[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 secretary@cftc.gov. 
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