[Federal Register Volume 63, Number 185 (Thursday, September 24, 1998)]
[Proposed Rules]
[Pages 51048-51051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25622]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3


Temporary Licenses for Associated Persons, Floor Brokers, Floor 
Traders and Guaranteed Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing amendments to its rules governing the granting of a 
temporary license (TL) by the National Futures Association (NFA) to 
applicants for registration in the categories of associated person 
(AP), floor broker (FB), floor trader (FT), and guaranteed introducing 
broker (IBG). These amendments would authorize NFA, in appropriate 
cases, to grant a TL to an applicant despite a ``yes'' answer to a 
Disciplinary History question, which currently makes an applicant 
ineligible for a TL. The Commission is proposing these amendments so 
that it may approve certain registration rules submitted by NFA without 
creating any inconsistency between the Commission's rules and those of 
NFA.

DATES: Comments must be submitted on or before October 26, 1998.

ADDRESSES: Comments on the proposed rules should be sent to Jean A. 
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street, NW., Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 418-5521, or by e-mail to 
[email protected]. Reference should be made to ``Temporary License 
Eligibility.''

FOR FURTHER INFORMATION CONTACT:
Lawrence B. Patent, Associate Chief Counsel, Division of Trading and 
Markets, Commodity Futures Trading Commission, Three Lafayette Center, 
1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5439.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 8a(1) of the Commodity Exchange Act (Act) was amended in 
1983 to authorize the Commission to grant a TL to an applicant for 
registration for a period not to exceed six months, subject to such 
rules, regulations and orders as the Commission may adopt.\1\ This 
amendment to the Act was intended to ``streamline and simplify the 
current registration procedures to enable the Commission to register 
fit persons more expeditiously.'' \2\
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    \1\ Futures Trading Act of 1982, Pub. L. 97-444, Section 223, 96 
Stat. 2310 (1983).
    \2\ H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 50 (1982).
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    The Commission adopted Rules 3.40-3.43 on February 27, 1984, to 
implement this authority with respect to AP applicants \3\ and 
simultaneously authorized NFA to perform the function of granting TLs 
to AP applicants in appropriate cases.\4\ The Commission added Rules 
3.44-3.47 to govern TLs for IBG applicants on December 16, 1986,\5\ and 
amended Rules 3.11 and 3.40-3.43 to govern TLs for FB and FT applicants 
on April 9, 1993.\6\ NFA adopted its own rules concerning TLs for APs 
and IBGs, which the Commission has approved.\7\ The Commission's rules 
and the NFA's rules currently in effect provide that, except as 
described below, one of the conditions for obtaining a TL is that an 
applicant have no ``yes'' answers to the Disciplinary History questions 
on the registration application.\8\ The exception concerns an applicant 
for registration as an AP, FB or FT whose previous registration in 
these capacities was terminated within the preceding 60 days. These 
applicants will receive a TL upon mailing of a new registration 
application (Form 8-R) if, among other things, the new registration 
application (1) contains no ``yes'' answers to the Disciplinary History 
questions, or (2)

[[Page 51049]]

none except those arising from a matter that already has been disclosed 
in connection with a previous registration application if registration 
was granted, or (3) the ``yes'' answer was disclosed more than 30 days 
previously in an amendment to the prior registration application.\9\
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    \3\ 49 FR 8208 (March 5, 1984). An AP is a natural person who 
(1) solicits or accepts customer orders for a futures commission 
merchant (FCM) or IB, (2) solicits a client's or prospective 
client's discretionary account for a commodity trading advisor, (3) 
solicits funds, securities or property for a participation in a 
commodity pool on behalf of a commodity pool operator, or (4) 
supervises any of the foregoing persons so engaged. Section 4k(1)-
(3) of the Act; Commission Rule 1.3(aa).
    \4\ 49 FR 8226 (March 5, 1984).
    \5\ 51 FR 45759 (Dec. 22, 1986). An IBG is a person (except an 
individual who elects to be and is registered as an AP of an FCM) 
engaged in soliciting or accepting customer orders but not the 
margin funds related thereto and who enters into a guarantee 
agreement with an FCM. The guarantee agreement relieves the IBG of 
the need to raise its own capital and restricts it to introducing 
accounts only to its guarantor FCM. Section 1a(14) of the Act; 
Commission Rules 1.3(mm), 1.17(a)(2)(ii) and 1.57(a)(1).
    \6\ 58 FR 19575 (Apr. 15, 1993). The related delegation order to 
NFA was issued simultaneously and published at 58 FR 19657 (Apr. 15, 
1993). An FB can trade for others or for his or her own account on 
or subject to the rules of any contract market; an FT can trade only 
for his or her own account on or subject to the rules of any 
contract market. Section 1a(8) and (9) of the Act; Commission Rule 
1.3(n) and (x).
    \7\ NFA Rules 301 and 302, respectively.
    \8\ Commission Rules 3.40(a) and 3.44(a)(2). The no ``yes'' 
answer restriction extends to principals of an IBG as well. 
Commission Rule 3.44(a)(3). See also Commission Rules 
3.11(c)(1)(ii)(D) and 3.11(c)(2)(ii) concerning an FT, or a person 
whose registration as an FT terminated within the preceding 60 days, 
seeking to become an FB.
    \9\ Commission Rules 3.11(c)(1)(i)(C), 3.11(c)(1)(ii)(C) and 
3.12(d)(1)(vi); NFA Rule 301(b)(1)(D). See also Commission Rule 
3.44(a)(3) and NFA Rule 302(a)(3) concerning principals of an IBG.
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    Rules authorizing the issuance of TLs were adopted so that 
apparently fit persons (i.e., those who had not self-declared any 
derogatory information on their registration applications) could begin 
acting like registrants in certain categories while various background 
checks were conducted. For example, checking an individual's 
fingerprints through the Federal Bureau of Investigation database can 
take six to eight weeks. The Commission believes that providing TLs is 
appropriate in light of the time required to complete the various 
background checks on applicants for registration.

II. NFA Proposals

    NFA has adopted and submitted for Commission approval amendments to 
NFA Rules 301 and 302, governing TLs for APs and IBGs, as well as new 
NFA Rule 303 to govern TLs for FBs and FTs. NFA's submission was made 
pursuant to Section 17(j) of the Act by letter dated August 25, 1997. 
In response to letters from the Commission's Division of Trading and 
Markets, NFA supplemented its submission by letters dated January 22, 
February 19 and August 11, 1998.\10\
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    \10\ Copies of the NFA rules submitted for Commission approval 
may be obtained upon request from the Commission's Office of the 
Secretariat at the address listed above.
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    NFA's rule amendments and the new rule would eliminate the no 
``yes'' answer criterion as an absolute bar to issuance of a TL. NFA 
notes that it now may not grant TLs to new applicants (i.e., those not 
registered within the preceding 60 days) with ``yes'' answers no matter 
how innocuous the disclosed matter may be, even if NFA has previously 
granted registration despite the ``yes'' answer. NFA believes that this 
restriction is no longer necessary because it has developed sufficient 
expertise exercising the authority granted to it in various Commission 
delegation orders to identify in an accurate and prompt manner those 
types of disciplinary matters that it would not use to disqualify an 
applicant from registration.
    NFA represents that under its proposed approach it would use its 
authority to grant TLs to applicants with ``yes'' answers that (1) NFA 
had previously cleared, or (2) NFA knew that it intended to clear. NFA 
further represents that it only brings adverse actions in circumstances 
that are ``similar to those in which the Commission has instituted 
registration actions based upon disciplinary offenses'' and that, in 
evaluating whether any applicant should be granted a TL despite a 
``yes'' answer to a Disciplinary History question, it will follow the 
recent guidance set forth by the Commission concerning the treatment of 
disciplinary histories of FBs, FTs and applicants for registration in 
either category.\11\
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    \11\ See Commission Advisory 61-97 (Dec. 8, 1997), to which is 
attached a letter to Robert K. Wilmouth, NFA President, from Jean A. 
Webb, Secretary of the Commission, dated Dec. 4, 1997.
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    NFA's new rule and rule amendments would also affect applicants for 
AP, FB and FT registration applying within 60 days of their last 
registration. Currently, these applicants may receive TLs upon mailing 
of a new Form 8-R if they have no new ``yes'' answers to Disciplinary 
History questions. A new ``yes'' answer in these circumstances is an 
answer that the applicant has not previously disclosed or has disclosed 
for the first time within 30 days of the submitted application.
    NFA represents that this ``no-new-yes'' answer requirement creates 
processing difficulties for NFA's automated registration processing 
system, the Membership Registration Receivables System (MRRS). NFA 
explained that, in order to process transfer TLs,\12\ MRRS must compare 
the date of the application and the date of the applicant's last 
registration termination in order to determine if the 60-day 
requirement is met. Next, MRRS must determine whether the applicant has 
previously disclosed the ``yes'' answer. MRRS then compares the date of 
the current application to the date the applicant previously disclosed 
the ``yes'' answer to determine if the 30-day requirement is satisfied. 
NFA represents that the procedures for transferring registrations also 
can produce processing errors that must be manually reviewed and 
corrected, thus consuming a significant amount of staff resources.\13\
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    \12\ The term ``transfer TL'' is used because the Commission's 
rules and similar NFA rules in this area were intended to permit an 
AP to move from one firm to another without an interruption. For 
example, an AP could leave Firm A on Friday, mail in his new Form 8-
R with a sponsor certification from Firm B, and be at work for Firm 
B under a TL on Monday morning.
    \13\ As an example, NFA indicates that in 1996 there were 24 
instances in which it did not grant TLs because of new ``yes'' 
answers. However, NFA ultimately granted registration to all but one 
of those individuals, while the remaining individual withdrew his 
application.
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    NFA proposes to eliminate the no-new-yes answer requirement from 
its Registration Rules. NFA believes that its proposal would enable it 
to achieve its regulatory goals more efficiently. NFA contends that, 
under this proposed approach, MRRS would operate more efficiently and 
staff resources could be redirected to facilitate the quick 
identification of transfer applicants who receive TLs despite 
problematic disciplinary history information. NFA represents that, when 
appropriate, it would promptly terminate such TLs and institute 
registration denial proceedings.

III. Proposed Commission Rule Amendments

    Although the NFA rule amendments concerning TLs submitted for 
Commission approval remain subject to Commission review and possible 
further refinement, the Commission preliminarily views the NFA rule 
amendments positively. As noted above, however, the NFA rule amendments 
are not consistent with Commission rules issued under Section 8a(1) of 
the Act, and therefore, the Commission could not approve them pursuant 
to Section 17(j) of the Act.\14\ Accordingly, in order to permit the 
Commission to approve the NFA rule amendments, the Commission is 
proposing to amend its rules governing TLs.\15\ The Commission's rule 
amendments would eliminate the provision that NFA may not grant a TL to 
an AP, FB, FT or IBG applicant if the applicant's registration 
application contains a ``yes'' answer to a Disciplinary History 
question.\16\ The Commission is also proposing to eliminate the no-new-
yes answer requirement from its rules governing TLs of AP, FB and FT 
applicants whose

[[Page 51050]]

registration terminated within the preceding 60 days.\17\
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    \14\ Section 17(j) of the Act provides in pertinent part that 
``A registered futures association shall submit to the Commission 
any change in or addition to its rules * * *. The Commission shall 
approve such rules, if such rules are determined by the Commission 
to be consistent with the requirements of this section and not 
otherwise in violation of this Act or the regulations issued 
pursuant to this Act * * *.''
    \15\ The Commission anticipates that, if it determines to 
approve NFA's rule amendments discussed above, such approval will be 
made concurrent with adoption of final Commission rule amendments 
that are being proposed herein.
    \16\ In the case of an IBG applicant, the provision pertaining 
to principals of the applicant would be amended similarly. See 
proposed amendments to Rules 3.40(a) and 3.44(a) (2) and (3).
    \17\ See proposed amendments to Commission Rules 3.11(c)(1)(i) 
and (c)(1)(ii), and 3.12(d)(1) and (d)(3).
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    There are two provisions of the Commission's rules where a ``yes'' 
answer to a Disciplinary History question will prevent granting of 
registration, not merely at TL. These circumstances pertain to: (1) a 
registered FT seeking to become registered as an FB (Commission Rule 
3.11(c)(2)(ii)); and (2) an AP whose registration is terminated because 
of the revocation or withdrawal of the sponsor's registration and who 
becomes associated with a new sponsor (Commission Rule 3.12(i)).\18\ 
Since these provisions are modeled upon those governing TLs, the 
Commission believes that it is appropriate to amend these provisions to 
remove the no ``yes'' answer restriction as well.
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    \18\ The AP situation could arise where, for example, one FCM 
merges into another, the merged FCM withdraws its registration and 
the surviving FCM absorbs the APs of the disappearing FCM.
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    The Commission also wishes to note that certain of its rules 
related to TLs are not being amended. Commission rules provide that a 
TL shall terminate immediately upon notice to an applicant that the 
applicant failed to disclose relevant disciplinary history or to 
disclose that, following the submission of the application, an event 
has occurred leading to an affirmative response. Such a notice must 
also be provided to the applicant's sponsor (in the case of an AP 
applicant), the contract market that has granted trading privileges (in 
the case of an FB or FT applicant) or the guarantor FCM (in the case of 
an IBG applicant).\19\ The Commission emphasizes that it is important 
for all applicants to continue to declare derogatory information as 
required by the registration forms since failure to do so can lead to 
termination of a TL and, if willful, to denial or conditioning of 
registration.\20\
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    \19\ The notice concerning failure to disclose or the occurrence 
of an event leading to an affirmative response also applies to a 
principal of an IBG. Commission Rules 3.42(a)(8) and 3.46(a)(10).
    \20\ See Section 8a(2)(G) and (3)(G) of the Act.
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    The Commission further notes that it is not amending the provisions 
of its rules governing TLs for FB applicants that restrict such persons 
to operating as an FT while the applicant has a TL prior to being 
granted registration as an FB.\21\
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    \21\ This restriction to acting only in the capacity of an FT 
during the pendency of the TL does not apply if the FB applicant was 
registered as an FB within the preceding 60 days. Commission Rule 
3.41(a).
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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 discussed herein 
would affect APs, FBs, FTs and IBGs. The Commission has previously 
determined to evaluate within the context of a particular rule proposal 
whether all or some FBs, FTs, and IBGs should be considered ``small 
entities'' for purposes of the RFA and, if so, to analyze the economic 
impact on FBs, FTs and IBGs of any such rule at that time.\22\ The rule 
amendments proposed herein will not affect the requirements for filing 
an application for registration. If adopted, these amendments will 
permit certain persons to obtain a TL where it now is not possible and 
thus permit them to begin lawfully acting as industry professionals 
sooner. Accordingly, the Chairperson, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the action taken 
herein will not have a significant economic impact on a substantial 
number of small entities.
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    \22\ See 47 FR 18618, 18620 (Apr. 30, 1982) (FBs); 48 FR 35248, 
35276-35278 (Aug. 3, 1983) (IBGs); and 58 FR 19575, 19588 (Apr. 15, 
1993) (FTs). With respect to APs, the Commission has previously 
stated that the RFA does not apply to APs because APs must be 
individuals under Section 4k of the Act and Rule 1.3(aa). See 48 FR 
14933, 14954 n.115 (Apr. 6, 1983).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq. 
(Supp. I 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 PRA. While 
the proposed rule amendments have no burden, the group of rules (3038-
0023) of which they are a part has the following burden:

Average Burden Hours Per Response.........  15.76
Numberr of Respondents....................  73,435
Frequency of Response.....................  Annually and on occasion.

    Copies of the OMB approved information collection package 
associated with these rules may be obtained from Desk Officer, CFTC, 
Office of Management and Budget, Room 10202, NEOB, Washington, DC 
20503, (202) 395-7340.

List of Subjects in 17 CFR Part 3

    Brokers, Registration.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, Sections 
4d, 4e, 4k, 8a and 17 thereof, 7 U.S.C. 6d, 6e, 6k, 12a and 21, the 
Commission hereby proposes to amend Part 3 of Chapter I of Title 17 of 
the Code of Federal Regulations as follows:

PART 3--REGISTRATION

    1. The authority citation for Part 3 continues 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, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 
13b, 13c, 16a, 18, 19, 21, and 23.

    2. Section 3.11 is proposed to be amended by revising paragraphs 
(c)(1)(i)(A) and (c)(1)(i)(B), by removing paragraph (c)(1)(i)(C), by 
revising paragraphs (c)(1)(ii)(A), (c)(1)(ii)(B) and (c)(1)(ii)(C), by 
removing paragraph (c)(1)(ii)(D) and redesignating paragraph 
(c)(1)(ii)(E) as paragraph (c)(1)(ii)(D), and by revising paragraph 
(c)(2)(ii) to read as follows:


Sec. 3.11  Registration of floor brokers and floor traders.

* * * * *
    (c) * * *
    (1) * * *
    (i) * * *
    (A) The person's registration as a floor broker is not suspended or 
revoked; and
    (B) There is no pending adjudicatory proceeding against the person 
under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55 
or 3.60 and, within the preceding twelve months, the Commission has not 
permitted the withdrawal of an application for registration in any 
capacity after initiating the procedures provided in Sec. 3.51.
    (ii) * * *
    (A) The person's registration as a floor trader is not suspended or 
revoked; and
    (B) There is no pending adjudicatory proceeding against the person 
under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Secs. 3.55 or 
3.60 and, within the preceding twelve months, the Commission has not 
permitted the withdrawal of an application for registration in any 
capacity after initiating the procedures provided in Sec. 3.51.
    (C) If such person is seeking registration as a floor broker, the 
person will be granted a temporary license to act in the capacity of 
floor trader only if the person's prior registration was not subject to 
conditions or restrictions.
* * * * *
    (2) * * *
    (ii) Any person registered as a floor trader whose registration is 
not subject

[[Page 51051]]

to conditions or restrictions and who continuously maintains trading 
privileges at any contract market that has made the certification 
required under Sec. 3.40 will be registered as, and in the capacity of, 
a floor broker upon mailing to the National Futures Association of a 
Form 3-R completed and filed in accordance with the instructions 
thereto indicating the intention to change registration category, 
accompanied by evidence of the granting of trading privileges at the 
new contract market, if applicable.
* * * * *
    3. Section 3.12 is proposed to be amended by revising paragraphs 
(d)(1)(iv) and (d)(1)(v), by removing paragraph (d)(1)(vi), by revising 
paragraphs (d)(3) and (i)(1)(v), by removing paragraph (i)(1)(vi) and 
redesignating paragraph (i)(1)(vii) as paragraph (i)(1)(vi), and by 
revising paragraph (i)(2) to read as follows:


Sec. 3.12  Registration of associated persons of futures commission 
merchants, introducing brokers, commodity trading advisors, commodity 
pool operators and leverage transaction merchants.

* * * * *
    (d) * * *
    (1) * * *
    (iv) Whether there is a pending adjudicatory proceeding under 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Secs. 3.55, 3.56 or 
3.60 or if, within the preceding twelve months, the Commission has 
permitted the withdrawal of an application for registration in any 
capacity after instituting the procedures provided in Sec. 3.51 and, if 
so, that the sponsor has been given a copy of the notice of the 
institution of a proceeding in connection therewith; and
    (v) That the sponsor has received a copy of the notice of the 
institution of a proceeding if the applicant has certified, in 
accordance with paragraph (d)(1)(iv) of this section, that there is a 
proceeding pending against the applicant as described in that paragraph 
or that the Commission has permitted the withdrawal of an application 
for registration as described in that paragraph.
* * * * *
    (3) The certifications permitted by paragraphs (d)(1)(i) and (v) of 
this section must be signed and dated by an officer, if the sponsor is 
a corporation, a general partner, if a partnership, or the proprietor, 
if a sole proprietorship. The certifications permitted by paragraphs 
(d)(1)(ii)-(iv) of this section must be signed and dated by the 
applicant for registration as an associated person.
* * * * *
    (i) * * *
    (1) * * *
    (v) That the new sponsor has received a copy of the notice of the 
institution of a proceeding if the applicant for registration has 
certified, in accordance with paragraph (i)(1)(iv) of this section, 
that there is a proceeding pending against the applicant as described 
in that paragraph or that the Commission has permitted the withdrawal 
of an application for registration as described in that paragraph; and
* * * * *
    (2) The certifications required by paragraphs (i)(1)(i), (i)(1)(v), 
and (i)(1)(vi) of this section must be signed and dated by an officer, 
if the sponsor is a corporation, a general partner, if a partnership, 
or the proprietor, if a sole proprietorship. The certifications 
required by paragraphs (i)(1)(ii)-(iv) of this section must be signed 
and dated by the applicant for registration as an associated person.
* * * * *
    4. Section 3.40 is proposed to be amended by revising paragraph (a) 
to read as follows:


Sec. 3.40  Temporary licensing of applicants for associated person, 
floor broker or floor trader registration.

* * * * *
    (a) A Form 8-R, properly completed in accordance with the 
instructions thereto;
* * * * *
    5. Section 3.44 is proposed to be amended by revising paragraphs 
(a)(2) and (a)(3) to read as follows:


Sec. 3.44  Temporary licensing of applicants for guaranteed introducing 
broker registration.

* * * * *
    (a) * * *
    (2) A Form 7-R properly completed in accordance with the 
instructions thereto;
    (3) A Form 8-R for the applicant, if a sole proprietor, and each 
principal (including each branch office manager) thereof, properly 
completed in accordance with the instructions thereto, all of whom 
would be eligible for a temporary license if they had applied as 
associated persons;
* * * * *
    Issued in Washington, DC on September 21, 1998, by the 
Commission.
Jean A. Webb,
Secretary of Commission.
[FR Doc. 98-25622 Filed 9-23-98; 8:45 am]
BILLING CODE 6351-01-M