[Federal Register Volume 71, Number 225 (Wednesday, November 22, 2006)]
[Rules and Regulations]
[Pages 67462-67465]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-19533]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AC34


Financial Reporting Requirements for Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending Commission regulations to require introducing 
brokers (``IBs'') submitting CFTC financial Forms 1-FR-IB that are 
certified by independent public accountants to file such financial 
reports electronically with the National Futures Association (``NFA''). 
The amendments also require that certified Financial and Operational 
Combined Uniform Single Reports (``FOCUS'' Reports), submitted by IBs 
registered with the Securities and Exchange Commission (``SEC'') as 
securities brokers or dealers (``B/Ds'') in lieu of Form 1-FR-IB, be 
filed either electronically or in paper form in accordance with the 
rules of the NFA. The CFTC also is amending Commission regulations to 
require that, with respect to any such electronic filing, a paper copy 
including the original signed certification be maintained by the IB in 
its records for a period of five years in accordance with Commission 
Regulation 1.31.

DATES: Effective Date: December 22, 2006.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and

[[Page 67463]]

Chief Accountant, at (202) 418-5430 or Jennifer C.P. Bauer, Special 
Counsel, at (202) 418-5472, Division of Clearing and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: 
[email protected] or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    Section 4f(b) of the Commodity Exchange Act (``Act'') authorizes 
the Commission to adopt regulations imposing minimum financial 
requirements on IBs.\1\ Commission Regulation 1.10(a)(2)(ii)(A) \2\ 
requires each person filing an application for registration as an IB to 
file a financial Form 1-FR-IB \3\ certified by an independent public 
accountant concurrently with the application. IBs that also are 
registered with the SEC as a B/D may file a FOCUS Report in lieu of a 
Form 1-FR-IB. The application for registration, and the certified Form 
1-FR-IB or FOCUS Report, must be filed with the NFA in paper form.\4\
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    \1\ 7 U.S.C. 6f(b).
    \2\ The regulations of the Commission cited in this release may 
be found at 17 CFR Ch. I (2006).
    \3\ The Form 1-FR-IB is a financial report that includes a 
statement of financial condition, a statement of income or loss, a 
statement of minimum net capital, and appropriate footnote 
disclosures.
    \4\ NFA is a registered futures association under Section 17 of 
the Commodity Exchange Act, 7 U.S.C. 21, and has been delegated 
responsibility for processing the Commission's registration 
function. NFA also is a self-regulatory organization, as defined in 
Regulation 1.3(ee).
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    Regulation 1.10(b)(2)(ii)(A) requires each registered IB to 
annually file a certified Form 1-FR-IB as of the close of the IB's 
fiscal year with NFA. IBs that are registered with the SEC as B/Ds may 
file an annual FOCUS Report with NFA in lieu of the Form 1-FR-IB. 
Regulation 1.10(b)(2)(iii) requires that certified Forms 1-FR-IB, or 
FOCUS Reports, must be filed in paper form with NFA and may not be 
filed electronically. Regulation 1.10(d)(4) requires that Forms 1-FR-
IB, or FOCUS reports filed in lieu thereof, be accompanied by an oath 
or affirmation from specified persons that the information in the 
filing is true and correct.
    The Commission previously has approved rules submitted by NFA that 
require IBs to submit uncertified Forms 1-FR-IB, or FOCUS Reports, 
electronically using the NFA EasyFile electronic filing system.\5\ NFA 
implemented electronic filing of the uncertified Form 1-FR for IBs 
beginning in 2002 by providing them with the WinJammer software 
utilized by other self-regulatory organizations and the Commission for 
the Forms 1-FR and FOCUS Reports filed electronically by futures 
commission merchants (``FCMs''). The EasyFile system was developed by 
NFA as a web-based alternative to WinJammer using the same security 
procedure available under NFA's On-line Registration System, or ORS.\6\
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    \5\ By letter dated June 1, 2004, NFA submitted to the 
Commission for its review and approval, pursuant to Section 17(j) of 
the Act (7 U.S.C. 21(j)), amendments to Section 5 of NFA Financial 
Requirements, regarding IB financial requirements, which amendments 
were approved by the Commission and were effective June 30, 2004.
    \6\ The firm's security manager can establish users with unique 
and secure user identification and password combinations and assign 
them abilities to enter data and/or submit the report in the NFA 
EasyFile system. This ``Security Manager'' procedure is part of 
NFA's existing electronic system for registration processing.
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    NFA petitioned the Commission to amend its regulations to permit 
NFA to expand the EasyFile electronic 1-FR-IB submissions of IBs to 
include the mandatory filing of certified Form 1-FR-IBs through the use 
of an electronic file in the Portable Document Format (``.pdf 
format''). The Commission has determined to amend its Regulations 1.10 
and 1.31 as set forth herein to effectuate this purpose. NFA has not 
requested the amendment of regulations to require mandatory electronic 
filing of certified FOCUS Reports from IBs that are SEC registered B/Ds 
as NFA currently does not have the systems capability to receive FOCUS 
reports through EasyFile.\7\ However, NFA has indicated that it will 
develop a mechanism to receive certified FOCUS Reports from IBs 
electronically in the future, and the Commission has determined to also 
amend its Regulation 1.10 to accommodate the future electronic filing 
of such reports by requiring such reports to be submitted in accordance 
with NFA rules, either electronically or in paper form.
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    \7\ NFA's petition states that EasyFile is not yet equipped to 
handle the receipt of FOCUS reports from IBs. Uncertified FOCUS 
reports of IBs are still submitted to NFA electronically using 
WinJammer.
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    NFA previously petitioned the Commission for rule amendments in 
2005 to enable NFA to implement mandatory electronic filing of 
commodity pool certified annual reports using the Web-based structure 
of EasyFile system, which amendments were adopted by the Commission and 
became effective in March 2006.\8\ As a result of these amendments and 
NFA's rules, currently all certified commodity pool annual reports must 
be received by NFA electronically, through the use of electronic files 
in the Portable Document Format (``.pdf format'').
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    \8\ 71 FR 8939 (Feb. 22, 2006).
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    NFA's electronic filing system for certified financial statements 
from IBs will similarly require that the IB submit an electronic .pdf 
file of the entire certified statement, including the financial 
information, footnotes, auditors' statement, and any necessary 
reconciliation of the IB's certified financial statement and most 
recent unaudited 1-FR. Because the IB will have already electronically 
submitted the unaudited Form 1-FR-IB to NFA through EasyFile, the IB 
will not have to re-enter any data from the certified statement unless 
that statement includes a reconciliation and difference from the 
unaudited Form 1-FR-IB of the same date. When the IB submits the 
electronic filing, NFA's EasyFile system prompts the submitter to read 
and to indicate agreement to an electronic oath or affirmation. The 
submitter already will have securely accessed NFA's system and had his 
or her identification authenticated through the use of his or her 
unique user identification and password combination, established and 
maintained by the firm's Security Manager. The IB's Security Manager 
can establish users and assign them abilities to enter data and/or 
submit the report and data in the NFA electronic filing system. The IB 
is responsible for ensuring that only persons who are duly authorized 
to bind the IB, in accordance with Regulation 1.10(d)(4), are granted 
the permission, through the use of a unique user identification and 
password, to submit the report and make the required oath or 
affirmation. This oath or affirmation is made with respect to the .pdf 
file of the annual report and any information entered into the system 
from the certified statement. The electronic version of the oath or 
affirmation will appear in dialog boxes when reports or data are 
submitted, and completion of the submission will require an affirmative 
acceptance of the oath or affirmation by the user. In clarification of 
the proposing release, a Personal Identification Number is not used to 
authenticate the identity of the authorized representative in the NFA's 
EasyFile system. The EasyFile system architecture uses a secure user 
identification and password combination for the same purpose, to 
authenticate the identity of the authorized user submitting the report.

II. Comments

    NFA was the only entity to file a comment letter on the proposed 
amendments. NFA supported the proposed amendments and stated that 
``(t)hese amendments will simplify the filing process and allow it to 
keep pace with technological changes without

[[Page 67464]]

losing any of the protections provided by the current requirements''. 
NFA also commented in support of the additional amendment to require 
IBs that file FOCUS reports in lieu of Form 1-FR to file electronically 
or in paper copy, according to NFA instructions, which will permit NFA 
to implement electronic filing of such reports when it develops the 
systems capacity to receive them electronically. NFA staff also 
verbally commented that the current EasyFile system architecture used 
by IBs and commodity pool operators does not include the use of a 
Personal Identification Number as discussed in the proposing release, 
but instead uses a unique user identification and password combination 
that fully satisfies the same purpose for the authentication of the 
authorized person making the electronic oath or affirmation. The 
Commission has therefore changed the language proposed for Regulation 
1.10(d)(4)(iii) to clarify that in the case of a Form 1-FR filed via 
electronic transmission in accordance with procedures established or 
approved by the Commission, such transmission must be accompanied by 
the Personal Identification Number or other user authentication 
assigned under such procedures to the authorized signer, and such 
Personal Identification Number or other user authentication will 
constitute and become a substitute for the manual signature of such 
authorized representative.

III. Amendments

    Regulation 1.10(b)(2)(iii) requires that a Form 1-FR certified by 
an independent public accountant that is filed by an FCM, IB or 
applicant for registration as an FCM or IB, must be filed in paper form 
and may not be filed electronically. The Commission is amending 
Regulation 1.10(b)(2)(iii) to provide that a certified Form 1-FR 
required from an IB, or applicant for IB registration, must be filed 
electronically with NFA through compliance with NFA's electronic filing 
procedures, and that a paper copy with the original, manually signed 
certification must be maintained by the IB in accordance with 
Regulation 1.31.
    The Commission also is amending Regulation 1.10(d)(4)(ii), by 
revising the second sentence and redesignating the revised sentence as 
Regulation 1.10(d)(4)(iii). Regulation 1.10(d)(4)(iii) would confirm 
that, in the case of a Form 1-FR-IB filed via electronic transmission 
in accordance with NFA procedures approved by the Commission, such 
transmission must be accompanied by the user authentication assigned 
under such procedures to the authorized signer, and the use of such 
user authentication will constitute and become a substitute for the 
manual signature of the authorized signer for the purpose of making the 
required oath or affirmation.
    In addition, the Commission is amending Regulation 1.10(h), to 
provide that an IB that is permitted to file a copy of its certified 
FOCUS Report in lieu of Form 1-FR file such report either in paper 
form, or through compliance with NFA's electronic filing procedures, 
according to the rules of NFA. The amendment to Regulation 1.10(h) also 
will require that a paper copy with the original, manually signed 
certification be maintained by the IB in accordance with Regulation 
1.31 for any IB FOCUS Report electronically filed with NFA. Lastly, the 
Commission is amending Regulation 1.31(d) to provide that paper copies 
of electronically filed certified Forms 1-FR or FOCUS Reports must be 
retained by the IB in hard copy with the original manually signed 
certification. These amendments implement mandatory electronic filing 
of certified annual reports on Form 1-FR-IB with NFA, as NFA has 
petitioned, and allow electronic filing by IBs of certified FOCUS 
reports as NFA may in the future require.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies, in rulemaking consider the impact of those 
rules on small businesses. The Commission previously has 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.\9\ These amendments will not place any additional burdens 
upon IBs that are small businesses since all such parties already are 
subject to the financial reporting requirements under Regulation 1.10 
and already comply with the electronic filing of uncertified reports 
through NFA's electronic filing system. The Commission's proposal 
solicited public comment on this analysis.\10\ No comments were 
received. Accordingly, the Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the action taken 
herein will not have a significant economic impact on a substantial 
number of small entities.
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    \9\ 47 FR 18618 (April 30, 1982).
    \10\ 71 FR 54789 at 54791 (September 19, 2006).
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B. Paperwork Reduction Act

    This rulemaking alters the method of collection for a required 
collection of information under Part 1 of the Commission's rules, but 
is not anticipated to change the burden under such collection as the 
actual financial reporting requirement has not changed and all the 
parties subject to such requirement already must use NFA's electronic 
filing system for the filing of uncertified reports. As required by the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Commission 
submitted a copy of this section to the Office of Management and Budget 
(``OMB'') for its review. No comments were received in response to the 
Commission's invitation in the notice of proposed rulemaking \11\ to 
comment on any change in the potential paperwork burden associated with 
these rule amendments.
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    \11\ Id.
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 C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by Section 119 of the CFMA, 
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 regulation outweigh its costs. Rather, Section 15(a) simply 
requires the Commission to ``consider the costs and benefits'' of its 
action.
    Section 15(a) of the Act 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's proposal contained an analysis of its 
consideration of these costs and benefits and solicited public comment 
thereon.\12\ No comments were received with respect to the analysis of 
the Commission's consideration. Therefore, pursuant to such 
consideration, the Commission has decided to adopt these amendments as 
discussed above.
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    \12\ 71 FR at 54791-2.

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[[Page 67465]]

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.
    Accordingly, 17 CFR part 1 is amended 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 1.10 is amended by:
0
a. revising paragraph (b)(2)(iii);
0
b. revising paragraph (d)(4)(ii);
0
c. adding paragraph (d)(4)(iii); and
0
c. revising paragraph (h), to read as follows:


Sec.  1.10  Financial reports of futures commission merchants and 
introducing brokers.

* * * * *
    (b) * * *
    (2) * * *
    (iii) A Form 1-FR required to be certified by an independent public 
accountant in accordance with Sec.  1.16 which is filed by a futures 
commission merchant or applicant for registration as a futures 
commission merchant must be filed in paper form and may not be filed 
electronically. A Form 1-FR required to be certified by an independent 
public accountant in accordance with Sec.  1.16 which is filed by an 
introducing broker or applicant for registration as an introducing 
broker must be filed electronically in accordance with NFA's electronic 
filing procedures, and a paper copy of such filing with the original 
manually signed certification must be maintained by such introducing 
broker or applicant in accordance with Sec.  1.31.
* * * * *
    (d) * * *
    (4) * * *
    (ii) If the registrant or applicant is registered with the 
Securities and Exchange Commission as a securities broker or dealer, 
the representative authorized under Sec.  240.17a-5 of this title to 
file for the securities broker or dealer its Financial and Operational 
Combined Uniform Single Report under the Securities Exchange Act of 
1934, Part II, Part IIA, or Part II CSE.
    (iii) In the case of a Form 1-FR filed via electronic transmission 
in accordance with procedures established or approved by the 
Commission, such transmission must be accompanied by the Personal 
Identification Number or other user authentication assigned under such 
procedures to the authorized signer, and the use of such Personal 
Identification Number or other user authentication will constitute and 
become a substitute for the manual signature of the authorized signer 
for the purpose of making the oath or affirmation referred to in this 
paragraph.
* * * * *
    (h) Filing option available to a futures commission merchant or an 
introducing broker that is also a securities broker or dealer. Any 
applicant or registrant which is registered with the Securities and 
Exchange Commission as a securities broker or dealer may comply with 
the requirements of this section by filing (in accordance with 
paragraphs (a), (b), (c), and (j) of this section) a copy of its 
Financial and Operational Combined Uniform Single Report under the 
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE 
(FOCUS Report), in lieu of Form 1-FR; Provided, however, That all 
information which is required to be furnished on and submitted with 
Form 1-FR is provided with such FOCUS Report; and Provided, further, 
That a certified FOCUS Report filed by an introducing broker or 
applicant for registration as an introducing broker in lieu of a 
certified Form 1-FR-IB must be filed according to NFA rules, either in 
paper form or electronically in accordance with NFA electronic filing 
procedures, and if filed electronically, a paper copy of such filing 
with the original manually signed certification must be maintained by 
such introducing broker or applicant in accordance with Sec.  1.31.
* * * * *

0
3. Section 1.31 is amended by revising paragraph (d) to read as 
follows:


Sec.  1.31  Books and records; keeping and inspection.

* * * * *
    (d) Trading cards, documents on which trade information is 
originally recorded in writing, written orders required to be kept 
pursuant to Sec.  1.35(a), (a-1)(1), (a-1)(2) and (d), and paper copies 
of electronically filed certified Forms 1-FR and FOCUS Reports with the 
original manually signed certification must be retained in hard-copy 
for the required time period.
* * * * *

    Issued in Washington, DC, on November 14, 2006 by the 
Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. E6-19533 Filed 11-21-06; 8:45 am]
BILLING CODE 6351-01-P