[Federal Register Volume 71, Number 37 (Friday, February 24, 2006)]
[Rules and Regulations]
[Pages 9442-9446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1745]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AC20


Definition of ``Client'' of a Commodity Trading Advisor

AGENCY: Commodity Futures Trading Commission.

ACTION: Final regulations.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
amending Regulation 1.3(bb) by adding to that regulation a definition 
of the term ``client,'' as it relates to commodity trading advisors 
(CTAs). This amendment clarifies inconsistencies in the Commission's 
regulations concerning the advisees of CTAs, and it reflects the 
Commission's longstanding view that its antifraud authority extends to 
all CTAs, irrespective of whether they provide advice on a personalized 
or nonpersonalized basis. The Commission is also amending Regulation 
1.3(bb) by adding the term ``derivatives transaction execution 
facility'' to the CTA definition set forth in that regulation.

DATES: Effective Date: March 27, 2006.

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director, 
or R. Stephen Painter Jr., Staff Attorney, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, 
telephone number: (202) 418-5450 or (202) 418-5416, respectively; 
facsimile number: (202) 418-5528; and electronic mail: [email protected] 
or [email protected], respectively.

SUPPLEMENTARY INFORMATION:

I. The Proposal

A. Background

    On September 28, 2005, the Commission published for public comment 
a proposed amendment to Regulation 1.3(bb) (Proposal).\1\ That 
amendment, which the Commission is

[[Page 9443]]

adopting as proposed, defines the term ``client'' of a CTA.
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    \1\ 70 FR 56608. This Federal Register release announcing the 
Proposal (Proposing Release) may be accessed through the 
Commission's Web site: http://www.cftc.gov/files/foia/fedreg05/foi050928a.pdf. In the Proposing Release, the Commission provided a 
detailed explanation of the proposed amendment to Regulation 
1.3(bb). Accordingly, the Commission encourages interested persons 
to read the Proposing Release for a fuller discussion of the purpose 
of the amendment to Regulation 1.3(bb).
    The Commission's regulations are found at 17 CFR Ch. I (2005) 
and may be accessed at http://www.gpoaccess.gov/ecfr.
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    Section 1a(6)(A) of the Commodity Exchange Act (Act or CEA) \2\ 
defines the term ``commodity trading advisor'' to mean any person who:
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    \2\ 7 U.S.C. 1a(6) (2000). The Act may be accessed at http://www.access.gpo.gov/uscode/title7/chapter1_.html.

    (i) For compensation or profit, engages in the business of 
advising others, either directly or through publications, writings, 
or electronic media, as to the value of or the advisability of 
trading in--
    (I) any contract of sale of a commodity for future delivery made 
or to be made on or subject to the rules of a contract market or 
derivatives transaction execution facility;
    (II) any commodity option authorized under section 4c; or
    (III) any leverage transaction authorized under section 19; or
    (ii) for compensation or profit, and as part of a regular 
business, issues or promulgates analyses or reports concerning any 
of the activities referred to in clause (i).

Under the language of Section 1a(6)(A) of the Act, the term ``commodity 
trading advisor'' includes advisors who provide nonpersonalized advice, 
such as publishers of advisory newsletters or Web sites, as well as 
advisors who provide advice tailored to the needs of particular persons 
and advisors who direct other persons' trading pursuant to a power of 
attorney or other written authorization.\3\
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    \3\ As noted in more detail in the Proposing Release, Section 
1a(6)(B) of the Act excludes certain persons from the CTA definition 
where, as provided for in Section 1a(6)(C) of the Act, their 
furnishing of advice with respect to trading in commodity futures 
and options is solely incidental to the conduct of their business or 
profession. 70 FR 56608, 56609.
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    Regulation 1.3(bb) contains essentially the same definition of the 
term ``commodity trading advisor'' as that contained in Section 1a(6) 
of the Act. However, neither the Act nor the Commission's regulations 
issued thereunder define who the ``others'' are that CTAs advise. 
Moreover, neither the Act nor the regulations are consistent when 
referring to these advisees. As explained in more detail in the 
Proposing Release,\4\ although most of the relevant provisions refer 
solely to ``clients,'' a few provisions of the Act and regulations 
refer to ``clients and subscribers.''
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    \4\ 70 FR 56608, 56609 nn.5-6.
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    The definition of the term ``client'' of a CTA being adopted today 
clarifies these inconsistencies. Specifically, the amendment to 
Regulation 1.3(bb) clarifies that, as used in the provisions of the Act 
and the regulations relating to CTAs, the term ``client'' refers to all 
advisees of a CTA, including persons who receive advice by subscribing 
to a newsletter or other information service. A ``subscriber,'' as used 
in these statutory provisions and regulations, is one type of 
``client.'' \5\ In this regard, the Commission notes that, as it stated 
in the Proposing Release,\6\ the amendment to Regulation 1.3(bb) 
clarifies that the antifraud provisions of Section 4o of the Act apply 
to all CTAs, and not just to those who provide advice on a personalized 
basis.
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    \5\ As noted in the Proposing Release, 70 FR 56608, 56609 n.8, 
and as discussed in more detail below, the usual presumption that 
different terms in a statute have separate meanings is rebutted as 
to the terms ``client'' and ``subscriber'' in Section 4l(1) of the 
Act. Consequently, the phrase ``clients and subscribers,'' as used 
in the Act and in the regulations, does not imply that ``clients'' 
and ``subscribers'' are two separate classes of advisees.
    \6\ Id. at 56609.
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B. New Regulation 1.3(bb)(2)

    As proposed and as adopted, new Regulation 1.3(bb)(2) defines the 
term ``client,'' as it relates to a CTA, as including:

any person (i) to whom a commodity trading advisor provides advice, 
for compensation or profit, either directly or through publications, 
writings, or electronic media, as to the value of, or the 
advisability of trading in, any contract of sale of a commodity for 
future delivery made or to be made on or subject to the rules of a 
contract market or derivatives transaction execution facility, any 
commodity option authorized under section 4c of the Act, or any 
leverage transaction authorized under section 19 of the Act; or (ii) 
to whom, for compensation or profit, and as part of a regular 
business, the commodity trading advisor issues or promulgates 
analyses or reports concerning any of the activities referred to 
[above]. The term `client' includes, without limitation, any 
subscriber of a commodity trading advisor.

This new definition of ``client'' includes clients to whom a CTA 
provides personalized trading advice as well as clients to whom a CTA 
provides nonpersonalized trading advice. Such nonpersonalized advice 
includes, among other things, standardized advice provided by 
newsletters, seminars, tutorials, periodicals, computer software, 
Internet websites, voicemail recordings, emails, and facsimiles. The 
definition also covers advice provided over a period of time pursuant 
to a subscription arrangement or on a one-time basis.
    As the Commission noted in the Proposing Release,\7\ because the 
definition of the term ``client'' of a CTA includes within its scope 
persons to whom the CTA provides advice on either a personalized or 
nonpersonalized basis, new Regulation 1.3(bb)(2) makes clear that the 
antifraud provisions of Section 4o of the Act apply to all persons who 
come within the statutory definition of the term ``commodity trading 
advisor,'' and not, for example, just to those who provide personalized 
trading advice or who direct their clients' trading--i.e., CTAs who 
must register as such with the Commission pursuant to Section 4m(1) of 
the Act.\8\
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    \7\ Id. at 56609.
    \8\ 7 U.S.C. 6m(1).
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C. Comments on the Proposal

    The Commission received five comment letters on the Proposal: \9\ 
One from the Association of the Bar of the City of New York (Bar 
Association), one from an attorney who represents certain CTAs that 
provide commodity trading advice on a nonpersonalized basis, and three 
from CTAs. The Bar Association wrote in support of the Proposal, 
agreeing that the Commission should eliminate inconsistencies in the 
regulations concerning the advisees of CTAs. It further agreed that the 
term ``client'' as used in the Act was not intended to abridge the 
Commission's jurisdiction to proceed against fraud by CTAs that provide 
advice on a nonpersonalized basis.
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    \9\ The comment letters may be accessed through the Commission's 
Web site: http://www.cftc.gov/foia/comment05/foi05-005_1.htm.
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    The other commenters wrote in opposition to the Proposal, with each 
suggesting that the proposed definition of ``client'' of a CTA might 
raise issues under the First Amendment of the United States 
Constitution.\10\ The Commission disagrees, because the definition of 
``client'' does no more than clarify that the manner in which advice is 
provided, whether on a personalized or nonpersonalized basis, does not 
affect whether a person comes within the CTA definition of Section 
1a(6)(A) of the Act. As proposed and as adopted, new Regulation 
1.3(bb)(2) does not impose any registration obligation on those CTAs 
that are currently eligible to claim the registration exemption of 
Regulation 4.14(a)(9).\11\ Consequently, because this

[[Page 9444]]

new regulation does not require CTAs that provide advice on a 
nonpersonalized basis to register if they are otherwise eligible to 
claim the registration exemption of Regulation 4.14(a)(9), the 
Commission believes that the regulation does not implicate the First 
Amendment. By defining the term ``client'' of a CTA, the Commission is 
merely clarifying its longstanding view that all CTAs, regardless of 
whether they provide personalized or nonpersonalized advice, are 
subject to the Commission's antifraud authority. The Commission does 
not believe that the regulation of false, deceptive, or misleading 
speech of CTAs--even of those CTAs that provide advice on a 
nonpersonalized basis--runs afoul of the protections of the First 
Amendment.\12\
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    \10\ The First Amendment prohibits Congress from, among other 
things, making any law abridging the freedom of speech. U.S. Const. 
amend. I.
    \11\ Regulation 4.14(a)(9) provides a registration exemption for 
CTAs that do not engage in either of the following activities: (1) 
Directing client accounts; or (2) providing commodity trading advice 
based on, or tailored to, the commodity interest or cash market 
positions or other circumstances or characteristics of particular 
clients. The Commission adopted Regulation 4.14(a)(9) in response to 
several Federal district court cases holding that the CTA 
registration requirement, as applied to certain ``publisher'' CTAs, 
constitutes an unconstitutional prior restraint on speech. 
Specifically, the Commission adopted Regulation 4.14(a)(9) because 
of its belief that ``minimizing impact on speech, other than false, 
deceptive or misleading speech, is a relevant policy consideration 
in determining the Commission's regulatory approach toward CTAs 
whose relationship with their clients is limited to standardized 
advice through media such as newsletters, prerecorded telephone 
newslines, Internet Web sites, and non-customized computer 
software.'' 65 FR 12938, 12939 (March 10, 2000).
    \12\ Indeed, the Commission may constitutionally prohibit the 
dissemination of commercial speech that is ``false, deceptive, or 
misleading.'' Zauderer v. Office of Disciplinary Counsel, 471 U.S. 
626, 638 (1985).
    One commenter suggested that the proposed definition of 
``client'' would violate the First Amendment because it would 
clarify that Section 4o of the Act covers fraud in connection with 
nonpersonalized advice. According to this commenter, Section 4o of 
the Act imposes fiduciary standards and such standards cannot 
constitutionally be imposed on providers of impersonal advice. The 
premise of this argument was rejected by the Court of Appeals in 
Commodity Trend Serv., Inc. v. CFTC (CTS), 233 F.3d 981 (7th Cir. 
2000). The court held that Section 4o of the Act ``effectuates the 
extant fiduciary duties of personalized advisors * * * but does not 
impose fiduciary obligations on impersonal advisors.'' Id. at 990, 
see also 233 F.3d at 993-95 (discussing the scope of Section 4o of 
the Act as applied to impersonal CTAs and holding the provision 
constitutional if properly applied). The Commission agrees with the 
analysis of this issue in CTS and finds it to be an adequate 
response to the commenter's concern.
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    In addition to raising First Amendment concerns, one commenter also 
suggested that the Commission lacks authority to adopt the Proposal 
because the amendment to Regulation 1.3(bb) would eliminate a 
substantive distinction between the terms ``client'' and ``subscriber'' 
that the United States Supreme Court recognized in Lowe v. SEC.\13\ 
This commenter further suggested that, because the Act and the 
Commission's regulations refer to ``clients'' and ``subscribers,'' 
Congress must have intended those words to have different meanings. 
Consequently, according to the commenter, the Commission does not have 
the authority to amend Regulation 1.3(bb) to clarify that a 
``subscriber'' is one type of ``client.''
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    \13\ 472 U.S. 181 (1985). That case involved a securities 
investment adviser and the application of the Investment Advisers 
Act (IAA), 15 U.S.C. Sec.  80b-1 et seq., to his conduct.
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    Both of these arguments were considered and rejected by the United 
States Court of Appeals for the Seventh Circuit in Commodity Trend 
Service, Inc. (CTS).\14\ As explained in the Proposing Release,\15\ CTS 
deferred to the Commission's interpretation of Section 4o of the Act, 
finding that the Commission's position was a reasonable interpretation 
of the statutory language and that it appeared to effectuate 
Congressional intent. In CTS, the court held that the use of the term 
``client'' in Section 4o does not connote only a personalized 
relationship. Instead, the term ``client'' ``can refer to * * * those 
who receive tailored advice from professionals or those who receive any 
kind of service regardless of whether it is personalized.'' \16\
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    \14\ CTS, 233 F.3d 981.
    \15\ 70 FR 56608, 56609.
    \16\ CTS, 233 F.3d at 991.
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    According to CTS, the distinction drawn by Lowe between the term 
``client'' and the term ``subscriber'' is not necessarily applicable to 
the CEA. Looking at the broad exclusion from the IAA for publishers, 
the Court in Lowe held that, under the IAA, Congress intended the term 
``client'' to refer only to a personalized relationship; investment 
advisers providing advice on a nonpersonalized basis are excluded 
entirely from the scope of the IAA because they generally fall within 
the IAA's broad exclusion for publishers.\17\ The CEA, on the other 
hand, does not exclude all publishers from its scope. Rather, the CEA 
expressly brings within its scope certain advisors that provide advice 
on a nonpersonalized basis--for example, publishers of nonpersonalized 
advice may come within the CTA definition, provided that their advice 
is not ``solely incidental'' to their publishing business.\18\ 
According to the court in CTS, if the use of the term ``client'' in 
Section 4o were construed as removing from the scope of that section's 
antifraud provisions CTAs who provide advice on a nonpersonalized 
basis, certain of those CTAs would come within the CTA definition, but 
virtually none of the Act's provisions would apply to them.\19\ 
According to the CTS court, Congress likely did not intend such an 
anomalous result.\20\
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    \17\ Id. at 988.
    \18\ See supra note 3.
    \19\ CTS, 233 F.3d at 988-89.
    \20\ Id. at 989.
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    Nor does the Commission believe that by using the terms ``client'' 
and ``subscriber,'' Congress intended ``client'' to refer only to CTAs 
that provide advice on a personalized basis. As noted by CTS,\21\ and 
as explained in the Proposing Release,\22\ the usual presumption that 
different terms in a statute have separate meanings is rebutted as to 
the terms ``client'' and ``subscriber'' by the language of Section 
4l(1) of the Act, which lists ``subscriptions'' as one of the 
``arrangements with clients'' entered into by CTAs. This language 
implies that, in connection with CTAs, a person who arranges for a 
subscription, in other words a ``subscriber,'' is a type of ``client.''
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    \21\ Id. at 989-90.
    \22\ 70 FR 56608, 56609 n.8.
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    In light of the foregoing, the Commission is adopting as proposed 
Regulation 1.3(bb)(2).

D. Amended Regulation 1.3(bb)(1)

    The Commodity Futures Modernization Act of 2000 (CFMA) amended the 
statutory definition of ``commodity trading advisor'' to take account 
of the new type of trading facility known as a ``derivatives 
transaction execution facility.'' \23\ As noted in the Proposing 
Release,\24\ the Commission is adopting a conforming change to the CTA 
definition contained in Regulation 1.3(bb)(1).
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    \23\ See Commodity Futures Modernization Act of 2000, Pub. L. 
106-554, Appendix E, 114 Stat. 2763, Section 123(a)(1)(A). The CFMA 
may be accessed through the Commission's Web site: http://www.cftc.gov/files/ogc/ogchr5660.pdf.
    \24\ 70 FR 56608, 56609 n.4.
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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \25\ 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 regulations on such entities in accordance 
with the RFA.\26\
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    \25\ 5 U.S.C. 601 et seq.
    \26\ 47 FR 18618 (April 30, 1982).
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    With respect to CTAs, the Commission has previously stated that it 
would evaluate within the context of a particular proposal whether all 
or some affected CTAs would be considered to be small entities and, if 
so, the economic impact on them of the proposal.\27\ As explained in 
the Proposing Release, the Commission does not believe that Regulation

[[Page 9445]]

1.3(bb)(2) will have a significant impact on affected CTAs. This is 
because the only burden imposed by the amendment is the obligation to 
comply with the antifraud provisions of Section 4o of the Act. Assuming 
arguendo, however, that compliance with Section 4o does constitute a 
significant burden, the burden is neither new nor additional, because 
new Regulation 1.3(bb)(2) is consistent with the Commission's 
longstanding interpretation of Section 4o as applicable to all CTAs.
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    \27\ Id. at 18620.
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    The Commission did not receive any public comments on its analysis 
of the application of the RFA to proposed Regulation 1.3(bb)(2).

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA)\28\ 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. This rulemaking does not require a 
new collection of information on the part of any entities subject to 
it. Accordingly, for purposes of the PRA, the Commission certified that 
the proposed amendment did not impose any new reporting or 
recordkeeping requirements.
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    \28\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis

    Section 15(a) of the Act \29\ 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.
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    \29\ 7 U.S.C. 19(a).
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    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 regulation 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 Commission has evaluated the costs 
and benefits of new Regulation 1.3(bb)(2) in light of the specific 
considerations identified in Section 15(a) of the Act as follows:
1. Protection of Market Participants and the Public
    Because Regulation 1.3(bb)(2) expressly brings all CTAs within the 
purview of the antifraud provisions of Section 4o of the Act, the 
regulation will enhance the Commission's ability to protect market 
participants and the public.
2. Efficiency and Competition
    Regulation 1.3(bb)(2) will have no effect, from the standpoint of 
imposing costs or creating benefits, on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
    Regulation 1.3(bb)(2) will 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 option markets.
4. Sound Risk Management Practices
    Regulation 1.3(bb)(2) will have no effect, from the standpoint of 
imposing costs or creating benefits, on the available range of sound 
risk management alternatives.
5. Other Public Interest Considerations
    Regulation 1.3(bb)(2) will have no effect, from the standpoint of 
imposing costs or creating benefits, on any other public interest 
considerations.
    Accordingly, after considering these factors, the Commission has 
determined to adopt the amendments to Regulation 1.3(bb) set forth 
below.

List of Subjects in 17 CFR Part 1

    17 CFR Part Brokers, Commodity futures, Consumer protection, 
Reporting and recordkeeping requirements.

0
For the reasons presented above, the Commission is amending 17 CFR part 
1 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, 5, 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 1.3 is amended by revising paragraph (bb)(1) and adding new 
paragraph (bb)(2) as follows:


Sec.  1.3  Definitions.

* * * * *
    (bb)(1) Commodity trading advisor. This term means any person who, 
for compensation or profit, engages in the business of advising others, 
either directly or through publications, writings or electronic media, 
as to the value of or the advisability of trading in any contract of 
sale of a commodity for future delivery made or to be made on or 
subject to the rules of a contract market or derivatives transaction 
execution facility, any commodity option authorized under section 4c of 
the Act, or any leverage transaction authorized under section 19 of the 
Act, or who, for compensation or profit, and as part of a regular 
business, issues or promulgates analyses or reports concerning any of 
the foregoing; but such term does not include (i) Any bank or trust 
company or any person acting as an employee thereof, (ii) any news 
reporter, news columnist, or news editor of the print or electronic 
media, or any lawyer, accountant, or teacher, (iii) any floor broker or 
futures commission merchant, (iv) the publisher or producer of any 
print or electronic data of general and regular dissemination, 
including its employees, (v) the named fiduciary, or trustee, of any 
defined benefit plan which is subject to the provisions of the Employee 
Retirement Income Security Act of 1974, or any fiduciary whose sole 
business is to advise that plan, (vi) any contract market or 
derivatives transaction execution facility, and (vii) such other 
persons not within the intent of this definition as the Commission may 
specify by rule, regulation or order: Provided, That the furnishing of 
such services by the foregoing persons is solely incidental to the 
conduct of their business or profession: Provided further, That the 
Commission, by rule or regulation, may include within this definition, 
any person advising as to the value of commodities or issuing reports 
or analyses concerning commodities, if the Commission determines that 
such rule or regulation will effectuate the purposes of this provision.
    (2) Client. This term, as it relates to a commodity trading 
advisor, means any person (i) to whom a commodity trading advisor 
provides advice, for compensation or profit, either directly or through 
publications, writings, or electronic media, as to the value of, or the 
advisability of trading in, any contract of sale of a commodity for 
future delivery made or to be made on or subject to the rules of a 
contract

[[Page 9446]]

market or derivatives transaction execution facility, any commodity 
option authorized under section 4c of the Act, or any leverage 
transaction authorized under section 19 of the Act; or (ii) to whom, 
for compensation or profit, and as part of a regular business, the 
commodity trading advisor issues or promulgates analyses or reports 
concerning any of the activities referred to in paragraph (bb)(2)(i) of 
this section. The term ``client'' includes, without limitation, any 
subscriber of a commodity trading advisor.
* * * * *

    Issued in Washington, DC, on February 21, 2006 by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06-1745 Filed 2-23-06; 8:45 am]
BILLING CODE 6351-01-P