[Federal Register Volume 70, Number 23 (Friday, February 4, 2005)]
[Rules and Regulations]
[Pages 5923-5925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1906]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 155

RIN 3038-AC16


Distribution of ``Risk Disclosure Statement'' by Futures 
Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending Rule 1.55 to provide that non-institutional 
customers may indicate with a single signature, in addition to the 
acknowledgment of receipt of various disclosures and the making of 
certain elections, the consent referenced in Rules 155.3(b)(2) and 
155.4(b)(2) and 155.4(b)(2) concerning customer permission for futures 
commission merchants (``FCMs'') and introducing brokers (``IBs'') to 
take the opposite side of an order. The Commission is also amending 
Rule 1.55(f) to specify that the acknowledgments required by Rules 
155.3(b)(2) and 155.4(b)(2) are not required of institutional customers 
when they open an account.

DATES: Effective March 7, 2005.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Deputy Director, 
or Susan A. Elliott, Special Counsel, Compliance and Registration 
Section, Division of Clearing and Intermediary Oversight, Commodity 
Futures Trading Commission. Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581. Telephone: (202) 418-5439 or (202) 418-5464, 
or electronic mail: [email protected] or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    On November 9, 2004 (69 FR 64873), the commission published a 
proposed amendment to Rule 1.55 to provide that the single signature by 
which non-institutional customers acknowledge receipt of basic risk 
disclosures of futures and option trading, and elect how hedging 
positions shall be handled in the event of a commodity broker 
bankruptcy, may also reflect the consent referenced in Rules 
155.3(b)(2) and 155.4(b)(2) concerning customer permission for FCMs and 
IBs to take the opposite side of an order. The Commission adopted a 
similar rule amendment in November 2000,\1\ but withdrew it the 
following month upon passage of the Commodity Futures Modernization Act 
of 2000.\2\ Most of the rules adopted and withdrawn in 2000 were 
reproposed and re-adopted in 2001,\3\ but this one was not. Because 
Commission staff received an inquiry about this issue, the Commission 
reproposed the rule amendment and sought comments.
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    \1\ 65 FR 77993 at 78013 (December 13, 2000).
    \2\ 65 FR 82272 (December 28, 2000).
    \3\ 66 FR 45221 at 45226 (August 28, 2001) (proposed rules) and 
66 FR 53510 at 53513 (October 23, 2001) (final rules).
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II. Rule Amendments

    Three comments were received, from the National Futures Association 
(``NFA''), the Futures Industry Association (``FIA'') and an FCM, 
Goldman Sachs & Co. All comments supported adoption of the proposed 
amendment to Rule 1.55(d)(1). In addition, the three commenters were 
unanimous in their recommendation that the Commission adopt another 
rule amendment that clarifies, in Rule 1.55(f), that acknowledgment to 
consent for an FCM or IB to take the opposite side of an order is not 
required of institutional customers when they open an account.
    The commenters requested that Rule 1.55(f) also be amended to add 
the consent required under Commission Rules 115.3(b)(2) and 155.4(b)(2) 
to the prescribed disclosures, consents and elections that 
institutional customers are not required to acknowledge in opening an 
account with an FCM. The Commission believes that such a further 
amendment is consistent with the proposal and with the general 
structure of Rule 1.55 and that it is appropriate to clarify Rule 
1.55(f) as the commenters suggest. The Commission emphasizes the point 
by cross-referencing Rule 1.55 in Rules 1.55.3 and 155.4.\4\
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    \4\ The Commission took a similar approach when it amended Rule 
1.55 as well as Rule 1.33 concerning electronic transmission of 
customer account statements. See 66 FR 53517 (Oct. 23, 2001).
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    As the Commission emphasized in its proposal, the single signature 
acknowledgment format was first adopted in 1993 based on a rationale of 
customer sophistication. If, with the Commission's proposed rule 
amendment, non-institutional customers are now deemed sufficiently 
sophisticated to have their consents acknowledged with a single 
signature, it is certainly appropriate to assume that more 
sophisticated institutional customers understand that they are 
consenting to the trade practices described in Rule 155.3(b)(2) and 
155.4(b)(2) without a separate acknowledgment when an account is 
opened.
    Section 4b of the Act \5\ nonetheless requires intermediaries to 
have the prior consent of the customer before knowingly taking, 
directly or indirectly, the opposite side of a customer's order. Thus, 
as one of the commenters pointed out, it is still the responsibility of 
the entity opening the account to ensure that prospective customers 
give ``the consent required under this rule,'' even when the customer 
is an institutional customer.\6\ The amendment of Rule 1.55(f) permits 
an entity to choose the most appropriate means to accomplish that 
objective. Finally, Rules 155.3(b)(2) and 155.4(b)(2) are amended to 
cross-reference Rule 1.55(d)(1).
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    \5\ Commodity Exchange Act Sec.  4b(a)(2)(iv) (``unlawful * * * 
to fill such order by offset against the order or orders of any 
other person, or willfully and knowingly and without the prior 
consent of such person to become the buyer in respect to any selling 
order of such person, or become the seller in respect to any buying 
order of such person''), 7 U.S.C. 4b(2)(C)(iv) (2003).
    \6\ Comment letter of Goldman Sachs & Co., December 9, 2004 at 
p. 2.

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[[Page 5924]]

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in proposing rules, consider the impact of 
those rules on small business. 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.\7\ The Commission previously has determined 
that, based upon the fiduciary nature of the FCM/customer 
relationships, as well as the requirement that FCMs meet minimum 
financial requirements. FCMs should be excluded from the definition of 
small entities. With respect to IBs, the CFTC has stated that it is 
appropriate to evaluate within the context of a particular rule 
proposal whether some or all of the affected entities should be 
considered small entities and, if so, to analyze the economic impact on 
them of any rule.\8\ In the regard, the amendment to Rule 1.55(d)(1) 
adopted herein does not require any IB to change its current method of 
doing business, and in fact eases a regulatory burden by permitting a 
single signature of the customer to represent an additional consent 
required by Commission regulations. The amendments to Rules 1.55(f) and 
155.3(b)(2) and 155.4(b)(2) clarify existing rules. No comments were 
received on this issue.
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    \7\ 47 FR 18618-18621 (April 30, 1982).
    \8\ Id.
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 \9\ imposes certain 
requirements on federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the Paperwork Reduction Act (``PRA''). The 
amendments to Rules 1.55(d) and 155(f) that are the subject of this 
rulemaking do not alter the paperwork burden associated with the OMB 
Collection of Information submission, OMB Control Number 3038-0022, 
Rules Pertaining to Contract Markets and Their Members, where the 
Commission most recently described the paperwork burden associated with 
the 2001 rulemaking amendments.\10\ Thus, there is no need for an 
additional submission pursuant to the PRA.
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    \9\ Pub. L. 104-13 (May 13, 1995).
    \10\ See 66 FR 45221, 45228 (August 28, 2001).
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List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Disclosure, 
Reporting and recordkeeping requirements.

17 CFR Part 155

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

0
In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, Sections 
4b, 4c(b), and 8a(5) thereof, 7 U.S.C. 6b, 6c(b), and 12a(5) (2000), 
and pursuant to the authority contained in 5 U.S.C. 552 and 552b 
(2003), the Commission hereby amends 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, 4, 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, and 24, as amended by the Commodity 
Futures Modernization Act of 2000, appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).


0
2. Section 1.55 is amended by revising paragraphs (d)(1) and (f) to 
read as follows:


Sec.  1.55  Distribution of ``Risk Disclosure Statement'' by futures 
commission merchants and introducing brokers.

* * * * *
    (d) * * *
    (1) Prior to the opening of such account, the futures commission 
merchant or introducing broker obtains an acknowledgement from the 
customer, which may consist of a single signature at the end of the 
futures commission merchant's or introducing broker's customer account 
agreement, or on a separate page, of the disclosure statements, 
consents and elections specified in this section and Sec.  1.33(g), and 
in Sec. Sec.  33.7, Sec.  155.3(b)(2), Sec.  155.4(b)(2), and Sec.  
190.06 of this chapter, and which may include authorization for the 
transfer of funds from a segregated customer account to another account 
of such customer, as listed directly above the signature line, provided 
the customer has acknowledged by check or other indication next to a 
description of each specified disclosure statement, consent or election 
that the customer has received and understood such disclosure statement 
or made such consent or election; and
    * * *
    (f) A futures commission merchant or, in the case of an introduced 
account, an introducing broker, may open a commodity futures account 
for an ``institutional customer'' as defined in Sec.  1.3(b) without 
furnishing such institutional customer the disclosure statements or 
obtaining the acknowledgments required under paragraph (a) of this 
section, Sec. Sec.  1.33(g) and 1.65(a)(3), and Sec. Sec.  30.6(a), 
33.7(a), 155.3(b)(2), 155.4(b)(2) and 190.10(c) of this chapter.
* * * * *

PART 155--TRADING STANDARDS

0
3. The authority citation for part 155 continues to read as follows:

    Authority: U.S.C. 6b, 6c, 6g, 6j and 12a, unless otherwise 
noted.


0
4. Section 155.3 is amended by revising paragraph (b)(2) as follows:


Sec.  155.3  Trading standards for futures commission merchants.

* * * * *
    (b) * * *
    (2)(i) Knowingly take, directly or indirectly, the other side of 
any order of another person revealed to the futures commission merchant 
or any of its affiliated persons by reason of their relationship to 
such other person, except with such other person's prior consent and in 
conformity with contract market rules approved by or certified to the 
Commission.
    (ii) In the case of a customer who does not qualify as an 
``institutional customer'' as defined in Sec.  1.3(g) of this chapter, 
a futures commission merchant must obtain the customer's prior consent 
through a signed acknowledgment, which may be accomplished in 
accordance with Sec.  1.55(d) of this chapter.
* * * * *

0
5. Section 155.4 is amended by revising paragraph (b)(2) as follows:


Sec.  155.4  Trading standards for introducing brokers.

* * * * *
    (b) * * *
    (2)(i) Knowingly take, directly or indirectly, the other side of 
any order of another person revealed to the introducing broker or any 
of its affiliated persons by reason of their relationship to such other 
person, except with such other persons's prior consent and in 
conformity with contract market rules approved by or certified to the 
Commission.

[[Page 5925]]

    (ii) In the case of a customer who does not qualify as an 
``institutional customer'' as defined in Sec.  1.3(g) of this chapter, 
an introducing broker must obtain the customer's prior consent through 
a signed acknowledgment, which may be accomplished in accordance with 
Sec.  1.55(d) of this chapter.
* * * * *

    Dated: January 27, 2005.

    By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 05-1906 Filed 2-3-05; 8:45 am]
BILLING CODE 6351-01-M