[Federal Register Volume 63, Number 34 (Friday, February 20, 1998)]
[Rules and Regulations]
[Pages 8566-8571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4258]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 30, 33, and 190


Distribution of Risk Disclosure Statements by Futures Commission 
Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: On September 10, 1997, the Commodity Futures Trading 
Commission (``CFTC'' or ``Commission'') published for comment proposed 
amendments to its rules concerning the mandatory risk disclosure 
obligations of futures commission merchants (``FCMs'') and introducing 
brokers (''IBs'') to their customers (the ``Proposal'').\1\ 
Specifically, the Commission proposed to relieve FCMs and IBs from the 
requirements to furnish certain defined customers with mandatory risk 
disclosure statements and to receive from such customers a signed 
acknowledgment of receipt of such statements pursuant to Rule 1.55(a) 
(risk disclosure pertaining to domestic futures); Rule 30.6(a) (risk 
disclosure pertaining to foreign futures or foreign options); Rule 
33.7(a) (risk disclosure pertaining to domestic exchange-traded 
commodity options); Rule 1.65(a)(3) (risk disclosure for customers 
whose accounts are transferred other than at the customer's request to 
another FCM or IB) and Rule 190.10(c) (disclosure pertaining to 
treatment in bankruptcy of non-cash property held by an FCM as margin 
for commodity interest contracts). The comment period for the Proposal 
was sixty days and closed on November 10, 1997.
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    \1\ 62 FR 47612 (September 10, 1997).
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    The Commission has carefully considered the comments received on 
the Proposal, and based upon its review of these comments and its 
reconsideration of the proposed rule amendments, it is adopting the 
Proposal as modified herein.

EFFECTIVE DATE: April 21, 1998.

FOR FURTHER INFORMATION CONTACT:
Thomas E. Joseph, 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

    CFTC rules require FCMs and IBs to provide customers with 
Commission-approved disclosure statements describing the risks of 
trading in domestic (and, as applicable, foreign) commodity futures and 
options and to receive written acknowledgment of receipt of such 
statements prior to opening an account for the customer.\2\ In 
addition, Commission Rule 190.10(c) requires an FCM to provide a 
customer with a disclosure statement concerning the treatment in 
bankruptcy of any non-cash property deposited as margin at the FCM by a 
customer before the FCM may accept this property from the customer to 
margin, guarantee or secure any commodity interest contract.\3\ As 
discussed more fully in the Proposal, the Commission, based upon its 
previous efforts to simplify disclosure obligations of Commission 
registrants, believed that it was appropriate to provide FCMs and IBs 
with relief from certain disclosure and bankruptcy statement 
requirements in the context of accounts for specified customers and 
thus published for comment proposed amendments to the risk disclosure 
and bankruptcy rules.\4\
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    \2\ See Rule 1.55(a) (risk disclosure requirement concerning 
trading domestic commodity futures); Rule 30.6(a) (risk disclosure 
requirement concerning non-United States commodity futures or 
options contracts); and Rule 33.7(a) (risk disclosure requirement 
concerning domestic, exchange-traded commodity options).
    \3\ Commission Rule 190.10 does not require an FCM to obtain a 
customer's written acknowledgment of receipt of this statement.
    \4\ See 62 FR at 47612-13 (discussing previous Commission 
efforts to reduce and streamline disclosure obligations of 
registrants).
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    The comment period for the Proposal closed on November 10, 1997, 
although the Commission considered comments received after this date. 
The Commission received comment letters from: (1) The Chicago Board of 
Trade (``CBOT''); (2) the Government Finance Officers Association 
(``GFOA''); (3) the Chicago Mercantile Exchange (``CME''); (4) the 
Futures Industry Association (``FIA''); (5) the National Futures 
Association (``NFA''); and (6) the Association of the Bar of the City 
of New York, Committee on Futures Regulation (``NYCBar''). Only the 
GFOA opposed the Commission's effort to modify its risk disclosure 
rules, although the GFOA alternatively requested that the Commission 
delete government entities from the list of customers for whom this 
relief can be claimed. The remaining five commenters generally 
supported the Proposal but suggested certain modifications, as 
discussed more fully below. The following discussion focuses 
principally on the comments received on the Proposal and the 
modifications to the Proposal made in response to these comments. 
Additional background information on these final rules is found in the 
Federal Register release setting forth the Proposal.\5\
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    \5\ 62 FR 47612 (September 10, 1997).
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II. Discussion

    The rule amendments adopted herein eliminate the requirement that 
FCMs and IBs provide specified customers, defined in Rule 1.55(f), with 
Commission-mandated risk disclosure statements and obtain from these 
customers a written acknowledgment of receipt of the risk disclosure 
statement, as required by Rules 1.55(a), 1.65(a)(3), 30.6(a), and 
33.7(a), before opening a commodity futures or options account for 
these customers. Additionally, the amendments relieve FCMs of the 
obligation to furnish these customers with the bankruptcy disclosure 
statement required by Rule 190.10(c) before accepting non-cash property 
from such customers to margin a commodity interest contract. FCMs or 
IBs will remain free to provide customers specified in proposed Rule 
1.55(f) with the Commission-approved risk disclosure statement without 
obtaining a written acknowledgement of receipt of this statement from 
these qualifying customers.\6\
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    \6\ FCMs will also remain free to provide all customers with the 
disclosure statement concerning the treatment in bankruptcy of non-
cash property held by an FCM to margin, secure or guarantee a 
commodity interest contract.

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[[Page 8567]]

    The categories of customers specified in Rule 1.55(f) for whom an 
FCM or IB may claim the relief adopted herein are based substantially 
upon the categories of eligible swap participants in part 35 of the 
Commission rules \7\ and eligible participants in part 36 of the 
Commission rules.\8\ Rule 1.55(f) provides FCMs and IBs with clear, 
objective criteria for identifying the customers to whom delivery of 
the Commission-approved disclosure statements is not required. In this 
regard, the Commission notes that the rule contains no specific 
requirement that FCMs and IBs maintain with their books and records any 
information in addition to that already required by other Commission 
rules in order to identify a particular customer's eligibility for the 
relief provided by the proposed amendments.\9\ However, FCMs and IBs 
are required to assure that mandated disclosure statements are provided 
to customers other than those to whom this relief applies. In order to 
substantiate compliance with such disclosure requirements and exercise 
meaningful supervision over customer accounts, FCMs and IBs should 
maintain and review on a regular basis adequate documentation relevant 
to establish the qualifications of the customers for whom the relief 
adopted herein will be claimed and to confirm the identities of 
customers to whom specified risk disclosures have been made and from 
whom acknowledgments have been obtained.\10\
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    \7\ See CFTC Rule 35.1(b)(2). Part 35 of the Commission's rules 
exempts certain swap agreements from most provisions of the Act and 
Commission rules.
    \8\See CFTC Rule 36.1(c)(2). Part 36 of the Commission's rules 
exempts certain contract market transactions from specified 
provisions of the Act and Commission regulations thereunder. Parts 
35 and 36 of the Commission rules were adopted pursuant to authority 
set forth in Section 4(c) of the Act, 7 U.S.C. 6(c). See 58 FR 5587 
(January 22, 1993) (adopting Part 35) and 60 FR 51323 (October 2, 
1995) (adopting Part 36). Section 4(c)(2) of the Act, 7 U.S.C. 
6(c)(2), requires that, among other conditions, any agreement, 
contract or transaction exempted from any provision of the Act 
pursuant to Section 4(c) of the Act must ``be entered into solely 
between appropriate persons,'' who are defined in Section 4(c)(3) 
(A) through (J) of the Act, 7 U.S.C. 6(c)(3)(A)-(J). Thus, the lists 
of eligible swap participants and eligible participants were, in 
turn, modeled closely on the list of appropriate persons provided in 
Section 4(c) of the Act.
    \9\ For example, FCMs and IBs would be required to obtain and 
maintain the information required by CFTC Rule 1.37 concerning all 
customers, including customers listed in Rule 1.55(f).
    \10\ Rule 166.3 requires FCMs and IBs to supervise diligently 
the handling of commodity interest accounts.
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    The comments received on the Proposal are summarized below. The 
Commission has carefully considered these comments. For the reasons 
discussed herein, the Commission is adopting these rule amendments 
substantially as proposed, although the Commission is removing 
government entities from the list of qualifying customers set forth in 
Rule 1.55(f) \11\ and deleting language, which commenters felt was 
redundant, from Rule 1.55(f) that had referred to the obligation of any 
FCM or IB claiming this relief to ``provide such disclosure as is 
material in the circumstances.''
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    \11\ The Commission's reasons for deleting ``government 
entities'' from the categories of customers for whom the relief 
adopted may be claimed is discussed below in the subsection entitled 
Government Entities.
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Comment in Opposition to the Proposal

    The GFOA objected to the Proposal and recommended that no change be 
made in the Commission's risk disclosure requirements. The GFOA 
stressed the difficulty of developing generalized standards to assess 
financial sophistication and the likelihood that the proposed rule 
amendments will erode customer protections. However, as the Commission 
emphasized in the Proposal, its previous efforts to consolidate and 
reduce disclosure obligations for registrants have not negatively 
affected the public interest. Moreover, the Commission believes that 
the stringent criteria set forth in Rule 1.55(f), along with the 
continuing disclosure obligations set forth in newly-designated Rule 
1.55(g), will allow it to eliminate requirements for standardized risk 
disclosures and customer acknowledgments of that disclosure for certain 
specified customers without eroding overall customer protection. Thus, 
after considering GFOA's objections, the Commission continues to 
believe that it would not be contrary to the public interest to adopt 
the Proposal, as modified herein, and has decided to adopt these final 
rule amendments.

Categories of Customers for Whom Relief May Be Claimed

    All the commenters urged the Commission to reconsider the 
categories of parties for whom FCMs and IBs can claim the relief 
adopted herein. Most generally, the NYCBar questioned ``the creation of 
a further group of `sophisticated' customers'' in defining the 
categories of customers for whom FCMs or IBs can claim the risk 
disclosure relief and urged the Commission to adopt an already existing 
standard such as that used by the Commission for defining qualified 
eligible participants (``QEPs''), qualified eligible clients (``QECs'') 
or appropriate persons,\12\ or used by the Securities and Exchange 
Commission (``SEC'') to define accredited investor, qualified 
institutional buyer or qualified purchaser.\13\ The NYCBar commented 
that creation of a new class of customers will lead to even more 
paperwork as FCMs or IBs try ``to insure that they receive the 
appropriate representations permitting them to invoke the expected 
relief.'' The NYCBar also suggested that the policy reasons behind the 
selection of the criteria used to define the customers set forth in 
Rule 1.55(f) were not sufficiently explained.
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    \12\ Commission Rule 4.7, 17 CFR 4.7, defines the terms QEP and 
QEC. The term ``appropriate persons'' is defined in Section 4(c) of 
the Act.
    \13\ The term ``accredited investor'' as used in SEC Regulation 
D is defined at 17 CFR 230.501. The term ``qualified institutional 
buyer'' is defined at 17 CFR 230.144A. The term ``qualified 
purchaser'' is defined at 15 U.S.C. 80-2(a)(51)(A) and 17 CFR 
270.2a51-1. See 62 FR 17512 (April 9, 1997) (adopting, among other 
rules, 17 CFR 270.2a51-1).
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    As stated in the Proposal, the categories of customers for whom an 
FCM or IB can claim the risk disclosure relief are based substantially 
upon the existing definitions of eligible swap participant and eligible 
Part 36 participant, which themselves are based upon the definition of 
appropriate persons contained in the Act. The Commission explained that 
these definitions were ``appropriate models for the definitions set 
forth in proposed Rule 1.55(f) inasmuch as the Part 35 and 36 rules 
exempt parties from providing mandatory risk disclosure statements * * 
* in connection with transactions covered by these rules.'' \14\ 
Modifications were made to the Part 35 and 36 definitions only to 
assure that the Proposal did not cause some commodity pools to be given 
risk disclosure statements when then-current Rule 1.55 did not require 
any pool to receive such a statement and to prevent applying criteria 
from the Part 35 and 36 rules that made little sense in the context of 
the Proposal.\15\
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    \14\ 62 FR at 47613.
    \15\ Id.
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    Moreover, as discussed more fully below, the Commission does not 
believe that the criteria applicable to securities regulations or to 
other commodities transactions are as relevant as the Part 35 and Part 
36 standards in identifying which categories of FCM or IB customers do 
not require the protections afforded by mandatory risk disclosure. By 
contrast, the criteria set forth in the Part 35 and Part 36 rules 
provide a reasonable basis for protecting the public interest and 
limiting the affected categories of commodity futures or options 
customers to those persons

[[Page 8568]]

whose wealth, line of business or other proxies of financial 
sophistication render them unlikely to require the protections afforded 
by standardized risk disclosure. Therefore, with the exception of 
removing government entities, the Commission has adopted in Rule 
1.55(f) the categories of customers for whom FCMs and IBs may claim 
this relief, as proposed, based upon the reasons explained below.
Government Entities
    As an alternative to its recommendation that the Commission not 
adopt the Proposal, the GFOA urged that government entities be removed 
from the list of qualifying customers. The GFOA emphasized that the 
proposed rule did not distinguish between small, local governmental 
organizations and large state treasury operations. In this respect, 
GFOA commented that:

    Finance officers in many of the smallest jurisdictions often 
have additional responsibilities as far removed from finance as 
handling public works projects and supervising public safety 
officers. These small jurisdictions often rely on public servants 
who may have little expertise with commodities. At a minimum, they 
should be able to expect full disclosure regarding the risk of 
commodities futures prior to deciding whether or not to open a 
commodities futures account and to commit taxpayer funds to such an 
investment.

Further, the GFOA commented that ``asset-based or, similarly portfolio-
size measurement tests have proved to be ineffective as predictors of 
problems. Large entities and investors, both public and private, have 
been the victims of misrepresentations and other misconduct just as 
small ones have.'' \16\
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    \16\ In its comment letter, the GFOA noted that it had supported 
the inclusion of local governments among the entities deemed 
``eligible swap participants'' by the Part 35 rules because it 
believed that to exclude such entities would have been an 
unwarranted federal intrusion into what is properly a state 
function--that is, the regulation of allowable investment activity 
by a state and its political subdivisions. The GFOA further noted 
that, in its comments on the Part 35 rules, it recommended that the 
Commission require improved disclosure regarding the types of 
contracts being entered into and the risks involved in such 
transactions. The GFOA also stated that it had opposed the 
Commission's Part 36 professional trading market exemption.
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    The GFOA is a 13,500-member professional association of state and 
local government finance officials and other public finance specialists 
whose responsibilities include debt, cash and pension fund management 
and is in a unique position to comment upon the financial 
sophistication and disclosure needs of governmental organizations. The 
Commission, based upon the GFOA's comments, believes that government 
entities, especially those in smaller jurisdictions, would benefit from 
continued receipt of the mandatory risk and bankruptcy disclosure 
statements. Moreover, the Commission has taken note, in particular, of 
the GFOA's comments that taxpayers deserve the full protection of the 
CFTC's risk disclosure regulations. Therefore, after careful 
consideration of the GFOA's comments, the Commission has decided to 
remove government entities from the list of customers for whom FCMs or 
IBs may claim the relief provided herein.
Natural Persons
    The CBOT, CME, FIA and NFA urged the Commission to allow FCMs and 
IBs to claim the proposed relief for customers who are natural persons 
who meet financial criteria significantly less stringent than the $10 
million total asset standard proposed in the rule. The two Chicago 
futures exchanges recommended that FCMs and IBs be allowed to claim the 
relief for natural persons who are accredited investors as defined in 
SEC Regulation D. The FIA urged the Commission to allow FCMs and IBs to 
claim the relief for natural persons with a net worth of $1 million 
while the NFA suggested that the Commission apply the same standard 
used to define a natural person who is a QEP under CFTC Rule 4.7(a). 
These commenters generally argued that the standards applied to 
regulated exchange-traded futures should be less onerous than those 
applied in unregulated markets such as the swaps market. The CBOT, in 
particular, believed that it was not realistic to require an individual 
to have the same level of assets as a qualifying corporation or to have 
asset holdings twice as large as those required for a qualifying 
investment company.
    As already mentioned, the total asset test is a proxy for financial 
sophistication. Trading futures even on regulated exchanges involves 
different risks than investments in securities. Thus, the private 
offering safeharbor codified in SEC Regulation D is not necessarily 
relevant to determining when a futures customer is not in need of 
standardized risk disclosure.\17\ Moreover, the Commission does not 
believe that in the context of this relief, it is unreasonable for 
natural persons to be required to have asset holdings larger than 
entities which are directly involved in the financial industry and are 
otherwise regulated since such entities would be less likely than 
individuals to require the protections afforded by mandatory risk 
disclosure.
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    \17\ This point is also applicable to FIA's suggestion 
concerning the net worth criteria for natural persons inasmuch as 
the SEC's Regulation D defines an ``accredited investor'' to include 
a natural person with a net worth of $1 million.
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    Perhaps more relevant to the issues raised by the proposal is the 
suggestion that FCMs and IBs be able to claim the relief with respect 
to natural persons who qualify as QEPs under CFTC Rule 4.7(a). Rule 
4.7(a) relieves CPOs from providing eligible clients who invest in 
qualifying pools with a Commission required Disclosure Document (which 
normally would include a standardized risk disclosure statement), 
provided that any offering memorandum must include all disclosures 
necessary to make the information contained therein not misleading. 
However, a pool participant's potential losses are generally limited to 
the amount of his or her investment in the pool, while persons trading 
directly in the futures markets (i.e., customers of an FCM or IB) are 
exposed potentially to losses beyond amounts deposited as initial 
margin and are responsible for any deficits that occur in their 
accounts as a result of adverse price movements. Given the potentially 
disparate risk exposures assumed by pool investors and customers of IBs 
and FCMs, the QEP criteria would not necessarily be a reasonable basis 
for defining customers for whom an FCM and IB can claim the relief 
adopted herein.\18\
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    \18\ The Commission notes that natural persons, along with other 
specified persons, may qualify as a QEC of a CTA under Rule 4.7(b). 
QECs are potentially exposed to unlimited liability in connection 
with the trading of their commodity futures accounts. Some but not 
all QECs will be among the categories of customers listed in Rule 
1.55(f). Under CFTC rules in effect prior to the rule amendments 
adopted herein, all QECs received a standardized risk disclosure 
statement from an FCM or IB before opening a commodity trading 
account although AECs would not receive a Disclosure Document from a 
CTA who correctly claimed the 4.7(b) relief. Given that QECs have 
received the full protections of the CFTC risk disclosure rules 
governing FCMs and IBs, the Commission does not believe that the QEC 
criteria are appropriate for determining which persons are no longer 
in need of the protections afforded by the standardized FCM/IB risk 
disclosure statements.
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Requirement That FCMs and IBs Claiming Relief Disclose Material 
Information

    FIA and NFA urged the Commission to eliminate from proposed Rule 
1.55(f) the statement that FCMs and IBs claiming relief ``provide such 
disclosure as is material in the circumstances.'' FIA and NFA commented 
that the requirement could be viewed as imposing a higher disclosure 
standard on FCMs and IBs claiming relief under the amendments than on 
other FCMs and IBs and, in any event, it was

[[Page 8569]]

duplicative of disclosure obligations recognized in then-current Rule 
1.55(f) (redesignated Rule 1.55(g) by this final rule).\19\
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    \19\ Newly-designated Rule 1.55(g) provides: ``This section 
[Rule 1.55] does not relieve a futures commission merchant or 
introducing broker from any other disclosure obligation it may have 
under applicable law.''
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    As the Commission stated in the Proposal, FCMs and IBs currently 
have obligations independent of the duty to deliver the standardized 
risk disclosure statement to disclose to customers information that 
would be material in the circumstances. These rule amendments are not 
intended to enlarge the scope of an FCM's or IB's existing duties. 
Given that the proposed wording may create confusion concerning the 
disclosure obligations for FCMs and IBs which claim this relief, the 
Commission has decided to delete the above-cited language from Rule 
1.55(f). As the commenters noted, however, FCMs and IBs continue to 
have disclosure obligations to customers for whom this relief has been 
claimed as recognized in newly-designated Rule 1.55(g).\20\ Moreover, 
as the Commission stated when it first adopted Rule 1.55(g), ``the 
essential purpose of the rule [is] to confirm the existing obligations 
of an FCM or IB under the law to disclose material information to its 
customers.'' \21\
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    \20\ The NYCBar also urged the Commission to define ``the scope 
and duty of such remaining [risk] disclosure obligations.'' As the 
Commission stated in the Proposal, these minimum disclosure 
obligations arise under the Act, under state law and under common 
law, and may differ in particular circumstances. See 62 FR at 47614-
15. Thus, the scope of an FCM's or IB's disclosure obligations will 
be affected by the particular facts surrounding a transaction and by 
the Act, by state law and by common law, as interpreted by the 
courts or in administrative proceedings. See id. at 47615 n.22.
    \21\ 50 FR 5380, 5381 (February 8, 1985).
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Obligation That FCM or IB Assure That Customers for Whom Relief Is 
Claimed Qualify for Such Relief

    FIA argued that FCMs or IBs should be able to claim the proposed 
relief and be relieved of any disclosure obligation if a customer's 
investment adviser or CTA represents that the client qualifies for 
relief and that the adviser or the CTA has made all necessary 
disclosure to such client. FIA contended that an institutional client's 
primary market relationship is with its investment adviser or CTA and 
not the FCM or IB and, thus, a CTA or adviser should have primary 
responsibility for disclosure. FIA also urged the Commission to 
consider whether CTAs and investment advisers, and not the carrying 
FCMs, should be responsible for providing their clients with the 
necessary risk and related disclosures in all circumstances, without 
regard to the financial status of those clients.
    FCMs and IBs have obligations under Commission Rules 166.3, 1.37 
and, as designated herein, 1.55(g) to supervise customer accounts 
diligently, to maintain accounts in the name of the ultimate customer, 
and to provide customers with adequate disclosure. In addition, the 
Commission has stated, and current law has already recognized, that an 
FCM's or IB's disclosure obligations vary with the functions and 
responsibilities that an FCM or IB undertakes on behalf of a 
customer.\22\ This current rulemaking is not intended to shift an FCM's 
or IB's existing obligations to other parties, such as a CTA or 
investment adviser, and therefore, the Commission has not made any 
change in the Proposal in response to this comment.
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    \22\ See 50 FR at 5381-82 (``the extent of the required risk 
disclosure [by an FCM or IB] will vary with the precise nature of 
the customer relationship and with the degree of customer reliance 
on an FCM's or IB's advice'').
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Financial and Segregation Interpretation No. 12

    The CBOT, CME, FIA and NFA suggested that the Commission eliminate 
the requirement under Financial and Segregation Interpretation No. 12 
that FCMs receive a signed, Commission-mandated subordination agreement 
from customers before the customer may have segregated funds held in 
foreign depositories. The Commission notes that on December 30, 1997, 
it published a concept release soliciting public comment on how to 
address risks related to holding segregated funds offshore or in 
foreign currencies.\23\ Since the subordination agreement has been one 
means by which the Commission has addressed these risks,\24\ comments 
concerning the need for or effectiveness of the subordination agreement 
requirement would best be considered by the Commission in connection 
with the December 30, 1997 concept release and not as part of this 
rulemaking exercise.\25\
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    \23\ 62 FR 67841 (December 30, 1997).
    \24\ See 53 FR 46911, 46913 (November 21, 1988) (release 
adopting Financial and Segregation Interpretation No. 12).
    \25\ Comments concerning the issues addressed in the concept 
release, including those related to the subordination agreement 
requirement, should be received by the Commission on or before March 
2, 1998. See 62 FR 67841.
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Electronic Distribution of Risk Disclosure Statement

    FIA and NFA also urged the Commission to allow FCMs/IBs to 
establish customer acknowledgment of receipt of electronically-
distributed risk disclosure statements through means of a unique 
customer identifier. Such a change would bring FCM and IB disclosure 
rules into line with similar, recently-amended rules for CPOs and CTAs 
\26\ and permit FCMs and IBs to deliver the required risk disclosure 
statements electronically to all categories of customers.
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    \26\ See 62 FR 39104 (July 22, 1997) (amending Rules 4.21 and 
4.31).
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    The Commission did not address the question of a customer's 
``electronic'' acknowledgment of risk disclosure statements in the 
Proposal. Any change in current procedures would clearly affect the 
rights of commodity futures customers beyond those persons identified 
in Rule 1.55(f), and such customers should be allowed adequate notice 
and opportunity to comment on any possible changes to current rules. 
However, although the Commission believes that this suggested change is 
outside the scope of the current rulemaking, the Commission recognizes 
the importance of the issues raised by FIA and NFA and will consider 
undertaking a future rulemaking or other action to address these 
issues.\27\
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    \27\ CFTC staff is reviewing issues related to the electronic 
distribution and acknowledgment of documents and will provide the 
Commission with recommendations on how best to address these issues.
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III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in promulgating final rules, consider the 
impact of those rules on small businesses. The rules discussed herein 
will affect FCMs and IBs. The Commission has already 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. FCMs have been determined not to be small 
entities under the RFA.
    With respect to IBs, the Commission has stated that it is 
appropriate to evaluate within the context of a particular rule 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. These 
rule amendments would not require any IB to alter its current method of 
doing business. Instead the rule amendments provide IBs with relief 
from certain disclosure and recordkeeping requirements with respect to 
certain identified customers. Presumably, an IB would only choose to 
make use of this relief if it were cost-

[[Page 8570]]

 effective to do so. Further, these rule amendments impose no 
additional burden or requirements on IBs and, thus, should not have a 
significant economic impact on a substantial number of IBs.

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. There is no burden associated with the rule amendments 
to Rule 1.55 or Rule 1.65. While these rule amendments have no burden, 
the group of rules (3038-0024) of which these rules are a part has the 
following burden:

Average burden hours per response: 128
Number of Respondents: 3,148
Frequency of response: 36

    Three OMB approved collections are affected by the adoption of 
these rule amendments. 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.

    The Commission previously submitted these rule amendments in 
proposed form and its associated information collection requirements to 
the Office of Management and Budget. The Office of Management and 
Budget approved the associated information collection on January 6, 
1998.
    3038-0007--Regulation of Domestic Exchange-Traded Commodity 
Options. The burden associated with collection 3038-0007, including 
these final rule amendments, is as follows:

Average burden hours per response: 50.57
Number of Respondents: 190,422
Frequency of response: 1,111

    The burden associated with Rule 33.7 is as follows:

Average burden hours per response: 0.08
Number of Respondents: 175
Frequency of response: 115

    3038-0021--Regulations Governing Bankruptcies of Commodity Brokers. 
The burden associated with collection 3038-0021, including these final 
rule amendments, is as follows:

Average burden hours per response: 0.35
Number of Respondents: 472
Frequency of response: 34

    The burden associated with Rule 190.10(c) is as follows:

Average burden hours per response: 0.05
Number of Respondents: 235
Frequency of response: 8

    3038-0035--Rules Relating to the Offer and Sale of Foreign Futures 
and Options. The burden associated with collection 3038-0035, including 
these final rule amendments, is as follows:

Average burden hours per response: 15.70
Number of Respondents: 2,832
Frequency of response: 48

    The burden associated with Rule 30.6 is as follows:

Average burden hours per response: 0.60
Number of Respondents: 360
Frequency of response: 4

    Persons wishing to comment on the information which would be 
required by these amended rules 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

    Customer protection, Risk disclosure statements, Commodity futures.

17 CFR Part 30

    Foreign futures and options transactions, Customer protection, Risk 
disclosure statements.

17 CFR Part 33

    Domestic exchange-traded commodity options transactions.

17 CFR Part 190

    Bankruptcy.

    In consideration of the foregoing and pursuant to the authority 
contained in the Commodity Exchange Act and in particular sections 
2(a)(1), 4b, 4c, 4d, 4f, 4g and 8a of the Act, as amended, 7 U.S.C. 2, 
6b, 6c, 6f, 6g and 12a, 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, 24.

    2. Section 1.55 is amended by revising paragraph (a)(1), by 
removing paragraph (a)(1)(iii), by redesignating paragraph (f) as 
paragraph (g), and by adding new paragraph (f) to read as follows:


Sec. 1.55  Distribution of ``Risk Disclosure Statement'' by futures 
commission merchants and introducing brokers.

    (a)(1) Except as provided in Sec. 1.65, no futures commission 
merchant, or in the case of an introduced account no introducing 
broker, may open a commodity futures account for a customer, other than 
for a customer specified in paragraph (f) of this section, unless the 
futures commission merchant or introducing broker first:
* * * * *
    (f) A futures commission merchant or, in the case of an introduced 
account an introducing broker, may open a commodity futures account for 
a customer without furnishing such customer the disclosure statements 
or obtaining the acknowledgments required under paragraph (a) of this 
section, Sec. 1.65(a)(13), and Sec. 30.6(a), Sec. 33.7(a), and 
Sec. 190.10(c) of this chapter, provided that the customer is, at the 
time at which the account is opened:
    (1) A bank or trust company;
    (2) A savings association or credit union;
    (3) An insurance company;
    (4) An investment company subject to regulation under the 
Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, et seq.) or a 
foreign entity performing a similar role or function subject as such to 
foreign regulations, provided that such investment company has total 
assets exceeding $5,000,000;
    (5) A pool operated by a commodity pool operator registered under 
the Commodity Exchange Act or exempt such registration or by a foreign 
person performing a similar function to that of a commodity pool 
operator and subject as such to foreign regulation;
    (6) A corporation, partnership, proprietorship, organization, 
trust, or other entity:
    (i) which has total assets exceeding $10,000,000; or

[[Page 8571]]

    (ii) which has a net worth of $1,000,000;
    (7) An employee benefit plan subject to the Employee Retirement 
Income Security Act of 1974, or a foreign person performing a similar 
role or function and subject as such to foreign regulation, with total 
assets exceeding $5,000,000 or whose investment decisions are made by a 
bank, trust company, insurance company, investment adviser subject to 
regulation under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1, 
et seq.), or a commodity trading advisor subject to regulation under 
the Commodity Exchange Act;
    (8) A broker-dealer subject to regulation under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a, et seq.) or a foreign person 
performing a similar role or function subject as such to foreign 
regulation, acting on its own behalf: provided, however, that if such 
broker-dealer is a natural person or proprietorship, the broker-dealer 
must also meet the requirements of paragraphs (f)(6) or (f)(10) of this 
section;
    (9) A futures commission merchant, floor brokers, or floor traders 
subject to regulation under the Commodity Exchange Act or a foreign 
person performing a similar role or function subject as such to foreign 
regulation; or
    (10) Any natural person with total assets exceeding $10,000,000.
* * * * *
    3. Section 1.65 is amended by redesignating paragraph (a)(3)(ii) as 
(a)(3)(iii) and adding new paragraph (a)(3)(ii) to read as follows:


Sec. 1.65  Notice of bulk transfers and disclosure obligations to 
customers.

    (a) * * *
    (3) * * *
    (ii) As to customers for which the transferee futures commission 
merchant or introducing broker has clear evidence that such customer 
was at the time the account was opened by the transferring futures 
commission merchant or introducing broker, or is at the time the 
account is being transferred, a customer listed in Sec. 1.55(f); or
* * * * *

PART 30--FOREIGN FUTURES OR FOREIGN OPTIONS TRANSACTIONS

    4. The authority citation for part 30 continues to read:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise 
noted.

    5. Section 30.6 is amended by revising paragraph (a) to read as 
follows:


Sec. 30.6  Disclosure.

    (a) Future commission merchants and introducing brokers. Except as 
provided in Sec. 1.65 of this chapter, no futures commission merchant, 
or in the case of an introduced account no introducing broker, may open 
a foreign futures or option account for a foreign futures or option 
customer, other than for a customer specified in Sec. 1.55(f) of this 
chapter, unless the futures commission merchant or introducing broker 
first furnishes the customer with a separate written disclosure 
statement containing only the language set forth in Sec. 1.55(b) of 
this chapter or as otherwise approved under Sec. 155(c) of this chapter 
(except for nonsubstantive additions such as captions), which has been 
acknowledged in accordance with Sec. 1.55 of this chapter: Provided, 
however, that the risk disclosure statement may be attached to other 
documents as the cover page or the first page of such documents and as 
the only material on such page.
* * * * *

PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION 
TRANSACTIONS

    6. The authority citation for part 33 continues to read:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c,6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-
1, 13b, 19, and 21, unless otherwise noted.

    7. Section 33.7 is amended by revising paragraph (a)(1) 
introductory text, to read as follows:


Sec. 33.7  Disclosure.

    (a)(1) Except as provided in Sec. 1.65 of this chapter, no futures 
commission merchant, or in the case of an introduced account no 
introducing broker, may open or cause the opening of a commodity option 
account for an option customer, other than for a customer specified in 
Sec. 1.55(f) of this chapter, unless the futures commission merchant or 
introducing broker first:
* * * * *

PART 190--BANKRUPTCY

    8. The authority citation for Part 190 continues to read:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24, 
and 11 U.S.C. 362, 546, 548, 556 and 761-766, unless otherwise 
noted.

    9. Section 190.10 is amended by revising paragraph (c)(1) to read 
as follows:


Sec. 190.10  General.

* * * * *
    (c) Disclosure statement for non-cash margin. (1) Except as 
provided in Sec. 1.65 of this chapter, no commodity broker (other than 
a clearing organization) may accept property other than cash from or 
for the account of a customer, other than a customer specified in 
Sec. 1.55(f) of this chapter, to margin, guarantee, or secure a 
commodity contract unless the commodity broker first furnishes the 
customer with the disclosure statement set forth in paragraph (c)(2) of 
this section in boldface print in at least 10 point type which may be 
provided as either a separate, written document or incorporated into 
the customer agreement, or with another statement approved under 
Sec. 1.55(c) of this chapter and set forth in appendix A to Sec. 1.55 
which the Commission finds satisfies this requirement.
* * * * *
    Issued in Washington, DC on February 13, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-4258 Filed 2-19-98; 8:45 am]
BILLING CODE 6351-01-M