[Federal Register Volume 66, Number 96 (Thursday, May 17, 2001)]
[Proposed Rules]
[Pages 27476-27480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12489]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 170

RIN Number: 3038-AB84


Notice Registration as a Futures Commission Merchant or 
Introducing Broker for Certain Securities Brokers or Dealers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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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'') is proposing to amend Rule 3.10, which 
specifies the information that various applicants for registration must 
file. The amendment would provide for notice registration as a futures 
commission merchant (``FCM'') or introducing broker (``IB''), as 
applicable, in the case of a broker or dealer (``BD'') registered with 
the Securities and Exchange Commission (``SEC'') that, among other 
things, limits its involvement with commodity futures contracts to 
security futures products. In accordance with

[[Page 27477]]

certain other provisions of the CFMA, the Commission is proposing to 
amend Rule 170.15, which requires each registered FCM to be a member of 
a registered futures association. The amendment would exempt notice-
registered BDs from this requirement.

DATES: Comments must be received by June 18, 2001.

ADDRESSES: Comments on the proposed rule amendments may be sent to Jean 
A. Webb, Secretary of the Commission, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. In addition, comments may be sent by facsimile transmission 
to (202) 418-5521, or by electronic mail to [email protected]. 
Reference should be made to ``Notice Registration as a Futures 
Commission Merchant or Introducing Broker for Certain Securities 
Brokers or Dealers.''

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Assistant Chief 
Counsel, or Lawrence B. Patent, Associate Chief Counsel, Division of 
Trading and Markets, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581, (202) 
418-5450, electronic mail: [email protected], or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    On December 21, 2000, the CFMA was signed into law.\1\ Among other 
things, the CFMA removed the restriction in the Commodity Exchange Act 
(``CEA'') 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.\4\
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    \1\ Pub. L. No. 106-554, 114 Stat. 2763. 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 at least December 21, 2003, security futures are the 
only security futures product that may be available for trading 
during the next 31 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 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 CEA 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 
contract market or derivatives transaction execution facility--e.g., 
for a security futures product--must be registered with the Commission 
as (1) an FCM, if it also accepts any money, securities, or property, 
or extends credit in lieu thereof, to margin, guarantee, or secure 
contracts, or (2) otherwise as an IB.\5\ Section 4f(a)(1) of the CEA 
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 authority, the Commission adopted Rule 3.10, which 
currently requires that an applicant for registration as an FCM or IB 
file a Form 7-R \7\ along with a Form 1-FR-FCM or Form 1-FR-IB, as 
applicable.\8\ In addition, Rule 170.15 requires that each person 
required to register as an FCM must become and remain a member of at 
least one registered futures association (i.e., NFA).
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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 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\ Rule 3.10(a)(1)(i). The Form 7-R, which requires general 
information such as a list of the applicant's principals and the 
applicant's disciplinary history, must be completed and filed with 
NFA in accordance with the instructions thereto. NFA is registered 
with the Commission as a registered futures association pursuant to 
Section 17 of the CEA. By Rule 3.2 and various orders issued by the 
Commission, the Commission has delegated to NFA the authority to 
register, among other persons, FCMs and IBs. Commission rules 
referred to herein are found at 17 CFR Ch. I (2001).
    \8\ Rule 3.10(a)(1)(ii). The Form 1-FR (-FCM or -IB) includes 
detailed financial statements and schedules that display the 
applicant's financial condition. Where the applicant is registered 
with the SEC as a BD, it may accompany its Form 7-R with a copy of 
its Financial and Operational Combined Uniform Single Report under 
the '34 Act, Part II or Part IIA. See Rule 1.10(h).
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    However, as a result of the CFMA, new Section 4f(a)(2) of the CEA 
now provides that notwithstanding Section 4f(a)(1), any BD that is 
registered with the SEC \9\ shall be registered as an FCM or IB, as 
applicable, ``effective contemporaneously with the submission of 
notice,'' if--
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    \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.

    (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.

Moreover, new Section 4f(a)(4)(C)(i) of the CEA provides that a BD that 
is registered as an FCM pursuant to notice registration shall not be 
required to become a member of a registered futures association. 
Accordingly, by this Federal Register release, the Commission is 
proposing to amend Rule 3.10 to provide for FCM and IB notice 
registration thereunder and to amend Rule 170.15 to exclude from its 
scope BDs notice-registered as FCMs.\10\
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    \10\ Section 4k(1) of the CEA generally requires each person who 
is an associated person (``AP'') of an FCM or IB to register as 
such. Rule 3.12 generally requires an applicant for registration as 
an AP to file a Form 8-R, which requires basic biographical 
information, along with a sponsor's certification. It is not 
necessary for the Commission to similarly propose notice 
registration under Rule 3.12 for the APs of those FCMs and IBs who 
would be subject to the proposed notice registration under Rule 
3.10, because the CFMA exempts these APs from registration 
altogether. Specifically, Section 252(d) of the CFMA amends Section 
4(k) of the CEA to provide that:
    Any associated person of a broker or dealer that is registered 
with the Securities and Exchange Commission, and who 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 or any 
options on such a contract, on or subject to the rules of any 
contract market or registered derivatives transaction execution 
facility to security futures products, shall be exempt from [Section 
4k(1)] of this Act and the rules thereunder.
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II. Proposed Amendments

A. Rule 3.10

    Rule 3.10 currently is structured as follows: paragraph (a), 
``Application for registration,'' contains the information that an 
application for registration under the rule must contain; paragraph 
(b), ``Duration of registration,'' generally provides that registration 
under paragraph (a) will continue until withdrawal or revocation; 
paragraph (c),

[[Page 27478]]

``Exemption from registration for certain persons,'' provides an 
exemption from registration as an FCM for certain persons; and 
paragraph (d), ``Annual filing,'' prescribes an annual review of a 
printout of registration information on file with NFA for persons 
registered pursuant to paragraph (a).
    The Commission is proposing to amend Rule 3.10 in several ways. 
First, paragraph (a)(1)(i) would be revised to alert applicants for 
registration that there is an alternative registration procedure under 
new Rule 3.10(a)(3). Second, paragraph (a)(3) would be added. Captioned 
``Notice registration as a futures commission merchant or introducing 
broker for certain securities brokers or dealers,'' it would add an 
exception to the FCM and IB registration requirements of Rule 3.10(a) 
for BDs who meet the criteria of new Section 4f(a)(2) of the CEA. 
Registration under paragraph (a)(3) would be made ``by following such 
procedures for notice registration as may be specified'' by NFA. This 
registration would be effective upon the filing of the notice 
prescribed by NFA, as mandated by Section 252(b)(2) of the CFMA. 
Finally, paragraph (d) would be amended to relieve these notice 
registrants from the annual update requirement.
    The Commission's proposal is consistent with the Commission's 
previous delegation of registration authority to NFA under Rule 3.2 and 
through various Commission orders. The Commission believes that its 
proposal is also consistent with Section 125 of the CFMA, which 
requires the Commission to report to Congress later this year on a 
study of the CEA and the Commission's rules, regulations and orders 
governing the conduct of persons required to be registered under the 
CEA. One area that the study must identify is ``the regulatory 
functions the Commission currently performs that can be delegated to a 
registered futures association * * * and the regulatory functions that 
the Commission has determined must be retained and the reasoning 
therefor.''
    As referred to above, notice registrant FCMs and IBs are exempt 
from NFA membership.\11\ Although the Commission cannot require NFA to 
perform registration functions for persons that are not NFA 
members,\12\ the Commission may authorize NFA to perform any 
registration function.\13\ Commission staff have discussed this matter 
with NFA, and NFA has agreed to undertake the function of processing 
notice registrations for BDs as discussed herein. If the Commission 
adopts these amendments to Rule 3.10, it expects to issue an order 
authorizing NFA to perform this function.
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    \11\ Section 252(c) of the CFMA; Section 4f(a)(4)(C) of the CEA.
    \12\ See Section 17(o)(1) of the CEA.
    \13\ Sections 8a(10) and 17(o)(2) of the CEA.
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B. Rule 170.15

    Section 17(m) of the CEA states that--

[n]otwithstanding any other provision of law, the Commission may 
approve rules of futures associations that, directly or indirectly, 
require persons eligible for membership in such associations to 
become members of at least one such association upon a determination 
by the Commission that such rules are necessary or appropriate to 
achieve the purposes and objectives of [the CEA].

Pursuant to this provision, the Commission adopted Rule 170.15, which 
provides that each person required to register as an FCM must become 
and remain a member of at least one registered futures association.\14\ 
However, and as noted above, because new section 4f(a)(4)(C)(i) of the 
CFMA exempts BDs who notice-register as FCMs from the requirement to 
become a member of a registered futures association, the Commission is 
proposing to amend Rule 170.15. The amendment would add a provision to 
exempt FCMs registered in accordance with Rule 3.10(a)(3) from the 
requirement to become and remain a member of a registered futures 
association.
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    \14\ NFA is the only registered futures association.
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III. 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 seeking to be registered under notice registration 
procedures as an FCM or IB pursuant to new Section 4f(a)(2). 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.\15\ The Commission 
previously determined that registered FCMs are not small entities for 
the purpose of the RFA.\16\ 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.\17\
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    \15\ 47 FR at 18618-21 (April 30, 1982).
    \16\ 47 FR at 18619-20.
    \17\ 47 FR at 18618, 18620.
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    These amendments would provide exemptive relief from provisions of 
the Commission's regulations that otherwise would be applicable to such 
persons. Consequently, the Commission believes that the adoption of 
these rule amendments would reduce the burden of compliance by persons 
seeking to be registered as an FCM or IB. 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

    This proposed rulemaking contains information collection 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\18\ The Commission has submitted a copy of this part to the 
Office of Management and Budget (``OMB'') for its review.
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    \18\ 44 U.S.C. 3501 et seq.
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Collection of Information
    Registration of future commission merchants, introducing brokers, 
commodity trading advisors, commodity pool operators and leverage 
transaction merchants, OMB Control Number 3038-0023.
    The burden associated with the proposed addition of Rule 3.10(a)(3) 
is estimated to be 1,000 hours, which will result from the notice 
registration as an FCM or IB of various persons who currently are 
registered as BDs with the SEC.
    The estimated burden of the proposed new rule was calculated as 
follows:
    Estimated number of respondents: 5,000.
    Reports annually by each respondent: 1.
    Total annual Responses: 5,000.
    Estimated average Number of Hours Per Response: 2.
    Estimated Total Number of Hours of Annual Burden in Fiscal Year: 
1,000.
    There are no paperwork burdens associated with the proposed 
amendments to Rule 3.10(d), which would clarify that the annual filing 
prescribed therein does not apply to notice-registered BDs, or to Rule 
170.15, which would exclude notice-registered BDs from the requirement 
that each registered FCM must become and remain a member of NFA.
    Organizations and individuals desiring to submit comments on the

[[Page 27479]]

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 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 CEA to require 
that the Commission, before promulgating a regulation under the CEA or 
issuing an order, consider the costs and benefits of the Commission's 
action in light of five criteria.\19\ The main considerations relevant 
to this proposal are the first two considerations set forth in the CEA, 
``protection of market participants and the public'' and ``efficiency, 
competitiveness and financial integrity of the futures markets.'' The 
Commission believes that persons who are registered as BDs with the SEC 
are appropriate subjects for notice registration where their futures-
related activity is restricted to security futures products. The 
Commission also believes that these additional registrants may promote 
the efficiency and competitiveness of those futures markets on which 
security future products may be traded and that their presence as 
intermediaries in these markets may serve to promote the financial 
integrity of those markets. The Commission further notes that the CFMA 
specifically mandates that registered BDs be noticed-registered with 
the Commission as an FCM or IB.
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    \19\ 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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List of Subjects

17 CFR Part 3

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures.

  

    For the reasons discussed in the preamble, the Commission hereby 
proposes to amend 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, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 
13c, 16a, 18, 19, 21, 23.

    2. Section 3.10 is amended by revising paragraph (a)(1)(i), by 
adding a new paragraph (a)(3) and by revising the first sentence of 
paragraph (d), to read as follows:


Sec. 3.10  Registration of futures commission merchants, introducing 
brokers, commodity trading advisors, commodity pool operators and 
leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in 
paragraph (a)(3) of this section, application for registration as a 
futures commission merchant, introducing broker, commodity trading 
advisor, commodity pool operator or leverage transaction merchant must 
be on Form 7-R, completed and filed with the National Futures 
Association in accordance with the instructions thereto.
* * * * *
    (3) Notice registration as a futures commission merchant or 
introducing broker for certain securities brokers or dealers. (i) Any 
broker or dealer that is registered with the Securities and Exchange 
Commission may be registered as a futures commission merchant or 
introducing broker, as applicable, by following such procedures for 
notice registration as may be specified by the National Futures 
Association, if--

    (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 as defined in section 1a(32) of the Act;
    (B) The registration of the broker or dealer is not suspended 
pursuant to an order of the Securities and Exchange Commission; and
    (C) 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.
    (ii) The registration will be effective upon the filing of the 
notice prescribed by the National Futures Association in accordance 
with the instructions thereto.
* * * * *
    (d) Annual filing. Any person registered as a futures commission 
merchant, introducing broker, commodity trading advisor, commodity pool 
operator or leverage transaction merchant in accordance with paragraph 
(a)(1) and (a)(2) of this section must file with the National Futures 
Association a Form 7-R, completed in accordance with the instructions 
thereto, annually on a date specified by the National Futures 
Association. * * *

PART 170--REGISTERED FUTURES ASSOCIATIONS

    3. The authority citation for part 170 continues to read as 
follows:

    Authority: 7 U.S.C. 6p, 12a and 21, unless otherwise noted.

Subpart C--Membership in a Registered Futures Association

    4. Section 170.15 is revised to read as follows:


Sec. 170.15  Futures commission merchants.

    (a) Except as provided in paragraph (b) of this section, each 
person required to register as a futures commission merchant must 
become and remain a member of at least one futures

[[Page 27480]]

association which is registered under section 17 of the Act and which 
provides for the membership therein of such futures commission 
merchant, unless no such futures association is so registered.
    (b) The requirements of paragraph (a) of this section shall not 
apply to a futures commission merchant registered in accordance with 
Sec. 3.10(a)(3) of this chapter.

    Issued in Washington, DC on May 14, 2001 by the Commission.
Edward W. Colbert,
Deputy Secretary of the Commission.
[FR Doc. 01-12489 Filed 5-16-01; 8:45 am]
BILLING CODE 6351-01-P