[Federal Register Volume 68, Number 112 (Wednesday, June 11, 2003)]
[Rules and Regulations]
[Pages 34790-34795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14776]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB93


Account Identification for Eligible Bunched Orders

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending Commission Rule 1.35(a-1)(5) (``Rule 1.35(a-
1)''), which allows certain account managers to bunch customer orders 
for execution and to allocate them to individual accounts at the end of 
the day. The amended rule will expand the availability of bunching to 
all customers, simplify the process and clarify the respective 
responsibilities of account managers and futures commission merchants 
(``FCMs'').

EFFECTIVE DATE: July 11, 2003.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Deputy Director, 
or R. Trabue Bland, Attorney-Advisor, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. 
Telephone: (202) 418-5430. Email: [email protected]. or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    Commission Rule 1.35(a-1), in effect since August 27, 1998 has 
allowed bunched orders for eligible customers to be placed on a 
contract market without specific customer account identification either 
at the time of order placement or at the time of report of execution. 
Rule 1.35(a-1) has limited post-execution allocation of bunched orders 
to sophisticated customers and required eligible account managers \1\ 
to make certain disclosures regarding the allocation methodology, the 
standard of fairness of allocations, composite or summary data of the 
trades, and whether the account manager has any interest in the bunched 
order.
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    \1\ The term account manager as used herein includes commodity 
trading advisors, investment advisers and other persons identified 
in the revised regulation, who would place orders and direct the 
allocation in accordance with the procedures set forth in the 
revised rule.
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    In December 2000, the Commodity Futures Modernization Act 
(``CFMA'') was enacted. One of the mandates of the CFMA was for the 
Commission to review its rules relating to intermediaries with an eye 
to identifying areas where greater flexibility might be warranted. 
Since the enactment of the CFMA, numerous industry participants have 
stated to Commission staff that the regulations related to bunched 
orders needed to be revisited for a number of reasons and the 
Commission so reported to Congress in its Intermediaries Study in June 
2002.
    For example, enhancements in technology have made it easier for 
account managers to enter orders directly, thereby making certain 
aspects of the current requirements less workable. In addition, many 
account managers use ``give-up'' agreements and multiple FCMs for 
clearing and execution. Thus, while the current rule requires that an 
account manager identify eligible customer accounts to which fills will 
be allocated before placing an order eligible for post-execution 
allocation, FCMs may not know that an order has been executed for a 
particular client until that order has been executed and cleared.\2\ 
Account managers and FCMs have also commented that their 
responsibilities under the current rule are unclear, especially their 
respective recordkeeping responsibilities. Therefore, as markets become 
more global in scope, account managers, both domestic and foreign, and 
FCMs have claimed that the current bunched order requirements serve as 
a disincentive to using U.S. futures markets.
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    \2\ 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8, 1997).
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    On February 2, 2001, the National Futures Association (``NFA'') and 
the Futures Industry Institute issued an industry-wide study of issues 
associated with order transmission and order entry process by commodity 
professionals (``Best Practices Study'').\3\ The study reported that, 
although the current rule increased flexibility over previously 
applicable requirements, many commenters in the study felt that the 
current rule caused ``unnecessary processing delays without adding 
customer protections that otherwise could be realized through equally 
effective, less costly procedures.''\4\
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    \3\ National Futures Association & Futures Industry Institute, 
Recommendations for Best Practices in Order Entry and Transmission 
of Exchange Traded Futures and Options Transactions (2001).
    \4\ Id. at 25.
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    Based upon the foregoing, on March 14, 2003, the Commission 
published the proposed amendments to Rule 1.35(a-1).\5\ The Commission 
received twenty-five comments on the proposed rule. The commenters 
included ten FCMs \6\, four exchanges \7\, two industry associations 
\8\, one commodity trading advisor (``CTA'') \9\, seven individuals 
\10\ and NFA. The FCMs, exchanges, industry associations, NFA and the 
CTA supported the amendments to the rule, generally stating that the 
essential customer protections would be retained while clarifying the 
responsibilities of FCMs and account managers. Six individuals 
submitted comments expressing concern over the possible unfair 
allocation by account managers. One commenter submitted comments 
expressing concern over the Commission's ability to monitor for unfair 
allocation under the amended rule. These comments are discussed fully 
below.
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    \5\ 68 FR 12319 (March 14, 2003).
    \6\ ABN AMRO, Inc., Bear Stearns & Co., Carr Futures, Inc., 
Credit Suisse First Boston, Fimat USA, Inc., Goldman Sachs & Co., 
J.P. Morgan Futures Inc., Lehman Brothers, Morgan Stanley & Co., and 
Prudential Securities Inc.
    \7\ The New York Board of Trade, Chicago Board of Trade, Chicago 
Mercantile Exchange, and the New York Mercantile Exchange.
    \8\ Futures Industry Association (``FIA'') and the Managed Funds 
Association (``MFA'').
    \9\ John Henry & Company, Inc.
    \10\ One commenter, Paul H. Bjarnason, Jr., is a former 
Commission employee. Six other individual commenters submitted 
identical letters.
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II. Final Rules

A. Eligible Customers

    The current rule limits the post-execution allocation of bunched 
orders to ``eligible customers,'' who, in essence, are sophisticated 
customers. In its comment, NFA noted that ``[a]ll customers deserve to 
have their orders filled efficiently and at the most favorable terms 
under the circumstances.'' The NFA and other commenters expressed the 
view that bunched orders can meet these objectives because bunched 
orders can provide better pricing and execution of orders. The 
Commission agrees; accordingly, as proposed, the amendments to Rule 
1.35(a-1)(5) will expand eligibility to all customers who

[[Page 34791]]

provide written investment discretion to account managers.\11\
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    \11\ Rule 1.35(a-1)(5) and NFA Compliance Rule 2-8(a), require 
that grants of discretionary authority to account controllers be in 
writing.
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    In the proposal, the Commission requested comment on whether it 
should retain an interpretive notice currently found at Appendix C to 
Part 1.\12\ Appendix C allows CTAs to bunch orders if they prefile 
their allocation procedures with a clearing member, NFA, or an 
exchange. As the Commission noted in the proposal, Appendix C may prove 
unnecessary given the amended rule. One commenter, FIA, stated that the 
Commission should make clear that the amended rule supercedes any NFA 
interpretive notices or Commission rules to the extent they are 
inconsistent. The Commission notes that Appendix C governs the 
allocation of bunched orders pursuant to a pre-filed or 
contemporaneously-filed allocation scheme as opposed to the amended 
Rule, which governs the post-execution allocation of bunched orders. 
However, if any conflict between the two rules arises, the standards 
set forth in this rule supercede any interpretive guidance on bunched 
orders issued by the Commission. The Commission will retain Appendix C 
as guidance to account managers who may wish to allocate orders under 
the circumstances described therein and as an example of permissible 
allocation methods, but may reconsider this issue in the future.
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    \12\ 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8, 
1997).
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B. Eligible Account Managers

    Current rule 1.35(a-1) includes as eligible account managers 
registered CTAs and Investment Advisers (``IAs''), banks, insurance 
companies, trust companies, and savings and loan associations. Rule 
1.35(a-1), as amended, expands the class of account managers permitted 
to bunch orders.\13\ Generally, the Commission and the Securities and 
Exchange Commission exempt certain CTAs and IAs from registration or 
other regulatory requirements if they exclusively service certain 
sophisticated customers.\14\ The Commission believes that post-
execution allocation should be expanded to these entities. The amended 
rule expands the list of eligible account managers to include CTAs and 
IAs who are exempt from registration, or are excluded from the 
definition of CTA or IA by operation of law or rule. In addition, the 
amended rule allows foreign advisors, who exercise discretionary 
trading authority over the accounts of non-United States persons, to be 
eligible account managers regardless of whether the foreign advisor has 
been granted an exemption pursuant to Rule 30.10.\15\
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    \13\ In the proposal, the Commission requested comment on 
whether it was appropriate to expand the list of eligible account 
managers. All comments received on this issue supported the 
expansion of eligible account managers.
    \14\ Another Commission rule proposal would expand the number of 
entities that are exempt from CTA registration. See, 68 FR 12622 
(March 17, 2003).
    \15\ 17 CFR 30.10 (2002). Rule 30.10 permits any person to 
petition for an exemption from certain of the Commission's Part 30 
rules, which govern foreign futures and option trading by persons 
located in the United States. Commission orders issued pursuant to 
Rule 30.10 permit firms, among other things, to solicit and accept 
orders for foreign futures and option contracts from United States 
customers without registering under the Commodity Exchange Act, 
based upon substituted compliance with the rules and regulations of 
the jurisdiction in which the firm is located.
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    As noted in the proposal, the amended rule does not apply to 
associated persons or introducing brokers exempt from Commission 
registration as CTAs pursuant to Rule 4.14(a)(3) and (6).\16\ As also 
noted in the proposed rule, the Commission will retain antifraud and 
antimanipulation authority over account managers who are exempt from 
registration. The Commission notes that foreign advisers would be 
foreign brokers or foreign traders subject to Commission Rule 15.05, 
which makes the FCMs through which foreign advisers make or cause to be 
made trades the agents of the foreign advisers for purposes of 
communications from the Commission.\17\
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    \16\ 17 CFR 4.14(a)(3) (2002), 17 CFR 4.14(a)(6) (2002).
    \17\ See 17 CFR 15.00(e) and 17 CFR 15.05 (2002).
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C. Information

    The Commission has converted the disclosure requirement of Rule 
1.35(a-1) to an information availability requirement. Under the amended 
rule, account managers are required to make the following information 
available to customers upon request: (1) The general nature of the 
allocation methodology the account manager uses; and (2) summary or 
composite data sufficient for that customer to compare its results with 
those of other relevant customers and, if applicable, any account in 
which the account manager has an interest. In addition, the Commission 
has added a requirement that account managers make available 
information on whether accounts in which the account manager may have 
any interest may be included with customer accounts in bunched orders 
eligible for post-execution allocation.\18\
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    \18\ In the proposal, the Commission requested comment on 
whether the information availability requirement was sufficient to 
inform customers. All comments received on this issue supported the 
information availability requirement.
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    One commenter, John Henry & Company, suggested that the amended 
rule clarify the definition of ``results'' to include only the result 
of executions and allocations as opposed to a broader measure such as 
account performance results. The Commission agrees. Therefore, under 
the amended Rule 1.35(a-1), account managers must only make available 
the results of executions and allocations to comply with Rule 1.35(a-
1)(5)(ii)(C).

D. Allocation

    The amended rule clarifies the allocation procedures for post-
execution allocation of bunched orders. In particular, the rule makes 
clear that the Commission will examine allocation fairness over time, 
rather than trade-by-trade.
    The amended rule requires that account managers observe three 
requirements when allocating post-execution. First, pursuant to Rule 
1.35(a-1)(5)(iii)(A), allocations must be fair and equitable. No 
account or group of accounts may receive consistently favorable or 
unfavorable treatment. Second, to determine whether the account manager 
is allocating fills fairly, the amended rule mandates that account 
managers use an allocation methodology sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocation.\19\ The final rule permits the account manager to exercise 
discretion over the allocation methodology, recognizing that allocation 
strategies may need to vary in order to treat all customers fairly. 
However, the Commission must be able to reconstruct the allocation 
methodology sufficiently to verify that the account manager is acting 
without bias.
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    \19\ Appendix C of Part 1 contains examples of allocation 
methods. See, 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8, 
1997). As noted in Appendix C, ``the appropriateness of any 
particular method for allocating split and partial fills depends on 
the CTA's overall trading approach. For example, a daily rotation of 
accounts may satisfy the general standards for CTAs who trade on a 
daily basis but inappropriate for CTAs who trade less frequently.''
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    One commenter, Paul H. Bjarnason, Jr., expressed concern that the 
amended rule may allow biased allocations by unscrupulous account 
managers. To combat biased allocations, Mr. Bjarnason recommended that 
the amended rule define allocation bias and require measurement of it 
with an

[[Page 34792]]

appropriate accounting system. In addition, Mr. Bjarnason suggested 
that the amended rule require account managers to track for bias in 
their trade allocations.
    As noted above, the Commission mandates that allocations be fair 
and equitable. The Commission agrees that account managers should 
diligently monitor for bias in their trade allocations and notes that 
NFA, in its interpretive notices, provides guidance on the type of 
allocation methodologies designed to provide non-preferential 
treatment.\20\ In its comment letter, NFA notes that it will amend its 
interpretive notices regarding bunched orders, but will retain the 
requirement that CTAs use an allocation methodology designed to provide 
non-preferential treatment for all accounts.\21\ Thus, given that NFA 
will be retaining this requirement, the Commission believes that it is 
unnecessary to modify the rule to define allocation bias further.
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    \20\ Interpretive Notice, NFA Compliance Rule 2-10: The 
Allocation of Block Orders for Multiple Accounts (June 9, 1998). Not 
all eligible account managers, e.g., foreign account managers, will 
be subject to NFA requirements or inspections. However, FCMs will 
remain subject to the duty to supervise accounts, whether or not 
managed by third party account managers. See, 17 CFR 166.3 (2002). 
In addition, FCMs are subject to NFA's requirements.
    \21\ In addition, NFA anticipates it will continue to (1) 
provide guidance on the type of allocation methodologies designed to 
provide non-preferential treatment; (2) require CTAs to regularly 
analyze each trading program to ensure that the allocation method 
has been fair and equitable and to document this analysis and (3) 
remind FCMs that they have certain basic duties to their customers 
in connection with bunched orders.
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    The third requirement that account managers must observe under the 
amended rule is to provide information to FCMs no later than a time 
sufficiently before the end of the day the order is executed to ensure 
that clearing records identify the ultimate customer for each trade. 
FIA, in its comment, noted a discrepancy in the proposing release. FIA 
noted that the preamble to the proposed rule stated that account 
managers must provide allocation information to FCMs in a time 
sufficiently before the end of the ``trading session,'' although the 
proposed rule text stated that account managers must provide allocation 
information sufficiently before the end of the ``trading day.'' In 
response, the Commission wishes to make clear that account managers 
must provide allocation information to FCMs before the end of the 
trading day during which the order is executed.
    As noted above, the amended rule clarifies the respective 
responsibilities of account managers and FCMs.\22\ Account managers are 
responsible for the allocation of bunched orders, not FCMs. Comments 
submitted by FCMs stated that the proposed amendments accurately 
reflect today's increasing use of electronic order entry systems. As 
Goldman Sachs noted in its comment, ``[t]he wide use of give-up 
arrangements means that an account manager's transactions on behalf of 
its clients frequently are executed through one FCM and later cleared 
through several different FCMs * * *. An FCM, therefore may have no 
reason to know that an order has been executed for a client's account 
until the transaction has been executed and cleared.''
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    \22\ In the proposal, the Commission requested comment on 
whether the proposed rule struck the appropriate balance with regard 
to judging allocation and assigning responsibilities to account 
managers and FCMs. All comments received on this issue supported the 
changes.
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    All FCMs will continue to have responsibility to monitor for 
unusual account activity. As noted in the proposed release, an 
interpretive notice accompanying NFA Compliance Rule 2-10, states that 
``[t]he FCM has certain basic duties to its customers, including the 
duty to supervise its own activities in a way designed to ensure that 
it treats its customers fairly. Specifically, an FCM would violate this 
duty if it has actual or constructive notice that allocations for its 
customers may be fraudulent and fails to take appropriate action. An 
FCM with such notice must make a reasonable inquiry into the matter 
and, if appropriate, refer the matter to the proper regulatory 
authorities.'' \23\
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    \23\ Id.
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    Under the amended rule, account managers have a responsibility to 
allocate trades fairly and equitably and FCMs must monitor account 
managers for unusual account activity. Paul H. Bjarnason, Jr., in his 
comment, expressed concern that, although account managers and FCMs 
have a duty to ensure that customers receive fair treatment, the 
amended rule may not prescribe sufficient oversight of allocations. Mr. 
Bjarnason suggests that account managers submit allocation reports to 
NFA and that NFA provide adequate audits of trade allocations. In 
response, as explained below, the Commission will require that account 
managers keep records sufficient to demonstrate that all allocations 
are fair and equitable and that the allocation methodology used by the 
account manager is objective. These records will be available to the 
Commission and other appropriate regulatory agencies. Customers will 
also have access to this information as well. In addition, the 
Commission notes that NFA schedules CTA audits using a risk-based 
auditing system that incorporates a regular auditing cycle. In its 
comment, NFA stated that any complaint involving fraudulent allocations 
would result in an immediate examination of any account manager 
registered with the Commission as a CTA. Therefore, given the 
recordkeeping requirements of the amended rule and NFA oversight, the 
Commission has determined to adopt the provision as proposed.

E. Records

    Amended Rule 1.35(a-1)(5)(vi) requires that account managers keep 
two types of records. First, account managers must keep records of 
information maintained pursuant to amended Rule 1.35(a-1)(5)(ii). 
Second, account managers must make records available that allow 
independent verification of the fairness of the account manager's 
allocation methodology as required in Rule 1.35(a-1)(5)(iii). The 
records kept pursuant to amended Rule 1.35(a-1)(5)(iv) must be made 
available to any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory body.
    The amended rule contains a provision to address cases in which 
account managers fail to provide the Commission with the information 
requested pursuant to amended Rule 1.35(a-1)(5)(iv)(A) or (B). 
Specifically, the Commission may prohibit the account manager from 
submitting orders for execution on designated contract markets and 
prohibit FCMs from accepting orders from such account managers. 
Commission action under this provision would not require prior notice 
and hearing. The failure of an account manager to respond to a request 
for information under this rule would be sufficient to trigger the 
prohibition. Any account manager that believes he or she is adversely 
affected by this process may use the procedures outlined in Rule 
21.03(g).\24\ Any prohibitions imposed pursuant to this Rule 1.35(a-
1)(5)(iv)(D) would be without prejudice to any other remedies the 
Commission or any other regulatory body may have against the account 
manager in question for violation of the rule or any other legal 
requirements.\25\
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    \24\ 17 CFR 21.03(g) (2002).
    \25\ Cf. 17 CFR 21.03(h) (2002) (providing for other Commission 
remedies).
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    Two commenters, MFA and John Henry & Company, expressed concern 
that the proposed information request provision would be too severe. 
MFA

[[Page 34793]]

suggested that the standard of failure to provide requested information 
should be revised to ``willful failure to provide'' requested 
information. In the alternative, MFA suggested that the prohibition 
should be limited to the prohibition of the use of bunched orders, 
rather than a blanket prohibition of trading on all contract markets. 
John Henry & Company echoed MFA's concern, suggesting that the standard 
of failure to provide requested information should be revised to 
``willful failure to provide.''
    The Commission recognizes that prohibiting account managers from 
trading on contract markets would have a serious impact on the account 
manager and possibly the account manager's customers. The Commission 
notes that this approach is the same as that in similar provisions in 
the Act and rules and that the prohibition can only be invoked by the 
Commission, itself, when it has reason to believe that an account 
manager has failed to provide information requested pursuant to 
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B).\26\ In addition, account 
managers will have the opportunity to have a hearing to contest the 
prohibition.\27\ Thus, weighing the impact of this provision on account 
managers with the interest of protecting customers, the Commission has 
determined to adopt the provision as proposed, that a failure to answer 
a Commission request for information will result in a prohibition of 
trading on all contract markets.
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    \26\ See, 17 CFR part 21 (2002).
    \27\ Similar statutory provisions and Commission rules have the 
same standard for failure to provide information. See, e.g., 7 
U.S.C. Sec.  2(h)(5)(C)(ii) (2001), 17 CFR 21.03 (2002).
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    The amended rule also provides that FCMs must retain certain 
records. Pursuant to amended Rule 1.35(a-1)(5)(iv)(C), FCMs that 
execute trades for orders eligible for bunching, or that carry accounts 
to which contracts executed for such orders are allocated, must 
maintain records that identify each order subject to post-execution 
allocation and the accounts to which contracts executed for such order 
are allocated.\28\
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    \28\ The recordkeeping provisions of Rule 1.31 would still 
apply. 17 CFR 1.31 (2002). It is important to note that at the time 
of order placement with the FCM, current rules require that a 
customer identification code must be placed on an order ticket, 
unless the order is bunched. See, 17 CFR 1.35(a-1) (2002).
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    In order for FCMs to keep records required pursuant to the rule, 
account managers employing post-execution allocation procedures 
generally would be expected to forward written allocation instructions 
to the clearing firm by facsimile, e-mail, or other electronic means. 
In those instances in which allocation instructions are furnished 
orally, the FCM must create a written record of the account manager's 
instructions. In each case, these records will be available to the 
Commission and other regulatory agencies or self-regulatory 
organizations.

F. Account Certification and Self Regulatory Organization Rule 
Enforcement and Audit Procedures

    As noted above, the Commission is clarifying the relative 
responsibilities of FCMs and account managers. Therefore, the amended 
rule, as proposed, deletes the requirement that account managers send 
certifications of their compliance with Rule 1.35(a-1) to FCMs. In 
addition, as the Commission is converting the recordkeeping requirement 
into an information availability requirement; the amended rule, as 
proposed, deletes the requirement that self regulatory organizations 
must adopt procedures to determine compliance with the previous rule's 
recordkeeping requirements.

III. Other Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies, in promulgating rules, consider the impact of 
those rules on small businesses. The Commission has previously 
determined that contract markets \29\, futures commission merchants 
\30\, registered commodity pool operators \31\ and large traders \32\ 
are not ``small entities'' for purposes of the Regulatory Flexibility 
Act. Although the Commission did not receive any comments on the impact 
of the amended rule on ``small entities,'' some account managers may be 
considered ``small entities'' for the purposes of the Regulatory 
Flexibility Act. In such cases, the amendments to the rule will have 
the net effect of decreasing the regulatory burden for such small 
entities. In addition, the Commission has previously determined to 
evaluate within the context of a particular rule proposal whether all 
or some commodity trading advisors should be considered ``small 
entities'' for purposes of the Regulatory Flexibility Act and, if so, 
to analyze the economic impact on commodity trading advisors of any 
such rule at that time.\33\ Commodity trading advisors who would place 
eligible orders pursuant to these procedures would likely do so for 
multiple clients and would likely be participating as investment 
managers in more than one financial market. Accordingly, the Commission 
does not believe that commodity trading advisors should be considered 
``small entities'' for purposes of this rule.
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    \29\ 47 FR 18618, 18619 (April 30, 1982).
    \30\ Id.
    \31\ Id. at 18620.
    \32\ Id.
    \33\ Id.
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B. Paperwork Reduction Act of 1995

    This rulemaking contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et 
seq., the Commission has submitted a copy of the rule amendments to the 
Office of Management and Budget (OMB) for its review. No comments were 
received in response to the Commission's invitation in the proposed 
rules to comment on any potential paperwork burden associated with this 
regulation.

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 amended rule is intended to facilitate increased flexibility 
and consistency, and to rationalize application of Commission 
regulations to entities subject to other regulatory frameworks. 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 amended Rule 1.35(a-1)(5) is expected to lessen the burden 
imposed

[[Page 34794]]

upon FCMs and account managers, market participants and the public will 
be protected by requirements in the allocation procedure. Accordingly, 
the amended rule should have no effect on the Commission's ability to 
protect market participants and the public.
    2. Efficiency and competition.
    The amended rule is expected to benefit efficiency in the commodity 
futures and options markets, resulting in greater liquidity and market 
efficiency.
    3. Financial integrity of futures markets and price discovery.
    The amended rule should have no effect, from the standpoint of 
imposing costs or creating benefits, on the financial integrity or 
price discovery function of the commodity futures and options markets.
    4. Sound risk management practices.
    The amended rule should have no effect on sound risk management 
practices.
    5. Other public interest considerations.
    The amended rule will also take into account certain effects of 
legislative changes and the passage of time.
    After considering these factors, the Commission has determined to 
issue the amended rule.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Commodity options, Consumer protection, 
Contract markets, Customers, Members of contract markets, 
Noncompetitive trading, Reporting and recordkeeping requirements, Rule 
enforcement programs.


0
In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, sections 5, 
5a, 5b, 6(a), 6b, 8a(7), and 8c, 7 U.S.C. 7, 7a, 7b, 8(a), 8b, 12a(7), 
12a(9), and 12c, the Commission hereby amends Part 1 of Chapter I of 
Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.


0
2. Section 1.35 is amended by revising paragraph (a-1)(5) to read as 
follows:


Sec.  1.35  Records of cash commodity, futures and option transactions.

* * * * *
    (a-1) * * *
    (5) Post-execution allocation of bunched orders. Specific customer 
account identifiers for accounts included in bunched orders need not be 
recorded at time of order placement or upon report of execution if the 
requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.
    (i) Eligible account managers. The person placing and directing the 
allocation of an order eligible for post-execution allocation must have 
been granted written investment discretion with regard to participating 
customer accounts. The following persons shall qualify as eligible 
account managers:
    (A) A commodity trading advisor registered with the Commission 
pursuant to the Act or excluded or exempt from registration under the 
Act or the Commission's rules, except for entities exempt under Sec.  
4.14(a)(3) or Sec.  4.14(a)(6) of this chapter;
    (B) An investment adviser registered with the Securities and 
Exchange
    Commission pursuant to the Investment Advisers Act of 1940 or with 
a state pursuant to applicable state law or excluded or exempt from 
registration under such Act or applicable state law or rule;
    (C) A bank, insurance company, trust company, or savings and loan 
association subject to federal or state regulation; or
    (D) A foreign adviser that exercises discretionary trading 
authority solely over the accounts of non-U.S. persons, as defined in 
Sec.  4.7(a)(1)(iv) of this chapter.
    (ii) Information. Eligible account managers shall make the 
following information available to customers upon request:
    (A) The general nature of the allocation methodology the account 
manager will use;
    (B) Whether accounts in which the account manager may have any 
interest may be included with customer accounts in bunched orders 
eligible for post-execution allocation; and
    (C) Summary or composite data sufficient for that customer to 
compare its results with those of other comparable customers and, if 
applicable, any account in which the account manager has an interest.
    (iii) Allocation. Orders eligible for post-execution allocation 
must be allocated by an eligible account manager in accordance with the 
following:
    (A) Allocations must be made as soon as practicable after the 
entire transaction is executed, but in any event account managers must 
provide allocation information to futures commission merchants no later 
than a time sufficiently before the end of the day the order is 
executed to ensure that clearing records identify the ultimate customer 
for each trade.
    (B) Allocations must be fair and equitable. No account or group of 
accounts may receive consistently favorable or unfavorable treatment.
    (C) The allocation methodology must be sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
    (iv) Records.
    (A) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, the 
information specified in paragraph (a-1)(5)(ii) of this section.
    (B) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, records 
sufficient to demonstrate that all allocations meet the standards of 
paragraph (a-1)(5)(iii) of this section and to permit the 
reconstruction of the handling of the order from the time of placement 
by the account manager to the allocation to individual accounts.
    (C) Futures commission merchants that execute orders or that carry 
accounts eligible for post-execution allocation, and members of 
contract markets that execute such orders, must maintain records that, 
as applicable, identify each order subject to post-execution allocation 
and the accounts to which contracts executed for such order are 
allocated.
    (D) In addition to any other remedies that may be available under 
the Act or otherwise, if the Commission has reason to believe that an 
account manager has failed to provide information requested pursuant to 
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the 
Commission may inform in writing any designated contract market or 
derivatives transaction execution facility and that designated contract 
market or derivatives transaction execution facility shall prohibit the 
account manager from submitting orders for execution except for 
liquidation of open positions and no futures commission merchants shall 
accept orders for execution on any designated contract market or 
derivatives transaction execution facility from the account manager 
except for liquidation of open positions.

[[Page 34795]]

    (E) Any account manager that believes he or she is or may be 
adversely affected or aggrieved by action taken by the Commission under 
paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity 
for a prompt hearing in accordance with the provisions of Sec.  
21.03(g) of this chapter.
* * * * *

    Issued in Washington, DC, on June 5, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-14776 Filed 6-10-03; 8:45 am]
BILLING CODE 6351-01-P