[Federal Register Volume 61, Number 208 (Friday, October 25, 1996)]
[Proposed Rules]
[Pages 55235-55238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27415]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 31
Financial Reports of Futures Commission Merchants, Introducing
Brokers and Leverage Transaction Merchants
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed Rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing to amend its Rule 1.10(d)(4), which
requires that each Form 1-FR filed with the Commission contain an oath
or affirmation attesting that, to the best knowledge and belief of the
individual making such oath or affirmation, the information contained
therein is true and correct. The proposed rule amendment would provide
that, for the purposes of making this attestation when filing a
financial report with the Commission electronically, the use of a
personal identification number (``PIN'') would be deemed to be the
equivalent of a manual signature.1 The proposal also would amend
Rule 1.10(c) to account for the possibility that registrants may choose
to file certain financial reports electronically using a Commission
issued PIN rather than filing such reports in paper form with the
regional office of the Commission nearest the principal place of
business of the registrant. The proposal would add Rule 1.10(b)(2)(iii)
to clarify that certified financial reports may not be filed
electronically.
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\1\ Commission Rule 1.10(h) permits registrants that are also
registered as securities broker-dealers with the Securities and
Exchange Commission to file a copy of their Financial and
Operational Combined Uniform Single Report (``FOCUS'') with the
Commission in lieu of Form 1-FR. The amendments discussed herein are
intended to apply equally to registrants who file Form 1-FR or FOCUS
with the Commission.
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In addition, the Commission is proposing to amend Rules 1.10(g) and
31.13(m) to clarify that certain portions of the financial reports will
be deemed public and other portions nonpublic, and to eliminate the
requirement that firms filing financial reports need to separately bind
portions of such reports generally treated as nonpublic in order for
such portions of the reports to be accorded nonpublic treatment.
DATES: Comments must be received on or before November 25, 1996.
ADDRESSES: Comments on the proposed amendments should be sent to Jean
A. Webb, Secretary of the Commission, Commodity Futures Trading
Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In
addition, comments may be sent by facsimile transmission to facsimile
number (202) 418-5221, or by electronic mail to [email protected].
Reference should be made to ``Attestation Amendments''.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Lawrence T. Eckert, Attorney Adviser, Division of Trading
and Markets, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington D.C. 20581. Telephone (202) 418-5450.
SUPPLEMENTARY INFORMATION:
I. Background
Commission Rule 1.10 sets forth the financial reporting
requirements for futures commission merchants (``FCMs'') and
independent introducing brokers (``IBIs'').2 This rule requires
generally that FCMs file with the Commission financial reports on Form
1-FR-FCM each quarter and that IBIs file financial reports on Form 1-
FR-IB semiannually.3 Pursuant to paragraph (d)(4) of the rule,
each Form 1-FR must include an attached oath or affirmation that, to
the best knowledge or belief of the individual making such oath or
affirmation, the information contained in the Form 1-FR is true and
correct. If the applicant or registrant is a sole proprietorship,
partnership or corporation, the oath or affirmation must be made by the
proprietor, a general partner or by the chief executive officer or
chief financial officer, respectively.
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\2\ Approximately two-thirds of introducing brokers enter into a
guarantee agreement with an FCM and thus are not required to raise
their own regulatory capital or file financial reports.
\3\ The Commission is currently proposing to amend certain of
its financial reporting requirements for FCMs and IBIs, including
time requirements for filing Form 1-FR. See 61 FR 7080 (Feb. 26,
1996).
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The Commission's Division of Trading and Markets (``Division'')
issued a no-action letter to the Chicago Board of Trade (``CBT'') in
February, 1996 concerning the attestation of financial reports where an
FCM is organized as a partnership.4 The no-action letter provided
relief to CBT member firms that are registered as FCMs and organized as
partnerships with only a corporation or limited liability company as a
general partner such that the FCM's chief financial officer (or the
individual who has these responsibilities) could sign the attestation
on Form 1-FR-FCM. However, the letter stated that in the case of an FCM
organized as a partnership with another partnership as its general
partner, the general partner of such other partnership must make the
attestation required by Rule 1.10(d)(4). The no-action letter also
provided relief to CBT to permit it to administer its financial filing
rule, CBT Capital Rule 311, in a similar manner.5
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\4\ CFTC Interpretative Letter 96-21, [Current Transfer Binder]
Comm. Fut. L. Rep. (CCH) para. 26,633 (Feb. 29, 1996).
\5\ Commission Rule 1.52(a), 17 CFR 1.52(a)(1996), requires each
self-regulatory organization (``SRO'') to adopt and submit for
Commission approval rules prescribing minimum financial and related
reporting requirements for member FCMs and IBs. Such requirements
must be the same as, or more stringent than, those contained in
Commission Rules 1.10 and 1.17, 17 CFR 1.10 and 1.17 (1996).
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CBT's request for relief stated that the request was prompted by
the fact that CBT was in the process of issuing PINs to those
individuals who are eligible to provide the required attestations in
connection with CBT's upcoming implementation of the electronic filing
of financial reports. Such filing is permitted by CBT Capital Rule 311.
Subsequently, the Division issued Advisory 12-96 to inform FCMs, IBIs
and self-regulatory organizations (``SROs'') that they would be granted
similar no-action treatment if they acted in accordance with the
Division's letter to CBT.6
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\6\ This was reprinted as CFTC Advisory 96-21 in [Current
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,640 (March 8,
1996).
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On May 28, 1996, the Commission issued Advisory 28-96, to alert
FCMs, IBs and SROs that in connection with any SRO program for
electronic filing of financial reports approved by the Commission, and
to the extent the SRO program does not require a manual signature for
purposes of attestation, the use of a PIN would be deemed to be the
equivalent of a manual signature for purposes of attestation under
Commission Rule 1.10(d)(4).7 The Commission noted therein that it
planned to implement procedures that would permit firms filing
electronically with an SRO to submit certain financial reports to the
Commission via electronic
[[Page 55236]]
transmission. The Commission currently is developing these procedures
and intends to implement them in the coming year.
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\7\ [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
26,711 (May 28, 1996).
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At the outset of the Commission's program to permit firms to submit
non-certified financial reports electronically, the Commission will
require that those firms which choose to file financial reports
electronically continue to file a paper report with their appropriate
regional office of the Commission as the official filing of such
report. After obtaining experience with the electronic filing system,
the Commission anticipates that it will permit registrants to file non-
certified financial reports solely by electronic means. Electronic
filing of certified financial reports will not be permitted.
II. Proposed Rule Amendments
A. Electronic Filing Issues
The Commission is proposing to amend its Rule 1.10(d)(4) such that
the use of a PIN in filing a Form 1-FR pursuant to Rule 1.10 would be
deemed to be the equivalent of a manual signature under the rule.
Therefore, the rule would make clear that the transmission of a
financial report to the Commission or an SRO under a PIN will
constitute a representation that the person whose PIN is used in such
transmission attests that, to the best knowledge and belief of that
person, the information contained in the financial report is true,
correct and complete.8 As many firms are already filing financial
reports with their SRO via electronic transmission in accordance with
SRO rules approved by the Commission and Advisory 28-96, this amendment
will simply serve to restate the Commission's position set forth in
that Advisory. In so doing, the amendment will make clear that a PIN
may be used in place of a manual signature with respect to non-
certified reports filed with the Commission and permit the Commission
to enforce the rule directly. The Commission hopes that this amendment
will encourage and facilitate the process of electronic filing of such
reports with the Commission but notes that, while it encourages the use
of the electronic filing option, the amendments would not mandate
electronic filing with the Commission.
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\8\ Commission Rule 1.10(c) provides that financial reports must
be filed with the Commission and the firm's designated self-
regulatory organization.
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As noted above, the Commission currently is developing procedures
that will allow it to accept non-certified financial reports
electronically. The Commission intends to adopt procedures for issuing
PINs to facilitate electronic filing with the Commission consistent
with the procedure currently in use by SROs such as CBT and the Chicago
Mercantile Exchange (``CME''). Under these procedures, an FCM or IBI
would be required to submit a PIN request form to the Commission's
Central Regional Office on company letterhead with a manual signature.
The request must be signed by the proprietor if the registrant is a
sole proprietorship, by a general partner if the registrant is a
partnership 9 and by the chief financial officer or chief
executive officer if the registrant is a corporation. The individual
representing the registrant must acknowledge that the use of the PIN
will be considered to be a substitute for his or her manual signature
attesting that, to the best knowledge and belief of that person, the
information contained in the financial report is true, correct and
complete. A new PIN request form would be required if the firm wished
to change the individual authorized to use a PIN to file the firm's
financial report.
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\9\ Similar signatures would be permitted, as discussed above,
for partnerships whose general partner is a non-natural person.
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The Commission also is proposing to amend paragraph (c) of Rule
1.10 and add a Rule 1.10(b)(2)(iii). The amendment to Rule 1.10(c)
would make clear that a registrant may file non-certified financial
reports via electronic transmission using a Commission issued PIN in
accordance with instructions issued by the Commission. New Rule
1.10(b)(2)(iii) would make clear that registrants will continue to be
required to file their certified financial reports, which must
accompany the application for registration and be submitted as of each
fiscal year end following registration, in paper form.
As noted above, the Commission would require at the outset of its
electronic filing program that firms filing non-certified financial
reports electronically continue to file a paper report with the
appropriate regional office of the Commission. However, the Commission
contemplates that, following some experience with electronic
transmission of financial data, it may be permissible for firms to
submit non-certified financial reports to the Commission solely via
electronic transmission.
B. Freedom of Information Act Issues
Currently, the Commission makes available only a paper copy of a
firm's financial report in response to a request for such report under
the Freedom of Information Act (``FOIA''). Consistent with this current
practice, the Commission intends to respond to an FOIA request for a
financial report that was filed with the Commission solely by
electronic transmission by printing a paper copy of the responsive,
public data and forwarding it to the requestor.
The data which the Commission would print and forward to the
requestor would be the public portions of a Form 1-FR. As clarified by
the proposed amendment to Rule 1.10(g), these are, for FCMs and IBIs,
the statement of financial condition and the statement of the
computation of the minimum capital requirements, and, in addition, for
FCMs only, the statements concerning segregation of customer funds and
the secured amount for foreign futures and option customers. Currently
under Rule 1.10(g), the Commission requires that the other portions of
the Form 1-FR \10\ be separately bound from the portions of the form
set forth in the preceding sentence in order to be accorded nonpublic
treatment.
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\10\ These are the statements of income (loss), cash flows,
changes in ownership equity and changes in liabilities subordinated
to the claims of general creditors. Only the latter two statements
are required to be filed with non-certified financial reports and
thus would generally be filed as part of a Form 1-FR submitted
electronically. See Rule 1.10(d)(1) (i) and (ii).
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Through the proposed amendment to Rule 1.10(g), the Commission will
reconfirm the current demarcation as to which portions of the Form 1-FR
are generally treated as public and nonpublic and eliminate the need
for firms to use a separate binding procedure to receive such treatment
for their reports, whether reports are filed in paper form or
electronically. The Commission believes that, in the context of
financial reports submitted electronically, it would be unduly
cumbersome to require a procedure similar to separate binding of paper
reports. Further, whether or not a firm chooses to file its reports in
the future electronically or in paper form, the Commission's rules
concerning the treatment of certain portions of Form 1-FR as public and
others as nonpublic have been extant for almost 20 years and are quite
well-known in the industry.
The Commission intends to propose to clarify, in a separate
release, its rules under FOIA and the Government in the Sunshine Act
(``GINSA'') in order to: (1) reaffirm that certain portions of the Form
1-FR are generally public and the remainder are nonpublic; and (2)
state that it will no longer process petitions for confidential
treatment of the generally public portions of a Form 1-FR. The proposed
amendments to Rule 1.10(g) (1) and (2) \11\ are intended to
[[Page 55237]]
complement these contemplated amendments of the FOIA and GINSA rules
and to eliminate a burden on firms to bind separately certain portions
of a Form 1-FR to assure nonpublic treatment.\12\
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\11\ The Commission has proposed to remove and reserve paragraph
(g)(3) and to revise paragraph (g)(5) of Rule 1.10. 61 FR 7080,
7085. The proposed amendments discussed herein would not interfere
with or require further amendment of those earlier proposals.
\12\ Although there are currently no registered leverage
transaction merchants (``LTMs''), the Commission is also proposing
to amend Rule 31.13(m) which currently provides for a separate
binding procedure similar to that set forth in Rule 1.10(g) with
respect to LTMs submitting financial reports on Form 2-FR.
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rules discussed herein will affect
FCMs, LTMs and IBIs. The Commission already has established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on such small entities in accordance
with the RFA.\13\ FCMs and LTMs \14\ have been determined not to be
small entities under the RFA.
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\13\ 47 FR 18618-18621 (April 30, 1982).
\14\ See 50 FR 102, 108 n.11 (Jan. 2, 1985).
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With respect to IBIs, the Commission has stated that it is
appropriate to evaluate within the context of a particular rule
proposal whether some or all IBIs should be considered to be small
entities and, if so, to analyze the economic impact on such entities at
that time.\15\ The proposed amendments would not require any IBI to
submit financial reports electronically but would only govern the
attestation of the completeness and accuracy of such reports so filed.
Presumably, an IBI would only choose to file a financial report
electronically if it were cost-effective to do so. These rule
amendments as proposed should impose no additional burden or
requirements on an IBI and thus, if adopted, would not have a
significant economic impact on a substantial number of IBIs.
Accordingly, pursuant to Rule 3(a) of the RFA, 5 U.S.C. 605(b), the
Chairperson, on behalf of the Commission, certifies that these proposed
amendments will not have a significant economic impact on a substantial
number of small entities.
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\15\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. While this proposed
rule has no burden, the group of rules (3038-0024) of which this is a
part has the following burden:
Average Burden Hours Per Response: 128.
Number of Respondents: 3,148.
Frequency of Response: Quarterly, Monthly or On Occasion.
Persons wishing to comment on the information which would be
required by this proposed/amended rule should contact Jeff Hill, Office
of Management and Budget, Room 3228, NEOB, Washington, DC 20503 (202)
395-7340. Copies of the information collection submission to OMB are
available from Gerald P. Smith, CFTC Clearance Officer, 1155 21st
Street, N.W., Washington, DC 20581, (202) 418-5160.
List of Subjects
17 CFR Part 1
Commodity futures, Consumer protection, Minimum financial and
related reporting requirements.
17 CFR Part 31
Commodity futures, Consumer protection, Leverage transactions,
Reporting and recordkeeping requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, Sections
4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), the Commission
hereby proposes to amend Parts 1 and 31 of chapter I of title 17 of the
Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6m, 6o, 6p, 7, 7a, 7b, 8, 9, 12,
12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.
2. Section 1.10 is amended by adding paragraph (b)(2)(iii) and
revising paragraphs (c), (d)(4), (g)(1) and (g)(2) to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(b) * * *
(2) * * *
(iii) 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, an introducing broker or an applicant for
registration in either category, must be filed in paper form and may
not be filed electronically.
* * * * *
(c) Where to file reports. The reports provided for in this section
will be considered filed when received by the regional office of the
Commission nearest the principal place of business of the registrant
(except that a registrant under the jurisdiction of the Commission's
Western Regional Office must file such reports with the Southwestern
Regional Office) and by the designated self-regulatory organization, if
any; and reports required to be filed by this section by an applicant
for registration will be considered filed when received by the National
Futures Association and by the regional office of the Commission
nearest the principal place of business of the applicant (except that
an applicant under the jurisdiction of the Commission's Western
Regional Office must file such reports with the Southwestern Regional
Office): Provided, however, That any report filed pursuant to
paragraphs (b)(1) or (b)(4) of this section or Sec. 1.12(b) which need
not be certified in accordance with Sec. 1.16 may be submitted to the
Commission in electronic form using a Commission-assigned Personal
Identification Number, and otherwise in accordance with instructions
issued by the Commission: And, Provided, further, That information
required of a registrant pursuant to paragraph (b)(4) of this section
need be furnished only to the self-regulatory organization requesting
such information and the Commission, and that information required of
an applicant pursuant to paragraph (b)(4) of this section need be
furnished only to the National Futures Association and the Commission.
(d) * * *
(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. 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.
In the case of a Form 1-FR filed via electronic transmission in
accordance with procedures established by the Commission, such
transmission must be accompanied by the Commission-assigned Personal
Identification Number of the authorized
[[Page 55238]]
signer and such Personal Identification Number 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.
* * * * *
(g) Nonpublic treatment of reports. (1) The following portions of
Forms 1-FR filed pursuant to this section will be public: the statement
of financial condition, the statement of the computation of the minimum
capital requirements, the statements (to be filed by a futures
commission merchant only) of segregation requirements and funds in
segregation for customers trading on U.S. commodity exchanges and for
customers' dealer options accounts, and the statement (to be filed by a
futures commission merchant only) of secured amounts and funds held in
separate accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter. The other financial
statements (including the statement of income (loss)), footnote
disclosures and schedules of Form 1-FR, trade secrets and certain other
commercial or financial information on such other statements and
schedules will be treated as nonpublic for purposes of the Freedom of
Information Act and the Government in the Sunshine Act and Parts 145
and 147 of this chapter.
(2) The following portions of copies of the Financial and
Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934, Part II or Part IIA filed pursuant to paragraph
(h) of this section, will be public: The statement of financial
condition, the statement of the computation of the minimum capital
requirements, the statements (to be filed by a futures commission
merchant only) of segregation requirements and funds in segregation for
customers trading on U.S. commodity exchanges and for customers' dealer
options accounts, and the statement (to be filed by a futures
commission merchant only) of secured amounts and funds held in separate
accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter. The other financial
statements (including the statement of income (loss)), footnote
disclosures and schedules of the Financial and Operational Combined
Uniform Single Report under the Securities and Exchange Act of 1934,
Part II or Part IIA, trade secrets and certain other commercial or
financial information on such other statements and schedules will be
treated as nonpublic for purposes of the Freedom of Information Act and
the Government in the Sunshine Act and parts 145 and 147 of this
chapter.
* * * * *
PART 31--LEVERAGE TRANSACTIONS
3. The authority citation for Part 31 continues to read as follows:
Authority: 7 U.S.C. 12a and 23.
4. Section 31.13 is amended by revising paragraph (m) to read as
follows:
Sec. 31.13 Financial reports of leverage transaction merchants.
* * * * *
(m) The following portions of Form 2-FR filed pursuant to this
section will be public: The statement of financial condition, the
computation of the minimum capital requirements pursuant to Sec. 31.9,
the schedule of coverage requirements and cover provided, and the
schedule of segregation requirements and funds on deposit in
segregation. The other financial statements (including the statement of
income (loss)), footnote disclosures and schedules of Form 2-FR, trade
secrets and certain other commercial or financial information on such
other statements and schedules, will be treated as nonpublic for
purposes of the Freedom of Information Act and the Government in the
Sunshine Act and Parts 145 and 147 of this chapter. All information on
such other statements, footnote disclosures and schedules 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. The independent public accountant's opinion
filed pursuant to this section will be deemed to be public information.
* * * * *
Issued in Washington, DC, on October 21, 1996 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-27415 Filed 10-24-96; 8:45 am]
BILLING CODE 6351-01-P