[Federal Register Volume 66, Number 160 (Friday, August 17, 2001)]
[Notices]
[Pages 43227-43229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20630]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION


Performance of Notice Registration Processing Functions by 
National Futures Association With Respect to Certain Securities Brokers 
and Dealers

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and order.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
authorizing the National Futures Association (``NFA''), effective 
September 17, 2001, to process notice registration filings as a futures 
commission merchant (``FCM'') or introducing broker (``IB'') in the 
case of a securities 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

[[Page 43228]]

addition, the Commission also is authorizing NFA (1) to terminate any 
such registration in the event the criteria upon which it was based are 
no longer satisfied, (2) to maintain, on behalf of the Commission, 
records regarding BDs notice-registered as an FCM or IB, and (3) to 
serve as the official custodian of those Commission records. This Order 
does not, however, authorize NFA to grant conditional registrations to 
BDs notice-registered as an FCM or IB or, except as stated above, to 
deny, revoke, suspend or take any other adverse actions with respect to 
such registrations. This Order also does not authorize NFA to accept or 
act upon requests for exemption, ``no-action'' or interpretative 
letters with respect to applicable registration requirements.

EFFECTIVE DATE: September 17, 2001.

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. Authority and Background

    In a separate notice published elsewhere today in the Federal 
Register, the Commission is amending its rules to implement the 
Congressional mandate in section 252(b) of the Commodity Futures 
Modernization Act of 2000 (``CFMA'') \1\ requiring notice registration 
as an FCM or IB of certain SEC-registered BDs if:
---------------------------------------------------------------------------

    \1\ Pub. L. 106-554, 114 Stat. 2763. The provision in question 
will be codified at Section 4f(a)(2) of the Commodity Exchange Act 
(``CEA''), 7 U.S.C. 6f(a)(2).
    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.

    Specifically, the Commission is amending Rule 3.10 by adding 
paragraph (a)(3) to provide for such notice registration.\2\
---------------------------------------------------------------------------

    \2\ Commission rules referred to herein generally are found in 
17 CFR Ch. I (2001).
---------------------------------------------------------------------------

    As proposed and as adopted, Rule 3.10(a)(3) provides that this 
notice registration may be made ``by following such procedures . . . as 
may be specified'' by NFA. As the Commission explained in proposing 
paragraph (a)(3), this is consistent with the Commission's previous 
delegations of registration authority to NFA under Rule 3.2 and through 
various Commission orders.\3\ The Commission further explained that 
this also is 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. In this 
regard, the Commission noted that one area that the study must identify 
is ``the regulatory functions the Commission currently performs that 
can be delegated to a registered futures association.'' \4\
---------------------------------------------------------------------------

    \3\ See, e.g., 48 FR 15940 (April 13, 1983); 48 FR 35158 (August 
3, 1983). Section 8a(10) of the Act, 7 U.S.C. 12a(10), provides that 
the Commission may authorize any person to perform any portion of 
the registration functions under the CEA, notwithstanding any other 
provision of law, in accordance with rules adopted by such person 
and submitted to the Commission for approval, or, if applicable, for 
review pursuant to section 17(j) of the CEA, 7 U.S.C. 21(j), and 
subject to the provisions of the CEA applicable to registrations 
granted by the Commission. See also section 17(o) of the CEA, 7 
U.S.C. 21(o).
    \4\ See 66 FR 27476 at 27478 (May 17, 2001).
---------------------------------------------------------------------------

    NFA Registration Rule 204, like Commission Rule 3.10, concerns the 
registration of persons as FCMs and IBs. On May 17, 2001, NFA's Board 
of Directors approved a proposed amendment to Rule 204 so as to conform 
NFA's rule to that proposed by the Commission for notice registration 
of certain BDs as an FCM or IB.\5\
    Upon consideration, the Commission has determined to authorize NFA, 
effective September 17, 2001, to perform notice registration functions 
as set forth in Rule 3.10 in accordance with the standards established 
by section 4f(a)(2) of the CEA. The Commission is further authorizing 
NFA, under specified conditions, to terminate any such registration and 
to perform records custodian functions with respect to notice 
registration under Rule 3.10. Concurrently, the Commission is 
separately approving on this date NFA's proposed amendment to its 
Registration Rule 204.\6\
---------------------------------------------------------------------------

    \5\ NFA's proposed amendments to Rule 204 also provide that 
notice registration under that rule ``shall be terminated 
immediately if any of the conditions set for [such] registration are 
no longer satisfied.'' Inasmuch as the Commission adopted as 
proposed the amendments to Rule 3.10, the Commission similarly 
approved as proposed NFA's amendments to Rule 204.
    \6\ Notice registration will be made on Notice Form 7-R, which 
was included in the NFA notice registration submission that the 
Commission approved.
---------------------------------------------------------------------------

    The Commission further notes that section 17(p)(1) of the CEA\7\ 
requires that each registered futures association (such as NFA) 
``establish training standards and proficiency testing for * * * all 
persons for which it has registration responsibilities.'' While this 
provision of the CEA would appear to require NFA to establish testing 
requirements for securities BD applicants for notice registration as an 
FCM or IB, the Commission believes that it is not the intent of 
Congress to require testing of these applicants. This is because 
section 252(c) of the CFMA provides that a BD notice-registered as an 
FCM or IB ``shall not be required to become a member of any futures 
association registered under section 17.'' \8\ The Commission also 
notes that testing requirements are generally intended to apply to 
associated persons, and associated persons of BDs that notice register 
as an FCM or IB are specifically exempted from registration under 
section 4k(5) of the Act, as added by Section 252(d) of the CFMA. In 
light of the foregoing, the Commission has determined to adopt a ``no-
action'' position with respect to the establishment by NFA of a 
proficiency testing requirement for BDs who notice register as FCMs or 
IBs. Accordingly, the Commission will not institute any enforcement 
action under section 17(p)(1) of the CEA against NFA based solely upon 
NFA's failure to establish training standards and proficiency testing 
for these BDs even though NFA is being authorized to perform certain 
registration functions with respect to these BDs.\9\
---------------------------------------------------------------------------

    \7\ 7 U.S.C. 21(p)(1).
    \8\ This provision has been codified at section 4f(a)(4)(C) of 
the CEA. In proposing amendments to Rule 3.10 the Commission 
explained that: (a)lthough the Commission cannot require NFA to 
perform registration functions for persons that are not NFA members, 
the Commission may authorize NFA to perform any registration 
function. 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. 66 FR 27476 at 27478.
    \9\ This treatment of NFA concerning testing requirements for 
these BDs is similar to the Commission's position regarding testing 
requirements for floor traders. See 58 FR 19657 at 19658 (April 15, 
1993). The Commission further notes, however, that the futures and 
securities industry self-regulatory organizations, including NFA, 
are developing enhancements to existing proficiency examinations, as 
well as training modules for existing registrants, so that industry 
professionals will be aware of their responsibilities to the public 
concerning security futures products.

---------------------------------------------------------------------------

[[Page 43229]]

    Section 17(o)(2) of the CEA provides that the Commission may 
authorize NFA, in performing Commission registration functions, to 
deny, condition, suspend, restrict or revoke any registration, subject 
to Commission review.\10\ As stated above, NFA Registration Rule 204, 
which the Commission has today approved, provides that BD notice 
registration as an FCM or IB ``shall be terminated immediately if the 
other conditions set for [such] registration are no longer satisfied.'' 
The Commission is not at this time, however, authorizing NFA to take 
any other adverse registration actions with respect to the BD notice 
registration applications that it processes pursuant to this Order. 
This is consistent with Section 252 of the CFMA.
---------------------------------------------------------------------------

    \10\ 7 U.S.C. 21(o)(2).
---------------------------------------------------------------------------

    By prior orders, the Commission has authorized NFA to maintain 
various other Commission registration records and certified NFA as the 
official custodian of such records for this agency.\11\ The Commission 
has now determined, in accordance with its authority under section 
8a(10) of the CEA,\12\ to authorize NFA to maintain and serve as 
official custodian of the Commission's registration records with 
respect to BDs notice-registered as an FCM or IB.
---------------------------------------------------------------------------

    \11\ See, e.g., 49 FR 39593 (October 9, 1984).
    \12\ 7 U.S.C. 12a(10).
---------------------------------------------------------------------------

    In maintaining the Commission's registration records pursuant to 
this Order, NFA shall be subject to all other requirements and 
obligations imposed upon it by the Commission in existing or future 
Orders or regulations.\13\ In this regard, NFA shall also implement 
such additional procedures (or modify existing procedures) as are 
necessary to ensure the security and integrity of the BD notice-
registered records in NFA's custody as acceptable to the Commission; to 
facilitate prompt access to those records by the Commission and its 
staff, particularly as described in other Commission Orders or rules; 
to facilitate disclosure of public or nonpublic information in those 
records when permitted by Commission Orders or rules and to keep logs 
as required by the Commission concerning disclosure of nonpublic 
information; and otherwise to safeguard the confidentiality of the 
records.
---------------------------------------------------------------------------

    \13\ See, e.g., 49 FR 35953 at 39595- 97.
---------------------------------------------------------------------------

II. Conclusion and Order

    The Commission has determined, in accordance with the provisions of 
Section 8a(10) of the CEA, to authorize NFA, effective September 17, 
2001, to perform the following registration functions:

    (1) To receive and maintain filings for notice registration 
under the Commodity Exchange Act as a futures commission merchant or 
introducing broker by those brokers and dealers registered with the 
Securities and Exchange Commission who meet the requirements of NFA 
Registration Rule 204;
    (2) To terminate the notice registration of a registered broker 
or dealer as a futures commission merchant or introducing broker 
where the broker or dealer no longer meets the requirements of NFA 
Registration Rule 204; and
    (3) To maintain records regarding brokers and dealers notice-
registered as a futures commission merchant or introducing broker 
and to serve as the official custodian of those Commission records.

    NFA shall perform these functions in accordance with the standards 
established by the CEA and the regulations promulgated thereunder.
    These determinations are based upon the Congressional intent 
expressed in sections 8a(10) and 17(o) of the CEA and section 125 of 
the CFMA. This Order does not, however, authorize NFA to accept or act 
upon requests for exemption from registration, to render ``no-action'' 
or interpretative letters with respect to applicable registration 
requirements, to grant conditional registrations, or, except as stated 
in item (2) above, to deny or take any other adverse action with 
respect to such registrations.
    Nothing in this Order or in sections 8a(10) or 17 of the CEA or in 
section 125 of the CFMA shall affect the Commission's authority to 
review the performance by NFA of Commission registration functions.\14\
---------------------------------------------------------------------------

    \14\ See also section 17(o)(3) of the CEA, 7 U.S.C. 21(o)(3).

    Issued in Washington, DC on August 10, 2001.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-20630 Filed 8-16-01; 8:45 am]
BILLING CODE 6351-01-P