc) Initial margin. This term means money, securities, or property
posted by a party to a futures, option, or swap as performance bond to
cover potential future exposures arising from changes in the market
value of the position.
(ddd) Margin call. This term means a request from a futures
commission merchant to a customer to post customer initial margin; or a
request by a derivatives clearing organization to a clearing member to
post clearing initial margin or variation margin.
(eee) Spread margin. This term means reduced initial margin that
takes into account correlations between certain related positions held
in a single account.
(fff) Variation margin. This term means a payment made by a party to
a futures, option, or swap to cover the current exposure arising from
changes in the market value of the position since the trade was executed
or the previous time the position was marked to market.
(ggg) Swap Dealer--(1) In general.The term swap dealer means any
person who:
(i) Holds itself out as a dealer in swaps;
(ii) Makes a market in swaps;
(iii) Regularly enters into swaps with counterparties as an ordinary
course of business for its own account; or
(iv) Engages in any activity causing it to be commonly known in the
trade as a dealer or market maker in swaps.
(2) Exception. The term swap dealer does not include a person that
enters into swaps for such person's own account, either individually or
in a fiduciary capacity, but not as a part of regular business.
(3) Scope of designation. A person who is a swap dealer shall be
deemed to be a swap dealer with respect to each swap it enters into,
regardless of the category of the swap or the person's activities in
connection with the swap. However, if a person makes an application to
limit its designation as a swap dealer to specified categories of swaps
or specified activities of the person in connection with swaps, the
Commission shall determine whether the person's designation as a swap
dealer shall be so limited. If the Commission grants such limited
designation, such limited designation swap dealer shall be deemed to be
a swap dealer with respect to each swap it enters into in the swap
category or categories for which it is so designated, regardless of the
person's activities in connection with such category or categories of
swaps. A person may make such application to limit the categories of
swaps or activities of the person that are subject to its swap dealer
designation at the same time as, or after, the person's initial
registration as a swap dealer.
(4) De minimis exception--(i)(A) In general. Except as provided in
paragraph (ggg)(4)(vi) of this section, a person that is not currently
registered as a swap dealer shall be deemed not to be a swap dealer as a
result of its swap dealing activity involving counterparties, so long as
the swap positions connected with those dealing activities into which
the person--or any other entity controlling, controlled by or under
common control with the person--enters over the course of the
immediately preceding 12 months (or following the effective date of
final rules implementing Section 1a(47) of the Act, 7 U.S.C. 1a(47), if
that period is less than 12 months) have an aggregate gross notional
amount of no more than $3 billion, subject to a phase in level of an
aggregate gross notional amount of no more than $8 billion applied in
accordance with paragraph (ggg)(4)(ii) of this section, and an aggregate
gross notional amount of no more than $25 million with regard to swaps
in which the counterparty is a ``special entity'' (as that term is
defined in Section 4s(h)(2)(C) of the Act, 7 U.S.C. 6s(h)(2)(C), and
Sec. 23.401(c) of this chapter), except as provided in paragraph
[[Page 17]]
(ggg)(4)(i)(B) of this section. For purposes of this paragraph, if the
stated notional amount of a swap is leveraged or enhanced by the
structure of the swap, the calculation shall be based on the effective
notional amount of the swap rather than on the stated notional amount.
(B) Utility Special Entities. (1) Solely for purposes of determining
whether a person's swap dealing activity has exceeded the $25 million
aggregate gross notional amount threshold set forth in paragraph
(ggg)(4)(i)(A) of this section for swaps in which the counterparty is a
special entity, a person may exclude ``utility operations-related
swaps'' in which the counterparty is a ``utility special entity.''
(2) For purposes of this paragraph (4)(i)(B), a ``utility special
entity'' is a special entity, as that term is defined in Section
4s(h)(2)(C) of the Act, 7 U.S.C. 6s(h)(2)(C), and Sec. 23.401(c) of
this chapter, that:
(i) Owns or operates electric or natural gas facilities, electric or
natural gas operations or anticipated electric or natural gas facilities
or operations;
(ii) Supplies natural gas or electric energy to other utility
special entities;
(iii) Has public service obligations or anticipated public service
obligations under Federal, State or local law or regulation to deliver
electric energy or natural gas service to utility customers; or
(iv) Is a Federal power marketing agency as defined in Section 3 of
the Federal Power Act, 16 U.S.C. 796(19).
(3) For purposes of this paragraph (ggg)(4)(i)(B), a ``utility
operations-related swap'' is a swap that meets the following conditions:
(i) A party to the swap is a utility special entity;
(ii) A utility special entity is using the swap to hedge or mitigate
commercial risk as defined in Sec. 50.50(c) of this chapter;
(iii) The swap is related to an exempt commodity, as that term is
defined in Section 1a(20) of the Act, 7 U.S.C. 1a(20), or to an
agricultural commodity insofar as such agricultural commodity is used
for fuel for generation of electricity or is otherwise used in the
normal operations of the utility special entity; and
(iv) The swap is an electric energy or natural gas swap, or the swap
is associated with: The generation, production, purchase or sale of
natural gas or electric energy, the supply of natural gas or electric
energy to a utility special entity, or the delivery of natural gas or
electric energy service to customers of a utility special entity; fuel
supply for the facilities or operations of a utility special entity;
compliance with an electric system reliability obligation; or compliance
with an energy, energy efficiency, conservation, or renewable energy or
environmental statute, regulation, or government order applicable to a
utility special entity.
(4) A person seeking to rely on the exclusion in paragraph
(ggg)(4)(i)(B)(1) of this section may rely on the written
representations of the utility special entity that it is a utility
special entity and that the swap is a utility operations-related swap,
as such terms are defined in paragraphs (ggg)(4)(i)(B)(2) and (3) of
this section, respectively, unless it has information that would cause a
reasonable person to question the accuracy of the representation. The
person must keep such representation in accordance with Sec. 1.31.
(ii) Phase-in procedure and staff report--(A) Phase-in period. For
purposes of paragraph (ggg)(4)(i) of this section, except as provided in
paragraph (ggg)(4)(vi) of this section, a person that engages in swap
dealing activity that does not exceed the phase-in level set forth in
paragraph (ggg)(4)(i) shall be deemed not to be a swap dealer as a
result of its swap dealing activity until the ``phase-in termination
date'' established as provided in paragraph (ggg)(4)(ii)(C) or (D) of
this section. The Commission shall announce the phase-in termination
date on the Commission Web site and publish such date in the Federal
Register.
(B) Staff report. No later than 30 months following the date that a
swap data repository first receives swap data in accordance with part 45
of this chapter, the staff of the Commission shall complete and publish
for public comment a report on topics relating to the definition of the
term ``swap dealer''
[[Page 18]]
and the de minimis threshold. The report should address the following
topics, as appropriate, based on the availability of data and
information: the potential impact of modifying the de minimis threshold,
and whether the de minimis threshold should be increased or decreased;
the factors that are useful for identifying swap dealing activity,
including the application of the dealer-trader distinction for that
purpose, and the potential use of objective tests or safe harbors as
part of the analysis; the impact of provisions in paragraphs (ggg)(5)
and (6) of this section excluding certain swaps from the dealer
analysis, and potential alternative approaches for such exclusions; and
any other analysis of swap data and information relating to swaps that
the Commission or staff deem relevant to this rule.
(C) Nine months after publication of the report required by
paragraph (ggg)(4)(ii)(B) of this section, and after giving due
consideration to that report and any associated public comment, the
Commission may either:
(1) Terminate the phase-in period set forth in paragraph
(ggg)(4)(ii)(A) of this section, in which case the phase-in termination
date shall be established by the Commission by order published in the
Federal Register; or
(2) Determine that it is necessary or appropriate in the public
interest to propose through rulemaking an alternative to the $3 billion
amount set forth in paragraph (ggg)(4)(i) of this section that would
constitute a de minimis quantity of swap dealing in connection with
transactions with or on behalf of customers within the meaning of
section 1(a)(47)(D) of the Act, 7 U.S.C. 1(a)(47)(D), in which case the
Commission shall by order published in the Federal Register provide
notice of such determination, which order shall also establish the
phase-in termination date.
(D) If the phase-in termination date has not been previously
established pursuant to paragraph (ggg)(4)(ii)(C) of this section, then
in any event the phase-in termination date shall occur five years after
the date that a swap data repository first receives swap data in
accordance with part 45 of this chapter.
(iii) Registration period for persons that can no longer take
advantage of the exception. A person that has not registered as a swap
dealer by virtue of satisfying the requirements of this paragraph
(ggg)(4), but that no longer can take advantage of that de minimis
exception, will be deemed not to be a swap dealer until the earlier of
the date on which it submits a complete application for registration
pursuant to Section 4s(b) of the Act, 7 U.S.C. 6s(b), or two months
after the end of the month in which that person becomes no longer able
to take advantage of the exception.
(iv) Applicability to registered swap dealers. A person who
currently is registered as a swap dealer may apply to withdraw that
registration, while continuing to engage in swap dealing activity in
reliance on this section, so long as that person has been registered as
a swap dealer for at least 12 months and satisfies the conditions of
paragraph (ggg)(4)(i) of this section.
(v) Future adjustments to scope of the de minimis exception. The
Commission may by rule or regulation change the requirements of the de
minimis exception described in paragraphs (ggg)(4)(i) through (iv) of
this section.
(vi) Voluntary registration. Notwithstanding paragraph (ggg)(4)(i)
of this section, a person that chooses to register with the Commission
as a swap dealer shall be deemed to be a swap dealer.
(5) Insured depository institution swaps in connection with
originating loans to customers. Swaps entered into by an insured
depository institution with a customer in connection with originating a
loan with that customer shall not be considered in determining whether
the insured depository institution is a swap dealer.
(i) An insured depository institution shall be considered to have
entered into a swap with a customer in connection with originating a
loan, as defined in paragraphs (ggg)(5)(ii) and (iii) of this section,
with that customer only if:
(A) The insured depository institution enters into the swap with the
customer no earlier than 90 days before and no later than 180 days after
the date of execution of the applicable loan
[[Page 19]]
agreement, or no earlier than 90 days before and no later than 180 days
after any transfer of principal to the customer by the insured
depository institution pursuant to the loan;
(B)(1) The rate, asset, liability or other notional item underlying
such swap is, or is directly related to, a financial term of such loan,
which includes, without limitation, the loan's duration, rate of
interest, the currency or currencies in which it is made and its
principal amount;
(2) Such swap is required, as a condition of the loan under the
insured depository institution's loan underwriting criteria, to be in
place in order to hedge price risks incidental to the borrower's
business and arising from potential changes in the price of a commodity
(other than an excluded commodity);
(C) The duration of the swap does not extend beyond termination of
the loan;
(D) The insured depository institution is:
(1) The sole source of funds to the customer under the loan;
(2) Committed to be, under the terms of the agreements related to
the loan, the source of at least 10 percent of the maximum principal
amount under the loan; or
(3) Committed to be, under the terms of the agreements related to
the loan, the source of a principal amount that is greater than or equal
to the aggregate notional amount of all swaps entered into by the
insured depository institution with the customer in connection with the
financial terms of the loan;
(E) The aggregate notional amount of all swaps entered into by the
customer in connection with the financial terms of the loan is, at any
time, not more than the aggregate principal amount outstanding under the
loan at that time; and
(F) If the swap is not accepted for clearing by a derivatives
clearing organization, the insured depository institution reports the
swap as required by section 4r of the Act, 7 U.S.C. 6r (except as
otherwise provided in section 4r(a)(3)(A), 7 U.S.C. 6r(a)(3)(A), or
section 4r(a)(3)(B), 7 U.S.C. 6r(a)(3)(B) of the Act).
(ii) An insured depository institution shall be considered to have
originated a loan with a customer if the insured depository institution:
(A) Directly transfers the loan amount to the customer;
(B) Is a part of a syndicate of lenders that is the source of the
loan amount that is transferred to the customer;
(C) Purchases or receives a participation in the loan; or
(D) Otherwise is the source of funds that are transferred to the
customer pursuant to the loan or any refinancing of the loan.
(iii) The term loan shall not include:
(A) Any transaction that is a sham, whether or not intended to
qualify for the exclusion from the definition of the term swap dealer in
this rule; or
(B) Any synthetic loan, including, without limitation, a loan credit
default swap or loan total return swap.
(6) Swaps that are not considered in determining whether a person is
a swap dealer. (i) Inter-affiliate activities. In determining whether a
person is a swap dealer, that person's swaps with majority-owned
affiliates shall not be considered. For these purposes the
counterparties to a swap are majority-owned affiliates if one
counterparty directly or indirectly owns a majority interest in the
other, or if a third party directly or indirectly owns a majority
interest in both counterparties to the swap, where ``majority interest''
is the right to vote or direct the vote of a majority of a class of
voting securities of an entity, the power to sell or direct the sale of
a majority of a class of voting securities of an entity, or the right to
receive upon dissolution or the contribution of a majority of the
capital of a partnership.
(ii) Activities of a cooperative. (A) Any swap that is entered into
by a cooperative with a member of such cooperative shall not be
considered in determining whether the cooperative is a swap dealer,
provided that:
(1) The swap is subject to policies and procedures of the
cooperative requiring that the cooperative monitors and manages the risk
of such swap;
(2) The cooperative reports the swap as required by Section 4r of
the Act, 7 U.S.C. 6r (except as otherwise provided in Section
4r(a)(3)(A) of the Act, 7
[[Page 20]]
U.S.C. 6r(a)(3)(A) or Section 4r(a)(3)(B) of the Act, 7 U.S.C.
6r(a)(3)(B)); and
(3) if the cooperative is a cooperative association of producers,
the swap is primarily based on a commodity that is not an excluded
commodity.
(B) For purposes of this paragraph (ggg)(6)(ii), the term
cooperative shall mean:
(1) A cooperative association of producers as defined in section
1a(14) of the Act, 7 U.S.C. 1a(14), or
(2) A person chartered under Federal law as a cooperative and
predominantly engaged in activities that are financial in nature as
defined in section 4(k) of the Bank Holding Company Act of 1956, 12
U.S.C. 1843(k).
(C) For purposes of this paragraph (ggg)(6)(ii), a swap shall be
deemed to be entered into by a cooperative association of producers with
a member of such cooperative association of producers when the swap is
between a cooperative association of producers and a person that is a
member of a cooperative association of producers that is itself a member
of the first cooperative association of producers.
(iii) Swaps entered into for the purpose of hedging physical
positions. In determining whether a person is a swap dealer, a swap that
the person enters into shall not be considered, if:
(A) The person enters into the swap for the purpose of offsetting or
mitigating the person's price risks that arise from the potential change
in the value of one or several--
(1) Assets that the person owns, produces, manufactures, processes,
or merchandises or anticipates owning, producing, manufacturing,
processing, or merchandising;
(2) Liabilities that the person owns or anticipates incurring; or
(3) Services that the person provides, purchases, or anticipates
providing or purchasing;
(B) The swap represents a substitute for transactions made or to be
made or positions taken or to be taken by the person at a later time in
a physical marketing channel;
(C) The swap is economically appropriate to the reduction of the
person's risks in the conduct and management of a commercial enterprise;
(D) The swap is entered into in accordance with sound commercial
practices; and
(E) The person does not enter into the swap in connection with
activity structured to evade designation as a swap dealer.
(iv) Swaps entered into by floor traders. In determining whether a
person is a swap dealer, each swap that the person enters into in its
capacity as a floor trader as defined by section 1a(23) of the Act or on
or subject to the rules of a swap execution facility shall not be
considered for the purpose of determining whether the person is a swap
dealer if the person:
(A) Is registered with the Commission as a floor trader pursuant to
Sec. 3.11 of this chapter;
(B) Enters into swaps with proprietary funds for that trader's own
account solely on or subject to the rules of a designated contract
market or swap execution facility and submits each such swap for
clearing to a derivatives clearing organization;
(C) Is not an affiliated person of a registered swap dealer;
(D) Does not directly, or through an affiliated person, negotiate
the terms of swap agreements, other than price and quantity or to
participate in a request for quote process subject to the rules of a
designated contract market or a swap execution facility;
(E) Does not directly or through an affiliated person offer or
provide swap clearing services to third parties;
(F) Does not directly or through an affiliated person enter into
swaps that would qualify as hedging physical positions pursuant to
paragraph (ggg)(6)(iii) of this section or hedging or mitigating
commercial risk pursuant to paragraph (kkk) of this section (except for
any such swap executed opposite a counterparty for which the transaction
would qualify as a bona fide hedging transaction);
(G) Does not participate in any market making program offered by a
designated contract market or swap execution facility; and
(H) Notwithstanding the fact such person is not registered as a swap
dealer, such person complies with Sec. Sec. 23.201, 23.202, 23.203, and
23.600 of this chapter
[[Page 21]]
with respect to each such swap as if it were a swap dealer.
(hhh) Major Swap Participant--(1) In general. The term major swap
participant means any person:
(i) That is not a swap dealer; and
(ii)(A) That maintains a substantial position in swaps for any of
the major swap categories, excluding both positions held for hedging or
mitigating commercial risk, and positions maintained by any employee
benefit plan (or any contract held by such a plan) as defined in
paragraphs (3) and (32) of Section 3 of the Employee Retirement Income
Security Act of 1974, 29 U.S.C. 1002, for the primary purpose of hedging
or mitigating any risk directly associated with the operation of the
plan;
(B) Whose outstanding swaps create substantial counterparty exposure
that could have serious adverse effects on the financial stability of
the United States banking system or financial markets; or
(C) That is a financial entity that:
(1) Is highly leveraged relative to the amount of capital such
entity holds and that is not subject to capital requirements established
by an appropriate Federal banking agency (as defined in Section 1a(2) of
the Act, 7 U.S.C. 1a(2)); and
(2) Maintains a substantial position in outstanding swaps in any
major swap category.
(2) Scope of designation. A person that is a major swap participant
shall be deemed to be a major swap participant with respect to each swap
it enters into, regardless of the category of the swap or the person's
activities in connection with the swap. However, if a person makes an
application to limit its designation as a major swap participant to
specified categories of swaps, the Commission shall determine whether
the person's designation as a major swap participant shall be so
limited. If the Commission grants such limited designation, such limited
designation major swap participant shall be deemed to be a major swap
participant with respect to each swap it enters into in the swap
category or categories for which it is so designated, regardless of the
person's activities in connection with such category or categories of
swaps. A person may make such application to limit its designation at
the same time as, or after, the person's initial registration as a major
swap participant.
(3) Timing requirements. A person that is not registered as a major
swap participant, but that meets the criteria in this rule to be a major
swap participant as a result of its swap activities in a fiscal quarter,
will not be deemed to be a major swap participant until the earlier of
the date on which it submits a complete application for registration as
a major swap participant pursuant to Section 4s(a)(2) of the Act, 7
U.S.C. 6s(a)(2), or two months after the end of that quarter.
(4) Reevaluation period. Notwithstanding paragraph (hhh)(3) of this
section, if a person that is not registered as a major swap participant
meets the criteria in this rule to be a major swap participant in a
fiscal quarter, but does not exceed any applicable threshold by more
than twenty percent in that quarter:
(i) That person will not be deemed a major swap participant pursuant
to the timing requirements specified in paragraph (hhh)(3) of this
section; but
(ii) That person will be deemed a major swap participant pursuant to
the timing requirements specified in paragraph (hhh)(3) of this section
at the end of the next fiscal quarter if the person exceeds any of the
applicable daily average thresholds in that next fiscal quarter.
(5) Termination of status. A person that is deemed to be a major
swap participant shall continue to be deemed a major swap participant
until such time that its swap activities do not exceed any of the daily
average thresholds set forth within this rule for four consecutive
fiscal quarters after the date on which the person becomes registered as
a major swap participant.
(6) Calculation of status. A person shall not be deemed to be a
``major swap participant,'' regardless of whether the criteria paragraph
(hhh)(1) of this section otherwise would cause the person to be a major
swap participant, provided the person meets the conditions set forth in
paragraphs (hhh)(6)(i), (ii) or (iii) of this section.
(i) Caps on uncollateralized exposure and notional positions.
[[Page 22]]
(A) Maximum potential uncollateralized exposure. The express terms
of the person's agreements or arrangements relating to swaps with its
counterparties at no time would permit the person to maintain a total
uncollateralized exposure of more than $100 million to all such
counterparties, including any exposure that may result from thresholds
or minimum transfer amounts established by credit support annexes or
similar arrangements; and
(B) Maximum notional amount of swap positions. The person does not
maintain swap positions in a notional amount of more than $2 billion in
any major category of swaps, or more than $4 billion in the aggregate
across all major categories; or
(ii) Caps on uncollateralized exposure plus monthly calculation.
(A) Maximum potential uncollateralized exposure. The express terms
of the person's agreements or arrangements relating to swaps with its
counterparties at no time would permit the person to maintain a total
uncollateralized exposure of more than $200 million to all such
counterparties (with regard to swaps and any other instruments by which
the person may have exposure to those counterparties), including any
exposure that may result from thresholds or minimum transfer amounts
established by credit support annexes or similar arrangements; and
(B) Calculation of positions. (1) At the end of each month, the
person performs the calculations prescribed by paragraph (jjj) of this
section with regard to whether the aggregate uncollateralized outward
exposure plus aggregate potential outward exposure as of that day
constitute a ``substantial position'' in a major category of swaps, or
pose ``substantial counterparty exposure that could have serious adverse
effects on the financial stability of the United States banking system
or financial markets''; these calculations shall disregard provisions of
those rules that provide for the analyses to be determined based on a
daily average over a calendar quarter; and
(2) Each such analysis produces thresholds of no more than:
(i) $1 billion in aggregate uncollateralized outward exposure plus
aggregate potential outward exposure in any major category of swaps; if
the person is subject to paragraph (jjj) of this section, by virtue of
being a highly leveraged financial entity that is not subject to capital
requirements established by an appropriate Federal banking agency, this
analysis shall account for all of the person's swap positions in that
major category (without excluding hedging positions), otherwise this
analysis shall exclude the same hedging and related positions that are
excluded from consideration pursuant to paragraph (jjj)(1)(i) of this
section; or
(ii) $2 billion in aggregate uncollateralized outward exposure plus
aggregate potential outward exposure (without any positions excluded
from the analysis) with regard to all of the person's swap positions.
(iii) Calculations based on certain information. (A)(1) At the end
of each month, the person's aggregate uncollateralized outward exposure
with respect to its swap positions in each major swap category is less
than $1.5 billion with respect to the rate swap category and less than
$500 million with respect to each of the other major swap categories;
and
(2) At the end of each month, the sum of the amount calculated under
paragraph (hhh)(6)(iii)(A)(1) of this section with respect to each major
swap category and the total notional principal amount of the person's
swap positions in each such major swap category, adjusted by the
multipliers set forth in paragraph (jjj)(3)(ii)(1) of this section on a
position-by-position basis reflecting the type of swap, is less than $3
billion with respect to the rate swap category and less than $1 billion
with respect to each of the other major swap categories; or
(B)(1) At the end of each month, the person's aggregate
uncollateralized outward exposure with respect to its swap positions
across all major swap categories is less than $500 million; and
(2) The sum of the amount calculated under paragraph
(hhh)(6)(iii)(B)(1) of this section and the product of the total
effective notional principal amount of the person's swap positions in
all major swap categories multiplied by 0.15 is less than $1 billion.
(C) For purposes of the calculations set forth in this paragraph
(hhh)(6)(iii):
[[Page 23]]
(1) The person's aggregate uncollateralized outward exposure for
positions held with swap dealers shall be equal to such exposure
reported on the most recent reports of such exposure received from such
swap dealers; and
(2) The person's aggregate uncollateralized outward exposure for
positions that are not reflected in any report of exposure from a swap
dealer (including all swap positions it holds with persons other than
swap dealers) shall be calculated in accordance with paragraph (jjj)(2)
of this section.
(iv) For purposes of the calculations set forth in this paragraph
(hhh)(6), the person shall use the effective notional amount of a
position rather than the stated notional amount of the position if the
stated notional amount is leveraged or enhanced by the structure of the
position.
(v) No presumption shall arise that a person is required to perform
the calculations needed to determine if it is a major swap participant,
solely by reason that the person does not meet the conditions specified
in paragraph (hhh)(6)(i), (ii) or (iii) of this section.
(7) Exclusions. A person who is registered as a derivatives clearing
organization with the Commission pursuant to section 5b of the Act and
regulations thereunder, shall not be deemed to be a major swap
participant, regardless of whether the criteria in this paragraph (hhh)
otherwise would cause the person to be a major swap participant.
(iii) Category of swaps; major swap category. For purposes of
Section 1a(33) the Act, 7 U.S.C. 1a(33), and paragraph (hhh) of this
section, the terms major swap category, category of swaps and any
similar terms mean any of the categories of swaps listed below. For the
avoidance of doubt, the term swap as it is used in this paragraph (iii)
has the meaning set forth in Section 1a(47) of the Act, 7 U.S.C. 1a(47),
and the rules thereunder.
(1) Rate swaps. Any swap which is primarily based on one or more
reference rates, including but not limited to any swap of payments
determined by fixed and floating interest rates, currency exchange
rates, inflation rates or other monetary rates, any foreign exchange
swap, as defined in Section 1a(25) of the Act, 7 U.S.C. 1a(25), and any
foreign exchange option other than an option to deliver currency.
(2) Credit swaps. Any swap that is primarily based on instruments of
indebtedness, including but not limited to any swap primarily based on
one or more broad-based indices related to debt instruments or loans,
and any swap that is an index credit default swap or total return swap
on one or more indices of debt instruments.
(3) Equity swaps. Any swap that is primarily based on equity
securities, including but not limited to any swap based on one or more
broad-based indices of equity securities and any total return swap on
one or more equity indices.
(4) Other commodity swaps. Any swap that is not included in the rate
swap, credit swap or equity swap categories.
(jjj) Substantial position. (1) In general. For purposes of Section
1a(33) of the Act, 7 U.S.C. 1a(33), and paragraph (hhh) of this section,
the term ``substantial position'' means swap positions that equal or
exceed any of the following thresholds in the specified major category
of swaps:
(i) For rate swaps:
(A) $3 billion in daily average aggregate uncollateralized outward
exposure; or
(B) $6 billion in:
(1) Daily average aggregate uncollateralized outward exposure plus
(2) Daily average aggregate potential outward exposure.
(ii) For credit swaps:
(A) $1 billion in daily average aggregate uncollateralized outward
exposure; or
(B) $2 billion in:
(1) Daily average aggregate uncollateralized outward exposure plus
(2) Daily average aggregate potential outward exposure.
(iii) For equity swaps:
(A) $1 billion in daily average aggregate uncollateralized outward
exposure; or
(B) $2 billion in:
(1) Daily average aggregate uncollateralized outward exposure plus
(2) Daily average aggregate potential outward exposure.
(iv) For other commodity swaps:
[[Page 24]]
(A) $1 billion in daily average aggregate uncollateralized outward
exposure; or
(B) $2 billion in:
(1) Daily average aggregate uncollateralized outward exposure plus
(2) Daily average aggregate potential outward exposure.
(2) Aggregate uncollateralized outward exposure--(i) In general.
Aggregate uncollateralized outward exposure in general means the sum of
the current exposure, obtained by marking-to-market using industry
standard practices, of each of the person's swap positions with negative
value in a major swap category, less the value of the collateral the
person has posted in connection with those positions.
(ii) Calculation of aggregate uncollateralized outward exposure. In
calculating this amount the person shall, with respect to each of its
swap counterparties in a given major swap category, determine the dollar
value of the aggregate current exposure arising from each of its swap
positions with negative value (subject to the netting provisions
described below) in that major category by marking-to-market using
industry standard practices; and deduct from that dollar amount the
aggregate value of the collateral the person has posted with respect to
the swap positions. The aggregate uncollateralized outward exposure
shall be the sum of those uncollateralized amounts across all of the
person's swap counterparties in the applicable major category.
(iii) Relevance of netting agreements. (A) If the person has one or
more master netting agreement in effect with a particular counterparty,
the person may measure the current exposure arising from its swaps in
any major category on a net basis, applying the terms of those
agreements. Calculation of net current exposure may take into account
offsetting positions entered into with that particular counterparty
involving swaps (in any swap category) as well as security-based swaps
and securities financing transactions (consisting of securities lending
and borrowing, securities margin lending and repurchase and reverse
repurchase agreements), and other financial instruments that are subject
to netting offsets for purposes of applicable bankruptcy law, to the
extent these are consistent with the offsets permitted by the master
netting agreements.
(B) Such adjustments may not take into account any offset associated
with positions that the person has with separate counterparties.
(iv) Allocation of uncollateralized outward exposure. If a person
calculates current exposure with a particular counterparty on a net
basis, as provided by paragraph (jjj)(2)(iii) of this section, the
portion of that current exposure that should be attributed to each
``major'' category of swaps for purposes of the substantial position
analysis should be calculated according to the formula:
[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]
Where: ES(MC) equals the amount of aggregate current exposure
attributable to the entity's swap positions in the ``major'' swap
category at issue; Enet total equals the entity's aggregate current
exposure to the counterparty at issue, after accounting for the netting
of positions and the posting of collateral; OTMS(MC) equals the exposure
associated with the entity's out-of-the-money positions in swaps in the
``major'' category at issue, subject to those netting arrangements; and
OTMS(O) equals the exposure associated with the entity's out-of-the-
money positions in the other ``major'' categories of swaps, subject to
those netting arrangements; and OTMnon-S equals the exposure associated
with the entity's out-of-the-money positions associated with
instruments, other than swaps, that are subject to those netting
arrangements.
(3) Aggregate potential outward exposure--(i) In general. Aggregate
potential outward exposure in any major swap category means the sum of:
[[Page 25]]
(A) The aggregate potential outward exposure for each of the
person's swap positions in a major swap category that are not subject to
daily mark-to-market margining and are not cleared by a registered or
exempt clearing agency or derivatives clearing organization, as
calculated in accordance with paragraph (jjj)(3)(ii) of this section;
and
(B) The aggregate potential outward exposure for each of the
person's swap positions in such major swap category that are either
subject to daily mark-to-market margining or are cleared by a registered
or exempt clearing agency or derivatives clearing organization, as
calculated in accordance with paragraph (jjj)(3)(iii) of this section.
(ii) Calculation of potential outward exposure for swaps that are
not subject to daily mark-to-market margining and are not cleared by a
registered or exempt clearing agency or derivatives clearing
organization--(A) In general. (1) For positions in swaps that are not
subject to daily mark-to-market margining and are not cleared by a
registered or exempt clearing agency or a derivatives clearing
organization, potential outward exposure equals the total notional
principal amount of those positions, multiplied by the following factors
on a position-by-position basis reflecting the type of swap. For any
swap that does not appropriately fall within any of the specified
categories, the ``other commodities'' conversion factors set forth in
the following Table 1 are to be used. If a swap is structured such that
on specified dates any outstanding exposure is settled and the terms are
reset so that the market value of the swap is zero, the remaining
maturity equals the time until the next reset date.
Table 1--Conversion Factor Matrix for Swaps
--------------------------------------------------------------------------------------------------------------------------------------------------------
Foreign exchange Precious metals
Residual maturity Interest rate rate and gold (except gold) Other commodities
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less.................................................. 0.00 0.01 0.07 0.10
Over one to five years............................................ 0.005 0.05 0.07 0.12
Over five years................................................... 0.015 0.075 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Residual maturity Credit Equity
------------------------------------------------------------------------
One year or less...................................... 0.10 0.06
Over one to five years................................ 0.10 0.08
Over five years....................................... 0.10 0.10
------------------------------------------------------------------------
(2) Use of effective notional amounts. If the stated notional amount
on a position is leveraged or enhanced by the structure of the position,
the calculation in paragraph (jjj)(3)(ii)(A)(1) of this section shall be
based on the effective notional amount of the position rather than on
the stated notional amount.
(3) Exclusion of certain positions. The calculation in paragraph
(jjj)(3)(ii)(A)(1) of this section shall exclude:
(i) Positions that constitute the purchase of an option, if the
purchaser has no additional payment obligations under the position;
(ii) Other positions for which the person has prepaid or otherwise
satisfied all of its payment obligations; and
(iii) Positions for which, pursuant to law or a regulatory
requirement, the person has assigned an amount of cash or U.S. Treasury
securities that is sufficient at all times to pay the person's maximum
possible liability under the position, and the person may not use that
cash or those Treasury securities for other purposes.
(4) Adjustment for certain positions. Notwithstanding paragraph
(jjj)(3)(ii)(A)(1) of this section, the potential outward exposure
associated with a position by which a person buys credit protection
using a credit default swap or index credit default swap, or associated
with a position by which a person purchases an option for which the
person retains additional payment obligations under the position, is
capped at the net present value of the unpaid premiums.
(B) Adjustment for netting agreements. Notwithstanding paragraph
(jjj)(3)(ii)(A) of this section, for positions subject to master netting
agreements the potential outward exposure associated with the person's
swaps with each counterparty equals a weighted average of the potential
outward exposure for the person's swaps
[[Page 26]]
with that counterparty as calculated under paragraph (jjj)(3)(ii)(A) of
this section, and that amount reduced by the ratio of net current
exposure to gross current exposure, consistent with the following
equation as calculated on a counterparty-by-counterparty basis:
PNet = 0.4 * PGross + 0.6 * NGR * PGross
Where: PNet is the potential outward exposure, adjusted for
bilateral netting, of the person's swaps with a particular counterparty;
PGross is the potential outward exposure without adjustment for
bilateral netting as calculated pursuant to paragraph (jjj)(3)(ii)(A) of
this section; and NGR is the ratio of the current exposure arising from
its swaps in the major category as calculated on a net basis according
to paragraphs (jjj)(2)(iii) and (iv) of this section, divided by the
current exposure arising from its swaps in the major category as
calculated in the absence of those netting procedures.
(iii) Calculation of potential outward exposure for swaps that are
either subject to daily mark-to-market margining or are cleared by a
registered or exempt clearing agency or derivatives clearing
organization. For positions in swaps that are subject to daily mark-to-
market margining or that are cleared by a registered or exempt clearing
agency or derivatives clearing organization:
(A) Potential outward exposure equals the potential exposure that
would be attributed to such positions using the procedures in paragraph
(jjj)(3)(ii) of this section multiplied by:
(1) 0.1, in the case of positions cleared by a registered or exempt
clearing agency or derivatives clearing organization; or
(2) 0.2, in the case of positions that are subject to daily mark-to-
market margining but that are not cleared by a registered or exempt
clearing agency or derivatives clearing organization.
(B) Solely for purposes of calculating potential outward exposure:
(1) A swap shall be considered to be subject to daily mark-to-market
margining if, and for so long as, the counterparties follow the daily
practice of exchanging collateral to reflect changes in the current
exposure arising from the swap (after taking into account any other
financial positions addressed by a netting agreement between the
counterparties).
(2) If the person is permitted by agreement to maintain a threshold
for which it is not required to post collateral, the position still will
be considered to be subject to daily mark-to-market margining for
purposes of calculating potential outward exposure, but the total amount
of that threshold (regardless of the actual exposure at any time), less
any initial margin posted up to the amount of that threshold, shall be
added to the person's aggregate uncollateralized outward exposure for
purposes of paragraph (jjj)(1)(i)(B), (ii)(B), (iii)(B) or (iv)(B) of
this section, as applicable.
(3) If the minimum transfer amount under the agreement is in excess
of $1 million, the position still will be considered to be subject to
daily mark-to-market margining for purposes of calculating potential
outward exposure, but the entirety of the minimum transfer amount shall
be added to the person's aggregate uncollateralized outward exposure for
purposes of paragraph (jjj)(1)(i)(B), (ii)(B), (iii)(B) or (iv)(B) of
this section, as applicable.
(4) A person may, at its discretion, calculate the potential outward
exposure of positions in swaps that are subject to daily mark-to-market
margining in accordance with paragraph (jjj)(3)(ii) of this section in
lieu of calculating the potential outward exposure of such swap
positions in accordance with this paragraph (jjj)(3)(iii).
(4) Calculation of daily average. Measures of daily average
aggregate uncollateralized outward exposure and daily average aggregate
potential outward exposure shall equal the arithmetic mean of the
applicable measure of exposure at the close of each business day,
beginning the first business day of each calendar quarter and continuing
through the last business day of that quarter.
(5) Inter-affiliate activities. In calculating its aggregate
uncollateralized outward exposure and its aggregate potential outward
exposure, the person shall not consider its swap positions with
counterparties that are majority-owned affiliates. For these purposes
the counterparties to a swap are majority-owned affiliates if one
counterparty directly or indirectly owns a majority interest in the
other, or if a third party
[[Page 27]]
directly or indirectly owns a majority interest in both counterparties
to the swap, where ``majority interest'' is the right to vote or direct
the vote of a majority of a class of voting securities of an entity, the
power to sell or direct the sale of a majority of a class of voting
securities of an entity, or the right to receive upon dissolution or the
contribution of a majority of the capital of a partnership.
(kkk) Hedging or mitigating commercial risk. For purposes of Section
1a(33) of the Act, 7 U.S.C. 1a(33) and paragraph (hhh) of this section,
a swap position is held for the purpose of hedging or mitigating
commercial risk when:
(1) Such position:
(i) Is economically appropriate to the reduction of risks in the
conduct and management of a commercial enterprise (or of a majority-
owned affiliate of the enterprise), where the risks arise from:
(A) The potential change in the value of assets that a person owns,
produces, manufactures, processes, or merchandises or reasonably
anticipates owning, producing, manufacturing, processing, or
merchandising in the ordinary course of business of the enterprise;
(B) The potential change in the value of liabilities that a person
has incurred or reasonably anticipates incurring in the ordinary course
of business of the enterprise; or
(C) The potential change in the value of services that a person
provides, purchases, or reasonably anticipates providing or purchasing
in the ordinary course of business of the enterprise;
(D) The potential change in the value of assets, services, inputs,
products, or commodities that a person owns, produces, manufactures,
processes, merchandises, leases, or sells, or reasonably anticipates
owning, producing, manufacturing, processing, merchandising, leasing, or
selling in the ordinary course of business of the enterprise;
(E) Any potential change in value related to any of the foregoing
arising from interest, currency, or foreign exchange rate movements
associated with such assets, liabilities, services, inputs, products, or
commodities; or
(F) Any fluctuation in interest, currency, or foreign exchange rate
exposures arising from a person's current or anticipated assets or
liabilities; or
(ii) Qualifies as bona fide hedging for purposes of an exemption
from position limits under the Act; or
(iii) Qualifies for hedging treatment under:
(A) Financial Accounting Standards Board Accounting Standards
Codification Topic 815, Derivatives and Hedging (formerly known as
Statement No. 133); or
(B) Governmental Accounting Standards Board Statement 53, Accounting
and Financial Reporting for Derivative Instruments; and
(2) Such position is:
(i) Not held for a purpose that is in the nature of speculation,
investing or trading; and
(ii) Not held to hedge or mitigate the risk of another swap or
security-based swap position, unless that other position itself is held
for the purpose of hedging or mitigating commercial risk as defined by
this rule or Sec. 240.3a67-4 of this title.
(lll) Substantial counterparty exposure--(1) In general. For
purposes of Section 1a(33) of the Act, 7 U.S.C. 1a(33), and paragraph
(hhh) of this section, the term substantial counterparty exposure that
could have serious adverse effects on the financial stability of the
United States banking system or financial markets means a swap position
that satisfies either of the following thresholds:
(i) $5 billion in daily average aggregate uncollateralized outward
exposure; or
(ii) $8 billion in:
(A) Daily average aggregate uncollateralized outward exposure plus
(B) Daily average aggregate potential outward exposure.
(2) Calculation methodology. For these purposes, the terms daily
average aggregate uncollateralized outward exposure and daily average
aggregate potential outward exposure shall be calculated the same way as
is prescribed in paragraph (jjj) of this section, except that these
amounts shall be calculated by reference to all of the person's swap
positions, rather than by reference to a specific major swap category.
(mmm) Financial entity; highly leveraged. (1) For purposes of
Section 1a(33)
[[Page 28]]
of the Act, 7 U.S.C. 1a(33), and paragraph (hhh) of this section, the
term financial entity means:
(i) A security-based swap dealer;
(ii) A major security-based swap participant;
(iii) A commodity pool as defined in Section 1a(10) of the Act, 7
U.S.C. 1a(10);
(iv) A private fund as defined in Section 202(a) of the Investment
Advisers Act of 1940, 15 U.S.C. 80b-2(a);
(v) An employee benefit plan as defined in paragraphs (3) and (32)
of Section 3 of the Employee Retirement Income Security Act of 1974, 29
U.S.C. 1002; and
(vi) A person predominantly engaged in activities that are in the
business of banking or financial in nature, as defined in Section 4(k)
of the Bank Holding Company Act of 1956, 12 U.S.C. 1843(k).
(2) For purposes of Section 1a(33) of the Act, 7 U.S.C. 1a(33), and
paragraph (hhh) of this section, the term highly leveraged means the
existence of a ratio of an entity's total liabilities to equity in
excess of 12 to 1 as measured at the close of business on the last
business day of the applicable fiscal quarter. For this purpose,
liabilities and equity should each be determined in accordance with U.S.
generally accepted accounting principles; provided, however, that a
person that is an employee benefit plan, as defined in paragraphs (3)
and (32) of Section 3 of the Employee Retirement Income Security Act of
1974, 29 U.S.C. 1002, may exclude obligations to pay benefits to plan
participants from the calculation of liabilities and substitute the
total value of plan assets for equity.
(nnn)-(www) [Reserved]
(xxx) Swap--(1) In general. The term swap has the meaning set forth
in section 1a(47) of the Commodity Exchange Act.
(2) Inclusion of particular products. (i) The term swap includes,
without limiting the meaning set forth in section 1a(47) of the
Commodity Exchange Act, the following agreements, contracts, and
transactions:
(A) A cross-currency swap;
(B) A currency option, foreign currency option, foreign exchange
option and foreign exchange rate option;
(C) A foreign exchange forward;
(D) A foreign exchange swap;
(E) A forward rate agreement; and
(F) A non-deliverable forward involving foreign exchange.
(ii) The term swap does not include an agreement, contract, or
transaction described in paragraph (xxx)(2)(i) of this section that is
otherwise excluded by section 1a(47)(B) of the Commodity Exchange Act.
(3) Foreign exchange forwards and foreign exchange swaps.
Notwithstanding paragraph (xxx)(2) of this section:
(i) A foreign exchange forward or a foreign exchange swap shall not
be considered a swap if the Secretary of the Treasury makes a
determination described in section 1a(47)(E)(i) of the Commodity
Exchange Act.
(ii) Notwithstanding paragraph (xxx)(3)(i) of this section:
(A) The reporting requirements set forth in section 4r of the
Commodity Exchange Act and regulations promulgated thereunder shall
apply to a foreign exchange forward or foreign exchange swap; and
(B) The business conduct standards set forth in section 4s(h) of the
Commodity Exchange Act and regulations promulgated thereunder shall
apply to a swap dealer or major swap participant that is a party to a
foreign exchange forward or foreign exchange swap.
(iii) For purposes of section 1a(47)(E) of the Commodity Exchange
Act and this paragraph (xxx), the term foreign exchange forward has the
meaning set forth in section 1a(24) of the Commodity Exchange Act.
(iv) For purposes of section 1a(47)(E) of the Commodity Exchange Act
and this paragraph (xxx), the term foreign exchange swap has the meaning
set forth in section 1a(25) of the Commodity Exchange Act.
(v) For purposes of sections 1a(24) and 1a(25) of the Commodity
Exchange Act and this paragraph (xxx), the following transactions are
not foreign exchange forwards or foreign exchange swaps:
(A) A currency swap or a cross-currency swap;
(B) A currency option, foreign currency option, foreign exchange
option, or foreign exchange rate option; and
[[Page 29]]
(C) A non-deliverable forward involving foreign exchange.
(4) Insurance. (i) This paragraph is a non-exclusive safe harbor.
The terms swap as used in section 1a(47) of the Commodity Exchange Act
and security-based swap as used in section 1a(42) of the Commodity
Exchange Act do not include an agreement, contract, or transaction that:
(A) By its terms or by law, as a condition of performance on the
agreement, contract, or transaction:
(1) Requires the beneficiary of the agreement, contract, or
transaction to have an insurable interest that is the subject of the
agreement, contract, or transaction and thereby carry the risk of loss
with respect to that interest continuously throughout the duration of
the agreement, contract, or transaction;
(2) Requires that loss to occur and to be proved, and that any
payment or indemnification therefor be limited to the value of the
insurable interest;
(3) Is not traded, separately from the insured interest, on an
organized market or over-the-counter; and
(4) With respect to financial guaranty insurance only, in the event
of payment default or insolvency of the obligor, any acceleration of
payments under the policy is at the sole discretion of the insurer; and
(B) Is provided:
(1)(i) By a person that is subject to supervision by the insurance
commissioner (or similar official or agency) of any State or by the
United States or an agency or instrumentality thereof; and
(ii) Such agreement, contract, or transaction is regulated as
insurance under applicable State law or the laws of the United States;
(2)(i) Directly or indirectly by the United States, any State or any
of their respective agencies or instrumentalities; or
(ii) Pursuant to a statutorily authorized program thereof; or
(3) In the case of reinsurance only, by a person to another person
that satisfies the conditions set forth in paragraph (xxx)(4)(i)(B) of
this section, provided that:
(i) Such person is not prohibited by applicable State law or the
laws of the United States from offering such agreement, contract, or
transaction to such person that satisfies the conditions set forth in
paragraph (xxx)(4)(i)(B) of this section;
(ii) The agreement, contract, or transaction to be reinsured
satisfies the conditions set forth in paragraph (xxx)(4)(i)(A) or
paragraph (xxx)(4)(i)(C) of this section; and
(iii) Except as otherwise permitted under applicable State law, the
total amount reimbursable by all reinsurers for such agreement,
contract, or transaction may not exceed the claims or losses paid by the
person writing the risk being ceded or transferred by such person; or
(4) In the case of non-admitted insurance, by a person who:
(i) Is located outside of the United States and listed on the
Quarterly Listing of Alien Insurers as maintained by the International
Insurers Department of the National Association of Insurance
Commissioners; or
(ii) Meets the eligibility criteria for non-admitted insurers under
applicable State law; or
(C) Is provided in accordance with the conditions set forth in
paragraph (xxx)(4)(i)(B) of this section and is one of the following
types of products:
(1) Surety bond;
(2) Fidelity bond;
(3) Life insurance;
(4) Health insurance;
(5) Long term care insurance;
(6) Title insurance;
(7) Property and casualty insurance;
(8) Annuity;
(9) Disability insurance;
(10) Insurance against default on individual residential mortgages;
and
(11) Reinsurance of any of the foregoing products identified in
paragraphs (xxx)(4)(i)(C)(1) through (10) of this section; or
(ii) The terms swap as used in section 1a(47) of the Commodity
Exchange Act and security-based swap as used in section 1a(42) of the
Commodity Exchange Act do not include an agreement, contract, or
transaction that was entered into on or before the effective date of
paragraph (xxx)(4) of this section, and that, at such time that it was
entered into, was provided in accordance with the conditions set forth
in paragraph (xxx)(4)(i)(B) of this section.
[[Page 30]]
(5) State. For purposes of paragraph (xxx)(4) of this section, the
term State means any state of the United States, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands, or any other possession
of the United States.
(6) Anti-Evasion:
(i) An agreement, contract, or transaction that is willfully
structured to evade any provision of Subtitle A of the Wall Street
Transparency and Accountability Act of 2010, including any amendments
made to the Commodity Exchange Act thereby (Subtitle A), shall be deemed
a swap for purposes of Subtitle A and the rules, regulations, and orders
of the Commission promulgated thereunder.
(ii) An interest rate swap or currency swap, including but not
limited to a transaction identified in paragraph (xxx)(3)(v) of this
section, that is willfully structured as a foreign exchange forward or
foreign exchange swap to evade any provision of Subtitle A shall be
deemed a swap for purposes of Subtitle A and the rules, regulations, and
orders of the Commission promulgated thereunder.
(iii) An agreement, contract, or transaction of a bank that is not
under the regulatory jurisdiction of an appropriate Federal banking
agency (as defined in section 1a(2) of the Commodity Exchange Act),
where the agreement, contract, or transaction is willfully structured as
an identified banking product (as defined in section 402 of the Legal
Certainty for Bank Products Act of 2000) to evade the provisions of the
Commodity Exchange Act, shall be deemed a swap for purposes of the
Commodity Exchange Act and the rules, regulations, and orders of the
Commission promulgated thereunder.
(iv) The form, label, and written documentation of an agreement,
contract, or transaction shall not be dispositive in determining whether
the agreement, contract, or transaction has been willfully structured to
evade as provided in paragraphs (xxx)(6)(i) through (xxx)(6)(iii) of
this section.
(v) An agreement, contract, or transaction that has been willfully
structured to evade as provided in paragraphs (xxx)(6)(i) through
(xxx)(6)(iii) of this section shall be considered in determining whether
a person that so willfully structured to evade is a swap dealer or major
swap participant.
(vi) Notwithstanding the foregoing, no agreement, contract, or
transaction structured as a security (including a security-based swap)
under the securities laws (as defined in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))) shall be deemed
a swap pursuant to this paragraph (xxx)(6) or shall be considered for
purposes of paragraph (xxx)(6)(v) of this section.
(yyy) Narrow-based security index as used in the definition of
``security-based swap''--(1) In general. Except as otherwise provided in
paragraphs (zzz) and (aaaa) of this section, for purposes of section
1a(42) of the Commodity Exchange Act, the term narrow-based security
index has the meaning set forth in section 1a(35) of the Commodity
Exchange Act, and the rules, regulations and orders of the Commission
thereunder.
(2) Tolerance period for swaps traded on designated contract
markets, swap execution facilities, and foreign boards of trade.
Notwithstanding paragraph (yyy)(1) of this section, solely for purposes
of swaps traded on or subject to the rules of a designated contract
market, swap execution facility, or foreign board of trade, a security
index underlying such swaps shall not be considered a narrow-based
security index if:
(i)(A) A swap on the index is traded on or subject to the rules of a
designated contract market, swap execution facility, or foreign board of
trade for at least 30 days as a swap on an index that was not a narrow-
based security index; or
(B) Such index was not a narrow-based security index during every
trading day of the six full calendar months preceding a date no earlier
than 30 days prior to the commencement of trading of a swap on such
index on a market described in paragraph (yyy)(2)(i)(A) of this section;
and
(ii) The index has been a narrow-based security index for no more
than 45 business days over three consecutive calendar months.
(3) Tolerance period for security-based swaps traded on national
securities exchanges or security-based swap execution facilities.
Notwithstanding paragraph
[[Page 31]]
(yyy)(1) of this section, solely for purposes of security-based swaps
traded on a national securities exchange or security-based swap
execution facility, a security index underlying such security-based
swaps shall be considered a narrow-based security index if:
(i)(A) A security-based swap on the index is traded on a national
securities exchange or security-based swap execution facility for at
least 30 days as a security-based swap on a narrow-based security index;
or
(B) Such index was a narrow-based security index during every
trading day of the six full calendar months preceding a date no earlier
than 30 days prior to the commencement of trading of a security-based
swap on such index on a market described in paragraph (yyy)(3)(i)(A) of
this section; and
(ii) The index has been a security index that is not a narrow-based
security index for no more than 45 business days over three consecutive
calendar months.
(4) Grace period. (i) Solely with respect to a swap that is traded
on or subject to the rules of a designated contract market, swap
execution facility, or foreign board of trade, an index that becomes a
narrow-based security index under paragraph (yyy)(2) of this section
solely because it was a narrow-based security index for more than 45
business days over three consecutive calendar months shall not be a
narrow-based security index for the following three calendar months.
(ii) Solely with respect to a security-based swap that is traded on
a national securities exchange or security-based swap execution
facility, an index that becomes a security index that is not a narrow-
based security index under paragraph (yyy)(3) of this section solely
because it was not a narrow-based security index for more than 45
business days over three consecutive calendar months shall be a narrow-
based security index for the following three calendar months.
(zzz) Meaning of ``issuers of securities in a narrow-based security
index'' as used in the definition of ``security-based swap'' as applied
to index credit default swaps.
(1) Notwithstanding paragraph (yyy)(1) of this section, and solely
for purposes of determining whether a credit default swap is a security-
based swap under the definition of ``security-based swap'' in section
3(a)(68)(A)(ii)(III) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(68)(A)(ii)(III), as incorporated in section 1a(42) of the
Commodity Exchange Act, the term issuers of securities in a narrow-based
security index means issuers of securities included in an index
(including an index referencing loan borrowers or loans of such
borrowers) in which:
(i)(A) There are nine or fewer non-affiliated issuers of securities
that are reference entities included in the index, provided that an
issuer of securities shall not be deemed a reference entity included in
the index for purposes of this section unless:
(1) A credit event with respect to such reference entity would
result in a payment by the credit protection seller to the credit
protection buyer under the credit default swap based on the related
notional amount allocated to such reference entity; or
(2) The fact of such credit event or the calculation in accordance
with paragraph (zzz)(1)(i)(A)(1) of this section of the amount owed with
respect to such credit event is taken into account in determining
whether to make any future payments under the credit default swap with
respect to any future credit events;
(B) The effective notional amount allocated to any reference entity
included in the index comprises more than 30 percent of the index's
weighting;
(C) The effective notional amount allocated to any five non-
affiliated reference entities included in the index comprises more than
60 percent of the index's weighting; or
(D) Except as provided in paragraph (zzz)(2) of this section, for
each reference entity included in the index, none of the criteria in
paragraphs (zzz)(1)(i)(D)(1) through (8) of this section is satisfied:
(1) The reference entity included in the index is required to file
reports pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
[[Page 32]]
(2) The reference entity included in the index is eligible to rely
on the exemption provided in rule 12g3-2(b) under the Securities
Exchange Act of 1934 (17 CFR 240.12g3-2(b));
(3) The reference entity included in the index has a worldwide
market value of its outstanding common equity held by non-affiliates of
$700 million or more;
(4) The reference entity included in the index (other than a
reference entity included in the index that is an issuing entity of an
asset-backed security as defined in section 3(a)(77) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)) has outstanding notes,
bonds, debentures, loans, or evidences of indebtedness (other than
revolving credit facilities) having a total remaining principal amount
of at least $1 billion;
(5) The reference entity included in the index is the issuer of an
exempted security as defined in section 3(a)(12) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(12)) (other than any municipal
security as defined in section 3(a)(29) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(29)));
(6) The reference entity included in the index is a government of a
foreign country or a political subdivision of a foreign country;
(7) If the reference entity included in the index is an issuing
entity of an asset-backed security as defined in section 3(a)(77) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)), such asset-
backed security was issued in a transaction registered under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) and has publicly
available distribution reports; and
(8) For a credit default swap entered into solely between eligible
contract participants as defined in section 1a(18) of the Commodity
Exchange Act:
(i) The reference entity included in the index (other than a
reference entity included in the index that is an issuing entity of an
asset-backed security as defined in section 3(a)(77) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(77))) makes available to the
public or otherwise makes available to such eligible contract
participant information about the reference entity included in the index
pursuant to rule 144A(d)(4) under the Securities Act of 1933 (17 CFR
230.144A(d)(4));
(ii) Financial information about the reference entity included in
the index (other than a reference entity included in the index that is
an issuing entity of an asset-backed security as defined in section
3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)))
is otherwise publicly available; or
(iii) In the case of a reference entity included in the index that
is an issuing entity of an asset-backed security as defined in section
3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)),
information of the type and level included in publicly available
distribution reports for similar asset-backed securities is publicly
available about both the reference entity included in the index and such
asset-backed security; and
(ii)(A) The index is not composed solely of reference entities that
are issuers of exempted securities as defined in section 3(a)(12) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(12)), as in effect on
the date of enactment of the Futures Trading Act of 1982 (other than any
municipal security as defined in section 3(a)(29) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(29))), as in effect on the date
of enactment of the Futures Trading Act of 1982; and
(B) Without taking into account any portion of the index composed of
reference entities that are issuers of exempted securities as defined in
section 3(a)(12) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(12)), as in effect on the date of enactment of the Futures
Trading Act of 1982 (other than any municipal security as defined in
section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(29))), the remaining portion of the index would be within the
term ``issuer of securities in a narrow-based security index'' under
paragraph (zzz)(1)(i) of this section.
(2) Paragraph (zzz)(1)(i)(D) of this section will not apply with
respect to a reference entity included in the index if:
(i) The effective notional amounts allocated to such reference
entity comprise less than five percent of the index's weighting; and
[[Page 33]]
(ii) The effective notional amounts allocated to reference entities
included in the index that satisfy paragraph (zzz)(1)(i)(D) of this
section comprise at least 80 percent of the index's weighting.
(3) For purposes of this paragraph (zzz):
(i) A reference entity included in the index is affiliated with
another reference entity included in the index (for purposes of
paragraph (zzz)(3)(iv) of this section) or another entity (for purposes
of paragraph (zzz)(3)(v) of this section) if it controls, is controlled
by, or is under common control with, that other reference entity
included in the index or other entity, as applicable; provided that each
reference entity included in the index that is an issuing entity of an
asset-backed security as defined in section 3(a)(77) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)) will not be considered
affiliated with any other reference entity included in the index or any
other entity that is an issuing entity of an asset-backed security.
(ii) Control for purposes of this section means ownership of more
than 50 percent of the equity of a reference entity included in the
index (for purposes of paragraph (zzz)(3)(iv) of this section) or
another entity (for purposes of paragraph (zzz)(3)(v) of this section),
or the ability to direct the voting of more than 50 percent of the
voting equity of a reference entity included in the index (for purposes
of paragraph (zzz)(3)(iv) of this section) or another entity (for
purposes of paragraph (zzz)(3)(v) of this section).
(iii) In identifying a reference entity included in the index for
purposes of this section, the term reference entity includes:
(A) An issuer of securities;
(B) An issuer of securities that is an issuing entity of an asset-
backed security as defined in section 3(a)(77) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)); and
(C) An issuer of securities that is a borrower with respect to any
loan identified in an index of borrowers or loans.
(iv) For purposes of calculating the thresholds in paragraphs
(zzz)(1)(i)(A) through (1)(i)(C) of this section, the term reference
entity included in the index includes a single reference entity included
in the index or a group of affiliated reference entities included in the
index as determined in accordance with paragraph (zzz)(3)(i) of this
section (with each reference entity included in the index that is an
issuing entity of an asset-backed security as defined in section
3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) being considered a separate
reference entity included in the index).
(v) For purposes of determining whether one of the criterion in
either paragraphs (zzz)(1)(i)(D)(1) through (zzz)(1)(i)(D)(4) of this
section or paragraphs (zzz)(1)(iv)(D)(8)(i) and (a)(1)(iv)(D)(8)(ii) of
this section is met, the term reference entity included in the index
includes a single reference entity included in the index or a group of
affiliated entities as determined in accordance with paragraph
(zzz)(3)(i) of this section (with each issuing entity of an asset-backed
security as defined in section 3(a)(77) of the Act (15 U.S.C.
78c(a)(77)) being considered a separate entity).
(aaaa) Meaning of ``narrow-based security index'' as used in the
definition of ``security-based swap'' as applied to index credit default
swaps.
(1) Notwithstanding paragraph (yyy)(1) of this section, and solely
for purposes of determining whether a credit default swap is a security-
based swap under the definition of ``security-based swap'' in section
3(a)(68)(A)(ii)(I) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(68)(A)(ii)(I), as incorporated in section 1a(42) of the Commodity
Exchange Act, the term narrow-based security index means an index in
which:
(i)(A) The index is composed of nine or fewer securities or
securities that are issued by nine or fewer non-affiliated issuers,
provided that a security shall not be deemed a component of the index
for purposes of this section unless:
(1) A credit event with respect to the issuer of such security or a
credit event with respect to such security would result in a payment by
the credit protection seller to the credit protection buyer under the
credit default swap based on the related notional amount allocated to
such security; or
[[Page 34]]
(2) The fact of such credit event or the calculation in accordance
with paragraph (aaaa)(1)(i)(A)(1) of this section of the amount owed
with respect to such credit event is taken into account in determining
whether to make any future payments under the credit default swap with
respect to any future credit events;
(B) The effective notional amount allocated to the securities of any
issuer included in the index comprises more than 30 percent of the
index's weighting;
(C) The effective notional amount allocated to the securities of any
five non-affiliated issuers included in the index comprises more than 60
percent of the index's weighting; or
(D) Except as provided in paragraph (aaaa)(2) of this section, for
each security included in the index, none of the criteria in paragraphs
(aaaa)(1)(i)(D)(1) through (8) is satisfied:
(1) The issuer of the security included in the index is required to
file reports pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
(2) The issuer of the security included in the index is eligible to
rely on the exemption provided in rule 12g3-2(b) under the Securities
Exchange Act of 1934 (17 CFR 240.12g3-2(b));
(3) The issuer of the security included in the index has a worldwide
market value of its outstanding common equity held by non-affiliates of
$700 million or more;
(4) The issuer of the security included in the index (other than an
issuer of the security that is an issuing entity of an asset-backed
security as defined in section 3(a)(77) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(77))) has outstanding notes, bonds,
debentures, loans or evidences of indebtedness (other than revolving
credit facilities) having a total remaining principal amount of at least
$1 billion;
(5) The security included in the index is an exempted security as
defined in section 3(a)(12) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(12)) (other than any municipal security as defined in
section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(29)));
(6) The issuer of the security included in the index is a government
of a foreign country or a political subdivision of a foreign country;
(7) If the security included in the index is an asset-backed
security as defined in section 3(a)(77) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(77)), the security was issued in a transaction
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.) and
has publicly available distribution reports; and
(8) For a credit default swap entered into solely between eligible
contract participants as defined in section 1a(18) of the Commodity
Exchange Act:
(i) The issuer of the security included in the index (other than an
issuer of the security that is an issuing entity of an asset-backed
security as defined in section 3(a)(77) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(77))) makes available to the public or
otherwise makes available to such eligible contract participant
information about such issuer pursuant to rule 144A(d)(4) of the
Securities Act of 1933 (17 CFR 230.144A(d)(4));
(ii) Financial information about the issuer of the security included
in the index (other than an issuer of the security that is an issuing
entity of an asset-backed security as defined in section 3(a)(77) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77))) is otherwise
publicly available; or
(iii) In the case of an asset-backed security as defined in section
3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)),
information of the type and level included in public distribution
reports for similar asset-backed securities is publicly available about
both the issuing entity and such asset-backed security; and
(ii)(A) The index is not composed solely of exempted securities as
defined in section 3(a)(12) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(12)), as in effect on the date of enactment of the Futures
Trading Act of 1982 (other than any municipal security as defined in
section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(29))), as in effect on the date of enactment of the Futures
Trading Act of 1982; and
[[Page 35]]
(B) Without taking into account any portion of the index composed of
exempted securities as defined in section 3(a)(12) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(12)), as in effect on the date of
enactment of the Futures Trading Act of 1982 (other than any municipal
security as defined in section 3(a)(29) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(29))), the remaining portion of the index
would be within the term ``narrow-based security index'' under paragraph
(aaaa)(1)(i) of this section.
(2) Paragraph (aaaa)(1)(i)(D) of this section will not apply with
respect to securities of an issuer included in the index if:
(i) The effective notional amounts allocated to all securities of
such issuer included in the index comprise less than five percent of the
index's weighting; and
(ii) The securities that satisfy paragraph (aaaa)(1)(i)(D) of this
section comprise at least 80 percent of the index's weighting.
(3) For purposes of this paragraph (aaaa):
(i) An issuer of securities included in the index is affiliated with
another issuer of securities included in the index (for purposes of
paragraph (aaaa)(3)(iv) of this section) or another entity (for purposes
of paragraph (aaaa)(3)(v) of this section) if it controls, is controlled
by, or is under common control with, that other issuer or other entity,
as applicable; provided that each issuer of securities included in the
index that is an issuing entity of an asset-backed security as defined
in section 3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(77)) will not be considered affiliated with any other issuer of
securities included in the index or any other entity that is an issuing
entity of an asset-backed security.
(ii) Control for purposes of this section means ownership of more
than 50 percent of the equity of an issuer of securities included in the
index (for purposes of paragraph (aaaa)(3)(iv) of this section) or
another entity (for purposes of paragraph (aaaa)(3)(v) of this section),
or the ability to direct the voting of more than 50 percent of the
voting equity an issuer of securities included in the index (for
purposes of paragraph (aaaa)(3)(iv) of this section) or another entity
(for purposes of paragraph (aaaa)(3)(v) of this section).
(iii) In identifying an issuer of securities included in the index
for purposes of this section, the term issuer includes:
(A) An issuer of securities; and
(B) An issuer of securities that is an issuing entity of an asset-
backed security as defined in section 3(a)(77) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)).
(iv) For purposes of calculating the thresholds in paragraphs
(zzz)(1)(i)(A) through (1)(i)(C) of this section, the term issuer of the
security included in the index includes a single issuer of securities
included in the index or a group of affiliated issuers of securities
included in the index as determined in accordance with paragraph
(aaaa)(3)(i) of this section (with each issuer of securities included in
the index that is an issuing entity of an asset-backed security as
defined in section 3(a)(77) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(77)) being considered a separate issuer of securities
included in the index).
(v) For purposes of determining whether one of the criterion in
either paragraphs (aaaa)(1)(i)(D)(1) through (aaaa)(1)(i)(D)(4) of this
section or paragraphs (aaaa)(1)(iv)(D)(8)(i) and (aaaa)(1)(iv)(D)(8)(ii)
of this section is met, the term issuer of the security included in the
index includes a single issuer of securities included in the index or a
group of affiliated entities as determined in accordance with paragraph
(aaaa)(3)(i) of this section (with each issuing entity of an asset-
backed security as defined in section 3(a)(77) of the Act (15 U.S.C.
78c(a)(77)) being considered a separate entity).
(bbbb) Futures contracts on certain foreign sovereign debt. The term
security-based swap as used in section 3(a)(68) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(68)), as incorporated in section
1a(42) of the Commodity Exchange Act, does not include an agreement,
contract, or transaction that is based on or references a qualifying
foreign futures contract (as defined in rule 3a12-8 under the Securities
Exchange Act of 1934 (17 CFR
[[Page 36]]
240.3a12-8)) on the debt securities of any one or more of the foreign
governments enumerated in rule 3a12-8 under the Securities Exchange Act
of 1934 (17 CFR 240.3a12-8), provided that such agreement, contract, or
transaction satisfies the following conditions:
(1) The futures contract that the agreement, contract, or
transaction references or upon which the agreement, contract, or
transaction is based is a qualifying foreign futures contract that
satisfies the conditions of rule 3a12-8 under the Securities Exchange
Act of 1934 (17 CFR 240.3a12-8) applicable to qualifying foreign futures
contracts;
(2) The agreement, contract, or transaction is traded on or through
a board of trade (as defined in the Commodity Exchange Act);
(3) The debt securities upon which the qualifying foreign futures
contract is based or referenced and any security used to determine the
cash settlement amount pursuant to paragraph (bbbb)(4) of this section
were not registered under the Securities Act of 1933 (15 U.S.C. 77 et
seq.) or the subject of any American depositary receipt registered under
the Securities Act of 1933;
(4) The agreement, contract, or transaction may only be cash
settled; and
(5) The agreement, contract or transaction is not entered into by
the issuer of the debt securities upon which the qualifying foreign
futures contract is based or referenced (including any security used to
determine the cash payment due on settlement of such agreement, contract
or transaction), an affiliate (as defined in the Securities Act of 1933
(15 U.S.C. 77 et seq.) and the rules and regulations thereunder) of the
issuer, or an underwriter of such issuer's debt securities.
(cccc) Cleared Swaps Customer. This term has the meaning provided in
Sec. 22.1 of this chapter.
(dddd) Cleared Swaps Customer Account. This term has the meaning
provided in Sec. 22.1 of this chapter.
(eeee) Cleared Swaps Customer Collateral. This term has the meaning
provided in Sec. 22.1 of this chapter.
(ffff) Confirmation. When used in reference to a futures commission
merchant, introducing broker, or commodity trading advisor, this term
means documentation (electronic or otherwise) that memorializes
specified terms of a transaction executed on behalf of a customer. When
used in reference to a swap dealer or major swap participant, this term
has the meaning set forth in Sec. 23.500 of this chapter.
(gggg) Customer Account. This term references both a Cleared Swaps
Customer Account and a Futures Account, as defined by paragraphs (dddd)
and (vv) of this section.
(hhhh) Electronic trading facility. This term means a trading
facility that--
(1) Operates by means of an electronic or telecommunications
network; and
(2) Maintains an automated audit trail of bids, offers, and the
matching of orders or the execution of transactions on the facility.
(iiii) Futures customer. This term means any person who uses a
futures commission merchant, introducing broker, commodity trading
advisor, or commodity pool operator as an agent in connection with
trading in any contract for the purchase of sale of a commodity for
future delivery or any option on such contract; 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 futures customer within the
meaning of sections 4d(a) and 4d(b) 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 futures 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 of the Act.
(jjjj) Futures customer funds. This term means all money,
securities, and property received by a futures commission merchant or by
a derivatives clearing organization from, for, or on behalf of, futures
customers:
(1) To margin, guarantee, or secure contracts for future delivery on
or subject to the rules of a contract market or derivatives clearing
organization, as the case may be, and all money accruing to such futures
customers as the result of such contracts; and
[[Page 37]]
(2) In connection with a commodity option transaction on or subject
to the rules of a contract market, or derivatives clearing organization,
as the case may be:
(i) To be used as a premium for the purchase of a commodity option
transaction for a futures customer;
(ii) As a premium payable to a futures customer;
(iii) To guarantee or secure performance of a commodity option by a
futures 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 a futures customer.
(3) Notwithstanding paragraphs (1) and (2) of this definition, the
term ``futures 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.
(kkkk) Order. This term means an instruction or authorization
provided by a customer to a futures commission merchant, introducing
broker or commodity trading advisor regarding trading in a commodity
interest on behalf of the customer.
(llll) Organized exchange. This term means a trading facility that--
(1) Permits trading--
(i) By or on behalf of a person that is not an eligible contract
participant; or
(ii) By persons other than on a principal-to-principal basis; or
(2) Has adopted (directly or through another nongovernmental entity)
rules that--
(i) Govern the conduct of participants, other than rules that govern
the submission of orders or execution of transactions on the trading
facility; and
(ii) Include disciplinary sanctions other than the exclusion of
participants from trading.
(mmmm) Prudential regulator. This term has the meaning given to the
term in section 1a(39) of the Commodity Exchange Act and includes the
Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the Farm Credit Administration, and the Federal Housing Finance Agency,
as applicable to the swap dealer or major swap participant. The term
also includes the Federal Deposit Insurance Corporation, with respect to
any financial company as defined in section 201 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act or any insured depository
institution under the Federal Deposit Insurance Act, and with respect to
each affiliate of any such company or institution.
(nnnn) Registered entity. This term means:
(1) A board of trade designated as a contract market under section 5
of the Act;
(2) A derivatives clearing organization registered under section 5b
of the Act;
(3) A board of trade designated as a contract market under section
5f of the Act;
(4) A swap execution facility registered under section 5h of the
Act;
(5) A swap data repository registered under section 21 of the Act;
and
(6) With respect to a contract that the Commission determines is a
significant price discovery contract, any electronic trading facility on
which the contract is executed or traded.
(oooo) Registrant. This term means: a commodity pool operator;
commodity trading advisor; futures commission merchant; introducing
broker; leverage transaction merchant; floor broker; floor trader; major
swap participant; retail foreign exchange dealer; or swap dealer that is
subject to these regulations; or an associated person of any of the
foregoing other than an associated person of a swap dealer or major swap
participant.
(pppp) Retail forex customer. This term means a person, other than
an eligible contract participant as defined in section 1a(18) of the
Act, acting on its own behalf and trading in any account, agreement,
contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of
the Act.
(qqqq) Swap data repository. This term means any person that
collects and maintains information or records with respect to
transactions or positions in, or the terms and conditions of, swaps
[[Page 38]]
entered into by third parties for the purpose of providing a centralized
recordkeeping facility for swaps.
(rrrr) Swap execution facility. This term means a trading system or
platform in which multiple participants have the ability to execute or
trade swaps by accepting bids and offers made by multiple participants
in the facility or system, through any means of interstate commerce,
including any trading facility, that--
(1) Facilitates the execution of swaps between persons; and
(2) Is not a designated contract market.
(ssss) Trading facility. This term has the meaning set forth in
section 1a(51) 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
section of the printed volume and at www.fdsys.gov.
Sec. 1.4 Electronic signatures, acknowledgments and verifications.
For purposes of complying with any provision in the Commodity
Exchange Act or the rules or regulations in this Chapter I that requires
a swap transaction to be acknowledged by a swap dealer or major swap
participant or a document to be signed or verified by a customer of a
futures commission merchant or introducing broker, a retail forex
customer of a retail foreign exchange dealer or futures commission
merchant, a pool participant or a client of a commodity trading advisor,
or a counterparty of a swap dealer or major swap participant, an
electronic signature executed by the customer, retail forex customer,
participant, client, counterparty, swap dealer, or major swap
participant will be sufficient, if the futures commission merchant,
retail foreign exchange dealer, introducing broker, commodity pool
operator, commodity trading advisor, swap dealer, or major swap
participant elects generally to accept electronic signatures,
acknowledgments or verifications or another Commission rule permits the
use of electronic signatures for the purposes listed above; Provided,
however, That the electronic signature must comply with applicable
Federal laws and other Commission rules; And, Provided further, That the
futures commission merchant, retail foreign exchange dealer, introducing
broker, commodity pool operator, commodity trading advisor, swap dealer,
or major swap participant must adopt and use 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.
[77 FR 66320, Nov. 2, 2012]
Sec. 1.6 Anti-evasion.
(a) It shall be unlawful to conduct activities outside the United
States, including entering into agreements, contracts, and transactions
and structuring entities, to willfully evade or attempt to evade any
provision of the Commodity Exchange Act as enacted by Subtitle A of the
Wall Street Transparency and Accountability Act of 2010 or the rules,
regulations, and orders of the Commission promulgated thereunder
(Subtitle A).
(b) The form, label, and written documentation of an agreement,
contract, or transaction, or an entity, shall not be dispositive in
determining whether the agreement, contract, or transaction, or entity,
has been entered into or structured to willfully evade as provided in
paragraph (a) of this section.
(c) An activity conducted outside the United States to evade as
provided in paragraph (a) of this section shall be subject to the
provisions of Subtitle A.
(d) Notwithstanding the foregoing, no agreement, contract, or
transaction structured as a security (including a security-based swap)
under the securities laws (as defined in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))) shall be deemed
a swap pursuant to this section.
[77 FR 48354, Aug. 13, 2012]
Sec. 1.7 Books and records requirements for security-based swap
agreements.
(a) A person registered as a swap data repository under section 21
of the Commodity Exchange Act and the rules and regulations thereunder:
[[Page 39]]
(1) Shall not be required to keep and maintain additional books and
records regarding security-based swap agreements other than the books
and records regarding swaps required to be kept and maintained pursuant
to section 21 of the Commodity Exchange Act and the rules and
regulations thereunder; and
(2) Shall not be required to collect and maintain additional data
regarding security-based swap agreements other than the data regarding
swaps required to be collected and maintained by such persons pursuant
to section 21 of the Commodity Exchange Act and the rules and
regulations thereunder.
(b) A person shall not be required to keep and maintain additional
books and records, including daily trading records, regarding security-
based swap agreements other than the books and records regarding swaps
required to be kept and maintained by such persons pursuant to section
4s of the Commodity Exchange Act and the rules and regulations
thereunder if such person is registered as:
(1) A swap dealer under section 4s(a)(1) of the Commodity Exchange
Act and the rules and regulations thereunder;
(2) A major swap participant under section 4s(a)(2) of the Commodity
Exchange Act and the rules and regulations thereunder;
(3) A security-based swap dealer under section 15F(a)(1) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(a)(1)) and the rules
and regulations thereunder; or
(4) a major security-based swap participant under section 15F(a)(2)
of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10(a)(2)) and the
rules and regulations thereunder.
(c) The term security-based swap agreement has the meaning set forth
in section 1a(47)(A)(v) of the Commodity Exchange Act.
[77 FR 48354, Aug. 13, 2012]
Sec. 1.8 Requests for interpretation of swaps, security-based swaps,
and mixed swaps.
(a) In general. Any person may submit a request to the Commission
and the Securities and Exchange Commission to provide a joint
interpretation of whether a particular agreement, contract, or
transaction (or class thereof) is:
(1) A swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act and the rules and regulations promulgated
thereunder;
(2) A security-based swap, as that term is defined in section 1a(42)
of the Commodity Exchange Act and the rules and regulations promulgated
thereunder; or
(3) A mixed swap, as that term is defined in section 1a(47)(D) of
the Commodity Exchange Act and the rules and regulations promulgated
thereunder.
(b) Request process. In making a request pursuant to paragraph (a)
of this section, the requesting person must provide the Commission and
the Securities and Exchange Commission with the following:
(1) All material information regarding the terms of the agreement,
contract, or transaction (or class thereof);
(2) A statement of the economic characteristics and purpose of the
agreement, contract, or transaction (or class thereof);
(3) The requesting person's determination as to whether the
agreement, contract, or transaction (or class thereof) should be
characterized as a swap, a security-based swap, or both, (i.e., a mixed
swap), including the basis for such determination; and
(4) Such other information as may be requested by the Commission or
the Securities and Exchange Commission.
(c) Request withdrawal. A person may withdraw a request made
pursuant to paragraph (a) of this section at any time prior to the
issuance of a joint interpretation or joint proposed rule by the
Commission and the Securities and Exchange Commission in response to the
request; provided, however, that notwithstanding such withdrawal, the
Commission and the Securities and Exchange Commission may provide a
joint interpretation of whether the agreement, contract, or transaction
(or class thereof) is a swap, a security-based swap, or both (i.e., a
mixed swap).
(d) Request by the Commission or the Securities and Exchange
Commission. In the absence of a request for a joint interpretation under
paragraph (a) of this section:
[[Page 40]]
(1) If the Commission or the Securities and Exchange Commission
receives a proposal to list, trade, or clear an agreement, contract, or
transaction (or class thereof) that raises questions as to the
appropriate characterization of such agreement, contract, or transaction
(or class thereof) as a swap, a security-based swap, or both (i.e., a
mixed swap), the Commission or the Securities and Exchange Commission,
as applicable, promptly shall notify the other of the agreement,
contract, or transaction (or class thereof); and
(2) The Commission or the Securities and Exchange Commission, or
their Chairmen jointly, may submit a request for a joint interpretation
as described in paragraph (a) of this section; such submission shall be
made pursuant to paragraph (b) of this section, and may be withdrawn
pursuant to paragraph (c) of this section.
(e) Timeframe for joint interpretation. (1) If the Commission and
the Securities and Exchange Commission determine to issue a joint
interpretation as described in paragraph (a) of this section, such joint
interpretation shall be issued within 120 days after receipt of a
complete submission requesting a joint interpretation under paragraph
(a) or (d) of this section.
(2) The Commission and the Securities and Exchange Commission shall
consult with the Board of Governors of the Federal Reserve System prior
to issuing any joint interpretation as described in paragraph (a) of
this section.
(3) If the Commission and the Securities and Exchange Commission
seek public comment with respect to a joint interpretation regarding an
agreement, contract, or transaction (or class thereof), the 120-day
period described in paragraph (e)(1) of this section shall be stayed
during the pendency of the comment period, but shall recommence with the
business day after the public comment period ends.
(4) Nothing in this section shall require the Commission and the
Securities and Exchange Commission to issue any joint interpretation.
(5) If the Commission and the Securities and Exchange Commission do
not issue a joint interpretation within the time period described in
paragraph (e)(1) or (e)(3) of this section, each of the Commission and
the Securities and Exchange Commission shall publicly provide the
reasons for not issuing such a joint interpretation within the
applicable timeframes.
(f) Joint proposed rule. (1) Rather than issue a joint
interpretation pursuant to paragraph (a) of this section, the Commission
and the Securities and Exchange Commission may issue a joint proposed
rule, in consultation with the Board of Governors of the Federal Reserve
System, to further define one or more of the terms swap, security-based
swap, or mixed swap.
(2) A joint proposed rule described in paragraph (f)(1) of this
section shall be issued within the timeframe for issuing a joint
interpretation set forth in paragraph (e) of this section.
[77 FR 48354, Aug. 13, 2012]
Sec. 1.9 Regulation of mixed swaps.
(a) In general. The term mixed swap has the meaning set forth in
section 1a(47)(D) of the Commodity Exchange Act.
(b) Regulation of bilateral uncleared mixed swaps entered into by
dually-registered dealers or major participants. A mixed swap that is
neither executed on nor subject to the rules of a designated contract
market, national securities exchange, swap execution facility, security-
based swap execution facility, or foreign board of trade; that will not
be submitted to a derivatives clearing organization or registered or
exempt clearing agency to be cleared; and where at least one party is
registered with the Commission as a swap dealer or major swap
participant and also with the Securities and Exchange Commission as a
security-based swap dealer or major security-based swap participant,
shall be subject to:
(1) The following provisions of the Commodity Exchange Act, and the
rules and regulations promulgated thereunder:
(i) Examinations and information sharing: sections 4s(f) and 8 of
the Commodity Exchange Act;
(ii) Enforcement: sections 2(a)(1)(B), 4(b), 4b, 4c, 4s(h)(1)(A),
4s(h)(4)(A), 6(c), 6(d), 6c, 6d, 9, 13(a), 13(b), and 23 of the
Commodity Exchange Act;
[[Page 41]]
(iii) Reporting to a swap data repository: section 4r of the
Commodity Exchange Act;
(iv) Real-time reporting: section 2(a)(13) of the Commodity Exchange
Act;
(v) Capital: section 4s(e) of the Commodity Exchange Act; and
(vi) Position Limits: section 4a of the Commodity Exchange Act; and
(2) The provisions of the Federal securities laws, as defined in
section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(47)), and the rules and regulations promulgated thereunder.
(c) Process for determining regulatory treatment for other mixed
swaps--(1) In general. Any person who desires or intends to list, trade,
or clear a mixed swap (or class thereof) that is not subject to
paragraph (b) of this section may request the Commission and the
Securities and Exchange Commission to issue a joint order permitting the
requesting person (and any other person or persons that subsequently
lists, trades, or clears that mixed swap) to comply, as to parallel
provisions only, with specified parallel provisions of either the
Commodity Exchange Act or the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.), and the rules and regulations thereunder (collectively,
specified parallel provisions), instead of being required to comply with
parallel provisions of both the Commodity Exchange Act and the
Securities Exchange Act of 1934. For purposes of this paragraph (c),
parallel provisions means comparable provisions of the Commodity
Exchange Act and the Securities Exchange Act of 1934 that were added or
amended by the Wall Street Transparency and Accountability Act of 2010
with respect to swaps and security-based swaps, and the rules and
regulations thereunder.
(2) Request Process. A person submitting a request pursuant to
paragraph (c)(1) of this section must provide the Commission and the
Securities and Exchange Commission with the following:
(i) All material information regarding the terms of the specified,
or specified class of, mixed swap;
(ii) The economic characteristics and purpose of the specified, or
specified class of, mixed swap;
(iii) The specified parallel provisions, and the reasons the person
believes such specified parallel provisions would be appropriate for the
mixed swap (or class thereof); and
(iv) An analysis of:
(A) The nature and purposes of the parallel provisions that are the
subject of the request;
(B) The comparability of such parallel provisions;
(C) The extent of any conflicts or differences between such parallel
provisions; and
(D) Such other information as may be requested by the Commission or
the Securities and Exchange Commission.
(3) Request withdrawal. A person may withdraw a request made
pursuant to paragraph (c)(1) of this section at any time prior to the
issuance of a joint order under paragraph (c)(4) of this section by the
Commission and the Securities and Exchange Commission in response to the
request.
(4) Issuance of orders. In response to a request under paragraph
(c)(1) of this section, the Commission and the Securities and Exchange
Commission, as necessary to carry out the purposes of the Wall Street
Transparency and Accountability Act of 2010, may issue a joint order,
after notice and opportunity for comment, permitting the requesting
person (and any other person or persons that subsequently lists, trades,
or clears that mixed swap) to comply, as to parallel provisions only,
with the specified parallel provisions (or another subset of the
parallel provisions that are the subject of the request, as the
Commissions determine is appropriate), instead of being required to
comply with parallel provisions of both the Commodity Exchange Act and
the Securities Exchange Act of 1934. In determining the contents of such
joint order, the Commission and the Securities and Exchange Commission
may consider, among other things:
(i) The nature and purposes of the parallel provisions that are the
subject of the request;
(ii) The comparability of such parallel provisions; and
(iii) The extent of any conflicts or differences between such
parallel provisions.
[[Page 42]]
(5) Timeframe. (i) If the Commission and the Securities and Exchange
Commission determine to issue a joint order as described in paragraph
(c)(4) of this section, such joint order shall be issued within 120 days
after receipt of a complete request for a joint order under paragraph
(c)(1) of this section, which time period shall be stayed during the
pendency of the public comment period provided for in paragraph (c)(4)
of this section and shall recommence with the business day after the
public comment period ends.
(ii) Nothing in this section shall require the Commission and the
Securities and Exchange Commission to issue any joint order.
(iii) If the Commission and the Securities and Exchange Commission
do not issue a joint order within the time period described in paragraph
(c)(5)(i) of this section, each of the Commission and the Securities and
Exchange Commission shall publicly provide the reasons for not issuing
such a joint order within that timeframe.
[77 FR 48354, Aug. 13, 2012]
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 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
[[Page 43]]
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-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 60 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
[[Page 44]]
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 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.
(5) Each futures commission merchant must file with the Commission
the measure of the future commission merchant's leverage as of the close
of the business each month. For purpose of this section, the term
``leverage'' shall be defined by a registered futures association of
which the futures commission merchant is a member. The futures
commission merchant is required to file the leverage information with
the Commission within 17 business days of the close of the futures
commission merchant's month end.
(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 (as set forth in
Sec. 140.02 of this chapter) 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.
[[Page 45]]
(2)(i) All filings or other notices prepared by a futures commission
merchant pursuant to this section must 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 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 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,
the statement of secured amounts and funds held in separate accounts for
30.7 customers (as defined in Sec. 30.1 of this chapter) in accordance
with Sec. 30.7 of this chapter, and the statement of cleared swaps
customer segregation requirements and funds in cleared swaps customer
accounts under section 4d(f) of the Act 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;
[[Page 46]]
(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,
the statement of secured amounts and funds held in separate accounts for
30.7 customers (as defined in Sec. 30.1 of this chapter) in accordance
with Sec. 30.7 of the chapter, and the statement of cleared swaps
customers segregation requirements and funds in cleared swaps customer
accounts under section 4d(f) of the Act 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, the statement of secured amounts and funds held in
separate accounts for 30.7 customers (as defined in Sec. 30.1 of this
chapter) in accordance with Sec. 30.7 of this chapter, and the
statement of cleared swaps customer segregation requirements and funds
in cleared swaps customer accounts under section 4d(f) of the Act, 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 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
[[Page 47]]
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 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
[[Page 48]]
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.
(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
[[Page 49]]
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,
the Statement (to be filed by a futures commission merchant only) of
Secured Amounts and Funds held in Separate Accounts for 30.7 Customers
(as defined in Sec. 30.1 of this chapter) in accordance with Sec. 30.7
of this chapter, and the Statement (to be filed by futures commission
merchants only) of Cleared Swaps Customer Segregation Requirements and
Funds in Cleared Swaps Customer Accounts under section 4d(f) of the Act.
(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.
(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
[[Page 50]]
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 or retail foreign exchange
dealer 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, retail foreign
exchange dealer, 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;
and, if the firm is a limited liability company or limited liability
partnership, either 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.
(2) No futures commission merchant or retail foreign exchange dealer
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) of this part or Sec.
5.6(b) of this chapter, as applicable; or
(ii) There is filed against the futures commission merchant or
retail foreign exchange dealer an adjudicatory proceeding brought by or
before the Commission pursuant to the provisions of sections 6(c), 6(d),
6c, 6d, 8a or 9 of the Act or Sec. 3.55, 3.56 or 3.60 of this chapter.
(3) A retail foreign exchange dealer may enter into a guarantee
agreement only with an introducing broker as defined in Sec. 5.1(f)(1)
of this chapter. A retail foreign exchange dealer may not enter into a
guarantee agreement with an introducing broker as defined in Sec.
1.3(mm) of this part.
(4) 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.
(5)(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
[[Page 51]]
such suspension, revocation or withdrawal.
(ii) If the registration of the futures commission merchant or
retail foreign exchange dealer 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.
(6) 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 or retail foreign exchange dealer 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 or retail foreign exchange dealer 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 or retail foreign
exchange dealer and the introducing broker.
(7) The termination of a guarantee agreement by a futures commission
merchant, retail foreign exchange dealer or an introducing broker, or
the expiration of such an agreement, shall not relieve any party from
any liability or obligation arising from acts or omissions which
occurred during the term of the agreement.
(8) An introducing broker may not simultaneously be a party to more
than one guarantee agreement: Provided, however, That the provisions of
this paragraph (j)(8) shall not be deemed to preclude an introducing
broker from entering into a guarantee agreement with another futures
commission merchant or retail foreign exchange dealer if the introducing
broker, futures commission merchant or retail foreign exchange dealer
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)(6) 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)(8) shall not be deemed to preclude an
introducing broker from entering into a guarantee agreement with another
futures commission merchant or retail foreign exchange dealer if the
futures commission merchant or retail foreign exchange dealer 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)(6)(ii) of this section.
(9)(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)(6) of this section, or that is due to expire in accordance
with the provisions of paragraph (j)(5)(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 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
[[Page 52]]
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: Provided, however, that an introducing broker as defined in Sec.
5.1(f)(1) of this chapter that is party to a guarantee agreement that
has been terminated or that has expired 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 broker files with its designated self-
regulatory organization a new guarantee agreement effective on or before
the termination or expiration date of the terminating or expiring
guarantee agreement.
(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)(9)(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)(6)(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: Provided, however, that an introducing broker as defined in Sec.
5.1(f)(1) of this chapter that is party to a guarantee agreement that
has been terminated must cease doing business as an introducing broker
from and after the effective date of such termination, and may not
resume doing business as an introducing broker as defined in Sec.
5.1(f)(1) of this chapter unless and until it files a new guarantee
agreement.
(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
[[Page 53]]
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
section of the printed volume and at www.fdsys.gov.
Sec. 1.11 Risk Management Program for futures commission merchants.
(a) Applicability. Nothing in this section shall apply to a futures
commission merchant that 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 from soliciting or accepting
orders for the purchase or sale of any commodity interest.
(b) Definitions. For purposes of this section:
(1) Business unit means any department, division, group, or
personnel of a futures commission merchant or any of its affiliates,
whether or not identified as such that:
(i) Engages in soliciting or in accepting orders for the purchase or
sale of any commodity interest 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; or
(ii) Otherwise handles segregated funds, including managing,
investing, and overseeing the custody of segregated funds, or any
documentation in connection therewith, other than for risk management
purposes; and
(iii) Any personnel exercising direct supervisory authority of the
performance of the activities described in paragraph (b)(1)(i) or (ii)
of this section.
(2) Customer means a futures customer as defined in Sec. 1.3,
Cleared Swaps Customer as defined in Sec. 22.1 of this chapter, and
30.7 customer as defined in Sec. 30.1 of this chapter.
(3) Governing body means the proprietor, if the futures commission
merchant is a sole proprietorship; a general partner, if the futures
commission merchant is a partnership; the board of directors if the
futures commission merchant is a corporation; the chief executive
officer, the chief financial officer, the manager, the managing member,
or those members vested with the management authority if the futures
commission merchant is a limited liability company or limited liability
partnership.
(4) Segregated funds means money, securities, or other property held
by a futures commission merchant in separate accounts pursuant to Sec.
1.20 for futures customers, pursuant to Sec. 22.2 of this chapter for
Cleared Swaps Customers, and pursuant to Sec. 30.7 of this chapter for
30.7 customers.
(5) Senior management means, any officer or officers specifically
granted the authority and responsibility to fulfill the requirements of
senior management by the governing body.
(c) Risk Management Program. (1) Each futures commission merchant
shall establish, maintain, and enforce a system of risk management
policies and procedures designed to monitor and manage the risks
associated with the activities of the futures commission merchant as
such. For purposes of this section, such policies and procedures shall
be referred to collectively as a ``Risk Management Program.''
(2) Each futures commission merchant shall maintain written policies
and procedures that describe the Risk Management Program of the futures
commission merchant.
(3) The Risk Management Program and the written risk management
policies and procedures, and any material changes thereto, shall be
approved in writing by the governing body of the futures commission
merchant.
(4) Each futures commission merchant shall furnish a copy of its
written risk management policies and procedures to the Commission and
its designated self-regulatory organization upon application for
registration and thereafter upon request.
(d) Risk management unit. As part of the Risk Management Program,
each
[[Page 54]]
futures commission merchant shall establish and maintain a risk
management unit with sufficient authority; qualified personnel; and
financial, operational, and other resources to carry out the risk
management program established pursuant to this section. The risk
management unit shall report directly to senior management and shall be
independent from the business unit.
(e) Elements of the Risk Management Program. The Risk Management
Program of each futures commission merchant shall include, at a minimum,
the following elements:
(1) Identification of risks and risk tolerance limits. (i) The Risk
Management Program shall take into account market, credit, liquidity,
foreign currency, legal, operational, settlement, segregation,
technological, capital, and any other applicable risks together with a
description of the risk tolerance limits set by the futures commission
merchant and the underlying methodology in the written policies and
procedures. The risk tolerance limits shall be reviewed and approved
quarterly by senior management and annually by the governing body.
Exceptions to risk tolerance limits shall be subject to written policies
and procedures.
(ii) The Risk Management Program shall take into account risks posed
by affiliates, all lines of business of the futures commission merchant,
and all other trading activity engaged in by the futures commission
merchant. The Risk Management Program shall be integrated into risk
management at the consolidated entity level.
(iii) The Risk Management Program shall include policies and
procedures for detecting breaches of risk tolerance limits set by the
futures commission merchant, and alerting supervisors within the risk
management unit and senior management, as appropriate.
(2) Periodic Risk Exposure Reports. (i) The risk management unit of
each futures commission merchant shall provide to senior management and
to its governing body quarterly written reports setting forth all
applicable risk exposures of the futures commission merchant; any
recommended or completed changes to the Risk Management Program; the
recommended time frame for implementing recommended changes; and the
status of any incomplete implementation of previously recommended
changes to the Risk Management Program. For purposes of this section,
such reports shall be referred to as ``Risk Exposure Reports.'' The Risk
Exposure Reports also shall be provided to the senior management and the
governing body immediately upon detection of any material change in the
risk exposure of the futures commission merchant.
(ii) Furnishing to the Commission. Each futures commission merchant
shall furnish copies of its Risk Exposure Reports to the Commission
within five (5) business days of providing such reports to its senior
management.
(3) Specific risk management considerations. The Risk Management
Program of each futures commission merchant shall include, but not be
limited to, policies and procedures necessary to monitor and manage the
following risks:
(i) Segregation risk. The written policies and procedures shall be
reasonably designed to ensure that segregated funds are separately
accounted for and segregated or secured as belonging to customers as
required by the Act and Commission regulations and must, at a minimum,
include or address the following:
(A) A process for the evaluation of depositories of segregated
funds, including, at a minimum, documented criteria that any depository
that will hold segregated funds, including an entity affiliated with the
futures commission merchant, must meet, including criteria addressing
the depository's capitalization, creditworthiness, operational
reliability, and access to liquidity. The criteria should further
consider the extent to which segregated funds are concentrated with any
depository or group of depositories. The criteria also should include
the availability of deposit insurance and the extent of the regulation
and supervision of the depository;
(B) A program to monitor an approved depository on an ongoing basis
to assess its continued satisfaction of the futures commission
merchant's established criteria, including a thorough
[[Page 55]]
due diligence review of each depository at least annually;
(C) An account opening process for depositories, including
documented authorization requirements, procedures that ensure that
segregated funds are not deposited with a depository prior to the
futures commission merchant receiving the acknowledgment letter required
from such depository pursuant to Sec. Sec. 1.20, and 22.2 and 30.7 of
this chapter, and procedures that ensure that such account is properly
titled to reflect that it is holding segregated funds pursuant to the
Act and Commission regulations;
(D) A process for establishing a targeted amount of residual
interest that the futures commission merchant seeks to maintain as its
residual interest in the segregated funds accounts and such process must
be designed to reasonably ensure that the futures commission merchant
maintains the targeted residual amounts and remains in compliance with
the segregated funds requirements at all times. The policies and
procedures must require that senior management, in establishing the
total amount of the targeted residual interest in the segregated funds
accounts, perform appropriate due diligence and consider various
factors, as applicable, relating to the nature of the futures commission
merchant's business including, but not limited to, the composition of
the futures commission merchant's customer base, the general
creditworthiness of the customer base, the general trading activity of
the customers, the types of markets and products traded by the
customers, the proprietary trading of the futures commission merchant,
the general volatility and liquidity of the markets and products traded
by customers, the futures commission merchant's own liquidity and
capital needs, and the historical trends in customer segregated fund
balances, including undermargined amounts and net deficit balances in
customers' accounts. The analysis and calculation of the targeted amount
of the future commission merchant's residual interest must be described
in writing with the specificity necessary to allow the Commission and
the futures commission merchant's designated self-regulatory
organization to duplicate the analysis and calculation and test the
assumptions made by the futures commission merchant. The adequacy of the
targeted residual interest and the process for establishing the targeted
residual interest must be reassessed periodically by Senior Management
and revised as necessary;
(E) A process for the withdrawal of cash, securities, or other
property from accounts holding segregated funds, where the withdrawal is
not for the purpose of payments to or on behalf of the futures
commission merchant's customers. Such policies and procedures must
satisfy the requirements of Sec. 1.23, Sec. 22.17 of this chapter, or
Sec. 30.7 of this chapter, as applicable;
(F) A process for assessing the appropriateness of specific
investments of segregated funds in permitted investments in accordance
with Sec. 1.25. Such policies and procedures must take into
consideration the market, credit, counterparty, operational, and
liquidity risks associated with such investments, and assess whether
such investments comply with the requirements in Sec. 1.25 including
that the futures commission merchant manage the permitted investments
consistent with the objectives of preserving principal and maintaining
liquidity;
(G) Procedures requiring the appropriate separation of duties among
individuals responsible for compliance with the Act and Commission
regulations relating to the protection and financial reporting of
segregated funds, including the separation of duties among personnel
that are responsible for advising customers on trading activities,
approving or overseeing cash receipts and disbursements (including
investment operations), and recording and reporting financial
transactions. The policies and procedures must require that any movement
of funds to affiliated companies and parties are properly approved and
documented;
(H) A process for the timely recording of all transactions,
including transactions impacting customers' accounts, in the firm's
books of record;
(I) A program for conducting annual training of all finance,
treasury, operations, regulatory, compliance, settlement, and other
relevant officers and
[[Page 56]]
employees regarding the segregation requirements for segregated funds
required by the Act and regulations, the requirements for notices under
Sec. 1.12, procedures for reporting suspected breaches of the policies
and procedures required by this section to the chief compliance officer,
without fear of retaliation, and the consequences of failing to comply
with the segregation requirements of the Act and regulations; and
(J) Policies and procedures for assessing the liquidity,
marketability and mark-to-market valuation of all securities or other
non-cash assets held as segregated funds, including permitted
investments under Sec. 1.25, to ensure that all non-cash assets held in
the customer segregated accounts, both customer-owned securities and
investments in accordance with Sec. 1.25, are readily marketable and
highly liquid. Such policies and procedures must require daily
measurement of liquidity needs with respect to customers; assessment of
procedures to liquidate all non-cash collateral in a timely manner and
without significant effect on price; and application of appropriate
collateral haircuts that accurately reflect market and credit risk.
(ii) Operational risk. The Risk Management Program shall include
automated financial risk management controls reasonably designed to
prevent the placing of erroneous orders, including those that exceed
pre-set capital, credit, or volume thresholds. The Risk Management
Program shall ensure that the use of automated trading programs is
subject to policies and procedures governing the use, supervision,
maintenance, testing, and inspection of such programs.
(iii) Capital risk. The written policies and procedures shall be
reasonably designed to ensure that the futures commission merchant has
sufficient capital to be in compliance with the Act and the regulations,
and sufficient capital and liquidity to meet the reasonably foreseeable
needs of the futures commission merchant.
(4) Supervision of the Risk Management Program. The Risk Management
Program shall include a supervisory system that is reasonably designed
to ensure that the policies and procedures required by this section are
diligently followed.
(f) Review and testing. (1) The Risk Management Program of each
futures commission merchant shall be reviewed and tested on at least an
annual basis, or upon any material change in the business of the futures
commission merchant that is reasonably likely to alter the risk profile
of the futures commission merchant.
(2) The annual reviews of the Risk Management Program shall include
an analysis of adherence to, and the effectiveness of, the risk
management policies and procedures, and any recommendations for
modifications to the Risk Management Program. The annual testing shall
be performed by qualified internal audit staff that are independent of
the business unit, or by a qualified third party audit service reporting
to staff that are independent of the business unit. The results of the
annual review of the Risk Management Program shall be promptly reported
to and reviewed by the chief compliance officer, senior management, and
governing body of the futures commission merchant.
(3) Each futures commission merchant shall document all internal and
external reviews and testing of its Risk Management Program and written
risk management policies and procedures including the date of the review
or test; the results; any deficiencies identified; the corrective action
taken; and the date that corrective action was taken. Such documentation
shall be provided to Commission staff, upon request.
(g) Distribution of risk management policies and procedures. The
Risk Management Program shall include procedures for the timely
distribution of its written risk management policies and procedures to
relevant supervisory personnel. Each futures commission merchant shall
maintain records of the persons to whom the risk management policies and
procedures were distributed and when they were distributed.
(h) Recordkeeping. (1) Each futures commission merchant shall
maintain copies of all written approvals required by this section.
(2) All records or reports, including, but not limited to, the
written policies
[[Page 57]]
and procedures and any changes thereto that a futures commission
merchant is required to maintain pursuant to this regulation shall be
maintained in accordance with Sec. 1.31 and shall be made available
promptly upon request to representatives of the Commission.
[78 FR 68620, Nov. 14, 2013]
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 notice, as set forth in paragraph (n) 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 have known 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 on which such person's adjusted net capital is
less than the minimum required; Provided, however, that if the applicant
or registrant cannot calculate or otherwise immediately determine its
financial condition, it must provide the notice required by paragraph
(a)(1) of this section and include in such notice a statement that the
entity cannot presently calculate its financial condition. The applicant
or registrant must provide similar documentation of its financial
condition 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 notice to that effect, as set forth in
paragraph (n) of this section, as soon as possible and no later than
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
notice of such fact as specified in paragraph (n) of this section,
specifying the books and records which have not been made or which are
not current, and as soon as possible, but not later than forty-eight
(48) hours after giving such notice, file a report as required by
paragraph (n) of this section 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 the
existence of any material inadequacy, as specified
[[Page 58]]
in Sec. 1.16(d)(2), such applicant or registrant must give notice of
such material inadequacy, as provided in paragraph (n) of this section,
as soon as possible but not later than twenty-four (24) hours of
discovering or being notified of the material inadequacy. The applicant
or registrant must file, in the manner provided for under paragraph (n)
of this section, a report stating what steps have been and are being
taken to correct the material inadequacy within forty-eight (48) hours
of filing its notice of the material inadequacy.
(e) Whenever any self-regulatory organization learns that a member
registrant has failed to file a notice or report as required by this
section, that self-regulatory organization must immediately report this
failure by notice, as provided in paragraph (n) of this section.
(f)(1) [Reserved]
(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 notice, as
provided in paragraph (n) of this section, of such a determination.
(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 provide notice, as provided in paragraph (n)
of this section, of such a determination to the designated self-
regulatory organization and the Commission. 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, 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 its own account, all such accounts
shall be combined.
(4) A futures commission merchant shall provide immediate notice, as
provided in paragraph (n) of this section, 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, cleared swaps, 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 provide immediate notice,
as provided in paragraph (n) of this section, 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
or dealer.
(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 notice, as provided
in
[[Page 59]]
paragraph (n) of this section, 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 as provided in paragraph (n) of this
section within two business days of the event or series of events
causing the reduction stating the reason for the reduction and steps the
futures commission merchant will be taking to ensure an appropriate
level of net capital is maintained by the futures commission merchant;
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 as provided in paragraph (n) of this section 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,
or upon a reasonable belief that a substantial reduction in capital has
occurred or will occur, the Director of the Division of Swap Dealer 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 trading on designated
contract markets, or the amount of funds on deposit in segregated
accounts for customers transacting in Cleared Swaps under part 22 of
this chapter, or the total amount set aside on behalf of customers
trading on non-United States markets under part 30 of this chapter, is
less than the total amount of such funds required by the Act and the
regulations to be on deposit in segregated or secured amount accounts on
behalf of such customers, the registrant must report such deficiency
immediately by notice to the registrant's designated self-regulatory
organization and the Commission, as provided in paragraph (n) of this
section.
(i) A futures commission merchant must provide immediate notice, as
set forth in paragraph (n) of this section, whenever it discovers or is
informed that it has invested funds held for futures customers trading
on designated contract markets pursuant to Sec. 1.20, Cleared Swaps
Customer Collateral, as
[[Page 60]]
defined in Sec. 22.1 of this chapter, or 30.7 customer funds, as
defined in Sec. 30.1 of this chapter, in instruments that are not
permitted investments under Sec. 1.25, or has otherwise violated the
requirements governing the investment of funds belonging to customers
under Sec. 1.25.
(j) A futures commission merchant must provide immediate notice, as
provided in paragraph (n) of this section, whenever the futures
commission merchant does not hold a sufficient amount of funds in
segregated accounts for futures customers under Sec. 1.20, in
segregated accounts for Cleared Swaps Customers under part 22 of this
chapter, or in secured amount accounts for customers trading on foreign
markets under part 30 of this chapter to meet the futures commission
merchant's targeted residual interest in the segregated or secured
amount accounts pursuant to its policies and procedures required under
Sec. 1.11, or whenever the futures commission merchant's amount of
residual interest is less than the sum of the undermargined amounts in
its customer accounts as determined at the point in time that the firm
is required to maintain the undermargined amounts under Sec. 1.22, and
Sec. Sec. 22.2 and 30.7 of this chapter.
(k) A futures commission merchant must provide immediate notice, as
provided in paragraph (n) of this section, whenever the futures
commission merchant, or the futures commission merchant's parent or
material affiliate, experiences a material adverse impact to its
creditworthiness or ability to fund its obligations, including any
change that could adversely impact the firm's liquidity resources.
(l) A futures commission merchant must provide prompt notice, but in
no event later than 24 hours, as provided in paragraph (n) of this
section, whenever the futures commission merchant experiences a material
change in its operations or risk profile, including a change in the
senior management of the futures commission merchant, the establishment
or termination of a line of business, or a material adverse change in
the futures commission merchant's clearing arrangements.
(m) A futures commission merchant must provide notice, if the
futures commission merchant has been notified by the Securities and
Exchange Commission, a securities self-regulatory organization, or a
futures self-regulatory organization, that it is the subject of a formal
investigation. A futures commission merchant must provide a copy of any
examination report issued to the futures commission merchant by the
Securities and Exchange Commission or a securities self-regulatory
organization. A futures commission merchant must provide the Commission
with notice of any correspondence received from the Securities and
Exchange Commission or a securities self-regulatory organization that
raises issues with the adequacy of the futures commission merchant's
capital position, liquidity to meet its obligations or otherwise operate
its business, or internal controls. The notices and examination reports
required by this section must be filed in a prompt manner, but in no
event later than 24 hours of the reportable event, and must be filed in
accordance with paragraph (n) of the section; Provided, however, that a
futures commission merchant is not required to file a notice or copy of
an examination report with the Securities and Exchange Commission, a
securities self-regulatory organization, or a futures self-regulatory
organization if such entity originally provided the communication or
report to the futures commission merchant.
(n) Notice. (1) Every notice and report required to be filed by this
section by a futures commission merchant or a self-regulatory
organization must be filed with the Commission, with the designated
self-regulatory organization, if any, and with the Securities and
Exchange Commission, if such registrant is a securities broker or
dealer. Every notice and report required to be 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. Every notice or report that is required to
be filed by this section by a futures commission
[[Page 61]]
merchant or a self-regulatory organization must include a discussion of
how the reporting event originated and what steps have been, or are
being taken, to address the reporting event.
(2) Every notice and report which an introducing broker or applicant
for registration as an introducing broker is required to 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. Every notice or
report that is required to be filed by this section by an introducing
broker or applicant for registration as an introducing broker must
include a discussion of how the reporting event originated and what
steps have been, or are being taken, to address the reporting event.
(3) Every notice or report that is required to be filed by a futures
commission merchant with the Commission or with a designated self-
regulatory organization under this section must be in writing and must
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; Provided, however, that if the registered
futures commission merchant cannot file the notice or report using the
electronic transmission approved by the Commission due to a transmission
or systems failure, the futures commission merchant must immediately
contact the Commission's regional office with jurisdiction over the
futures commission merchant as provided in Sec. 140.02 of this chapter,
and by email to [email protected]. Any such electronic submission must
clearly indicate the futures commission merchant 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
section of the printed volume and at www.fdsys.gov.
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
[[Page 62]]
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 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
[[Page 63]]
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:
(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
[[Page 64]]
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 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
[[Page 65]]
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) 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
[[Page 66]]
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 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 (2) of this section must 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 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.
(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
[[Page 67]]
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 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
[[Page 68]]
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 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, as amended at
78 FR 68625, Nov. 14, 2013]
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.
[[Page 69]]
(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. Sec. 1.3, and 30.7 customer, as defined in Sec. 30.1 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 standing as such under the laws of the place of his residence or
principal office; Provided, however, that a certified public accountant
engaged to conduct an examination of a futures commission merchant must
be registered with the Public Company Accounting Oversight Board and
must have undergone an examination by the Public Company Accounting
Oversight Board, and may not be subject to a permanent or temporary bar
to engage in the examination of public issuers or brokers or dealers
registered with the Securities and Exchange Commission as a result of a
Public Company Accounting Oversight Board disciplinary hearing.
(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.
(4) The governing body of each futures commission merchant must
ensure that the certified public accountant engaged is duly qualified to
perform an audit of the futures commission merchant. Such an evaluation
of the qualifications of the certified public accountant should include,
among other issues, the certified public accountant's experience in
auditing futures commission merchants, the depth of the certified public
accountant's staff, the certified public accountant's knowledge of the
Act and Regulations, the size and geographic location of the futures
commission merchant, and the independence of the certified public
accountant. The governing body should
[[Page 70]]
also review and consider the inspection reports issued by the Public
Company Accounting Oversight Board as part of the assessment of the
qualifications of the public accountant to perform an audit of the
futures commission merchant.
(c) Accountant's reports--(1) Technical requirements. The
accountant's report must:
(i) Be dated;
(ii) Indicate the city and State where issued; and
(iii) Identify without detailed enumeration the financial statements
covered by the report.
(2) Representations as to the audit. The accountant's report must
state whether the audit was made in accordance with the auditing
standards adopted by the Public Company Accounting Oversight Board, and
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 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 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
[[Page 71]]
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 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
[[Page 72]]
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 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 is required to be filed with
the Commission must 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 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.
(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
[[Page 73]]
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 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
[[Page 74]]
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; 77
FR 66320, Nov. 2, 2012; 78 FR 68625, Nov. 14, 2013]
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 Exchange Commission (17
CFR 240.15c3-1(a)).
(ii) [Reserved]
(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
[[Page 75]]
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, or who cannot certify to the
Commission immediately upon request and demonstrate with verifiable
evidence that it has sufficient access to liquidity to continue
operating as a going concern, 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 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 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. This term means a futures customer as defined in Sec.
1.3, a cleared over the counter customer as defined in paragraph (b)(10)
of this section, and a 30.7 customer as defined in Sec. 30.1 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
[[Page 76]]
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. This term 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 an account
that is included in the definition of customer as defined in Sec.
1.17(b)(2).
(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 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 commodity 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 commodity 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 commodity 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
[[Page 77]]
(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:
(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;
[[Page 78]]
(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 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 guarantee 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
[[Page 79]]
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 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 commodity--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 that invests funds deposited by futures customers as
defined in Sec. 1.3, Cleared Swaps Customers as defined in Sec. 22.1
of this chapter, and 30.7 customers as defined in Sec. 30.1 of this
chapter in securities as permitted investments under Sec. 1.25, the
deductions specified in Rule 240.15c3-1(c)(2)(vi) or Rule 240.15c3-
1(c)(2)(vii) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi) and 17 CFR 240.15c3-
[[Page 80]]
1(c)(2)(vii)) (``securities haircuts''). Futures commission merchants
that establish and enforce written policies and procedures to assess the
credit risk of commercial paper, convertible debt instruments, or
nonconvertible debt instruments in accordance with Rule 240.15c3-
1(c)(2)(vi) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi)) may apply the lower haircut percentages specified in Rule
240.15c3-1(c)(2)(vi) for such commercial paper, convertible debt
instruments and nonconvertible debt instruments. Futures commission
merchants must maintain their written policies and procedures in
accordance with Sec. 1.31;
(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 no more than one business day. 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 no more than one business day, 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. 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 paragraph (c)(5) of this section;
(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 no more than
one business day. 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
no more than one business day 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. 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 paragraph shall be the lesser of the value
attributable to such asset pursuant to the margin rules of the
applicable board of trade, or the market value of such asset after
application of the percentage deductions specified in paragraph (c)(5)
of this section;
[[Page 81]]
(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 commodity 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;
(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 options 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 the
foreign futures or foreign options secured amount, as Sec. 1.3(rr)
defines such term, 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
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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 Swap Dealer 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 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 Swap Dealer 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)
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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 Swap Dealer 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:
(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
[[Page 84]]
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, 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
[[Page 85]]
(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 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
[[Page 86]]
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 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
[[Page 87]]
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 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
[[Page 88]]
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 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
[[Page 89]]
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 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
[[Page 90]]
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 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
[[Page 91]]
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 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
[[Page 92]]
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
(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
[[Page 93]]
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;
(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;
[[Page 94]]
(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 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
[[Page 95]]
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 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
[[Page 96]]
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 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 at www.fdsys.gov.
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.
[[Page 97]]
(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 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 Futures customer funds to be segregated and separately
accounted for.
(a) General. A futures commission merchant must separately account
for all futures customer funds and segregate such funds as belonging to
its futures customers. A futures commission merchant shall deposit
futures customer funds under an account name that clearly identifies
them as futures customer funds and shows that such funds are segregated
as required by sections 4d(a) and 4d(b) of the Act and by this part. A
futures commission merchant must at all times maintain in the separate
account or accounts money, securities and property in an amount at least
sufficient in the aggregate to cover its total obligations to all
futures customers as computed under paragraph (i) of this section. The
futures commission merchant must perform appropriate due diligence as
required by Sec. 1.11 on any and all locations of futures customer
funds, as specified in paragraph (b) of this section, to ensure that the
location in which the futures commission merchant has deposited such
funds is a financially sound entity.
(b) Location of futures customer funds. A futures commission
merchant may deposit futures customer funds, subject to the risk
management policies and procedures of the futures commission merchant
required by Sec. 1.11, with the following depositories:
(1) A bank or trust company;
[[Page 98]]
(2) A derivatives clearing organization; or
(3) Another futures commission merchant.
(c) Limitation on the holding of futures customer funds outside of
the United States. A futures commission merchant may hold futures
customer funds with a depository outside of the United States only in
accordance with Sec. 1.49.
(d) Written acknowledgment from depositories. (1) A futures
commission merchant must obtain a written acknowledgment from each bank,
trust company, derivatives clearing organization, or futures commission
merchant prior to or contemporaneously with the opening of an account by
the futures commission merchant with such depositories; provided,
however, that a written acknowledgment need not be obtained from a
derivatives clearing organization that has adopted and submitted to the
Commission rules that provide for the segregation of futures customer
funds in accordance with all relevant provisions of the Act and the
rules and orders promulgated thereunder.
(2) The written acknowledgment must be in the form as set out in
appendix A to this part.
(3)(i) A futures commission merchant shall deposit futures customer
funds only with a depository that agrees to provide the director of the
Division of Swap Dealer and Intermediary Oversight, or any successor
division, or such director's designees, with direct, read-only
electronic access to transaction and account balance information for
futures customer accounts.
(ii) The written acknowledgment must contain the futures commission
merchant's authorization to the depository to provide direct, read-only
electronic access to futures customer account transaction and account
balance information to the director of the Division of Swap Dealer and
Intermediary Oversight, or any successor division, or such director's
designees, without further notice to or consent from the futures
commission merchant.
(4) A futures commission merchant shall deposit futures customer
funds only with a depository that agrees to provide the Commission and
the futures commission merchant's designated self-regulatory
organization with a copy of the executed written acknowledgment no later
than three business days after the opening of the account or the
execution of a new written acknowledgment for an existing account, as
applicable. The Commission must receive the written acknowledgment from
the depository via electronic means, in a format and manner determined
by the Commission. The written acknowledgment must contain the futures
commission merchant's authorization to the depository to provide the
written acknowledgment to the Commission and to the futures commission
merchant's designated self-regulatory organization without further
notice to or consent from the futures commission merchant.
(5) A futures commission merchant shall deposit futures customer
funds only with a depository that agrees that accounts containing
customer funds may be examined at any reasonable time by the director of
the Division of Swap Dealer and Intermediary Oversight or the director
of the Division of Clearing and Risk, or any successor divisions, or
such directors' designees, or an appropriate officer, agent or employee
of the futures commission merchant's designated self-regulatory
organization. The written acknowledgment must contain the futures
commission merchant's authorization to the depository to permit any such
examination to take place without further notice to or consent from the
futures commission merchant.
(6) A futures commission merchant shall deposit futures customer
funds only with a depository that agrees to reply promptly and directly
to any request from the director of the Division of Swap Dealer and
Intermediary Oversight or the director of the Division of Clearing and
Risk, or any successor divisions, or such directors' designees, or an
appropriate officer, agent or employee of the futures commission
merchant's designated self-regulatory organization for confirmation of
account balances or provision of any other information regarding or
related to an account. The written acknowledgment must contain the
futures commission merchant's authorization to the depository to reply
promptly and directly as
[[Page 99]]
required by this paragraph without further notice to or consent from the
futures commission merchant.
(7) The futures commission merchant shall promptly file a copy of
the written acknowledgment with the Commission in the format and manner
specified by the Commission no later than three business days after the
opening of the account or the execution of a new written acknowledgment
for an existing account, as applicable.
(8) A futures commission merchant shall obtain a new written
acknowledgment within 120 days of any changes in the following:
(i) The name or business address of the futures commission merchant;
(ii) The name or business address of the bank, trust company,
derivatives clearing organization or futures commission merchant
receiving futures customer funds; or
(iii) The account number(s) under which futures customer funds are
held.
(9) A futures commission merchant shall maintain each written
acknowledgment readily accessible in its files in accordance with Sec.
1.31, for as long as the account remains open, and thereafter for the
period provided in Sec. 1.31.
(e) Commingling. (1) A futures commission merchant may for
convenience commingle the futures customer funds that it receives from,
or on behalf of, multiple futures customers in a single account or
multiple accounts with one or more of the depositories listed in
paragraph (b) of this section.
(2) A futures commission merchant shall not commingle futures
customer funds with the money, securities or property of such futures
commission merchant, or with any proprietary account of such futures
commission merchant, or use such funds to secure or guarantee the
obligation of, or extend credit to, such futures commission merchant or
any proprietary account of such futures commission merchant; provided,
however, a futures commission merchant may deposit proprietary funds in
segregated accounts as permitted under Sec. 1.23.
(3) A futures commission merchant may not commingle futures customer
funds with funds deposited by 30.7 customers as defined in Sec. 30.1 of
this chapter and set aside in separate accounts as required by part 30
of this chapter, or with funds deposited by Cleared Swaps Customers as
defined in Sec. 22.1 of this chapter and held in segregated accounts
pursuant to section 4d(f) of the Act; provided, however, that a futures
commission merchant may commingle futures customer funds with funds
deposited by 30.7 customers or Cleared Swaps Customers if expressly
permitted by a Commission regulation or order, or by a derivatives
clearing organization rule approved in accordance with Sec. 39.15(b)(2)
of this chapter.
(f) Limitation on use of futures customer funds. (1) A futures
commission merchant shall treat and deal with the funds of a futures
customer as belonging to such futures customer. A futures commission
merchant shall not use the funds of a futures customer to secure or
guarantee the commodity interests, or to secure or extend the credit, of
any person other than the futures customer for whom the funds are held.
(2) A futures commission merchant shall obligate futures customer
funds to a derivatives clearing organization, a futures commission
merchant, or any depository solely to purchase, margin, guarantee,
secure, transfer, adjust or settle trades, contracts or commodity option
transactions of futures customers; provided, however, that a futures
commission merchant is permitted to use the funds belonging to a futures
customer that are necessary in the normal course of business to pay
lawfully accruing fees or expenses on behalf of the futures customer's
positions including commissions, brokerage, interest, taxes, storage and
other fees and charges.
(3) No person, including any derivatives clearing organization or
any depository, that has received futures 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 futures
customers of the futures commission merchant which deposited such funds.
(g) Derivatives clearing organizations--(1) General. All futures
customer funds received by a derivatives clearing organization from a
member to purchase, margin, guarantee, secure or settle the trades,
contracts or commodity options
[[Page 100]]
of the clearing member's futures customers and all money accruing to
such futures customers as the result of trades, contracts or commodity
options so carried shall be separately accounted for and segregated as
belonging to such futures customers, and a derivatives clearing
organization shall not hold, use or dispose of such futures customer
funds except as belonging to such futures customers. A derivatives
clearing organization shall deposit futures customer funds under an
account name that clearly identifies them as futures customer funds and
shows that such funds are segregated as required by sections 4d(a) and
4d(b) of the Act and by this part.
(2) Location of futures customer funds. A derivatives clearing
organization may deposit futures customer funds with a bank or trust
company, which may include a Federal Reserve Bank with respect to
deposits of a derivatives clearing organization that is designated by
the Financial Stability Oversight Council to be systemically important.
(3) Limitation on the holding of futures customer funds outside of
the United States. A derivatives clearing organization may hold futures
customer funds with a depository outside of the United States only in
accordance with Sec. 1.49.
(4) Written acknowledgment from depositories. (i) A derivatives
clearing organization must obtain a written acknowledgment from each
depository prior to or contemporaneously with the opening of a futures
customer funds account; provided, however, that a derivatives clearing
organization is not required to obtain a written acknowledgment from a
Federal Reserve Bank with which it has opened a futures customer funds
account.
(ii) The written acknowledgment must be in the form as set out in
appendix B to this part.
(iii) A derivatives clearing organization shall deposit futures
customer funds only with a depository that agrees to provide the
Commission with a copy of the executed written acknowledgment no later
than three business days after the opening of the account or the
execution of a new written acknowledgment for an existing account, as
applicable. The Commission must receive the written acknowledgment from
the depository via electronic means, in a format and manner determined
by the Commission. The written acknowledgment must contain the
derivatives clearing organization's authorization to the depository to
provide the written acknowledgment to the Commission without further
notice to or consent from the derivatives clearing organization.
(iv) A derivatives clearing organization shall deposit futures
customer funds only with a depository that agrees to reply promptly and
directly to any request from the director of the Division of Clearing
and Risk or the director of the Division of Swap Dealer and Intermediary
Oversight, or any successor divisions, or such directors' designees, for
confirmation of account balances or provision of any other information
regarding or related to an account. The written acknowledgment must
contain the derivatives clearing organization's authorization to the
depository to reply promptly and directly as required by this paragraph
without further notice to or consent from the derivatives clearing
organization.
(v) A derivatives clearing organization shall promptly file a copy
of the written acknowledgment with the Commission in the format and
manner specified by the Commission no later than three business days
after the opening of the account or the execution of a new written
acknowledgment for an existing account, as applicable.
(vi) A derivatives clearing organization shall obtain a new written
acknowledgment within 120 days of any changes in the following:
(A) The name or business address of the derivatives clearing
organization;
(B) The name or business address of the depository receiving futures
customer funds; or
(C) The account number(s) under which futures customer funds are
held.
(vii) A derivatives clearing organization shall maintain each
written acknowledgment readily accessible in its files in accordance
with Sec. 1.31, for as long as the account remains open, and thereafter
for the period provided in Sec. 1.31.
[[Page 101]]
(5) Commingling. (i) A derivatives clearing organization may for
convenience commingle the futures customer funds that it receives from,
or on behalf of, multiple futures commission merchants in a single
account or multiple accounts with one or more of the depositories listed
in paragraph (g)(2) of this section.
(ii) A derivatives clearing organization shall not commingle futures
customer funds with the money, securities or property of such
derivatives clearing organization or with any proprietary account of any
of its clearing members, or use such funds to secure or guarantee the
obligations of, or extend credit to, such derivatives clearing
organization or any proprietary account of any of its clearing members.
(iii) A derivatives clearing organization may not commingle funds
held for futures customers with funds deposited by clearing members on
behalf of their 30.7 customers as defined in Sec. 30.1 of this chapter
and set aside in separate accounts as required by part 30 of this
chapter, or with funds deposited by clearing members on behalf of their
Cleared Swaps Customers as defined in Sec. 22.1 of this chapter and
held in segregated accounts pursuant section 4d(f) of the Act; provided,
however, that a derivatives clearing organization may commingle futures
customer funds with funds deposited by clearing members on behalf of
their 30.7 customers or Cleared Swaps Customers if expressly permitted
by a Commission regulation or order, or by a derivatives clearing
organization rule approved in accordance with Sec. 39.15(b)(2) of this
chapter.
(h) Immediate availability of bank and trust company deposits. All
futures customer funds deposited by a futures commission merchant or a
derivatives clearing organization with a bank or trust company must be
immediately available for withdrawal upon the demand of the futures
commission merchant or derivatives clearing organization.
(i) Requirements as to amount. (1) For purposes of this paragraph
(i), the term ``account'' shall mean the entries on the books and
records of a futures commission merchant pertaining to the futures
customer funds of a particular futures customer.
(2) The futures commission merchant must reflect in the account that
it maintains for each futures customer the net liquidating equity for
each such customer, calculated as follows: The market value of any
futures customer funds that it receives from such customer, as adjusted
by:
(i) Any uses permitted under paragraph (f) of this section;
(ii) Any accruals on permitted investments of such collateral under
Sec. 1.25 that, pursuant to the futures commission merchant's customer
agreement with that customer, are creditable to such customer;
(iii) Any gains and losses with respect to contracts for the
purchase or sale of a commodity for future delivery and any options on
such contracts;
(iv) Any charges lawfully accruing to the futures customer,
including any commission, brokerage fee, interest, tax, or storage fee;
and
(v) Any appropriately authorized distribution or transfer of such
collateral.
(3) If the market value of futures customer funds in the account of
a futures customer is positive after adjustments, then that account has
a credit balance. If the market value of futures customer funds in the
account of a futures customer is negative after adjustments, then that
account has a debit balance.
(4) The futures commission merchant must maintain in segregation an
amount equal to the sum of any credit balances that the futures
customers of the futures commission merchant have in their accounts.
This balance may not be reduced by any debit balances that the futures
customers of the futures commission merchants have in their accounts.
Appendix A to Sec. 1.20--Futures Commission Merchant Acknowledgment
Letter for CFTC Regulation 1.20 Customer Segregated Account
[Date]
[Name and Address of Bank, Trust Company, Derivatives Clearing
Organization or Futures Commission Merchant]
We refer to the Segregated Account(s) which [Name of Futures
Commission Merchant] (``we'' or ``our'') have opened or will open with
[Name of Bank, Trust Company,
[[Page 102]]
Derivatives Clearing Organization or Futures Commission Merchant]
(``you'' or ``your'') entitled:
[Name of Futures Commission Merchant] [if applicable, add ``FCM Customer
Omnibus Account''] CFTC Regulation 1.20 Customer Segregated Account
under Sections 4d(a) and 4d(b) of the Commodity Exchange Act [and, if
applicable, ``, Abbreviated as [short title reflected in the
depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').
You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable,
money, securities and other property (collectively the ``Funds'') of
customers who trade commodities, options, swaps, and other products, as
required by Commodity Futures Trading Commission (``CFTC'') Regulations,
including Regulation 1.20, as amended; that the Funds held by you,
hereafter deposited in the Account(s) or accruing to the credit of the
Account(s), will be separately accounted for and segregated on your
books from our own funds and from any other funds or accounts held by us
in accordance with the provisions of the Commodity Exchange Act, as
amended (the ``Act''), and part 1 of the CFTC's regulations, as amended;
and that the Funds must otherwise be treated in accordance with the
provisions of Section 4d of the Act and CFTC regulations thereunder.
Furthermore, you acknowledge and agree that such Funds may not be
used by you or by us to secure or guarantee any obligations that we
might owe to you, and they may not be used by us to secure or obtain
credit from you. You further acknowledge and agree that the Funds in the
Account(s) shall not be subject to any right of offset or lien for or on
account of any indebtedness, obligations or liabilities we may now or in
the future have owing to you. This prohibition does not affect your
right to recover funds advanced in the form of cash transfers, lines of
credit, repurchase agreements or other similar liquidity arrangements
you make in lieu of liquidating non-cash assets held in the Account(s)
or in lieu of converting cash held in the Account(s) to cash in a
different currency.
In addition, you agree that the Account(s) may be examined at any
reasonable time by the director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC or the director of the Division of
Clearing and Risk of the CFTC, or any successor divisions, or such
directors' designees, or an appropriate officer, agent or employee of
our designated self-regulatory organization (``DSRO''), [Name of DSRO],
and this letter constitutes the authorization and direction of the
undersigned on our behalf to permit any such examination to take place
without further notice to or consent from us.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other information
regarding or related to the Account(s) from the director of the Division
of Swap Dealer and Intermediary Oversight of the CFTC or the director of
the Division of Clearing and Risk of the CFTC, or any successor
divisions, or such directors' designees, or an appropriate officer,
agent, or employee of [Name of DSRO], acting in its capacity as our
DSRO, and this letter constitutes the authorization and direction of the
undersigned on our behalf to release the requested information without
further notice to or consent from us.
You further acknowledge and agree that, pursuant to authorization
granted by us to you previously or herein, you have provided, or will
promptly provide following the opening of the Account(s), the director
of the Division of Swap Dealer and Intermediary Oversight of the CFTC,
or any successor division, or such director's designees, with
technological connectivity, which may include provision of hardware,
software, and related technology and protocol support, to facilitate
direct, read-only electronic access to transaction and account balance
information for the Account(s). This letter constitutes the
authorization and direction of the undersigned on our behalf for you to
establish this connectivity and access if not previously established,
without further notice to or consent from us.
The parties agree that all actions on your part to respond to the
above information and access requests will be made in accordance with,
and subject to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information or access request, in order to
provide for the secure transmission and delivery of the requested
information or access to the appropriate recipient(s). We will not hold
you responsible for acting pursuant to any information or access request
from the director of the Division of Swap Dealer and Intermediary
Oversight of the CFTC or the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such directors'
designees, or an appropriate officer, agent, or employee of [Name of
DSRO], acting in its capacity as our DSRO, upon which you have relied
after having taken measures in accordance with your applicable policies
and procedures to assure that such request was provided to you by an
individual authorized to make such a request.
In the event that we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
[[Page 103]]
acknowledge that you will have no obligation to release the Funds held
in the Account(s), except upon instruction of the Trustee in Bankruptcy
or pursuant to the Order of the respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary, nothing
contained herein shall be construed as limiting your right to assert any
right of offset or lien on assets that are not Funds maintained in the
Account(s), or to impose such charges against us or any proprietary
account maintained by us with you. Further, it is understood that
amounts represented by checks, drafts or other items shall not be
considered to be part of the Account(s) until finally collected.
Accordingly, checks, drafts and other items credited to the Account(s)
and subsequently dishonored or otherwise returned to you or reversed,
for any reason, and any claims relating thereto, including but not
limited to claims of alteration or forgery, may be charged back to the
Account(s), and we shall be responsible to you as a general endorser of
all such items whether or not actually so endorsed.
You may conclusively presume that any withdrawal from the Account(s)
and the balances maintained therein are in conformity with the Act and
CFTC regulations without any further inquiry, provided that, in the
ordinary course of your business as a depository, you have no notice of
or actual knowledge of a potential violation by us of any provision of
the Act or the CFTC regulations that relates to the segregation of
customer funds; and you shall not in any manner not expressly agreed to
herein be responsible to us for ensuring compliance by us with such
provisions of the Act and CFTC regulations; however, the aforementioned
presumption does not affect any obligation you may otherwise have under
the Act or CFTC regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree or
levy relates in whole or in part to the Account(s). In any event, you
shall not be liable by reason of any action or omission to act pursuant
to any such order, judgment, decree or levy, to us or to any other
person, firm, association or corporation even if thereafter any such
order, decree, judgment or levy shall be reversed, modified, set aside
or vacated.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of doubt,
regardless of a change in the name of either party. This letter
agreement supersedes and replaces any prior agreement between the
parties in connection with the Account(s), including but not limited to
any prior acknowledgment letter agreement, to the extent that such prior
agreement is inconsistent with the terms hereof. In the event of any
conflict between this letter agreement and any other agreement between
the parties in connection with the Account(s), this letter agreement
shall govern with respect to matters specific to Section 4d of the Act
and the CFTC's regulations thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to the
principles of choice of law.
Please acknowledge that you agree to abide by the requirements and
conditions set forth above by signing and returning to us the enclosed
copy of this letter agreement, and that you further agree to provide a
copy of this fully executed letter agreement directly to the CFTC (via
electronic means in a format and manner determined by the CFTC) and to
[Name of DSRO], acting in its capacity as our DSRO. We hereby authorize
and direct you to provide such copies without further notice to or
consent from us, no later than three business days after opening the
Account(s) or revising this letter agreement, as applicable.
[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank, Trust Company, Derivatives Clearing Organization or
Futures Commission Merchant]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:
Appendix B to Sec. 1.20--Derivatives Clearing Organization
Acknowledgment Letter for CFTC Regulation 1.20 Customer Segregated
Account
[Date]
[Name and Address of Bank or Trust Company]
We refer to the Segregated Account(s) which [Name of Derivatives
Clearing Organization] (``we'' or ``our'') have opened or will open with
[Name of Bank or Trust Company] (``you'' or ``your'') entitled:
[Name of Derivatives Clearing Organization] Futures Customer Omnibus
Account, CFTC Regulation 1.20 Customer Segregated Account under Sections
4d(a) and 4d(b) of the Commodity Exchange Act [and, if applicable, ``,
Abbreviated as [short title reflected in the depository's electronic
system]'']
Account Number(s): [ ]
[[Page 104]]
(collectively, the ``Account(s)'').
You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable,
money, securities and other property (collectively the ``Funds'') of
customers who trade commodities, options, swaps, and other products, as
required by Commodity Futures Trading Commission (``CFTC'') Regulations,
including Regulation 1.20, as amended; that the Funds held by you,
hereafter deposited in the Account(s) or accruing to the credit of the
Account(s), will be separately accounted for and segregated on your
books from our own funds and from any other funds or accounts held by us
in accordance with the provisions of the Commodity Exchange Act, as
amended (the ``Act''), and part 1 of the CFTC's regulations, as amended;
and that the Funds must otherwise be treated in accordance with the
provisions of Section 4d of the Act and CFTC regulations thereunder.
Furthermore, you acknowledge and agree that such Funds may not be
used by you or by us to secure or guarantee any obligations that we
might owe to you, and they may not be used by us to secure or obtain
credit from you. You further acknowledge and agree that the Funds in the
Account(s) shall not be subject to any right of offset or lien for or on
account of any indebtedness, obligations or liabilities we may now or in
the future have owing to you. This prohibition does not affect your
right to recover funds advanced in the form of cash transfers, lines of
credit, repurchase agreements or other similar liquidity arrangements
you make in lieu of liquidating non-cash assets held in the Account(s)
or in lieu of converting cash held in the Account(s) to cash in a
different currency.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other information
regarding or related to the Account(s) from the director of the Division
of Clearing and Risk of the CFTC or the director of the Division of Swap
Dealer and Intermediary Oversight of the CFTC, or any successor
divisions, or such directors' designees, and this letter constitutes the
authorization and direction of the undersigned on our behalf to release
the requested information without further notice to or consent from us.
The parties agree that all actions on your part to respond to the
above information requests will be made in accordance with, and subject
to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information request, in order to provide for
the secure transmission and delivery of the requested information to the
appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information request from the director of the Division of Clearing and
Risk of the CFTC or the director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC, or any successor divisions, or such
directors' designees, upon which you have relied after having taken
measures in accordance with your applicable policies and procedures to
assure that such request was provided to you by an individual authorized
to make such a request.
In the event that we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Funds held
in the Account(s), except upon instruction of the Trustee in Bankruptcy
or pursuant to the Order of the respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary, nothing
contained herein shall be construed as limiting your right to assert any
right of offset or lien on assets that are not Funds maintained in the
Account(s), or to impose such charges against us or any proprietary
account maintained by us with you. Further, it is understood that
amounts represented by checks, drafts or other items shall not be
considered to be part of the Account(s) until finally collected.
Accordingly, checks, drafts and other items credited to the Account(s)
and subsequently dishonored or otherwise returned to you or reversed,
for any reason, and any claims relating thereto, including but not
limited to claims of alteration or forgery, may be charged back to the
Account(s), and we shall be responsible to you as a general endorser of
all such items whether or not actually so endorsed.
You may conclusively presume that any withdrawal from the Account(s)
and the balances maintained therein are in conformity with the Act and
CFTC regulations without any further inquiry, provided that, in the
ordinary course of your business as a depository, you have no notice of
or actual knowledge of a potential violation by us of any provision of
the Act or the CFTC regulations that relates to the segregation of
customer funds; and you shall not in any manner not expressly agreed to
herein be responsible to us for ensuring compliance by us with such
provisions of the Act and CFTC regulations; however, the aforementioned
presumption does not affect any obligation you may otherwise have under
the Act or CFTC regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree or
levy relates in whole or in part to the Account(s). In any event, you
shall not be liable by reason of any action or omission to act pursuant
to any such order, judgment, decree or levy, to
[[Page 105]]
us or to any other person, firm, association or corporation even if
thereafter any such order, decree, judgment or levy shall be reversed,
modified, set aside or vacated.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of doubt,
regardless of a change in the name of either party. This letter
agreement supersedes and replaces any prior agreement between the
parties in connection with the Account(s), including but not limited to
any prior acknowledgment letter agreement, to the extent that such prior
agreement is inconsistent with the terms hereof. In the event of any
conflict between this letter agreement and any other agreement between
the parties in connection with the Account(s), this letter agreement
shall govern with respect to matters specific to Section 4d of the Act
and the CFTC's regulations thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to the
principles of choice of law.
Please acknowledge that you agree to abide by the requirements and
conditions set forth above by signing and returning to us the enclosed
copy of this letter agreement, and that you further agree to provide a
copy of this fully executed letter agreement directly to the CFTC (via
electronic means in a format and manner determined by the CFTC). We
hereby authorize and direct you to provide such copy without further
notice to or consent from us, no later than three business days after
opening the Account(s) or revising this letter agreement, as applicable.
[Name of Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank or Trust Company]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:
[78 FR 68627, Nov. 14, 2013, as amended at 79 FR 26832, May 12, 2014; 81
FR 53267, Aug. 12, 2016]
Sec. 1.21 Care of money and equities accruing to futures customers.
All money received directly or indirectly by, and all money and
equities accruing to, a futures commission merchant from any derivatives
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 futures customer shall be considered as accruing to such
futures customer within the meaning of the Act and these regulations.
Such money and equities shall be treated and dealt with as belonging to
such futures customer in accordance with the provisions of the Act and
these regulations. Money and equities accruing in connection with
futures 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 futures customers having open
trades, contracts, or commodity option positions which if closed would
result in a credit to such futures customers.
[77 FR 66321, Nov. 2, 2012]
Sec. 1.22 Use of futures customer funds restricted.
(a) No futures commission merchant shall use, or permit the use of,
the futures customer funds of one futures 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 futures customer.
(b) Futures customer funds shall not be used to carry trades or
positions of the same futures customer other than in contracts for the
purchase of sale of any commodity for future delivery or for options
thereon traded through the facilities of a designated contract market.
(c)(1) The undermargined amount for a futures customer's account is
the amount, if any, by which:
(i) The total amount of collateral required for that futures
customer's positions in that account, at the time or times referred to
in paragraph (c)(2) of this section, exceeds
(ii) The value of the futures customer funds for that account, as
calculated in Sec. 1.20(i)(2).
(2) Each futures commission merchant must compute, based on the
information available to the futures commission merchant as of the close
of each business day,
[[Page 106]]
(i) The undermargined amounts, based on the clearing initial margin
that will be required to be maintained by that futures commission
merchant for its futures customers, at each derivatives clearing
organization of which the futures commission merchant is a member, at
the point of the daily settlement (as described in Sec. 39.14 of this
chapter) that will complete during the following business day for each
such derivatives clearing organization less
(ii) Any debit balances referred to in Sec. 1.20(i)(4) included in
such undermargined amounts.
(3)(i) Prior to the Residual Interest Deadline, such futures
commission merchant must maintain residual interest in segregated funds
that is at least equal to the computation set forth in paragraph (c)(2)
of this section. Where a futures commission merchant is subject to
multiple Residual Interest Deadlines, prior to each Residual Interest
Deadline, such futures commission merchant must maintain residual
interest in segregated funds that is at least equal to the portion of
the computation set forth in paragraph (c)(2) of this section
attributable to the clearing initial margin required by the derivatives
clearing organization making such settlement.
(ii) A futures commission merchant may reduce the amount of residual
interest required in paragraph (c)(3)(i) of this section to account for
payments received from or on behalf of undermargined futures customers
(less the sum of any disbursements made to or on behalf of such
customers) between the close of the previous business day and the
Residual Interest Deadline.
(4) For purposes of paragraph (c)(2) of this section, a futures
commission merchant should include, as clearing initial margin, customer
initial margin that the futures commission merchant will be required to
maintain, for that futures commission merchant's futures customers, at
another futures commission merchant.
(5) Residual Interest Deadline defined. (i) Except as provided in
paragraph (c)(5)(ii) of this section, the Residual Interest Deadline
shall be the time of the settlement referenced in paragraph (c)(2)(i)
or, as appropriate, (c)(4), of this section.
(ii) Starting on November 14, 2014 and during the phase-in period
described in paragraph (c)(5)(iii) of this section, the Residual
Interest Deadline shall be 6:00 p.m. Eastern Time on the date of the
settlement referenced in paragraph (c)(2)(i) or, as appropriate, (c)(4),
of this section.
(iii)(A) No later than May 16, 2016, the staff of the Commission
shall complete and publish for public comment a report addressing, to
the extent information is practically available, the practicability (for
both futures commission merchants and customers) of moving that deadline
from 6:00 p.m. Eastern Time on the date of the settlement referenced in
paragraph (c)(2)(i) or, as appropriate, (c)(4), of this section to the
time of that settlement (or to some other time of day), including
whether and on what schedule it would be feasible to do so, and the
costs and benefits of such potential requirements. Staff shall, using
the Commission's Web site, solicit public comment and shall conduct a
public roundtable regarding specific issues to be covered by such
report.
(B) Nine months after publication of the report required by
paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall
not be required to) do either of the following:
(1) Terminate the phase-in period through rulemaking, in which case
the phase-in period shall end as of a date established by a final rule
published in the Federal Register, which date shall be no less than one
year after the date such rule is published; or
(2) Determine that it is necessary or appropriate in the public
interest to propose through rulemaking a different Residual Interest
Deadline. In that event, the Commission shall establish, if necessary, a
phase-in schedule in the final rule published in the Federal Register.
(C) If the phase-in schedule has not been terminated or revised
pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual
Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of the
settlement referenced in paragraph (c)(2)(i) or, as appropriate, (c)(4)
of this section until such time
[[Page 107]]
that the Commission takes further action through rulemaking.
[78 FR 68631, Nov. 14, 2013, as amended at 80 FR 15509, Mar. 24, 2015]
Sec. 1.23 Interest of futures commission merchant in segregated
futures customer funds; additions and withdrawals.
(a)(1) The provision in sections 4d(a)(2) and 4d(b) of the Act and
the provision in Sec. 1.20 that prohibit the commingling of futures
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 futures customer funds segregated as
required by the Act and the regulations in this part and set apart for
the benefit of futures customers; nor shall such provisions be construed
to prevent a futures commission merchant from adding to such segregated
futures 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 of this part, as it may deem necessary to ensure any
and all futures customers' accounts from becoming undersegregated at any
time.
(2) If a futures commission merchant discovers at any time that it
is holding insufficient funds in segregated accounts to meet its
obligations under Sec. Sec. 1.20 and 1.22, the futures commission
merchant shall immediately deposit sufficient funds into segregation to
bring the account into compliance.
(b) A futures commission merchant may not withdraw funds, except
withdrawals that are made to or for the benefit of futures customers,
from an account or accounts holding futures customer funds unless the
futures commission merchant has prepared the daily segregation
calculation required by Sec. 1.32 as of the close of business on the
previous business day. A futures commission merchant that has completed
its daily segregation calculation may make withdrawals, in addition to
withdrawals that are made to or for the benefit of futures customers, to
the extent of its actual residual financial interest in funds held in
segregated futures accounts, adjusted to reflect market activity and
other events that may have decreased the amount of the firm's residual
financial interest since the close of business on the previous business
day, including the withdrawal of securities held in segregated
safekeeping accounts held by a bank, trust company, derivatives clearing
organization or other futures commission merchant. Such withdrawal(s),
however, shall not result in the funds of one futures customer being
used to purchase, margin or carry the trades, contracts or commodity
options, or extend the credit of any other futures customer or other
person.
(c) Notwithstanding paragraphs (a) and (b) of this section, each
futures commission merchant shall establish a targeted residual interest
(i.e., excess funds) that is in an amount that, when maintained as its
residual interest in the segregated funds accounts, reasonably ensures
that the futures commission merchant shall remain in compliance with the
segregated funds requirements at all times. Each futures commission
merchant shall establish policies and procedures designed to reasonably
ensure that the futures commission merchant maintains the targeted
residual amounts in segregated funds at all times. The futures
commission merchant shall maintain sufficient capital and liquidity, and
take such other appropriate steps as are necessary, to reasonably ensure
that such amount of targeted residual interest is maintained as the
futures commission merchant's residual interest in the segregated funds
accounts at all times. In determining the amount of the targeted
residual interest, the futures commission merchant shall analyze all
relevant factors affecting the amounts in segregated funds from time to
time, including without limitation various factors, as applicable,
relating to the nature of the futures commission merchant's business
including, but not limited to, the composition of the futures commission
merchant's customer base, the general creditworthiness of the customer
base, the general trading activity of the customers, the types of
markets and products traded by the customers, the proprietary trading of
the futures commission merchant, the general volatility and liquidity of
the
[[Page 108]]
markets and products traded by customers, the futures commission
merchant's own liquidity and capital needs, and the historical trends in
customer segregated fund balances and debit balances in customers' and
undermargined accounts. The analysis and calculation of the targeted
amount of the future commission merchant's residual interest must be
described in writing with the specificity necessary to allow the
Commission and the futures commission merchant's designated self-
regulatory organization to duplicate the analysis and calculation and
test the assumptions made by the futures commission merchant. The
adequacy of the targeted residual interest and the process for
establishing the targeted residual interest must be reassessed
periodically by the futures commission merchant and revised as
necessary.
(d) Notwithstanding any other paragraph of this section, a futures
commission merchant may not withdraw funds, in a single transaction or a
series of transactions, that are not made to or for the benefit of
futures customers from futures accounts if such withdrawal(s) would
exceed 25 percent of the futures commission merchant's residual interest
in such accounts as reported on the daily segregation calculation
required by Sec. 1.32 and computed as of the close of business on the
previous business day, unless:
(1) The futures commission merchant's chief executive officer, chief
finance officer or other senior official that is listed as a principal
of the futures commission merchant on its Form 7-R and is knowledgeable
about the futures commission merchant's financial requirements and
financial position pre-approves in writing the withdrawal, or series of
withdrawals;
(2) The futures commission merchant files written notice of the
withdrawal or series of withdrawals, with the Commission and with its
designated self-regulatory organization immediately after the chief
executive officer, chief finance officer or other senior official as
described in paragraph (d)(1) of this section pre-approves the
withdrawal or series of withdrawals. The written notice must:
(i) Be signed by the chief executive officer, chief finance officer
or other senior official as described in paragraph (d)(1) of this
section that pre-approved the withdrawal, and give notice that the
futures commission merchant has withdrawn or intends to withdraw more
than 25 percent of its residual interest in segregated accounts holding
futures customer funds;
(ii) Include a description of the reasons for the withdrawal or
series of withdrawals;
(iii) List the amount of funds provided to each recipient and each
recipient's name;
(iv) Include the current estimate of the amount of the futures
commission merchant's residual interest in the futures accounts after
the withdrawal;
(v) Contain a representation by the chief executive officer, chief
finance officer or other senior official as described in paragraph
(d)(1) of this section that pre-approved the withdrawal, or series of
withdrawals, that, after due diligence, to such person's knowledge and
reasonable belief, the futures commission merchant remains in compliance
with the segregation requirements after the withdrawal. The chief
executive officer, chief finance officer or other senior official as
described in paragraph (d)(1) of this section must consider the daily
segregation calculation as of the close of business on the previous
business day and any other factors that may cause a material change in
the futures commission merchant's residual interest since the close of
business the previous business day, including known unsecured futures
customer debits or deficits, current day market activity and any other
withdrawals made from the futures accounts; and
(vi) Any such written notice filed with the Commission must 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 instruction issued by or
approved by the Commission. Any such electronic submission must clearly
indicate the registrant on whose behalf such filing is made and the use
of such user authentication in submitting such filing will constitute
[[Page 109]]
and become a substitute for the manual signature of the authorized
signer. Any written notice filed must be followed up with direct
communication to the Regional office of the Commission that has
supervisory authority over the futures commission merchant whereby the
Commission acknowledges receipt of the notice; and
(3) After making a withdrawal requiring the approval and notice
required in paragraphs (d)(1) and (2) of this section, and before the
completion of its next daily segregated funds calculation, no futures
commission merchant may make any further withdrawals from accounts
holding futures customer funds, except to or for the benefit of futures
customers, without, for each withdrawal, obtaining the approval required
under paragraph (d)(1) of this section and filing a written notice in
the manner specified under paragraph (d)(2) of this section with the
Commission and its designated self-regulatory organization signed by the
chief executive officer, chief finance officer, or other senior
official. The written notice must:
(i) List the amount of funds provided to each recipient and each
recipient's name;
(ii) Disclose the reason for each withdrawal;
(iii) Confirm that the chief executive officer, chief finance
officer, or other senior official (and identify of the person if
different from the person who signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of the futures commission
merchant's remaining total residual interest in the segregated accounts
holding futures customer funds after the withdrawal; and
(v) Include a representation that, after due diligence, to the best
of the notice signatory's knowledge and reasonable belief the futures
commission merchant remains in compliance with the segregation
requirements after the withdrawal.
(e) If a futures commission merchant withdraws funds from futures
accounts that are not made to or for the benefit of futures customers,
and the withdrawal causes the futures commission merchant to not hold
sufficient funds in the futures accounts to meet its targeted residual
interest, as required to be computed under Sec. 1.11, the futures
commission merchant should deposit its own funds into the futures
accounts to restore the account balance to the targeted residual
interest amount by the close of business on the next business day, or,
if appropriate, revise the futures commission merchant's targeted amount
of residual interest pursuant to the policies and procedures required by
Sec. 1.11. Notwithstanding the foregoing, if a the futures commission
merchant's residual interest in customer accounts is less than the
amount required by Sec. 1.22 at any particular point in time, the
futures commission merchant must immediately restore the residual
interest to exceed the sum of such amounts. Any proprietary funds
deposited in the futures accounts must be unencumbered and otherwise
compliant with Sec. 1.25, as applicable.
[78 FR 68632, Nov. 14, 2013, as amended at 79 FR 44126, July 30, 2014]
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
derivatives clearing organization or in memberships in or obligations of
any contract market; or
(b) Money held by any derivatives 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 futures customers of such futures commission merchant.
[77 FR 66322, Nov. 2, 2012]
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);
[[Page 110]]
(ii) General obligations of any State or of any political
subdivision thereof (municipal securities);
(iii) Obligations of any United States government corporation or
enterprise sponsored by the United States government (U.S. agency
obligations);
(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 fully guaranteed as to principal and interest
by the United States under the Temporary Liquidity Guarantee Program as
administered by the Federal Deposit Insurance Corporation (commercial
paper);
(vi) Corporate notes or bonds fully guaranteed as to principal and
interest by the United States under the Temporary Liquidity Guarantee
Program as administered by the Federal Deposit Insurance Corporation
(corporate notes or bonds); and
(vii) 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 (vii) 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
``highly liquid'' as defined in paragraph (b)(1) of this section.
(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) Obligations issued by the Federal National Mortgage Association
or the Federal Home Loan Mortgage Association are permitted while these
entities operate under the conservatorship or receivership of the
Federal Housing Finance Authority with capital support from the United
States.
(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) Liquidity. Investments must be ``highly liquid'' such that they
have the ability to be converted into cash within one business day
without material discount in value.
(2) 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)(2)(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)(2)(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:
[[Page 111]]
(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 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 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 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.
(vi) Commercial paper and corporate notes or bonds must meet the
following criteria:
(A) The size of the issuance must be greater than $1 billion;
(B) The instrument must be denominated in U.S. dollars; and
(C) The instrument must be fully guaranteed as to principal and
interest by the United States for its entire term.
(3) Concentration--(i) Asset-based concentration limits for direct
investments. (A) Investments in U.S. government securities shall not be
subject to a concentration limit.
(B) Investments in U.S. agency obligations may not exceed 50 percent
of the total assets held in segregation by the futures commission
merchant or derivatives clearing organization.
(C) Investments in each of commercial paper, corporate notes or
bonds and certificates of deposit may not exceed 25 percent of the total
assets held in segregation by the futures commission merchant or
derivatives clearing organization.
(D) Investments in municipal securities may not exceed 10 percent of
the total assets held in segregation by the futures commission merchant
or derivatives clearing organization.
(E) Subject to paragraph (b)(3)(i)(G) of this section, investments
in money market mutual funds comprising only U.S. government securities
shall not be subject to a concentration limit.
(F) Subject to paragraph (b)(3)(i)(G) of this section, investments
in money market mutual funds, other than those described in paragraph
(b)(3)(i)(E) of this section, may not exceed 50 percent of the total
assets held in segregation by the futures commission merchant or
derivatives clearing organization.
(G) Investments in money market mutual funds comprising less than $1
billion in assets and/or which have a management company comprising less
than $25 billion in assets, may not exceed 10 percent of the total
assets held
[[Page 112]]
in segregation by the futures commission merchant or derivatives
clearing organization.
(ii) Issuer-based concentration limits for direct investments. (A)
Securities of any single issuer of U.S. agency obligations 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.
(B) 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.
(C) Interests in any single family of money market mutual funds
described in paragraph (b)(3)(i)(F) of this section may not exceed 25
percent of total assets held in segregation by the futures commission
merchant or derivatives clearing organization.
(D) Interests in any individual money market mutual fund described
in paragraph (b)(3)(i)(F) of this section may not exceed 10 percent of
total assets held in segregation by the futures commission merchant or
derivatives clearing organization.
(E) For purposes of determining compliance with the issuer-based
concentration limits set forth in this section, securities issued by
entities that are affiliated, as defined in paragraph (b)(5) 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.
(iii) Concentration limits for agreements to repurchase--(A)
Repurchase agreements. For purposes of determining compliance with the
asset-based and issuer-based 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.
(B) Reverse repurchase agreements. For purposes of determining
compliance with the asset-based and issuer-based 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) Treatment of customer-owned securities. For purposes of
determining compliance with the asset-based and issuer-based
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.
(v) Counterparty concentration limits. Securities purchased by a
futures commission merchant or derivatives clearing organization from a
single counterparty, or from one or more counterparties under common
ownership or control, subject to an agreement to resell the securities
to the counterparty or counterparties, shall not exceed 25 percent of
total assets held in segregation or under Sec. 30.7 of this chapter by
the futures commission merchant or derivatives clearing organization.
(4) 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
[[Page 113]]
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.
(5) 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.
(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 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. The futures commission merchant or the derivatives
clearing organization shall obtain the acknowledgment letter required by
Sec. 1.26 from an entity that has substantial control over the fund
shares purchased with customer funds and has the knowledge and authority
to facilitate redemption and payment or transfer of the customer funds.
Such entity may include the fund sponsor or depository acting as
custodian for fund shares.
(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) For any period during which there is a non-routine closure of
the Fedwire or applicable Federal Reserve Banks;
(B) For any period:
(1) During which the New York Stock Exchange is closed other than
customary week-end and holiday closings; or
(2) During which trading on the New York Stock Exchange is
restricted;
(C) For any period during which an emergency exists as a result of
which:
(1) Disposal by the company of securities owned by it is not
reasonably practicable; or
[[Page 114]]
(2) It is not reasonably practicable for such company fairly to
determine the value of its net assets;
(D) For any period as the Securities and Exchange Commission may by
order permit for the protection of security holders of the company;
(E) For any period during which the Securities and Exchange
Commission has, by rule or regulation, deemed that:
(1) Trading shall be restricted; or
(2) An emergency exists; or
(F) For any period during which each of the conditions of Sec.
270.22e-3(a)(1) through (3) of this title are met.
(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.
(7) The appendix to this section sets forth language that will
satisfy the requirements of paragraph (c)(5) of this section.
(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
(vii) 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) Permitted 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) A futures commission merchant or derivatives clearing
organization shall not enter into an agreement to repurchase or resell
with a counterparty that is an affiliate of the futures commission
merchant or derivatives clearing organization, respectively. 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.
(4) 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)(3)(iii)(A) and (B) of this
section.
(5) 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 (13) of this section and which
states that the parties thereto intend the transaction to be treated as
a purchase and sale of securities.
(6) The term of the agreement is no more than one business day, or
reversal of the transaction is possible on demand.
(7) 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 paragraph (d)(2) of
this section, a Federal Reserve Bank, a derivatives clearing
organization, or the Depository Trust Company in an account that
complies with the requirements of Sec. 1.26.
(8) 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;
[[Page 115]]
(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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.''
(13) 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) Deposit of firm-owned securities into segregation. A futures
commission merchant may deposit unencumbered securities of the type
specified in this section, which it owns for its own account, into a
customer account. A futures commission merchant must include such
securities, transfers of securities, and disposition of proceeds from
the sale or maturity of such securities 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
in accordance with the provisions of Sec. 1.20 part. For purposes of
this section and Sec. Sec. 1.27, 1.28, 1.29, and 1.32, securities of
the type specified by this section that are owned by the futures
commission merchant and deposited into a customer account shall be
considered customer funds until such investments are withdrawn from
segregation in accordance with the provisions of Sec. 1.23. Investments
permitted by Sec. 1.25 that are owned by the futures commission
merchant and deposited into a futures customer account pursuant to Sec.
1.26 shall be considered futures customer funds until such investments
are
[[Page 116]]
withdrawn from segregation in accordance with Sec. 1.23. Investments
permitted by Sec. 1.25 that are owned by the futures commission
merchant and deposited into a Cleared Swaps Customer Account, as defined
in Sec. 22.1 of this chapter, shall be considered Cleared Swaps
Customer Collateral, as defined in Sec. 22.1 of this chapter, until
such investments are withdrawn from segregation in accordance with Sec.
22.17 of this chapter.
Appendix to Sec. 1.25--Money Market Mutual Fund Prospectus Provisions
Acceptable for Compliance With Section 1.25(c)(5)
Upon receipt of a proper redemption request submitted in a timely
manner and otherwise in accordance with the redemption procedures set
forth in this prospectus, the [Name of Fund] will redeem the requested
shares and make a payment to you in satisfaction thereof no later than
the business day following the redemption request. The [Name of Fund]
may postpone and/or suspend redemption and payment beyond one business
day only as follows:
a. For any period during which there is a non-routine closure of the
Fedwire or applicable Federal Reserve Banks;
b. For any period (1) during which the New York Stock Exchange is
closed other than customary week-end and holiday closings or (2) during
which trading on the New York Stock Exchange is restricted;
c. For any period during which an emergency exists as a result of
which (1) disposal of securities owned by the [Name of Fund] is not
reasonably practicable or (2) it is not reasonably practicable for the
[Name of Fund] to fairly determine the net asset value of shares of the
[Name of Fund];
d. For any period during which the Securities and Exchange
Commission has, by rule or regulation, deemed that (1) trading shall be
restricted or (2) an emergency exists;
e. For any period that the Securities and Exchange Commission, may
by order permit for your protection; or
f. For any period during which the [Name of Fund,] as part of a
necessary liquidation of the fund, has properly postponed and/or
suspended redemption of shares and payment in accordance with federal
securities laws.
[76 FR 78798, Dec. 19, 2011, as amended at 77 FR 66322, Nov. 2, 2012; 78
FR 68633, Nov. 14, 2013]
Sec. 1.26 Deposit of instruments purchased with futures customer funds.
(a) Each futures commission merchant who invests futures customer
funds in instruments described in Sec. 1.25, except for investments in
money market mutual funds, shall separately account for such instruments
as futures customer funds and segregate such instruments as funds
belonging to such futures customers in accordance with the requirements
of Sec. 1.20. Each derivatives clearing organization which invests
money belonging or accruing to futures customers of its clearing members
in instruments described in Sec. 1.25, except for investments in money
market mutual funds, shall separately account for such instruments as
customer funds and segregate such instruments as customer funds
belonging to such futures customers in accordance with Sec. 1.20.
(b) Each futures commission merchant or derivatives clearing
organization which invests futures customer funds in money market mutual
funds, as permitted by Sec. 1.25, shall separately account for such
funds and segregate such funds as belonging to such futures customers.
Such funds shall be deposited under an account name that clearly shows
that they belong to futures customers and are segregated as required by
sections 4d(a) and 4d(b) of the Act and by this part. Each futures
commission merchant or derivatives clearing organization, upon opening
such an account, shall obtain and maintain readily accessible in its
files in accordance with Sec. 1.31, for as long as the account remains
open, and thereafter for the period provided in Sec. 1.31, a written
acknowledgment and shall file such acknowledgment in accordance with the
requirements of Sec. 1.20. In the event such funds are held directly
with the money market mutual fund or its affiliate, the written
acknowledgment shall be in the form as set out in appendix A or B to
this section. In the event such funds are held with a depository, the
written acknowledgment shall be in the form as set out in appendix A or
B to Sec. 1.20. In either case, the written acknowledgment shall be
obtained, provided to the Commission and designated self-regulatory
organizations, and retained as required under Sec. 1.20.
[[Page 117]]
Appendix A to Sec. 1.26--Futures Commission Merchant Acknowledgment
Letter for CFTC Regulation 1.26 Customer Segregated Money Market Mutual
Fund Account
[Date]
[Name and Address of Money Market Mutual Fund]
We propose to invest funds held by [Name of Futures Commission
Merchant] (``we'' or ``our'') on behalf of our customers in shares of
[Name of Money Market Mutual Fund] (``you'' or ``your'') under
account(s) entitled (or shares issued to):
[Name of Futures Commission Merchant] [if applicable, add ``FCM Customer
Omnibus Account''] CFTC Regulation 1.26 Customer Segregated Money Market
Mutual Fund Account under Sections 4d(a) and 4d(b) of the Commodity
Exchange Act [and, if applicable, ``, Abbreviated as [short title
reflected in the depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').
You acknowledge that we are holding these funds, including any
shares issued and amounts accruing in connection therewith
(collectively, the ``Shares''), for the benefit of customers who trade
commodities, options, swaps and other products (``Commodity
Customers''), as required by Commodity Futures Trading Commission
(``CFTC'') Regulation 1.26, as amended; that the Shares held by you,
hereafter deposited in the Account(s) or accruing to the credit of the
Account(s), will be separately accounted for and segregated on your
books from our own funds and from any other funds or accounts held by us
in accordance with the provisions of the Commodity Exchange Act, as
amended (the ``Act''), and part 1 of the CFTC's regulations, as amended;
and that the Shares must otherwise be treated in accordance with the
provisions of Section 4d of the Act and CFTC regulations thereunder.
Furthermore, you acknowledge and agree that such Shares may not be
used by you or by us to secure or guarantee any obligations that we
might owe to you, and they may not be used by us to secure or obtain
credit from you. You further acknowledge and agree that the Shares in
the Account(s) shall not be subject to any right of offset or lien for
or on account of any indebtedness, obligations or liabilities we may now
or in the future have owing to you.
In addition, you agree that the Account(s) may be examined at any
reasonable time by the director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC or the director of the Division of
Clearing and Risk of the CFTC, or any successor divisions, or such
directors' designees, or an appropriate officer, agent or employee of
our designated self-regulatory organization (``DSRO''), [Name of DSRO],
and this letter constitutes the authorization and direction of the
undersigned on our behalf to permit any such examination to take place
without further notice to or consent from us.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other account
information regarding or related to the Account(s) from the director of
the Division of Swap Dealer and Intermediary Oversight of the CFTC or
the director of the Division of Clearing and Risk of the CFTC, or any
successor divisions, or such directors' designees, or an appropriate
officer, agent, or employee of [Name of DSRO], acting in its capacity as
our DSRO, and this letter constitutes the authorization and direction of
the undersigned on our behalf to release the requested information
without further notice to or consent from us.
You further acknowledge and agree that, pursuant to the
authorization granted by us to you previously or herein, you have
provided, or will provide following the opening of the Account(s), the
director of the Division of Swap Dealer and Intermediary Oversight of
the CFTC, or any successor division, or such director's designees, with
technological connectivity, which may include provision of hardware,
software, and related technology and protocol support, to facilitate
direct, read-only electronic access to transaction and account balance
information for the Account(s). This letter constitutes the
authorization and direction of the undersigned on our behalf for you to
establish this connectivity and access if not previously established,
without further notice to or consent from us.
The parties agree that all actions on your part to respond to the
above information and access requests will be made in accordance with,
and subject to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information or access request, in order to
provide for the secure transmission and delivery of the requested
information or access to the appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information or access request from the director of the Division of Swap
Dealer and Intermediary Oversight of the CFTC or the director of the
Division of Clearing and Risk of the CFTC, or any successor divisions,
or such directors' designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its capacity as our DSRO, upon
which you have relied after having taken measures in accordance with
your applicable policies and procedures to assure that such request was
provided to you
[[Page 118]]
by an individual authorized to make such a request.
In the event we become subject to either a voluntary or involuntary
petition for relief under the U.S. Bankruptcy Code, we acknowledge that
you will have no obligation to release the Shares held in the
Account(s), except upon instruction of the Trustee in Bankruptcy or
pursuant to the Order of the respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary, nothing
contained herein shall be construed as limiting your right to assert any
right of offset or lien on assets that are not Shares maintained in the
Account(s), or to impose such charges against us or any proprietary
account maintained by us with you. Further, it is understood that
amounts represented by checks, drafts or other items shall not be
considered to be part of the Account(s) until finally collected.
Accordingly, checks, drafts and other items credited to the Account(s)
and subsequently dishonored or otherwise returned to you or reversed,
for any reason and any claims relating thereto, including but not
limited to claims of alteration or forgery, may be charged back to the
Account(s), and we shall be responsible to you as a general endorser of
all such items whether or not actually so endorsed.
You may conclusively presume that any withdrawal from the Account(s)
and the balances maintained therein are in conformity with the Act and
CFTC regulations without any further inquiry, provided that, in the
ordinary course of your business as a depository, you have no notice of
or actual knowledge of a potential violation by us of any provision of
the Act or the CFTC regulations that relates to the segregation of
customer funds; and you shall not in any manner not expressly agreed to
herein be responsible to us for ensuring compliance by us with such
provisions of the Act and CFTC regulations; however, the aforementioned
presumption does not affect any obligation you may otherwise have under
the Act or CFTC regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree or
levy relates in whole or in part to the Account(s). In any event, you
shall not be liable by reason of any action or omission to act pursuant
to such order, judgment, decree or levy, to us or to any other person,
firm, association or corporation even if thereafter any such order,
decree, judgment or levy shall be reversed, modified, set aside or
vacated.
We are permitted to invest customers' funds in money market mutual
funds pursuant to CFTC Regulation 1.25. That rule sets forth the
following conditions, among others, with respect to any investment in a
money market mutual fund:
(1) The net asset value of the fund must be computed by 9:00 a.m. of
the business day following each business day and be made available to us
by that time;
(2) The fund must be legally obligated to redeem an interest in the
fund and make payment in satisfaction thereof by the close of the
business day following the day on which we make a redemption request
except as otherwise specified in CFTC Regulation 1.25(c)(5)(ii); and,
(3) The agreement under which we invest customers' funds must not
contain any provision that would prevent us from pledging or
transferring fund shares.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns, and for the avoidance of doubt,
regardless of a change in the name of either party. This letter
agreement supersedes and replaces any prior agreement between the
parties in connection with the Account(s), including but not limited to
any prior acknowledgment letter agreement, to the extent that such prior
agreement is inconsistent with the terms hereof. In the event of any
conflict between this letter agreement and any other agreement between
the parties in connection with the Account(s), this letter agreement
shall govern with respect to matters specific to Section 4d of the Act
and the CFTC's regulations thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to the
principles of choice of law.
Please acknowledge that you agree to abide by the requirements and
conditions set forth above by signing and returning to us the enclosed
copy of this letter agreement, and that you further agree to provide a
copy of this fully executed letter agreement directly to the CFTC (via
electronic means in a format and manner determined by the CFTC) and to
[Name of DSRO], acting in its capacity as our DSRO, in accordance with
CFTC Regulation 1.20. We hereby authorize and direct you to provide such
copies without further notice to or consent from us, no later than three
business days after opening the Account(s) or revising this letter
agreement, as applicable.
[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
Date:
[[Page 119]]
Appendix B to Sec. 1.26--Derivatives Clearing Organization
Acknowledgment Letter for CFTC Regulation 1.26 Customer Segregated Money
Market Mutual Fund Account
[Date]
[Name and Address of Money Market Mutual Fund]
We propose to invest funds held by [Name of Derivatives Clearing
Organization] (``we'' or ``our'') on behalf of customers in shares of
[Name of Money Market Mutual Fund] (``you'' or ``your'') under
account(s) entitled (or shares issued to):
[Name of Derivatives Clearing Organization] Futures Customer Omnibus
Account, CFTC Regulation 1.26 Customer Segregated Money Market Mutual
Fund Account under Sections 4d(a) and 4d(b) of the Commodity Exchange
Act [and, if applicable, ``, Abbreviated as [short title reflected in
the depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').
You acknowledge that we are holding these funds, including any
shares issued and amounts accruing in connection therewith
(collectively, the ``Shares''), for the benefit of customers who trade
commodities, options, swaps and other products, as required by Commodity
Futures Trading Commission (``CFTC'') Regulation 1.26, as amended; that
the Shares held by you, hereafter deposited in the Account(s) or
accruing to the credit of the Account(s), will be separately accounted
for and segregated on your books from our own funds and from any other
funds or accounts held by us in accordance with the provisions of the
Commodity Exchange Act, as amended (the ``Act''), and part 1 of the
CFTC's regulations, as amended; and that the Shares must otherwise be
treated in accordance with the provisions of Section 4d of the Act and
CFTC regulations thereunder.
Furthermore, you acknowledge and agree that such Shares may not be
used by you or by us to secure or guarantee any obligations that we
might owe to you, and they may not be used by us to secure or obtain
credit from you. You further acknowledge and agree that the Shares in
the Account(s) shall not be subject to any right of offset or lien for
or on account of any indebtedness, obligations or liabilities we may now
or in the future have owing to you.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other information
regarding or related to the Account(s) from the director of the Division
of Clearing and Risk of the CFTC or the director of the Division of Swap
Dealer and Intermediary Oversight of the CFTC, or any successor
divisions, or such directors' designees, and this letter constitutes the
authorization and direction of the undersigned on our behalf to release
the requested information without further notice to or consent from us.
The parties agree that all actions on your part to respond to the
above information requests will be made in accordance with, and subject
to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information request, in order to provide for
the secure transmission and delivery of the requested information to the
appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information request from the director of the Division of Clearing and
Risk of the CFTC or the director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC, or any successor divisions, or such
directors' designees, upon which you have relied after having taken
measures in accordance with your applicable policies and procedures to
assure that such request was provided to you by an individual authorized
to make such a request.
In the event that we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Shares held
in the Account(s), except upon instruction of the Trustee in Bankruptcy
or pursuant to the Order of the respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary, nothing
contained herein shall be construed as limiting your right to assert any
right of offset or lien on assets that are not Shares maintained in the
Account(s), or to impose such charges against us or any proprietary
account maintained by us with you. Further, it is understood that
amounts represented by checks, drafts or other items shall not be
considered to be part of the Account(s) until finally collected.
Accordingly, checks, drafts and other items credited to the Account(s)
and subsequently dishonored or otherwise returned to you or reversed,
for any reason, and any claims relating thereto, including but not
limited to claims of alteration or forgery, may be charged back to the
Account(s), and we shall be responsible to you as a general endorser of
all such items whether or not actually so endorsed.
You may conclusively presume that any withdrawal from the Account(s)
and the balances maintained therein are in conformity with the Act and
CFTC regulations without any further inquiry, provided that, in the
ordinary course of your business as a depository, you have no notice of
or actual knowledge of a potential violation by us of any provision of
the Act or the CFTC regulations that relates to the segregation of
customer
[[Page 120]]
funds; and you shall not in any manner not expressly agreed to herein be
responsible to us for ensuring compliance by us with such provisions of
the Act and CFTC regulations; however, the aforementioned presumption
does not affect any obligation you may otherwise have under the Act or
CFTC regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree or
levy relates in whole or in part to the Account(s). In any event, you
shall not be liable by reason of any action or omission to act pursuant
to any such order, judgment, decree or levy, to us or to any other
person, firm, association or corporation even if thereafter any such
order, decree, judgment or levy shall be reversed, modified, set aside
or vacated.
We are permitted to invest customers' funds in money market mutual
funds pursuant to CFTC Regulation 1.25. That rule sets forth the
following conditions, among others, with respect to any investment in a
money market mutual fund:
(1) The net asset value of the fund must be computed by 9:00 a.m. of
the business day following each business day and be made available to us
by that time;
(2) The fund must be legally obligated to redeem an interest in the
fund and make payment in satisfaction thereof by the close of the
business day following the day on which we make a redemption request
except as otherwise specified in CFTC Regulation 1.25(c)(5)(ii); and,
(3) The agreement under which we invest customers' funds must not
contain any provision that would prevent us from pledging or
transferring fund shares.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of doubt,
regardless of a change in the name of either party. This letter
agreement supersedes and replaces any prior agreement between the
parties in connection with the Account(s), including but not limited to
any prior acknowledgment letter agreement, to the extent that such prior
agreement is inconsistent with the terms hereof. In the event of any
conflict between this letter agreement and any other agreement between
the parties in connection with the Account(s), this letter agreement
shall govern with respect to matters specific to Section 4d of the Act
and the CFTC's regulations thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to the
principles of choice of law.
Please acknowledge that you agree to abide by the requirements and
conditions set forth above by signing and returning to us the enclosed
copy of this letter agreement, and that you further agree to provide a
copy of this fully executed letter agreement directly to the CFTC (via
electronic means in a format and manner determined by the CFTC) in
accordance with CFTC Regulation 1.20. We hereby authorize and direct you
to provide such copy without further notice to or consent from us, no
later than three business days after opening the Account(s) or revising
this letter agreement, as applicable.
[Name of Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:
[78 FR 68634, Nov. 14, 2013, as amended at 79 FR 26833, May 12, 2014]
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, 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 on such disposition, if any; and
(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
[[Page 121]]
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; 77 FR 66322, Nov. 2, 2012]
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 Gains and losses resulting from investment of customer funds.
(a) The investment of customer funds in instruments described in
Sec. 1.25 shall not prevent the futures commission merchant or
derivatives clearing organization so investing such funds from receiving
and retaining as its own any incremental income or interest income
resulting therefrom.
(b) The futures commission merchant or derivatives clearing
organization, as applicable, shall bear sole responsibility for any
losses resulting from the investment of customer funds in instruments
described in Sec. 1.25. No investment losses shall be borne or
otherwise allocated to the customers of the futures commission merchant
and, if customer funds are invested by a derivatives clearing
organization in its discretion, to the futures commission merchant.
[78 FR 68637, Nov. 14, 2013]
Sec. 1.30 Loans by futures commission merchants; treatment of proceeds.
Nothing in the regulations in this chapter shall prevent a futures
commission merchant from lending its own funds to customers on
securities and property pledged by such customers, or from repledging or
selling such securities and property pursuant to specific written
agreement with such customers. The proceeds of such loans used to
purchase, margin, guarantee, or secure the trades, contracts, or
commodity options of customers shall be treated and dealt with by a
futures commission merchant as belonging to such customers, in
accordance with and subject to the provisions of the Act and these
regulations. A futures commission merchant may not loan funds on an
unsecured basis to finance customers' trading, nor may a futures
commission merchant loan funds to customers secured by the customer
accounts of such customers.
[78 FR 68637, Nov. 14, 2013]
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 in their original form (for paper
records) or native file format (for electronic records) 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; Provided, however, That records
of any swap or related cash or forward transaction shall be kept until
the termination, maturity, expiration, transfer, assignment, or novation
date of the transaction and for a period of five years after such date.
Records of oral communications kept pursuant to Sec. Sec. 1.35(a) and
23.202(a)(1) and (b)(1) of
[[Page 122]]
this chapter shall be kept for a period of one year. All such books and
records shall be open to inspection by any representative of the
Commission, or the United States Department of Justice. For purposes of
this section, native file format means an electronic file that exists in
the format in which it was originally created.
(2) Persons required to keep books and records by the Act or by
these regulations shall produce such records in a form specified by any
representative of the Commission. Such production shall be made, 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, books and
records required to be kept by the Act or by these regulations may be
stored 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) of this section) for the required time period
under the conditions set forth in this paragraph (b); Provided, however,
For electronic records, such storage media must preserve the native file
format of the electronic records as required by paragraph (a)(1) of this
section.
(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
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-required 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
[[Page 123]]
(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 compatible data processing media as defined in Sec.
15.00(d) 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 (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
[[Page 124]]
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; 77 FR
66323, Nov. 2, 2012; 77 FR 75541, Dec. 21, 2012]
Sec. 1.32 Reporting of segregated account computation and details
regarding the holding of futures customer funds.
(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 futures customer funds on deposit in
segregated accounts on behalf of futures customers;
(2) The amount of such futures customer funds required by the Act
and these regulations to be on deposit in segregated accounts on behalf
of such futures customers; and
(3) The amount of the futures commission merchant's residual
interest in such futures customer funds.
(b) In computing the amount of futures customer funds required to be
in segregated accounts, a futures commission merchant may offset any net
deficit in a particular futures customer's account against the current
market value of readily marketable securities, less applicable
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 futures customer's account. Futures
commission merchants that establish and enforce written policies and
procedures to assess the credit risk of commercial paper, convertible
debt instruments, or nonconvertible debt instruments in accordance with
Rule 240.15c3-1(c)(2)(vi) of the Securities and Exchange Commission (17
CFR 240.15c3-1(c)(2)(vi)) may apply the lower haircut percentages
specified in Rule 240.15c3-1(c)(2)(vi) for such commercial paper,
convertible debt instruments and nonconvertible debt instruments. 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 must
segregate the securities in a safekeeping account with a bank, trust
company, derivatives clearing organization, 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) Each futures commission merchant is required to document its
segregation computation required by paragraph (a) of this section by
preparing a Statement of Segregation Requirements and Funds in
Segregation for Customers Trading on U.S. Commodity Exchanges contained
in the Form 1-FR-FCM as of the close of each business day. Nothing in
this paragraph shall affect the requirement that a futures commission
merchant at all times maintain sufficient money, securities and property
to cover its total obligations to all futures customers, in accordance
with Sec. 1.20.
(d) Each futures commission merchant is required to submit to the
Commission and to the firm's designated self-regulatory organization
[[Page 125]]
the daily Statement of Segregation Requirements and Funds in Segregation
for Customers Trading on U.S. Commodity Exchanges required by paragraph
(c) of this section by noon the following business day.
(e) Each futures commission merchant shall file the Statement of
Segregation Requirements and Funds in Segregation for Customers Trading
on U.S. Commodity Exchanges required by paragraph (c) of this section in
an electronic format using a form of user authentication assigned in
accordance with procedures established or approved by the Commission.
(f) Each futures commission merchant is required to submit to the
Commission and to the firm's designated self-regulatory organization a
report listing the names of all banks, trust companies, futures
commission merchants, derivatives clearing organizations, or any other
depository or custodian holding futures customer funds as of the
fifteenth day of the month, or the first business day thereafter, and
the last business day of each month. This report must include:
(1) The name and location of each entity holding futures customer
funds;
(2) The total amount of futures customer funds held by each entity
listed in paragraph (f)(1) of this section; and
(3) The total amount of cash and investments that each entity listed
in paragraph (f)(1) of this section holds for the futures commission
merchant. The futures commission merchant must report the following
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 of a State (municipal securities);
(iii) General obligation issued by any enterprise sponsored by the
United States (government sponsored enterprise securities);
(iv) Certificates of deposit issued by a bank;
(v) Commercial paper fully guaranteed as to principal and interest
by the United States under the Temporary Liquidity Guarantee Program as
administered by the Federal Deposit Insurance Corporation;
(vi) Corporate notes or bonds fully guaranteed as to principal and
interest by the United States under the Temporary Liquidity Guarantee
Program as administered by the Federal Deposit Insurance Corporation;
and
(vii) Interests in money market mutual funds.
(g) Each futures commission merchant must report the total amount of
futures customer-owned securities held by the futures commission
merchant as margin collateral and must list the names and locations of
the depositories holding such margin collateral.
(h) Each futures commission merchant must report the total amount of
futures customer funds that have been used to purchase securities under
agreements to resell the securities (reverse repurchase transactions).
(i) Each futures commission merchant must report which, if any, of
the depositories holding futures customer funds under paragraph (f)(1)
of this section are affiliated with the futures commission merchant.
(j) Each futures commission merchant shall file the detailed list of
depositories required by paragraph (f) of this section by 11:59 p.m. the
next business day in an electronic format using a form of user
authentication assigned in accordance with procedures established or
approved by the Commission.
(k) Each futures commission merchant shall retain its daily
segregation computation and the Statement of Segregation Requirements
and Funds in Segregation for Customers Trading on U.S. Commodity
Exchanges required by paragraph (c) of this section, and its detailed
list of depositories required by paragraph (f) of this section, together
with all supporting documentation, in accordance with the requirements
of Sec. 1.31.
[66 FR 41133, Aug. 7, 2001, as amended at 68 FR 5551, Feb. 4, 2003; 77
FR 66323, Nov. 2, 2012; 78 FR 68637, Nov. 14, 2013]
Sec. 1.33 Monthly and confirmation statements.
(a) Monthly statements. Each futures commission merchant must
promptly furnish in writing to each customer, and to each foreign
futures or foreign options customer, as defined by Sec. 30.1 of this
chapter, as of the close of the last
[[Page 126]]
business day of each month or as of any regular monthly date selected,
except for accounts in which there are neither open contracts 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 futures customer and foreign futures or
foreign options customer position--
(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 futures customer funds or foreign futures or foreign
options secured amount, as defined by Sec. 1.3(rr), carried with the
futures commission merchant.
(2) For each commodity option position and foreign option position--
(i) All commodity options and foreign options purchased, sold,
exercised, or expired during the monthly reporting period, identified by
underlying futures contract or underlying commodity, strike price,
transaction date, and expiration date;
(ii) The open commodity option and foreign option positions carried
for such customer or foreign futures or foreign options customer as of
the end of the monthly reporting period, identified by underlying
futures contract or underlying commodity, 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 related customer funds carried in such customer's
account(s) or any related foreign futures or foreign options secured
amount carried in the account(s) of a foreign futures or foreign options
customer.
(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.
(3) For each Cleared Swaps Customer position--
(i) The Cleared Swaps, as Sec. 22.1 of this chapter defines that
term, carried by the futures commission merchant for the Cleared Swaps
Customer;
(ii) The net unrealized profits or losses in all Cleared Swaps
marked to the market;
(iii) Any Cleared Swaps Customer Collateral carried with the futures
commission merchant; and
(4) A detailed accounting of all financial charges and credits to
customers and foreign futures or foreign options customers, during the
monthly reporting period, including all customer funds and any foreign
futures or foreign options secured amount, received from or disbursed to
customers or foreign futures or foreign options customers, as well as
realized profits and losses.
(b) Confirmation statement. Each futures commission merchant must,
not later than the next business day after any commodity interest or
commodity option transaction, including any foreign futures or foreign
options transactions, furnish to each customer or foreign futures or
foreign options customer:
(1) A written confirmation of each commodity futures transaction
caused to be executed by it for the customer.
(2) A written confirmation of each Cleared Swap carried by the
futures commission merchant, containing at least the following
information:
(i) The unique swap identifier, as required by Sec. 45.4(a) of this
chapter, for each Cleared Swap and the date each Cleared Swap was
executed;
(ii) The product name of each Cleared Swap;
(iii) The price at which the Cleared Swap was executed;
(iv) The date of maturity for each Cleared Swap; and
(v) The derivatives clearing organization through which it is
cleared.
[[Page 127]]
(3) To each option customer, a written confirmation of each
commodity option transaction, containing at least the following
information:
(i) The 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 commodity;
(v) The final exercise date of the commodity option purchased or
sold; and
(vi) The date the commodity option transaction was executed.
(4) 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.
(5) Notwithstanding the provisions of paragraphs (b)(1) through
(b)(4) of this section, a commodity interest 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 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)
[[Page 128]]
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 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; 77 FR
66323, Nov. 2, 2012]
Sec. 1.34 Monthly record, ``point balance''.
(a) With respect to commodity futures transactions, 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) With respect to commodity option transactions, 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 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 commodity (by option expiration date), and by strike price.
[77 FR 66324, Nov. 2, 2012]
Sec. 1.35 Records of commodity interest and related cash or
forward transactions.
(a) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets or swap
execution facilities--(1) Futures commission merchants, retail foreign
exchange dealers, and certain introducing brokers. Each futures
commission merchant, retail foreign exchange dealer, and introducing
broker that has generated over the preceding three years more than $5
million in aggregate gross revenues from its activities as an
introducing broker, shall:
(i) Keep full, complete, and systematic records (including all
pertinent data and memoranda) of all transactions relating to its
business of dealing in commodity interests and related cash or forward
transactions, which shall include 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, which have been prepared in
the course of its business of dealing in commodity interests and related
cash or forward transactions (for purposes of this section, all records
described in this paragraph (a)(1)(i) are referred to as ``commodity
interest and related records'');
(ii) If such person is a member of a designated contract market or
swap execution facility, retain and produce for inspection 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, the designated contract market or the swap
execution facility (for purposes of this section, all records described
in this paragraph (a)(1)(ii) are referred to as ``original source
documents,'' and, together with commodity
[[Page 129]]
interest and related records, ``transaction records''); and
(iii) Keep all oral and written communications provided or received
concerning quotes, solicitations, bids, offers, instructions, trading,
and prices that lead to the execution of a transaction in a commodity
interest and any related cash or forward transactions (but not oral
communications that lead solely to the execution of a related cash or
forward transaction), whether transmitted by telephone, voicemail,
facsimile, instant messaging, chat rooms, electronic mail, mobile
device, or other digital or electronic media (for purposes of this
section, all communications described in this paragraph (a)(1)(iii) are
referred to as ``oral pre-trade communications'' if transmitted orally
or as ``written pre-trade communications'' if transmitted in writing,
and all such communications are referred to collectively as ``pre-trade
communications'').
(2) Registered members of designated contract markets or swap
execution facilities. Each introducing broker that is not subject to
paragraph (a)(1) of this section and is a member of a designated
contract market or swap execution facility, and each member of a
designated contract market or swap execution facility that is registered
or required to be registered with the Commission as a floor trader,
commodity pool operator, commodity trading advisor, swap dealer, or
major swap participant, shall keep:
(i) All transaction records; and
(ii) All written pre-trade communications.
(3) Other introducing brokers. Each introducing broker that is not
subject to paragraph (a)(1) or (2) of this section shall keep:
(i) All commodity interest and related records; and
(ii) All written pre-trade communications.
(4) Floor broker members of designated contract markets or swap
execution facilities. Each member of a designated contract market or
swap execution facility that is registered or required to be registered
with the Commission as a floor broker shall keep:
(i) All transaction records;
(ii) All written pre-trade communications; and
(iii) All oral pre-trade communications that lead to the purchase or
sale of any commodity for future delivery, security futures product,
swap, or commodity option authorized under section 4c of the Commodity
Exchange Act for the account of any person other than such floor broker.
(5) Form and manner. All records required to be kept pursuant to
paragraphs (a)(1), (2), (3), and (4) of this section shall be kept in a
form and manner that:
(i) Permits prompt, accurate, and reliable location, access, and
retrieval of any particular record, data, or information; and
(ii) Other than pre-trade communications, allows for identification
of a particular transaction.
(6) Unregistered members of designated contract markets or swap
execution facilities. Each member of a designated contract market or
swap execution facility that is not registered or required to be
registered with the Commission in any capacity, shall keep all
transaction records; provided that such records need not include
transmissions by short message service (SMS) or multimedia messaging
service (MMS).
(7) Definition of related cash or forward transaction. For purposes
of this section, ``related cash or forward transaction'' means a
purchase or sale for immediate or deferred physical shipment or delivery
of an asset related to a commodity interest transaction where the
commodity interest transaction and the related cash or forward
transaction are used to hedge, mitigate the risk of, or offset one
another.
(8) Other requirements. Each futures commission merchant, retail
foreign exchange dealer, introducing broker, and member of a designated
contract market or swap execution facility shall retain the records
required to be kept by this section 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.
[[Page 130]]
(9) Alternative Compliance Schedule. (i) The Commission may in its
discretion establish an alternative compliance schedule for the
requirement to record oral communications under paragraph (a)(1) or (4)
of this section that is found to be technologically or economically
impracticable for an affected entity that seeks, in good faith, to
comply with the requirement to record oral communications under
paragraph (a)(1) or (4) of this section within a reasonable time period
beyond the date on which compliance by such affected entity is otherwise
required.
(ii) A request for an alternative compliance schedule under
paragraph (a)(9)(i) of this section shall be acted upon within 30 days
from the time such a request is received, or it shall be deemed
approved.
(iii) The Commission hereby delegates to the Director of the
Division of Swap Dealer and Intermediary Oversight or such other
employee or employees as the Director may designate from time to time,
the authority to exercise the discretion. Notwithstanding such
delegation, in any case in which a Commission employee delegated
authority under this paragraph believes it appropriate, he or she may
submit to the Commission for its consideration the question of whether
an alternative compliance schedule should be established. The delegation
of authority in this paragraph shall not prohibit the Commission, at its
election, from exercising the authority set forth in paragraph (a)(9)(i)
of this section.
(iv) Relief granted under paragraph (a)(9)(i) of this section shall
not cause an affected entity to be out of compliance or deemed in
violation of any recordkeeping requirements.
(b) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets and swap
execution facilities: Recording of customers' orders. (1) Each futures
commission merchant, each retail foreign exchange dealer, each
introducing broker, and each member of a designated contract market or
swap execution facility receiving a customer's order that cannot
immediately be entered into a trade matching engine shall immediately
upon receipt thereof prepare a written record of the order including the
account identification, except as provided in paragraph (b)(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 commodity option orders, the time, to
the nearest minute, the order is transmitted for execution.
(2)(i) Each member of a designated contract market who on the floor
of such designated contract market receives a 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
designated contract market, shall immediately upon receipt thereof
prepare a written record of the order in non-erasable ink, including the
account identification, except as provided in paragraph (b)(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.
(ii) Except as provided in paragraph (b)(3) of this section:
(A) Each member of a designated contract market who on the floor of
such designated 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 member of a designated contract market 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 designated contract market for execution:
(1) The member placing such order immediately upon placement of the
order shall record the order and time of
[[Page 131]]
placement to the nearest minute on a sequentially-numbered trading card
maintained in accordance with the requirements of paragraph (f) 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 (f) 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 designated contract market
personnel or the clearing member.
(3)(i) The requirements of paragraph (b)(2)(ii) of this section will
not apply if a designated contract market maintains in effect rules
which provide for an exemption where:
(A) A member of a designated contract market places with another
member of such designated 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 (f) 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 (b)(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 designated contract market reporting the
execution from the floor of the designated contract market of a
customer's order or the order of another member of the designated
contract market received in accordance with paragraphs (b)(2)(i) or
(b)(2)(ii)(A) of this section, shall record on a written record of the
order, including the account identification, except as provided in
paragraph (b)(5) of this section, and order number, by time-stamp or
other timing device, the date and time to the nearest minute such report
of execution is made. Each member of a designated contract market shall
submit the written records of customer orders or orders from other
designated contract market members to designated contract market
personnel or to the clearing member responsible for the collection of
orders prepared pursuant to this paragraph. The execution price and
other information reported on the order tickets must be written in non-
erasable ink.
(5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders executed on
designated contract markets or swap execution facilities need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (b)(5)(i) through (v) of this section are
met. Specific customer account identifiers for accounts included in
bunched orders involving swaps need not be included in confirmations or
acknowledgments provided by swap dealers or major swap participants
pursuant to Sec. 23.501(a) of this chapter if the requirements of
paragraphs (b)(5)(i) through (v) of this section are met.
(i) Eligible account managers for orders executed on designated
contract markets or swap execution facilities. 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 for trades executed on designated
contract markets or swap execution facilities:
(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) 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
[[Page 132]]
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;
(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;
(E) A futures commission merchant registered with the Commission
pursuant to the Act; or
(F) An introducing broker registered with the Commission pursuant to
the Act.
(ii) Eligible account managers for orders executed bilaterally. 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 for trades executed
bilaterally:
(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) of this chapter;
(B) A futures commission merchant registered with the Commission
pursuant to the Act; or
(C) An introducing broker registered with the Commission pursuant to
the Act.
(iii) 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 and consistent with Sec. Sec. 155.3(a)(1) and 155.4(a)(1) of
this chapter, any account in which the account manager has an interest.
(iv) Allocation. Orders eligible for post-execution allocation must
be allocated by an eligible account manager in accordance with the
following:
(A) Allocations must be made as soon as practicable after the entire
transaction is executed, but in any event no later than the following
times: For cleared trades, 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. For
uncleared trades, account managers must provide allocation information
to the counterparty no later than the end of the calendar day that the
swap was executed.
(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.
(v) 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 (b)(5)(iii) 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 (b)(5)(iv) 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, introducing brokers, or commodity
trading advisors that execute orders or that carry accounts eligible for
post-execution allocation, and members of
[[Page 133]]
designated contract markets or swap execution facilities 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 (b)(5)(v)(A) or (b)(5)(v)(B) of this section, the Commission
may inform in writing any designated contract market, swap execution
facility, swap dealer, or major swap participant, and that designated
contract market, swap execution facility, swap dealer, or major swap
participant shall prohibit the account manager from submitting orders
for execution except for liquidation of open positions and no futures
commission merchant shall accept orders for execution on any designated
contract market, swap execution facility, or bilaterally 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 (b)(5)(v)(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.
(c)(1) Futures commission merchants, introducing brokers, and
members of designated contract markets and swap execution facilities.
Upon request of the designated contract market or swap execution
facility, the Commission, or the United States Department of Justice,
each futures commission merchant, introducing broker, and member of a
designated contract market or swap execution facility shall request from
its customers and, upon receipt thereof, provide to the requesting body
documentation of cash transactions underlying exchanges of futures or
swaps for cash commodities or exchanges of futures or swaps in
connection with cash commodity transactions.
(2) Customers. Each customer of a futures commission merchant,
introducing broker, or member of a designated contract market or swap
execution facility shall create, retain, and produce upon request of the
designated contract market or swap execution facility, the Commission,
or the United States Department of Justice documentation of cash
transactions underlying exchanges of futures or swaps for cash
commodities or exchanges of futures or swaps 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.
(4) Documentation. For the purposes of this paragraph (c),
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.
(d) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of derivatives clearing organizations
clearing trades executed on designated contract markets and swap
execution facilities. Each futures commission merchant, each retail
foreign exchange dealer, and each member of a derivatives clearing
organization clearing trades executed on a designated contract market or
swap execution facility and, for purposes of paragraph (d)(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 all charges against and credits to such 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):
[[Page 134]]
(i) All commodity futures transactions executed for such account,
including the date, price, quantity, market, commodity and future;
(ii) All retail forex transactions executed for such account,
including the date, price, quantity, and currency;
(iii) 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 commodity, strike price, and details of the purchase price of
the option, including premium, mark-up, commission and fees; and
(iv) All swap transactions executed for such account, including the
date, price, quantity, market, commodity, swap, and, if cleared, the
derivatives clearing organization; 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 retail forex transactions executed on that day for such
account, including the date, price, quantity, currency and the person
who whom such transaction was made;
(iii) 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 commodity, 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;
(iv) All swap transactions executed on that day, including the date,
price, quantity, market, commodity, swap, the person for whom such
transaction was made, and, if cleared, the derivatives clearing
organization; and
(v) In the case of an introducing broker, the record or journal
required by this paragraph (d)(3) shall also include the futures
commission merchant or retail foreign exchange dealer carrying the
account for which each commodity futures, retail forex, commodity
option, and swap 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), the requirements of paragraphs (d)(1) and (d)(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 futures, retail
forex, commodity option, or swap books and records are maintained, at
the expense of such person, reproduced copies which show the records as
specified in paragraphs (d)(1) and (d)(2) of this section, on request of
any representatives of the Commission or the U.S. Department of Justice.
(e) Members of derivatives clearing organizations clearing trades
executed on designated contract markets and swap execution facilities.
In the daily record or journal required to be kept under paragraph
(d)(3) of this section, each member of a derivatives clearing
organization clearing trades executed on a designated contract market or
swap execution facility 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.
(f) Members of designated contract markets. (1) Each member of a
designated contract market who, in the place provided by the designated
contract market for the meeting of persons similarly engaged, executes
purchases or sales of any commodity for future delivery, commodity
option, or swap on or subject to the rules of such designated 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, time, quantity, and, as applicable, underlying
commodity, contract for future delivery, or swap, 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
[[Page 135]]
broker or floor trader with whom the transaction was executed, and the
opposite clearing member (if such opposite clearing member is made known
to the member).
(2) Each member of a designated 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 designated contract market must identify on his
or her trading cards the purchases and sales executed during the opening
and closing periods designated by the designated contract market.
(4) Trading cards prepared by a member of a designated contract
market 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 designated contract
market and submitted pursuant to paragraph (f)(7)(i) of this section
must be time-stamped promptly to the nearest minute upon collection by
either the designated contract market or the relevant clearing member.
(6) Each member of a designated contract market shall be accountable
for all trading cards prepared 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 designated contract
market must:
(i) Be submitted to designated contract market personnel or the
clearing member within 15 minutes of designated intervals not to exceed
30 minutes, commencing with the beginning of each trading session. The
time period for 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 submitted as often as is practicable to
the designated contract market or relevant clearing member; 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 the collection schedule for trading cards and provided further,
that the member is accountable for any trading card that subsequently is
rewritten pursuant to paragraph (f)(6) of this section.
(8) Each member of a designated contract market must use a new
trading card at the beginning of each designated 30-minute interval (or
such lesser interval as may be determined appropriate) or as may be
required pursuant hereto.
(g) Members of derivatives clearing organizations clearing trades
executed on designated contract markets and swap execution facilities.
(1) Each member of a derivatives clearing organization clearing trades
executed on a designated contract market or swap execution facility
shall maintain a single record which shall show for each futures,
option, or swap trade: the transaction date, time, quantity, and, as
applicable, underlying commodity, contract for future delivery, or swap,
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, clearing member selling, and symbols indicating the
buying and selling customer types. The customer
[[Page 136]]
type indicator shall show, with respect to each person executing the
trade, whether such person:
(i) Was trading for his or her own account, or an account for which
he or she has discretion;
(ii) Was trading for his or her clearing member's house account;
(iii) Was trading for another member present on the exchange floor,
or an account controlled by such other member; or
(iv) Was trading for any other type of customer.
(2) The record required by this paragraph (g) shall also show, by
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with the provisions of subpart J of part 38
of this chapter, 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 (g) 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.
[77 FR 66324, Nov. 2, 2012, as amended at 77 FR 75541, Dec. 21, 2012; 80
FR 80255, Dec. 24, 2015]
Sec. 1.36 Record of securities and property received from customers.
(a) Each futures commission merchant and each retail foreign
exchange dealer shall maintain, as provided in Sec. 1.31, a record of
all securities and property received from customers or retail forex
customers in lieu of money to margin, purchase, guarantee, or secure the
commodity interests of such customers or retail forex customers. Such
record shall show separately for each customer or retail forex customer:
A description of the securities or property received; the name and
address of such customer or retail forex customer; the dates when the
securities or property were received; the identity of the depositories
or other places where such securities or property are segregated or
held; the dates of deposits and withdrawals from such depositories; and
the dates of return of such securities or property to such customer or
retail forex customer, or other disposition thereof, together with the
facts and circumstances of such other disposition. In the event any
futures commission merchant deposits with a derivatives clearing
organization, directly or with a bank or trust company acting as
custodian for such derivatives clearing organization, securities and/or
property which belong to a particular customer, such futures commission
merchant shall obtain written acknowledgment from such derivatives
clearing organization that it was informed that such securities or
property belong to customers of the futures commission merchant making
the deposit. Such acknowledgment shall be retained as provided in Sec.
1.31.
(b) Each derivatives clearing organization which receives from
members securities or property belonging to particular customers of such
members in lieu of money to margin, purchase, guarantee, or secure the
commodity interests of such customers, or receives notice that any such
securities or property have been received by a bank or trust company
acting as custodian for such derivatives 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.
[77 FR 66328, Nov. 2, 2012]
Sec. 1.37 Customer's name, address, and occupation recorded; record
of guarantor or controller of account.
(a) Each futures commission merchant, retail foreign exchange
dealer, introducing broker, and member of a contract market shall keep a
record in permanent form which shall show for each commodity interest
account carried or introduced by it the true name and address of the
person for whom such account is carried or introduced
[[Page 137]]
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
customer's account or assign account numbers in such a manner to
identify that person.
(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 in
each swap 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 and swap execution facility
shall keep a record in permanent form, 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 or swap execution facility 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 or swap execution facility on which transactions in
futures, swaps or options (other than swaps) 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.
[77 FR 66328, Nov. 2, 2012]
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 or a
swap execution facility who shall have at the same time both buying and
selling orders of different principals for the same swap, 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 commodity, expiration date
[[Page 138]]
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 or swap execution facility which have been approved
by or self-certified to 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 non-pit trading in swaps or 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 bids posted at 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 or swap execution facility
designated to observe such transactions and, by appropriate descriptive
words or symbol, clearly identifies all such transactions on his trading
card or other record, made at the time of execution, and notes thereon
the exact time of execution and promptly presents or makes available
said record to such official representative for verification and
initialing, as appropriate;
(3) Such swap execution facility or contract market keeps a record
in permanent form of each such transaction showing all transaction
details required to be captured by the Act, Commission rule or
regulation; and
(4) Neither the futures commission merchant, other registrant
receiving nor the member executing such orders has any interest therein,
directly or indirectly, except as a fiduciary.
(b) Large order execution procedures. (1) A member of a contract
market or a swap execution facility may execute simultaneous buying and
selling orders of different principals directly between the principals
in compliance with Commission regulations and large order execution
procedures established by written rules of the contract market or swap
execution facility that have been approved by or self-certified to 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 or swap execution facility 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 or swap execution facility rules to implement the large order
execution procedures. The petition shall include:
(i) An explanation of why the proposed large order execution rules
do not comply with paragraph (a) of this section; and
(ii) A description of a special surveillance program that would be
followed by the contract market or swap execution facility in monitoring
the large order execution procedures.
(2) 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 purpose of the provision from which explanation is sought. The
petition shall be considered concurrently with the proposed large order
execution rules.
(c) Not deemed filling orders by offset. 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 section
4b(a) of the Act.
[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; 77 FR 66329, Nov. 2, 2012]
[[Page 139]]
Miscellaneous
Sec. 1.40 Crop, market information letters, reports; copies required.
Each futures commission merchant, each retail foreign exchange
dealer, each introducing broker, and each member of a contract market or
a swap execution facility shall, upon request, furnish or cause to be
furnished to the Commission a true copy of any letter, circular,
telecommunication, or report published or given general circulation by
such futures commission merchant, retail foreign exchange dealer,
introducing broker, member or eligible contract participant which
concerns crop or market information or conditions that affect or tend to
affect the price of any commodity, including any exchange rate, and the
true source of or authority for the information contained therein.
[77 FR 66329, Nov. 2, 2012]
Sec. Sec. 1.41-1.45 [Reserved]
Sec. 1.46 Application and closing out of offsetting long and short positions.
(a) Application of purchases and sales. (1) 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:
(i) 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;
(ii) 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;
(iii) Purchases a put or call option for the account of any customer
when the account of such customer at the time of such purchase has a
short put or call option position with the same underlying futures
contract or same underlying commodity, strike price, expiration date and
contract market as that purchased; or
(iv) Sells a put or call option for the account of any customer when
the account of such customer at the time of such sale has a long put or
call option position with the same underlying futures contract or same
underlying commodity, 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 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.
(2) Any futures commission merchant or retail foreign exchange
dealer who:
(i) Engages in a retail forex transaction involving the purchase of
any currency for the account of any retail forex customer when the
account of such retail forex customer at the time of such purchase has
an open retail forex transaction for the sale of the same currency;
(ii) Engages in a retail forex transaction involving the sale of any
currency for the account of any retail forex customer when the account
of such retail forex customer at the time of such sale has an open
retail forex transaction for the purchase of the same currency;
(iii) Purchases a put or call option involving foreign currency for
the account of any customer when the account of such customer at the
time of such purchase has a short put or call option position with the
same underlying currency, strike price, and expiration date as that
purchased; or
(iv) Sells a put or call option involving foreign currency for the
account of any customer when the account of such customer at the time of
such sale has a long put or call option position with the same
underlying currency, strike price, and expiration date as that sold--
shall immediately apply such purchase or sale against such previously
held opposite transaction, and shall promptly furnish such retail forex
[[Page 140]]
customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the
futures commission merchant or retail foreign exchange dealer by an
introducing broker and the names of the futures commission merchant or
retail foreign exchange dealer, and the introducing broker.
(b) Close-out against oldest open position. In all instances wherein
the short or long futures, retail forex transaction or option position
in such customer's or retail forex customer's account immediately prior
to such offsetting purchase or sale is greater than the quantity
purchased or sold, the futures commission merchant or retail foreign
exchange dealer 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 the offsetting
transaction shall be applied as specified by the customer without regard
to the date of acquisition of the previously held position; and
Provided, further, that a futures commission merchant or retail foreign
exchange dealer, if permitted by the rules of a registered futures
association, may offset, at the customer's request, retail forex
transactions of the same size, even if the customer holds other
transactions of a different size, but in each case must offset the
transaction against the oldest transaction of the same size. Such
instructions may also be accepted from any person who, by power of
attorney or otherwise, actually directs trading in the customer's or
retail forex customer's account unless the person directing the trading
is the futures commission merchant or retail foreign exchange dealer
(including any partner thereof), or is an officer, employee, or agent of
the futures commission merchant or retail foreign exchange dealer. 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 or retail
foreign exchange dealer shall clearly show on the statement issued to
the customer or retail forex customer in connection with the
transaction, that because of the specific instructions given by or on
behalf of the customer or retail forex 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 or retail foreign exchange dealer has
received such specific instructions in writing from the customer or
retail forex 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
[[Page 141]]
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
(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]
Editorial Note: For Federal Register citations affecting Sec. 1.46,
see the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and at www.fdsys.gov.
Sec. Sec. 1.47-1.48 [Reserved]
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.
(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, 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
[[Page 142]]
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 that has in excess of $1 billion of
regulatory capital;
(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:
(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, as amended at 76 FR 44264, July 25, 2011; 77
FR 66330, Nov. 2, 2012]
Sec. Sec. 1.50-1.51 [Reserved]
Sec. 1.52 Self-regulatory organization adoption and surveillance of
minimum financial requirements.
(a) For purposes of this section, the following terms are defined as
follows:
(1) Examinations expert is defined as a Nationally recognized
accounting and auditing firm with substantial expertise in audits of
futures commission merchants, risk assessment and internal control
reviews, and is an accounting and auditing firm that is acceptable to
the Commission; and
(2) Self-regulatory organization means a contract market (as defined
in Sec. 1.3(h)) or a registered futures association under section 17 of
the Act. The term ``self-regulatory organization'' for purpose of this
section does not include a swap execution facility (as defined in Sec.
1.3(rrrr)).
(b)(1) Each self-regulatory organization must adopt rules
prescribing minimum financial and related reporting requirements for
members who are registered futures commission merchants or registered
retail foreign exchange dealers. Each self-regulatory organization other
than a contract market must adopt rules prescribing minimum financial
and related reporting requirements for members who are registered
introducing brokers. The self-regulatory organization's minimum
financial and related reporting requirements must be the same as, or
more stringent than, the requirements contained in Sec. Sec. 1.10 and
1.17, for futures commission merchants and introducing brokers, and
Sec. Sec. 5.7 and 5.12 of this chapter for retail foreign exchange
dealers; provided, however, that a self-regulatory organization may
permit its member registrants that 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
(``FOCUS Report''), Part II, Part IIA, or Part II CSE, as applicable, in
lieu of Form 1-FR; provided, further, that such self-regulatory
organization must require such member registrants to provide all
information in Form 1-FR that is not included in the FOCUS Report
[[Page 143]]
Part II, Part IIA, or Part CSE provided by such member registrant. The
definition of adjusted net capital must be the same as that prescribed
in Sec. 1.17(c) for futures commission merchants and introducing
brokers, and Sec. 5.7(b)(2) of this chapter for futures commission
merchants offering or engaging in retail forex transactions and for
retail foreign exchange dealers.
(2) In addition to the requirements set forth in paragraph (b)(1) of
this section, each self-regulatory organization that has a futures
commission merchant member registrant must adopt rules prescribing risk
management requirements for futures commission merchant member
registrants that shall be the same as, or more stringent than, the
requirements contained in Sec. 1.11.
(c)(1) Each self-regulatory organization must establish and operate
a supervisory program that includes written policies and procedures
concerning the application of such supervisory program in the
examination of its member registrants for the purpose of assessing
whether each member registrant is in compliance with the applicable
self-regulatory organization and Commission regulations governing
minimum net capital and related financial requirements, the obligation
to segregate customer funds, risk management requirements, financial
reporting requirements, recordkeeping requirements, and sales practice
and other compliance requirements. The supervisory program also must
address the following elements:
(i) Adequate levels and independence of examination staff. A self-
regulatory organization must maintain staff of an adequate size,
training, and experience to effectively implement a supervisory program.
Staff of the self-regulatory organization, including officers,
directors, and supervising committee members, must maintain independent
judgment and its actions must not impair its independence nor appear to
impair its independence in matters related to the supervisory program.
The self-regulatory organization must provide annual ethics training to
all staff with responsibilities for the supervisory program.
(ii) Ongoing surveillance. A self-regulatory organization's ongoing
surveillance of member registrants must include the review and analysis
of financial reports and regulatory notices filed by member registrants
with the designated self-regulatory organization.
(iii) High-risk firms. A self-regulatory organization's supervisory
program must include procedures for identifying member registrants that
are determined to pose a high degree of potential financial risk,
including the potential risk of loss of customer funds. High-risk member
registrants must include firms experiencing financial or operational
difficulties, failing to meet segregation or net capital requirements,
failing to maintain current books and records, or experiencing material
inadequacies in internal controls. Enhanced monitoring for high risk
firms should include, as appropriate, daily review of net capital,
segregation, and secured calculations, to assess compliance with self-
regulatory organization and Commission requirements.
(iv) On-site examinations. (A) A self-regulatory organization must
conduct routine periodic on-site examinations of member registrants.
Member futures commission merchants and retail foreign exchange dealers
must be subject to on-site examinations no less frequently than once
every eighteen months. A self-regulatory organization shall establish a
risk-based method of establishing the scope of each on-site examination;
provided, however, that the scope of each on-site examination of a
futures commission merchant or retail foreign exchange dealer must
include an assessment of whether the registrant is in compliance with
applicable Commission and self-regulatory organization minimum capital,
customer fund protection, recordkeeping, and reporting requirements.
(B) A self-regulatory organization other than a contract market must
establish the frequency of on-site examinations of member introducing
brokers that do not operate pursuant to guarantee agreements with
futures commission merchants or retail foreign exchange dealers using a
risk-based approach, which takes into consideration
[[Page 144]]
the time elapsed since the self-regulatory organization's previous
examination of the introducing broker.
(C) A self-regulatory organization must conduct on-site examinations
of member registrants in accordance with uniform examination programs
and procedures that have been submitted to the Commission.
(v) Adequate documentation. A self-regulatory organization must
adequately document all aspects of the operation of the supervisory
program, including the conduct of risk-based scope setting and the risk-
based surveillance of high-risk member registrants, and the imposition
of remedial and punitive action(s) for material violations.
(2) In addition to the requirements set forth in paragraph (c)(1) of
this section, the supervisory program of a self-regulatory organization
that has a registered futures commission merchant member must satisfy
the following requirements:
(i) The supervisory program must set forth in writing the
examination standards that the self-regulatory organization must apply
in its examination of its registered futures commission merchant member.
The supervisory program must be based on controls testing and
substantive testing, and must address all areas of risk to which the
futures commission merchant can reasonably be foreseen to be subject.
The supervisory program must be based on an understanding of the
internal control environment to determine the nature, timing and extent
of the controls and substantive testing to be performed. The
determination as to which elements of the supervisory program are to be
performed on any examination must be based on the risk profile of each
registered futures commission merchant member.
(ii) All aspects of the supervisory program, including the standards
pursuant to paragraph (c)(2)(iii) of this section, must, at minimum,
conform to auditing standards issued by the Public Company Accounting
Oversight Board as such standards would be applicable to a non-financial
statement audit. These standards would include the training and
proficiency of the auditor, due professional care in the performance of
work, consideration of fraud in an audit, audit risk and materiality in
conducting an audit, planning and supervision, understanding the entity
and its environment and assessing the risks of material misstatement,
performing audit procedures in response to assessed risk and evaluating
the audit evidence obtained, auditor's communication with those charged
with governance, and communicating internal control matters identified
in an audit.
(iii) The supervisory program must, at a minimum, have standards
addressing the following:
(A) The ethics of an examiner;
(B) The independence of an examiner;
(C) The supervision, review, and quality control of an examiner's
work product;
(D) The evidence and documentation to be reviewed and retained in
connection with an examination;
(E) The sampling size and techniques used in an examination;
(F) The examination risk assessment process;
(G) The examination planning process;
(H) Materiality assessment;
(I) Quality control procedures to ensure that the examinations
maintain the level of quality expected;
(J) Communications between an examiner and the regulatory oversight
committee, or the functional equivalent of the regulatory oversight
committee, of the self-regulatory organization of which the futures
commission merchant is a member;
(K) Communications between an examiner and a futures commission
merchant's audit committee of the board of directors or other similar
governing body;
(L) Analytical review procedures;
(M) Record retention; and
(N) Required items for inclusion in the examination report, such as
repeat violations, material items, and high risk issues. The examination
report is intended solely for the information and use of the self-
regulatory organizations and the Commission, and is not intended to be
and should not be used by any other person or entity.
(iv) A self-regulatory organization must cause an examinations
expert to evaluate the supervisory program and
[[Page 145]]
such self-regulatory organization's application of the supervisory
program at least once every three years.
(A) The self-regulatory organization must obtain from such
examinations expert a written report on findings and recommendations
issued under the consulting services standards of the American Institute
of Certified Public Accountants that includes the following:
(1) A statement that the examinations expert has evaluated the
supervisory program, including the sufficiency of the risk-based
approach and the internal controls testing thereof, and comments and
recommendations in connection with such evaluation from such
examinations expert;
(2) A statement that the examinations expert has evaluated the
application of the supervisory program by the self-regulatory
organization, and comments and recommendations in connection with such
evaluation from such examinations expert; and
(3) The examinations expert's report should include an analysis of
the supervisory program's design to detect material weaknesses in an
entity's internal control environment;
(4) A discussion and recommendation of any new or best practices as
prescribed by industry sources, including, but not limited to, those
from the American Institute of Certified Public Accountants, the Public
Company Accounting Oversight Board, the Institute of Internal Auditors,
and The Risk Management Association.
(B) The self-regulatory organization must provide the written report
to the Commission no later than thirty days following the receipt
thereof. The self-regulatory organization may also provide to the
Commission a response, in writing, to any of the findings, comments or
recommendations made by the examinations expert. Upon resolution of any
questions or comments raised by the Commission, and upon written notice
from the Commission that it has no further comments or questions on the
supervisory program as amended (by reason of the examinations expert's
proposals, considerations of the Commission's questions or comments, or
otherwise), the self-regulatory organization shall commence applying
such supervisory program as the standard for examining its registered
futures commission merchant members for all examinations conducted with
an ``as-of'' date later than the date of the Commission's written
notification.
(v) The supervisory program must require the self-regulatory
organization to report to its risk and/or audit committee of the board
of directors, or a functional equivalent committee, with timely reports
of the activities and findings of the supervisory program to assist the
risk and/or audit committee of the board of directors, or a functional
equivalent committee, to fulfill its responsibility of overseeing the
examination function.
(vi) The initial supervisory program shall be established as
follows. Within 180 days following the effective date of this section,
or such other time as the Commission may approve, the self-regulatory
organization shall submit a proposed supervisory program to the
Commission for its review and comment, together with a written report
that includes the elements found in paragraphs (c)(2)(iv)(A)(1) and (3)
of this section from an examinations expert who has evaluated the
supervisory program. The self-regulatory organization may provide the
Commission a written response to any findings, comments or
recommendations made by the examinations expert. Upon resolution of any
questions or comments raised by the Commission, and upon written notice
from the Commission that it has no further comments or questions on the
proposed supervisory program as amended (by reason of the considerations
of the Commission's questions or comments or otherwise), the self-
regulatory organizations shall commence applying such supervisory
program as the standard for examining its members that are registered as
futures commission merchants for all examinations conducted with an
``as-of'' date later than the date of the Commission's written
notification.
(vii) The examinations expert's report, the self-regulatory
organization's response, as well as any information concerning the
supervisory program or any review conducted pursuant to the program that
is obtained by the examinations expert, is confidential. Except
[[Page 146]]
as expressly provided for in this section, such information may not be
disclosed to anyone not involved in the review process.
(d)(1) 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, retail
foreign exchange dealer, or introducing broker that is a member of more
than one such self-regulatory organization, the function of:
(i) Monitoring and examining for compliance with the minimum
financial and related reporting requirements and risk management
requirements, including policies and procedures relating to the receipt,
holding, investing and disbursement of customer funds, adopted by such
self-regulatory organizations and the Commission in accordance with
paragraphs (b) and (c) of this section; and
(ii) Receiving the financial reports and notices necessitated by
such minimum financial and related reporting requirements; provided,
however, that the self-regulatory organization that delegates the
functions set forth in this paragraph (d)(1) shall remain responsible
for its member registrants' compliance with the regulatory obligations,
and if such self-regulatory organization becomes aware that a delegated
function is not being performed as required under this section, the
self-regulatory organization shall promptly take any necessary steps to
address any noncompliance.
(2) If a plan established pursuant to paragraph (d)(1) of this
section applies to any registered futures commission merchant, then such
plan must include the following elements:
(i) The Joint Audit Committee. The self-regulatory organizations
that choose to participate in the plan shall form a Joint Audit
Committee, consisting of all self-regulatory organizations in the plan
as members. The members of the Joint Audit Committee shall establish,
operate and maintain a Joint Audit Program in accordance with the
requirements of this section to ensure an effective and a high quality
program for examining futures commission merchants, to designate the
designated self-regulatory organizations that will be responsible for
the examinations of futures commission merchants pursuant to the Joint
Audit Program, and to satisfy such additional obligations set forth in
this section in order to facilitate the examinations of futures
commission merchants by their respective designated self-regulatory
organizations.
(ii) The Joint Audit Program. The Joint Audit Program must, at
minimum, satisfy the following requirements.
(A) The purpose of the Joint Audit Program must be to assess whether
each registered futures commission merchant member of the Joint Audit
Committee self-regulatory organization members is in compliance with the
Joint Audit Program and Commission regulations governing minimum net
capital and related financial requirements, the obligation to segregate
customer funds, risk management requirements, including policies and
procedures relating to the receipt, holding, investment, and
disbursement of customer funds, financial reporting requirements,
recordkeeping requirements, and sales practice and other compliance
requirements.
(B) The Joint Audit Program must include written policies and
procedures concerning the application of the Joint Audit Program in the
examination of the registered futures commission merchant members of the
Joint Audit Committee self-regulatory organization members.
(C)(1) Adequate levels and independence of examination staff. A
designated self-regulatory organization must maintain staff of an
adequate size, training, and experience to effectively implement the
Joint Audit Program. Staff of the designated self-regulatory
organization, including officers, directors, and supervising committee
members, must maintain independent judgment and its actions must not
impair its independence nor appear to impair its independence in matters
related to the Joint Audit Program. The designated self-regulatory
organization must provide annual ethics training to all staff with
responsibilities for the Joint Audit Program.
[[Page 147]]
(2) Ongoing surveillance. A designated self-regulatory
organization's ongoing surveillance of futures commission merchant
member registrants over which it has oversight responsibilities must
include the review and analysis of financial reports and regulatory
notices filed by such member registrants with the designated self-
regulatory organization.
(3) High-risk firms. The Joint Audit Program must include procedures
for identifying futures commission merchant member registrants over
which it has oversight responsibilities that are determined to pose a
high degree of potential financial risk, including the potential risk of
loss of customer funds. High-risk member registrants must include firms
experiencing financial or operational difficulties, failing to meet
segregation or net capital requirements, failing to maintain current
books and records, or experiencing material inadequacies in internal
controls. Enhanced monitoring for high risk firms should include, as
appropriate, daily review of net capital, segregation, and secured
calculations, to assess compliance with self-regulatory and Commission
requirements.
(4) On-site examinations. A designated self-regulatory organization
must conduct routine periodic on-site examinations of futures commission
merchant member registrants over which it has oversight
responsibilities. Such member registrants must be subject to on-site
examinations no less frequently than once every eighteen months. A
designated self-regulatory organization shall establish a risk-based
method of establishing the scope of each on-site examination, provided,
however, that the scope of each on-site examination of a futures
commission merchant must include an assessment of whether the registrant
is in compliance with applicable Commission and self-regulatory
organization minimum capital, customer fund protection, recordkeeping,
and reporting requirements. A designated self-regulatory organization
must conduct on-site examinations of futures commission merchant
registrants in accordance with the Joint Audit Program.
(D) The Joint Audit Committee members must adequately document all
aspects of the operation of the Joint Audit Program, including the
conduct of risk-based scope setting and the risk-based surveillance of
high-risk member registrants, and the imposition of remedial and
punitive action(s) for material violations.
(E) The Joint Audit Program must set forth in writing the
examination standards that a designated self-regulatory organization
must apply in its examination of a registered futures commission
merchant. The Joint Audit Program must be based on controls testing and
substantive testing, and must address all areas of risk to which the
futures commission merchant can reasonably be foreseen to be subject.
The Joint Audit Program must be based on an understanding of the
internal control environment to determine the nature, timing and extent
of the controls and substantive testing to be performed. The
determination as to which elements of the Joint Audit Program are to be
performed on any examination must be based on the risk profile of each
registered futures commission merchant.
(F) All aspects of the Joint Audit Program, including the standards
required pursuant to paragraph (d)(2)(ii)(G) of this section, must, at
minimum, conform to auditing standards issued by the Public Company
Accounting Oversight Board as such standards would be applicable to a
non-financial statement audit. These standards would include the
training and proficiency of the auditor, due professional care in the
performance of work, consideration of fraud in an audit, audit risk and
materiality in conducting an audit, planning and supervision,
understanding the entity and its environment and assessing the risks of
material misstatement, performing audit procedures in response to
assessed risk and evaluating the audit evidence obtained, auditor's
communication with those charged with governance, and communicating
internal control matters identified in an audit.
(G) The Joint Audit Program must have standards addressing those
items listed in paragraph (c)(2)(iii) of this section.
(H) The initial Joint Audit Program shall be established as follows.
Within
[[Page 148]]
180 days following the effective date of this section, or such other
time as the Commission may approve, the Joint Audit Committee members
shall submit a proposed initial Joint Audit Program to the Commission
for its review and comment, together with a written report that includes
the elements found in paragraphs (d)(2)(ii)(I)(1) and (d)(2)(ii)(I)(3)
of this section from an examinations expert who has evaluated the Joint
Audit Program. The Joint Audit Committee members may also provide to the
Commission a response, in writing, to any of the findings, comments or
recommendations made by the examinations expert. Upon resolution of any
questions or comments raised by the Commission, and upon written notice
from the Commission that it has no further comments or questions on the
proposed Joint Audit Program as amended (by reason of the considerations
of the Commission's questions or comments or otherwise), the designated
self-regulatory organizations shall commence applying such Joint Audit
Program as the standard for examining their respective registered
futures commission merchants for all examinations conducted with an
``as-of'' date later than the date of the Commission's written
notification.
(I) Following the establishment of the Joint Audit Program, no less
frequently than once every three years, the Joint Audit Committee
members must cause an examinations expert to evaluate the Joint Audit
Program and each designated self-regulatory organization's application
of the Joint Audit Program. The Joint Audit Committee members must
obtain from such examinations expert a written report, and must provide
the written report to the Commission no later than forty-five days prior
to the annual meeting of the members of the Joint Audit Committee to be
held in that year pursuant to paragraph (d)(2)(iii)(A) of this section.
The Joint Audit Committee members may also provide to the Commission a
response, in writing, to any of the findings, comments or
recommendations made by the examinations expert. The examinations
expert's written report must include the following:
(1) A statement that the examinations expert has evaluated the Joint
Audit Program, including the sufficiency of the risk-based approach and
the internal controls testing thereof, and comments and recommendations
in connection with such evaluation from such examinations expert;
(2) A statement that the examinations expert has evaluated the
application of the Joint Audit Program by each designated self-
regulatory organization, and comments and recommendations in connection
with such evaluation from such examinations expert;
(3) The examinations expert's report on findings and recommendations
issued under the consulting services standards of the American Institute
of Certified Public Accountants and should include an analysis of the
supervisory program's design to detect material weaknesses in an
entities internal control environment; and
(4) A discussion and recommendation of any new or best practices as
prescribed by industry sources, including, but not limited to, those
from the American Institute of Certified Public Accountants, the Public
Company Accounting Oversight Board, the Internal Audit Association and
The Risk Management Association.
(J) The examinations expert's report, the Joint Audit Committee's
response, as well as any information concerning the supervisory program
or any review conducted pursuant to the program that is obtained by the
examinations expert, is confidential. Except as expressly provided for
in paragraphs (d)(2)(ii)(G) or (d)(2)(ii)(H) of this section, such
information may not be disclosed to anyone not involved in the review
process.
(K) The Joint Audit Program must require each Joint Audit Committee
member to provide to its risk and/or audit committee of the board of
directors, or a functionally equivalent committee, with timely reports
of the activities and findings of the Joint Audit Program to assist the
risk and/or audit committee of the board of directors, or a functionally
equivalent committee, in fulfilling its responsibility of overseeing the
examination function.
(iii) Meetings of the Joint Audit Committee. (A) No less frequently
than once every year, the Joint Audit Committee
[[Page 149]]
members must meet to consider whether changes to the Joint Audit Program
are appropriate, and in considering such, in meetings corresponding to
the written report obtained from an examinations expert pursuant to
paragraph (d)(2)(ii)(I) of this section, the Joint Audit Committee
members must consider such written report, including the results of the
examinations expert's assessment of the Joint Audit Program and any
additional recommendations. The Commission's questions, comments and
proposals must also be considered. Upon written notice from the
Commission that it has no further comments or questions on the Joint
Audit Program as amended (by reason of the examinations expert's
proposals, considerations of the Commission's questions, comments and
proposals, or otherwise), the designated self-regulatory organizations
shall commence applying such Joint Audit Program as the standard for
examining their respective registered futures commission merchants for
all examinations conducted with an ``as-of'' date later than the date of
the Commission's written notification.
(B) In addition to the items considered in paragraph (d)(2)(iii)(A)
of this section, the Joint Audit Committee members must consider the
following items during the annual meeting:
(1) The role of the Joint Audit Committee and its members as it
relates to self-regulatory organization responsibilities;
(2) Developing and maintaining the Joint Audit Program for all
designated self-regulatory organizations to follow with no exceptions;
(3) Coordinating self-regulatory organization responsibilities with
those of independent certified public accountants, the Commission and
other regulators and self-regulatory organizations (e.g., the Securities
and Exchange Commission, the Financial Industry Regulatory Authority,
and others, as the case may be for futures commission merchants subject
to regulation by multiple regulators and self-regulatory organizations);
(4) Coordinating and sharing information between the Joint Audit
Committee members, including issues and industry concerns in connection
with examinations of futures commission merchants;
(5) Identifying industry regulatory reporting issues and financial
and operational internal control issues and modifying the Joint Audit
Program accordingly;
(6) Issuing risk alerts for futures commission merchants and/or
designated self-regulatory organization examiners on an as-needed basis
as issues arise;
(7) Issuing an annual examination alert for certified public
accountants and designated self-regulatory organization examiners;
(8) Responding to industry issues;
(9) Providing industry feedback to Commission proposals; and
(10) Developing and maintaining a standard of ethics and
independence with which all examination units of the Joint Audit
Committee members must comply.
(C) Minutes must be taken of all meetings and distributed to all
members on a timely basis.
(D) The Commission must receive timely prior notice of each meeting,
have to right to attend and participate in each meeting and receive
written copies of the reports and minutes required pursuant to
paragraphs (d)(2)(ii)(J) and (d)(2)(iii)(C) of this section,
respectively.
(3) The plan referenced in paragraph (d)(1) of this section shall
not be effective without Commission approval pursuant to paragraph (h)
of this section.
(e) Any plan filed under this section may contain provisions for the
allocation of expenses reasonably incurred by designated self-regulatory
organizations among the self-regulatory organizations participating in
such a plan.
(f) A plan's designated self-regulatory organizations must report
to:
(1) That plan's other self-regulatory organizations any violation of
such other self-regulatory organizations' rules and regulations for
which the responsibility to monitor or examine has been delegated to
such designated self-regulatory organization under this section; and
(2) The Director of the Division of Swap Dealer and Intermediary
Oversight of the Commission any violation of a self-regulatory
organization's rules
[[Page 150]]
and regulations or any violation of the Commission's regulations for
which the responsibility to monitor, audit, or examine has been
delegated to such designated self-regulatory organization under this
section.
(g) The Joint Audit Committee members may, among themselves,
establish programs to provide access to any necessary financial or
related information.
(h) 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;
(3) Reduces multiple monitoring and multiple examining for
compliance with the minimum financial rules of the Commission and of the
self-regulatory organizations submitting the plan of any futures
commission merchant, retail foreign exchange dealer, or introducing
broker that 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, retail foreign exchange
dealer, or introducing broker that is a member of more than one self-
regulatory organization;
(5) Fosters cooperation and coordination among the self-regulatory
organizations; and
(6) Does not hinder the development of a registered futures
association under section 17 of the Act.
(i) After the Commission has approved a plan, or part thereof, under
paragraph (h) of this section, a self-regulatory organization delegating
the functions described in paragraph (d)(1) of this section must notify
each of its members that are subject to such a plan:
(1) Of the limited scope of the delegating self-regulatory
organization's responsibility for such a member's compliance with the
Commission's and self-regulatory organization's minimum financial and
related reporting requirements; and
(2) Of the identity of the designated self-regulatory organization
that has been delegated responsibility for such a member; provided,
however, that the self-regulatory organization that delegates, pursuant
to paragraph (d) of this section, the functions set forth in paragraphs
(b) and (c) of this section shall remain responsible for its member
registrants' compliance with the regulatory obligations, and if such
self-regulatory organization becomes aware that a delegated function is
not being performed as required under this section, the self-regulatory
organization shall promptly take any necessary steps to address any
noncompliance.
(j) The Commission may at any time, after appropriate notice and
opportunity for hearing, withdraw its approval of any plan, or part
thereof, established under this section, if such plan, or part thereof,
ceases to adequately effectuate the purposes of section 4f(b) of the Act
or of this section.
(k) Whenever a registered futures commission merchant, a registered
retail foreign exchange dealer, 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 electronic notice of that event to the Commission at its
Washington, DC, headquarters and send a copy of that notification to
such futures commission merchant, retail foreign exchange dealer, or
introducing broker.
(l) Nothing in this section shall preclude the Commission from
examining any futures commission merchant, retail foreign exchange
dealer, or introducing broker for compliance with the minimum financial
and related reporting requirements, and the risk management
requirements, as applicable, to which such futures commission merchant,
retail foreign exchange dealer, or introducing broker is subject.
(m) In the event a plan is not filed and/or approved for each
registered futures commission merchant, retail foreign exchange dealer,
or introducing broker that is a member of more than one self-regulatory
organization, the
[[Page 151]]
Commission may design and, after notice and opportunity for comment,
approve a plan for those futures commission merchants, retail foreign
exchange dealers, or introducing brokers that are not the subject of an
approved plan (under paragraph (h) of this section), delegating to a
designated self-regulatory organization the responsibilities described
in paragraph (d) of this section.
[78 FR 68638, Nov. 14, 2013]
Sec. 1.53 [Reserved]
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 Public disclosures by futures commission merchants.
(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) The funds you deposit with a futures commission merchant for
trading futures positions are not protected by insurance in the event of
the bankruptcy or insolvency of the futures commission merchant, or in
the event your funds are misappropriated.
(3) The funds you deposit with a futures commission merchant for
trading futures positions are not protected by the Securities Investor
Protection Corporation even if the futures commission merchant is
registered with the Securities and Exchange Commission as a broker or
dealer.
(4) The funds you deposit with a futures commission merchant are
generally not guaranteed or insured by a derivatives clearing
organization in the event of the bankruptcy or insolvency of the futures
commission merchant, or if the futures commission merchant is otherwise
unable to refund your funds. Certain derivatives clearing organizations,
however, may have programs that provide limited insurance to customers.
You should inquire of your futures commission merchant whether your
funds will be insured by a derivatives clearing organization and you
should understand the benefits and limitations of such insurance
programs.
(5) The funds you deposit with a futures commission merchant are not
held by the futures commission merchant in a separate account for your
individual benefit. Futures
[[Page 152]]
commission merchants commingle the funds received from customers in one
or more accounts and you may be exposed to losses incurred by other
customers if the futures commission merchant does not have sufficient
capital to cover such other customers' trading losses.
(6) The funds you deposit with a futures commission merchant may be
invested by the futures commission merchant in certain types of
financial instruments that have been approved by the Commission for the
purpose of such investments. Permitted investments are listed in
Commission Regulation 1.25 and include: U.S. government securities;
municipal securities; money market mutual funds; and certain corporate
notes and bonds. The futures commission merchant may retain the interest
and other earnings realized from its investment of customer funds. You
should be familiar with the types of financial instruments that a
futures commission merchant may invest customer funds in.
(7) Futures commission merchants are permitted to deposit customer
funds with affiliated entities, such as affiliated banks, securities
brokers or dealers, or foreign brokers. You should inquire as to whether
your futures commission merchant deposits funds with affiliates and
assess whether such deposits by the futures commission merchant with its
affiliates increases the risks to your funds.
(8) You should consult your futures commission merchant concerning
the nature of the protections available to safeguard funds or property
deposited for your account.
(9) 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'').
(10) All futures positions involve risk, and a ``spread'' position
may not be less risky than an outright ``long'' or ``short'' position.
(11) The high degree of leverage (gearing) that is often obtainable
in futures trading because of the small margin requirements can work
against you as well as for you. Leverage (gearing) can lead to large
losses as well as gains.
(12) In addition to the risks noted in the paragraphs enumerated
above, you should be familiar with the futures commission merchant you
select to entrust your funds for trading futures positions. The
Commodity Futures Trading Commission requires each futures commission
merchant to make publicly available on its Web site firm specific
disclosures and financial information to assist you with your assessment
and selection of a futures commission merchant. Information regarding
this futures commission merchant may be obtained by visiting our Web
site, www.[Web site address].
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:
(13) 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.
(14) 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
[[Page 153]]
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; Provided, however, that an FCM also provides
a customer with the risk disclosure statement required by paragraph (b)
of this section and obtains the customer's acknowledgment that it has
read and understands the disclosure document.
(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, 155.3(b)(2), 155.4(b)(2), and 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.
(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 154]]
[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]
[[Page 155]]
[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]
* * * * *
[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 156]]
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.
(i) Notwithstanding any other provision of this section, no futures
commission merchant may enter into a customer account agreement or first
accept funds from a customer, unless the futures commission merchant
discloses to the customer all information about the futures commission
merchant, including its business, operations, risk profile, and
affiliates, that would be material to the customer's decision to entrust
such funds to and otherwise do business with the futures commission
merchant and that is otherwise necessary for full and fair disclosure.
In connection with the disclosure of such information, the futures
commission merchant shall provide material information about the topics
described in paragraph (k) of this section, expanding upon such
information as necessary to keep such disclosure from being misleading,
whether through omission or otherwise. The futures commission merchant
shall also disclose the same information required by this paragraph to
all customers existing on the effective date of this paragraph even if
the futures commission merchant and such existing customers have
previously entered into a customer account agreement or the futures
commission merchant has already accepted funds from such existing
customers. The futures commission merchant shall update the information
required by this section as and when necessary, but at least annually,
to keep such information accurate and complete and shall promptly
disclose such updated information to all of its customers. In connection
with such obligation to update information, the futures commission
merchant shall take into account any material change to its business
operation, financial condition and other factors material to the
customer's decision to entrust the customer's funds and otherwise do
business with the futures commission merchant since its most recent
disclosure pursuant to this paragraph, and for this purpose shall
without limitation consider events that require periodic reporting
required to be filed pursuant to Sec. 1.12. For purposes of this
section, the disclosures required pursuant to this paragraph will be
referred to as the ``Disclosure Documents.'' The Disclosure Documents
shall provide a detailed table of contents referencing and describing
the Disclosure Documents.
(j)(1) Each futures commission merchant shall make the Disclosure
Documents available to each customer to whom disclosure is required
pursuant to paragraph (i) of this section (for purposes of this section,
its ``FCM Customers'') and to the general public.
(2) A futures commission merchant shall make the Disclosure
Documents available to FCM Customers and to the general public by
posting a copy of the Disclosure Documents on the futures commission
merchant's Web site. A futures commission merchant, however, may use an
electronic means other than its Web site to make the Disclosure
Documents available to its FCM Customers; provided that:
(i) The electronic version of the Disclosure Documents shall be
presented in a format that is readily communicated to the FCM Customers.
Information is readily communicated to the FCM Customers if it is
accessible to the ordinary computer 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; and
(ii) A complete paper copy of the Disclosure Documents shall be
provided to an FCM Customer upon request.
(k) Specific topics. The futures commission merchant shall provide
material information about the following specific topics:
[[Page 157]]
(1) The futures commission merchant's name, address of its principal
place of business, phone number, fax number, and email address;
(2) The name, title, business address, business background, areas of
responsibility, and the nature of the duties of each person that is
defined as a principal of the futures commission merchant pursuant to
Sec. 3.1 of this chapter;
(3) The significant types of business activities and product lines
engaged in by the futures commission merchant, and the approximate
percentage of the futures commission merchant's assets and capital that
are used in each type of activity;
(4) The futures commission merchant's business on behalf of its
customers, including types of customers, markets traded, international
businesses, and clearinghouses and carrying brokers used, and the
futures commission merchant's policies and procedures concerning the
choice of bank depositories, custodians, and counterparties to permitted
transactions under Sec. 1.25;
(5) The material risks, accompanied by an explanation of how such
risks may be material to its customers, of entrusting funds to the
futures commission merchant, including, without limitation, the nature
of investments made by the futures commission merchant (including credit
quality, weighted average maturity, and weighted average coupon); the
futures commission merchant's creditworthiness, leverage, capital,
liquidity, principal liabilities, balance sheet leverage and other lines
of business; risks to the futures commission merchant created by its
affiliates and their activities, including investment of customer funds
in an affiliated entity; and any significant liabilities, contingent or
otherwise, and material commitments;
(6) The name of the futures commission merchant's designated self-
regulatory organization and its Web site address and the location where
the annual audited financial statements of the futures commission
merchant is made available;
(7) Any material administrative, civil, enforcement, or criminal
complaints or actions filed against the FCM where such complaints or
actions have not concluded, and any enforcement complaints or actions
filed against the FCM during the last three years;
(8) A basic overview of customer fund segregation, futures
commission merchant collateral management and investments, futures
commission merchants, and joint futures commission merchant/broker
dealers;
(9) Information on how a customer may obtain information regarding
filing a complaint about the futures commission merchant with the
Commission or with the firm's designated self-regulatory organization;
and
(10) The following financial data as of the most recent month-end
when the Disclosure Document is prepared:
(i) The futures commission merchant's total equity, regulatory
capital, and net worth, all computed in accordance with U.S. Generally
Accepted Accounting Principles and Sec. 1.17, as applicable;
(ii) The dollar value of the futures commission merchant's
proprietary margin requirements as a percentage of the aggregate margin
requirement for futures customers, Cleared Swaps Customers, and 30.7
customers;
(iii) The smallest number of futures customers, Cleared Swaps
Customers, and 30.7 customers that comprise 50 percent of the futures
commission merchant's total funds held for futures customers, Cleared
Swaps Customers, and 30.7 customers, respectively;
(iv) The aggregate notional value, by asset class, of all non-
hedged, principal over-the-counter transactions into which the futures
commission merchant has entered;
(v) The amount, generic source and purpose of any committed
unsecured lines of credit (or similar short-term funding) the futures
commission merchant has obtained but not yet drawn upon;
(vi) The aggregated amount of financing the futures commission
merchant provides for customer transactions involving illiquid financial
products for which it is difficult to obtain timely and accurate prices;
and
(vii) The percentage of futures customer, Cleared Swaps Customer,
and 30.7 customer receivable balances that the futures commission
merchant had
[[Page 158]]
to write-off as uncollectable during the past 12-month period, as
compared to the current balance of funds held for futures customers,
Cleared Swaps Customers, and 30.7 customers; and
(11) A summary of the futures commission merchant's current risk
practices, controls and procedures.
(l) In addition to the foregoing, each futures commission merchant
shall adopt policies and procedures reasonably designed to ensure that
advertising and solicitation activities by each such futures commission
merchant and any introducing brokers associated with such futures
commission merchant are not misleading to its FCM Customers in
connection with their decision to entrust funds to and otherwise do
business with such futures commission merchant.
(m) The Disclosure Document required by paragraph (i) of this
section is in addition to the Risk Disclosure Statement required under
paragraph (a) of this section.
(n) All Disclosure Documents, with each Disclosure Document dated
the date of first use, shall be maintained in accordance with Sec. 1.31
and shall be made available promptly upon request to representatives of
its designated self-regulatory organization, representatives of the
Commission, and representatives of applicable prudential regulators.
(o)(1) Each futures commission merchant shall make the following
financial information publicly available on its Web site:
(i) The daily Statement of Segregation Requirements and Funds in
Segregation for Customers Trading on U.S. Exchanges for the most current
12-month period;
(ii) The daily Statement of Secured Amounts and Funds Held in
Separate Accounts for 30.7 Customers Pursuant to Commission Regulation
30.7 for the most current 12-month period;
(iii) The daily Statement of Cleared Swaps Customer Segregation
Requirements and Funds in Cleared Swaps Customer Accounts Under Section
4d(f) of the Act for the most current 12-month period;
(iv) A summary schedule of the futures commission merchant's
adjusted net capital, net capital, and excess net capital, all computed
in accordance with Sec. 1.17 and reflecting balances as of the month-
end for the 12 most recent months;
(v) The Statement of Financial Condition, the Statement of
Segregation Requirements and Funds in Segregation for Customers Trading
on U.S. Exchanges, the Statement of Secured Amounts and Funds Held in
Separate Accounts for 30.7 Customers Pursuant to Commission Regulation
30.7, the Statement of Cleared Swaps Customer Segregation Requirements
and Funds in Cleared Swaps Customer Accounts Under Section 4d(f) of the
Act, an all related footnotes to the above schedules that are part of
the futures commission merchant's most current certified annual report
pursuant to Sec. 1.16; and
(vi) The Statement of Segregation Requirements and Funds in
Segregation for Customers Trading on U.S. Exchanges, the Statement of
Secured Amounts and Funds Held in Separate Accounts for 30.7 Customers
Pursuant to Commission Regulation30.7, and the Statement of Cleared
Swaps Customer Accounts Under Section 4d(f) of the Act that are part of
the futures commission merchant's unaudited Form 1-FR-FCM or Financial
and Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934 (``FOCUS Report'') for the most current 12-month
period.
(2) To the extent any of the financial data identified in paragraph
(1) of this section is amended, the FCM must clearly notate that the
data has been amended.
(3) Each futures commission merchant must include a statement on its
Web site that is available to the public that financial information
regarding the futures commission merchant, including how the futures
commission merchant invests and holds customer funds, may be obtained
from the National Futures Association and include a link to the Web site
of the National Futures Association's Basic System where information
regarding the futures commission merchant's investment of customer funds
is maintained.
(4) Each futures commission merchant must include a statement on its
Web site that is available to the public
[[Page 159]]
that additional financial information on all futures commission
merchants is available from the Commodity Futures Trading Commission,
and include a link to the Commodity Futures Trading Commission's Web
page for financial data for futures commission merchants.
[43 FR 31890, July 24, 1978]
Editorial Note: For Federal Register citations affecting Sec. 1.55,
see the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and at www.fdsys.gov.
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 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) must open and carry such customer's account with such guarantor
futures commission merchant on a fully-disclosed basis; and
(2) Transmit promptly for execution all 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 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 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 if:
(1) The futures commission merchant carrying the 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;
(2) The check is payable to the futures commission merchant carrying
the 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:
[[Page 160]]
(i) Which is maintained in an account name which clearly identifies
the funds therein as belonging to customers of the futures commission
merchant carrying the 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 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 customers and are being held in
accordance with the provisions of the Act and the regulations in this
chapter.
[48 FR 35291, Aug. 3, 1983, as amended at 57 FR 23143, June 2, 1992; 77
FR 66330, Nov. 2, 2012]
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 Sec. 1.3(ee), and includes the term
``clearing organization,'' as defined in Sec. 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 commodity
interest on a contract market or a swap execution facility, or to clear
a swap contract through a derivatives clearing organization. As used in
this section, ``material information'' includes, but is not limited to,
information relating to present or anticipated cash positions, commodity
interests, trading strategies, the financial condition of members of
self-regulatory organizations or members of linked exchanges or their
customers, or the regulatory actions or proposed regulatory actions of a
self-regulatory organization or a linked exchange.
[[Page 161]]
(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 or swap execution facility 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, swap execution facility, 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, commodity option
or swap contract traded on or subject to the rules of a contract market,
a swap execution facility or linked exchange, or cleared by a
derivatives clearing organization, 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, swap execution
facility, linked exchange, or other board of trade, exchange, or market,
or cleared by a derivatives clearing organization, 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 the meaning of Sec. 4.10(d) of this
chapter, and whose units of participation have been registered under the
Securities Act of 1933, or a trading vehicle for which Sec. 4.5 of this
chapter 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 5c(c) of the Act and part 40 of this chapter (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, swap execution
facility, or clearing organization;
(B) Trading, directly or indirectly, in any related commodity
interest;
(C) Trading, directly or indirectly, in a commodity interest traded
on contract markets or swap execution facilities or cleared by
derivatives 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 other person any material, non-public
[[Page 162]]
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;
Registered futures association rules. Each registered futures
association must maintain in effect rules which have been submitted to
the Commission pursuant to section 17(j) of the Act 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; 77
FR 66330, Nov. 2, 2012]
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 163]]
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. Sec. 1.61-1.62 [Reserved]
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 Sec. 1.3(ee), and includes a ``clearing
organization'' as defined in 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.
[[Page 164]]
(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 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 5c(c) of
the Act and part 40 of this chapter 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,
[[Page 165]]
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. Each self-
regulatory organization must maintain and keep current the schedule
required by this section, and post the schedule on the self-regulatory
organization's Web site so that it is 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; 77 FR 66331, Nov. 2, 2012]
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
[[Page 166]]
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:
(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]
[[Page 167]]
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 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. Sec.
1.55(a)(1)(ii) and 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
[[Page 168]]
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;
(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 Swap Dealer 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; 78 FR 22419, Apr.
16, 2013]
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
[[Page 169]]
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 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
[[Page 170]]
the Proceedings Clerk shall promptly serve a copy of such order on the
floor trader, the Division of Swap Dealer 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 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; 78 FR 22419, Apr.
16, 2013]
Sec. 1.67 Notification of final disciplinary action involving
financial harm to a customer.
(a) Definitions. For purposes of this section:
Final disciplinary action means any decision by or settlement with a
contract market or swap execution facility in a disciplinary matter
which cannot be further appealed at the contract market or swap
execution facility, 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.
(b) Upon any final disciplinary action in which a contract market or
swap execution facility 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 or swap execution facility shall promptly
provide written notice of the disciplinary action to the futures
commission merchant or other registrant; and
(ii) A futures commission merchant or other registrant 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 or other registrant, such futures commission
merchant or other registrant shall promptly provide 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 or swap execution facility 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) of this
chapter shall be deemed to include the principal facts of the
disciplinary action thereof.
[77 FR 66331, Nov. 2, 2012]
Sec. 1.68 [Reserved]
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
[[Page 171]]
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;
(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
[[Page 172]]
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.
(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.
[[Page 173]]
(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 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
[[Page 174]]
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. 1.71 Conflicts of interest policies and procedures by futures
commission merchants and introducing brokers.
(a) Definitions. For purposes of this section, the following terms
shall be defined as provided.
(1) Affiliate. This term means, with respect to any person, a person
controlling, controlled by, or under common control with, such person.
(2) Business trading unit. This term means any department, division,
group, or personnel of a futures commission merchant or introducing
broker or any of its affiliates, whether or not identified as such, that
performs, or personnel exercising direct supervisory authority over the
performance of, any pricing (excluding price verification for risk
management purposes), trading, sales, marketing, advertising,
solicitation, structuring, or brokerage activities on behalf of a
futures commission merchant or introducing broker or any of its
affiliates.
(3) Clearing unit. This term means any department, division, group,
or personnel of a futures commission merchant or any of its affiliates,
whether or not identified as such, that performs, or personnel
exercising direct supervisory authority over the performance of, any
proprietary or customer clearing activities on behalf of a futures
commission merchant or any of its affiliates.
(4) Derivative. This term means:
(i) A contract for the purchase or sale of a commodity for future
delivery;
(ii) A security futures product;
(iii) A swap;
(iv) Any agreement, contract, or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; and
(v) Any commodity option authorized under section 4c of the Act; and
(vi) any leverage transaction authorized under section 19 of the Act.
(5) Non-research personnel. This term means any employee of the
business trading unit or clearing unit, or any other employee of the
futures commission merchant or introducing broker, other than an
employee performing a legal or compliance function, who is not directly
responsible for, or otherwise not directly involved in, research or
analysis intended for inclusion in a research report.
(6) Public appearance. This term means any participation in a
conference call, seminar, forum (including an interactive electronic
forum) or other public speaking activity before 15 or more persons
(individuals or entities), or interview or appearance before one or more
representatives of the media, radio, television or print media, or the
writing of a print media article, in which a research analyst makes a
recommendation or offers an opinion concerning a derivatives
transaction. This term does not include a password-protected Webcast,
conference call or similar event with 15 or more existing customers,
provided that all of the event participants previously received the most
current research report or other documentation that contains the
required applicable disclosures, and that the research analyst appearing
at the event corrects and updates during the public appearance any
disclosures in the research report that are inaccurate, misleading, or
no longer applicable.
(7) Research analyst. This term means the employee of a futures
commission merchant or introducing broker who is primarily responsible
for, and any employee who reports directly or indirectly to such
research analyst in connection with, preparation of the substance of a
research report relating to any derivative, whether or not any such
person has the job title of ``research analyst.''
(8) Research department. This term means any department or division
that is principally responsible for preparing the substance of a
research report relating to any derivative on behalf of a futures
commission merchant or introducing broker, including a department or
division contained in an affiliate of a futures commission merchant or
introducing broker.
(9) Research report. This term means any written communication
(including electronic) that includes an analysis of
[[Page 175]]
the price or market for any derivative, and that provides information
reasonably sufficient upon which to base a decision to enter into a
derivatives transaction. This term does not include:
(i) Communications distributed to fewer than 15 persons;
(ii) Commentaries on economic, political or market conditions;
(iii) Statistical summaries of multiple companies' financial data,
including listings of current ratings;
(iv) Periodic reports or other communications prepared for
investment company shareholders or commodity pool participants that
discuss individual derivatives positions in the context of a fund's past
performance or the basis for previously-made discretionary decisions;
(v) Any communications generated by an employee of the business
trading unit that is conveyed as a solicitation for entering into a
derivatives transaction, and is conspicuously identified as such; and
(vi) Internal communications that are not given to current or
prospective customers.
(b) Policies and procedures. (1) Except as provided in paragraph
(b)(2) of this section, each futures commission merchant and introducing
broker subject to this rule must adopt and implement written policies
and procedures reasonably designed to ensure that the futures commission
merchant or introducing broker and its employees comply with the
provisions of this rule.
(2) Small Introducing Brokers. An introducing broker that has
generated, over the preceding 3 years, $5 million or less in aggregate
gross revenues from its activities as an introducing broker must
establish structural and institutional safeguards reasonably designed to
ensure that the activities of any person within the firm relating to
research or analysis of the price or market for any commodity or
derivative are separated by appropriate informational partitions within
the firm from the review, pressure, or oversight of persons whose
involvement in trading or clearing activities might potentially bias the
judgment or supervision of the persons.
(c) Research analysts and research reports--(1) Restrictions on
relationship with research department. (i) Non-research personnel shall
not direct a research analyst's decision to publish a research report of
the futures commission merchant or introducing broker, and non-research
personnel shall not direct the views and opinions expressed in a
research report of the futures commission merchant or introducing
broker.
(ii) No research analyst may be subject to the supervision or
control of any employee of the futures commission merchant's or
introducing broker's business trading unit or clearing unit, and no
employee of the business trading unit or clearing unit may have any
influence or control over the evaluation or compensation of a research
analyst.
(iii) Except as provided in paragraph (c)(1)(iv) of this section,
non-research personnel, other than the board of directors and any
committee thereof, shall not review or approve a research report of the
futures commission merchant or introducing broker before its
publication.
(iv) Non-research personnel may review a research report before its
publication as necessary only to verify the factual accuracy of
information in the research report, to provide for non-substantive
editing, to format the layout or style of the research report, or to
identify any potential conflicts of interest, provided that:
(A) Any written communication between non-research personnel and
research department personnel concerning the content of a research
report must be made either through authorized legal or compliance
personnel of the futures commission merchant or introducing broker or in
a transmission copied to such personnel; and
(B) Any oral communication between non-research personnel and
research department personnel concerning the content of a research
report must be documented and made either through authorized legal or
compliance personnel acting as an intermediary or in a conversation
conducted in the presence of such personnel.
(2) Restrictions on communications. Any written or oral
communication by
[[Page 176]]
a research analyst to a current or prospective customer relating to any
derivative must not omit any material fact or qualification that would
cause the communication to be misleading to a reasonable person.
(3) Restrictions on research analyst compensation. A futures
commission merchant or introducing broker may not consider as a factor
in reviewing or approving a research analyst's compensation his or her
contributions to the futures commission merchant's or introducing
broker's trading or clearing business. Except for communicating client
or customer feedback, ratings and other indicators of research analyst
performance to research department management, no employee of the
business trading unit or clearing unit of the futures commission
merchant or introducing broker may influence the review or approval of a
research analyst's compensation.
(4) Prohibition of promise of favorable research. No futures
commission merchant or introducing broker may directly or indirectly
offer favorable research, or threaten to change research, to an existing
or prospective customer as consideration or inducement for the receipt
of business or compensation.
(5) Disclosure requirements--(i) Ownership and material conflicts of
interest. A futures commission merchant or introducing broker must
disclose in research reports and a research analyst must disclose in
public appearances whether the research analyst maintains a financial
interest in any derivative of a type, class, or category that the
research analyst follows, and the general nature of the financial
interest.
(ii) Prominence of disclosure. Disclosures and references to
disclosures must be clear, comprehensive, and prominent. With respect to
public appearances by research analysts, the disclosures required by
paragraph (c)(5) of this section must be conspicuous.
(iii) Records of public appearances. Each futures commission
merchant and introducing broker must maintain records of public
appearances by research analysts sufficient to demonstrate compliance by
those research analysts with the applicable disclosure requirements
under paragraph (c)(5) of this section.
(iv) Third-party research reports. (A) For the purposes of paragraph
(c)(5)(iv) of this section, ``independent third-party research report''
shall mean a research report, in respect of which the person or entity
producing the report:
(1) Has no affiliation or business or contractual relationship with
the distributing futures commission merchant or introducing broker, or
that futures commission merchant's or introducing broker's affiliates,
that is reasonably likely to inform the content of its research reports;
and
(2) Makes content determinations without any input from the
distributing futures commission merchant or introducing broker or from
the futures commission merchant's or introducing broker's affiliates.
(B) Subject to paragraph (c)(5)(iv)(C) of this section, if a futures
commission merchant or introducing broker distributes or makes available
any independent third-party research report, the futures commission
merchant or introducing broker must accompany the research report with,
or provide a web address that directs the recipient to, the current
applicable disclosures, as they pertain to the futures commission
merchant or introducing broker, required by this section. Each futures
commission merchant and introducing broker must establish written
policies and procedures reasonably designed to ensure the completeness
and accuracy of all applicable disclosures.
(C) The requirements of paragraph (c)(5)(iv)(B) of this section
shall not apply to independent third-party research reports made
available by a futures commission merchant or introducing broker to its
customers:
(1) Upon request; or
(2) Through a Web site maintained by the futures commission merchant
or introducing broker.
(6) Prohibition of retaliation against research analysts. No futures
commission merchant or introducing broker, and no employee of a futures
commission merchant or introducing broker who is involved with the
futures commission merchant's or introducing broker's trading or
clearing activities, may, directly or indirectly, retaliate against
[[Page 177]]
or threaten to retaliate against any research analyst employed by the
futures commission merchant or introducing broker or its affiliates as a
result of an adverse, negative, or otherwise unfavorable research report
or public appearance written or made, in good faith, by the research
analyst that may adversely affect the futures commission merchant's or
introducing broker's present or prospective trading or clearing
activities.
(7) Small Introducing Brokers. An introducing broker that has
generated, over the preceding 3 years, $5 million or less in aggregate
gross revenues from its activities as an introducing broker is exempt
from the requirements set forth in this paragraph (c).
(d) Clearing activities. (1) No futures commission merchant shall
permit any affiliated swap dealer or major swap participant to directly
or indirectly interfere with, or attempt to influence, the decision of
the clearing unit personnel of the futures commission merchant to
provide clearing services and activities to a particular customer,
including but not limited to a decision relating to the following:
(i) Whether to offer clearing services and activities to a
particular customer;
(ii) Whether to accept a particular customer for the purposes of
clearing derivatives;
(iii) Whether to submit a customer's transaction to a particular
derivatives clearing organization;
(iv) Whether to set or adjust risk tolerance levels for a particular
customer;
(v) Whether to accept certain forms of collateral from a particular
customer; or
(vi) Whether to set a particular customer's fees for clearing
services based upon criteria that are not generally available and
applicable to other customers of the futures commission merchant.
(2) Each futures commission merchant shall create and maintain an
appropriate informational partition between business trading units of an
affiliated swap dealer or major swap participant and clearing unit
personnel of the futures commission merchant to reasonably ensure
compliance with the Act and the prohibitions specified in paragraph
(d)(1) of this section. At a minimum, such informational partitions
shall require that:
(i) No employee of a business trading unit of an affiliated swap
dealer or major swap participant may review or approve the provision of
clearing services and activities by clearing unit personnel of the
futures commission merchant, make any determination regarding whether
the futures commission merchant accepts clearing customers, or in any
way condition or tie the provision of trading services upon or to the
provision of clearing services or otherwise participate in the provision
of clearing services by improperly incentivizing or encouraging the use
of the affiliated futures commission merchant. Any employee of a
business trading unit of an affiliated swap dealer or major swap
participant may participate in the activities of the futures commission
merchant as necessary for (A) participating in default management
undertaken by a derivatives clearing organization during an event of
default; and (B) transferring, liquidating, or hedging any proprietary
or customer positions during an event of default;
(ii) No employee of a business trading unit of an affiliated swap
dealer or major swap participant shall supervise, control, or influence
any employee of a clearing unit of the futures commission merchant; and
(iii) No employee of the business trading unit of an affiliated swap
dealer or major swap participant shall influence or control compensation
or evaluation of any employee of the clearing unit of the futures
commission merchant.
(e) Undue influence on customers. Each futures commission merchant
and introducing broker must adopt and implement written policies and
procedures that mandate the disclosure to its customers of any material
incentives and any material conflicts of interest regarding the decision
of a customer as to the trade execution and/or clearing of the
derivatives transaction.
(f) Records. All records that a futures commission merchant or
introducing broker is required to maintain pursuant to this regulation
shall be maintained in accordance with Commission Regulation Sec. 1.31
and shall be made
[[Page 178]]
available promptly upon request to representatives of the Commission.
[77 FR 20198, Apr. 3, 2012]
Sec. 1.72 Restrictions on customer clearing arrangements.
No futures commission merchant providing clearing services to
customers shall enter into an arrangement that:
(a) Discloses to the futures commission merchant or any swap dealer
or major swap participant the identity of a customer's original
executing counterparty;
(b) Limits the number of counterparties with whom a customer may
enter into a trade;
(c) Restricts the size of the position a customer may take with any
individual counterparty, apart from an overall limit for all positions
held by the customer at the futures commission merchant;
(d) Impairs a customer's access to execution of a trade on terms
that have a reasonable relationship to the best terms available; or
(e) Prevents compliance with the timeframes set forth in Sec.
1.74(b), Sec. 23.610(b), or Sec. 39.12(b)(7) of this chapter.
[77 FR 21306, Apr. 9, 2012]
Sec. 1.73 Clearing futures commission merchant risk management.
(a) Each futures commission merchant that is a clearing member of a
derivatives clearing organization shall:
(1) Establish risk-based limits in the proprietary account and in
each customer account based on position size, order size, margin
requirements, or similar factors;
(2) Screen orders for compliance with the risk-based limits in
accordance with the following:
(i) When a clearing futures commission merchant provides electronic
market access or accepts orders for automated execution, it shall use
automated means to screen orders for compliance with the limits;
(ii) When a clearing futures commission merchant accepts orders for
non-automated execution, it shall establish and maintain systems of risk
controls reasonably designed to ensure compliance with the limits;
(iii) When a clearing futures commission merchant accepts
transactions that were executed bilaterally and then submitted for
clearing, it shall establish and maintain systems of risk management
controls reasonably designed to ensure compliance with the limits;
(iv) When a firm executes an order on behalf of a customer but gives
it up to another firm for clearing,
(A) The clearing futures commission merchant shall establish risk-
based limits for the customer, and enter into an agreement in advance
with the executing firm that requires the executing firm to screen
orders for compliance with those limits in accordance with paragraph
(a)(2)(i) or (ii) as applicable; and
(B) The clearing futures commission merchant shall establish and
maintain systems of risk management controls reasonably designed to
ensure compliance with the limits.
(v) When an account manager bunches orders on behalf of multiple
customers for execution as a block and post-trade allocation to
individual accounts for clearing:
(A) The futures commission merchant that initially clears the block
shall establish risk-based limits for the block account and screen the
order in accordance with paragraph (a)(2)(i) or (ii) as applicable;
(B) The futures commission merchants that clear the allocated trades
on behalf of customers shall establish risk-based limits for each
customer and enter into an agreement in advance with the account manager
that requires the account manager to screen orders for compliance with
those limits; and
(C) The futures commission merchants that clear the allocated trades
on behalf of customers shall establish and maintain systems of risk
management controls reasonably designed to ensure compliance with the
limits.
(3) Monitor for adherence to the risk-based limits intra-day and
overnight;
(4) Conduct stress tests under extreme but plausible conditions of
all positions in the proprietary account and in each customer account
that could pose material risk to the futures
[[Page 179]]
commission merchant at least once per week;
(5) Evaluate its ability to meet initial margin requirements at
least once per week;
(6) Evaluate its ability to meet variation margin requirements in
cash at least once per week;
(7) Evaluate its ability to liquidate, in an orderly manner, the
positions in the proprietary and customer accounts and estimate the cost
of the liquidation at least once per quarter; and
(8) Test all lines of credit at least once per year.
(b) Each futures commission merchant that is a clearing member of a
derivatives clearing organization shall:
(1) Establish written procedures to comply with this regulation; and
(2) Keep full, complete, and systematic records documenting its
compliance with this regulation.
(3) All records required to be maintained pursuant to these
regulations shall be maintained in accordance with Commission Regulation
1.31 (17 CFR 1.31) and shall be made available promptly upon request to
representatives of the Commission and to representatives of applicable
prudential regulators.
[77 FR 21306, Apr. 9, 2012]
Sec. 1.74 Futures commission merchant acceptance for clearing.
(a) Each futures commission merchant that is a clearing member of a
derivatives clearing organization shall coordinate with each derivatives
clearing organization on which it clears to establish systems that
enable the futures commission merchant, or the derivatives clearing
organization acting on its behalf, to accept or reject each trade
submitted to the derivatives clearing organization for clearing by or
for the futures commission merchant or a customer of the futures
commission merchant as quickly as would be technologically practicable
if fully automated systems were used; and
(b) Each futures commission merchant that is a clearing member of a
derivatives clearing organization shall accept or reject each trade
submitted by or for it or its customers as quickly as would be
technologically practicable if fully automated systems were used; a
clearing futures commission merchant may meet this requirement by:
(1) Establishing systems to pre-screen orders for compliance with
criteria specified by the clearing futures commission merchant;
(2) Establishing systems that authorize a derivatives clearing
organization to accept or reject on its behalf trades that meet, or fail
to meet, criteria specified by the clearing futures commission merchant;
or
(3) Establishing systems that enable the clearing futures commission
merchant to communicate to the derivatives clearing organization
acceptance or rejection of each trade as quickly as would be
technologically practicable if fully automated systems were used.
[77 FR 21307, Apr. 9, 2012]
Sec. 1.75 Delegation of authority to the Director of the Division of
Clearing and Risk to establish an alternative compliance schedule to
comply with futures commission merchant acceptance for clearing.
(a) The Commission hereby delegates to the Director of the Division
of Clearing and Risk or such other employee or employees as the Director
may designate from time to time, the authority to establish an
alternative compliance schedule for requirements of Sec. 1.74 for swaps
that are found to be technologically or economically impracticable for
an affected futures commission merchant that seeks, in good faith, to
comply with the requirements of Sec. 1.74 within a reasonable time
period beyond the date on which compliance by such futures commission
merchant is otherwise required.
(b) A request for an alternative compliance schedule under this
section shall be acted upon by the Director of the Division of Clearing
and Risk within 30 days from the time such a request is received, or it
shall be deemed approved.
(c) An exception granted under this section shall not cause a
registrant to be out of compliance or deemed in violation of any
registration requirements.
(d) Notwithstanding any other provision of this section, in any case
in
[[Page 180]]
which a Commission employee delegated authority under this section
believes it appropriate, he or she may submit to the Commission for its
consideration the question of whether an alternative compliance schedule
should be established. Nothing in this section shall be deemed to
prohibit the Commission, at its election, from exercising the authority
delegated in this section.
[77 FR 21307, Apr. 9, 2012]
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 charged to exchanges based upon a
formula that 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; 77 FR 66332, Nov. 2,
2012]
Sec. Appendix C to Part 1 [Reserved]
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:
[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]
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]
[[Page 181]]
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 Chief compliance officer.
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, retail foreign
exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.
3.11 Registration of floor brokers and floor traders.
3.12 Registration of associated persons of futures commission merchants,
retail foreign exchange dealers, introducing brokers,
commodity trading advisors, commodity pool operators and
leverage transaction merchants.
3.13-3.20 [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.
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.
[[Page 182]]
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. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c, 6d,
6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21, and 23, as amended by Title VII of Pub. L. 111-203, 124
Stat. 1376.
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 entity that is an
applicant for registration, a registrant or a person required to be
registered under the Act or the regulations in this part:
(1) If the entity is organized as a sole proprietorship, the
proprietor and chief compliance officer; if a partnership, any general
partner and chief compliance officer; if a corporation, any director,
the president, chief executive officer, chief operating officer, chief
financial officer, chief compliance 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, chief compliance 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 either the owner of ten
percent or more of the outstanding shares of any class of equity
securities, other than non-voting securities, is entitled to vote or has
the power to sell or direct the sale of ten percent or more of the
outstanding shares of any class of equity securities, other than non-
voting securities, is entitled to receive ten percent or more of the
profits of the entity, or has the power to exercise a controlling
influence over the entity's activities that are subject to regulation by
the Commission; or
(ii) Any person other than an individual that is the direct owner of
ten percent or more of the outstanding shares of any class of equity
securities, other than non-voting securities; or
(3) Any person that has contributed ten percent or more of the
capital of the entity, provided, however, that if such capital
contribution consists of subordinated debt contributed by either:
(i) An unaffiliated bank insured by the Federal Deposit Insurance
Corporation,
(ii) An unaffiliated ``foreign bank,'' as defined in 12 CFR
211.21(n) that currently operates an ``office of a foreign bank,'' as
defined in 12 CFR 211.21(t), which is licensed under 12 CFR 211.24(a),
(iii) Such unaffiliated office of a foreign bank that is licensed,
or
(iv) An insurance company subject to regulation by any State, such
bank, foreign bank, office of a foreign bank, or insurance company will
not be deemed to be a principal for purposes of this section, provided
such debt is not guaranteed by another party not listed as a principal.
(4) Any individual who, directly or indirectly, creates or uses a
trust, proxy, power of attorney, pooling arrangement or any other
contract, arrangement, or device with the purpose or effect of divesting
such person of direct or indirect ownership of an equity security of the
entity, other than a non-voting security, or preventing the vesting of
such ownership, or of avoiding making a contribution of ten percent or
more of the capital of the entity, as part of a plan or scheme to evade
being deemed a principal of the entity,
[[Page 183]]
shall be deemed to be a principal of the entity.
(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, retail
foreign exchange dealer, 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)-(e) [Reserved]
(f) Section 4s Implementing Regulation. Section 4s Implementing
Regulation means a regulation the Commission issues pursuant to section
4s(e), 4s(f), 4s(g), 4s(h), 4s(i), 4s(j), 4s(k) or 4s(l) of the Act.
(g) Swap Definitional Regulation. Swap Definitional Regulation means
a regulation the Commission issues to further define the term ``swap
dealer,'' ``major swap participant'' or ``swap'' in section 1a(49),
1a(33) or 1a(47) of the Act, respectively, pursuant to the Dodd-Frank
Wall Street Reform and Consumer Protection Act.
(h) Swaps activities. Swaps activities means, with respect to a
registrant, such registrant's activities related to swaps and any
product used to hedge such swaps, including, but not limited to,
futures, options, other swaps or security-based swaps, debt or equity
securities, foreign currency, physical commodities, and other
derivatives.
(i) Board of directors. Board of directors means the board of
directors, board of governors, or equivalent governing body of a
registrant.
[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; 75 FR 55424, Sept. 10, 2010; 77 FR
2626, Jan. 19, 2012; 77 FR 3590, Jan. 25, 2012; 77 FR 20200, Apr. 3,
2012; 77 FR 51903, Aug. 28, 2012]
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 and swap
execution facility that has granted the applicant trading privileges in
the case of an applicant for registration as a floor broker or floor
trader, if registration has been granted under the Act.
(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
[[Page 184]]
temporary license in accordance with Sec. 3.40, the National Futures
Association shall notify the designated contract market or swap
execution facility that has granted the applicant trading privileges
that only a temporary license has been granted.
(3)(i) If an applicant for registration as a swap dealer or major
swap participant pursuant to Sec. 3.10(a)(1)(v) files a Form 7-R and a
Form 8-R and fingerprint card for each natural person who is a principal
of the applicant, accompanied by such documentation as may be required
to demonstrate compliance with each of the Section 4s Implementing
Regulations, as defined in Sec. 3.1(f), as are applicable to it, in
accordance with the terms of the Section 4s Implementing Regulations,
the National Futures Association shall notify the swap dealer or major
swap participant, as the case may be, that it is provisionally
registered.
(ii) Subsequent to providing notice of provisional registration to
an applicant for registration as a swap dealer or major swap
participant, the National Futures Association shall determine whether
the documentation submitted pursuant to Sec. 3.10(a)(1)(v) by the
applicant demonstrates compliance with the Section 4s Implementing
Regulation to which it pertains; Provided, that where the National
Futures Association has notified the applicant that it is provisionally
registered, the applicant must supplement its registration application
by providing such documentation as may be required to demonstrate
compliance with each Section 4s Implementing Regulation that the
Commission issues subsequent to the date the National Futures
Association notifies the applicant that it is provisionally registered.
(iii) On and after the date on which the National Futures
Association confirms that the applicant for registration as a swap
dealer or major swap participant has demonstrated its initial compliance
with the applicable requirements of each of the Section 4s Implementing
Regulations and all other applicable registration requirements under the
Act and Commission regulations, the provisional registration of the
applicant shall cease and it shall be registered as a swap dealer or
major swap participant, as the case may be.
(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; 77 FR 2626, Jan. 19,
,2012; 77 FR 51904, Aug. 28, 2012]
Sec. 3.3 Chief compliance officer.
(a) Designation. Each futures commission merchant, swap dealer, and
major swap participant shall designate an individual to serve as its
chief compliance officer, and provide the chief compliance officer with
the responsibility and authority to develop, in consultation with the
board of directors or the senior officer, appropriate policies and
procedures to fulfill the duties set forth in the Act and Commission
regulations relating to the swap dealer's or major swap participant's
swaps activities, or to the futures commission merchant's business as a
futures commission merchant and to ensure compliance with the Act and
Commission regulations relating to the swap dealer's or major swap
participant's swaps activities, or to the futures commission merchant's
business as a futures commission merchant.
(1) The chief compliance officer shall report to the board of
directors or the senior officer of the futures commission merchant, swap
dealer, or major swap participant. The board of directors or the senior
officer shall appoint the chief compliance officer, shall approve the
compensation of the chief compliance officer, and shall meet with the
chief compliance officer at least once a year and at the election of the
chief compliance officer.
(2) Only the board of directors or the senior officer of the futures
commission merchant, swap dealer, or major swap participant may remove
the chief compliance officer.
(b) Qualifications. The individual designated to serve as chief
compliance officer shall have the background and
[[Page 185]]
skills appropriate for fulfilling the responsibilities of the position.
No individual disqualified, or subject to disqualification, from
registration under section 8a(2) or 8a(3) of the Act may serve as a
chief compliance officer.
(c) Submission with registration. Each application for registration
as a futures commission merchant under Sec. 3.10, a swap dealer under
Sec. 23.21, or a major swap participant under Sec. 23.21, must include
a designation of a chief compliance officer by submitting a Form 8-R for
the chief compliance officer as a principal of the applicant pursuant to
Sec. 3.10(a)(2).
(d) Chief compliance officer duties. The chief compliance officer's
duties shall include, but are not limited to:
(1) Administering the registrant's policies and procedures
reasonably designed to ensure compliance with the Act and Commission
regulations;
(2) In consultation with the board of directors or the senior
officer, resolving any conflicts of interest that may arise;
(3) Taking reasonable steps to ensure compliance with the Act and
Commission regulations relating to the swap dealer's or major swap
participant's swaps activities, or to the futures commission merchant's
business as a futures commission merchant;
(4) Establishing procedures, in consultation with the board of
directors or the senior officer, for the remediation of noncompliance
issues identified by the chief compliance officer through a compliance
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
(5) Establishing procedures, in consultation with the board of
directors or the senior officer, for the handling, management response,
remediation, retesting, and closing of noncompliance issues; and
(6) Preparing and signing the annual report required under
paragraphs (e) and (f) of this section.
(e) Annual report. The chief compliance officer annually shall
prepare a written report that covers the most recently completed fiscal
year of the futures commission merchant, swap dealer, or major swap
participant, and provide the annual report to the board of directors or
the senior officer. The annual report shall, at a minimum:
(1) Contain a description of the written policies and procedures,
including the code of ethics and conflicts of interest policies, of the
futures commission merchant, swap dealer, or major swap participant;
(2) Review each applicable requirement under the Act and Commission
regulations, and with respect to each:
(i) Identify the policies and procedures that are reasonably
designed to ensure compliance with the requirement under the Act and
Commission regulations;
(ii) Provide an assessment as to the effectiveness of these policies
and procedures; and
(iii) Discuss areas for improvement, and recommend potential or
prospective changes or improvements to its compliance program and
resources devoted to compliance;
(3) List any material changes to compliance policies and procedures
during the coverage period for the report;
(4) Describe the financial, managerial, operational, and staffing
resources set aside for compliance with respect to the Act and
Commission regulations, including any material deficiencies in such
resources; and
(5) Describe any material non-compliance issues identified, and the
corresponding action taken.
(f) Furnishing the annual report to the Commission. (1) Prior to
furnishing the annual report to the Commission, the chief compliance
officer shall provide the annual report to the board of directors or the
senior officer of the futures commission merchant, swap dealer, or major
swap participant for its review. Furnishing the annual report to the
board of directors or the senior officer shall be recorded in the board
minutes or otherwise, as evidence of compliance with this requirement.
(2)(i) Except as provided in paragraph (f)(2)(ii) of this section,
the annual report shall be furnished electronically to the Commission
not more than 90 days after the end of the fiscal year of the futures
commission merchant, swap dealer, or major swap participant.
(ii) The annual report of a swap dealer or major swap participant
that is eligible to comply with a substituted
[[Page 186]]
compliance regime for paragraph (e) of this section pursuant to a
comparability determination of the Commission may be furnished to the
Commission electronically up to 15 days after the date on which the
comparable annual report must be completed under the requirements of the
applicable substituted compliance regime. If the substituted compliance
regime does not specify a date by which the comparable annual report
must be completed, then the annual report shall be furnished to the
Commission by the date specified in paragraph (f)(2)(i) of this section.
(3) The report shall include a certification by the chief compliance
officer or chief executive officer of the registrant that, to the best
of his or her knowledge and reasonable belief, and under penalty of law,
the information contained in the annual report is accurate and complete.
(4) The futures commission merchant, swap dealer, or major swap
participant shall promptly furnish an amended annual report if material
errors or omissions in the report are identified. An amendment must
contain the certification required under paragraph (f)(3) of this
section.
(5) A futures commission merchant, swap dealer, or major swap
participant may request from the Commission an extension of time to
furnish its annual report, provided the registrant's failure to timely
furnish the report could not be eliminated by the registrant without
unreasonable effort or expense. Extensions of the deadline will be
granted at the discretion of the Commission.
(6) A futures commission merchant, swap dealer, or major swap
participant may incorporate by reference sections of an annual report
that has been furnished within the current or immediately preceding
reporting period to the Commission. If the futures commission merchant,
swap dealer, or major swap participant is registered in more than one
capacity with the Commission, and must submit more than one annual
report, an annual report submitted as one registrant may incorporate by
reference sections in the annual report furnished within the current or
immediately preceding reporting period as the other registrant.
(g) Recordkeeping. (1) The futures commission merchant, swap dealer,
or major swap participant shall maintain:
(i) A copy of the registrant's policies and procedures reasonably
designed to ensure compliance with the Act and Commission regulations;
(ii) Copies of materials, including written reports provided to the
board of directors or the senior officer in connection with the review
of the annual report under paragraph (e) of this section; and
(iii) Any records relevant to the annual report, including, but not
limited to, work papers and other documents that form the basis of the
report, and memoranda, correspondence, other documents, and records that
are created, sent or received in connection with the annual report and
contain conclusions, opinions, analyses, or financial data related to
the annual report.
(2) All records or reports that a futures commission merchant, swap
dealer, or major swap participant are required to maintain pursuant to
this section shall be maintained in accordance with Sec. 1.31 and shall
be made available promptly upon request to representatives of the
Commission and to representatives of the applicable prudential
regulator, as defined in 1a(39) of the Act.
(h) Delegation of authority. The Commission hereby delegates to the
Director of the Division of Swap Dealer and Intermediary Oversight, or
such other employee or employees as the Director may designate from time
to time, the authority to grant extensions of time, as set forth in
paragraph (f)(5) of this section. Notwithstanding such delegation, in
any case in which a Commission employee delegated authority under this
paragraph believes it appropriate, he or she may submit to the
Commission for its consideration the question of whether an extension of
time should be granted. The delegation of authority in this paragraph
shall not prohibit the Commission, at its election, from exercising the
authority set forth in paragraph (f)(5) of this section.
[77 FR 20200, Apr. 3, 2012, as amended at 78 FR 68645, Nov. 14, 2013; 81
FR 80566, Nov. 16, 2016]
[[Page 187]]
Sec. 3.4 Registration in one capacity not included in registration
in any other capacity.
(a) Except as may be otherwise provided in the Act or in any rule,
regulation, or order of the Commission, each futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, floor broker, floor trader of any commodity for future
delivery, commodity trading advisor, commodity pool operator,
introducing broker, leverage transaction merchant, and associated person
(other than an associated person of a swap dealer or major swap
participant) must register as such under the Act. Except as may be
otherwise provided in the Act or in any rule, regulation, or order of
the Commission, registration in one capacity under the Act shall not
include registration in any other capacity.
(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; 75
FR 55424, Sept. 10, 2010; 77 FR 2626, Jan. 19, 2012; 77 FR 51904, Aug.
28, 2012]
Sec. Sec. 3.5-3.9 [Reserved]
Sec. 3.10 Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.
(a) Application for registration. (1)(i) Except as provided in
paragraph (a)(3) of this section, application for registration as a
futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity pool
operator, commodity trading advisor, 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,
retail foreign exchange dealer 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.
(v)(A) Applicants for registration as a swap dealer or major swap
participant must accompany their Form 7-R with such documentation as may
be required to demonstrate compliance with each Section 4s Implementing
Regulation, as defined in Sec. 3.1(f), applicable to them, in
accordance with the terms of the Section 4s Implementing Regulation;
Provided, however, that for the purposes of this paragraph (a)(1)(v) the
term ``compliance'' includes the term ``the ability to comply,'' to the
extent that a particular Section 4s Implementing Regulation may require
demonstration of the ability to comply with a requirement thereunder.
(B) The filing of the Form 7-R and accompanying documentation by the
applicant swap dealer or major swap participant authorizes the
Commission to conduct on-site inspection of the applicant to determine
compliance with the Section 4s Implementing Regulations applicable to
it.
[[Page 188]]
(C)(1) At any time prior to the latest effective date of the Swap
Definitional Regulations, defined in Sec. 3.1(g), any person may apply
to be registered as a swap dealer or major swap participant.
(2) By no later than the latest effective date of the Swap
Definitional Regulations, each person who is a swap dealer or major swap
participant on that date must apply to be registered as a swap dealer or
major swap participant, as the case may be.
(3) From and after the latest effective date of the Swap
Definitional Regulations, each person who intends to engage in business
as a swap dealer or major swap participant must apply to be registered
as a swap dealer or major swap participant, as the case may be.
(D)(1) Where an applicant for registration as a swap dealer or major
swap participant to whom the National Futures Association has provided
notice of provisional registration under Sec. 3.2(c)(3) fails to
demonstrate compliance with a Section 4s Implementing Regulation, the
National Futures Association will notify the applicant that its
application is deficient, whereupon the applicant must withdraw its
registration application, it must not engage in any new activity as a
swap dealer or major swap participant, as the case may be, and the
applicant shall cease to be provisionally registered; Provided, that in
the event the applicant fails to withdraw its registration application
or cure the deficiency within 90 days following receipt of notice from
the National Futures Association that its application is deficient, the
application will be deemed withdrawn and thereupon its provisional
registration shall cease; Provided further, that upon written request by
the applicant submitted to the Commission, the Commission may in its
discretion extend the time by which the applicant must cure the
deficiency.
(2) The provisions of the foregoing paragraph (a)(1)(v)(D)(1) of
this section shall supplement and be in addition to any other activities
in which the National Futures Association engages under the Act and
Commission regulations in connection with processing an application for
registration as a swap dealer or major swap participant.
(E) Unless specifically reserved in the applicable swap
documentation, no withdrawal, deemed withdrawal, cessation or revocation
of registration as a swap dealer or major swap participant pursuant to
paragraph (a)(1)(v), (b), or (d) of this section shall constitute a
termination event, force majeure, an illegality, increased costs, a
regulatory change, or a similar event under a swap (including any
related credit support arrangement) that would permit a party to
terminate, renegotiate, modify, amend or supplement one or more
transactions under the swap.
(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 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, to
security futures products as defined in section 1a(44) 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
[[Page 189]]
(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, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator, commodity
trading advisor, 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.
Upon effectiveness of any revocation or withdrawal of registration, such
person will immediately be prohibited from engaging in new 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 bilaterally, on
or subject to the rules of a designated contract market, or on or
subject to the rules of a swap execution facility, for clearing on an
omnibus basis through a futures commission merchant registered in
accordance with section 4d of the Act.
(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 executed bilaterally or made on
or subject to the rules of any designated contract market or swap
execution facility only on behalf of persons located outside the United
States, its territories or possessions, is not required to register in
such capacity provided that any such commodity interest transaction is
submitted for clearing through a futures commission merchant registered
in accordance with section 4d of the Act.
(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
[[Page 190]]
chapter, to a registered futures commission merchant for the purpose of
trading on a designated contract market;
(iii) Such person's affiliated futures commission merchant has filed
with the National Futures Association (Attn: Vice President, Compliance)
an acknowledgement that the affiliated futures commission merchant will
be jointly and severally liable for any violations of the Act or the
Commission's regulations committed by such person in connection with
those introducing activities, whether or not the affiliated futures
commission merchant submits for clearing any trades resulting from those
introducing activities; and
(iv) Such person does not solicit any person located in the United
States, its territories or possessions for trading on a designated
contract market, nor does such person handle the customer funds of any
person located in the United States, its territories or possessions for
the purpose of trading on any designated contract market.
(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.
(5) In determining whether a person is a swap dealer, the activities
of a registered swap dealer with respect to which such person is an
associated person shall not be considered.
(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, retail
foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
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; 75 FR
55424, Sept. 10, 2010; 77 FR 2626, Jan. 19, 2012; 77 FR 51904, Aug. 28,
2012]
Sec. 3.11 Registration of floor brokers and floor traders.
(a) Application for registration. (1) Application for registration
as a floor broker or floor trader must be on Form 8-R, if as an
individual, or Form 7-R, if as a non-natural person, and must be
completed and filed with the National Futures Association in accordance
with the instructions thereto. Each Form 7-R filed in accordance with
this paragraph (a) must be accompanied by a Form 8-R, completed in
accordance with the instructions thereto and executed by each individual
who is a principal of the applicant, and each individual responsible for
entry of orders from that applicant's own account. Each Form 8-R filed
in accordance with this paragraph (a) must be accompanied by the
fingerprints of the applicant on a fingerprint card provided for that
purpose by the National Futures Association, except that a fingerprint
card need not be filed by any applicant who has a current Form 8-R on
file with the Commission or the National Futures Association.
(2) An applicant for registration as a floor broker or floor trader
will not be registered or issued a temporary license as a floor broker
or floor trader unless the applicant has been granted trading privileges
by a board of trade designated as a contract market or registered as a
swap execution facility by the Commission.
(3) When the Commission or the National Futures Association
determines that an applicant for registration as a
[[Page 191]]
floor broker or floor trader is not disqualified from such registration
or temporary license, the National Futures Association will notify the
applicant and any contract market or swap execution facility that has
granted the applicant trading privileges that the applicant's
registration or temporary license as a floor broker or floor trader is
granted.
(b) Duration of registration. A person registered as a floor broker
or floor trader in accordance with paragraph (a) of this section, and
whose registration has neither been revoked nor withdrawn, will continue
to be so registered unless such person's trading privileges on all
contract markets and swap execution facilities have ceased: provided,
that if a floor broker or floor trader whose trading privileges on all
contract markets and swap execution facilities have ceased for reasons
unrelated to any Commission action or any contract market or swap
execution facility disciplinary proceeding and whose registration is not
revoked, suspended or withdrawn is granted trading privileges as a floor
broker or floor trader, respectively, by any contract market or swap
execution facility where such person held such privileges within the
preceding sixty days, such registration as a floor broker or floor
trader, respectively, shall be deemed to continue and no new Form 7-R,
Form 8-R or Form 3-R record of a change to Form 7-R or Form 8-R need be
filed solely on the basis of the resumption of trading privileges. A
floor broker or floor trader is prohibited from engaging in activities
requiring registration under the Act or from representing such person to
be a registrant under the Act or the representative or agent of any
registrant during the pendency of any suspension of such registration or
of all such trading privileges. Each contract market and swap execution
facility that has granted trading privileges to a person who is
registered, or has applied for registration, as a floor broker or floor
trader, must provide notice in accordance with Sec. 3.31(d) after such
person's trading privileges on such contract market or swap execution
facility have ceased.
(c) Exceptions. A registered floor broker need not also register as
a floor trader in order to engage in activity as a floor trader.
[77 FR 51905, Aug. 28, 2012]
Sec. 3.12 Registration of associated persons of futures commission
merchants, retail foreign exchange dealers, introducing brokers,
commodity trading advisors, commodity pool operators and
leverage transaction merchants.
(a) Registration required. It shall be unlawful for any person to be
associated with a futures commission merchant, retail foreign exchange
dealer, 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, retail foreign exchange
dealer, introducing broker, commodity trading advisor, commodity pool
operator or leverage transaction merchant in accordance with the
procedures in paragraphs (c), (d), (f), or (i), of this section or is
exempt from such registration pursuant to paragraph (h) of this section.
(b) Duration of registration. A person registered in accordance with
paragraphs (c), (d), (f), or (i) of this section and whose registration
has not been revoked will continue to be so registered until the
revocation or withdrawal of the registration of each of the registrant's
sponsors, or until the cessation of the association of the registrant
with each of the registrant's sponsors. Such person will be prohibited
from engaging in activities requiring registration under the Act or from
representing himself or herself to be a registrant under the Act or the
representative or agent of any registrant during the pendency of any
suspension of his or her registration, or his or her sponsor's
registration. Each of the registrant's sponsors must file a notice in
accordance with Sec. 3.31(c) reporting the termination of the
association of the associated person.
(c) Application for registration. Except as otherwise provided in
paragraphs (d), (f), and (i) of this section, application for
registration as an associated person in any capacity must be on
[[Page 192]]
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;
(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. 3.55, Sec.
3.56 or Sec. 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.
[[Page 193]]
(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,
retail foreign exchange dealer, 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 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,
with a retail foreign exchange dealer, 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, retail foreign exchange dealer or introducing broker and all
such customers' accounts solicited or accepted by the associated person
are carried by the futures commission merchant, retail foreign exchange
dealer or introduced by the introducing broker with which the associated
person is associated, such a person shall
[[Page 194]]
be deemed to be associated solely with the futures commission merchant,
retail foreign exchange dealer or introducing broker and may not also
register as an associated person of the commodity trading advisor(s).
(5)(i)(A) 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 of a swap
dealer or major swap participant if the swap dealer or major swap
participant meets the requirements set forth in Sec. 3.60(b)(2)(i)(A).
(B) A person who is already associated as an associated person of a
swap dealer or major swap participant may become registered as an
associated person of a futures commission merchant, retail foreign
exchange dealer, introducing broker, commodity trading advisor,
commodity pool operator, or leverage transaction merchant if the futures
commission merchant, retail foreign exchange dealer, introducing broker,
commodity trading advisor, commodity pool operator, or leverage
transaction merchant with which the person intends to associate meets
the requirements set forth in Sec. 3.60(b)(2)(i)(A) and (B).
(ii) Each sponsor and each swap dealer and/or major swap participant
with whom the person is associated shall supervise that associated
person, and each sponsor and each swap dealer and/or major swap
participant is jointly and severally responsible for the conduct of the
associated person with respect to the:
(A) Solicitation or acceptance of customer 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,
(E) Solicitation or acceptance of swaps, and
(F) 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 futures commission merchant, retail
foreign exchange dealer, introducing broker, commodity trading advisor,
commodity pool operator, leverage transaction merchant, swap dealer, or
major swap participant with which the associated person is associated.
(g) Petitions for exemption. Any person adversely affected by the
operation of this section may file a petition with the Secretary of the
Commission, which petition must set forth with particularity the reasons
why that person believes that an applicant should be exempted from the
requirements of this section and why such an exemption would not be
contrary to the public interest and the purposes of the provision from
which exemption is sought. The petition will be granted or denied by the
Commission on the basis of the papers filed. The Commission may grant
such a petition if it finds that the exemption is not contrary to the
public interest and the purposes of the provision from which exemption
is sought. The petition may be granted subject to such terms and
conditions as the Commission may find appropriate.
(h) Exemption from registration. (1) A person is not required to
register as an associated person in any capacity if that person is:
(i) Registered under the Act as a futures commission merchant,
retail foreign exchange dealer, swap dealer, major swap participant,
floor broker, or as an introducing broker;
(ii) Engaged in the solicitation of funds, securities, or property
for a participation in a commodity pool, or the supervision of any
person or persons so engaged, pursuant to registration with the
Financial Industry Regulatory Authority as a registered representative,
registered principal, limited representative or limited principal, and
that person does not engage in any other activity subject to regulation
by the Commission;
(iii) The chief operating officer, general partner or other person
in the supervisory chain-of-command, provided the futures commission
merchant, retail foreign exchange dealer, introducing broker, commodity
trading advisor, commodity pool operator, or leverage transaction
merchant engages in commodity interest related activity
[[Page 195]]
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 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', retail forex 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.
[[Page 196]]
(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
(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
[[Page 197]]
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.
(Approved by the Office of Management and Budget under control number
3038-0023)
[45 FR 80491, Dec. 5, 1980]
Editorial Note: For Federal Register citations affecting Sec. 3.12,
see the List of CFR Sections Affected, which appears in the Finding Aids
section of the printed volume and at www.fdsys.gov.
Sec. Sec. 3.13-3.20 [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
that has been submitted to the Federal Bureau of Investigation for
identification and appropriate processing and of each report, record,
and notation made available by the Federal Bureau of Investigation with
respect to that fingerprint card if such identification and processing
has been completed satisfactorily by the Federal Bureau of Investigation
not more than ninety days prior to the filing with the National Futures
Association of the photocopy;
(2) A statement that such person's application for initial
registration in any capacity was granted within the preceding ninety
days, provided that the provisions of this paragraph (a)(2) shall not be
applicable to any person who, by Commission rule, regulation, or order,
was not required to file a fingerprint card in connection with such
application for initial registration; or
(3) A statement that such person has a current Form 8-R on file with
the Commission or the National Futures Association.
(b) 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 individual
floor trader: The applicant for registration; and with respect to
fingerprints of each individual who is responsible for entry of orders
from the account of a floor trader that is a non-natural person, the
applicant for registration, or
(3) With respect to the fingerprints of a principal: An officer, if
the futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, commodity trading advisor, commodity
pool operator, introducing broker, floor trader that is a non-natural
person, or leverage transaction merchant with which the principal will
be affiliated is a corporation; a general partner, if a partnership; or
the sole proprietor, if a sole proprietorship.
(c) Outside directors. Any futures commission merchant, retail
foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
floor trader that is a non-natural person, or leverage transaction
merchant that has a principal who is a director but is not also an
officer or employee of the firm may, in lieu of submitting a fingerprint
card in accordance with the provisions of Sec. 3.10(a)(2), file a
``Notice Pursuant to Rule 3.21(c)'' with the National Futures
Association. Such notice shall state, if true, that such outside
director:
(1) Is not engaged in:
[[Page 198]]
(i) The solicitation or acceptance of customers' orders or retail
forex 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 of leverage customers' orders for leverage
transactions,
(v) The solicitation or acceptance of a swap agreement;
(2) Does not regularly have access to the keeping, handling or
processing of:
(i) Transactions involving ``commodity interests,'' as that term is
defined in Sec. 1.3(yy);
(ii) Customer funds, retail forex customer funds, leverage customer
funds, foreign futures or foreign options secured amount, or adjusted
net capital; or
(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, retail foreign
exchange dealer, swap dealer, major swap participant, introducing
broker, commodity trading advisor, commodity pool operator, floor trader
that is a non-natural person, leverage transaction merchant, or
applicant for registration in any of these capacities of which the
person is an outside director;
(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 this paragraph (c) is sought does not have
access to the keeping, handling or processing of the items described in
paragraphs (c)(2)(i) and (ii) of this section; and
(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).
(e) Foreign natural persons. (1) For purposes of this paragraph (e):
(i) The term foreign natural person means any natural person who has
not resided in the United States since reaching the age of 18 years.
(ii) The term certifying firm means:
(A) For any natural person that is a principal or associated person
of a futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity pool
operator, commodity trading advisor, leverage transaction merchant,
floor broker, or floor trader, such futures commission merchant, retail
foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
leverage transaction merchant, floor broker, or floor trader; and
(B) For any natural person that is responsible for, or directs, the
entry of orders from a floor broker's or floor trader's own account,
such floor broker or floor trader.
(2) Any obligation in this part to provide a fingerprint card for a
foreign natural person shall be deemed satisfied with respect to a
certifying firm if:
(i) Such certifying firm causes a criminal history background check
of such foreign natural person to be performed; and
(ii) The criminal history background check:
[[Page 199]]
(A) Is of a type that would reveal all matters listed under Sections
8a(2)(D) or 8a(3)(D), (E), or (H) of the Act relating to such foreign
natural person;
(B) Does not reveal any matters that constitute a disqualification
under Sections 8a(2) or 8a(3) of the Act, other than those disclosed to
the National Futures Association; and
(C) Is completed not more than one calendar year prior to the date
that such certifying firm submits the certification described in
paragraph (e)(2)(iii) of this section;
(iii) A person authorized by such certifying firm submits, in
reliance on such criminal history background check, a certification by
such certifying firm to the National Futures Association, that:
(A) States that the conditions of paragraphs (e)(2)(i) and (ii) of
this section have been satisfied; and
(B) Is signed by a person authorized by such certifying firm to make
such certification.
(3) The certifying firm shall maintain, in accordance with Sec.
1.31 of this chapter, records documenting that the criminal history
background check performed pursuant to paragraph (e)(2)(i) of this
section was completed and the results thereof.
[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; 75 FR 55425, Sept. 10, 2010; 77 FR
2627, Jan. 19, 2012; 77 FR 51906, Aug. 28, 2012; 81 FR 18747, Apr. 1,
2016]
Sec. 3.22 Supplemental filings.
Notwithstanding any other provision of this chapter, the Commission,
the Directors of the Division of Swap Dealer 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.
(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 at 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; 77 FR 51906, Aug. 28, 2012; 78 FR
22419, Apr. 16, 2013]
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 200]]
any communications from the Commission or the National Futures
Association, including any summons, complaint, reparation claim, order,
subpoena, special call, request for information, notice, and other
written documents or correspondence, unless the registrant, applicant or
principal specifies another address for this purpose: Provided that the
Commission or the National Futures Association may address any
correspondence relating to a biographical supplement submitted for or on
behalf of a principal to the futures commission merchant, retail foreign
exchange dealer, swap dealer, major swap participant, introducing
broker, commodity pool operator, commodity trading advisor, floor trader
that is a non-natural person, or leverage transaction merchant with
which the principal is affiliated and may address any correspondence
relating to an associated person to the futures commission merchant,
retail foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
floor trader that is a non-natural person, or leverage transaction
merchant with which the associated person or the applicant for
registration is or will be associated as an associated person.
(b) Each registrant, while registered and for two years after
termination of registration, and each principal, while affiliated and
for two years after termination of affiliation, must notify in writing
the National Futures Association of any change of the address on the
application for registration, biographical supplement, or other address
filed with the National Futures Association for the purpose of receiving
communications from the Commission or the National Futures Association.
Failure to file a required response to any communication sent to the
latest such address filed with the National Futures Association that is
caused by a failure to notify in writing the National Futures
Association of an address change may result in an order of default and
award of claimed monetary damages or other appropriate order in any
National Futures Association or Commission proceeding, including a
reparation proceeding brought under part 12 of this chapter.
[77 FR 51906, Aug. 28, 2012]
Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.
(a)(1) Each applicant or registrant as a futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, commodity trading advisor, commodity pool operator,
introducing broker, floor trader that is a non-natural person or
leverage transaction merchant shall, in accordance with the instructions
thereto, promptly correct any deficiency or inaccuracy in Form 7-R or
Form 8-R that no longer renders accurate and current the information
contained therein, with the exception of any change that requires
withdrawal from registration under Sec. 3.33. Each such correction
shall be prepared and filed in accordance with the instructions thereto
to create a Form 3-R record of such change.
(2) Where a registrant has changed its form of organization to or
from a sole proprietorship, the registrant must request withdrawal from
registration in accordance with Sec. 3.33.
(3) Where any person becomes a principal of an applicant or
registrant subsequent to the filing of the applicant's or registrant's
current Form 7-R:
(i) If the new principal is not a natural person, the registrant
shall update such Form 7-R to create a Form 3-R record of change.
(ii) If the new principal is a natural person, the registrant shall
file a Form 8-R, completed in accordance with the instructions thereto
and executed by such person who is a principal of the registrant and who
was not listed on the registrant's initial application for registration
or any amendment thereto.
(b) Each applicant or registrant as a floor broker, floor trader or
associated person, and each principal of a futures commission merchant,
retail foreign exchange dealer, swap dealer, major swap participant,
commodity trading advisor, commodity pool operator, introducing broker,
floor trader that is a non-natural person, or leverage transaction
merchant must, in accordance with the instructions thereto, promptly
correct any deficiency or inaccuracy
[[Page 201]]
in the Form 8-R or supplemental statement thereto to create a Form 3-R
record of change.
(c)(1) After the filing of a Form 8-R or updating a Form 8-R to
create a Form 3-R record of change by or on behalf of any person for the
purpose of permitting that person to be an associated person of a
futures commission merchant, retail foreign exchange dealer, commodity
trading advisor, commodity pool operator, introducing broker, or a
leverage transaction merchant, that futures commission merchant, retail
foreign exchange dealer, commodity trading advisor, commodity pool
operator, introducing broker or leverage transaction merchant must,
within thirty days after the occurrence of either of the following, file
a notice thereof with the National Futures Association indicating:
(i) The failure of that person to become associated with the futures
commission merchant, retail foreign exchange dealer, 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, retail foreign exchange dealer,
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, retail foreign exchange dealer, swap
dealer, major swap participant, commodity trading advisor, commodity
pool operator, introducing broker, floor trader that is a non-natural
person, or leverage transaction merchant must, within thirty days after
the termination of the affiliation of a principal with the registrant or
applicant, file a notice thereof with the National Futures Association.
(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 swap execution facility that has granted
trading privileges to a person who is registered, has received a
temporary license, or has applied for registration as a floor broker or
floor trader, must notify the National Futures Association within sixty
days after such person has ceased having trading privileges on such
contract market or swap execution facility.
(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; 75 FR 55426,
Sept. 10, 2010; 77 FR 2628, Jan. 19, 2012; 77 FR 51907, Aug. 28, 2012]
Sec. 3.33 Withdrawal from registration.
(a) A futures commission merchant, retail foreign exchange dealer,
swap dealer, major swap participant, introducing broker, commodity
trading advisor, commodity pool operator, floor trader that is a non-
natural person, or leverage transaction merchant must request that its
registration be withdrawn prior to any voluntary resolution to file
articles (or a certificate) of dissolution (or cancellation), and upon
notice of any involuntary dissolution initiated by a third-party. A
futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity trading
advisor, commodity pool operator, leverage transaction merchant, floor
broker or floor trader may request that its registration be withdrawn in
accordance with the requirements of this section if:
(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, 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
[[Page 202]]
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, introducing broker, commodity trading advisor, commodity
pool operator, floor trader that is a non-natural person, or leverage
transaction merchant must be made on Form 7-W, and a request for
withdrawal from registration as a floor broker or individual floor
trader must be made on Form 8-W, completed and filed with the National
Futures Association in accordance with the instructions thereto. The
request for withdrawal must be made by a person duly authorized by the
registrant and must specify:
(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, retail forex customer or option customer
agreements, if any, have been terminated;
(ii) That all customer, retail forex customer or option customer
positions, if any, have been transferred on behalf of customers or
option customers or closed;
(iii) That all customer, retail forex customer or option customer
cash balances, securities, or other property, if any, have been
transferred on behalf of customers, retail forex customers or option
customers or returned, and that there are no obligations to customers,
retail forex 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, retail forex
customer, option customer, leverage customer, swap counterparty 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, swap counterparty or commodity pool participant claims against
the registrant;
(vii) In the case of a futures commission merchant or a retail
foreign exchange dealer 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;
[[Page 203]]
(viii) In the case of a swap dealer, that the person will not engage
in any new activity described in the definition of the term ``swap
dealer'' in section 1a(49) of the Act, as such term may be further
defined by the Commission; and
(ix) In the case of a major swap participant, that the person will
not engage in any new activity described in the definition of the term
``major swap participant'' in section 1a(33) of the Act, as such term
may be further defined by the Commission.
(c) Where a leverage transaction merchant is requesting withdrawal
from registration in that capacity and the 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, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator, commodity
trading advisor, floor trader that is a non-natural person, or leverage
transaction merchant on Form 7-W, and a request for withdrawal from
registration as a floor broker or individual floor trader on Form 8-W,
must be filed with the National Futures Association and a copy of such
request must be sent by the National Futures Association within three
business days of the receipt of such withdrawal request to the Commodity
Futures Trading Commission, Division of Swap Dealer and Intermediary
Oversight, Three Lafayette Centre, 1155 21st Street NW., Washington, DC
20581. In addition, any floor broker or individual floor trader
requesting withdrawal from registration must file a copy of his or her
Form 8-W with each contract market or swap execution facility that has
granted him or her trading privileges, and any floor trader that is a
non-natural person requesting withdrawal from registration must file a
copy of its Form 7-W with each contract market or swap execution
facility that has granted it trading privileges. Within three business
days of any determination by the National Futures Association under
Sec. 3.10(d) to treat the failure by a registrant to file an annual
Form 7-R as a request for withdrawal, the National Futures Association
shall send the Commission notice of that determination.
(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
[[Page 204]]
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
section of the printed volume and at www.fdsys.gov.
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:
(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 individual 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 swap execution facility that has filed with the
National Futures Association a certification signed by its chief
operating officer with respect to the review of an applicant's
employment, credit and other history in connection with the granting of
trading privileges.
(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, as amended at 77 FR 51908, Aug. 28, 2012]
Sec. 3.42 Termination.
(a) A temporary license issued pursuant to Sec. 3.40 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
[[Page 205]]
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 and swap execution facilities 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 rules of a designated
contract market, swap execution facility or registered futures
association within the time specified in section 10(g) of the National
Futures Association's Code of Arbitration or the comparable time period
specified in the rules of a contract market or other appropriate
arbitration forum.
(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 or swap execution facility that has
granted the applicant trading privileges that:
(i) The applicant failed to disclose relevant disciplinary history
information on the applicant's Form 8-R; or
(ii) An event has occurred leading to a required disclosure on the
applicant's Form 8-R.
(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; 77 FR 51908, Aug.
28, 2012]
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 or retail foreign exchange dealer 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.
[[Page 206]]
(4) A certification executed by a person duly authorized by the
futures commission merchant or retail foreign exchange dealer that has
executed the guarantee agreement required by paragraph (a)(1) of this
section, stating that:
(i) The futures commission merchant or retail foreign exchange
dealer 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 or retail
foreign exchange dealer'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.
(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; 75 FR 55427, Sept. 10, 2010; 77 FR 51908, Aug. 28, 2012]
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 or retail foreign exchange dealer other than the futures
commission merchant or retail foreign exchange dealer 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)(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 or retail foreign exchange dealer effective the day following
the last effective date of the existing guarantee agreement.
[51 FR 45761, Dec. 22, 1986, as amended at 75 FR 55427, Sept. 10, 2010]
Sec. 3.46 Termination.
(a) A temporary license issued pursuant to Sec. 3.44 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);
[[Page 207]]
(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
under section 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, swap execution facility, or registered futures
association within the time specified in section 10(g) of the National
Futures Association's Code of Arbitration or the comparable time period
specified in the rules of a contract market, swap execution facility, or
other appropriate arbitration forum.
(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 on
the applicant's Form 7-R or on a principal's Form 8-R; or
(ii) An event has occurred leading to a required disclosure on the
applicant's Form 7-R or on a principal's Form 8-R.
(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; 77 FR 51908, Aug.
28, 2012]
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 or retail foreign exchange
dealer which
[[Page 208]]
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 Swap Dealer 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 Swap Dealer 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; 75 FR 55427, Sept. 10, 2010; 78 FR 22419, Apr. 16, 2013]
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
[[Page 209]]
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, 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 Swap Dealer 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; 78 FR 22419, Apr. 16, 2013]
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
[[Page 210]]
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, contract market,
or swap execution facility, as appropriate for the registrant in
accordance with Sec. 3.60(b)(2)(i) and who meets the standards set
forth in Sec. 3.60(b)(2)(i)(A) and (C).
(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 Swap Dealer 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
[[Page 211]]
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; 77 FR 51908, Aug. 28, 2012; 78 FR 22419, Apr.
16, 2013]
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.
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.
[[Page 212]]
(2)(i) In the response, if the person is not an associated person, a
floor broker or a floor trader or an applicant for registration in any
of those capacities, the applicant or registrant shall also state
whether he or she intends to show that registration would not pose a
substantial risk to the public despite the existence of the
disqualification set forth in the notice. If the person is an associated
person, a floor broker or a floor trader or an applicant for
registration in any of those capacities, the applicant or registrant
shall also state whether he or she intends to show that full,
conditioned or restricted registration would not pose a substantial risk
to the public despite the existence of the disqualification set forth in
the notice. If the person is an associated person or an applicant for
registration as an associated person and intends to make such a showing,
he or she must also submit a letter signed by an officer or general
partner authorized to bind the sponsor whereby the sponsor agrees to
sign a Supplemental Sponsor Certification Statement and supervise
compliance with any conditions or restrictions that may be imposed on
the applicant or registrant as a result of a statutory disqualification
proceeding under this section; if the person is a floor broker or a
floor trader or an applicant for registration in either capacity and
intends to make such a showing, he or she must, in the case of a floor
broker or applicant for registration as a floor broker, also submit a
letter signed by his employer or if he or she has no employer by another
floor broker or, in the case of a floor trader or applicant for
registration as a floor trader, also submit a letter signed by an
officer of the floor trader's clearing member, if such officer is a
registrant or a principal of a registrant, or the chief operating
officer of each contract market or swap execution facility that has
granted trading privileges, whereby the employer or floor broker,
appropriate registrant, principal or chief operating officer (on behalf
of the contract market or swap execution facility) agrees to sign a
Supplemental Sponsor Certification Statement and supervise compliance
with any conditions or restrictions that may be imposed on the applicant
or registrant as a result of a statutory disqualification proceeding
under this section; provided, that, with respect to such sponsor,
supervising employer or floor broker, supervising registrant or
principal:
(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,
a retail foreign exchange dealer or a leverage transaction merchant, the
sponsor is not subject to the reporting requirements of Sec. 1.12(b),
Sec. 5.6(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
[[Page 213]]
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 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:
[[Page 214]]
(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
(3) If the person is an associated person, a floor broker or a floor
trader or an applicant for registration in any of those capacities,
evidence that the applicant's or registrant's registration on a
conditioned or restricted basis would be subject to supervisory controls
likely both to detect future wrongdoing by the applicant or registrant
and protect the public from any harm arising from future wrongdoing by
the applicant or registrant. Any decision providing for a conditioned or
restricted registration shall take into consideration the applicant's or
registrant's statutory disqualification and the time period remaining on
such statutory disqualification, and shall fix a time period after which
the registrant and his or her sponsor, supervising employer or floor
broker, or supervising registrant, principal, contract market, or swap
execution facility may petition to lift or modify the conditions or
restrictions in accordance with Sec. 3.64.
(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
[[Page 215]]
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
(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, contract market, or swap
execution facility to fulfill its obligations with respect to
supervision or monitoring of a conditioned or restricted registrant as
agreed to in the Supplemental Sponsor Certification Statement shall be
deemed a violation of this rule under the Act.
[57 FR 23152, June 2, 1992, as amended at 58 FR 19596, Apr. 15, 1993; 60
FR 54801, Oct. 26, 1995; 75 FR 55428, Sept. 10, 2010; 77 FR 51908, Aug.
28, 2012]
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]
[[Page 216]]
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
Swap Dealer 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; 78
FR 22419, Apr. 16, 2013]
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 or her sponsor,
supervising employer or floor broker, or supervising registrant,
principal, contract market, or swap execution facility shall be limited
to a showing, by affidavit, that the conditions or restrictions have
been satisfied pursuant to the order which imposed them. The affidavit
must be sworn to by a person with actual knowledge of the registrant's
activities on behalf of the sponsor, supervising employer or floor
broker, or supervising registrant, principal, contract market or swap
execution facility.
(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
[[Page 217]]
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; 77 FR 51909, Aug. 28, 2012]
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 Swap Dealer 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, Registration and
Compliance Branch, Division of Swap Dealer 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 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; 78 FR 22419,
Apr. 16, 2013]
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, to the Director of the Division of Swap Dealer and
Intermediary Oversight or his or her designee the authority to grant or
deny requests filed pursuant to Sec. 3.12(g). The Director of the
Division of Swap Dealer and Intermediary Oversight may submit to the
Commission for its consideration any matter which has been delegated to
him pursuant to Sec. 3.12(g). The Commission hereby delegates, until
such time as it orders otherwise, the authority to perform all functions
specified in subparts B through D of this part to the persons authorized
to perform them thereunder.
(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
[[Page 218]]
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; 77 FR 51909, Aug. 28, 2012]
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 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:
[[Page 219]]
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 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,
[[Page 220]]
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:
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
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
[[Page 221]]
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 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.
---------------------------------------------------------------------------
\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
[[Page 222]]
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).
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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 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
[[Page 223]]
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.
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\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).
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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 Swap Dealer 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.
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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).
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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
[[Page 224]]
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.
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\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.
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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\
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\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 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.
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\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
[[Page 225]]
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\
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\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 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; 78 FR 22419, Apr. 16, 2013]
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.
[[Page 226]]
(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 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.
[[Page 227]]
(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.
4.17 Severability.
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.
4.25 Performance disclosures.
4.26 Use, amendment and filing of Disclosure Document.
4.27 Additional reporting by advisors of certain large commodity pools.
Subpart C_Commodity Trading Advisors
4.30 Prohibited activities.
4.31 Required delivery of Disclosure Document to prospective clients.
4.32 [Reserved]
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--Form CPO-PQR
Appendix B to Part 4--Adjustments for Additions and Withdrawals in the
Computation of Rate of Return
Appendix C to Part 4--Form CTA-PR
Authority: 7 U.S.C. 1a, 2, 6(c), 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
[[Page 228]]
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:
(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,
[[Page 229]]
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:
(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.
(iii) Furthermore, if the person claiming the exclusion is an
investment company registered as such under the Investment Company Act
of 1940, then the notice of eligibility must also contain
representations that such person will operate the qualifying entity as
described in Rule 4.5(b)(1) in a manner such that the qualifying entity:
(A) Will use commodity futures or commodity options contracts, or
swaps solely for bona fide hedging purposes within the meaning and
intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5);
Provided however, That in addition, with respect to positions in
commodity futures or commodity option
[[Page 230]]
contracts, or swaps which do not come within the meaning and intent of
Rules 1.3(z)(1) and 151.5, a qualifying entity may represent that the
aggregate initial margin and premiums required to establish such
positions will not exceed five percent of the liquidation value of the
qualifying entity's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into;
and, Provided further, 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
Rule 190.01(x) (17 CFR 190.01(x)) may be excluded in computing such five
percent; or
(B) The aggregate net notional value of commodity futures, commodity
options contracts, or swaps positions not used solely for bona fide
hedging purposes within the meaning and intent of Rules 1.3(z)(1) and
151.5 (17 CFR 1.3(z)(1) and 151.5), 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 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, 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, for each such retail forex transaction, by calculating
the value in U.S. Dollars for such transaction, at the time the
transaction was established, excluding for this purpose the value in
U.S. Dollars of offsetting long and short transactions, if any, and for
any cleared swap by the value as determined consistent with the terms of
17 CFR part 45; and
(2) The person may net futures contracts with the same underlying
commodity across designated contract markets and foreign boards of
trade; and swaps cleared on the same designated clearing organization
where appropriate; and (C) Will not be, and has not been, marketing
participations to the public as or in a commodity pool or otherwise as
or in a vehicle for trading in the commodity futures, commodity options,
or swaps markets.
(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.
(5) Annual notice. Each person who has filed a notice of exclusion
under this section must affirm on an annual basis the notice of
exemption from registration, withdraw such exemption due to the
cessation of activities requiring registration or exemption therefrom,
or withdraw such exemption and apply for registration within 60 days of
the calendar year end through National Futures Association's electronic
exemption filing system.
(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.
[[Page 231]]
(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; 77 FR 11283, Feb. 24,
2012; 77 FR 17328, Mar. 26, 2012]
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:
(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.
(3) A swap dealer registered with the Commission as such pursuant to
the Act or excluded or exempt from registration under the Act or the
Commission's regulations; Provided, however, That the commodity interest
and swap advisory activities of the swap dealer are solely incidental to
the conduct of its business as a swap dealer.
(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, as amended at 77 FR 9822, Feb. 17, 2012]
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
[[Page 232]]
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 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, together with required minimum security deposit for
retail forex transactions (as defined in Sec. 5.1(m) of this chapter)
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) A futures commission merchant registered pursuant to section
4d of the Act, or a principal thereof;
(B) A retail foreign exchange dealer registered pursuant to section
2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;
(C) A swap dealer registered pursuant to section 4s(a)(1) 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
[[Page 233]]
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 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
[[Page 234]]
(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
(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
[[Page 235]]
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;
(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 would qualify him as an
accredited investor as defined in Sec. 230.501(a)(5) of this title;
(x) A natural person who would qualify as an accredited investor as
defined in Sec. 203.501(a)(6) of this title;
(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
[[Page 236]]
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 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) to present and compute the commodity
pool's financial statements contained in the Annual
[[Page 237]]
Report other than in accordance with generally accepted accounting
principles and has filed notice pursuant to Sec. 4.22(d)(2)(iii) may
also use the alternative accounting principles, standards or practices
identified in the notice with respect to the computation and
presentation of the account statement.
(3) Annual report relief. (i) Exemption from the specific
requirements of Sec. 4.22(c) 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 that section, 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 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) Legend. 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.
(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 (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). Books and records that
are not maintained at the pool operator's main business office shall be
maintained by one or more of the following: the pool's administrator,
distributor or custodian, or a bank or registered broker or dealer
acting in a similar capacity with respect to the pool. Such books and
records must be made 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.
(5) If the pool operator does not maintain its books and records at
its main business office, the pool operator shall:
(i) At the time it registers with the Commission or delegates its
recordkeeping obligations, whichever is later, file a statement that:
(A) Identifies the name, main business address, and main business
telephone number of the person(s) who will be keeping required books and
records in lieu of the pool operator;
(B) Sets forth the name and telephone number of a contact for each
[[Page 238]]
person who will be keeping required books and records in lieu of the
pool operator;
(C) Specifies, by reference to the respective paragraph of this
section, the books and records that such person will be keeping; and
(D) Contains representations from the pool operator that:
(1) It will promptly amend the statement if the contact information
or location of any of the books and records required to be kept by this
section changes, by identifying in such amendment the new location and
any other information that has changed;
(2) It remains responsible for ensuring that all books and records
required by this section are kept in accordance with Sec. 1.31;
(3) Within 48 hours after a request by a representative of the
Commission, it will obtain the original books and records from the
location at which they are maintained, and provide them for inspection
at the pool operator's main business office; Provided, however, that if
the original books and records are permitted to be, and are maintained,
at a location outside the United States, its territories or possessions,
the pool operator will obtain and provide such original books and
records for inspection at the pool operator's main business office
within 72 hours of such a request; and
(4) It will disclose in the pool's Disclosure Document the location
of its books and records that are required under this section.
(ii) The pool operator shall also file electronically with the
National Futures Association a statement from each person who will be
keeping required books and records in lieu of the pool operator wherein
such person:
(A) Acknowledges that the pool operator intends that the person keep
and maintain required pool books and records;
(B) Agrees to keep and maintain such records required in accordance
with Sec. 1.31 of this chapter; and
(C) Agrees to keep such required books and records open to
inspection by any representative of the Commission, the National Futures
Association, or the United States Department of Justice in accordance
with Sec. 1.31 of this chapter.
(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
[[Page 239]]
trading advisor that has claimed exemption hereunder and elects not to
disclose any such performance in the Disclosure Document for non-exempt
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
[[Page 240]]
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 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, Sec.
4.22, Sec. 4.23, Sec. 4.24, Sec. 4.25 or Sec. 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, Sec. 4.33,
Sec. 4.34, Sec. 4.35 or Sec. 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
[[Page 241]]
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; 75 FR 55428, Sept. 10, 2010; 77 FR
11284, Feb. 24, 2012; 77 FR 17329, Mar. 26, 2012; 77 FR 54358, Sept. 5,
2012; 78 FR 52333, Aug. 22, 2013; 81 FR 85154, Nov. 25, 2016]
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
[[Page 242]]
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 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
[[Page 243]]
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
based on amount and nature of commodity interest trading--(1)
Eligibility. Subject to compliance with the provisions of paragraph (d)
of this section, any person who is registered as a commodity pool
operator, or has applied for such registration, may claim any or 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 interest transactions for which
the aggregate initial margin and premiums, and required minimum security
deposit for retail forex transactions (as defined in Sec. 5.1(m) of
this chapter) 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) of this
chapter 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) Relief available to pool operator. 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
[[Page 244]]
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.
(c) Exemption from subpart B for certain commodity pool operators
based on registration under the Securities Act of 1933 or the Investment
Company Act of 1940--(1) Eligibility. Subject to compliance with the
provisions of paragraph (d) of this section, any person who is
registered as a commodity pool operator, or has applied for such
registration, may claim any or all of the relief available under
paragraph (c)(2) of this section if, with respect to the pool for which
it makes such claim:
(i) The units of participation will be offered and sold pursuant to
an effective registration statement under the Securities Act of 1933; or
(ii) The pool is registered under the Investment Company Act of
1940.
(2) Relief available to pool operator claiming relief under
paragraph (c)(1)(i). The commodity pool operator of a pool whose units
of participation meet the criteria of paragraph (c)(1)(i) if this
section may claim the following relief:
(i) In the case of Sec. 4.21, exemption from the Disclosure
Document delivery and acknowledgment requirements of that section,
Provided, however, that the pool operator:
(A) Cause the pool's Disclosure Document to be readily accessible on
an Internet Web site maintained by the pool operator;
(B) Cause the Disclosure Document to be kept current in accordance
with the requirements of Sec. 4.26(a);
(C) Clearly inform prospective pool participants with whom it has
contact of the Internet address of such Web site and direct any broker,
dealer or other selling agent to whom the pool operator sells units of
participation in the pool to so inform prospective pool participants;
and
(D) Comply with all other requirements applicable to pool Disclosure
Documents under part 4. The pool operator may satisfy the requirement of
Sec. 4.26(b) to attach to the Disclosure Document a copy of the pool's
most current Account Statement and Annual Report if the pool operator
makes such Account Statement and Annual Report readily accessible on an
Internet Web site maintained by the pool operator.
(ii) In the case of Sec. 4.22, exemption from the Account Statement
distribution requirement of that section; Provided, however, that the
pool operator:
(A) Cause the pool's Account Statements, including the certification
required by Sec. 4.22(h), to be readily accessible on an Internet Web
site maintained by the pool operator within 30 calendar days after the
last day of the applicable reporting period and continuing for a period
of not less than 30 calendar days; and
(B) Cause the Disclosure Document for the pool to clearly indicate:
(1) That the information required to be included in the Account
Statements will be readily accessible on an Internet Web site maintained
by the pool operator; and
(2) The Internet address of such Web site.
(3) Relief available to pool operator claiming relief under
paragraph (c)(1)(ii). The commodity pool operator of a pool whose units
of participation meet the criteria of paragraph (c)(1)(ii) of this
section may claim the following relief:
(i) The pool operator of an offered pool will be exempt from the
requirements of Sec. Sec. 4.21, 4.24, 4.25, and 4.26; Provided, that
(A) The pool operator of an offered pool with less than a three-year
operating history discloses the performance of all accounts and pools
that are managed by the pool operator and that have investment
objectives, policies, and strategies substantially similar to those of
the offered pool; and,
(B) The disclosure provided with respect to the offered pool
complies with the provisions of the Investment Company Act of 1940, the
Securities Act of 1933, the Securities Exchange Act of 1934, the
regulations promulgated thereunder, and any guidance issued by the
Securities and Exchange Commission or any division thereof.
[[Page 245]]
(ii) Exemption from the Account Statement distribution requirement
of Sec. Sec. 4.22(a) and (b); Provided, however, that the pool
operator:
(A) Causes the current net asset value per share to be available to
participants;
(B) Causes the pool to clearly disclose:
(1) That the information will be readily accessible on an Internet
Web site maintained by the pool operator or its designee or otherwise
made available to participants and the means through which the
information will be made available; and
(2) The Internet address of such Web site, if applicable; and
(iii) Exemption from the provisions of Sec. 4.23 that require that
a pool operator's books and records be made available to participants
for inspection and/or copying at the request of the participant.
(d)(1) Notice of claim for exemption. Any registered commodity pool
operator, or applicant for commodity pool operator registration, who
desires to claim the relief available under paragraph (b) or (c) of this
Sec. 4.12 must file electronically a claim of exemption with the
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 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:
(A) The pool will be operated in compliance with paragraph (b)(1)(i)
of this section and the pool operator will comply with the requirements
of paragraph (b)(1)(ii) of this section;
(B) The pool will be operated in compliance with paragraph (c)(1) of
this section and the pool operator will comply with the requirements of
paragraph (c)(2) of this section; or
(C) The pool will be operated in compliance with paragraph (c)(1) of
this section and the pool operator will comply with the requirements of
paragraph (c)(3) of this section;
(iv) Specify the relief sought under paragraph (b)(2), (c)(2), or
(c)(3) of this section, as the case may be;
(v) Be filed by a representative duly authorized to bind the pool
operator.
(2)(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:
(A) Will not be effective unless and until the notice required by
this paragraph (d) contains all information called for herein and any
statements required under paragraph (c)(2)(iii) have been provided; and
(B) Will cease to be effective upon any change which would render
the representations made pursuant to paragraph (d)(1)(iii) of this
section inaccurate or the continuation of such representations false or
misleading.
(3)(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).
(4)(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; 75 FR 55428, Sept.
10, 2010; 76 FR 28644, May 18, 2011; 78 FR 52333, Aug. 22, 2013]
[[Page 246]]
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 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, premiums, and required minimum
security deposit for retail forex transactions (as defined in Sec.
5.1(m) of this chapter) 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 futures
position
[[Page 247]]
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, 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,
for each such retail forex transaction, by calculating the value in U.S.
Dollars of such transaction, at the time the transaction was
established, excluding for this purpose the value in U.S. Dollars of
offsetting long and short transactions, if any, and for any cleared swap
by the value as determined consistent with the terms of 17 CFR part 45;
and
(2) The person may net futures contracts with the same underlying
commodity across designated contract markets and foreign boards of
trade; and swaps cleared on the same derivatives clearing organization
where appropriate; 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;
(4) [Reserved]
(5) The person is acting as a director or trustee with respect to a
pool whose operator is registered as a commodity pool operator and is
eligible to claim relief under Sec. 4.12(c) of this chapter, Provided,
however, that:
(i) The person acts in such capacity solely to comply with the
requirements under section 10A of the Securities Exchange Act of 1934,
as amended, and any Securities and Exchange Commission rules and
exchange listing requirements adopted pursuant thereto, that the pool
have an audit committee comprised exclusively of independent directors
or trustees;
(ii) The person has no power or authority to manage or control the
operations or activities of the pool except as necessary to comply with
such requirement; and
(iii) The registered pool operator of the pool is and will be liable
for any violation of the Act or the Commission's regulations by the
person in connection with the person's serving as a director or trustee
with respect to the pool.
(6)(i) Eligibility for exemption under paragraph (a)(1), (a)(2),
(a)(3) or (a)(4) of 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.
[[Page 248]]
(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), (2), or (3)) and represent
that the pool will be operated in accordance with the criteria of that
paragraph; 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 that
the pool operator delivers a subscription agreement for the pool to a
prospective participant in the pool; Provided, however, that in the case
of a claim for relief under Sec. 4.13(a)(5), the person must file the
notice by the later of the effective date of the pool's registration
statement under the Securities Act of 1933 or the date on which the
person first becomes a director or trustee; and Provided, further, 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) Annual notice. Each person who has filed a notice of exemption
from registration under this section must affirm on an annual basis the
notice of exemption from registration, withdraw such exemption due to
the cessation of activities requiring registration or exemption
therefrom, or withdraw such exemption and apply for registration within
60 days of the calendar year end through National Futures Association's
electronic exemption filing system.
(5) 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 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.
[[Page 249]]
(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) 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) 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) 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 each existing participant in a pool that the person
elects to operate as described in paragraph (a)(3) 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) 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; 75 FR 55428, Sept. 10, 2010; 76 FR 28645, May 18, 2011; 77 FR
11284, Feb. 24, 2012; 77 FR 17329, Mar. 26, 2012]
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 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;
[[Page 250]]
(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)(i) 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;
(ii) It is registered under the Act as a retail foreign exchange
dealer and the person's trading advice is solely in connection with its
business as a retail foreign exchange dealer.
(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, if registered as a commodity
pool operator, who may treat each pool it operates that meets the
criteria of Sec. 4.13(a)(3) 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 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:
[[Page 251]]
(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) Annual notice. Each person who has filed a notice of exemption
from registration under this section must affirm on an annual basis the
notice of exemption from registration, withdraw such exemption due to
the cessation of activities requiring registration or exemption
therefrom, or withdraw such exemption and apply for registration within
60 days of the calendar year end through National Futures Association's
electronic exemption filing system.
(E) 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
(4) All trusts of which the natural person and/or the persons
referred to in
[[Page 252]]
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 253]]
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; 75 FR 55428, Sept. 10,
2010; 77 FR 11284, Feb. 24, 2012; 77 FR 17330, Mar. 26, 2012]
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.
Sec. 4.17 Severability.
If any provision of this part, or the application thereof to any
person or circumstances, is held invalid, such invalidity shall not
affect other provisions or application of such provision to other
persons or circumstances which can be given effect without the invalid
provision or application.
[78 FR 52333, Aug. 22, 2013]
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 established 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
[[Page 254]]
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 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) [Reserved]
[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; 78 FR 52333, Aug.
22, 2013]
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;
(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,
[[Page 255]]
commodity trading advisor, futures commission merchant, retail foreign
exchange dealer, swap dealer, 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)(iii) 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
(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
[[Page 256]]
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
(3) The timeframe within which the commodity pool operator will
provide the final report.
(iii) A report filed pursuant to paragraph (c)(7) of this section
that would otherwise be required by paragraph (c) of this section is not
required to be audited in accordance with paragraph (d) of this section
if the commodity pool operator:
[[Page 257]]
(A) Obtains a written waiver of their right to receive an audited
Annual Report from each participant other than the pool operator, the
pool's commodity trading advisor, any person controlling, controlled by,
or under common control with the pool operator or trading advisor, and
any principal of the foregoing; and
(B) At the time of filing the Annual Report with the National
Futures Association, certifies that it has received a written waiver
from each participant from whom it is required to obtain a waiver to
qualify for the relief available under this paragraph (c)(7). The
commodity pool operator must maintain the waivers in accordance with
Sec. 4.23 and must make the waivers available to the Commission or
National Futures Association upon request. Notwithstanding the
provisions of paragraph (g)(2)(ii) of this section, the relief made
available by this paragraph (c)(7)(iii) will not be available where the
commodity pool operator has not previously distributed an audited Annual
Report to pool participants and submitted an audited Annual Report to
the National Futures Association.
(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) Subject to the provisions of paragraphs (d)(2) and (g)(2) of
this section, the financial statements in the Annual Report required by
this section or by Sec. 4.7(b)(3) must be presented and computed in
accordance with United States generally accepted accounting principles
consistently applied and must be audited by an independent public
accountant; Provided, however, and subject to the exception in paragraph
(c)(7)(iii)(B) of this section, that the requirement that the Annual
Report be audited by an independent public accountant does not apply for
any fiscal year during which the only participants in the pool are one
or more of the pool operator, the pool's commodity trading advisor, any
person controlling, controlled by, or under common control with the pool
operator or trading advisor, and any principal of the foregoing; and
Provided further, that the CPO obtains a written waiver from each such
pool participant of their right to receive an audited Annual Report for
such fiscal year, maintains such waivers in accordance with Sec. 4.23,
and makes such waivers available to the Commission or National Futures
Association upon request. 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) Where a commodity pool is organized in a jurisdiction other
than the United States, 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 the generally accepted accounting
principles, standards or practices followed in such other jurisdiction;
Provided, That:
(A) The other jurisdiction follows accounting principles, standards
or practices set forth in paragraph (d)(2)(ii) of this section and the
Annual Report presents and computes the financial statements of the pool
in accordance with the applicable accounting principles, standards or
practices followed by such other jurisdiction;
(B) The Annual Report includes a condensed schedule of investments,
or,
[[Page 258]]
if required by the applicable accounting principles, standards or
practices followed by such other jurisdiction, a full schedule of
investments;
(C) The Annual Report reports special allocations of ownership
equity in accordance with paragraph (e)(2) of this section;
(D) The Disclosure Document or offering memorandum for the pool
identifies the accounting principles, standards or practices of the
other jurisdiction pursuant to which the Annual Report presents and
computes the financial statements of the pool; and
(E) Where the accounting principles, standards or practices of the
other jurisdiction require consolidated financial statements for the
pool, such as a feeder fund consolidating with its master fund, all
applicable disclosures required by United States generally accepted
accounting principles for the feeder fund must be presented with the
reporting pool's consolidated financial statements.
(ii) For purposes of paragraph (d)(2)(i) of this section, the
following alternative accounting principles, standards or practices may
be employed in the preparation and computation of the financial
statements in the Annual Report of the commodity pool; Provided, That
any such alternative accounting principles, standards or practices so
employed are those followed by the jurisdiction other than the United
States in which the commodity pool is organized:
(A) International Financial Reporting Standards;
(B) Generally Accepted Accounting Practice in the United Kingdom;
(C) New Irish Generally Accepted Accounting Practice;
(D) Luxembourg Generally Accepted Accounting Principles; or
(E) Canadian Generally Accepted Accounting Principles.
(iii) To claim the relief available under this paragraph (d)(2), a
commodity pool operator must file a notice with the National Futures
Association within 90 calendar days after the end of the pool's first
fiscal year.
(A) The notice must contain: The name, main business address, main
telephone number and National Futures Association registration
identification number of the commodity pool operator; the name and
identification number of the commodity pool for which the pool operator
is claiming relief; and the alternative accounting principles, standards
or practices pursuant to which the financial statements in the Annual
Report will be presented and computed;
(B) The notice must include a representation that the commodity pool
operator complies with each of the conditions specified in paragraphs
(d)(2)(i)(A) through (D) of this section and, if applicable, paragraph
(d)(2)(i)(E) of this section; and
(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'
[[Page 259]]
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 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'');
[[Page 260]]
(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)(i) 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.
(ii) For purposes of this paragraph (g)(2), the time period from the
date on which the commodity pool operator first receives funds,
securities or other property from a participant in the pool that is not
a person listed in paragraphs (g)(2)(ii)(A)(1) through (g)(2)(ii)(A)(5)
of this section to the end of the pool's first fiscal year is the stub
period of the pool. Where the stub period is four months or less, the
first Annual Report for the pool may be unaudited; Provided, however,
That:
(A) Throughout the stub period, the pool had no more than fifteen
participants and no more than $3,000,000 in aggregate gross capital
contributions. For the purpose of satisfying these criteria, the
commodity pool operator may exclude the following persons and their
contributions:
(1) The pool operator, the pool's commodity trading advisor, any
person controlling, controlled by, or under common control with the pool
operator or trading advisor, and any principal of the foregoing;
(2) A child, sibling, or parent of any of these participants;
(3) The spouse of any participant specified in paragraph
(g)(2)(ii)(A)(1) or (2) of this section;
(4) Any relative of a participant specified in paragraph
(g)(2)(ii)(A)(1), (2) or (3) of this section, their spouse or a relative
of their spouse, who has the same principal residence as such
participant; and
(5) An entity that is wholly-owned by one or more participants
specified in paragraph (g)(2)(ii)(A)(1), (2), (3) or (4) of this
section; and
[[Page 261]]
(B) The next Annual Report for the pool is audited and covers the
stub period plus the pool's first 12-month fiscal year.
(C) To claim the relief available under paragraph (g)(2)(ii) of this
section, a commodity pool operator must:
(1) Prior to the date upon which it is required to distribute and
submit an audited Annual Report for the pool's first fiscal year, obtain
a written waiver of the pool participant's right to receive an audited
Annual Report for the pool's first fiscal year from each participant
other than a participant who is the pool operator, the pool's commodity
trading advisor, any person controlling, controlled by, or under common
control with the pool operator or trading advisor, or any principal of
the foregoing. The waiver may be included in the subscription agreement
for the pool or other agreement with the participant; Provided, however,
That the waiver is a separate page in the agreement and the pool
operator requires the participant to separately sign and date it. The
waiver must be in a form substantially as follows: ``[Name of
participant], a participant in [Name of pool], voluntarily waives the
right under CFTC Regulation 4.22(d) to receive an audited Annual Report
for the fiscal year ended [end date of the pool's first fiscal year] and
will accept in lieu thereof an unaudited Annual Report covering [the
stub period] and an audited Annual Report covering [the start date of
the stub period] through [the end date of the pool's first twelve-month
fiscal year].''; and
(2) On or before the date upon which it is required to distribute
and submit the Annual Report for the pool's first fiscal year, file a
notice with the National Futures Association, along with a certification
that it has received the required written waiver from each participant
who is not the pool operator, the pool's commodity trading advisor, any
person controlling, controlled by, or under common control with the pool
operator or trading advisor, or any principal of the foregoing, and who
has been a participant in the pool for its first fiscal year.
(i) The notice must contain: The name, main business address, main
telephone number and National Futures Association registration
identification number of the commodity pool operator; the name and
identification number of the commodity pool for which the pool operator
is claiming relief; and the beginning and end dates of the stub period
of the pool;
(ii) The notice must include a representation that the commodity
pool operator meets the criteria of paragraph (g)(2)(ii)(A) of this
section and that it will comply with the condition of paragraph
(g)(2)(ii)(B) of this section; and
(iii) The notice must be signed by the commodity pool operator in
accordance with paragraph (h) of this section.
(D)(1) Each unaudited Annual Report for which the relief available
under paragraph (g)(2)(ii) of this section has been claimed must
prominently disclose on the cover page thereof: ``Pursuant to an
exemption from the Commodity Futures Trading Commission, this unaudited
Annual Report covers the period from [beginning date of the stub period
of the pool] to the end of the pool's first fiscal year, a period of
[number] months.''
(2) The next Annual Report for the pool must prominently disclose on
the cover page thereof: ``Pursuant to an exemption from the Commodity
Futures Trading Commission, this audited Annual Report covers the period
from [beginning date of the stub period of the pool] to the end of the
pool's first 12-month fiscal year, a period of [number] months.''
(E) The commodity pool operator must maintain in accordance with
Sec. 4.23 of this chapter each waiver it has obtained to claim the
relief available under paragraph (g)(2)(ii) of this section.
(3) The commodity pool operator must continue to use the elected
fiscal 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
[[Page 262]]
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; 77 FR 54358, Sept. 5, 2012; 81 FR 85154, Nov. 25, 2016]
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. Books and records that are not
maintained at the pool operator's main business office shall be
maintained by one or more of the following: the pool's administrator,
distributor or custodian, or a bank or registered broker or dealer
acting in a similar capacity with respect to the pool. All books and
records shall be maintained 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.
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 books and records are maintained at the
commodity pool operator's main business office that is outside 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 263]]
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 commodity,
swap type and counterparty, the futures commission merchant and/or
retail foreign exchange dealer carrying the account and the introducing
broker, if any, whether the commodity interest was purchased, sold
(including, in the case of a retail forex transaction, offset),
exercised, expired (including, in the case of a retail forex
transaction, whether it was rolled forward), 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. This requirement may be satisfied
through a transfer agent's maintenance of records or through a list of
relevant intermediaries where shares are held in an omnibus account or
through intermediaries.
(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 or acknowledgment of a commodity
interest transaction of the pool, and each purchase and sale statement
and each monthly statement for the pool received from a futures
commission merchant, retail foreign exchange dealer or swap dealer.
(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 commodity,
swap type and counterparty, the futures commission merchant or retail
foreign exchange dealer carrying the
[[Page 264]]
account and the introducing broker, if any, whether the commodity
interest was purchased, sold, exercised, or expired, and the gain or
loss realized; Provided, however, that if the pool operator is a
counterparty to a swap, it must comply with the swap data recordkeeping
and reporting requirements of part 45 of this chapter, as applicable.
(2) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant or retail foreign exchange dealer to:
(i) The commodity pool operator relating to a personal account of
the pool operator; 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.
(c) If the pool operator does not maintain its books and records at
its main business office, the pool operator shall:
(1) At the time it registers with the Commission or delegates its
recordkeeping obligations, whichever is later, file a statement that:
(i) Identifies the name, main business address, and main business
telephone number of the person(s) who will be keeping required books and
records in lieu of the pool operator;
(ii) Sets forth the name and telephone number of a contact for each
person who will be keeping required books and records in lieu of the
pool operator;
(iii) Specifies, by reference to the respective paragraph of this
section, the books and records that such person will be keeping; and
(iv) Contains representations from the pool operator that:
(A) It will promptly amend the statement if the contact information
or location of any of the books and records required to be kept by this
section changes, by identifying in such amendment the new location and
any other information that has changed;
(B) It remains responsible for ensuring that all books and records
required by this section are kept in accordance with Sec. 1.31;
(C) Within 48 hours after a request by a representative of the
Commission, it will obtain the original books and records from the
location at which they are maintained, and provide them for inspection
at the pool operator's main business office; Provided, however, that if
the original books and records are permitted to be, and are maintained,
at a location outside the United States, its territories or possessions,
the pool operator will obtain and provide such original books and
records for inspection at the pool operator's main business office
within 72 hours of such a request; and
(D) It will disclose in the pool's Disclosure Document the location
of its books and records that are required under this section.
(2) The pool operator shall also file electronically with the
National Futures Association a statement from each person who will be
keeping required books and records in lieu of the pool operator wherein
such person:
(i) Acknowledges that the pool operator intends that the person keep
and maintain required pool books and records;
(ii) Agrees to keep and maintain such records required in accordance
with Sec. 1.31 of this chapter; and
(iii) Agrees to keep such required books and records open to
inspection by any representative of the Commission or the United States
Department of Justice in accordance with Sec. 1.31 of this chapter and
to make such required books and records available to pool
[[Page 265]]
participants in accordance with this section.
(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; 75 FR 55428, Sept. 10, 2010; 77 FR
54358, Sept. 5, 2012; 77 FR 66332, Nov. 2, 2012; 78 FR 52334, Aug. 22,
2013]
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 COMMODITY INTEREST 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. 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 the Risk Disclosure Statement, to be
prominently disclosed as the last paragraph thereof:
ALSO, BEFORE YOU DECIDE TO PARTICIPATE IN THIS POOL, YOU SHOULD
[[Page 266]]
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.
(4) If the pool may engage in retail Forex transactions, the Risk
Disclosure Statement must further state:
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN OFF-
EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN THE
INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE FOREIGN
CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS USED TO
MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION CONTRACTS. IF THE
POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT COUNTERPARTY
BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED OR PROFITS
EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE TREATED AS A
COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF
THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE POOL MAY BE A
GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF
OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY
CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE
FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER
GENERAL CREDITORS.
(5) If the pool may engage in swaps, the Risk Disclosure Statement
must further state:
SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL
RISK.
HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE
LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN
VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF
AN UNDERLYING OR RELATED MARKET FACTOR.
IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL OPERATOR
TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE POOL'S
EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS
SCHEDULED TERMINATION DATE.
(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.);
[[Page 267]]
(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 and/or retail foreign
exchange dealer 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 and/or retail foreign
exchange dealer.
(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, risks relating to volatility, leverage,
liquidity, counterparty creditworthiness, as applicable to the types of
trading programs to be followed, trading structures to be employed and
investment activity (including retail forex and swap transactions)
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
swap, 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
and/or retail foreign exchange dealers 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
[[Page 268]]
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 or as security
deposit 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, and any fees incurred to maintain an
open position in retail forex transactions;
(iii) Fees and commissions paid in connection with trading advice
provided to the pool;
(iv) Fees and expenses incurred within investments in investee
pools, 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 costs or fees included in the spread between bid and asked
prices for retail forex or, if known, swap transactions; and
(xiii) Any other direct or indirect cost.
(3) Where any fee, commission or other expense is determined by
reference to a base amount including, but
[[Page 269]]
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, soliciting
participants for the pool, acting as a counterparty to the pool's retail
forex or swap transactions, or acting as a swap dealer with respect to
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 and/or retail foreign exchange dealer and/or from the
maintenance of the pool's swap positions with a swap dealer, or from the
introduction of the pool's account to a futures commission merchant and/
or retail foreign exchange dealer and/or swap dealer 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 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/or retail foreign
exchange dealers and/or swap dealers and its introducing brokers, if
any.
(2) With respect to a futures commission merchant and/or retail
foreign exchange dealer and/or swap dealer 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, retail foreign exchange dealer's, swap
dealer'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
[[Page 270]]
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 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;
[[Page 271]]
(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; 75 FR 55429, Sept. 10, 2010; 76 FR 44264,
July 25, 2011; 77 FR 11285, Feb. 24, 2012; 77 FR 17330, Mar. 26, 2012;
77 FR 54358, Sept. 5, 2012]
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;
(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
[[Page 272]]
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 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,
[[Page 273]]
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.
(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.
[[Page 274]]
(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 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:
[[Page 275]]
(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 COMMODITY INTEREST 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; 75 FR 55429, Sept. 10, 2010]
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 twelve 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 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:
[[Page 276]]
(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; 78 FR
52335, Aug. 22, 2013]
Sec. 4.27 Additional reporting by advisors of certain large commodity pools.
(a) General definitions. For the purposes of this section:
(1) Commodity pool operator or CPO has the same meaning as commodity
pool operator defined in section 1a(11) of the Commodity Exchange Act;
(2) Commodity trading advisor or CTA has the same meaning as defined
in section 1a(12);
(3) Direct has the same meaning as defined in section 4.10(f);
(4) Net asset value or NAV has the same meaning as net asset value
as defined in section 4.10(b);
(5) Pool has the same meaning as defined in section 1(a)(10) of the
Commodity Exchange Act;
(6) Reporting period means the reporting period as defined in the
forms promulgated hereunder;
(b) Persons required to report. A reporting person is:
(1) Any commodity pool operator that is registered or required to be
registered under the Commodity Exchange Act and the Commission's
regulations thereunder; or
(2) Any commodity trading advisor that is registered or required to
be registered under the Commodity Exchange Act and the Commission's
regulations thereunder.
(c) Reporting. (1) Except as provided in paragraph (c)(2) of this
section, each reporting person shall file with the National Futures
Association, a report with respect to the directed assets of each pool
under the advisement of the commodity pool operator consistent with
appendix A to this part or commodity trading advisor consistent with
appendix C to this part.
(2) All financial information shall be reported in accordance with
generally accepted accounting principles consistently applied.
Notwithstanding the foregoing, or anything in the instructions to
appendix A of this part to the contrary, a commodity pool operator of a
pool that meets the conditions specified in Sec. 4.22(d)(2)(i) to
present and compute the commodity pool's financial statements contained
in the Annual Report other than in accordance with United States
generally accepted accounting principles and has filed notice pursuant
to Sec. 4.22(d)(2)(iii) may also use the alternative accounting
principles, standards or practices identified in the notice in reporting
information required to be reported pursuant to paragraph (c)(1) of this
section.
(d) Investment advisers to private funds. Except as otherwise
expressly provided in this section, CPOs and CTAs that are dually
registered with the Securities and Exchange Commission and are required
to file Form PF pursuant to the rules promulgated under the Investment
Advisers Act of 1940, shall file Form PF with the Securities and
Exchange Commission in lieu of filing such other reports with respect to
private funds as may be required under this section. In addition, except
as otherwise expressly provided in this section, CPOs and CTAs that are
dually registered with the Securities and Exchange Commission and are
required to file Form PF pursuant to the rules promulgated under the
Investment Advisers Act of 1940, may file Form PF with the Securities
and Exchange Commission in lieu of filing such other reports
[[Page 277]]
with respect to commodity pools that are not private funds as may be
required under this section. Dually registered CPOs and CTAs that file
Form PF with the Securities and Exchange Commission will be deemed to
have filed Form PF with the Commission for purposes of any enforcement
action regarding any false or misleading statement of a material fact in
Form PF.
(e) Filing requirements. Each report required to be filed with the
National Futures Association under this section shall:
(1)(i) Contain an oath and affirmation that, to the best of the
knowledge and belief of the individual making the oath and 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 and
(ii) Each oath or affirmation must be made by a representative duly
authorized to bind the CPO or CTA.
(2) Be submitted consistent with the National Futures Association's
electronic filing procedures.
(f) Termination of reporting requirement. All reporting persons
shall continue to file such reports as are required under this section
until the effective date of a Form 7W filed in accordance with the
Commission's regulations.
(g) Public records. Reports filed pursuant to this section shall not
be considered Public Records as defined in Sec. 145.0 of this chapter.
[77 FR 17330, Mar. 26, 2012, as amended at 81 FR 85155, Nov. 25, 2016]
Subpart C_Commodity Trading Advisors
Sec. 4.30 Prohibited activities.
(a) Except as provided in paragraph (b) of this section, 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.
(b) The prohibition in paragraph (a) of this section shall not apply
to:
(1) A futures commission merchant that is registered as such under
the Act;
(2) A leverage transaction merchant that is registered as a
commodity trading advisor under the Act;
(3) A retail foreign exchange dealer that is registered as such
under the Act; or
(4) A swap dealer that is registered as such under the Act, with
respect to funds, securities or other property accepted to purchase,
margin, guarantee or secure any swap that is not cleared through a
derivatives clearing organization.
[77 FR 54359, Sept. 5, 2012]
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
[[Page 278]]
a prospective client to direct the client's commodity interest account
or to 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 [Reserved]
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 or acknowledgment of a commodity
interest transaction, and each purchase and sale statement and each
monthly statement received from a futures commission merchant, a retail
foreign exchange dealer or a swap dealer.
(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 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 commodity,
swap type and counterparty, the futures commission merchant and/or
retail foreign exchange dealer carrying the account and the introducing
broker, if any, whether the commodity interest was purchased, sold
(including, in the case of a retail forex transaction, offset),
exercised, expired (including, in the case of a retail forex
transaction, whether it was rolled forward), and the gain or loss
realized; Provided, however, that if the trading advisor is a
counterparty to a swap, it
[[Page 279]]
must comply with the swap data recordkeeping and reporting requirements
of part 45 of this chapter, as applicable.
(2) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant or retail foreign exchange dealer 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; 75 FR 55430, Sept. 10, 2010; 77
FR 54359, Sept. 5, 2012; 77 FR 66332, Nov. 2, 2012]
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 COMMODITY INTERESTS 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 FUTURES CONTRACT OR SELL A
COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU
MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY DEPOSIT
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
INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF
LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
[[Page 280]]
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 INTEREST MARKETS. YOU SHOULD
THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY
INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE
PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page number).
(2)(i) 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.
(ii) If the commodity trading advisor may engage in retail forex
transactions 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 OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT
CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A
COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME PROTECTIONS
AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION
CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND YOU HAVE A CLAIM
FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON TRANSACTIONS WITH THE
COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A COMMODITY CUSTOMER
CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF THE BANKRUPTCY CODE
AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL CREDITOR AND YOUR CLAIM
MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY
MONIES STILL AVAILABLE AFTER PRIORITY CLAIMS ARE PAID. EVEN FUNDS THAT
THE COUNTERPARTY KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM
THE CLAIMS OF PRIORITY AND OTHER GENERAL CREDITORS.
FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN
THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR
RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.
(3) If the commodity trading advisor is not also a registered
futures commission merchant or a registered retail foreign exchange
dealer, 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 OR RETAIL FOREIGN EXCHANGE
DEALER, AS APPLICABLE.
(4) If the commodity trading advisor may engage in swaps, the Risk
Disclosure Statement must further state:
SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF
[[Page 281]]
THE TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
FUNDING RISK, AND OPERATIONAL RISK.
HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE
LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS
BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL
GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE
VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.
IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR OFFSET
YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A
TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.
(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 and/or retail foreign exchange
dealer 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 or retail foreign exchange dealer 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
(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 (including retail forex and swap
transactions, if any).
(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 and/or retail foreign
exchange dealers carrying accounts it manages shall treat offsetting
positions pursuant to Sec. 1.46 of this chapter, if the method is other
[[Page 282]]
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,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading
advisor must explain how such base amount will be calculated. Where any
fee is based on the difference between bid and asked prices on retail
forex or swap transactions, the trading advisor must explain how such
fee 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 and/or retail foreign exchange
dealer 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/
or retail foreign exchange dealer; 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 and/or
retail foreign exchange dealer, and/or from the maintenance of the
client's swap positions with a swap dealer or from 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 or retail foreign exchange
dealer 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
and/or retail foreign exchange dealer and/or swap dealer.
(2) With respect to a futures commission merchant, retail foreign
exchange dealer, swap dealer or 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, retail foreign exchange dealer's, swap
dealer'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.
[[Page 283]]
(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. 4.31, Sec.
4.34, Sec. 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;
75 FR 55430, Sept. 10, 2010; 77 FR 11285, Feb. 24, 2012; 77 FR 17330,
Mar. 26, 2012; 77 FR 54359, Sept. 5, 2012]
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;
(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
[[Page 284]]
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.
(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
[[Page 285]]
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 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
[[Page 286]]
not more than three months preceding the date of the Document.
(b) No commodity trading advisor may use a Disclosure Document dated
more than twelve 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; 78 FR 52335, Aug. 22, 2013]
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 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
[[Page 287]]
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-- Form CPO-PQR
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[77 FR 11286, Feb. 24, 2012]
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
[[Page 339]]
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 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]
Appendix C to Part 4--Form CTA-PR
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[77 FR 11337, Feb. 24, 2012]
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PART 5_OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS--Table of Contents
Sec.
5.1 Definitions.
5.2 Prohibited transactions.
5.3 Registration of persons engaged in retail forex transactions.
5.4 Applicability of part 4 of this chapter to commodity pool operators
and commodity trading advisors.
5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign
exchange dealers, futures commission merchants and introducing
brokers regarding retail forex transactions.
5.6 Maintenance of minimum financial requirements by retail foreign
exchange dealers and futures commission merchants offering or
engaging in retail forex transactions.
5.7 Minimum financial requirements for retail foreign exchange dealers
and futures commission merchants offering or engaging in
retail forex transactions.
5.8 Aggregate retail forex assets.
5.9 Security deposits for retail forex transactions.
5.10 Risk assessment recordkeeping requirements for retail foreign
exchange dealers.
5.11 Risk assessment reporting requirements for retail foreign exchange
dealers.
5.12 Financial reports of retail foreign exchange dealers.
5.13 Reporting to customers of retail foreign exchange dealers and
futures commission merchants; monthly and confirmation
statements.
5.14 Records to be kept by retail foreign exchange dealers and futures
commission merchants.
5.15 Unlawful representations.
5.16 Prohibition of guarantees against loss.
5.17 Authorization to trade.
5.18 Trading and operational standards.
5.19 Pending legal proceedings.
5.20 Special calls for account and transaction information.
5.21 Supervision.
5.22 Registered futures association membership.
5.23 Notice of bulk transfers and bulk liquidations.
5.24 Applicability of other parts of this chapter.
5.25 Applicability of the Act.
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i,
6k, 6m, 6n, 6o, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, and 23, as
amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (Jul. 21, 2010).
Source: 75 FR 55432, Sept. 10, 2010, unless otherwise noted.
Sec. 5.1 Definitions.
(a) Affiliated person of a futures commission merchant means a
person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;
(b) Aggregate retail forex assets means an amount of liquid assets
held in accordance with Sec. 5.8 of this part;
(c) Associated person of an affiliated person of a futures
commission merchant means any natural person associated with an
affiliated person of 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:
(1) The solicitation or acceptance of retail forex customers' orders
(other than in a clerical capacity); or
(2) The supervision of any person or persons so engaged;
(d)(1) Commodity pool operator, for purposes of this part, means any
person who operates or solicits funds, securities, or property for a
pooled investment vehicle that is not an eligible contract participant
as defined in section 1a(18) of the Act, and that engages in retail
forex transactions;
(2) Associated person of a commodity pool operator, for purposes of
this part, means any natural person associated with a commodity pool
operator as defined in paragraph (d)(1) of this section 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 pooled investment vehicle; or
(ii) The supervision of any person or persons so engaged;
(e)(1) Commodity trading advisor, for purposes of this part, means
any person who exercises discretionary trading authority or obtains
written authorization to exercise discretionary trading authority over
any account for or on behalf of any person that is not an eligible
contract participant as defined in section 1a(18) of the Act, in
connection with retail forex transactions;
[[Page 344]]
(2) Associated person of a commodity trading advisor, for purposes
of this part, means any natural person associated with a commodity
trading advisor as defined in paragraph (e)(1) of this section 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;
(f)(1) Introducing broker, for purposes of this part, means any
person who solicits or accepts orders from a customer that is not an
eligible contract participant as defined in section 1a(18) of the Act,
in connection with retail forex transactions;
(2) Associated person of an introducing broker, for purposes of this
part, means any natural person associated with an introducing broker as
defined in paragraph (g)(1) of this section 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 retail forex customers' orders
(other than in a clerical capacity); or
(ii) The supervision of any person or persons so engaged;
(g) Primarily or substantially means, when used to describe the
extent of a futures commission merchant's engagement in the activities
described in section 1a(28)(A)(i)(I)(aa)(AA) of the Act and section
1a(28)(A)(i)(II) of the Act insofar as that section references the
activities described in section 1a(28)(A)(i)(I)(aa)(AA), that:
(1) Such activities account for more than fifty percent of the
futures commission merchant's gross revenues, computed in accordance
with generally accepted accounting principles, on an annual basis;
(2) The futures commission merchant receives gross revenues,
computed in accordance with generally accepted accounting principles,
from such activities in excess of $500,000 in any twelve month period;
or
(3) The futures commission merchant is a clearing member of a
registered derivatives clearing organization.
(h)(1) Retail foreign exchange dealer means any person that is, or
that offers to be, the counterparty to a retail forex transaction,
except for a person described in item (aa), (bb), (cc)(AA) or (dd) of
section 2(c)(2)(B)(i)(II) of the Act;
(2) Associated person of a retail foreign exchange dealer means any
natural person associated with a retail foreign exchange dealer as
defined in paragraph (i)(1) of this section 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 retail forex customers' orders
(other than in a clerical capacity); or
(ii) The supervision of any person or persons so engaged;
(i) Retail forex account means the account of a person who is not an
eligible contract participant as defined in section 1a(18) of the Act,
established with a retail foreign exchange dealer or a futures
commission merchant, in which account retail forex transactions
(including options on contracts for the purchase or sale of foreign
currency) with such retail foreign exchange dealer or futures commission
merchant as counterparty are undertaken, or which account is established
in order to enter into such transactions.
(j) Retail forex account agreement means the contractual agreement
between a futures commission merchant or retail foreign exchange dealer
and any person who is not an eligible contract participant as defined in
section 1a(18) of the Act, which agreement contains the terms governing
the person's retail forex account with such futures commission merchant
or retail foreign exchange dealer.
(k) Retail forex customer means a person, other than an eligible
contract participant as defined in section 1a(18) of the Act, acting on
its own behalf and trading in any account, agreement, contract or
transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
(l) Retail forex obligation means the net credit balance at a retail
foreign
[[Page 345]]
exchange dealer or futures commission merchant that would be obtained by
combining all money, securities and property deposited by a retail forex
customer into a retail forex account or accounts, adjusted for the
realized and unrealized net profit or loss, if any, accruing on the open
trades, contracts or transactions in the retail forex account or
accounts, without including any retail forex customers' accounts that
contain negative net liquidating balances.
(m) Retail forex transaction means any account, agreement, contract
or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
A retail forex transaction does not include an account, agreement,
contract or transaction in foreign currency that is a contract of sale
of a commodity for future delivery (or an option thereon) that is
executed, traded on or otherwise subject to the rules of a contract
market designated pursuant to section 5(a) of the Act.
[75 FR 55432, Sept. 10, 2010, as amended at 77 FR 66332, Nov. 2, 2012]
Sec. 5.2 Prohibited transactions.
(a) Scope. The provisions of this section shall be applicable to any
retail forex transaction.
(b) Fraudulent conduct prohibited. It shall be unlawful for any
person, by use of the mails or by any means or instrumentality of
interstate commerce, directly or indirectly, in or in connection with
any retail forex transaction:
(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.
(c) Acting as counterparty and exercising discretion prohibited. (1)
No person who acts as the counterparty for any retail forex transaction
may do so for an account for which the person or any affiliate of the
person is authorized (by contract, power of attorney or otherwise) to
cause transactions to be effected without the client's specific
authorization.
(2) For purposes of this paragraph (c), an ``affiliate'' of a person
means a person controlling, controlled by or under common control with,
the first person.
Sec. 5.3 Registration of persons engaged in retail forex transactions.
(a) Subject to paragraph (b) of this section, each of the following
is subject to the registration provisions under the Act and to part 3 of
this chapter:
(1)(i) Any affiliated person of a futures commission merchant, as
defined in Sec. 5.1(a) of this part, which affiliated person:
(A) Solicits or accepts orders from any person that is not an
eligible contract participant in connection with any retail forex
transaction; or
(B) Accepts money, securities, or property (or extends credit in
lieu thereof) in connection with such solicitation or acceptance of
orders in order to engage in any retail forex transaction, is required
to register as a retail foreign exchange dealer; and
(ii) Any associated person of an affiliated person of a futures
commission merchant, as defined in Sec. 5.1(c) of this part, is
required to register as an associated person of an affiliated person of
a futures commission merchant.
(2)(i) Any commodity pool operator, as defined in Sec. 5.1(d)(1) of
this part, is required to register as a commodity pool operator;
(ii) Any associated person of a commodity pool operator, as defined
in Sec. 5.1(d)(2) of this part, is required to register as an
associated person of a commodity pool operator;
(3)(i) Any commodity trading advisor, as defined in Sec. 5.1(e)(1)
of this part, is required to register as a commodity trading advisor;
(ii) Any associated person of a commodity trading advisor, as
defined in Sec. 5.1(e)(2) of this part, is required to register as an
associated person of a commodity trading advisor;
(4)(i) Any person registered as a futures commission merchant:
(A) That is not primarily or substantially engaged in the business
activities described in section 1a(28)(A)(i)(I)(aa)(AA) of the Act and
[[Page 346]]
section 1a(28)(A)(i)(II) of the Act insofar as that section references
the activities described in section 1a(28)(A)(i)(I)(aa)(AA);
(B) That solicits or accepts orders from any person that is not an
eligible contract participant in connection with any retail forex
transaction; and
(C) That accepts money, securities, or property (or extends credit
in lieu thereof) in connection with such solicitation or acceptance of
orders in order to engage in retail forex transactions, is required to
register as a retail foreign exchange dealer;
(ii) Any associated person of a futures commission merchant
described in paragraph (a)(4)(i) of this section is required to register
as an associated person of a futures commission merchant;
(5)(i) Any introducing broker, as defined in Sec. 5.1(f)(1) of this
part, is required to register as an introducing broker;
(ii) Any associated person of an introducing broker, as defined in
Sec. 5.1(f)(2) of this part, is required to register as an associated
person of an introducing broker;
(6)(i) Any retail foreign exchange dealer, as defined in Sec.
5.1(h)(1) of this part is required to register as a retail foreign
exchange dealer;
(ii) Any associated person of a retail foreign exchange dealer, as
defined in Sec. 5.1(h)(2) of this part, is required to register as an
associated person of a retail foreign exchange dealer;
(b) Any person described in paragraph (a) of this section that is
already registered in the required capacity specified in paragraph (a)
is not required under this section to register twice in the same
capacity; Provided, however, that a person already registered as an
associated person of one class of registrant may also be required to
register as an associated person of another class of registrant in order
to comply with this section.
[75 FR 55432, Sept. 10, 2010, as amended at 76 FR 56106, Sept. 12, 2011]
Sec. 5.4 Applicability of part 4 of this chapter to commodity
pool operators and commodity trading advisors.
Part 4 of this chapter applies to any person required pursuant to
the provisions of this part 5 to register as a commodity pool operator
or as a commodity trading advisor. Failure by any such person to comply
with the requirements of part 4 will constitute a violation of this
section and the relevant section of part 4.
Sec. 5.5 Distribution of ``Risk Disclosure Statement'' by retail
foreign exchange dealers, futures commission merchants and
introducing brokers regarding retail forex transactions.
(a) Except as provided in Sec. 5.23 of this part, no retail foreign
exchange dealer, futures commission merchant, or in the case of an
introduced account no introducing broker, may open an account that will
engage in retail forex transactions for a retail forex customer, unless
the retail foreign exchange dealer, futures commission merchant or
introducing broker first:
(1)(i) In the case of a retail foreign exchange dealer or a person
required to register as an introducing broker solely by reason of this
part, furnishes the retail forex customer with a separate written
disclosure statement containing only the language set forth in paragraph
(b) of this section and the disclosure required by paragraph (e) of this
section;
(ii) In the case of a futures commission merchant or a person
required to register as an introducing broker because it engages in the
activities described in Sec. 1.3(mm) of this chapter, furnishes the
retail forex customer with a separate written disclosure statement
containing only the language set forth in paragraph (b) of this section
and the disclosure required by paragraph (e) of this section; Provided,
however, that the disclosure statement may be attached to other
documents as the initial page(s) of such documents and as the only
material on such page(s); and
(2) Receives from the retail forex customer an acknowledgment signed
and dated by the retail forex customer that he received and understood
the disclosure statement.
[[Page 347]]
(b) The language set forth in the written disclosure statement
required by paragraph (a) of this section shall be as follows:
RISK DISCLOSURE STATEMENT
OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED
TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A
FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR
COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED
HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING
AND YOU MAY LOSE MORE THAN YOU DEPOSIT.
YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS
BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER IS
YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE YOU
ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM THE
REGISTRATION STATUS OF YOUR COUNTERPARTY.
The off-exchange foreign currency trading you are entering into is
not conducted on an interbank market, nor is it conducted on a futures
exchange subject to regulation as a designated contract market by the
Commodity Futures Trading Commission. The foreign currency trades you
transact are trades with the futures commission merchant or retail
foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER
IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when
you lose money trading, your dealer is making money on such trades, in
addition to any fees, commissions, or spreads the dealer may charge.
(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY
TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR
ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE
GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.
Any trading platform that you may use to enter off-exchange foreign
currency transactions is only connected to your futures commission
merchant or retail foreign exchange dealer. You are accessing that
trading platform only to transact with your dealer. You are not trading
with any other entities or customers of the dealer by accessing such
platform. The availability and operation of any such platform, including
the consequences of the unavailability of the trading platform for any
reason, is governed only by the terms of your account agreement with the
dealer.
(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.
All of your rights associated with your retail forex trading,
including the manner and denomination of any payments made to you, are
governed by the contract terms established in your account agreement
with the futures commission merchant or retail foreign exchange dealer.
Funds deposited by you with a futures commission merchant or retail
foreign exchange dealer for trading off-exchange foreign currency
transactions are not subject to the customer funds protections provided
to customers trading on a contract market that is designated by the
Commodity Futures Trading Commission. Your dealer may commingle your
funds with its own operating funds or use them for other purposes. In
the event your dealer becomes bankrupt, any funds the dealer is holding
for you in addition to any amounts owed to you resulting from trading,
whether or not any assets are maintained in separate deposit accounts by
the dealer, may be treated as an unsecured creditor's claim.
(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY
TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR
MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.
Your ability to close your transactions or offset positions is
limited to what your dealer will offer to you, as there is no other
market for these transactions. Your dealer may offer any prices it
wishes, and it may offer prices derived from outside sources or not in
its discretion. Your dealer may establish its prices by offering spreads
from third party prices, but it is under no obligation to do so or to
continue to do so. Your dealer may offer different prices to different
customers at any point in time on its own terms. The terms of your
account agreement alone govern the obligations your dealer has to you to
offer prices and offer offset or liquidating transactions in your
account and make any payments to you. The prices offered by your dealer
may or may not reflect prices available elsewhere at any exchange,
interbank, or other market for foreign currency.
(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS
The futures commission merchant or retail foreign exchange dealer
may compensate introducing brokers for introducing your account in ways
which are not disclosed to you. Such paid solicitors are not required to
have, and may not have, any special expertise in trading, and may have
conflicts of interest based on the method by which they are compensated.
Solicitors working on behalf of futures commission merchants and
[[Page 348]]
retail foreign exchange dealers are required to register. You should
confirm that they are, in fact registered. You should thoroughly
investigate the manner in which all such solicitors are compensated and
be very cautious in granting any person or entity authority to trade on
your behalf. You should always consider obtaining dated written
confirmation of any information you are relying on from your dealer or a
solicitor in making any trading or account decisions.
FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY
DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR
CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS
MAY INDICATE POTENTIAL SALES FRAUD.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND
OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS WITH
A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
I hereby acknowledge that I have received and understood this risk
disclosure statement.
________________________________________________________________________
Date
________________________________________________________________________
Signature of Customer
(c) The acknowledgment required by paragraph (a) of this section
must be retained by the retail foreign exchange dealer, futures
commission merchant or introducing broker in accordance with Sec. 1.31
of this chapter.
(d) This section does not relieve a retail foreign exchange dealer,
futures commission merchant or introducing broker from any other
disclosure obligation it may have under applicable law.
(e)(1) Immediately following the language set forth in paragraph (b)
of this section, the statement required by paragraph (a) of this section
shall include, for each of the most recent four calendar quarters during
which the counterparty maintained retail forex customer accounts:
(i) The total number of non discretionary retail forex customer
accounts maintained by the retail foreign exchange dealer or futures
commission merchant;
(ii) The percentage of such accounts that were profitable during the
quarter; and
(iii) The percentage of such accounts that were not profitable
during the quarter.
(2) Identification of retail forex customer accounts for the purpose
of this disclosure and the calculation in determining whether each such
account was profitable or not profitable must be made in accordance with
Sec. 5.18(i) of this part. Such statement of profitable trades shall
include the following legend: PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS. Each retail foreign exchange dealer or
futures commission merchant shall provide, upon request, to any retail
forex customer or prospective retail forex customer the total number of
non discretionary retail forex accounts maintained by such foreign
exchange dealer or futures commission merchant, the percentage of such
accounts that were profitable and the percentage of such accounts that
were not profitable, calculated in accordance with Sec. 5.18(i) of this
part, for each calendar quarter during the most recent five year period
during which such retail foreign exchange dealer or futures commission
merchant maintained non discretionary retail forex customer accounts.
Sec. 5.6 Maintenance of minimum financial requirements by retail
foreign exchange dealers and futures commission merchants offering
or engaging in retail forex transactions.
(a) Each futures commission merchant offering or engaging in retail
forex transactions or who files an application for registration as a
futures commission merchant that will offer or engage in retail forex
transactions and each person registered as a retail foreign exchange
dealer or who files an application for registration as a retail foreign
exchange dealer, who knows or should have known that its adjusted net
capital at any time is less than the minimum required by Sec. 5.7 of
this part or by the capital rule of a registered futures association of
which it is a member, must:
(1) Give telephonic notice, to be confirmed in writing by facsimile
notice, that the applicant's or registrant's adjusted net capital is
less than that required by Sec. 5.7 of this part. The notice must be
given immediately after the
[[Page 349]]
applicant or registrant knows or should know that its adjusted net
capital is less than that 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 applicant or registrant, who knows or should have known
that its adjusted net capital at any time is less than the greatest of:
(1) $22,000,000;
(2) 110 percent of the amount required by Sec. 5.7(a)(1)(i)(B) of
this part; or
(3) 110 percent of the amount of adjusted net capital required by a
registered futures association of which the futures commission merchant
or retail foreign exchange dealer is a member, must file written notice
to that effect within 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 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 24 hours, and within
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. 5.6 of this part, that self-regulatory organization must
immediately report this failure by telephone, confirmed in writing
immediately by facsimile notice, as provided in paragraph (h) of this
section.
(f) A retail foreign exchange dealer or a futures commission
merchant offering or engaging in retail forex transactions 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. 5.12 of this part. 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
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 the equity capital of the retail foreign exchange dealer or
futures commission merchant offering or engaging in retail forex
transactions or the equity capital of a subsidiary or affiliate of the
retail foreign exchange dealer or futures commission merchant offering
or engaging in retail forex transactions consolidated pursuant to Sec.
1.17(f) of this chapter 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 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 (f)(1) and (f)(2) of this section do not
apply to any retail foreign exchange transaction in the ordinary course
of business between a retail foreign exchange dealer and any affiliate
where the retail foreign exchange dealer makes payment to or on behalf
of such affiliate for such transaction and then receives payment
[[Page 350]]
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
offering or engaging in retail forex transactions or a retail foreign
exchange dealer, the Director of the Division of Swap Dealer and
Intermediary Oversight or the Director's designee may require that the
futures commission merchant offering or engaging in retail forex
transactions or retail foreign exchange dealer provide or cause a
Material Affiliated Person (as that term is defined in Sec. 5.10(a)(2)
of this part) to provide, within three business days from the date of
the request or such shorter period as the Director or designee may
specify, such other information as the Director or designee determines
to be necessary based upon market conditions, reports provided by the
retail foreign exchange dealer or futures commission merchant offering
or engaging in retail forex transactions, or other available
information.
(g) Whenever a person registered as a futures commission merchant
offering or engaging in retail forex transactions or a retail foreign
exchange dealer knows or should know that the total amount of its retail
forex obligation exceeds the amount of the aggregate retail forex assets
the registrant maintains in accordance with the provisions of Sec. 5.8
of this chapter, the registrant must report such deficiency immediately
by telephone notice, confirmed immediately in writing by facsimile
notice.
(h) Every notice and written report required to be given or filed
with the Commission by this section by an applicant 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, and
with the National Futures Association. Every notice and written report
required to be given or filed with the Commission by this section by a
registrant or 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, and with
the registrant's designated self-regulatory organization. In addition,
every notice and written report required to be given by this section
must also be filed with the Chief Accountant of the Division of Swap
Dealer and Intermediary Oversight at the Commission's principal office
in Washington, DC.
(i) In lieu of filing paper copies with the Commission, all filings
or other notices prepared by a futures commission merchant or retail
foreign exchange dealer 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, retail
foreign exchange dealer 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. 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.
[75 FR 55432, Sept. 10, 2010, as amended at 78 FR 22419, Apr. 16, 2013]
Sec. 5.7 Minimum financial requirements for retail foreign exchange
dealers and futures commission merchants offering or engaging
in retail forex transactions.
(a)(1)(i) Each futures commission merchant offering or engaging in
retail forex transactions and each retail foreign exchange dealer must
maintain adjusted net capital equal to or in excess of the greatest of:
(A) $20,000,000;
(B) $20,000,000 plus five percent of the futures commission
merchant's or retail foreign exchange dealer's total retail forex
obligation in excess of $10,000,000;
(C) any amount required under Sec. 1.17 of this chapter, as
applicable; or
[[Page 351]]
(D) the amount of adjusted net capital required by a registered
futures association of which the futures commission merchant or retail
foreign exchange dealer is a member.
(ii) Section 1.17 of this chapter shall apply to retail foreign
exchange dealers as if such retail foreign exchange dealers were futures
commission merchants, or as applicable, applicants or registrants, as
stated in Sec. 1.17 for the purpose of determining the adjusted net
capital under this section. For the purpose of applying this section,
``applicant'' or ``registrant'' shall include retail foreign exchange
dealers and futures commission merchants offering or engaging in retail
forex transactions and applicants therefore.
(2) No person applying for registration as a retail foreign exchange
dealer or a futures commission merchant that will engage in retail forex
transactions shall be so registered unless such person affirmatively
demonstrates to the satisfaction of a registered futures association
that it complies with the financial requirements of this section.
(3) 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 registrant's designated self-
regulatory organization.
(4) A registrant who is not in compliance with this section, or is
unable to demonstrate such compliance as required by paragraph (a)(3) of
this section, shall, as directed by and under the supervision of the
Commission or the registrant's designated self-regulatory organization,
either liquidate or transfer all retail forex accounts (including the
novation of retail forex contracts) and refund or transfer all funds
associated with such retail forex accounts and immediately cease
offering or engaging in retail forex transactions until such time as the
firm is able to demonstrate to the Commission or the registrant's
designated self-regulatory organization such compliance: Provided,
however, That if such registrant immediately demonstrates to the
satisfaction of the Commission or the registrant's designated self-
regulatory organization the ability to achieve compliance, the
Commission or the registrant's designated self-regulatory organization
may in its discretion allow such registrant up to a maximum of 10
business days, or such additional time as determined by the Commission,
in which to achieve compliance without having to liquidate positions or
transfer accounts and cease doing business as required above. Nothing in
this paragraph (a)(4) shall be construed as preventing the Commission or
the registrant's 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 or in Sec. 1.17 of this chapter.
(2) The adjusted net capital of an applicant or registrant for the
purpose of this section shall be determined by the application of Sec.
1.17 pursuant to paragraph (a)(1)(ii) of this section, with the
following additions:
(i) All positions in retail forex accounts and other financial
positions and instruments of the applicant or registrant must be marked
to market and adjusted daily by referencing to current market prices or
rates of exchange.
(ii) Current assets must exclude any retail forex account which
liquidates to a deficit or contains a debit ledger balance only and is
not secured in accordance with Sec. 1.17(c)(3).
(iii) Current assets must exclude any unsecured receivable accrued
from any over-the-counter transaction in foreign currency, options on
foreign currency or options on contracts for the purchase or sale of
foreign currency, or arising from the deposit of collateral or
compensating balances with respect to such transactions, unless such
unsecured receivable is from a person who is an eligible contract
participant that also is:
[[Page 352]]
(A) A bank or trust company regulated by a United States banking
regulator;
(B) A broker-dealer registered with the Securities and Exchange
Commission and a member of the Financial Industry Regulatory Authority;
(C) A futures commission merchant registered with the Commission and
a member of the National Futures Association;
(D) A retail foreign exchange dealer registered with the Commission
and a member of the National Futures Association;
(E) An entity regulated as a foreign equivalent of any of the
persons listed in paragraphs (b)(2)(iii)(A) through (D) of this section,
if such person is regulated in a money center country as defined in
Sec. 1.49 of this chapter and recognized by the futures commission
merchant's or retail foreign exchange dealer's designated self-
regulatory organization as a foreign equivalent;
(F) Any other entity approved by the futures commission merchant's
or retail foreign exchange dealer's designated self-regulatory
organization.
(iv) The value attributed to any retail forex transaction that is an
option shall be the difference between the option's exercise value or
striking value and the market value of the underlying. In the case of a
call, if the market value of the underlying is less than the exercise
value or striking value of such call, it shall be given no value; and,
in the case of a put, if the market value of the underlying is more than
the exercise value or striking value of the put, it shall be given no
value.
(v)(A) In computing adjusted net capital, the capital deductions set
forth in Sec. 1.17(c)(5)(ii) of this chapter shall apply to retail
forex transactions other than options. The capital deductions which
apply are six percent for net positions in Euros, British pounds,
Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net
positions in all other foreign currencies, Provided, however, That there
shall be no capital deductions for retail forex transactions covered (as
defined in Sec. 1.17(j) of this chapter) by the applicant or registrant
by open futures contracts to the extent such futures contracts are not
otherwise designated as cover for any other net capital purposes. For
purposes of this paragraph (b)(2)(v)(A), such retail forex transactions
shall be treated as if they were inventory and cover were therefore
applicable. A retail foreign exchange dealer or futures commission
merchant may not use an affiliate (unless approved by the firm's
designated self-regulatory organization) or any person that is
considered unregulated under the rules of the firm's designated self-
regulatory organization to cover its currency positions for purposes of
this section.
(B) In computing adjusted net capital, the capital deductions set
forth in Sec. 1.17(c)(5)(vi) of this chapter shall apply to all retail
forex transactions that are options.
(C) For the purpose of applying capital deductions on open
proprietary futures positions under Sec. 1.17(c)(5)(x) of this chapter,
net or individual positions in retail forex transactions shall not
constitute cover under Sec. 1.17(j) for the purpose of applying such
charges.
(c) An applicant or registrant must prepare, and keep current,
ledgers or other similar records which show or summarize, with
appropriate references to supporting documents, each transaction
affecting the applicant's or registrant's asset, liability, income,
expense and capital accounts, and in which (except as otherwise
permitted in writing by the Commission) all the applicant's or
registrant's asset, liability and capital accounts are classified into
the account classification subdivisions specified on Form 1-FR-FCM. Each
applicant or registrant shall prepare and keep current such records.
(d) An applicant or registrant must make and keep as a record in
accordance with Sec. 5.14 of this part formal computations of its
adjusted net capital and of its minimum financial requirements pursuant
to this section as of the close of business each month and on other such
dates called for by the Commission, the National Futures Association, or
another self-regulatory organization of which the firm is a member. Such
computations must be completed and made available for inspection by any
representative of the Commission, the National Futures Association, a
self-regulatory organization of which the firm is a member, or
[[Page 353]]
the United States Department of Justice commencing the first month-end
after the date the application for registration is filed.
Sec. 5.8 Aggregate retail forex assets.
(a) Each retail foreign exchange dealer and futures commission
merchant offering or engaging in retail forex transactions shall
calculate its total retail forex obligation and shall at all times hold
assets solely of the type permissible under Sec. 1.25 of this chapter
equal to or in excess of the total retail forex obligation at one or
more qualifying institutions in the United States or money center
countries as defined in Sec. 1.49 of this chapter.
(b) For assets held in the United States, a qualifying institution
is:
(1) A bank or trust company regulated by a United States banking
regulator;
(2) A broker-dealer registered with the Securities and Exchange
Commission and a member of the Financial Industry Regulatory Authority;
or
(3) A futures commission merchant registered with the Commission and
a member of the National Futures Association.
(c) For assets held in a money center country, a qualifying
institution is:
(1) A bank or trust company regulated in a money center country,
Provided that the bank or trust company has regulatory capital in excess
of $1 billion;
(2) An entity regulated in a money center country as an equivalent
of a broker-dealer or futures commission merchant as determined by the
retail foreign exchange dealer's or futures commission merchant's
designated self-regulatory organization, Provided that the entity
maintains regulatory capital in excess of $100 million; or
(3) A futures commission merchant registered with the Commission and
a member of the National Futures Association.
(d) Assets held in a money center country are not eligible to meet
the requirements of paragraph (a) of this section unless the retail
foreign exchange dealer or futures commission merchant has entered into
an agreement that is acceptable to the firm's designated self-regulatory
organization and that authorizes the qualifying institution to provide
account information to the Commission and the firm's designated self-
regulatory organization.
(e) In computing its adjusted net capital pursuant to Sec. 5.7 of
this part, a retail foreign exchange dealer or futures commission
merchant may not include aggregate retail forex assets as current assets
or otherwise record any property received from retail forex customers as
an asset without recording a corresponding liability to the retail forex
customers.
Sec. 5.9 Security deposits for retail forex transactions.
(a) Each futures commission merchant engaging, or offering to
engage, in retail forex transactions and each retail foreign exchange
dealer must collect from each retail forex customer a minimum security
deposit for each retail forex transaction equal to the applicable
percentage as set by the registered futures association of which they
are a member; Provided, that the registered futures association's
security deposit requirement cannot be less than:
(1) 2% of the notional value of the retail forex transaction for
major currency pairs and 5% of the notional value of the retail forex
transaction for all other currency pairs;
(2) For short options, 2% for major currency pairs and 5% for all
other currency pairs of the notional value of the retail forex
transaction, plus the premium received by the retail forex customer; or
(3) For long options, the full premium charged and received by the
futures commission merchant or retail foreign exchange dealer from the
retail forex customer.
(b) Security deposits must be made in the form of cash or other
financial instruments that comply with the requirements specified in
Sec. 1.25 of this chapter.
(c) A futures commission merchant or retail foreign exchange dealer
is required to collect additional security deposits from a retail forex
customer, or liquidate the retail forex customer's positions, if the
amount of the retail forex customer's security deposits
[[Page 354]]
maintained with the futures commission merchant or retail foreign
exchange dealer are not sufficient to meet the requirements of this
section.
(d) A major currency pair security deposit percentage is only
applicable when both sides of a retail over-the-counter foreign exchange
transaction involve major currencies.
(e) Any registered futures association whose members serve as
counterparties to retail forex transaction shall designate which
currencies are ``major currencies'', and shall review, no less
frequently than annually, major currency designations and security
deposit requirements, and shall adjust the designations and requirements
as necessary.
Sec. 5.10 Risk assessment recordkeeping requirements
for retail foreign exchange dealers.
(a) Requirement to maintain and preserve information. (1) Each
retail foreign exchange dealer registered with the Commission pursuant
to section 2(c)(2)(B)(i)(II)(ff) of the Act shall prepare, maintain and
preserve the following information:
(i) An organizational chart which includes the retail foreign
exchange dealer 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 retail
foreign exchange dealer'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 retail foreign exchange
dealer, 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 retail foreign
exchange dealer's trading activities, including systems and policies for
supervising, monitoring, reporting and reviewing trading activities in
forex transactions, 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 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 retail
foreign exchange dealer 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 retail
foreign exchange dealer's organizational structure, which shall include
the retail foreign exchange dealer 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 retail foreign
exchange dealer's highest level Material Affiliated Person as part of
its internal financial reporting process. Any additional information
required to be filed under Sec. 5.11(a)(2)(iii) of this part 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
[[Page 355]]
Person within the retail foreign exchange dealer's organizational
structure, which shall include the retail foreign exchange dealer 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 retail foreign exchange dealer's highest level Material Affiliated
Person as part of its internal financial reporting process. Any
additional information required to be filed under Sec. 5.11(a)(2)(iii)
shall also be maintained and preserved.
(2) The determination of whether an affiliated person of a retail
foreign exchange dealer 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 retail foreign exchange
dealer and the affiliated person;
(ii) The overall financing requirements of the retail foreign
exchange dealer and the affiliated person, and the degree, if any, to
which the retail foreign exchange dealer and the affiliated person are
financially dependent on each other;
(iii) The degree to which the retail foreign exchange dealer and the
affiliated person directly or indirectly engage in over-the-counter
transactions with each other;
(iv) The degree, if any, to which the retail foreign exchange dealer
or its customers rely on the affiliated person for operational support
or services in connection with the retail foreign exchange dealer's
business;
(v) The level of market, credit or other risk present in the
activities of the affiliated person; and
(vi) The extent to which the affiliated person has the authority or
the ability to cause a withdrawal of capital from the retail foreign
exchange dealer.
(3) For purposes of this section and Sec. 5.11 of this part, 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 of this
chapter.
(b) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. A retail
foreign exchange dealer shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(i), (iii) and (iv) of
this section with respect to a Material Affiliated Person if:
(1) The Material Affiliated Person is required to maintain and
preserve information pursuant to Sec. 240.17h-1T of this title, or such
other risk assessment regulations as the Securities and Exchange
Commission may adopt, and the retail foreign exchange dealer 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 the 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 retail foreign
exchange dealer 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
[[Page 356]]
(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 retail foreign exchange dealer 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)(1) Special provisions with respect to Material Affiliated
Persons subject to the supervision of a Foreign Regulatory Authority. A
retail foreign exchange dealer shall be deemed to be in compliance with
the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of
this section with respect to a Material Affiliated Person if such retail
foreign exchange dealer 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:
(i) The retail foreign exchange dealer 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
retail foreign exchange dealer, the Material Affiliated Person, the
foreign futures authority or other foreign regulatory authority from
providing such information to the Commission; or
(ii) 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 retail foreign exchange dealer's fiscal
year-end and which will allow the Commission to obtain the type of
information required herein.
(2) The retail foreign exchange dealer 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(26) of the Act.
(d) Exemptions. The Commission may exempt any retail foreign
exchange dealer 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 retail foreign exchange dealer 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 of this chapter. If such records are maintained at a place other
than the retail foreign exchange dealer'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 retail foreign
exchange dealer 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
[[Page 357]]
or at a records storage facility pursuant to the provisions of this
paragraph shall not relieve the retail foreign exchange dealer required
to maintain and preserve such records from any of its responsibilities
under this section or Sec. 5.11 of this part.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a retail foreign
exchange dealer concerning a Material Affiliated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. Each retail foreign exchange dealer who
is subject to the requirements of this section shall maintain and
preserve the information required by paragraphs (a)(1)(i) and (ii) of
this section commencing 60 calendar days after registration becomes
effective and the information required by paragraphs (a)(1)(iii) and
(iv) of this section commencing 105 calendar days following the first
fiscal year-end occurring after registration becomes effective.
[75 FR 55432, Sept. 10, 2010, as amended at 76 FR 56106, Sept. 12, 2011]
Sec. 5.11 Risk assessment reporting requirements for
retail foreign exchange dealers.
(a) Reporting requirements with respect to information required to
be maintained by Sec. 5.10 of this part. (1) Each retail foreign
exchange dealer registered with the Commission pursuant to Section
2(c)(2)(B)(i)(II)(ff) of the Act shall file the following with the
regional office of the Commission with which it files periodic financial
reports within 60 calendar days after the effective date of such
registration:
(i) A copy of the organizational chart maintained by the retail
foreign exchange dealer pursuant to Sec. 5.10(a)(l)(i) of this part.
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 retail foreign
exchange dealer pursuant to Sec. 5.10(a)(l)(ii) of this part. If the
retail foreign exchange dealer 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 retail foreign exchange dealer registered with the
Commission pursuant to section 2(c)(2)(B)(i)(II)(ff) of the Act 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 retail
foreign exchange dealer's organizational structure, which shall include
the retail foreign exchange dealer 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 retail foreign exchange dealer'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 retail foreign exchange dealer's
organizational structure, which shall include the retail foreign
exchange dealer 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
consolidated
[[Page 358]]
statements shall include appropriate explanatory notes. The
consolidating statements may be those prepared by the retail foreign
exchange dealer'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 retail foreign exchange dealer's organizational structure.
(3) For the purposes of this section, the term Material Affiliated
Person shall have the meaning used in Sec. 5.10 of this part.
(4) The reports required to be filed pursuant to paragraphs (a)(1)
and (2) of this section shall be considered filed when received by the
regional office of the Commission with whom the retail foreign exchange
dealer files financial reports pursuant to Sec. 5.12 of this part.
(b) Exemptions. The Commission may exempt any retail foreign
exchange dealer 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.
(c) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. (1) In the
case of a Material Affiliated Person that is required to maintain and
preserve information pursuant to Sec. 240.17h-1T of this title, or such
other risk assessment regulations as the Securities and Exchange
Commission may adopt, the retail foreign exchange dealer 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
retail foreign exchange dealer 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 the 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 retail foreign
exchange dealer 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 retail foreign exchange dealer or such
Material Affiliated Person maintains in accordance with Sec. 5.10 of
this part 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 retail foreign exchange dealer 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 retail foreign exchange dealer 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 retail
foreign exchange dealer or such Material Affiliated Person maintains in
accordance with Sec. 5.14 of this part 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 retail foreign exchange
[[Page 359]]
dealer 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 of this chapter, 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 retail foreign exchange dealer 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 retail
foreign exchange dealer pursuant to this section shall not constitute an
admission for any purpose that a Material Affiliated Person is otherwise
subject to the Act.
(d) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A retail
foreign exchange dealer 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 if such retail foreign exchange dealer
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 retail foreign exchange dealer 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
retail foreign exchange dealer, 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 retail foreign exchange dealer's fiscal
year-end and which will allow the Commission to obtain the type of
information required herein. The retail foreign exchange dealer 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(26)
of the Act.
(e) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a retail foreign
exchange dealer concerning a Material Associated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(f) Implementation schedule. Each retail foreign exchange dealer who
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, and the information
required by paragraph (a)(2) of this section within 105 calendar days
after registration is granted.
[75 FR 55432, Sept. 10, 2010, as amended at 76 FR 56106, Sept. 12, 2011]
Sec. 5.12 Financial reports of retail foreign exchange dealers.
(a)(1) Each person who files an application for registration as a
retail foreign exchange dealer with the National Futures Association
shall submit, concurrently with the filing of such application, either:
(i) A Form 1-FR-FCM certified by an independent public accountant as
of a date not more than 45 days prior to the date on which such report
is filed; or
(ii) 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
[[Page 360]]
and a Form 1-FR-FCM certified by an independent public accountant as of
a date not more than one year prior to the date on which such report is
filed.
(2) 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.
(3) The provisions of paragraph (a)(1) of this section do not apply
to any person succeeding to and continuing the business of another
retail foreign exchange dealer.
(b)(1) Each person registered as a retail foreign exchange dealer
must file a Form 1-FR-FCM as of the close of business each month. Each
Form 1-FR must be filed no later than 17 business days after the date
for which the report is made.
(2) In addition to the monthly financial reports required by
paragraph (b)(1) of this section, each person registered as a retail
foreign exchange dealer must file a Form 1-FR-FCM as of the close of its
fiscal year, which must be certified by an independent public accountant
and must be filed no later than 90 days after the close of the retail
foreign exchange dealer's fiscal year.
(3) A Form 1-FR-FCM required to be certified by an independent
public accountant which is filed by a retail foreign exchange dealer
must be filed in paper form and may not be filed electronically with the
Commission. A Form 1-FR-FCM required to be certified by an independent
public accountant which is filed by an applicant for registration as a
retail foreign exchange dealer with the National Futures Association
must be filed electronically in accordance with electronic filing
procedures established by the National Futures Association, however a
paper copy of any such filing with the original manually signed
certification must be maintained by the applicant for registration as a
retail foreign exchange dealer in accordance with Sec. 1.31.
(c) Each Form 1-FR-FCM required by the provisions of paragraphs
(a)(1) and (b)(2) of this section to be certified by an independent
public accountant must be certified in accordance with Sec. 1.16 of
this chapter, and must be accompanied by the accountant's report on
material inadequacies in accordance with the provisions of Sec.
1.16(c)(5) of this chapter. In all other respects, the independent
public accountant shall act in accordance with the provisions of Sec.
1.16 (except paragraph (f)) of this chapter: Provided, however, that the
term ``Sec. 5.7'' shall be substituted for the term ``Sec. 1.17,'' and
the term ``retail foreign exchange dealer'' shall be substituted for the
term ``futures commission merchant.''
(d) Upon receiving written notice from any representative of the
Commission, National Futures Association, or any self-regulatory
organization of which the firm is a member, a retail foreign exchange
dealer or applicant for such registration, must, monthly or at such
times as specified, furnish the Commission, National Futures
Association, or self-regulatory organization a Form 1-FR-FCM or such
other financial information requested in the written notice. Each such
Form 1-FR-FCM or such other information must be furnished within the
time period specified in the written notice, and in accordance with the
provisions of paragraph (i) of this section.
(e)(1) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 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) A statement of income (loss) 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 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;
(iv) A statement of changes in liabilities subordinated to claims of
general creditors for the period between the
[[Page 361]]
date of the most recent statement of financial condition filed with the
Commission and the date for which the report is made;
(v) A statement of the computation of the minimum capital
requirements pursuant to Sec. 5.7 of this part as of the date for which
the report is made; and
(vi) In addition to the information expressly required, such further
material information as may be necessary to make the required statements
and schedules not misleading.
(2) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 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) 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. 5.7 of this part as of the date for which
the report is made;
(iv) Appropriate footnote disclosures;
(v) A reconciliation, including appropriate explanations, of the
statement of the computation of the minimum capital requirements
pursuant to Sec. 5.7 of this part, in the certified Form 1-FR-FCM with
the applicant's or registrant's corresponding uncertified most recent
Form 1-FR-FCM filing when material differences exist or, if no material
differences exist, a statement so indicating; and
(vi) 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 (e)(2)(i) and (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 paragraph (b)(2) of this
section or accompanying the application for registration pursuant to
paragraph (a)(1) of 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-FCM 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. 5.7 of this part.
Such reconciliation must be certified by an independent public
accountant in accordance with Sec. 1.16 of this chapter.
(4) Attached to each Form 1-FR-FCM 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-FCM is true and correct. The individual making such
oath or affirmation must be: 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.
(f) 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-FCM pursuant to
paragraph (a)(1) of this section, but in no event may such fiscal year
end more than one year from the date of the Form 1-FR-FCM filed pursuant
to paragraph (a)(1) 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
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otherwise, unless a change in such fiscal year has been approved
pursuant to this paragraph (f)(2).
(ii) A registrant 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 registrant's designated self-
regulatory organization. The registrant must file immediately with the
Commission a copy of any notice it receives from its 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.
(g) In the event a retail foreign exchange dealer or applicant for
registration as a retail foreign exchange dealer finds that it cannot
file its Form 1-FR-FCM for any period within the time specified in
paragraph (b)(1) or (2) of this section without substantial undue
hardship, it may request approval for an extension of time by filing an
application for an extension of time with, in the case of a registrant,
its designated self-regulatory organization, or, in the case of an
applicant, the National Futures Association. The registrant or applicant
also must file a copy of its application for an extension of time with
the Commission. The application shall be approved or denied in writing
by the National Futures Association or designated self-regulatory
organization, as applicable. The registrant or applicant must file
immediately with the Commission a copy of any notice it receives
approving or denying the request for extension of time. A written notice
of approval shall become effective upon the filing by the registrant or
applicant of a copy with the Commission, and a written notice of denial
shall be effective as of the date of the notice.
(h) Public availability of reports. (1) Forms 1-FR-FCM filed
pursuant to 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 (i)(2) of this
section.
(2) The following information in Forms 1-FR-FCM 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.
5.7 of this chapter; the amount of its adjusted net capital in excess of
its minimum net capital requirement; and the amount of the retail forex
obligation owed to its retail forex customers; and
(ii) The Statement of Financial Condition and the opinion of the
independent public accountant in the certified annual financial reports
of retail foreign exchange dealers.
(3) All information that is exempt from mandatory public disclosure
under paragraph (h)(1) of this section will, however, be available for
official use by any official or employee of the United States or any
State, by the National Futures Association or any other self-regulatory
organization of which the person filing such report is a member, and by
any other person to whom the Commission believes disclosure of such
information is in the public interest. Nothing in this paragraph (h)
will limit the authority of any self-regulatory organization to request
or receive any information relative to its members' financial condition.
(i)(1) In the case of an applicant, all filings or other notices
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 applicant's principal place of business is located and by
the National Futures Association. In the case of a registrant, all
filings or other notices 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 registrant's designated self-regulatory
organization. Any copy that under paragraph (f)(2) or (g) of this
section is required to be filed with the Commission shall be filed with
the regional office of the Commission with
[[Page 363]]
jurisdiction over the state in which the registrant's principal place of
business is located.
(2) All filings or other notices filed pursuant to this section
which need not be certified in accordance with Sec. 1.16 may be
submitted to the Commission in electronic form using a 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 retail
foreign exchange dealer 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. 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. 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
paragraph (e)(4) of this section.
Sec. 5.13 Reporting to customers of retail foreign exchange
dealers and futures commission merchants; monthly and
confirmation statements.
(a) Monthly statements. Each retail foreign exchange dealer or
futures commission merchant must promptly furnish in writing to each
retail forex 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 retail forex customer:
(i) The open retail forex transactions with prices at which
acquired;
(ii) The net unrealized profits or losses in all open retail forex
transactions marked to the market; and
(iii) Any money, securities or other property carried with the
retail foreign exchange dealer or futures commission merchant; and
(iv) A detailed accounting of all financial charges and credits to
such retail forex accounts during the monthly reporting period,
including money, securities or property received from or disbursed to
such customer and realized profits and losses; and
(2) For each retail forex customer engaging in forex options
transactions:
(i) All forex options purchased, sold, exercised, or expired during
the monthly reporting period, identified by underlying retail forex
transaction or underlying currency, strike price, transaction date, and
expiration date;
(ii) The open forex option positions carried for such customer as of
the end of the monthly reporting period, identified by underlying retail
forex transaction or underlying currency, strike price, transaction
date, and expiration date;
(iii) All open forex option positions marked to the market and the
amount each position is in the money, if any;
(iv) Any money, securities or other property carried with the retail
foreign exchange dealer or futures commission merchant; and
(v) A detailed accounting of all financial charges and credits to
such retail forex account(s) during the monthly reporting period,
including money, securities and property received from or disbursed to
such customer, premiums charged and received, and realized profits and
losses.
(b) Confirmation statement. Each retail foreign exchange dealer or
futures commission merchant must, not later than the next business day
after any retail forex or forex option transaction, furnish:
(1) To each retail forex customer, a written confirmation of each
retail forex transaction caused to be executed by it for the customer,
including offsetting transactions executed during the same business day
and the rollover of
[[Page 364]]
an open retail forex transaction to the next business day.
(2) To each retail forex customer engaging in forex option
transactions, a written confirmation of each forex option transaction,
containing at least the following information:
(i) The retail forex 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 forex
option transaction;
(iii) The strike price;
(iv) The underlying retail forex transaction or underlying currency;
(v) The final exercise date of the forex option purchased or sold;
and
(vi) The date the forex option transaction was executed.
(3) To each retail forex customer engaging in forex option
transactions, upon the expiration or exercise of any forex option, a
written confirmation statement thereof, which statement shall include
the date of such occurrence, a description of the forex option involved,
and, in the case of exercise, the details of the retail forex or
physical currency position which resulted therefrom including, if
applicable, the final trading date of the retail forex transaction
underlying the option.
(4) Notwithstanding the provisions of paragraphs (b)(1) through (3)
of this section, a retail forex transaction or forex option transaction
that is caused to be executed for a pooled investment vehicle that
engages in retail forex transactions need be confirmed only to the
operator of such pooled investment vehicle.
(c) Controlled accounts. With respect to any account controlled by
any person other than the retail forex customer or forex option customer
for whom such account is carried, each retail foreign exchange dealer or
futures commission merchant shall promptly furnish in writing to such
other person the information required by paragraphs (a) and (b) of this
section.
(d) Recordkeeping. Each retail foreign exchange dealer or futures
commission merchant shall retain, in accordance with Sec. 1.31 of this
chapter, a copy of each monthly statement and confirmation required by
this section.
(e) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the retail foreign exchange dealer or futures commission
merchant is providing the statement was introduced by an introducing
broker and the names of the retail foreign exchange dealer or futures
commission merchant and introducing broker.
(f) Electronic transmission of statements. (1) The statements
required by this section may be furnished to a retail forex customer by
means of electronic media if the retail forex customer so consents,
Provided, however, that a retail foreign exchange dealer or 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, and provided, further, that a retail foreign exchange dealer
or futures commission merchant must obtain the retail forex customer's
signed consent acknowledging such disclosure prior to the transmission
of any statement by means of electronic media.
(2) Any statement required to be furnished to a person other than a
retail forex customer in accordance with paragraph (f) of this section
may be furnished by electronic media.
(3) A retail foreign exchange dealer or futures commission merchant
who furnishes statements to a retail forex customer by means of
electronic media must retain a daily confirmation statement for such
retail forex customer as of the end of the trading session, reflecting
all transactions made during that session for the customer, in
accordance with Sec. 1.31 of this chapter.
(g) Combination with other statements. Any futures commission
merchant required to deliver statements to retail forex customers in
accordance with Sec. 1.33 of this chapter may combine into
[[Page 365]]
one monthly statement or confirmation statement, as the case may be, the
information required by this section and the information required by
Sec. 1.33, provided that retail forex account information is separately
identified from any other trading or account activity of the retail
forex customer.
Sec. 5.14 Records to be kept by retail foreign exchange
dealers and futures commission merchants.
(a) No person shall be registered as a retail foreign exchange
dealer 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
categories that are in accord with generally accepted accounting
principles as applicable. Each person so registered shall prepare and
keep current such records.
(b) Each applicant or registrant must make and keep as a record in
accordance with Sec. 1.31 of this chapter formal computations of its
adjusted net capital and of its minimum financial requirements pursuant
to Sec. 1.17 or Sec. 5.7 of this chapter, or the requirements of the
designated self-regulatory organization to which it is subject, as
applicable, 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.
Sec. 5.15 Unlawful representations.
It shall be unlawful for any person registered pursuant to the
requirements of this part to represent or imply in any manner whatsoever
that such person has been sponsored, recommended or approved, or that
its abilities or qualifications have been reviewed or evaluated, by the
Commission, the Federal government or any agency thereof.
Sec. 5.16 Prohibition of guarantees against loss.
(a) No retail foreign exchange dealer, futures commission merchant
or introducing broker may in any way represent that it will, with
respect to any retail foreign exchange transaction in any account
carried by a retail foreign exchange dealer or 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 security deposits, margin, or
other deposits as established for retail forex customers.
(b) No person may in any way represent that a retail foreign
exchange dealer, futures commission merchant or introducing broker will
engage in any of the acts or practices described in paragraph (a) of
this section.
(c) This section shall not be construed to prevent a retail foreign
exchange dealer, futures commission merchant or introducing broker from
assuming or sharing in the losses resulting from an error or mishandling
of an order.
(d) This section shall not affect any guarantee entered into prior
to October 18, 2010, but this section shall apply to any extension,
modification or renewal thereof entered into after such date.
Sec. 5.17 Authorization to trade.
No retail foreign exchange dealer, futures commission merchant,
introducing broker or any of their associated persons may directly or
indirectly effect a retail forex transaction for the account of any
customer unless before the transaction the customer, or person
designated by the customer to control the account specifically
authorized
[[Page 366]]
the retail foreign exchange dealer, futures commission merchant,
introducing broker or any of their associated persons to effect the
transaction. A transaction is ``specifically authorized'' if the
customer or person designated by the customer to control the account
specifies:
(a) The precise retail forex transaction to be effected;
(b) The exact amount of the foreign currency to be purchased or
sold; and
(c) In the case of an option, the identity of the foreign currency
or contract that underlies the option.
Sec. 5.18 Trading and operational standards.
(a) For purposes of this section:
(1) The term retail forex counterparty includes, as appropriate:
(i) A retail foreign exchange dealer as defined in Sec. 5.1 of this
part;
(ii) A futures commission merchant as defined in section 1a(28) of
the Act; and
(iii) An affiliated person of a futures commission merchant as
defined in Sec. 5.1 of this part.
(2) The term related person when used in reference to a retail forex
counterparty means any general partner, officer, director, owner of more
than ten percent of the equity interest, associated person or employee
of the retail forex counterparty, and any relative or spouse of any of
the foregoing persons, or any relative of such spouse, who shares the
same home as any of the foregoing persons.
(b) Prior to engaging in a retail forex transaction, each retail
forex counterparty shall, at a minimum, establish and enforce internal
rules, procedures and controls to:
(1) Ensure, to the extent possible, that each order received from a
retail forex customer which order is executable at or near the price
that the retail forex counterparty has quoted to the customer is entered
for execution before any order in any retail forex transaction for any
proprietary account, any other account in which a related person of the
retail forex counterparty has an interest, or any account for which such
a related person may originate orders without the prior specific consent
of the account owner (if such related person has gained knowledge of the
retail forex customer's order prior to the transmission of an order for
a proprietary account), an account in which such a related person has an
interest, or an account in which such a related person may originate
orders without the prior specific consent of the account owner; and
(2) Prevent related persons of forex counterparties from placing
orders, directly or indirectly, with another person in a manner designed
to circumvent the provisions of paragraph (b)(1) of this section;
(3) Fairly and objectively establish settlement prices for retail
forex transactions; and
(4) Record and maintain essential information regarding customer
orders and account activity, and to provide such information to
customers upon request. Such information shall include:
(i) Transaction records for the customer's account, including:
(A) The date and time each order is received by the retail forex
counterparty;
(B) The price at which each order is placed, or, in the case of an
option, the premium paid
(C) If the transaction was entered into by means of a trading
platform, the price quoted on the trading platform when the order was
placed, or, in the case of an option, the premium quoted;
(D) The customer account identification information;
(E) The currency pair;
(F) The size of the transaction;
(G) Whether the order was a buy or sell order;
(H) The type of order, if the order was not a market order;
(I) If a trading platform is used, the date and time the order is
transmitted to the trading platform;
(J) If a trading platform is used, the date and time the order is
executed;
(K) The size and price at which the order is executed, or in the
case of an option, the amount of the premium paid for each option
purchased, or the amount credited for each option sold; and
(L) For options, whether the option is a put or call, the strike
price, and expiration date.
[[Page 367]]
(ii) Account records that contain the following information:
(A) The funds in the account, net of any commissions and fees;
(B) The net profits and losses on open trades; and
(C) The funds in the account plus or minus the net profits and
losses on open trades. (In the case of open option positions, the
account balance should be adjusted for the net option value);
(iii) If a trading platform is used, daily logs showing each price
change on the platform, the time of the change to the nearest second,
and the trading volume at that time and price; and
(iv) Any method or algorithm used to determine the bid or asked
price for any retail forex transaction or the prices at which customer
orders are executed, including, but not limited to, any markups, fees,
commissions or other items which affect the profitability or risk of
loss of a retail forex customer's transaction.
(c) No retail forex counterparty shall disclose that an order of
another person is being held by the retail forex counterparty, unless
such disclosure is necessary to the effective execution of such order or
is made at the request of an authorized representative of the
Commission, or a futures association registered with the Commission
pursuant to section 17 of the Act.
(d) No retail forex counterparty shall knowingly handle the account
of any related person of another retail forex counterparty unless it:
(1) Receives written authorization from a person designated by such
other retail forex counterparty with responsibility for the surveillance
over such account pursuant to paragraph (b)(2) of this section;
(2) Prepares immediately upon receipt of an order for such account a
written record of such order, including the account identification and
order number, and records thereon to the nearest minute, by time-stamp
or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to such other retail forex
counterparty copies of all statements for such account and of all
written records prepared upon the receipt of orders for such account
pursuant to paragraph (b)(2) of this section.
(e) No related person of a retail forex counterparty shall have an
account, directly or indirectly, with another retail forex counterparty
unless:
(1) It receives written authorization to maintain such an account
from a person designated by the retail forex counterparty of which it is
a related person with responsibility for the surveillance over such
account pursuant to paragraph (b)(2) of this section; and
(2) Copies of all statements for such account and of all written
records prepared by such other retail forex counterparty upon receipt of
orders for such account pursuant to paragraph (d)(2) of this section are
transmitted on a regular basis to the retail forex counterparty of which
it is a related person.
(f) No retail forex counterparty shall:
(1) Enter into a retail forex transaction, to be executed pursuant
to a market or limit order at a price that is not at or near the price
at which other retail forex customers, during that same time period,
have executed retail forex transactions with the retail forex
counterparty; Provided, however, that this paragraph (f)(1) shall not
prohibit such practice if done in accordance with the rules of a
registered futures association, and of which such retail foreign
exchange dealer, futures commission merchant or affiliated person of a
futures commission merchant is a member;
(2) Adjust or alter prices for a retail forex transaction after the
transaction has been confirmed to the retail forex customer; Provided,
however, that this paragraph (f)(2) shall not prohibit such practice if
in accordance with the rules of a registered futures association, and of
which such retail foreign exchange dealer, futures commission merchant
or affiliated person of a futures commission merchant is a member;
(3)(i) Provide a retail forex customer a new bid price for a retail
forex transaction that is higher than its previous bid without providing
a new asked price that is also higher than its previous asked price by a
similar amount;
(ii) Provide a retail forex customer a new bid price for a retail
forex transaction that is lower than its previous
[[Page 368]]
bid without providing a new asked price that is also lower than its
previous asked price by a similar amount; or
(4) Establish a new position for a retail forex customer (except one
that offsets an existing position for that retail forex customer) where
the retail forex counterparty holds outstanding orders of other retail
forex customers for the same currency pair at a comparable price.
(g)(1) Each retail forex counterparty and each CPO, CTA and IB
subject to this part 5 shall maintain a record of all communications
received by such person concerning facts giving rise to possible
violations of the Act, rules, regulations or orders thereunder, related
to their retail forex business. The record shall contain the name of the
complainant, if provided, the date of the communication, the agreement,
contract or transaction, the substance of the communication, and the
name of the person who received the communication.
(2) Each retail forex counterparty and each CPO, CTA and IB subject
to this part 5 shall provide to the Division of Enforcement of the
Commission, electronically, a copy of the record of each communication
received pursuant to paragraph (g)(1) of this section. Such copy shall
be provided to the Division of Enforcement of the Commission no later
than 30 calendar days after the communication is received: Provided,
however, that in the case of a communication concerning facts giving
rise to possible fraud under the Act or Commission regulations, such
copy shall be provided to the Division of Enforcement of the Commission
within three business days after the communication is received.
(h) An introducing broker as defined in Sec. 5.1(f)(1) of this
part, applicant for registration as an introducing broker as defined in
Sec. 5.1(f)(1) of this part, or person succeeding to and continuing the
business of another introducing broker as defined in Sec. 5.1(f)(1) of
this part must comply with all provisions applicable to an introducing
broker under this chapter; Provided, however, that an introducing broker
operating pursuant to, or an applicant for registration as an
introducing broker who has filed concurrently with its application for
registration, a guarantee agreement meeting the requirements of Sec.
1.10(j) of this chapter is not subject to the minimum capital and
related financial reporting requirements of Sec. Sec. 1.10, 1.12 and
1.17 of this chapter.
(i)(1) Each retail forex counterparty shall prepare and maintain on
a quarterly basis (calendar quarter) a calculation of the percentage of
nondiscretionary retail forex customer accounts open for any period of
time during the quarter that were profitable, and the percentage of such
accounts that were not profitable. In calculating whether a retail forex
account was profitable or not profitable during the quarter, the FCM or
RFED must compute the realized and unrealized gains and/or losses on all
retail forex transactions carried in the retail forex account at any
time during the quarter, and subtract all fees, commissions, and any
other charges posted to the retail forex account during the quarter, and
add any interest income and other income or rebates credited to the
retail forex account during the quarter. All deposits and/or withdrawals
of funds made by a retail forex customer during the quarter must be
excluded from the computation of whether the retail forex account was
profitable or not profitable during the quarter. Computations that
result in a zero or negative number shall be considered a retail forex
account that was not profitable. Computations that result in a positive
number shall be considered a retail forex account that was profitable.
RFEDs and FCMs shall maintain such calculations along with data
supporting such calculations for five years in accordance with Sec.
1.31.
(2) In calculating its percentages of nondiscretionary retail forex
customer accounts that were profitable or not profitable, the retail
forex counterparty may only use those retail forex accounts, as defined
in Sec. 5.1(i) of this part, that are nondiscretionary accounts;
provided, that the retail forex account is not a proprietary account, as
defined in paragraph (i)(3) of this section.
[[Page 369]]
(3) Proprietary account for this section means a retail forex
account carried on the books of a retail foreign exchange dealer or a
futures commission merchant for one of the following persons, or of
which ten percent or more is owned by one of the following persons, or
of which an aggregate of ten percent or more of which is owned by more
than one of the following persons:
(i) Such retail foreign exchange dealer or futures commission
merchant itself;
(ii) If the retail foreign exchange dealer or futures commission
merchant is a partnership, a general partner in such partnership;
(iii) If the retail foreign exchange dealer or futures commission
merchant is 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 retail forex transactions of such partnership,
(C) The keeping of records pertaining to retail forex transactions,
or
(D) The signing or co-signing of checks or drafts on behalf of such
partnership;
(iv) If the retail foreign exchange dealer or futures commission
merchant is 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 retail foreign exchange dealer or futures
commission merchant whose duties include:
(A) The management of the business of such retail foreign exchange
dealer or futures commission merchant or any part thereof,
(B) The handling of retail forex transactions of such retail foreign
exchange dealer or futures commission merchant,
(C) The keeping of records pertaining to retail forex transactions
of such retail foreign exchange dealer or futures commission merchant,
or
(D) The signing or co-signing of checks or drafts on behalf of such
retail foreign exchange dealer or futures commission merchant;
(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
retail foreign exchange dealer or futures commission merchant; or
(viii) A business affiliate that, directly or indirectly is
controlled by or is under common control with, such retail foreign
exchange dealer or futures commission merchant.
(j) Each retail forex counterparty shall designate one or more
principals to serve as a chief compliance officer(s). The chief
compliance officer(s) shall certify to the Commission and a registered
national futures association annually that the retail forex counterparty
has in place processes to establish, maintain, review, modify and test
policies and procedures reasonably designed to achieve compliance with
the Act, rules, regulations and orders thereunder. The certification
shall include a statement that the counterparty has in place compliance
processes, and that the chief compliance officer(s) has apprised the
chief executive officer of the compliance efforts to date and identify
and address significant compliance problems and plans to address those
problems.
[75 FR 55432, Sept. 10, 2010, as amended at 76 FR 56106, Sept. 12, 2011]
Sec. 5.19 Pending legal proceedings.
(a) Every retail foreign exchange dealer or futures commission
merchant and each CPO, CTA or IB subject to this part 5 shall submit 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 the Commission may thereafter
request filed in any material legal proceeding to which the retail
foreign exchange dealer, futures commission merchant, CPO, CTA or IB is
a party or to which its property or assets is subject with respect to
retail forex transactions.
(b) Every retail foreign exchange dealer or futures commission
merchant and each CPO, CTA or IB subject to this part 5 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
[[Page 370]]
thereafter request filed in any material legal proceeding instituted
against any person who is a principal of the retail foreign exchange
dealer, futures commission merchant CPO, CTA or IB (as the term
``principal'' is defined in Sec. 3.1(a) of this chapter) arising from
conduct in such person's capacity as a principal of the retail foreign
exchange dealer, futures commission merchant, CPO, CTA or IB and
alleging violations, with regard to retail forex transactions, 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.
(c) 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: Director, Division of Enforcement. All documents required
by this section to be submitted to the Commission as to matters pending
on October 18, 2010 shall be mailed to the Commission within 45 days of
that effective date. Thereafter, all decisions and notices of appeal
required to be submitted by retail foreign exchange dealers, futures
commission merchants, CPOs, CTAs or IBs shall be mailed within 10 days
of the filing or receipt by the retail foreign exchange dealer or
futures commission merchant of the relevant notice of appeal. For
purposes of paragraph (a) and (b) of this section, 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.
Sec. 5.20 Special calls for account and transaction information.
(a) Preparation and transmission of information upon special call.
All information required upon special call shall be prepared in such
form and manner and in accordance with such instructions, and shall be
transmitted at such time and to such office of the Commission, as may be
specified in the call.
(b) Special calls for information on controlled accounts from retail
foreign exchange dealers, futures commission merchants and introducing
brokers. Upon call by the Commission, each retail foreign exchange
dealer, futures commission merchant and introducing broker shall file
with the Commission the names and addresses of all persons who, by power
of attorney or otherwise, exercise trading control over any customer's
account in retail forex transactions.
(c) Special calls for information on open transactions in accounts
carried or introduced by retail foreign exchange dealers, futures
commission merchants, and introducing brokers. Upon special call by the
Commission for information relating to retail forex transactions held or
introduced on the dates specified in the call, each retail foreign
exchange dealer, futures commission merchant, or introducing broker
shall furnish to the Commission the following information concerning
accounts of traders owning or controlling such retail forex transaction
positions, as may be specified in the call:
(1) The name, address, and telephone number of the person for whom
each account is carried;
(2) The principal business or occupation of the person for whom each
account is introduced or carried, as specified in the call;
(3) The name, address and principal business or occupation of any
person who controls the trading of each account;
(4) The name and address of any person having a financial interest
of ten percent or more in each account;
(5) The number of open retail forex transaction positions introduced
or carried in each account, as specified in the call; and
(6) The total number of retail forex transactions against which
delivery has been made.
(d) Delegation of authority to the Director of the Division of Swap
Dealer and Intermediary Oversight and the Director of the Division of
Market Oversight. The Commission hereby delegates, until the Commission
orders otherwise, to the Director of the Division of Swap Dealer
[[Page 371]]
and Intermediary Oversight and the Director of the Division of Market
Oversight, or to the respective Director's designees, the authority set
forth in this section to make special calls for information on
controlled accounts from retail foreign exchange dealers, futures
commission merchants and from introducing brokers, and to make special
calls for information on open contracts in accounts carried or
introduced by futures commission merchants, introducing brokers, and
foreign brokers. Either Director may submit to the Commission for its
consideration any matter that has been delegated pursuant to this
section. Nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising the authority delegated in
this section to the Directors.
[75 FR 55432, Sept. 10, 2010, as amended at 78 FR 22419, Apr. 16, 2013]
Sec. 5.21 Supervision.
Each Commission registrant subject to this part 5, except an
associated person who has no supervisory duties, must diligently
supervise the handling by its partners, officers, employees and agents
(or persons occupying a similar status or performing a similar function)
of all retail forex accounts carried, operated, advised or introduced by
the registrant and all other activities of its partners, officers,
employees and agents (or persons occupying a similar status or
performing a similar function) relating to its business as a Commission
registrant.
Sec. 5.22 Registered futures association membership.
(a) Each person registered as a retail foreign exchange dealer must
become and remain a member of at least one futures association that is
registered under section 17 of the Act and that provides for the
membership therein of such retail foreign exchange dealer.
(b) Each person required to register as:
(1) An introducing broker, because the person solicits or accepts
orders for retail forex transactions;
(2) A commodity pool operator because the person operates, or
solicits funds, securities, or property for, a pooled investment vehicle
that engages in retail forex transactions; or
(3) A commodity trading advisor because the person exercises
discretionary trading authority, or obtains written authorization to
exercise discretionary trading authority over, an account in connection
with retail forex transactions, must become and remain a member of at
least one futures association that is registered under section 17 of the
Act and that provides for the membership therein of such person.
Sec. 5.23 Notice of bulk transfers and bulk liquidations.
(a) Notice and disclosure to retail forex customers of a bulk
transfer. (1) A retail foreign exchange dealer, futures commission
merchant or introducing broker must obtain the written prior and
specific consent of its retail forex customer to the assignment of any
position or transfer of any account of the retail forex customer to
another retail foreign exchange dealer, futures commission merchant or
introducing broker, unless made at the retail forex customer's request.
(2) Absent a request of the retail forex customer or the consent
described in paragraph (a)(1) of this section, assignments of positions
and transfers of accounts of retail forex customers may be permitted
under rules of the retail forex dealer's, futures commission merchant's,
or introducing broker's designated self-regulatory organization that
establish notice and other requirements with respect to the assignment
of positions and transfers of accounts of retail forex customers. If
such rules permit implied consent as a result of the failure of the
retail forex customer to object after having received notice of the
proposed assignment or transfer, such rules must provide that the notice
must include a statement that the retail forex customer is not required
to accept the proposed assignment or transfer and may direct the
transferor firm to liquidate the positions of the retail forex customer
or transfer the account to a firm of the retail forex customer's
selection.
(3) For assignments and transfers made under this section, other
than at the retail forex customer's request, the
[[Page 372]]
transferee retail foreign exchange dealer, futures commission merchant
or introducing broker must provide to the retail forex customer the risk
disclosure statements and forms of acknowledgment required by part 5 of
this chapter and receive the required signed acknowledgments within
sixty days of such assignments or transfers. This requirement shall not
apply:
(i) If the transferee retail foreign exchange dealer, futures
commission merchant or introducing broker has clear written evidence
that the retail forex customer has received and acknowledged receipt of
the required disclosure statements; or
(ii) If the transfer of accounts is made from one introducing broker
to another introducing broker guaranteed by the same retail foreign
exchange dealer or futures commission merchant pursuant to a guarantee
agreement in accordance with the requirements of Sec. 1.10(j) of this
chapter and such retail foreign exchange dealer or futures commission
merchant maintains the relevant acknowledgments required by part 5 of
this chapter.
(b) Notice to the Commission. Each retail foreign exchange dealer,
futures commission merchant or introducing broker shall file with the
Commission prior notice of any transfer of accounts of any retail forex
customer that is not initiated at the request of the customer, where the
transfer involves 50 percent or more of the transferor's total number of
retail forex customer accounts.
(c) Contents of notice to the Commission. The notice required by
paragraph (b) of this section shall include:
(1) The name, principal business address and telephone number of the
transferor futures retail foreign exchange dealer, futures commission
merchant or introducing broker;
(2) The name, principal business address and telephone number of
each transferee retail foreign exchange dealer, futures commission
merchant or introducing broker;
(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 any notices to customers regarding the transfers; and
(6) A statement of the number of accounts to be transferred.
(d) Notice of the bulk liquidation of retail forex transactions. A
retail foreign exchange dealer or futures commission merchant may not
initiate the bulk liquidation of properly margined retail forex
transactions unless such liquidation complies with the rules and
procedures of the retail forex dealer's or futures commission merchant's
designated self-regulatory organization and the retail forex dealer or
futures commission merchant provides the Commission with prior written
notice of the liquidation.
(e) Contents of notice of bulk liquidation. The notice required by
paragraph (d) of this section shall include:
(1) The name, principal business address and telephone number of the
initiating retail foreign exchange dealer or futures commission
merchant;
(2) A brief statement of the reasons for the liquidation;
(3) A copy of any notices to customers regarding the liquidation;
and
(4) A statement of the number of accounts to be liquidated.
(f) Filing of notices. The notice required by paragraph (b) and (d)
of this section shall be filed five business days prior to the transfer
or liquidation of the retail forex transaction with the Deputy Director,
Compliance and Registration Section, Division of Swap Dealer 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.
(g) No effect on other obligations. The requirements of this section
shall not affect the obligations of a retail foreign exchange dealer,
futures commission merchant or introducing broker under the rules of a
self-regulatory organization or applicable customer account agreement
with respect to assignments of positions or transfers of accounts or
liquidation of positions.
(h) Corrective notice. If a proposed transfer is not completed in
accordance with the notice required to be filed by
[[Page 373]]
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.
[75 FR 55432, Sept. 10, 2010, as amended at 78 FR 22419, Apr. 16, 2013]
Sec. 5.24 Applicability of other parts of this chapter
Insofar as it is consistent with the requirements of this part, all
other provisions of this chapter that apply to a person shall apply to
such person as though such provisions were expressly set forth in this
part.
Sec. 5.25 Applicability of the Act.
Except as otherwise specified in this part and unless the context
otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k,
4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall
apply to retail forex transactions that are subject to the requirements
of this part as though such provisions were set forth herein and
included specific references to retail forex transactions and the
persons defined in Sec. 5.1 of this part.
PART 7_REGISTERED ENTITY RULES ALTERED OR SUPPLEMENTED BY THE
COMMISSION--Table of Contents
Authority: 7 U.S.C. 7a-2(c) and 12a(7), as amended by Title VII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.
111-203, 124 Stat. 1376 (2010).
Source: 77 FR 66332, Nov. 2, 2012, unless otherwise noted.
Subpart A_General Provisions
Sec. 7.1 Scope of rules.
This part sets forth registered entity rules altered or supplemented
by the Commission pursuant to section 8a(7) of the Act.
Subparts B-C [Reserved]
PART 8 [RESERVED]
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,
[[Page 374]]
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 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;
[[Page 375]]
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
Swap Dealer and Intermediary Oversight and Division of Clearing and Risk
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; 78 FR 22419, Apr. 16, 2013]
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 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
[[Page 376]]
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.
(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.
[[Page 377]]
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 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 to any
employee under the General Counsel's supervision as the General Counsel
may designate, 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
[[Page 378]]
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 his 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, or his designee, under this section.
[52 FR 25366, July 7, 1987, as amended at 60 FR 54801, Oct. 26, 1995; 64
FR 46270, Aug. 25, 1999; 78 FR 1145, Jan. 8, 2013]
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:
(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.
[[Page 379]]
(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
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
[[Page 380]]
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, 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
[[Page 381]]
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 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:
[[Page 382]]
(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 Swap Dealer and
Intermediary Oversight and Division of Clearing and Risk 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 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; 78
FR 22419, Apr. 16, 2013]
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
[[Page 383]]
Division of Market Oversight or the Division of Swap Dealer and
Intermediary Oversight and Division of Clearing and Risk 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 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
[[Page 384]]
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.
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.
[[Page 385]]
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, retail
foreign exchange dealer, 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 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; 75 FR 55449, Sept. 10, 2010]
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;
[[Page 386]]
(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 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. Faxes must be sent to (202) 418-
5532, and emails must be sent to [email protected]. The office is
open from 8:15 a.m. to 4:45 p.m., Eastern Time, Monday through Friday,
except on federal holidays.
[78 FR 12934, Feb. 26, 2013]
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
[[Page 387]]
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 part shall be conducted before a Presiding Officer who
is not an Administrative Law Judge, all provisions of this part or of
part 3 of this chapter 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;
(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.
[41 FR 2511, Jan. 16, 1976, as amended at 78 FR 12934, Feb. 26, 2013]
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
[[Page 388]]
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.
(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
[[Page 389]]
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 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)
When one party serves another with documents under these rules, a copy
must be served on all other parties as well as filed with
[[Page 390]]
the Proceedings Clerk. Similarly, when a person files a document with
the Office of Proceedings, the person must serve a copy of the document
on all other parties.
(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
an overnight or similar commercial delivery service;
(iii) Facsimile (``fax''); or
(iv) Electronic mail (``email'').
(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
email. Where a party effects service by mail or similar package delivery
service (but not by fax or email), the time within which the party being
served may respond shall be extended by five (5) days. Service by fax or
email shall be permitted at the discretion of the Presiding Officer,
with the parties' consent. Signed documents that are served by email
must be in PDF or other non-alterable form.
(3) Service by email or fax shall be permitted at the discretion of
the Presiding Officer, with the parties' consent. The consent of a party
must specify the email address or fax number to be used. Signed
documents that are served by email must be in PDF or other non-alterable
form.
(4) Service will be complete at the time of personal service; upon
deposit in the mail or with an overnight or similar commercial delivery
service of a properly addressed document for which all postage or
delivery service fees have been paid; or upon transmission by fax or
email. Service by email or by fax will not be effective if the party
making service learns that the attempted service did not reach the
person to be served.
(5) Where service is effected by mail or a commercial delivery
service (but not by fax or email), the time within which the person
being served may respond shall be extended by five (5) days.
(6) Statement of service. A statement of service shall be made by
filing with the Proceedings Clerk, simultaneously with the filing of the
document, a statement signed by the party making service or by his
attorney or representative that:
(i) Confirms that service has been made,
(ii) Identifies each person served,
(iii) Sets forth the date of service, and
(iv) Recites the manner of service.
(b) Service of decisions and orders. A copy of all rulings, opinions
and orders shall be served by the Proceedings Clerk on each of the
parties.
(c) Designation of person to receive service. The first page of the
first document filed in a proceeding by a party or participant must
include the name and contact information of a person authorized to
receive service on the party or participant's behalf. Contact
information must include a post office address and daytime telephone
number, and should also include the person's fax or email. 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 to receive service 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 first-class mail or a more expeditious
form of United States mail or by overnight or similar commercial
delivery service 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 emailing it to [email protected]
in accordance with the conditions set forth in paragraph (a)(2) of this
section.
(2) To be timely filed under this part, a document must be delivered
in person; mailed by first-class or a more expeditious form of United
States mail or by an overnight or similar commercial
[[Page 391]]
delivery service; or faxed or emailed to the Proceedings Clerk within
the time prescribed for filing.
(e) Formalities of filing. (1) An original of all documents shall be
filed with the Proceedings Clerk. If a party files a document with the
Proceedings Clerk by fax or email, they should not also send paper
copies.
(2) First page. The first page of all documents filed with the
Proceedings Clerk must include the Commission's name, the docket number,
the title of proceeding, the subject of the document, and the name of
the person on whose behalf the document is being filed. In subsequent
filings, the case title may be abbreviated by listing the name of the
first respondent, followed by ``et al.'' 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) Format. Documents must be legible and printed on normal white
paper of eight and one half by eleven inches. The typeface, margins, and
spacing of all documents presented for filing must meet the following
requirements: all text must be 12-point type or larger, except for text
in footnotes which may be 10-point type; all documents must have at
least one-inch margins on all sides; all text must be double-spaced,
except for headings, text in footnotes, or block quotations, which may
be single-spaced. Emailed documents must be in PDF or other non-
alterable form.
(4) Signatures. (i) The original of all documents must be signed by
the person filing the same or by his duly authorized agent or attorney.
(ii) Effect. The signature on any document of any person acting
either for himself or as attorney or agent for another constitutes
certification by him that:
(A) He has read the document and knows the contents thereof;
(B) If executed in any representative capacity, it was done with
full power and authority to do so;
(C) To the best of his knowledge, information, and belief, every
statement contained in the document is true and not misleading; and
(D) The document is not being interposed for delay.
(5) Length and form of briefs. All briefs of more than fifteen pages
shall include an index and a table of cases and other authorities cited.
No brief shall exceed 50 pages in length without prior permission of the
Presiding Officer or the Commission.
(f) 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; 78 FR 12935, Feb. 26, 2013]
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
[[Page 392]]
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 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]
Sec. 10.24 Amendments and supplemental pleadings.
(a) Complaint and notice of hearing. The Commission may, at any
time, amend the complaint and notice of hearing in any proceeding. If
the Commission so amends the complaint and notice of hearing, the
Administrative Law Judge shall adjust the scheduling of the proceeding
to the extent necessary to avoid any prejudice to any of the parties to
the proceeding. Upon motion to the Administrative Law Judge and with
notice to all other parties and the Commission, the Division of
Enforcement may amend a complaint to correct typographical and clerical
errors or to make other technical, non-substantive revisions within the
scope of the original complaint.
(b) Other pleadings. Except for the complaint and notice of hearing,
a party may amend any pleading once as a matter of course at any time
before a responsive pleading is served or, if the pleading is one to
which no responsive pleading is permitted, he may amend it within 20
days after it is served. Otherwise a party may amend a pleading only by
leave of the Administrative
[[Page 393]]
Law Judge, which shall be freely given when justice so requires.
(c) Response to amended pleadings. Any party may file a response to
any amendment to any pleading, including the complaint, within ten days
after the date of service upon him of the amendment or within the time
provided to respond to the original pleading, whichever is later.
(d) Pleadings to conform to the evidence. When issues not raised by
the pleadings but reasonably within the scope of a proceeding initiated
by the complaint are tried with the express or implied consent of the
parties, they shall be treated in all respects as if they had been
raised in the pleadings.
[41 FR 2511, Jan. 16, 1976, as amended at 63 FR 55791, Oct. 19, 1998]
Sec. 10.25 Form of pleadings.
All averments of claim and defense shall be made in consecutively
numbered paragraphs. The contents of each paragraph shall be limited as
far as practicable to a single set of circumstances.
Sec. 10.26 Motions and other papers.
(a) Presentation. An application for a form of relief not otherwise
specifically provided for in these rules shall be made by motion, filed
with the Proceedings Clerk, which shall be in writing unless made on the
record during a hearing. The motion shall state: (1) The relief sought;
(2) the basis for relief; and (3) the authority relied upon. If a motion
is supported by briefs, affidavits or other papers, they shall be served
and filed with the motion. All motions and applications, unless
otherwise provided in these rules, shall be directed to the
Administrative Law Judge prior to the filing of an initial decision in a
proceeding, and to the Commission after the initial decision has been
filed.
(b) Answers to motions. Any party may serve and file a written
response to a motion within ten days after service of the motion upon
him or within such longer or shorter period as established by these
rules or as the Administrative Law Judge or the Commission may direct.
The absence of a response to a motion may be considered by the
Administrative Law Judge or the Commission in deciding whether to grant
the requested relief.
(c) Motions for procedural orders. Motions for procedural orders,
including motions for extension of time, may be acted on at any time,
without awaiting a response thereto. Any party adversely affected by
such order may request reconsideration, vacation or modification of the
order.
(d) Dilatory motions. Repetitive or numerous motions dealing with
the same subject matter shall not be permitted.
(e) Review by the Commission. Interloctory review by the Commission
of a ruling on a motion by an Administrative Law Judge may be sought in
accordance with the procedures and under the circumstances set forth in
Sec. 10.101 of these rules.
[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995; 63
FR 55791, Oct. 19, 1998]
Subpart C_Parties and Limited Participation
Sec. 10.31 Parties.
The parties to an adjudicatory proceeding shall include the Division
of Enforcement, each respondent named in the complaint and each person
permitted to intervene pursuant to Sec. 10.33 of these rules. A
respondent shall cease to be a party or purposes of a pending proceeding
when (a) a default order is entered against him pursuant to Sec. 10.93;
or (b) the Commission accepts an offer of settlement pursuant to Sec.
10.108 of these rules.
Sec. 10.32 Substitution of parties.
Upon motion and for good cause shown the Administrative Law Judge
may order a substitution of parties.