[Federal Register Volume 59, Number 237 (Monday, December 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30443]


[[Page Unknown]]

[Federal Register: December 12, 1994]


                                                   VOL. 59, NO. 237

                                          Monday, December 12, 1994

COMMODITY FUTURES TRADING COMMISSION

 

Chicago Board of Trade's Proposed New Rules 424.00 and 480.14, 
and New Regulation 424.01--Member Firm Managed Futures Accounts, and 
Customer Agreements and Risk Disclosure Statement Relating Thereto

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed Chicago Board of Trade (``CBOT'') rules and 
regulation related to the offering and operation of certain retail 
customer managed futures accounts carried by CBOT member firms.

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SUMMARY: The CBOT has submitted two proposed new rules and one proposed 
new regulation1 pursuant to Section 5a(a)(12) of the Commodity 
Exchange Act (``Act''). The proposed new provisions would establish 
requirements for certain retail customer managed futures accounts 
carried by CBOT member firms (``Member Firms'').
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    \1\CBOT rules are approved by a full vote of the CBOT's 
membership. CBOT regulations are approved by the board of directors. 
Rules and Regulations have the same effect on members.
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    Acting pursuant to the authority delegated by Commission Regulation 
140.96, the Division of Trading and Markets has determined to publish 
the CBOT's proposal for public comment. The Division believes that 
publication of the CBOT's proposal is in the public interest and will 
assist the Commission in considering the views of interested persons.

DATES: Comments must be received on or before January 11, 1995.

FOR FURTHER INFORMATION CONTACT: France M.T. Maca, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
2033 K Street NW., Washington, DC 20581. Telephone: (202) 254-8955.

SUPPLEMENTARY INFORMATION:

I. Description of Proposed Rules

    By letter dated August 8, 1994 (together with submitted materials: 
the ``Submission'' or ``Proposal''), the CBOT submitted proposed new 
Rules 424.00 and 480.14 and new Regulation 424.01 pursuant to 
Commission Regulation 1.41(c). The Division advised the CBOT that it 
will consider the Submission under Regulation 1.41(b) and the CBOT did 
not object thereto. The proposed new provisions were revised and 
resubmitted October 12, 1994. The CBOT represents that the objective of 
the Proposal is ``to make possible a regulatory framework in which 
active solicitation of retail business by Member Firms can be made 
practicable--thereby fostered--by ensuring adequate customer protection 
while also clarifying Member Firms' compliance obligations.'' The CBOT 
represents that the proposed rules and regulation have been designed 
specifically to permit Member Firms to offer certain managed accounts 
without securities registration under the Securities Act of 1933.2
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    \2\The CBOT represents that these accounts would meet all the 
conditions set forth by the Securities and Exchange Commission for 
investment vehicles to avoid the offeror being deemed to be engaged 
in the issuance of securities. See Investment Company Act Release 
No. 11391 [1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) 82,662 
(October 10, 1980) and related no-action letters cited in the 
Submission.
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    Under the Proposal, Member Firms could solicit customers to open 
Member Firm Managed Futures Accounts (``MFMFAs''). Each MFMFA would be 
a discretionary account owned by, and carried in the name of, an 
individual customer, managed by either the Member Firm, an associated 
person (``AP'') thereof, or an unaffiliated trading manager such as a 
registered commodity trading advisor (``CTA''). The CBOT contemplates 
that MFMFAs would trade contracts to which the average pricing system 
(``APS'')3 and average quantity order system (``AQOS'')4 are 
applicable. The Proposal contemplates that, except as provided therein, 
each MFMFA would be subject to all applicable requirements of the 
Commodity Exchange Act, the Commission regulations and CBOT rules. 
Among other exceptions, however, Member Firms would not be required to 
provide the Disclosure Document of a commodity trading advisor 
(``CTA'') retained to direct a MFMFA, as otherwise required by 
Commission Regulation 4.31, nor would they be required to provide daily 
purchase and sale confirmations to MFMFA customers, as required by 
Commission Regulation 1.33(b). CTA Disclosure Documents would be 
available upon request, and daily confirmations would be available at 
the office of the Member Firm.5 Each MFMFA customer would be 
provided with, and acknowledge receipt of, a MFMFA Risk Disclosure 
Statement disclosing, among other things, the risks of investing in a 
MFMFA and the provisions regarding daily confirmations and delivery of 
the Disclosure Document of a CTA managing a MFMFA.6 The Risk 
Disclosure Statement also would disclose that no individual customer 
could invest more than ten percent of his or her liquid net worth, 
exclusive of home, furnishings and automobile, in a single MFMFA or 
more than twenty percent of liquid worth in all his or her MFMFAs at 
all Member Firms combined. As submitted, the Proposal also includes a 
provision for mandatory arbitration of disputes relating to MFMFAs.
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    \3\The APS set forth in CBOT Rule 421.03 was permitted to be 
made effective in June of 1992. It enables Member Firms to confirm 
to customers an average price when portions of an order or series of 
orders for the same accounts are executed at different prices. Other 
exchanges also have average pricing systems.
    \4\The AQOS set forth in CBOT Rule 421.04 was permitted to be 
made effective in October of 1993. It permits the confirmation to 
customers of average contract quantities. To date, no other exchange 
has adopted an average quantity order system.
    \5\Monthly statements showing each transaction would be provided 
to each account customer, as required by Commission Regulation 
1.33(a).
    \6\The CBOT further represents that ``[e]ach Member Firm will 
have representatives reasonably available during normal business 
hours to answer any inquiries or provide consultation to customers'' 
regarding MFMFAs.
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    Member Firms sponsoring a MFMFA would be required to submit, upon 
request, a separate ledger recording all day trades to the CBOT's 
Office of Investigations and Audits and to adopt and enforce written 
procedures enabling them to supervise the solicitation of investments 
in MFMFAs and the handling of complaints related to such accounts. No 
person participating in MFMFA trading decisions could receive monthly 
commissions in an amount greater than 2.083 percent of net equity in 
any particular MFMFA as of the beginning of the month.

II. Request for Comments

    Comment is requested on any aspect of the Proposal that members of 
the public believe may raise issues under the Act or Commission 
regulations. In this regard, the Commission notes that, naturally, 
Section 4o of the Act would apply to the proposed provisions. The 
Commission further notes that the Proposal, as submitted, could not be 
approved unless certain existing Commission regulations were amended. 
For example, as noted above, the Proposal would: (1) Require account 
owners to consent to the submission of all disputes relating to MFMFAs 
to binding arbitration, which appears to conflict with Commission 
Regulation 180.3(b) pursuant to which a customer's consent to 
arbitration prior to the time a claim or grievance arises may not be a 
condition to the customer's ability to utilize the services of the 
futures commission merchant; (2) permit Member Firms to not provide 
MFMFA customers with daily purchase and sale confirmations as now is 
required by Commission Regulation 1.33(b); and (3) require delivery of 
the Disclosure Document of a CTA retained to direct a MFMFA to the 
account owner solely where requested by the customer, whereas 
Commission Regulation 4.31 requires delivery of the Disclosure Document 
to prospective CTA clients at or before the time of their solicitation 
or opening a discretionary account with the CTA. Accordingly, 
commenters may wish to address the questions of whether the proposed 
arbitration, disclosure and trade confirmation provisions provide 
adequate customer protection. Further, commenters should discuss what 
are the compelling reasons, if any, from a fairness, business, increase 
of access, flexibility, or other perspective, why the Commission should 
revise the above-cited rules to provide for the exceptions necessary to 
implement the Proposal and what conditions, if any, should limit the 
use of such exceptions. In addition, the Commission requests comment on 
whether Member Firms or their APs participating in the proposed program 
may come within the Commission's regulatory framework for commodity 
trading advisors and should be required to register as such, on whether 
the Proposal presents issues related to the oversight of such Member 
Firms and APs and on any other aspect of the Proposal.
    Copies of the Submission are available for inspection at the Office 
of the Secretariat, Commodity Futures Trading Commission, 2033 K Street 
NW., Washington, DC 20581. Copies also may be obtained through the 
Office of the Secretariat at the above address or by telephoning (202) 
254-6314. Some materials may be subject to confidential treatment 
pursuant to 17 CFR 145.5 or 145.9.
    Any person interested in submitting written data, views, or 
arguments on the Proposal should send such comments to Jean A. Webb, 
Secretary, Commodity Futures Trading Commission, 2033 K Street NW., 
Washington, DC 20581, by the specified date.

    Issued in Washington, DC, on December 6, 1994.
Alan L. Seifert,
Deputy Director.
[FR Doc. 94-30443 Filed 12-9-94; 8:45 am]
BILLING CODE 6351-01-P