[Federal Register Volume 72, Number 80 (Thursday, April 26, 2007)]
[Proposed Rules]
[Pages 20788-20791]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-8025]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AC37


Registration of Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend Commission Regulation 3.10 to require 
certain registered intermediaries, i.e., futures commission merchants 
(``FCMs''), introducing brokers (``IBs''), commodity pool operators 
(``CPOs''), commodity trading advisors (``CTAs'') and leverage 
transaction merchants (``LTMs''), to complete an online annual review 
of their registration information maintained with the National Futures 
Association (``NFA''). The proposed amendment (``Proposed Amendment'') 
would ensure that NFA will have accurate and current information about 
such registrants. The Commission's proposal (``Proposal'') also 
includes a technical and conforming amendment to Commission Regulation 
3.33(f), which regulation is cross-referenced in the Proposed 
Amendment.

DATES: Comments must be received on or before May 29, 2007.

ADDRESSES: Comments on the Proposal should be sent to Eileen Donovan, 
Acting Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 418-5521, or by e-mail to 
[email protected]. Reference should be made to ``Proposal Regarding 
the Registration of Intermediaries.'' Comments also may be submitted by 
connecting to the Federal eRulemaking Portal at http://www.regulations.gov and following the comment submission instructions.

FOR FURTHER INFORMATION CONTACT: Helene D. Schroeder, 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 number: (202) 418-5450; facsimile number: (202) 418-5528; and 
electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

A. The Regulatory Framework

    Sections 4d, 4f(a)(1), 4m and 4n(1) of the Commodity Exchange Act 
(``Act'') \1\ require the registration of firms seeking to act as 
intermediaries for exchange-traded futures.\2\ The statutory framework 
for registration procedures is

[[Page 20789]]

set forth in Section 4f(a)(1) of the Act for FCMs and IBs,\3\ and in 
Section 4n(a)(1) for CPOs and CTAs.\4\ Additionally, Section 19 of the 
Act grants the Commission plenary authority over leverage 
transactions.\5\
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    \1\ 7 U.S.C. 1 et seq. (2000). The Act can be accessed at http://www.access.gpo.gov/uscode/title7/chapter1_.html.
    \2\ Section 4c of the Act provides the Commission with plenary 
authority over commodity options.
    \3\ 7 U.S.C. 6f(a)(1).
    \4\ 7 U.S.C. 6n(1).
    \5\ 7 U.S.C. 23. Commission Regulation 31.5, 17 CFR 31.5 (2006), 
was promulgated under this provision and along with Regulation 3.10, 
17 CFR 3.10, governs the registration of LTMs. The Commission's 
regulations can be accessed at http://www.access.gpo.gov/nara/cfr/waisidx_06/17cfrv1_06.html.
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    Pursuant to these statutory and other regulatory provisions, a 
person seeking to register as an intermediary must file an application 
that contains the information and facts that are deemed necessary by 
the Commission.\6\ Sections 4f and 4n further provide that, unless 
renewed, the person's registration will expire automatically each year, 
or at such other time (not less than one year from the date of 
issuance) as the Commission by rule, regulation or order may 
prescribe.\7\
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    \6\ In the case of FCMs and IBs, the application must provide 
the ``names and addresses of the managers of all branch offices, and 
the names of such officers and partners, if a partnership, and the 
names of such officers, directors, and stockholders, if a 
corporation, as the Commission may direct.'' With regard to CPOs and 
CTAs, the application must contain identifying information, 
education and business affiliations of controlling persons thereof, 
the manner of giving advice and rendering of analyses or reports, 
the basis upon which the applicant is or will be compensated and 
such other information as the Commission may require to determine 
whether the applicant is qualified for registration.
    \7\ In this regard, Section 4f(a)(1) provides in pertinent part 
as follows: ``Each registration shall expire on December 31 of the 
year for which issued or at such other time, not less than one year 
from the date of issuance, as the Commission may by rule, 
regulation, or order prescribe, and shall be renewed upon 
application therefor unless the registration has been suspended (and 
the period of such suspension has not expired) or revoked pursuant 
to the provisions of this Act.''
    Section 4n(2) additionally provides: ``Each registration under 
this section shall expire on the 30th day of June of each year, or 
at such other time, not less than one year from the effective date 
thereof, as the Commission may by rule regulation, or order 
prescribe, and shall be renewed upon application therefor subject to 
the same requirements as in the case of an original application.''
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    Section 17(o)(1) of the Act authorizes the Commission to require 
any registered futures association to perform any portion of its 
registration functions under the Act with respect to each member of the 
association,\8\ and Section 8a(10) permits the Commission to authorize 
any person to perform any registration functions under the Act, in 
accordance with rules adopted by such person and submitted to the 
Commission for approval.\9\ The Commission has exercised this authority 
by delegating to NFA, the sole registered futures association, its 
authority to process applications for registration of 
intermediaries.\10\
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    \8\ 7 U.S.C. 21(o)(1).
    \9\ 7 U.S.C. 12a(10).
    \10\ 54 FR 19556 (May 8, 1989) (LTMs); 49 FR 39593 (Oct. 9, 
1984) (FCMs, CPOs and CTAs); and 48 FR 35158 (Aug. 3, 1983) (IBs).
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    Part 3 of the Commission's Regulations \11\ contains the 
regulations relating to the registration of intermediaries and other 
futures industry professionals. Commission Regulation 3.10(a) specifies 
that an application for registration as an FCM, IB, CPO, CTA or LTM 
must be on a Form 7-R, completed and filed with NFA in accordance with 
the instructions thereto.\12\ Commission Regulation 3.31(a)(1) imposes 
a continuing obligation on registrants to update their registration 
information.\13\ Specifically, Commission Regulation 3.31(a)(1) 
requires each FCM, IB, CTA, CPO or LTM to promptly correct any 
deficiency or inaccuracy that is contained in the person's Form 7-R or 
any Form 8-R filed on behalf of a principal or an associated person 
that no longer renders accurate and current the information contained 
therein. It further specifies that each such correction must be made on 
a Form 3-R and must be prepared and filed with NFA in accordance with 
the instructions thereto.
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    \11\ 17 CFR part 3.
    \12\ 17 CFR 3.10(a).
    \13\ 17 CFR 3.31(a)(1).
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    To further ensure that registration information remained accurate 
and current, Commission Regulation 3.10(d), which was revoked in 2002, 
required FCMs, IBs, CPOs, CTAs and LTMs to file the Form 7-R with NFA 
annually on a date specified by NFA. In accordance with that 
regulation, NFA sent each FCM, IB, CPO, CTA and LTM a pre-printed paper 
copy of the registrant's Form 7-R to review. If the information in the 
printout was inaccurate, the registrant was required to correct the 
information and return the printout with the corrections to NFA.\14\
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    \14\ Regulation 3.10(d) also provided that the failure to file 
the Form 7-R within 30 days following the date specified by NFA 
would be deemed to be a request for withdrawal from registration.
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B. Implementation of NFA's Online Registration System

    In light of technological advancements and improvements, NFA 
altered its registration procedures in 2002 by shifting from paper-
based registration to an online or electronic registration system. 
Pursuant to the updated procedures, NFA requires, with limited 
exception,\15\ that all registration (and membership) forms, including 
the completed Form 7-R and 3-R, must be filed with NFA electronically 
through NFA's online registration system.
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    \15\ For example, NFA requires that any securities broker or 
dealer that is registered with the Securities and Exchange 
Commission that becomes a notice-registered FCM or IB must submit a 
hardcopy version of its Form 7-R.
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    In June 2002, the Commission deleted the requirement for firms to 
review annually registration information as specified by Commission 
Regulation 3.10(d).\16\ The Commission determined that, because such 
persons were already under an ongoing obligation pursuant to Commission 
Regulation 3.31(a) to update their registration information to correct 
deficiencies and inaccuracies, the continuation of the annual paper 
updating process was redundant and resulted in unnecessary costs to 
both NFA and the registrant.\17\ Further, because NFA was implementing 
an online system for the intake of registration documents, the 
Commission believed it made little sense for NFA to continue receiving 
annual paper updates of such registration forms.
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    \16\ 67 FR 38869 (June 6, 2002).
    \17\ Id. at 38871.
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    In the period since the elimination of Regulation 3.10(d), NFA has 
experienced some problems with the registration information provided by 
certain intermediaries. Further, the Commission and NFA recently have 
arranged for firms to designate an enforcement contact to be the 
recipient of communications from the Commission relating to enforcement 
issues. It is important to maintain an up-to-date list of such 
contacts. In addition, although the Commission has seen no evidence of 
security breaches of registration information, an annual review of 
information in the registration database should enhance the overall 
safety of such data.
    NFA has devoted significant resources toward developing an online 
registration update protocol for firms to review and update their 
registration records. The protocol is designed to provide a 
straightforward process by which registrants can review and modify 
their existing registration information.\18\ In addition to providing 
an updated list of users, the protocol will require registrants to 
provide updated disciplinary, branch office and firm contact 
information. The Proposed Amendment is intended to facilitate NFA's 
efforts in implementing this new

[[Page 20790]]

protocol and ensure that NFA is in possession of current and accurate 
information regarding intermediaries. All firms remain subject to their 
obligations under Regulation 3.31(a)(1) to promptly correct any 
deficiency or inaccuracy in a Form 7-R or Form 8-R filed by the firm.
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    \18\ For example, a firm could modify the title given for a 
particular principal of a firm, but it could not identify a new 
principal, as this would require separate application.
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II. Proposal

    The Proposed Amendment, which would set forth an annual review 
requirement, would be added as new paragraph (d).\19\ As proposed, the 
new paragraph would provide that each FCM, IB, CPO, CTA and LTM, in 
accordance with procedures established by NFA, must complete an online 
annual review of the registration information maintained by NFA. 
Pursuant to procedures established by NFA, registrants would be 
expected to correct any deficiencies or inaccuracies contained therein.
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    \19\ Paragraph (d) of Regulation 3.10 had been reserved.
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    The Proposed Amendment also would provide that the failure to 
complete the review and update within 30 days of the date established 
by NFA for completion would be deemed to be a request for withdrawal 
from registration. As further provided therein, NFA would be required 
to process the request in accordance with the existing procedures for 
withdrawal of registration set forth in Commission Regulation 3.33(f).
    Commission Regulation 3.33(f) establishes the date on which a 
request for withdrawal of registration will become effective unless the 
Commission or NFA take certain actions as specified therein.\20\ When 
the Commission deleted the requirement for registrants to conduct an 
annual paper updating process by revoking Commission Regulation 3.10(d) 
in 2002, the Commission did not make a conforming change to Commission 
Regulation 3.33(f). Specifically, the Commission did not remove 
unnecessary language that cross-referenced the revoked provision. That 
language, which appears as the introductory phrase of Commission 
Regulation 3.33(f) provides as follows: ``Except as otherwise provided 
in Regulation 3.10(d).'' This introductory phrase will continue to be 
unnecessary if the Proposed Amendment is adopted. Accordingly, the 
Commission's Proposal also includes a technical and conforming 
amendment to Commission Regulation 3.33(f) to remove the introductory 
language. As proposed, the text would begin with the language following 
the introductory phrase: ``A request for withdrawing of registration.'' 
The residual text in Commission Regulation 3.33(f) would remain intact.
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    \20\ Commission Regulation can be accessed at the Web site 
provided in footnote 5. See also NFA Registration Rule 601(c).
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III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \21\ requires that 
agencies, in proposing regulations, consider the impact of those 
regulations on small businesses. The Proposed Amendment would affect 
persons that are registered as FCMs, IBs, CPOs, CTAs and LTMs. 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.\22\ The 
Commission previously determined that registered FCMs, CPOs and LTMs 
are not small entities for the purpose of the RFA.\23\ With respect to 
the remaining persons, CTAs and IBs, the Commission does not believe 
that the economic impact of the Proposed Amendment will be significant. 
First, the information that would be required under the Proposed 
Amendment already is required to be collected under the existing 
registration framework. Second, the Proposed Amendment and NFA's new 
protocol will focus each registrant on the specific areas that must be 
reviewed and, if needed, updated. Third, the Proposed Amendment will 
permit review and updating via electronic means in keeping with the 
current registration procedures. Accordingly, in accordance with 
Section 3(a) of the RFA,\24\ the Chairman, on behalf of the Commission, 
certifies that the proposed rules will not have a significant economic 
impact on a substantial number of small entities. However, the 
Commission invites the public to comment on this finding.
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    \21\ 5 U.S.C. 601 et seq.
    \22\ 47 FR 18618 (Apr. 30, 1982).
    \23\ 47 FR 18618, 18619.
    \24\ 5 U.S.C. 605(b).
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B. Cost-Benefit Analysis

    Section 15(a) of the Act \25\ 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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    \25\ 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: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission, in its discretion, may choose 
to give greater weight to any one of the five enumerated areas and 
determine that, notwithstanding its costs, a particular regulation is 
necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or to accomplish any of the purposes 
of the Act.
    The Proposed Amendment concerns the registration of certain 
intermediaries, in particular, FCMs, IBs, CPOs, CTAs and LTMs. 
Specifically, the Proposed Amendment will require these intermediaries 
to complete an online annual review of their registration information, 
including disciplinary information, firm contacts and lists of 
authorized users. By ensuring that NFA, the self-regulatory 
organization that oversees the activities of these registrants, will 
have accurate and current information regarding registrants, the 
Proposed Amendment will maximize the protection of market participants 
and the public.
    Such intermediaries already are under an ongoing obligation to 
provide updated information to NFA pursuant to Commission Regulation 
3.31(a)(1). The Proposed Amendment would require these registrants to 
comply with an online review protocol established by NFA. This protocol 
would provide a straightforward process for registrants to 
electronically update their registration information. It would focus 
and guide registrants on the particular areas that need updating. By 
facilitating NFA's efforts to adopt this protocol, the Proposed 
Amendment also should result in efficiency enhancements for registrants 
and NFA.
    The Proposed Amendment should have no effect on the following three 
enumerated areas: (1) Efficiency, competitiveness or the financial 
integrity of futures markets; (2) price discovery; and (3) sound risk 
management practices.
    After considering these factors, the Commission has determined to 
issue the Proposed Amendment discussed above. The Commission invites 
public comment on its application of the cost-benefit provision. 
Commenters also are invited to submit any data that they may have 
quantifying the costs and benefits

[[Page 20791]]

of the Proposed Amendment with their comment letters.

C. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
obligations on federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA.\26\ The Proposed Amendment would 
require intermediaries to conduct an annual review of their 
registration information maintained with NFA. The information that 
would be reviewed in accordance with the Proposed Amendment is part of 
an approved collection of information. Moreover, the Proposed Amendment 
would not result in any material modifications to this approved 
collection. Accordingly, for purposes of the PRA, the Commission 
certifies that the requirements of the PRA are inapplicable to the 
Proposed Amendment.
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    \26\ 26 44 U.S.C. 3501 et seq.
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List of Subjects in 17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity Futures, 
Reporting and recordkeeping requirements.

    For the reasons discussed in the preamble, the Commission proposes 
to amend 17 CFR part 3 as follows:

PART 3--REGISTRATION

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

    Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 
13c, 16a, 18, 19, 21, 23.

    2. Section 3.10 is amended by adding paragraph (d) to read as 
follows:


Sec.  3.10  Registration of futures commission merchants, introducing 
brokers, commodity trading advisors, commodity pool operators and 
leverage transaction merchants.

* * * * *
    (d) On a date to be established by the National Futures 
Association, and in accordance with procedures established by the 
National Futures Association, each registrant as a futures commission 
merchant, introducing broker, commodity trading advisor, commodity pool 
operator or leverage transaction merchant shall, on an annual basis, 
review and update registration information maintained with the National 
Futures Association. The failure to complete the review and update 
within thirty days following the date established by the National 
Futures Association shall be deemed to be a request for withdrawal from 
registration, which shall be processed in accordance with the 
provisions of Sec.  3.33(f).
    3. Section 3.33 is amended by revising paragraph (f) introductory 
text to read as follows:


Sec.  3.33  Withdrawal from registration.

* * * * *
    (f) A request for withdrawal from registration will become 
effective on the thirtieth day after receipt of such request by the 
National Futures Association, or earlier upon written notice from the 
National Futures Association (with the written concurrence of the 
Commission) of the granting of such request, unless prior to the 
effective date:
* * * * *

    Issued in Washington, DC, on April 23, 2007, by the Commission.
Eileen Donovan,
Acting Secretary of the Commission.
 [FR Doc. E7-8025 Filed 4-25-07; 8:45 am]
BILLING CODE 6351-01-P