[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Rules and Regulations]
[Pages 4633-4642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2251]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 3, 145 and 147
Financial Reporting and Debt-Equity Ratio Requirements for
Futures Commission Merchants and Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is amending several provisions of its Rule 1.10 which governs financial
reporting requirements for futures commission merchants (FCMs) and
introducing brokers (IBs). The amendments require that financial
reports which need not be certified by an independent public accountant
be filed within 17 business days of the end of the reporting period
(generally the end of a month, a quarter or a six-month period), rather
than within 45 calendar days as previously required. The amendments
provide a phase-in period such that registrants have 30 calendar days
from the end of the reporting period within which to file their
financial reports for reporting periods ending on or between June 30,
1997 and December 31, 1997. Certified financial reports will continue
to be required to be filed within 90 calendar days of the fiscal year
end, rather than 60 days as proposed, except that firms which are also
registered as securities broker-dealers will be required to file their
certified year end reports with the Commission at the same time they
are required to file with the Securities and Exchange Commission (SEC),
which is 60 days after the year end. Further, all registrants will now
be required to file an uncertified financial report with the Commission
for the final quarter (or semiannual period in the case of IBs) of each
fiscal year within 17 business days (or 30 calendar days during the
phase-in period) from the end of the quarter or semiannual period, as
discussed above. Monthly capital computations required under Rule
1.18(b) also will be required to be available for inspection within 17
business days from month end, rather than 10 business days as proposed,
with an initial phase-in period that will allow firms to continue to
prepare the computations within 30 calendar days, as currently
required. In addition, the Commission is deleting the provision which
permits a self-regulatory organization (SRO) to allow its member FCMs
to file financial reports on a semiannual rather than a quarterly
basis. Further, the Commission is amending the debt-equity ratio rule
such that the 30 percent minimum equity requirement would apply to all
of a firm's capital, rather than only to that portion of a firm's
capital necessary to meet the minimum financial requirement.
EFFECTIVE DATE: June 30, 1997.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, Division of Trading and Markets, Commodity Futures Trading
Commission, 1155 21st Street N.W., Washington, DC 20581. Telephone:
(202) 418-5439.
SUPPLEMENTARY INFORMATION:
I. Financial Reporting Requirements for FCMs and IBs
A. Background
On February 26, 1996, the Commission published for comment proposed
amendments to several of its financial reporting requirements for FCMs
and IBs set forth in Commission Rule 1.10 and to the Commission's debt-
equity ratio requirement set forth in Rule 1.17(d) (the
``Proposals'').1 These proposed rule amendments were intended to
conform the Commission's rules with those of the SEC as part of the
Commission's ongoing efforts to harmonize its rules with those of the
SEC to the extent practicable. These amendments are part of a series of
rulemaking proceedings related to the discussions at the Commission's
roundtable on capital issues held in September 1995.2 At that
roundtable, the general consensus among the industry and academic
experts present was that the Commission should conform its rules
concerning the financial reporting cycle and debt-equity ratio
requirements with those of the SEC.
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\1\ 61 FR 7080 (Feb. 26, 1996).
\2\ See 61 FR 19177 (May 1, 1996).
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The Proposals were: (1) To reduce the current time periods (a) for
filing uncertified financial reports from 45 (or 30, for FCMs subject
to monthly reporting under ``early warning'' requirements) calendar
days to 17 business days, (b) for filing certified financial reports
from 90 to 60 calendar days, and (c) for preparing monthly capital
computations from 30 calendar to 10 business days; (2) to delete the
provisions which (a) permit an SRO to allow member FCMs to file
financial reports semiannually rather than quarterly, (b) require a
guaranteed IB (IBG) to file a copy of a guarantee agreement with the
Commission, and (c)
[[Page 4634]]
permit an IB which is also a country elevator to use a compilation
report prepared in accordance with requirements of the U.S. Department
of Agriculture in lieu of Form 1-FR-IB; and (3) to amend the debt-
equity ratio rule to apply the 30 percent minimum equity requirement to
all of a firm's capital.
The 30 day public comment period on the Proposals expired on March
27, 1996. The Commission received 22 written comments on the Proposals,
including 12 from FCMs, three from contract markets, three from trade
associations, three from accounting firms, and one from a bank that has
a subsidiary registered as an independent IB (IBI). In general, most
commenters voiced concerns about the impact of reduced time periods
within which to file financial reports on the business operations of
firms and on the accuracy of the reports prepared. A number of the
commenters proposed alternative filing periods to those contained in
the Proposals. These comments and alternatives are discussed more fully
below.
The Commission has considered carefully the comments received. The
Commission has determined generally to adopt as proposed the amendments
which require those financial reports which need not be certified by an
independent public accountant to be filed within 17 business days of
the end of the reporting period, rather than within 45 calendar days as
currently required. As the Commission realizes that certain firms may
require a period of time to prepare for the change in reporting
deadline, the final rules do not become effective until June 30, 1997
and thereafter are phased in over a six-month period. This phase-in
period provides that for reporting periods ending on or between June
30, 1997 and December 31, 1997, financial reports which are not
required to be certified must be filed within 30 calendar days of the
end of the reporting period.
With respect to those financial reports which must be certified by
an independent public accountant, the Commission has determined, based
upon a review of the comments, not to adopt at this time the provision
of the Proposals that would have reduced from 90 calendar days to 60
calendar days the time period within which registrants must file their
fiscal year end financial reports. Instead, the Commission has
determined to require registrants to file an uncertified financial
report for the final quarter (or semiannual period, in the case of
IBIs) of the fiscal year within 17 business days (or 30 calendar days
for fiscal years ending on or between June 30, 1997 and December 31,
1997) and continue to allow 90 days within which registrants may file
their annual certified reports. If material differences exist between
the capital computation and the segregation and secured amount
schedules contained in the certified report and the uncertified fourth
quarter (or, for IBIs, the second semiannual) report, the certified
report must include a reconciliation with appropriate explanations. If
no such material differences exist, there must be a statement so
indicating. Further, the Commission will require firms that are also
registered with the SEC and thereby required to file certified
financial reports within 60 days of the fiscal year end to file copies
of such reports simultaneously with the Commission.
The Commission also has determined, based upon a review of the
comments and its own reconsideration of the issue, to modify its
proposed amendment to Rule 1.18(b) concerning the completion of monthly
capital computations, such that monthly capital computations will be
required to be completed and available for inspection within 17
business days from month end rather than within 10 business days as
proposed or within 30 calendar days as required currently. In so doing,
the Commission reminds registrants that the Commission interprets Rule
1.17(a)(4) to require FCMs and IBIs to have a system in place to
determine whether they are in capital compliance at all times and to be
able on demand of the Commission or an SRO to prepare a pro forma
calculation subject to the Commission's or SRO's discretion to permit
up to 10 days to complete the same. The Commission will provide,
similar to what is provided for uncertified financial reports discussed
above, a phase-in period during which 30 calendar days will continue to
be allowed for preparation of the monthly computation. Further, the
Commission has determined to adopt its proposal to delete the provision
which permits an SRO to allow its member FCMs to file financial reports
on a semiannual rather than a quarterly basis. Finally, the Commission
has determined to adopt as proposed the amendment to Rule 1.17(d), the
Commission's debt-equity ratio rule, such that the 30 percent minimum
equity requirement will apply to all of a firm's capital rather than
only to that portion of a firm's capital necessary to meet the minimum
financial requirement.
B. Rule Amendments
1. Financial Reporting Cycle
The Commission proposed to amend its financial reporting
requirements for FCMs and IBIs such that interim unaudited financial
reports would be due within 17 business days, rather than the current
45 calendar days, of the ``as of'' date, and the certified financial
report as of the fiscal year end would be due within 60, rather than
90, calendar days of the fiscal year end.3 Sixteen of the
commenters addressed the issues concerning a shortening of the filing
period for uncertified reports while eighteen addressed the issues
concerning a shortening of the filing period for certified reports. Two
commenters addressed all of the proposed changes generally. One
commenter, a bank with an IBI subsidiary, supported all of the
Commission's amendments stating, among other things, that financial
reporting should be accelerated so as to prevent the reporting of stale
data and that conforming Commission regulations with those of the SEC
would ease the regulatory expense and burden of compliance. The
remaining commenters, however, were concerned generally about the
effect that shortening the filing deadlines would have upon firm
resources and the accuracy of financial reports.
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\3\ See proposed amendments to Commission Rules 1.10(b)(1) (i)
and (ii), 61 FR 7080, 7085-86.
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As noted above, participants in the September 1995 roundtable on
capital, including representatives from the industry SROs, urged the
Commission to adopt the rule changes embodied in the Proposals.
a. Uncertified Reports. With respect to uncertified filings, ten
commenters cited an increase in hardship as a result of necessary
workload reallocations and an increase in expense due to the potential
need for hiring additional staff as reasons for not changing the filing
deadline. Four commenters stated that Commission Rule 1.12(g), which
requires notification by an FCM within two business days of a twenty
percent or greater reduction in the firm's net capital compared to that
last reported in a financial report filed with the Commission, provides
adequate timely information of an FCM's financial difficulty.
Additionally, ten commenters, including the three contract markets, two
trade associations and five FCMs, suggested that a 30 calendar day
filing deadline would be more reasonable.
Although the Commission realizes that a shortening of the time
period in
[[Page 4635]]
which to file uncertified financial reports may require a period of
adjustment for some firms, the Commission believes that this additional
burden is warranted when weighed in the balance with the need to obtain
financial information in a timely manner. Indeed, exchange traded
derivatives positions change frequently; hence, the more current
relevant financial information is the more useful it is in
appropriately monitoring financial integrity on an ongoing basis. It
would therefore be anomalous for FCMs to have longer reporting
timeframes than securities broker-dealers. As a change to a 17 business
day filing period will conform the Commission's rules with those of the
SEC in this area, no additional burden should be created for the large
number of firms that are dually registered with the Commission and the
SEC.4
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\4\ As of November 30, 1996, almost one-half of FCMs (115 out of
240) and more than one-third of IBIs (141 out of 376) were dually
registered with the SEC.
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Under these final rules, interim uncertified financial reports will
be due within 17 business days (about 24 calendar days) of the end of
the reporting period. However, in light of the potential adjustment
necessary for some firms to come into full compliance with this rule
change, the rules provide a phase-in period, whereby firms will have 30
calendar days from the end of the reporting period in which to file
their interim reports for reporting periods ending on or between June
30, 1997 and December 31, 1997, the first six months during which the
amendments are effective. Two trade associations commented that should
the Commission and the SEC replace Commission Form 1-FR and the SEC
Financial and Operational Combined Uniform Single (FOCUS) Report with a
single financial reporting form that would be adopted by both agencies,
any greater detail that might be required in such a form might make a
17 business day filing deadline difficult to comply with. In this
regard, the Commission notes that if such a combined form were to
require statements and schedules in addition to those currently
required, the agencies intend to revisit the filing timetables at least
with respect to the additional schedules but would continue to pursue
harmonization of filing deadlines to the extent practicable.5
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\5\ See 61 FR 7080, 7081 n.6.
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Similarly, as proposed, the Commission will require that FCMs
subject to the ``early warning'' requirement 6 of monthly
financial reports, which are now due within 30 calendar days of the
month end, file such reports within 17 business days of the month end.
This requirement is also being phased in so that for months ending on
or between June 30, 1997 and December 31, 1997, the filing requirement
will be 30 calendar days as at present.7 One trade association
commenter objected to this proposed amendment. However, the Commission
believes that FCMs subject to the early warning requirements--that is,
FCMs with adjusted net capital of less than 150 percent of the minimum
requirement--should not have a longer period within which to file
uncertified financial reports than is provided generally.8 This is
because such firms are intended to be subject to increased regulatory
and self-regulatory scrutiny.
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\6\ See 61 FR 7080, 7081-82.
\7\ This amendment is adopted as part of Rule 1.12(b)(4). In the
Proposals, this amendment was proposed as an amendment to Rule
1.12(b)(3) but when the Commission amended Rule 1.12 in May 1996, it
redesignated Rule 1.12(b)(3) as Rule 1.12(b)(4). See 61 FR 7080,
7081 n.8; 61 FR 19177, 19185.
\8\ See 61 FR 7080, 7083.
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The only amendments with respect to filing uncertified financial
reports that are not being phased in concern the uncertified financial
report which a new applicant, or an IBG seeking to become an IBI, can
file if it also submits a certified financial report that is no more
than one year old. An uncertified report accompanying a certified
report which is less than one year old in such circumstances must be
filed within 17 business days of the ``as of'' date, rather than the
current 45 calendar days. See amendments to Rules 1.10 (a)(2)(i)(B),
(a)(2)(ii)(B), (j)(8)(i)(B) and (j)(8)(ii)(B). These are alternative
filings made at the firm's option in lieu of filing only a recent
certified financial report. Thus, the firm has some choice as to the
timing of the uncertified financial statement in this context.
Moreover, this option is likely to be used by a firm already making
regulatory filings which require annual certified financial statements,
such as a securities broker-dealer. None of the commenters specifically
addressed this aspect of the Proposals. The Commission has therefore
determined to adopt the amendments to Rules 1.10 (a)(2)(i)(B),
(a)(2)(ii)(B), (j)(8)(i)(B) and (j)(8)(ii)(B) as proposed.
b. Certified Reports. With respect to the Commission's proposed
rule amendment to shorten the time period for filing annual certified
financial reports, commenters voiced similar concerns to those raised
concerning shortening the time period for filing uncertified interim
reports. Specifically, six commenters stated that firm resources would
have to be shifted to meet new deadlines and small firms would not have
sufficient staff to meet these new demands. Eight commenters, including
the three contract market commenters and two trade associations, noted
that adopting the proposal would cause audit expenses to increase as a
result of a greater demand for accounting services during peak periods
and the need for additional in-house staff. As an alternative to the
Commission's proposal, two contract markets and an FCM suggested that
the Commission could meet its objective of obtaining more timely
financial information by requiring firms to file an unaudited financial
statement within 30 or 45 days of the fiscal year end followed by
filing the certified report within 90 days.9 One of the contract
markets and the FCM suggested that firms provide a reconciliation
between their certified and uncertified reports. Two additional
commenters suggested that if the Proposal is adopted, the Commission
should permit an automatic 30 day extension upon a request which
includes an unaudited fourth quarter financial report and an auditor's
statement that based upon the part of the audit completed to date,
there are no known material inadequacies in the firm's accounting
system or internal controls or failures to comply with the Commission's
minimum capital or segregation requirements.
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\9\ Both the Chicago Mercantile Exchange (CME) and Chicago Board
of Trade (CBT) require the filing of an uncertified financial report
for the fourth quarter in addition to the certified financial report
as of the fiscal year end. More than 40 percent of FCMs are members
of either CME or CBT.
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Based upon the Commission's review of the comments received and
reconsideration of this aspect of the Proposals, the Commission has
determined to leave unchanged the time period within which FCMs and
IBIs must file their annual certified financial reports. Thus, FCMs and
IBIs continue to have 90 calendar days within which to file their
annual certified financial statements, except for those firms already
filing certified financial reports with the SEC within 60 calendar days
because they are securities broker-dealers. Such firms will be
required, pursuant to provisos added to paragraphs (b)(1)(ii) and
(b)(2)(ii)(A) of Rule 1.10, to file copies of such certified reports
with the Commission at the same time the reports are filed with the
SEC. The Commission does not believe this will create any added burden
for such firms since they have been filing certified reports with the
SEC on the
[[Page 4636]]
shorter timeframe. Further, paragraphs (b)(1)(i) and (b)(2)(i) of Rule
1.10 have been amended to make clear that each FCM must file an
uncertified report covering the firm's fourth quarter within 17
business days of the end of the quarter and each IBI must file an
uncertified report covering the firm's second semiannual period within
17 business days of the end of the period, respectively. The Commission
has also redesignated paragraph (d)(2)(vi) of Rule 1.10 as paragraph
(d)(2)(vii) 10 and added a new paragraph (d)(2)(vi) to require
that the year end certified financial report, as suggested by certain
commenters as noted above, contain a reconciliation between that report
and the fourth quarter (or, in the case of IBIs, second semiannual)
uncertified report if material differences exist in the net capital
computation, segregation schedules or secured amount schedules. The
reconciliation must include appropriate explanations. If there are no
material differences between the reports, there must be a statement so
indicating in the certified report. This is consistent with SEC
rules.11 In conformity with the Commission's amendments with
respect to other uncertified filings, Rules 1.10 (b)(1)(i) and
(b)(2)(i) provide a phase-in period such that for quarters (with
respect to FCMs) or semiannual periods (with respect to IBIs) ending on
or between June 30, 1997 and December 31, 1997, firms have 30 calendar
days from the end of the quarter or semiannual period within which to
file their uncertified reports.
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\10\ The redesignated paragraph requires that a certified
financial report include ``[i]n addition to the information
expressly required, such further material information as may be
necessary to make the required statements not misleading.''
\11\ See 17 CFR 240.17a-5(d)(4) (1996).
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2. Monthly Computation
The monthly computation of adjusted net capital and minimum
financial requirement which FCMs and IBIs must prepare in accordance
with Commission Rule 1.18 is currently required to be made available
for inspection within 30 days. The Commission proposed to shorten this
time period to 10 business days since these computations do not involve
the preparation of all of the statements and schedules included in a
Form 1-FR-FCM or a Form 1-FR-IB. The Commission also noted in its
proposal that this shorter time period would conform the requirement
pertaining to monthly capital computations to the SEC's requirement for
filing Part I of the FOCUS Report.
The Commission received fourteen comment letters concerning the
proposed amendment of Rule 1.18. All of these commenters stated that 10
business days is too short a period of time in which to prepare the
monthly computation. Five commenters noted that a formal capital
computation requires the same review and reconciliation process that is
needed to prepare a financial report and, therefore, the time period
for completing such a computation should not be any shorter than that
provided for filing a financial report. Additionally, two contract
markets, two trade associations and an FCM stated that securities
broker-dealers who file Part I of FOCUS are often provided an extension
of time through their respective designated examining authority,12
such that the filing of their monthly capital computations is generally
due within 17 business days from month end. In consideration of these
comments, Rule 1.18(b) as adopted provides that firms must complete and
make available for inspection formal computations of their adjusted net
capital and minimum financial requirements within 17 business days from
month end. As is true with respect to the Commission's other amendments
discussed above, amended Rule 1.18(b) contains a phase-in period, such
that firms continue to have 30 calendar days from month end in which to
complete their monthly computations for all months ending on or before
December 31, 1997.
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\12\ The Commission has confirmed this to be the case.
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The Commission also notes that an FCM or IB must maintain
compliance with the Commission's minimum financial requirements at all
times. Thus, although Rule 1.18(b) provides 17 business days for an FCM
or IBI to complete a formal capital computation, a firm must
nonetheless be able to demonstrate its compliance with the Commission's
minimum capital requirement prior to this deadline if requested by the
Commission.13 The Commission encourages the SROs to use monthly
calculations in their financial monitoring systems and notes that the
CME, CBT and the New York Stock Exchange, Inc. now require clearing
member firms to file as well as to calculate capital monthly.
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\13\ 61 FR 7080, 7081 & n.3.
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3. Other Amendments
The Commission further proposed to delete that portion of Rule
1.52(a) which permits an SRO to allow its member FCMs to file financial
reports semiannually rather than quarterly. In the Proposals, the
Commission stated that it believes this rule amendment is consistent
with the concept that the existing reporting timeframe should be
accelerated so that the financial data reported and used by regulators
for monitoring purposes is reasonably current. Additionally, the
Commission noted that relatively few firms (less than ten percent of
FCMs, approximately 20 in all) are now filing only semiannually, so the
rule amendment would not cause undue hardship for a substantial number
of FCMs. All six of the commenters who addressed this aspect of the
Proposals supported this rule amendment and the Commission is adopting
it as proposed.
The Commission also proposed two other minor amendments to the
financial reporting requirements in Rule 1.10, both of which pertain to
IBs. Currently, an applicant for registration as an IB that intends to
operate pursuant to a guarantee agreement with an FCM must file a copy
of the guarantee agreement with 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 in Los Angeles must file a copy with the Commission's
Southwestern Regional Office in Kansas City).14 This requirement
is in addition to the requirement to file the original of the guarantee
agreement with the registration application submitted to National
Futures Association (NFA). The Commission proposed to amend Rule
1.10(c) to eliminate the requirement that a copy of a guarantee
agreement be filed with a Commission regional office. An IB's status as
an IBG can be readily discerned by Commission staff from contacting
NFA's Information Center or by accessing the registration database. An
IBG has no ongoing financial reporting requirements, so the Commission
believes that no purpose is served by continuing to maintain copies of
guarantee agreements in its regional offices. The Commission further
believes that this amendment to Rule 1.10(c) will ease filing burdens
on IB applicants and record maintenance burdens on the Commission's
staff. The Commission received no comments specifically addressing this
issue and has determined to adopt the amendment to Rule 1.10(c) as
proposed.15
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\14\ The geographic coverage of jurisdiction of the Commission's
regional offices is set forth in 17 CFR 140.2 (1996).
\15\ The Commission has separately proposed further amendment of
Rule 1.10(c) as part of rule amendments concerning electronic filing
of financial reports and attestation requirements related thereto.
61 FR 55235 (Oct. 25, 1996).
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In addition, the Commission proposed to amend the financial
reporting
[[Page 4637]]
requirements to eliminate Rule 1.10(i). Rule 1.10(i) provides that an
IBI or an applicant which is also a country elevator can satisfy its
financial reporting obligation by filing, in lieu of filing a Form 1-
FR-IB, a copy of a compilation report of financial statements of
warehousemen for purposes of Uniform Grain Storage Agreements, prepared
in accordance with requirements of the U.S. Department of Agriculture.
This alternative filing provision was adopted when the Commission first
adopted rules to govern IBs in 1983 16 and has never been
utilized. No comments specifically addressed this issue. The Commission
believes that it is appropriate to delete this provision as a means of
streamlining and simplifying Rule 1.10. References to Rule 1.10(i) in
other Commission rules have likewise been eliminated.17
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\16\ 48 FR 35248, 35263, 35282 (Aug. 3, 1983).
\17\ See deletions of Rules 1.10(g)(3), 145.5(d)(1)(i)(G) and
147.3(b)(4)(i)(A)(7) as well as amendments to Rules 1.10(g)(5),
1.18(a) and (b), and 3.33(c)(1).
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II. Amendments to Debt-Equity Ratio Requirements
Commission Rule 1.17(d) sets forth the debt-equity ratio
requirement, which states that at least 30 percent of an FCM's or IBI's
required debt-equity total must consist of equity capital.18 Thus,
if an FCM's required debt-equity total amount is $1 million, it must
maintain equity capital as defined in the Commission's rules of
$300,000. No matter how much adjusted net capital is actually
maintained by an FCM or IBI, the thirty percent equity requirement
currently applies only to the amount of required debt-equity total.
Accordingly, if an FCM has a $1 million adjusted net capital
requirement and actually maintains $5 million in adjusted net capital
(i.e., it has $4 million in ``excess'' adjusted net capital), the
entire $4 million amount above the minimum requirement could consist of
debt subject to satisfactory subordination agreements in accordance
with Commission Rule 1.17(h).19
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\18\ In addition to certain subordinated debt as described more
fully below, equity capital includes the following:
(1) 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;
(2) In the case of a partnership, the sum of its capital
accounts of partners (inclusive of such partners' commodity interest
and securities accounts subject to the provisions of Rule 1.17(e)
concerning restrictions on withdrawals of equity capital), and
unrealized profit and loss; and
(3) In the case of a sole proprietorship, the sum of its capital
accounts and unrealized profit and loss.
``Debt-equity total'' means equity capital as described above
plus the outstanding principal amount of subordinated debt which
does not qualify as equity capital. The ``required debt-equity
total'' means debt-equity total less the amount by which a firm's
adjusted net capital exceeds the minimum required. 17 CFR
1.17(d)(1996).
\19\ 17 CFR 1.17(h) (1996), as amended by 61 FR 19177, 19186-87
(May 1, 1996).
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When the Commission originally proposed what is now Rule 1.17(d) in
1977, the debt-equity ratio requirement was patterned upon the SEC rule
and would have applied to a firm's debt-equity total.20 However,
in response to comments that ``it would be inappropriate to penalize a
firm that maintains capital in the form of satisfactory subordination
agreements, which is in excess of the minimum required by the
regulations,'' the Commission revised its proposal. As adopted in 1978,
Rule 1.17(d) provides that the required debt-equity total to which the
30 percent equity capital requirement applies means a firm's debt-
equity total less its excess adjusted net capital.21
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\20\ 42 FR 27166, 27177 (May 26, 1977).
\21\ 43 FR 39956, 39965, 39976 (Sept. 8, 1978).
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Several of the panelists at the capital roundtable on September 18,
1995 urged the Commission to pursue greater harmonization between CFTC
and SEC financial rules and related reporting requirements and the
debt-equity ratio requirement was one area referred to in this regard.
The Commission also notes that the general international standard is to
apply the debt-equity ratio requirement to all of a firm's
capital.22 The Commission believes that it is important for its
rules to conform to international standards with respect to the quality
of capital.
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\22\ This is the recommendation of Working Party No. 3 of the
Technical Committee of the International Organization of Securities
Commissions (IOSCO). See Report of the Technical Committee of IOSCO,
``Capital Requirements for Multinational Securities Firms,'' XV
Annual Conference of IOSCO, Santiago, Chile 1990.
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Accordingly, in light of these developments and its own
reconsideration of the issue, the Commission determined to propose an
amendment to Rule 1.17(d) to require that the 30 percent debt-equity
ratio requirement apply to an FCM's or IBI's debt-equity total.23
In making this proposal, the Commission noted that a large proportion
of FCMs and IBIs are also securities brokers or dealers and thus
already subject to the SEC rule concerning the debt-equity
ratio.24
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\23\ 61 FR 7080, 7083-84, 7086.
\24\ The Commission also noted that the SEC definition of equity
capital does not include, in the case of a partnership, partners'
securities accounts. See 17 CFR 240.15c3-1(d)(1996).
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The Commission further noted that Rule 1.17(d)(1) provides that
certain subordinated debt may qualify as equity capital if specified
conditions are met, in addition to those which apply to subordinated
debt in general. These additional conditions are: (1) The lender must
be a partner or stockholder of the FCM or IBI; (2) the initial term of
the debt must be at least three years, and there must be a remaining
term of not less than twelve months; 25 (3) the governing
subordination agreement does not contain most of the otherwise
permissible provisions relating to accelerated maturity; (4) the
governing subordination agreement allows no special prepayment of the
debt (i.e., prepayment before one year from the date such subordination
agreement becomes effective); and (5) the debt in question is
maintained as equity capital subject to the provisions on withdrawal of
equity capital contained in Commission Rule 1.17(e). If a firm is
organized as a partnership, however, additional conditions (3) and (4)
need not be met for subordinated debt to qualify as equity capital, if
the partnership agreement provides that the capital contributed
pursuant to a satisfactory subordination agreement as defined in
Commission Rule 1.17(h) shall in all respects be partnership capital
subject to the provisions restricting the withdrawal thereof set forth
in Commission Rule 1.17(e).
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\25\ Subordinated debt entered into today with a maturity date
of December 31, 2000 could, therefore, qualify as equity capital if
all other requirements were met. On January 1, 2000, however, such
subordinated debt would no longer be counted as equity capital
unless an extension of the maturity date had been agreed to by the
parties, since the remaining term of the debt would be less than one
year at that time.
---------------------------------------------------------------------------
Eight commenters addressed this aspect of the Commission's
Proposals and all of them supported the amendment to Rule 1.17(d) to
require application of the 30 percent debt-equity ratio requirement to
a firm's debt-equity total. Based upon these comments and the
Commission's further consideration of this issue, the amendment to Rule
1.17(d) is being adopted as proposed.
The Commission also addressed another issue in connection with the
debt-equity ratio requirement in the Proposals, in response to a letter
submitted by the CME on behalf of the Intermarket Financial
Surveillance Group, an organization composed of representatives of U.S.
commodity and securities organizations. The CME letter, addressed to
the Commission's Division of Trading and Markets and dated October 31,
1995, supported the goal of conforming the rules of the Commission and
the SEC concerning the debt-equity
[[Page 4638]]
ratio requirement. CME also requested in that letter, and in a similar
letter of the same date to the SEC's Division of Market Regulation,
that the financial rules of each agency be amended such that goodwill
net of amortization could be subtracted from the denominator when a
firm calculates its debt-equity ratio.26 Since the SEC had not yet
made such a change in its rule and since the Commission's intention in
making its February 1996 proposal was to conform its rule to that of
the SEC concerning the debt-equity ratio requirement, the Commission
did not propose to incorporate the CME's request in the proposed
amendment to Rule 1.17(d). However, the Commission specifically
requested comment upon the CME's suggestion and whether the Commission
should adopt such a rule amendment in conjunction with or irrespective
of action taken by the SEC. The Commission also noted that its staff
would discuss this matter with staff of the SEC.
---------------------------------------------------------------------------
\26\ CME stated in its letters that it was making this request
because, by definition, goodwill is an intangible asset acquired in
a business combination which represents the excess ``going concern''
value over the fair value of a firm's net assets, it lacks
separability from the firm itself, and its value is often
indefinite, indeterminate and subject to wide fluctuation.
---------------------------------------------------------------------------
In addition to the CME, two other futures exchanges, the CBT and
the New York Mercantile Exchange (NYMEX), and an FCM supported
elimination of goodwill from the debt-equity calculation.27
However, the Securities Industry Association (SIA), the trade
association for securities firms, commented that it is not appropriate
for the Commission to subtract goodwill from the debt-equity
calculation because the number of firms reporting goodwill as an asset
is insignificant and to do so would create disparity with the SEC.
---------------------------------------------------------------------------
\27\ NYMEX stated that such an amendment should only be adopted
in conjunction with a similar amendment to the SEC's rule to assure
consistent treatment.
---------------------------------------------------------------------------
The Commission had noted, when it issued the Proposals, that
information provided by CME based upon studies of several SROs
indicated that the number of firms reporting goodwill as an asset was
quite small.28 The Commission understood that the original
requests concerning goodwill were made primarily in an effort to
accommodate certain large firms dually registered as FCMs and as
securities broker-dealers. Discussions between Commission staff and SEC
staff have revealed that the SEC continues to consider the matter but
an amendment to the SEC's rule in this area is not imminent. Further,
as noted above, the securities industry's trade association has
commented in opposition to the elimination of goodwill from the debt-
equity calculation. Accordingly, the Commission has determined not to
amend Rule 1.17(d) in this regard at this time. The Commission
nonetheless believes that if goodwill is reported as an asset the
better rule is to subtract it from the denominator when a firm
calculates its debt-equity ratio and the Commission intends to continue
to pursue this matter with the SEC.
---------------------------------------------------------------------------
\28\ 61 FR 7080, 7084.
---------------------------------------------------------------------------
III. Ongoing Process
The Commission's adoption of the amendments discussed herein and
its adoption of amendments in May 1996 29 accomplish the
Commission's short term goals arising out of the September 1995
roundtable on capital. Some of the other issues discussed at that
roundtable are necessarily longer term projects that will require
further study, such as whether the second prong of the current minimum
financial requirement, based upon four percent of the sum of segregated
customer funds and the secured amount, should be amended in an effort
to make an FCM's minimum adjusted net capital requirement reflect more
closely the risks to an FCM caused by carrying open positions. The
Commission intends to continue its consultation with industry
representatives and other interested parties concerning the minimum
financial and related reporting requirements.
---------------------------------------------------------------------------
\29\ These amendments covered (1) early warning reporting, (2)
required minimum dollar amount of capital, (3) prepayment of
subordinated debt, (4) gross collection of exchange-set margin for
omnibus accounts, and (5) the capital charge on receivables from
foreign brokers. 61 FR 19177.
---------------------------------------------------------------------------
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments adopted herein
would affect FCMs and IBIs. The Commission has previously determined
that, based upon the fiduciary nature of FCM/customer relationships, as
well as the requirement that FCMs meet minimum financial requirements,
FCMs should be excluded from the definition of small entity.30
---------------------------------------------------------------------------
\30\ See 47 FR 18618, 18619 (Apr. 30, 1982).
---------------------------------------------------------------------------
With respect to IBs, the Commission has stated that it is
appropriate to evaluate within the context of a particular rule
proposal whether some or all IBs should be considered to be small
entities and, if so, to analyze the economic impact on such entities at
that time.31 The amendments to Rules 1.10 and 1.18 relate to the
time within which financial reports must be filed and monthly financial
computations must be prepared. The requirements related to filing
certified financial reports as of the fiscal year end will not be
amended as proposed and the amendments being adopted to other
provisions of the rules are to be phased in over a period of
approximately one year so that firms can make any necessary
adjustments. In addition, the amendment to Rule 1.17(d) for an IBI
conforms the Commission's requirement to that of the SEC. More than
one-third of the IBIs are also subject to the jurisdiction of the SEC
and therefore the amendment to Rule 1.17(d) should have no impact on
the financial operations of these IBIs. Thus, the Chairperson certifies
that these amendments should not have a significant economic impact on
a substantial number of small entities.
---------------------------------------------------------------------------
\31\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
When publishing final rules, the Paperwork Reduction Act of 1995
(Pub. L. 104-13 (May 13, 1995)) imposes certain requirements on federal
agencies (including the Commission) in connection with their conducting
or sponsoring any collection of information as defined by the Paperwork
Reduction Act. In compliance with the Act, this final rule informs the
public of:
(1) The reasons the information is planned to be and/or has been
collected; (2) the way such information is planned to be and/or has
been used to further the proper performance of the functions of the
agency; (3) an estimate, to the extent practicable, of the average
burden of the collection (together with a request that the public
direct to the agency any comments concerning the accuracy of this
burden estimate and any suggestions for reducing this burden); (4)
whether responses to the collection of information are voluntary,
required to obtain or retain a benefit, or mandatory; (5) the nature
and extent of confidentiality to be provided, if any; and (6) the
fact that an agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it
displays a currently valid OMB control number.
On February 26, 1996, the Commission published proposed rules
dealing with this matter stating that the information collection burden
would be unchanged if the rules were adopted as proposed. However,
because the Commission has determined, in response to comments on the
Proposals, to leave unchanged the filing requirement for the certified
financial report due as of the fiscal year end and
[[Page 4639]]
to explicitly require an uncertified financial report as of the last
quarter, the paperwork burden under Rule 1.10 will increase.
The Commission has submitted this rule and its associated
information collection requirements to the Office of Management and
Budget. The burden associated with this entire collection (3038-0024),
including this final rule, is as follows:
Average burden hours per response: 18.00.
Number of Respondents: 1,662.00.
Frequency of response: 19.00.
The burden associated with this specific final rule is as follows:
Average burden hours per response: 4.00.
Number of Respondents: 500.00.
Frequency of response: 9.00.
Persons wishing to comment on the information required by this
final rule should contact the Desk Officer, CFTC, Office of Management
and Budget, Room 10202, NEOB, Washington, DC 20503, (202) 395-7340.
Copies of the information collection submission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street N.W., Washington, DC
20581, (202) 418-5160.
List of Subjects
17 CFR Part 1
Commodity futures, Minimum financial requirements.
17 CFR Part 3
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 145
Freedom of information, Exceptions.
17 CFR Part 147
Sunshine Act, Exceptions.
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 amends 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, 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 revising paragraphs (a)(2)(i)(A) and
(B), (a)(2)(ii)(A) and (B), (a)(3)(i), (a)(3)(ii)(A), (b)(1),
(b)(2)(i), (b)(2)(ii)(A), (c) and (d)(2)(v), by redesignating paragraph
(d)(2)(vi) as paragraph (d)(2)(vii) and by adding a new paragraph
(d)(2)(vi), by revising paragraphs (d)(3), (f) heading, and (f)(1), by
removing and reserving paragraph (g)(3), by revising paragraph (g)(5),
by removing and reserving paragraph (i), and by revising paragraphs
(j)(8)(i)(B) and (j)(8)(ii)(B) to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
(a) * * *
(2) * * *
(i) * * *
(A) 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
(B) 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 1 year prior to the date on which
such report is filed.
* * * * *
(ii) * * *
(A) 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; or
(B) 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 1 year prior to the date on which
such report is filed; or
* * * * *
(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) * * *
(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) 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 for each fiscal
quarter of each fiscal year, including the final fiscal quarter of each
fiscal year, unless the futures commission merchant elects, pursuant to
paragraph (e)(2) of this section, to file a Form 1-FR-FCM for each
calendar quarter of each calendar year, including the final calendar
quarter of each calendar year. Each Form 1-FR-FCM must be filed no
later than 17 business days after the date for which the report is
made: Provided, however, That for each fiscal or calendar quarter
ending between June 30, 1997 and December 31, 1997, inclusive, each
Form 1-FR-FCM must be filed no later than 30 calendar days after the
date for which the report is made.
(ii) In addition to the 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 (even if it files quarterly reports as of each calendar
quarter) which must be certified by an independent public accountant in
accordance with Sec. 1.16 no later than 90 days after the close of each
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
[[Page 4640]]
middle and the close of each fiscal year unless the introducing broker
elects pursuant to paragraph (e)(2) of this section to file a Form 1-
FR-IB semiannually as of the middle and the close of each calendar
year. Each Form 1-FR-IB must be filed no later than 17 business days
after the date for which the report is made: Provided, however, That
for each reporting period ending between June 30, 1997 and December 31,
1997, inclusive, each Form 1-FR-IB must be filed no later than 30
calendar 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
(even if it files semiannual reports on a calendar year basis) which
must be certified by an independent public accountant in accordance
with Sec. 1.16 no later than 90 days after the close of each
introducing broker's fiscal year: Provided, however, that a registrant
which is registered with the Securities and Exchange Commission as a
securities broker or dealer must file this report not later than the
time permitted for filing an annual audit report under Sec. 240.17a-
5(d)(5) of this title.
* * * * *
(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 South-western
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 South western Regional
Office): Provided, however, 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: And, provided further, That 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) * * *
(2) * * *
(v) Appropriate footnote disclosures;
(vi) A reconciliation, including appropriate explanations, of the
statement of the computation of the minimum capital requirements
pursuant to Sec. 1.17 and, for a futures commission merchant only, the
statements of segregation requirements and funds in segregation for
customers trading on U.S. commodity exchanges and for customers' dealer
option accounts, and the statement of secured amounts and funds held in
separate accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter, in the certified Form 1-FR
with the applicant's or registrant's corresponding uncertified most
recent Form 1-FR filing when material differences exist or, if no
material differences exist, a statement so indicating; and
* * * * *
(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.
* * * * *
(f) Extension of time for filing uncertified reports. (1) In the
event a registrant finds that it cannot file its report for any period
within the time specified in paragraphs (b)(1)(i), (b)(2)(i) or (b)(4)
of this section or Sec. 1.12(b) without substantial undue hardship, it
may file with the principal office of the Commission in Washington,
D.C., 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 Commission before the time specified in paragraphs
(b)(1)(i), (b)(2)(i) or (b)(4) of this section or Sec. 1.12(b) for
filing the report. Notice of such application must be given to the
designated self-regulatory organization, if any, concurrently with the
filing of such application with the Commission. Within ten calendar
days after receipt of the application for an extension of time, the
Commission shall: (i) Notify the registrant of the grant or denial of
the requested extension; or (ii) indicate to the registrant that
additional time is required to analyze the request, in which case the
amount of time needed will be specified. (See Sec. 1.16(f) for
extension of the time for filing certified financial statements.)
* * * * *
(g) * * *
(3) [Reserved]
* * * * *
(5) The independent accountant's opinion and a guarantee agreement
filed pursuant to this section will be deemed public information.
* * * * *
(i) [Reserved]
(j) * * *
(8) * * *
(i) * * *
(B) 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.
* * * * *
(ii) * * *
(B) 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.
* * * * *
3. Section 1.12 is amended by revising paragraph (b)(4) to read as
follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(b) * * *
(4) For securities brokers or dealers, the amount of net capital
specified in Rule 17a-11(b) of the Securities and Exchange Commission
(17 CFR
[[Page 4641]]
240.17a-11(b)), must file written notice to that effect as set forth in
paragraph (g) of this section within five (5) business days of such
event. Such applicant or registrant must also file a Form 1-FR-FCM (or,
if such applicant or registrant is registered with the Securities and
Exchange Commission as a securities broker or dealer, it may file, 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, in lieu of Form 1-FR-FCM) or such other financial
statement designated by the National Futures Association, in the case
of an applicant, or by the Commission or the designated self-regulatory
organization, if any, in the case of a registrant, as of the close of
business for the month during which such event takes place and as of
the close of business for each month thereafter until three (3)
successive months have elapsed during which the applicant's or
registrant's adjusted net capital is at all times equal to or in excess
of the minimums set forth in this paragraph (b) which are applicable to
such applicant or registrant. Each financial statement required by this
paragraph (b) must be filed within 17 business days after the end of
the month for which such report is being made: Provided, however, That
for each month ending between June 30, 1997 and December 31, 1997,
inclusive, for which a financial statement is required by this
paragraph (b), such financial statement must be filed within 30
calendar days after the end of the month for which such report is being
made.
* * * * *
4. Section 1.17 is amended by revising the introductory text of
paragraph (d) and by removing paragraph (d)(3) to read as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(d) Each applicant or registrant shall have equity capital
(inclusive of satisfactory subordination agreements which qualify under
this paragraph (d) as equity capital) of not less than 30 percent of
the debt-equity total, provided, an applicant or registrant may be
exempted from the provisions of this paragraph (d) for a period not to
exceed 90 days or for such longer period which the Commission may, upon
application of the applicant or registrant, grant in the public
interest or for the protection of investors. For the purposes of this
paragraph (d):
* * * * *
5. Section 1.18 is amended by revising paragraphs (a) and (b) to
read as follows:
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 or
Part IIA, in lieu of Form 1-FR-FCM or Form 1-FR-IB, the account
classification subdivisions specified on such Report, or categories
that are in accord with generally accepted accounting principles. 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 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. An
applicant or registrant which is also registered as a securities broker
or dealer with the Securities and Exchange Commission may meet the
computation requirements of this paragraph (b) by completing the
Statement of Financial and Operational Combined Uniform Single Report
under the Securities Exchange Act of 1934, Part II or Part IIA. 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: Provided, however, That for each month ending between June 30,
1997 and December 31, 1997, inclusive, such computations must be
completed and made available for inspection within 30 calendar days
after the date for which the computations are made.
* * * * *
6. Section 1.52 is amended by revising paragraph (a) to read as
follows:
Sec. 1.52 Self-regulatory organization adoption and surveillance of
minimum financial requirements.
(a) Each self-regulatory organization must adopt, and submit for
Commission approval, rules prescribing minimum financial and related
reporting requirements for all its members who are registered futures
commission merchants. Each self-regulatory organization other than a
contract market must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for
all its members who are registered introducing brokers. Each contract
market which elects to have a category of membership for introducing
brokers must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for
all its members who are registered introducing brokers. Each self-
regulatory organization shall submit for Commission approval any
modification or other amendments to such rules. Such requirements must
be the same as, or more stringent than, those contained in Secs. 1.10
and 1.17 and the definition of adjusted net capital must be the same as
that prescribed in Sec. 1.17(c): Provided, however, A designated self-
regulatory organization may permit its member registrants which are
registered with the Securities and Exchange Commission as securities
brokers or dealers to file (in accordance with Sec. 1.10(h)) a copy of
their Financial and Operational Combined Uniform Single Report under
the Securities Exchange Act of 1934, Part II or Part IIA, in lieu of
Form 1-FR: And, provided further, A designated self-regulatory
organization may permit its member introducing brokers to file a Form
1-FR-IB in lieu of a Form 1-FR-FCM.
* * * * *
PART 3--REGISTRATION
7. The authority citation for Part 3 is revised to read as follows:
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 4, 4a, 6, 6a, 6b,
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b,
13c, 16a, 18, 19, 21, 23.
[[Page 4642]]
Subpart A--Registration
8. Section 3.33 is amended by revising paragraph (c)(1) to read as
follows:
Sec. 3.33 Withdrawal from registration.
* * * * *
(c)(1) Where a futures commission merchant or an introducing broker
which is not operating pursuant to a guarantee agreement 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 1-FR-FCM or a Form 1-FR-IB,
respectively, which contains the information specified in
Sec. 1.10(d)(1) of this chapter as of a date not more than 30 days
prior to the date of the withdrawal request: Provided, however, That if
such registrant is also registered with the Securities and Exchange
Commission as a securities broker or dealer, it may file a copy of its
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II or Part IIA (in accordance
with Sec. 1.10(h) of this chapter), in lieu of Form 1-FR-FCM or Form 1-
FR-IB. Any financial report submitted pursuant to this paragraph (c)(1)
must contain the information specified in Sec. 1.10(d)(1) of this
chapter as of a date not more than 30 days prior to the date of the
withdrawal request.
* * * * *
PART 145--COMMISSION RECORDS AND INFORMATION
9. The authority citation for Part 145 continues to read as
follows:
Authority: Pub. L. 89-554, 80 Stat. 383, Pub. L. 90-23, 81 Stat.
54, Pub. L. 93-502, 88 Stat. 1561-1564 (5 U.S.C. 552); Sec. 101(a),
Pub. L. 93-463, 88 Stat. 1389 (5 U.S.C. 4a(j)); Pub. L. 99-570,
unless otherwise noted.
Sec. 145.5 [Amended]
10. Section 145.5 is amended by removing and reserving paragraph
(d)(1)(i)(G).
PART 147--OPEN COMMISSION MEETINGS
11. The authority citation for Part 147 continues to read as
follows:
Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.
552b); Sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.
4a(j) (Supp. V 1975)), unless otherwise noted.
Sec. 147.3 [Amended]
12. Section 147.3 is amended by removing and reserving paragraph
(b)(4)(i)(A)(7).
Issued in Washington, D.C. on January 21, 1997 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-2251 Filed 1-30-97; 8:45 am]
BILLING CODE 6351-01-P