[Federal Register Volume 67, Number 76 (Friday, April 19, 2002)]
[Proposed Rules]
[Pages 19358-19365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9296]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AB89


Registration of Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed Rules.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') is proposing amendments to Part 3 of its rules, which 
governs registration of intermediaries in the futures industry. These 
amendments are necessary to facilitate the change from the current 
paper-based registration system to online registration. It is expected 
that the online registration system will provide applicants with a more 
streamlined process for registering, resulting in less redundancy and 
quicker processing of applications by the National Futures Association. 
The proposed amendments would permit a floor broker that receives a 
temporary license to act in the capacity of a fully registered floor 
broker, and an applicant for registration as an associated person to be 
granted a temporary license upon filing the Form 8-R and a sponsor's 
certification, but prior to submission of fingerprints. Several other 
amendments are technical in nature to accommodate the transfer from a 
paper-based to an electronic

[[Page 19359]]

system and to recognize derivatives transaction execution facilities.

DATES: Comments on the proposed new rule and amendments must be 
received by May 20, 2002.

ADDRESSES: Comments on the proposed rule should be sent to Jean A. 
Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW, Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 418-5528, or by e-mail to 
[email protected]. Reference should be made to ``Registration.''

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel, or Michael A. Piracci, Attorney-Advisor, Division of Trading 
and Markets, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW, Washington, DC 20581. Telephone: (202) 
418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

    The Commission has previously delegated the authority to process 
applications for registration of intermediaries and floor traders under 
the Commodity Exchange Act (the ``Act'')\1\ to the National Futures 
Association (``NFA'').\2\ NFA has submitted to the Commission, for its 
approval, pursuant to Section 17(j) of the Act, amendments to NFA 
registration rules that would require applicants seeking registration 
under the Act as futures commission merchants (``FCMs''), introducing 
brokers (``IBs''), commodity pool operators (``CPOs''), commodity 
trading advisors (``CTAs''), leverage transaction merchants (``LTMs''), 
associated persons (``APs''), floor brokers (``FBs''), and floor 
traders (``FT'') to file applications electronically through an online 
registration system.\3\
    Technological advancements have resulted in fundamental changes in 
the futures industry, as is the case in almost every other industry. 
The Commission has encouraged and attempted to facilitate the use of 
electronic technology in the futures industry.\4\ The Commission also 
believes that it must constantly look at ways that technology can 
better assist the Commission in fulfilling its regulatory mission.\5\
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    \1\ 7 U.S.C. 1 et seq. (2000).
    \2\ See, e.g., 58 FR 19657 (Apr. 15, 1993) (floor traders); 51 
FR 34490 (Sep. 29, 1986) (floor brokers); 49 FR 39593 (Oct. 9, 1984) 
(futures commission merchants, commodity pool operators, commodity 
trading advisors, and associated persons thereof); 48 FR 35158 (Aug. 
3, 1983) (introducing brokers and associated persons thereof).
    \3\ Agricultural trade option merchants as well as applicants 
for registration as FCMs and IBs pursuant to Section 4f(a)(2) of the 
Act (notice-registration of securities broker-dealers whose only 
futures-related activity involves security futures products) will 
still file paper applications.
    \4\ For example, the Commission has created a Technology 
Advisory Committee, see 66 FR 57427 (Nov. 15, 2001); see also 65 FR 
12466 (Mar. 9, 2000) (adopting new Rule 1.4, which permits the use 
of electronic signatures in lieu of handwritten signatures where the 
Act or Commission rules require a customer's signature). 
Additionally, the Commission had previously authorized NFA to 
implement a pilot program that allowed certain registrants to enter 
registration data electronically for APs and branch office managers 
of these registrants. 55 FR 35925 (Sep. 4, 1990).
    \5\ For example, the National Association of Securities Dealers, 
the registered national securities association responsible for 
processing the registration filings of certain persons required to 
register with the Securities and Exchange Commission, has required 
all registration filings to be submitted via the World Wide Web to 
its Central Registration Depository system since 1999.
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    NFA's new online registration system should streamline the 
registration process and result in a system that is easier to use for 
applicants, registrants, and regulators. The new system should make it 
quicker and easier for persons to provide NFA with the required 
information and enable NFA to process more efficiently this information 
in determining whether to grant an application for registration, while 
maintaining most of the features of the current system. Additionally, 
information on registrants should be more readily accessible by the 
public, NFA, and the Commission.

II. The Proposed Rule Amendments

    A. Additional Categories and Sponsors
    As part of the new online registration system, applicants that have 
a current active status, either as a registrant or as a listed 
principal, and who seek to add an additional registration category 
would be required to file a ``short path'' version of the form required 
for a new applicant.\6\ This ``short path'' form would require the 
applicant to supply only necessary information that is not already in 
the registration database. For example, if an entity registered as an 
IB applies to become registered also as a CTA, the entity would 
complete the ``short path'' Form 7-R, which requires the applicant to 
select the appropriate categories for which it would be registered and 
to indicate the category in which it intends to vote on NFA membership 
matters. Likewise, natural persons currently registered as APs, FBs, 
FTs, or listed as branch managers or principals that seek to add an 
additional category would complete a ``short path'' Form 8-R.
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    \6\ Currently, such applicants are required to file a Form 3-R 
(which is akin to the new ``short path'' form) or Form 8-R, 
depending upon their current status and the additional category 
requested.
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    The Form 7-R would no longer require an applicant to list 
principals that are natural persons because when a Form 8-R is filed 
indicating a principal category, the system will require the 
appropriate information, including information regarding the sponsor 
firm. Currently, under Commission Rule 3.10(a)(2)(i),\7\ each Form 7-R 
must be accompanied with a Form 8-R and fingerprints for each natural 
person who is a principal of the applicant. The rule does not apply to 
a principal that has a current Form 8-R on file. However, because the 
necessary information about the firm for whom a natural person is a 
principal is gathered through the Form 8-R, if a natural person with a 
current active status seeks to add a principal category or to become a 
principal of another firm, then it would be necessary for a ``short 
path'' Form 8-R to be filed.\8\ Accordingly, the Commission is 
proposing to amend Rule 3.10(a)(2)(i) to reflect this change.
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    \7\ Commission rules referred to herein may be found at 17 CFR 
Chap. I (2001).
    \8\ Fingerprints will still not be required.
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    Currently, a person who is unconditionally registered as an AP may 
become associated as an AP with another sponsor if the new sponsor 
files a Form 3-R with NFA. The Form 3-R must contain a certification 
signed by each sponsor acknowledging that each sponsor, in addition to 
being responsible for supervising the AP, is jointly and severally 
liable for the conduct of the AP. As noted above, under the new online 
registration system, APs with a current status seeking to add another 
sponsor would file a ``short path'' Form 8-R, which, similar to the 
current paper Form 3-R, would require the submission of only that 
information not already in the database required for adding the 
applicable sponsor. Accordingly, the Commission is amending Rule 3.12 
to reflect the fact that the sponsor must file a Form 8-R instead of 
the Form 3-R.
    Maintaining the requirement that all of the sponsors of the AP sign 
and file the acknowledgment mandated under the current rule in an 
electronic environment would require sending the filing via traditional 
delivery or via a complicated and costly electronic signature system, 
both resulting in a delay in adding the sponsor. Additionally, the 
Commission believes it is unnecessary to require the signed 
acknowledgment where the rule makes clear that a sponsor is responsible 
for supervising its APs and is liable for

[[Page 19360]]

their conduct.\9\ Accordingly, the Commission is removing the 
requirement that a signed certification be submitted to add an 
additional sponsor. Instead, the NFA, upon receipt of the Form 8-R for 
an AP seeking to add a sponsor, shall notify the existing sponsors of 
the AP of the application. The amended rule would continue to hold each 
sponsor responsible for the supervision of the AP and make each sponsor 
jointly and severally liable for the conduct of the AP with respect to 
customers common to that sponsor and another sponsor.\10\ Requiring a 
signed acknowledgement of this fact would present an added burden for 
registrants that the Commission does not believe is necessary.
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    \9\ Existing Commission rules also make clear the sponsor's 
responsibility and liability to supervise its APs. See, e.g., Rule 
166.3.
    \10\ NFA Registration Rule 207, as amended, holds sponsors to 
the same standards.
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    NFA's proposed Registration Rule 207(a) would permit a person whose 
application for registration as an AP is pending, or who is temporarily 
licensed as an AP, to apply to become registered as an AP of another 
sponsor. Pursuant to proposed Registration Rule 207(b), the AP would 
become registered as an AP of the new sponsor only if he or she is 
already registered as an AP with another sponsor. The Commission 
believes that NFA's proposed Registration Rule 207 is consistent with 
the proposed amendments to Commission Rule 3.12(f).

B. Updates

1. Annual and Triennial Updates
    Pursuant to Commission Rule 3.31, any applicant or registrant must 
promptly correct any inaccuracy in its Form 7-R or Form 8-R. 
Accordingly, registrants are under an ongoing duty to ensure that their 
registration filings are accurate. Currently, pursuant to Rule 3.10(d), 
a firm is required to file annually with NFA a Form 7-R. For this 
purpose, NFA sends to each firm a pre-printed paper copy of the firm's 
Form 7-R that the firm must then update and file with NFA. Similarly, 
pursuant to Rule 3.11(d), every three years the NFA provides each 
registered FB and FT with a paper printout of the information contained 
in NFA's registration database concerning the registrant. If the 
information in the printout is inaccurate, the registrant must correct 
the information and return the printout to NFA. Otherwise, the 
registrant is not required to return the printout and is deemed to have 
recertified the registration information contained in the printout.
    As noted above, these persons are already under an ongoing 
obligation to update the applicable registration information when 
necessary. The continuation of the annual and triennial update process 
is redundant and results in unnecessary costs to both NFA and the 
registrant. Accordingly, the Commission is amending the rules to delete 
these requirements.
2. Changes in Form of Organization
    Pursuant to Rule 3.31, a change in the form of organization of a 
registrant requires that the registrant correct its Form 7-R. 
Currently, when a firm files a Form 3-R to report a change in the form 
of the organization, it must be accompanied by a certification ``signed 
in a manner sufficient to be binding under local law'' that the 
registrant will be liable for all obligations of the pre-existing 
organization. Similar to the acknowledgment currently required when an 
AP adds a sponsor, the Commission believes it is an unnecessary burden 
on registrants to require a signed certification by the registrant 
acknowledging its liability for the obligations of the pre-existing 
organization when Commission rules, and NFA rules, can make clear the 
registrants' responsibilities. Accordingly, the Commission is amending 
Rule 3.31 to make clear that, when a registrant reports a change in the 
form of its organization by filing a Form 3-R under Rule 3.31, it 
remains liable for all obligations of the pre-existing organization.
    Notwithstanding the above, under the proposed amendments, where a 
registrant is ceasing to be or is becoming a sole proprietorship, the 
registrant would have to file a Form 7-W, withdrawing the registration 
of the pre-existing organization, and file a Form 7-R regarding the new 
organization. A change to or from a sole proprietorship to another form 
of business entity, such as a corporation, is not a mere change in the 
form of organization. There is a fundamental difference between a 
natural person and a corporation. A corporation undertaking business 
that was being conducted by a sole proprietor is not a continuation of 
an existing organization, but is the creation of a completely new and 
separate legal entity, thus requiring the filing of a Form 7-W 
regarding the pre-existing organization and a Form 7-R on behalf of the 
new organization.

C. Temporary Licenses

1. Initial Filing
    Pursuant to Commission Rule 3.40, an applicant for registration as 
an AP, FB, or FT, may be granted a temporary license upon the filing of 
a completed Form 8-R, the applicant's fingerprints, and, (a) if the 
applicant is applying for registration as an AP, the required sponsor's 
certification, or (b) if the applicant is applying for registration as 
an FB or FT, the required proof of having been granted trading 
privileges by a contract market. Under the online registration system, 
there would be a delay between the filing of the Form 8-R, which will 
occur instantaneously via the Internet, and the filing of the 
applicant's fingerprints, which must still be physically provided on a 
fingerprint card. Accordingly, the Commission is proposing to amend 
Rule 3.40 to provide that NFA may grant a temporary license to an 
applicant for registration as an AP upon filing of the completed Form 
8-R and the sponsor's certification, but before the applicant's 
fingerprints are filed. The fingerprints must be filed with NFA within 
20 days. This will not result in any change of the policies that NFA 
uses in determining to grant a temporary license to an AP.
    FBs and FTs will have to continue to file the current documents 
required under the rule, including fingerprints, to receive a temporary 
license. Temporary licenses for FBs and FTs will not be granted online 
because, to be eligible for a temporary license, FB and FT applicants 
must have been granted trading privileges on a contract market or DTF. 
It has been the experience of the Commission and NFA that FB and FT 
applicants, especially new applicants, almost never receive trading 
privileges before applying for registration. In fact, the applicant's 
fingerprint cards and registration fees are almost always received 
before an exchange grants them trading privileges. Moreover, if NFA 
were to grant an FB or FT applicant a temporary license and later 
withdraw it, such action could have larger financial implications for 
the individual than would be the case for an AP applicant. For example, 
an FB or FT applicant must make sizeable investments to obtain trading 
privileges on the floor of an exchange.
2. Restrictions on Activities
    Currently, an applicant for registration as an FB who is granted a 
temporary license, and has not been registered as an FB during the 
preceding 60 days, is only permitted to act as an FT. The Commission 
does not believe that this difference is required. The fitness 
standards for becoming registered as an FB or an FT are the same. 
Likewise, the fitness standards for becoming temporarily licensed as an 
FB or an FT should be the same. When the

[[Page 19361]]

Commission adopted rules that limited FBs granted temporary licenses to 
acting as FTs, it noted that, after gaining further experience in the 
area, it might revisit the issue.\11\ In the nine years since 
applicants for registration as FBs have been permitted to receive a 
temporary license, the Commission and NFA have found that it is very 
rare that a temporary license granted to an applicant for registration 
as an FB has had to be terminated as a result of the ensuing fitness 
check. This is attributable to the fact that, in order to be granted a 
temporary license as an FB, an applicant must have been granted trading 
privileges by a contract market and a contract market conducts its own 
fitness check before granting a person trading privileges. Generally, 
information that would prevent an applicant from becoming registered 
with the Commission as an FB would also prevent the person from 
obtaining trading privileges on a contract market. Accordingly, the 
Commission is proposing to permit an applicant for registration as an 
FB who has been granted a temporary license to act in the capacity of 
an FB for the duration of the temporary license.
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    \11\ 58 FR 19575, 19583 (Apr. 15, 1993).
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3. Special Temporary Licenses
    Currently, pursuant to Commission Rule 3.11(c)(1), an FB or FT, 
whose registration has terminated within the preceding sixty days, and 
who has been granted trading privileges at a new contract market that 
has filed with NFA the certification required under Rule 3.40(c), 
regarding the applicant, will be granted a temporary license to act as 
an FB or FT upon mailing a Form 8-R, a fingerprint card, and if 
applicable, a supplemental sponsor certification. These are the same 
submissions necessary to be granted a temporary license under 
Commission Rule 3.40. However, pursuant to Rule 3.11(c)(1), once the 
applicant has mailed the Form 8-R and the fingerprint card to NFA the 
applicant's temporary license will be granted, as opposed to the 
requirement under Rule 3.40 that the documents be filed with NFA. 
However, the applicant must have been granted trading privileges by a 
new contract market and the contract market must have made the required 
certification before the applicant could be granted the temporary 
license. The Commission does not believe that it is necessary to 
maintain both rules for granting temporary licenses to FBs and FTs when 
the practical result under either rule is the same. Accordingly, the 
Commission is proposing to remove Rule 3.11(c)(1). All temporary 
licenses for FBs and FTs will be granted pursuant to Rule 3.40.
    The Commission is also proposing to remove Rule 3.11(c)(2). 
Currently, pursuant to Commission Rule 3.11(c)(2), any FB or FT who 
continuously maintains trading privileges at a contract market may 
change their registration category from an FB to an FT or vice versa 
upon mailing to NFA a completed Form 3-R indicating an intention to 
change categories. As noted above, under NFA's proposed online 
registration system, applicants for adding additional registration 
categories will file a ``short path'' Form 8-R. Additionally, under 
Commission Rule 3.11(a), an applicant for registration as an FB or FT 
is not required to file a fingerprint card if the applicant has a 
current Form 8-R on file with NFA.\12\ Accordingly, removing Rule 
3.11(c)(2) should not negatively affect those already registered as FBs 
or FTs seeking to switch registration categories.
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    \12\ NFA proposed Registration Rule 205(b) similarly provides 
that an applicant for FB or FT registration need not file a 
fingerprint card or pay the registration fee if the applicant has a 
current Form 8-R on file.
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    Similar to the granting of a temporary license as a new applicant 
for AP registration, as discussed above, the Commission is also 
proposing to amend Rule 3.12(d) to permit the granting of a special 
temporary license to an AP whose registration terminated within the 
preceding 60 days upon the filing of a completed Form 8-R, but prior to 
the applicant's fingerprints being filed with NFA. The fingerprints 
must be filed with NFA within 20 days.

D. FCM and IB Withdrawal From Registration

    Currently, pursuant to Commission Rule 3.33(c)(1), when an FCM or 
an independent IB is requesting withdrawal from registration because it 
has ceased engaging in activities that require registration, their 
request for withdrawal must be accompanied by Form 1-FR-FCM or 1-FR-IB 
\13\ completed within a month of the date of the request for 
withdrawal. Pursuant to NFA Financial Requirement Section 1(b), each 
FCM for which NFA is the designated self-regulatory organization must 
file a Form 1-FR-FCM for each month end. Accordingly, for such FCMs, a 
Form 1-FR-FCM for the previous month will have already been filed. 
Additionally, an IB is not permitted to hold customer funds. Therefore, 
requiring an IB seeking withdrawal to file Form 1-FR-IB in every 
instance is unnecessary. Moreover, if there was a reason for the 
Commission to be concerned about the financial state of a particular IB 
requesting withdrawal, the Commission may, pursuant to Rule 3.33(f)(4), 
require that the IB provide the appropriate financial statements, 
including a Form 1-FR-IB, before it is permitted to withdraw its 
registration. Accordingly, the Commission is proposing to remove Rule 
3.33(c)(1).
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    \13\ The Forms 1-FR-FCM and 1-FR-IB are statements of the 
financial condition of an FC or IB respectively, used, in part, to 
ensure compliance with applicable Commission minimum financial 
requirements.
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E. Certification Signatories

    Commission Rules 3.12(c)(1), 3.12(d)(3) (sponsor certifications 
regarding an applicant for AP registration), 3.33(b) (Form 7-W for a 
firm's withdrawal of registration), 3.44(a)(4) (FCM certification 
regarding a temporary license for an IB) require that only certain 
persons may sign the pertinent documents on behalf of the 
registrant.\14\ Under the proposed online registration system, where 
the pertinent documents will be filed electronically, it would be 
difficult, if not impossible, to ensure that only one of the enumerated 
persons was actually submitting the document.
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    \14\ For example, Rule 3.12(c)(1) requires that the sponsor's 
certification be signed by an officer if the sponsor is a 
corporation, a general partner, if a partnership, or the sole 
proprietor, if a sole proprietorship.
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    NFA, in its proposed Registration Rule 802, provides that the 
electronic filing of required documents constitutes, among other 
things, the applicant's, registrant's, or sponsor's certification that 
the person who electronically files the document is authorized by the 
entity to make the required certifications, representations, requests, 
acknowledgements, authorizations, and agreements contained therein. 
Moreover, proposed NFA Registration Rule 801(b) provides that any 
registration filing made on behalf of a registrant or applicant by a 
person authorized by the applicant or registrant shall be deemed to be 
a filing of such registrant or applicant.\15\
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    \15\ Under the proposed NFA rules, FBs and FTs may not authorize 
any other person to file a Form 8-R on their behalf. Additionally, 
persons for whom a sponsor has filed a Form 8-R must verify the 
information themselves and may not authorize any other person to do 
so on their behalf.
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    Therefore, the entity filing the pertinent certification or form 
under Commission Rules 3.12(c)(1), 3.33(b), 3.44(a)(4) should be held 
accountable for any representations in the applicable document. 
Accordingly, the Commission is proposing to amend these rules to make 
clear that a person duly authorized by the registrant or

[[Page 19362]]

sponsor must file the relevant certification or form.

F. Other Amendments

    The Commission is also proposing to make certain technical 
amendments. For example, the Commission is proposing to amend Rules 
3.11 and 3.31 so as to reference both contract markets and derivatives 
transaction execution facilities. Additionally, the Commission is 
proposing to remove references in Part 3 to Part 180, which has been 
removed and reserved.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'')\16\ requires that 
agencies, in proposing rules, consider the impact of those rules on 
small businesses. 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.\17\ The Commission has previously determined that FCMs, 
registered CPOs, and LTMs are not small entities for the purpose of the 
RFA.\18\ Therefore, the requirements of the RFA do not apply to those 
entities. With respect to the remaining entities, the proposed rule 
amendments will not place any additional burdens upon such parties 
since all registrants are already subject to the registration filing 
requirements of the Act and Part 3 of the Commission's regulations. To 
the contrary, the proposed amendments will help to streamline and 
simplify the current registration procedures. Accordingly, the 
Chairman, on behalf of the Commission, certifies pursuant to Section 
3(a) of the RFA \19\ that the proposed rules will not have a 
significant economic impact on a substantial number of small entities. 
However, the Commission invites the public to comment on this finding.
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    \16\ 5 U.S.C. 601 et seq.
    \17\ 47 FR 18618 (April 30, 1982).
    \18\ Id. at 18619-20 (discussing FCMs and CPOs); 54 FR 19556, 
19557 (May 8, 1989) (discussing LTMs).
    \19\ 5 U.S.C. 605(b).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \20\ 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 proposed rule amendments do not 
require a new collection of information on the part of any entities 
subject to the proposed rule amendments. Accordingly, for purposes of 
the PRA, the Commission certifies that these proposed rule amendments, 
if promulgated in final form, would not impose any new reporting or 
recordkeeping requirements. The Commission has submitted hard copies of 
how the screens will appear in the electronic registration system to 
OMB.
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    \20\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its action before issuing a new regulation under 
the Act. By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of a new regulation or to determine 
whether the benefits of the proposed regulation outweigh its costs. 
Rather, Section 15(a) simply requires the Commission to ``consider the 
costs and benefits'' of its action.
    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
Protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The proposed amendments are intended to facilitate a streamlined 
registration process that would result in less redundancy and quicker 
processing of applications. The Commission is considering the costs and 
benefits of these rules in light of the specific provisions of Section 
15(a) of the Act:
1. Protection of Market Participants and the Public
    While the proposed amendments are expected to lessen the burden 
imposed upon applicants in the registration process, they do not reduce 
the fitness standards for becoming registered with the Commission. 
Accordingly, they should have no effect on the Commission's ability to 
protect market participants and the public.
2. Efficiency and Competition
    The proposed amendments are expected to benefit efficiency and 
competition by more quickly facilitating entry into the industry and by 
enabling information to be collected and made available in a more 
timely manner.
3. Financial Integrity of Futures Markets and Price Discovery
    The proposed amendments should have no effect, from the standpoint 
of imposing costs or creating benefits, on the financial integrity or 
price discovery function of the futures and options markets.
4. Sound Risk Management Practices
    The proposal should have no effect on the risk management practices 
of the futures and options industry.
5. Other public interest considerations
    The proposed amendments, in facilitating the change to an online 
registration system, are expected to result in a registration system 
that is easier to use and more efficient in its processing of 
registration applications. Additionally, the system should permit more 
information about registrants to be readily accessible by the public 
more quickly.
    After considering these factors, the Commission has determined to 
propose the amendments discussed above. The Commission invites public 
comment on its application of the cost-benefit provision. Commenters 
also are invited to submit any data that they may have quantifying the 
costs and benefits of the proposal with their comment letters.

Lists of Subjects in 17 CFR Part 3

    Brokers, Commodity Futures, Registration.

    In consideration of the foregoing, 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. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 
13c, 16a, 18, 19, 21, 23.

    2. Section 3.2 is amended by revising paragraph (c) to read as 
follows:


Sec. 3.2  Registration processing by the National Futures Association; 
notification and duration of registration.

* * * * *
    (c) The National Futures Association shall notify the registrant, 
or the sponsor in the case of an applicant for registration as an 
associated person, and each designated contract market or registered 
derivatives trading execution facility that has granted the applicant

[[Page 19363]]

trading privileges in the case of an applicant for registration as a 
floor broker or floor trader, if registration has been granted under 
the Act.
    (1) If an applicant for registration as an associated person 
receives a temporary license in accordance with Sec. 3.40, the National 
Futures Association shall notify the sponsor that only a temporary 
license has been granted.
    (2) If an applicant for registration as a floor broker or floor 
trader receives a temporary license in accordance with Sec. 3.40, the 
National Futures Association shall notify the designated contract 
market or registered derivatives trading execution facility that has 
granted the applicant trading privileges that only a temporary license 
has been granted.
* * * * *
    3. Section 3.10 is amended by revising paragraph (a)(2)(i) and by 
removing 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) * * *
    (2)(i) Each Form 7-R filed in accordance with the requirements of 
paragraph (a)(1)(i) of this section must be accompanied by a Form 8-R, 
completed in accordance with the instructions thereto and executed by 
each natural person who is a principal of the applicant, and must be 
accompanied by the fingerprints of that principal on a fingerprint card 
provided by the National Futures Association for that purpose: 
Provided, however, that if such principal is a director who qualifies 
for the exemption from the fingerprint requirement pursuant to 
Sec. 3.21(c) or has a current Form 8-R on file with the Commission or 
the National Futures Association, the fingerprints of that principal do 
not need to accompany the Form 7-R.
* * * * *
    4. Section 3.11 is revised by amending paragraphs (a)(2), (a)(3), 
and (b), and by removing paragraphs (c) and (d) to read as follows:


Sec. 3.11  Registration of floor brokers and floor traders.

    (a) * * *
    (2) An applicant for registration as a floor broker or floor trader 
will not be registered or issued a temporary license as a floor broker 
or floor trader unless the applicant has been granted trading 
privileges by a board of trade designated as a contract market or 
registered as a derivatives transaction execution facility by the 
Commission.
    (3) When the Commission or the National Futures Association 
determines that an applicant for registration as a floor broker or 
floor trader is not disqualified from such registration or temporary 
license, the National Futures Association will notify the applicant and 
any contract market or derivatives transaction execution facility that 
has granted the applicant trading privileges that the applicant's 
registration or temporary license as a floor broker or floor trader is 
granted.
    (b) Duration of registration. A person registered as a floor broker 
or floor trader in accordance with paragraphs (a) or (c) of this 
section, and whose registration has neither been revoked nor withdrawn, 
will continue to be so registered unless such person's trading 
privileges on all contract markets or derivatives transaction execution 
facilities have ceased: Provided, That if a floor broker or floor 
trader whose trading privileges on all contract markets or derivatives 
transaction execution facilities have ceased for reasons unrelated to 
any Commission action or any contract market or derivatives transaction 
execution facility disciplinary proceeding and whose registration is 
not revoked, suspended or withdrawn is granted trading privileges as a 
floor broker or floor trader, respectively, by any contract market or 
derivatives transaction execution facility where he held such 
privileges within the preceding sixty days, such registration as a 
floor broker or floor trader, respectively, shall be deemed to continue 
and no new Form 8-R or Form 3-R need be filed solely on the basis of 
the resumption of trading privileges. A floor broker or floor trader is 
prohibited from engaging in activities requiring registration under the 
Act or from representing himself to be a registrant under the Act or 
the representative or agent of any registrant during the pendency of 
any suspension of such registration or of all such trading privileges. 
In accordance with Sec. 3.31(d), each contract market or derivatives 
transaction execution facility that has granted trading privileges to a 
person who is registered, or has applied for registration, as a floor 
broker or floor trader, must notify the National Futures Association 
within sixty days after such person's trading privileges on such 
contract market or derivatives transaction execution facility have 
ceased.
    5. Section 3.12 is amended as follows:
    a. By revising paragraphs (c)(1), (c)(4), and the introductory text 
of paragraph (d)(1);
    b. By redesignating paragraphs (d)(2) and (d)(3) as (d)(3) and 
(d)(4) and revising paragraphs (d)(3) and (d)(4) as redesignated;
    c. By adding a new paragraph (d)(2); and
    d. By revising paragraph (f), the revisions and addition to read as 
follows:


Sec. 3.12  Registration of associated persons of futures commission 
merchants, introducing brokers, commodity trading advisors, commodity 
pool operators, and leverage transaction merchants.

* * * * *
    (c) * * *
    (1) No person registered as an associated person in accordance with 
this paragraph (c) unless a person duly authorized by the sponsor 
certifies that:
* * * * *
    (4) When the Commission or the National Futures Association 
determines that an applicant for registration as an associated person 
is not unfit for such registration, it will notify the sponsor that has 
made the certifications required by paragraph (c)(1) of this section 
that the applicant's registration as an associated person is granted 
contingent upon the sponsor hiring or otherwise employing the applicant 
as such within thirty days.
* * * * *
    (d) Special temporary licensing and registration procedures for 
certain persons. (1) Registration terminated within the preceding 60 
days. Except as otherwise provided in paragraphs (f) and (i) of this 
section, any person whose registration as an associated person in any 
capacity has terminated within the preceding 60 days and who becomes 
associated with a new sponsor will be granted a temporary license to 
act in the capacity of an associated person of such sponsor upon filing 
by that sponsor with the National Futures Association a Form 8-R, 
completed in accordance with the instructions thereto and, if 
applicable, a Supplemental Sponsor Certification Statement filed on 
behalf of the new sponsor (who must meet the requirements set forth in 
Sec. 3.60(b)(2)(i)(A) and (B)) stating that the new sponsor will 
supervise the applicant in accordance with conditions identical to 
those agreed to by the previous sponsor, which includes certifications 
stating:
* * * * *
    (2) Any temporary license granted pursuant to paragraph (d)(1) of 
this section shall be terminated immediately

[[Page 19364]]

upon notice to the sponsor of the person granted the temporary license 
that, within 20 days following the date the temporary license was 
issued, the National Futures Association has not received the 
applicant's fingerprints.
    (3) A temporary license received in accordance with paragraph 
(d)(1) of this section shall be subject to the provisions of Secs. 3.42 
and 3.43.
    (4) The certifications permitted by paragraphs (d)(1)(i) and (v) of 
this section must be filed by a person duly authorized by the sponsor. 
The certifications permitted by paragraphs (d)(1)(ii)-(iv) must be 
filed by the applicant for registration as an associated person.
* * * * *
    (f) Reporting of dual and multiple associations. (1)(i) Except as 
otherwise provided in paragraph (f)(4) of this section, a person who is 
already registered as an associated person in any capacity whose 
registration is not subject to conditions or restrictions may become 
associated as an associated person with another sponsor if the new 
sponsor (who must meet the requirements set forth in Sec. 3.60(b)(2)(i) 
(A) and (B)) files with the National Futures Association a Form 8-R in 
accordance with the instructions thereto.
    (ii) NFA shall notify each sponsor of the associated person that 
the associated person has applied to become associated with another 
sponsor.
    (iii) Each sponsor of the associated person shall supervise that 
associated person and each sponsor is jointly and severally responsible 
for the conduct of the associated person with respect to the:
    (A) Solicitation or acceptance of customers' orders,
    (B) Solicitation of funds, securities, or property for a 
participation in a commodity pool,
    (C) Solicitation of a client's or prospective client's 
discretionary account,
    (D) Solicitation or acceptance of leverage customers' orders for 
leverage transactions, and
    (E) Associated person's supervision of any person or persons 
engaged in any of the foregoing solicitations or acceptances, with 
respect to any customers common to it and any other futures commission 
merchant, introducing broker, commodity trading advisor, commodity pool 
operator, or leverage transaction merchant with which the associated 
person is associated.
    (2) Upon receipt by the National Futures Association of a Form 8-R 
filed in accordance with paragraph (f)(1) of this section from an 
associated person, the associated person named therein shall be 
registered as an associated person of the new sponsor.
* * * * *
    6. Section 3.31 is amended as follows:
    a. By revising paragraph (a)(1);
    b. By redesignating paragraph (a)(2) as paragraph (a)(3);
    c. By adding a new paragraph (a)(2);
    d. By revising paragraph (a)(3); and
    e. By amending paragraph (d) by adding ``or derivatives transaction 
execution facility'' after each instance of ``contract market''; the 
revisions and addition to read as follows:


Sec. 3.31  Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission 
merchant, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant shall, in 
accordance with the instructions thereto, promptly correct any 
deficiency or inaccuracy in Form 7-R or Form 8-R which no longer 
renders accurate and current the information contained therein. Each 
such correction shall be made on Form 3-R and shall be prepared and 
filed in accordance with the instructions thereto. Provided, however, 
that where a registrant is reporting a change in the form of 
organization from or to a sole proprietorship, the registrant must file 
a Form 7-W regarding the pre-existing organization and a Form 7-R 
regarding the newly formed organization.
    (2) If a registrant files a Form 3-R, pursuant to this section, to 
report a change in the form of the organization of the registrant, the 
registrant shall be liable for all obligations of the pre-existing 
organization under the Act, as it may be amended from time to time, and 
the rules, regulations, or orders which have been or may be promulgated 
thereunder.
    (3) Where the deficiency or inaccuracy is created by the addition 
of a new principal not listed on the registrant's application for 
registration (or amendment of such application prior to the granting of 
registration), and the new principal is not a natural person, the 
registrant shall file a Form 3-R filed in accordance with the 
requirements of paragraph (a)(1) of this section. Provided, however, 
that if the new principal is a natural person, the registrant shall 
file a Form 8-R, completed in accordance with the instructions thereto 
and executed by such person who is a principal of the registrant and 
who was not listed on the registrant's initial application for 
registration or any amendment thereto. The Form 8-R for each such 
principal shall be accompanied by the fingerprints of that principal on 
a fingerprint card provided by the National Futures Association for 
that purpose, unless such principal is a director who qualifies for the 
exemption from the fingerprint requirement pursuant to Sec. 3.21(c) or 
such principal has a current Form 8-R on file with the Commission or 
the National Futures Association.
* * * * *


Sec. 3.33  [Amended].

    7. Section 3.33 is amended as follows:
    a. By amending the introductory text of paragraph (b) by removing 
``the sole proprietor if the registrant is a sole proprietorship, by a 
general partner if a partnership, or by the president or chief 
executive officer if a corporation,'' and adding in its place ``a 
person duly authorized by the registrant'';
    b. By removing paragraph (b)(3);
    c. By redesignating paragraphs (b)(4) through (b)(7) as (b)(3) 
through (b)(6);
    d. By removing paragraph (c)(1);
    e. By redesignating paragraph (c)(2) as paragraph (c);
    f. By removing and reserving paragraph (d); and
    g. By amending paragraph (e) by removing ``sent to the National 
Futures Association, Registration Office, 200 West Madison Street, 
Chicago, Illinois 60606'' and adding in its place ``filed with the 
National Futures Association''.
    8. Section 3.40 is revised to read as follows:


Sec. 3.40  Temporary licensing of applicants for associated person, 
floor broker or floor trader registration.

    (a) Notwithstanding any other provision of these regulations and 
pursuant to the terms and conditions of this subpart:
    (1) The National Futures Association may grant a temporary license 
to any applicant for registration as an associated person upon the 
contemporaneous filing with the National Futures Association of:
    (i) A Form 8-R, properly completed in accordance with the 
instructions thereto; and
    (ii) The sponsor's certification required by Sec. 3.12(c): 
Provided, however, that the fingerprints of the applicant on a 
fingerprint card provided by the National Futures Association for that 
purpose must be filed with the National Futures Association within 20 
days following the date the temporary license is issued; and, provided 
further, that failure to file the fingerprints within this period will 
result in the

[[Page 19365]]

termination of the temporary license immediately upon notice to the 
applicant's sponsor that the National Futures Association has not 
received the applicant's fingerprints.
    (2) The National Futures Association may grant a temporary license 
to any applicant for registration as a floor broker or floor trader 
upon the contemporaneous filing with the National Futures Association 
of:
    (i) A Form 8-R, properly completed in accordance with the 
instructions thereto;
    (ii) The fingerprints of the applicant on a fingerprint card 
provided by the National Futures Association for that purpose;
    (iii) A Supplemental Sponsor Certification Statement executed by a 
sponsor meeting the requirements under Sec. 3.60(b)(2)(i), if the 
applicant is subject to an order imposing conditions on the applicant's 
registration; and
    (iv) Evidence that the applicant has been granted trading 
privileges by a contract market or derivatives transaction execution 
facility that has filed with the National Futures Association a 
certification signed by its chief operating officer with respect to the 
review of an applicant's employment, credit and other history in 
connection with the granting of trading privileges.
    (b) The failure of an applicant or the applicant's sponsor to 
respond to a request by the Commission or the National Futures 
Association for clarification of any information set forth in the 
application of the applicant or for the resubmission of fingerprints in 
accordance with such request will be deemed to constitute a withdrawal 
of the applicant's registration application and shall result in the 
immediate termination of the applicant's temporary license.
    (c) Subject to the provisions of Sec. 3.42 and all of the 
obligations imposed on such registrants under the Act (in particular, 
section 14 thereof) and the rules, regulations, and orders thereunder, 
an applicant for registration as an associated person who has received 
notification that a temporary license has been granted may act in the 
capacity of an associated person, an applicant for registration as a 
floor trader who has received written notification that a temporary 
license has been granted may act in the capacity of a floor trader, and 
an applicant for registration as a floor broker who has received 
written notification that a temporary license has been granted may act 
in the capacity of a floor broker.


Sec. 3.41  [Removed]

    9. Section 3.41 is removed.
    10. Section 3.42 is amended by revising paragraphs (a)(2), (a)(3), 
(a)(4) and (a)(6) to read as follows:


Sec. 3.42  Termination.

    (a) * * *
    (2) Immediately upon termination of the association of the 
applicant for registration as an associated person with the registrant 
which filed the sponsorship certification, or immediately upon loss of 
trading privileges by an applicant for registration as a floor broker 
or floor trader on all contract markets which filed the certification 
described in Sec. 3.40;
    (3) Immediately upon the withdrawal of the registration application 
pursuant to Sec. 3.40;
    (4) Immediately upon failure to comply with an order to pay a civil 
monetary penalty, restitution, or disgorgement within the time 
permitted under Sections 6(e), 6b, or 6c(d) of the Act;
* * * * *
    (6) Immediately upon failure to comply with an award in an 
arbitration proceeding conducted pursuant to the rules of a designated 
contract market, registered derivatives transaction execution facility, 
or registered futures association within the time specified in Section 
10(g) of the National Futures Association's Code of Arbitration or the 
comparable time period specified in the rules of a contract market, 
registered derivatives transaction execution facility, or other 
appropriate arbitration forum.
* * * * *
    11. Section 3.44 is amended by revising the introductory text of 
paragraph (a)(4) and revising paragraph (a)(5) to read as follows:


Sec. 3.44  Temporary licensing of applicants for guaranteed introducing 
broker registration.

    (a) * * *
    (4) A certification executed by a person duly authorized by the 
futures commission merchant that has executed the guarantee agreement 
required by paragraph (a)(1) of this section, stating that:
* * * * *
    (5) The fingerprints of the applicant, if a sole proprietor, and of 
each principal (including each branch office manager) thereof on 
fingerprint cards provided by the National Futures Association for that 
purpose: Provided, that a principal who has a current Form 8-R on file 
with the National Futures Association or the Commission is not required 
to submit a fingerprint card.
* * * * *
    12. Section 3.46 is amended by revising paragraphs (a)(6) and 
(a)(8) to read as follows:


Sec. 3.46  Termination.

    (a) * * *
    (6) Immediately upon failure to comply with an order to pay a civil 
monetary penalty, restitution, or disgorgement within the time 
permitted under Sections 6(e), 6b, or 6c(d) of the Act;
* * * * *
    (8) Immediately upon failure to comply with an award in an 
arbitration proceeding conducted pursuant to the rules of a designated 
contract market, registered derivatives transaction execution facility, 
or registered futures association within the time specified in Section 
10(g) of the National Futures Association's Code of Arbitration or the 
comparable time period specified in the rules of a contract market, 
registered derivatives transaction execution facility, or other 
appropriate arbitration forum.
* * * * *

    Issued in Washington, DC on April 12, 2002, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-9296 Filed 4-18-02; 8:45 am]
BILLING CODE 6351-01-P