[Federal Register Volume 66, Number 76 (Thursday, April 19, 2001)]
[Proposed Rules]
[Pages 20118-20121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9586]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 41 and 140

RIN 3038-AB81


Exemption for Certain Brokers or Dealers from Provisions of the 
Commodity Exchange Act and CFTC Regulations

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules and request for comment.

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SUMMARY: In accordance with certain provisions of the Commodity Futures 
Modernization Act of 2000 (``CFMA''), the Commodity Futures Trading 
Commission (``Commission'' or ``CFTC'') is proposing to adopt a new 
rule establishing procedures for granting orders exempting certain 
brokers or dealers (``BDs'') registered with the Securities and 
Exchange Commission (``SEC'') from provisions of the Commodity Exchange 
Act (the ``Act'') and/or the Commission's regulations where the 
Commission determines that the exemption is necessary or appropriate in 
the public interest and consistent with the protection of investors. 
The Commission is also requesting comments regarding particular 
provisions of the Act and Commission rules from which BDs should be 
exempted by rule (in addition to the specific exemptive provisions of 
the CFMA).

DATES: Comments must be received by May 21, 2001.

ADDRESSES: Comments on the proposed rules 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 for Certain 
Brokers or Dealers from Provisions of the Commodity Exchange Act and 
CFTC Regulations.''

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, or Christopher W. Cummings, Special Counsel, Division of 
Trading and Markets, Commodity Futures Trading Commission, 1155 21st 
Street, N.W., Washington, D.C. 20581, telephone number: (202) 418-5450, 
facsimile number: (202) 418-5536, electronic mail: [email protected], or 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    The CFMA, signed into law on December 21, 2000, effected, among 
other things, removal of the restriction in the Commodity Exchange Act 
(the ``Act'') \1\ on the trading of futures contracts on individual 
equity securities and narrow-based indices of equity securities.\2\ 
Under the revised law, security futures products \3\ may be traded on a 
designated contract market or on a registered derivatives transaction 
execution facility (``DTF'').\4\
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    \1\ 7 U.S.C. 1 et seq., as amended by Pub. L. No. 106-554, 114 
Stat. 2763 (2000). The text of the CFMA may be accessed on the 
Internet at http://agriculture.house.gov/txt5660.pdf.
    \2\ See Section 251(a) of the CFMA. This trading previously had 
been prohibited by Section 2(a)(1)(B)(v) of the CEA.
    \3\ The term ``security futures product'' is defined in Section 
1a(32) of the CEA to mean ``a security future or any put, call, 
straddle, option, or privilege on any security future.'' The term 
``security future'' is defined in Section 1a(31) of the CEA. Because 
the CFMA also provides that options on security futures cannot be 
traded until December 21, 2003 at the earliest, security futures are 
the only security futures product that may be available for trading 
during the next 32 months.
    \4\ The CFMA also specifically prescribes certain dates on which 
security futures trading can commence. Specifically, principal-to-
principal transactions between institutions cannot commence until 
August 21, 2001, and retail transactions cannot commence until 
December 21, 2001. Both starting dates are conditioned upon the 
registration of a futures association (i.e., National Futures 
Association (``NFA'')) as a limited purpose national securities 
association under the Securities Exchange Act of 1934 (`` '34 
Act''). Section 202(a) of the CFMA; Section 6(g)(5) of the '34 Act.
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    Section 4d of the Act provides that any person who engages in 
soliciting or accepting orders for the purchase or sale of any 
commodity for future delivery on or subject to the rules of any 
designated contract market or DTF--e.g., for a security futures 
product--must be registered with the Commission as: (1) a futures 
commission merchant (``FCM''), if it also accepts any money, 
securities, or property, or extends credit in lieu thereof, to margin, 
guarantee, or secure futures contracts; or (2) an introducing broker 
(``IB'') if it does not accept money or other property to margin, 
guarantee or secure futures contracts.\5\ Section 4f(a)(1) of the Act 
provides that application for registration as an FCM or IB ``shall be 
made in such form and manner as prescribed by the Commission.'' \6\ 
Pursuant to this

[[Page 20119]]

authority, the Commission adopted Rule 3.10, which currently requires 
that an applicant for registration as an FCM or IB file prescribed 
registration and financial report forms.\7\
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    \5\ See Sections 1a(20) and (23) of the CEA, which define the 
terms ``futures commission merchant'' and ``introducing broker,'' 
respectively.
    \6\ Prior to the enactment of the CFMA, this provision was found 
in Section 4f(a) of the CEA. The CFMA (at Section 252(b)) amended 
Section 4(f) by redesignating paragraph (a) as paragraph (a)(1) and 
by adding new paragraphs (a)(2) and (a)(3) (Section 252(b)(2) of the 
CFMA) and (a)(4) (Section 252(c) of the CFMA).
    \7\ Commission regulations referred to herein are found at 17 
CFR Ch. I (2000).
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    However, as a result of the CFMA, new Section 4f(a)(2) of the Act 
\8\ now provides that, notwithstanding Section 4f(a)(1), any BD \9\ 
that is registered with the SEC shall be registered as an FCM or IB, as 
applicable, ``effective contemporaneously with the submission of 
notice,'' if:
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    \8\ As set forth in Section 252(b) of the CFMA.
    \9\ Because the CFMA speaks in terms of a ``broker or dealer,'' 
the term ``BD'' as used in this release applies equally to a broker, 
a dealer or a person registered as both a broker and a dealer.
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    (A) the broker or dealer limits its solicitation of orders, 
acceptance of orders, or execution of orders, or placing of orders on 
behalf of others involving any contracts of sale of any commodity for 
future delivery, on or subject to the rules of any contract market or 
registered derivatives transaction execution facility to security 
futures products;
    (B) the broker or dealer files written notice with the Commission 
in such form as the Commission, by rule, may prescribe containing such 
information as the Commission, by rule, may prescribe as necessary or 
appropriate in the public interest or for the protection of investors;
    (C) the registration of the broker or dealer is not suspended 
pursuant to an order of the Securities and Exchange Commission; and
    (D) the broker or dealer is a member of a national securities 
association registered pursuant to section 15A(a) of the Securities 
Exchange Act of 1934.

    Accordingly, in a separate Federal Register release the Commission 
is proposing to amend Rule 3.10 to provide for FCM and IB notice 
registration thereunder.\10\
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    \10\ Section 4k(1) of the Act currently requires each person who 
is an associated person (``AP'') of an FCM or IB to register as 
such. The CFMA exempts from registration the APs of FCMs and IBs who 
would be subject to notice registration.
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    New Section 4f(a)(3) of the Act \11\ provides a similar exemption 
(without the notice filing requirement) from the requirement under 
Section 4e of the Act to register as a floor broker (``FB'') or floor 
trader (``FT''). An FB or FT is exempt from registration as such if:
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    \11\ As set forth in Section 252(b) of the CFMA.
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    (A) the floor broker or floor trader is a broker or dealer 
registered with the Securities and Exchange Commission;
    (B) the floor broker or floor trader limits its solicitation of 
orders, acceptance of orders, or execution of orders, or placing of 
orders on behalf of others involving any contracts of sale of any 
commodity for future delivery, on or subject to the rules of any 
contract market to security futures products; \12\ and
    (C) the registration of the floor broker or floor trader is not 
suspended pursuant to an order of the Securities and Exchange 
Commission.
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    \12\ Of course, an FT is restricted to executing orders for his 
or her own account and the Commission does not view this provision 
of the CFMA as expanding the scope of activities in which an FT may 
engage.
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    Persons registered as FCMs or IBs pursuant to the notice 
registration procedure of new Section 4f(a)(2) and persons who are 
exempt from FB or FT registration pursuant to new Section 4f(a)(3) are 
expressly exempted by new Section 4f(a)(4) \13\ from certain enumerated 
provisions of the Act, as well as those of the Commission's rules that 
were promulgated under those provisions.\14\ In addition to the 
statutory exemption granted to such persons from the foregoing 
specified sections of the Act, under the CFMA the Commission is 
authorized, by rule, regulation or order, to exempt, conditionally or 
unconditionally, from any provision of the Act or the Commission's 
rules, any BD subject to the notice filing requirements of new Section 
4f(a)(2) or exempt from FB or FT registration under new Section 
4f(a)(3), to the extent the exemption is necessary or appropriate in 
the public interest and is consistent with the protection of 
investors.\15\ By this Federal Register release, the Commission is 
seeking comments regarding specific sections of the Act or provisions 
of the Commission's rules, beyond those already specified in the CFMA, 
from which such BDs should be made exempt by rule.
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    \13\ As set forth in Section 252(c) of the CFMA.
    \14\ Those provisions include: Section 4c(b)-- regulation of 
commodity options trading by the Commission; Section 4c(d)--dealer 
options exemption; Section 4c(e)--Commission authority to ban dealer 
options; Section 4c(g)--requirement for contemporaneous, written 
record of all orders for execution on the floor or subject to the 
rules of a designated contract market or DTF; Section 4d-- 
registration requirements for FCMs and IBs and customer funds 
segregation requirement for FCMs; Section 4e--registration 
requirement for FBs and FTs; Section 4h--prohibition of 
misrepresentation that a person is a member of a registered entity, 
that a person is registered with the Commission, or that a futures 
contract will be or has been executed on a registered entity; 
Section 4f(b)--FCM and IB minimum financial requirements; Section 
4f(c)--FCM risk assessment requirement; Section 4j--restrictions on 
dual trading in security futures products; Section 4k(1)--
registration requirement for APs of FCMs and IBs; Section 4p--
proficiency testing and ethics training requirements for 
registrants; Section 6d--State causes of action under the Act and 
Commission right to intervene or appeal; Section 8(d)--Commission's 
obligation to investigate commodity marketing conditions and to 
furnish reports to producers, consumers and distributors; Section 
8(g)--Commission obligation to disclose information concerning 
registrants to State governments and political subdivisions thereof; 
and Section 16--Commission authority to investigate markets and to 
furnish reports to the public on a regular basis. APs of BDs who 
limit their futures-related activities to security futures products 
are also exempt from registration under the Act and the same 
provisions of the Act and rules thereunder cited in this footnote. 
See Section 252(d) of the CFMA, purporting to add a new Section 
4k(5) of the Act. There was a pre-existing Section 4k(5) in the Act, 
so the new section should probably be designated as Section 4k(6).
    \15\ New Section 4f(a)(4)(B)(i) of the Act, as set forth in 
Section 252(c) of the CFMA. The CFMA does not grant corresponding 
authority to the SEC with respect to FCMs who notice-register as BDs 
to engage in security futures transactions.
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    The CFMA also directs the Commission to determine, by rule or 
regulation, the procedures under which an order under new Section 
4f(a)(4)(B) shall be granted.\16\ In response to this directive, the 
Commission is proposing the rule changes set forth herein.\17\
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    \16\ New Section 4f(a)(4)(B)(ii) of the Act, as set forth in 
Section 252(c) of the CFMA.
    \17\ The final subparagraph of new Section 4f(a)(4) provides 
that: (1) a person that is notice-registered as an FCM pursuant to 
new Section 4f(a)(2) or an AP thereof, or that is an FB or FT exempt 
from registration under new Section 4f(a)(3), need not become a 
member of a registered futures association (i.e., the National 
Futures Association); and (2) a registered futures association may 
not prevent its members from transacting business with a person that 
is exempt under new Sections 4f(a)(2) or (a)(3).
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II. Application for an Order Granting Additional Exemptive Relief

    New Section 4f(a)(4)(B)(i) of the Act provides that the Commission 
may issue an order to exempt, conditionally or unconditionally, any BD 
subject to notice registration under new Section 4f(a)(2) of the Act, 
or any BD exempt from floor broker or floor trader registration 
pursuant to new Section 4f(a)(3), from any provision of the Act or any 
provision of the Commission's regulations to the extent that the 
exemption is necessary or appropriate in the public interest and is 
consistent with the protection of investors. New Section 
4f(a)(4)(B)(ii) directs the Commission to determine the procedures by 
which an exemptive order under Section 4f(a)(4)(B) shall be granted, 
and vests the Commission with sole discretion to decline to entertain 
any application for such an order.\18\ Accordingly, the Commission is 
proposing, in this rulemaking, procedures for applying for an exemptive 
order under Section 4f(a)(4)(B) of the Act. Of course, exemption from 
the sections of the Act listed in Section 4f(a)(4)(A) is automatic.

[[Page 20120]]

Accordingly, it is unnecessary for persons to request such orders.
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    \18\ The CFMA places no corresponding obligation upon the SEC.
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    Proposed Rule 41.41 calls for applicants to supply either a written 
application or an electronic mail submission containing the applicant's 
name, main business address and phone number, information about the 
applicant's registration status with the SEC (and assurance that the 
registration is not subject to a suspension), the specific section(s) 
of the Act or provision(s) of Commission rules from which exemption is 
sought, any applicable analogous provisions of the securities laws and 
regulations, an explanation of the facts and circumstances under which 
the applicant believes that the requested exemptive relief is necessary 
or appropriate in the public interest; and an explanation of the extent 
to which the requested exemptive relief is consistent with the 
protection of investors. The last two items constitute the basis upon 
which the CFMA requires the Commission to base the grant of a request 
for an order. The proposed rule also states that the grant or denial of 
a request is within the Commission's sole discretion (as specifically 
provided in the CFMA).

III. Delegation of Authority

    The Commission is proposing to delegate to the Director of the 
Division of Trading and Markets authority to grant or deny applications 
for exemptive orders under proposed Rule 41.41. With respect to the 
granting and denying of applications for exemptive orders the 
delegation is intended to expedite the procedure and to place it with 
the staff members most directly involved in exemptive matters. The 
Commission believes that this delegation will maximize regulatory 
efficiency with respect to these proposed rule changes.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rule amendments discussed herein 
would affect persons registered under notice-registration procedures as 
FCMs or as IBs, and persons who are exempt from FB or FT registration 
pursuant to new Section 4f(a)(3). 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.\19\ The Commission previously determined that 
registered FCMs are not small entities for the purpose of the RFA.\20\ 
With respect to IBs, the Commission has stated that it would evaluate 
within the context of a particular rule proposal whether all or some 
affected IBs would be considered to be small entities and, if so, the 
economic impact on them of any rule.\21\
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    \19\ 47 FR 18618-21 (April 30, 1982).
    \20\ 47 FR at 18619-20.
    \21\ 47 FR at 18618, 18620.
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    The amendments proposed herein do not impose any new burdens upon 
persons registered as FCMs or IBs pursuant to the notice registration 
procedure of new Section 4f(a)(2) and persons who are exempt from FB or 
FT registration pursuant to new Section 4f(a)(3). Rather, these 
amendments establish procedures for requesting additional exemptive 
relief from provisions of the Act and/or the Commission's regulations 
for such persons. Consequently, the Commission believes that the 
adoption of these rule amendments will in many cases reduce the burden 
of compliance by persons notice-registered as FCMs or IBs and persons 
who are exempt from FB or FT registration pursuant to new Section 
4f(a)(3). Accordingly, the Acting 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. Nonetheless the Commission specifically requests comment on 
the impact this proposed rule may have on small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \22\ 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. The Commission has submitted a copy 
of this part to the Office of Management and Budget (``OMB'') for its 
review.
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    \22\ 44 U.S.C. 3501 et seq.
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Collection of Information
    Requests for no-action, exemptive and interpretative letters. OMB 
Control Number 3038-0049.
    The effect of the proposed rule will be to increase the burden 
previously approved by OMB by 1,000 hours because of the application 
for exemptive orders. The burden associated with the proposed addition 
of Rule 41.41 is estimated to be 1,000 hours, which will result from 
the application for exemptive orders by persons currently registered as 
BDs with the SEC who either choose to register as FCMs or IBs pursuant 
to the notice registration procedure of new Section 4f(a)(2) of the 
Act, or are exempt from FB or FT registration pursuant to new Section 
4f(a)(3).
    The estimated burden of the proposed new rule was calculated as 
follows:
    Estimated number of respondents: 5,000.
    Reports annually by each respondent: .4.
    Total annual Responses: 2,000.
    Estimated average Number of Hours Per Response: .5.
    Estimated Total Number of Hours of Annual Burden in Fiscal Year: 
1,000.
    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 
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. 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

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the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC 20581, 
(202) 418-5160.

C. Cost-Benefit Analysis

    Section 119 of the CFMA amended Section 15 of the Act to require 
that the Commission, before promulgating a regulation under the Act or 
issuing an order, consider the costs and benefits of the Commission's 
action in light of five criteria.\23\ The main considerations relevant 
to this proposal are the first two considerations set forth in the Act, 
``protection of market participants and the public'' and ``efficiency, 
competitiveness and financial integrity of the futures markets.'' The 
Commission notes that the CFMA specifically mandates that procedures be 
established by which notice-registered FCMs and IBs and persons exempt 
from registering as FBs or FTs may seek orders granting additional 
exemptive relief beyond that specifically granted by the CFMA to such 
persons. The CFMA further authorizes the Commission to provide such 
exemptive relief, conditionally or unconditionally, by means of 
rulemaking. Accordingly, this proposal to adopt Rule 41.41 and the 
accompanying request for comments on provisions as to which further 
exemptive rulemaking may be appropriate are published in compliance 
with requirements that Congress has determined to be in the public 
interest.
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    \23\ These considerations include: (A) protection of market 
participants and the public; (B) efficiency, competitiveness, and 
financial integrity of futures markets; (C) price discovery; (D) 
sound risk management practices; and (E) other public interest 
considerations.
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Lists of Subjects

17 CFR Part 41

    Security futures products.

17 CFR Part 140

    Authority delegations.
    For the reasons stated in the preamble, the Commission proposes to 
amend Chapter I of Title 17 of the Code of Federal Regulations as 
follows:

PART 41--SECURITY FUTURES PRODUCTS

    1. The authority citation for Part 41 is revised to read as 
follows:

    Authority: Pub. L. 106-554, 114 Stat. 2763, section 252.
    2. Section 41.41 is added to read as follows:


Sec. 41.1-41.40  [Reserved]


Sec. 41.41  Application for an exemptive order pursuant to section 
4f(a)(4)(B) of the Act.

    (a) Any futures commission merchant or introducing broker 
registered in accordance with the notice registration provisions of 
Sec. 3.10 of this chapter, or any broker or dealer exempt from floor 
broker or floor trader registration pursuant to section 4f(a)(3) of the 
Act, may apply to the Commission for an order pursuant to section 
4f(a)(4)(B) of the Act granting exemption to such person from any 
provision of the Act or the Commission's regulations other than 
sections 4c(b), 4c(d), 4c(e), 4c(g), 4d, 4e, 4h, 4f(b), 4f(c), 4j, 
4k(1), 4p, 6d, 8(d), 8(g), and 16 of the Act and the rules thereunder.
    (b) An application pursuant to this section must set forth in 
writing or in an electronic mail message the following information:
    (1) The name, main business address and main business telephone 
number of the person applying for an order;
    (2) The capacity in which the person is registered with the 
Securities and Exchange Commission and the person's CRD number (if a 
member of the National Association of Securities Dealers, Inc.) or 
equivalent self-regulatory organization identification, together with a 
certification, if true, that the person's registration is not suspended 
pursuant to an order of the Securities and Exchange Commission;
    (3) The particular section(s) of the Act and/or provision(s) of the 
Commission's regulations with respect to which the person seeks 
exemption;
    (4) Any provision(s) of the securities laws or rules, or of the 
rules of a securities self-regulatory organization analogous to the 
provision(s);
    (5) A clear explanation of the facts and circumstances under which 
the person believes that the requested exemptive relief is necessary or 
appropriate in the public interest; and
    (6) A clear explanation of the extent to which the requested 
exemptive relief is consistent with the protection of investors.
    (c) An application for an order must be submitted to the Director 
of the Division of Trading and Markets, Commodity Futures Trading 
Commission, 1155 21st Street, N.W., Washington, D.C. 20581, if in paper 
form, or to  [email protected] if submitted via electronic mail.
    (d) The Commission may, in its sole discretion, grant the 
application, deny the application, or grant the application subject to 
one or more conditions.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    3. The authority citation for Part 140 continues to read as 
follows:

    Authority: 7 U.S.C. 4a and 12a.

    4. Section 140.91 is amended by adding and reserving paragraph 
(a)(7) and adding new paragraph (a)(8) to read as follows:


Sec. 140.91  Delegation of authority to the Director of the Division of 
Trading and Markets.

    (a) * * *
    (7) [Reserved.]
    (8) All functions reserved to the Commission in Sec. 41.41 of this 
chapter.
* * * * *

    Issued in Washington, D.C. on April 12, 2001, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-9586 Filed 4-18-01; 8:45 am]
BILLING CODE 6351-01-P