[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Rules and Regulations]
[Pages 1725-1728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-653]


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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: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
has adopted 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 authorize NFA, in appropriate cases, to 
grant a TL to an

[[Page 1726]]

applicant despite a ``yes'' answer to a Disciplinary History question, 
which currently makes an applicant ineligible for a TL. The Commission 
adopted these amendments so that it could approve certain registration 
rules submitted by NFA without creating any inconsistency between the 
Commission's rules and those of NFA.

EFFECTIVE DATE: February 11, 1999.

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. CFTC Rules

A. Proposed Rule Amendments

    On September 21, 1998, the Commission issued proposed amendments to 
its rules governing the granting of a TL by NFA to applicants for 
registration in the categories of AP, FB, FT and IBG.\1\ Among other 
things, these proposed rule 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 impetus for the Commission's 
proposals was NFA's submission for Commission approval of 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 rule amendments and 
the new rule would eliminate the no ``yes'' answer criterion as an 
absolute bar to the issuance of a TL. The Commission proposed 
amendments to its own rules so that it could approve the rule 
amendments and new rule submitted by NFA without creating any 
inconsistency between the Commission's rules and those of NFA.\2\ The 
Commission also proposed, in response to NFA's submission, to eliminate 
the ``no-new-yes'' answer requirements from its rules governing TLs of 
AP, FB or FT applicants whose registration terminated within the 
preceding 60 days in order to permit more of these applicants to obtain 
a TL upon mailing a new registration application (Form 8-R).
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    \1\ 63 FR 51048 (Sept. 24, 1998).
    \2\ Section 17(j) of the Commodity Exchange Act (Act) 7 U.S.C. 
21(j)(1994), 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 other-wise in violation of this 
act or the regulations issued pursuant to this Act. . . .'' See also 
Commission Rule 3.2(a).
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    On its own initiative, the Commission proposed to amend two other 
provisions of its rules where a ``yes'' answer to a Disciplinary 
History question now prevents granting of registration, not merely a 
TL, since these provisions are modeled upon those governing TLs. 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)).\3\
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    \3\ The AP situation could arise where, for example, one futures 
commission merchant (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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B. Comments on Proposals

    The Commission provided a 30-day comment period on its proposed 
rule amendments. Three comment letters were received, from NFA, the 
Chicago Mercantile Exchange and the Chicago Board of Trade. All three 
letters supported the Commission's proposals. NFA further suggested 
that the Commission avoid the necessity for adopting amendments to 
Commission rules to accommodate NFA rule amendments concerning 
registration processing by either: (1) Interpreting section 17(j) of 
the Act not to require identical CFTC and NFA rules but only rules that 
achieve the same underlying regulatory purpose; (2) amending Commission 
Rule 3.2(a) to eliminate the consistency requirement; or (3) repealing 
the Commission's registration processing rules.

C. Adoption of Rule Amendments

    The Commission has carefully considered the comments received, but 
does not believe that it is appropriate to make further amendments to 
its Part 3 registration rules at this time as suggested by NFA. 
Accordingly, the Commission has determined to adopt the rule amendments 
as proposed.\4\
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    \4\ A more complete discussion of the Commission's authority 
concerning TLs and NFA's rules in this area is set forth in the 
release announcing the Commission's proposed rule amendments, 63 FR 
51048.
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    The Commission indicated when it proposed its rule amendments 
concerning TLs that it would approve amendments to NFA Rules 301 and 
302, as well as new NFA Rule 303, when the Commission adopted the 
proposed amendments to its rules, and the Commission has done so.\5\ 
NFA represents that it will use its authority to grant TLs to 
applicants with ``yes'' answers that (1) NFA has previously cleared, or 
(2) NFA knows that it intends to clear.\6\ NFA further represents 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.\7\
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    \5\ 63 FR 51048, 51049 n.15.
    \6\ Examples of matters requiring a ``yes'' answer where NFA may 
determine to issue a TL under this new authority would include a 
petty theft misdemeanor conviction that predates the registration 
application by more than five years or a single exchange 
disciplinary action that involves only financial or minor 
recordkeeping requirements.
    \7\ 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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    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 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).\8\ The Commission emphasizes that all applicants must 
declare derogatory information as required by the registration forms 
since failure to do so may lead to termination of a TL and, if willful, 
to denial or conditioning of registration.\9\
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    \8\ 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).
    \9\ See section 8a(2)(G) and (3)(G) of the Act; Auster v. CFTC, 
687 F.2d 294 (9th Cir. 1982).
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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.\10\
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    \10\ 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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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that

[[Page 1727]]

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.\11\ The rule amendments 
discussed herein will not affect the requirements for filing an 
application for registration, but 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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    \11\ 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 rule amendments discussed herein 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
Number 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 amends 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 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 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.
    (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 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 amended by revising paragraph (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

[[Page 1728]]

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 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 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 January 6, 1999 by the Commission.
Jean E. Webb,
Secretary of the Commission.
[FR Doc. 99-653 Filed 1-11-99; 8:45 am]
BILLING CODE 6351-01-M