[Federal Register Volume 64, Number 234 (Tuesday, December 7, 1999)]
[Proposed Rules]
[Pages 68304-68307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31687]



[[Page 68304]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AB48


Exemption From Registration as a Commodity Trading Advisor

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission proposes to amend its 
rules to create an exemption from registration requirements for 
commodity trading advisors that provide advice by means of media such 
as newsletters, Internet web sites, and non-customized computer 
software.

DATES: Comments must be received by February 7, 2000.

ADDRESSES: Comments on the proposed rule may be sent to Jean A. Webb, 
Secretary of the Commission, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. 
In addition, comments may be sent by facsimile transmission to 
facsimile number (202) 418-5521, or by electronic mail to 
[email protected]. Reference should be made to ``Exemption from 
Registration as a Commodity Trading Advisor.''

FOR FURTHER INFORMATION CONTACT: Martin White, Attorney, (202) 418-
5120, electronic mail: [email protected], Office of General Counsel, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, N.W., Washington, D.C. 20581; or Michael J. Garawski, (202) 
418-5120, electronic mail: [email protected], Office of General 
Counsel, Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street, N.W., Washington, D.C. 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    The Commission proposes to exempt certain commodity trading 
advisors (``CTAs'') from Section 4m(1) of the Commodity Exchange Act 
(``CEA'' or ``Act''), 7 U.S.C. 6m(1) (1994), which requires CTAs to 
register with the Commission. The precise scope of the exemption is 
described below. Generally speaking, the exemption is intended to apply 
to CTAs that provide commodity trading advice by means of media such as 
newsletters, Internet web sites, and non-customized computer 
software.\1\ For purposes of convenience, these CTAs will be referred 
to as ``Section 4.14(a)(9) CTAs.'' \2\
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    \1\ In this notice, the term ``commodity trading advice'' refers 
to advice with respect to trading in a ``commodity interest,'' as 
defined in Commission Rule 3.1(f), 17 CFR 3.1(f).
    \2\ ``Section 4.14(a)(9)'' is a shorthand reference to Section 
4.14(a)(9) of the Commission's Rules, 17 CFR 4.14(a)(9), at which 
the proposed exemption would be codified, if promulgated.
    A person that provides commodity trading advice by means of 
newsletters, Internet web sites, or similar means falls within the 
statutory definition of ``commodity trading advisor'' unless the 
person is a ``publisher or producer of.. print or electronic data of 
general and regular dissemination'' and the furnishing of commodity 
trading advice is ``solely incidental to the conduct of their 
business or profession.'' See Sections 1a(5) (B) and (C) of the Act, 
7 U.S.C. 1a(5) (B) and (C) (1994); In re R&W Technical Services, 
Ltd., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 
27,582 (CFTC Mar. 16, 1999); In re Armstrong, [1992-1994 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 25,657 (CFTC Feb. 8, 1993).
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    Over the last several years, the Commission has been involved in 
several litigated cases that address whether CTAs that provide advice 
through newsletters, Internet web sites, or similar means can be 
required to register under Section 4m(1) of the CEA. In two of those 
cases, Taucher v. Born, 53 F. Supp. 2d 464 (D.D.C. 1999) (appeal 
pending), and Commodity Trend Service v. CFTC, No. 97 C 2362 (N.D. Ill. 
Sept. 28, 1999), federal district courts held that the Section 4m(1) 
registration requirement constitutes an unconstitutional prior 
restraint in violation of the First Amendment as applied to the 
plaintiffs.\3\ In both cases, the plaintiffs provided only standardized 
commodity trading advice through a variety of media, including Internet 
web sites, computer software, voice recordings accessible by telephone, 
e-mails, facsimiles, and periodicals. Moreover, the plaintiffs in these 
cases did not have discretionary control over their clients' accounts, 
did not provide advice tailored to the financial situation of any 
specific client, and had no personal contact with their clients. All of 
the information provided to each client was identical.
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    \3\ Both district courts relied on Lowe v. SEC. 472 U.S. 181 
(1985), in which the Supreme Court held that the Investment Advisers 
Act of 1940, which regulates investment advisers in the securities 
industry, should be interpreted to apply only to persons who provide 
personalized advice. The district courts relied primarily on the 
concurring opinion in Lowe, which rested on constitutional grounds.
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    The Commission has not itself determined that applying Section 
4m(1) to Section 4.14(a)(9) CTAs violates the Constitution or that the 
district court decisions in Taucher and CTS represent a complete and 
accurate statement of the constitutional limits of Congress's power 
with respect to the regulation of Section 4.14(a)(9) CTAs. The 
Commission has nevertheless determined that it may be appropriate to 
exempt Section 4.14(a)(9) CTAs from registration for the following 
reasons:
    1. Taucher and CTS have created legal uncertainty as to whether 
Section 4.14(a)(9) CTAs may be required to register with the 
Commission. Absent a Supreme Court decision on the issue, continued 
litigation is unlikely to eliminate this uncertainty for a considerable 
period of time. Moreover, litigation of First Amendment issues has 
required the expenditure of considerable resources by the Commission 
and, in some instances, has complicated the investigation and 
prosecution of fraud by CTAs.
    2. Whatever the courts may determine to be the precise 
constitutional limits of Congressional authority in this area, the 
Commission believes that minimizing impact on speech, other than 
deceptive or misleading speech, is a relevant policy consideration in 
determining the Commission's regulatory approach toward CTAs whose 
relationship with their clients is limited to communications through 
media such as newsletters, Internet web sites, and non-customized 
computer software.

II. The Proposed Rule

    The proposed rule would add a new subsection to Commission Rule 
4.14 to create an additional exemption from registration for certain 
CTAs. The new exemption is expressed in negative terms: the rule 
exempts CTAs that are not engaged in the types of advisory activities 
specified in the new subsection. A CTA would have to meet all of the 
specified conditions to qualify for the proposed exemption. The general 
intent of the proposed rule is to retain the registration requirement 
for CTAs whose advisory activities may be licensed even under the 
constitutional standards implicit in the district court decisions in 
Taucher and Commodity Trend Service.
    Proposed Subsection 4.14(a)(9)(i) provides that, to qualify for the 
exemption, a CTA may not direct client accounts. As defined by 
Commission Rule 4.10(f), ``[d]irect, as used in the context of trading 
commodity interest accounts, refers to agreements whereby a person is 
authorized to cause transactions to be effected for a client's 
commodity interest account without the client's specific 
authorization.'' Such authority creates a business relationship between 
the CTA and the client that clearly goes beyond speech. Registration of 
CTAs that direct client accounts thus raises no First Amendment issue.
    Proposed Subsection 4.14(a)(9)(ii) provides that a CTA qualifies 
for the exemption only if it does not provide

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commodity interest trading advice based on, or tailored to, the 
commodity interest or cash market positions or other circumstances or 
characteristics of particular clients. A CTA that provides this kind of 
advice carries out a function comparable to that of a traditional 
professional. See Lowe v. SEC, 472 U.S. 181, 232-33 (1985) (White, J., 
concurring). This provision is intended to preserve the registration 
requirement for CTAs whose knowledge of their clients is limited to 
information concerning a particular commodity interest account or 
particular commodity interest trading activity, as well as to CTAs who 
base their advice on a broader range of information about the client. 
Moreover, so long as the CTA's advice was based on or tailored to such 
information, the CTA would have to register even if it gave the same 
advice to groups of similarly situated clients.
    Proposed Subsection 4.14(a)(9)(iii) provides that a CTA qualifies 
for the exemption only if it does not provide commodity interest 
trading advice through personally interactive communications with 
individual clients, such as face-to-face conversations; telephone 
conversations; or electronic mail exchanges between individuals. The 
use of such means of communications implies that the advisor is giving 
advice in the context of a relationship with the client that is more 
personal than the remote and standardized relationship between the 
publisher of a newsletter or non-custom software and its readers or 
users.
    It is the intent of the Commission that a CTA that manages a 
client's trading under some type of informal arrangement should be 
required to register even if the CTA is not authorized to cause 
transactions to be effected without the client's specific 
authorization, and therefore does not ``direct'' the client's accounts. 
The Commission, however, has not proposed that an explicit condition to 
this effect be included in the proposed exemption rule. The Commission 
believes that, in practice, a CTA that manages a client's trading, but 
does not ``direct'' the client's account, would almost certainly fail 
to meet the conditions set forth in the proposed subsections 
4.14(a)(9)(ii) and 4.14(a)(9)(iii). As a result, the Commission does 
not believe that a separate subsection dealing with CTAs that manage 
their clients' trading under informal arrangements is necessary. The 
Commission invites comments on whether this belief is accurate and on 
whether a subsection dealing explicitly with CTAs that manage their 
clients' trading under informal arrangements should be added to the 
proposed exemption.
    Under the proposed rule, any CTA that meets all of the conditions 
of proposed Subsection 4.14(a)(9) would not be required to register 
with the Commission as a requirement for doing business as a CTA. Such 
a CTA, unless it chose to register voluntarily, also would be exempt 
from the various regulatory requirements set forth in the CEA and the 
Commission's rules that, by their terms, apply only to registrants or 
persons required to be registered. For example, an exempt CTA would not 
be subject to the recordkeeping and production requirements of Section 
4n(3)(A) of the CEA and Commission Rule 4.33, the ethics training 
requirement of Section 4p(b) of the CEA, or liability for reparations 
under Section 14 of the CEA.
    An exempt CTA would still be subject to those provisions of the CEA 
andthe Commission's rules that, by their terms, apply to CTAs without 
regard to registration. These include Section 4o of the CEA, which 
prohibits fraud by CTAs; Commission Rule 4.30, which, broadly speaking, 
prohibits CTAs from handling clients' funds; Commission Rule 4.41(a), 
which prohibits deceptive advertising by CTAs; and Commission Rule 
4.41(b), which requires representations concerning simulated or 
hypothetical performance results by CTAs to be accompanied by 
disclosures describing the limitations of such results as an indicator 
of actual performance. Exempt CTAs also would be subject to those 
provisions of the CEA that apply to any person, including, for example, 
Section 4b of the CEA, which prohibits certain forms of fraud. 
Similarly, the proposed exemption would not alter the duty of a Section 
4.14(a)(9) CTA to register with the Commission in a capacity other than 
as a CTA, if the CTA, in addition to its advisory activities, engages 
in other business activities that require such registration.
    Should the Commission proceed to adopt a final rule, an exempt CTA 
that wanted to register or retain its current registration, for 
example, to enhance the confidence of clients or potential clients, 
would be entitled to register voluntarily.

III. Examples

    In order to convey the intent of the proposed exemption, the 
following examples illustrate how the proposed rule would operate in 
specific situations:\4\
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    \4\ In all of the following examples, the CTA remains subject to 
requirements of the Act or the Commission's regulations that apply 
to all CTAs without regard to registration, such as Section 4o of 
the Act and Commission Rule 4.41(a) and (b), as well as to 
provisions that apply to any person, such as Section 4b of the Act, 
to the extent that the CTA's actions fall within the activities 
proscribed by those provisions.
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    A. A CTA provides commodity trading advice only through 
newsletters, books, and periodicals. The advice includes specific 
recommendations, such as recommendations to buy or sell specific 
futures contracts should a particular price level be reached. 
Recipients of publications all receive the same advice. The CTA does 
not have powers of attorney from any of his clients to trade accounts. 
Under proposed Rule 4.14(a)(9), this CTA would be exempt from the 
Section 4m registration requirement.
    B. A CTA provides specific commodity trading advice through e-
mails, facsimiles, and an Internet web site. The advice is based on a 
computerized trading system, which also is available for purchase and 
use on a personal computer. Such advice is provided on a daily basis 
and is reactive to the latest market activity. The advice consists only 
of an instruction to buy or sell a futures contract and where, if at 
all, to place a stop order. The CTA's clients all receive the same 
advice. The CTA does not have powers of attorney from any of his 
clients to trade accounts, although many clients follow the CTA's 
advice exactly. Under proposed Rule 4.14(a)(9), this CTA would be 
exempt from the Section 4m registration requirement.
    C. A CTA sells a computerized trading system like the system 
described in example B. The CTA does not have powers of attorney from 
any of its clients to trade accounts. In telephone conversations with 
clients, the CTA discusses technical questions concerning the software, 
such as how to install the application and computer memory 
requirements. Such advice is not ``trading'' advice within the meaning 
of proposed Rule 4.14(a)(9)(iii). Under proposed Rule 4.14(a)(9), this 
CTA would be exempt from the Section 4m registration requirement.
    D. A CTA provides commodity trading advice through a weekly print 
periodical and invites readers to contact him by telephone with further 
questions. Each week, several readers of the publication call the CTA 
to inquire about the CTA's confidence in his published recommendations. 
The CTA does not have a power of attorney to trade any of his 
subscribers' accounts. The CTA responds to readers' questions 
personally on the telephone but does so with no knowledge of the 
reader's

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investment portfolio, tolerance for risk, investment goals or other 
personal characteristics. Under proposed Rule 4.14(a)(9)(iii), this CTA 
would not be exempt from the Section 4m registration requirement, 
because it provides commodity trading advice through interactive 
communications with individual clients.
    E. A CTA has a computerized trading system like the system 
described in example B. The CTA meets with his clients individually and 
face-to-face, and gives all of them identical trading advice that is 
based on what the computer system advises. The CTA does not have a 
power of attorney to trade any of his clients' accounts. Under proposed 
Rule 4.14(a)(9)(iii), this CTA would not be exempt from the Section 4m 
registration requirement, because he provides commodity trading advice 
through interactive communications with individual clients.
    F. A CTA advises his clients only through facsimile messages and 
does not discuss his advice with them. The CTA does not have a power of 
attorney to trade any of his clients' accounts. Before advising any 
client, the CTA first gathers current knowledge about the client's 
current futures holdings and net cash available for futures 
investments. The CTA's advice is different for different clients, 
depending on their profile. However, the CTA sends similar advice to 
groups of clients with similar profiles. Under proposed Rule 
4.14(a)(9)(ii), this CTA would not be exempt from the Section 4m 
registration requirement, because he provides commodity trading advice 
based on, or tailored to, the commodity interest or cash market 
positions or other circumstances or characteristics of particular 
clients.

IV. Request for Comments

    The Commission specifically encourages members of the public to 
submit comments on the following issues, in addition to all other 
issues relevant to the proposed rule:
    1. Should the rule include a provision explicitly stating that the 
proposed exemption does not apply to CTAs that manage their clients' 
commodity interest trading under informal arrangements? If so, what 
language should be used to characterize such CTAs for purposes of the 
exemption?
    2. Should CTAs falling within the scope of the proposed exemption 
be subject to any regulatory requirements beyond the requirements, such 
as Section 4o of the CEA and Commission Rule 4.41, that apply to other 
exempt CTAs? If so, what should those requirements be? For example, 
should Section 4.14(a)(9) CTAs still be subject to recordkeeping 
requirements?
    3. Are there any categories of CTAs that are not included within 
the scope of the proposed exemption but should be?
    4. Are there any categories of CTAs that are included within the 
scope of the proposed exemption but should not be?

V. Statutory Authority

    Pursuant to Sections 4(c)(1) and 8a(5) of the CEA, 7 U.S.C. 6(c) 
and 12a(5), the Commission has statutory authority to promulgate the 
proposed rule. The proposed rulemaking would revise the authority 
citation for Part 4 to include 7 U.S.C. 6(c).

VI. 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 business. The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on such entities in 
accordance with the RFA.\5\ With respect to CTAs, the Commission has 
stated that it would evaluate within the context of a particular rule 
proposal whether all or some affected CTAs would be considered to be 
small entities and, if so, the economic impact on them of any rule.
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    \5\ 47 FR 18618-21 (Apr. 30, 1982).
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    The proposed exemption would reduce or remove existing economic 
burdens. Moreover, the registration requirements that would be affected 
by the proposed rule involve only minimal economic burdens, except in 
the case of the limited number of CTAs who may fail to qualify for 
registration under Section 8a of the CEA because of disciplinary or 
other disqualifying factors. Therefore, the Chairman of the Commission 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. Such a certification is consistent with the regulatory 
flexibility analysis conducted by the Commission in a previous 
rulemaking exempting certain persons from the CTA registration 
requirement.\6\ Nonetheless, the Commission specifically requests 
comment on the impact this proposed rule may have on small entities.
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    \6\ See 52 FR 41983 n.57 (Nov. 2, 1987).
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B. Paperwork Reduction Act

    Proposed Rule 4.14(a)(9) affects information collection 
requirements. As required by the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), the Commission has submitted a copy of this section to 
the Office of Management and Budget (OMB) for its review.
    1. Collection of Information: Rules Relating to the Operations and 
Activities of Commodity Pool Operators and Commodity Trading Advisors 
and to Monthly Reporting by Futures Commission Merchants, OMB Control 
Number 3038-0005.
    The expected effect of the proposed rule will be to reduce the 
burden previously approved by OMB for this collection of information by 
18,200 hours because it will exempt certain commodity trading advisors 
from the registration requirement in Section 4m(1) of the Commodity 
Exchange Act and associated recordkeeping requirements. Specifically 
the burden associated with Commission Rule 4.33 is expected to be 
reduced by 18,200 hours:

Estimated number of respondents (after proposed exemption): 2,000.
Annual responses by each respondent: 1.
Total annual responses: 2000.
Estimated average hours per response: 26.
Annual reporting burden: 52,000 hours.

This annual reporting burden of 52,000 hours represents a reduction of 
18,200 hours as a result of the proposed new rule. (The estimated 
burden figure of 52,000 hours for Rule 4.33 is higher than the Rule 
4.33 burden figure previously reported to the Office of Management and 
Budget. The Commission, however, believes that the previously reported 
figure may be based on an incorrect figure for the number of CTAs.)
    2. Collection of Information: Rules, Regulations and Forms for 
Domestic and Foreign Futures and Options Relating to Registration with 
the Commission, OMB Control Number 3038-0023.
    The expected effect of the proposed rule will be to reduce the 
burden previously approved by OMB for this collection of information by 
311 hours because it will exempt certain commodity trading advisors 
from the registration requirement in Section 4m(1) of the Commodity 
Exchange Act and associated reporting and recordkeeping requirements.
    Specifically:
    The burden associated with Commission Rule 3.10(a), Form 7-R, as 
applied to CTAs is expected to be reduced by 72 hours:

Estimated number of respondents (after proposed exemption): 350.

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Annual responses by each respondent: 1.
Total annual responses: 350.
Estimated average hours per response: .40.
Annual reporting burden: 140 hours.

This annual reporting burden of 140 hours represents a reduction of 72 
hours as a result of the proposed new rule.
    The burden associated with Commission Rule 3.10(a), Form 8-R, is 
expected to be reduced by 99 hours:

Estimated number of respondents (after proposed exemption): 2800.
Annual responses by each respondent: 1.
Total annual responses: 2800.
Estimated average hours per response: .33.
Annual reporting burden: 924 hours.

This annual reporting burden of 924 hours represents a reduction of 99 
hours as a result of the proposed new rule.
    The burden associated with Commission Rule 3.10(d) is expected to 
be reduced by 140 hours:

Estimated number of respondents (after proposed exemption): 3100.
Annual responses by each respondent: 1.
Total annual responses: 3100.
Estimated average hours per response: .20.
Annual reporting burden: 620 hours.

This annual reporting burden of 620 hours represents a reduction of 140 
hours as a result of the proposed new rule.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Commodity Futures Trading Commission.
    The Commission considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the Commission's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Commission on the 
proposed regulations.
    Copies of the information collection submission to OMB are 
available from the CFTC Clearance Officer, 1155 21st Street, NW, 
Washington DC 20581, (202) 418-5160.

List of Subjects in 17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Reporting and 
recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 4 as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 
23.

    2. Section 4.14 is amended by adding paragraph (a)(9) to read as 
follows:


Sec. 4.14  Exemption from registration as a commodity trading advisor.

    (a) * * *
    (9) It does not engage in any of the following activities:
    (i) Direct client accounts;
    (ii) Provide commodity interest trading advice based on, or 
tailored to, the commodity interest or cash market positions or other 
circumstances or characteristics of particular clients; or
    (iii) Provide commodity interest trading advice through interactive 
communications with individual clients, such as face-to-face or 
telephone conversations or electronic mail exchanges between 
individuals.
* * * * *
    Dated: December 2, 1999.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-31687 Filed 12-6-99; 8:45 am]
BILLING CODE 6351-01-P