[Federal Register Volume 75, Number 12 (Wednesday, January 20, 2010)]
[Proposed Rules]
[Pages 3282-3330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-456]



[[Page 3281]]

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Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 3, 4, et al.



Regulation of Off-Exchange Retail Foreign Exchange Transactions and 
Intermediaries; Proposed Rule

  Federal Register / Vol. 75, No. 12 / Wednesday, January 20, 2010 / 
Proposed Rules  

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166

RIN 3038-AC61


Regulation of Off-Exchange Retail Foreign Exchange Transactions 
and Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to adopt a comprehensive regulatory scheme 
(``Proposal'') to implement the CFTC Reauthorization Act of 2008 
(``CRA'') \1\ with respect to off-exchange transactions in foreign 
currency with members of the retail public (i.e., ``retail forex 
transactions''). The Commodity Exchange Act, as amended by the CRA, 
generally provides that the Commission's jurisdiction extends to 
contracts of sale of a commodity for future delivery (or an option on 
such a contract) or an option (other than an option executed or traded 
on a national securities exchange), and to certain leveraged or 
margined contracts in foreign currency that are offered to or entered 
into with retail customers. The Commission is proposing a scheme that 
would put in place requirements for, among other things, registration, 
disclosure, recordkeeping, financial reporting, minimum capital, and 
other operational standards, based on both the CFTC's existing 
regulations for commodity interest transactions and commodity interest 
intermediaries, as well as rules of the National Futures Association 
(``NFA'') that are already existing with respect to retail forex 
transactions offered by NFA's members. Additionally, the Proposal would 
amend existing regulations as needed to clarify their application to, 
and inclusion in, the new regulatory scheme for retail forex.
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    \1\ Food, Conservation, and Energy Act of 2008, Pub. L. 110-246, 
122 Stat. 1651, 2189-2204 (2008).

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DATES: Comments must be received on or before March 22, 2010.

ADDRESSES: You may submit comments, identified by RIN 3038-AC61, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
     E-mail: [email protected]. Include ``Regulation of Retail 
Forex'' in the subject line of the message.
     Fax: (202) 418-5521.
     Mail: Send to David Stawick, Secretary, Commodity Futures 
Trading Commission, 1155 21st Street, NW., Washington, DC 20581.
     Courier: Same as Mail above.
    All comments received will be posted without change to http://www.cftc.gov, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: For information regarding financial 
and related reporting requirements, contact: Thomas Smith, Chief 
Accountant and Deputy Director, Division of Clearing and Intermediary 
Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone 
number: 202-418-5495; facsimile number: 202-418-5547; and electronic 
mail: [email protected]. Jennifer Bauer, Special Counsel, Division of 
Clearing and Intermediary Oversight, Division of Clearing and 
Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. 
Telephone number: 202-418-5472; facsimile number: 202-418-5547; and 
electronic mail: [email protected].
    For all other information contact: William Penner, Deputy Director, 
Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., 
Washington, DC 20581. Telephone number: 202-418-5450; facsimile number: 
202-418-5547; and electronic mail: [email protected]. Christopher 
Cummings, Special Counsel, Division of Clearing and Intermediary 
Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone 
number (202) 418-5450; facsimile number: 202-418- 5547; and electronic 
mail: [email protected].
    Peter Sanchez, Special Counsel, Division of Clearing and 
Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. 
Telephone number (202) 418-5450; facsimile number: 202-418-5547; and 
electronic mail: [email protected].

SUPPLEMENTARY INFORMATION: The CRA provides the Commission with broad 
authority to ``make, promulgate and enforce such rules and regulations 
as, in the judgment of the Commission, are reasonably necessary to 
effectuate any of the provisions of [the Commodity Exchange] Act'' in 
connection with off-exchange foreign currency futures, options, and 
options on futures, as well as leveraged off-exchange contracts offered 
to or entered into with retail customers.\2\ The Commission is given 
similarly broad authority to promulgate and enforce rules regarding 
registration of persons who solicit, exercise discretionary trading 
authority or operate or solicit funds in connection with any of these 
types of transactions.\3\
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    \2\ See, 7 U.S.C. 2(c)(2)(B)(v) and 7 U.S.C. 
2(c)(2)(C)(ii)(III).
    \3\ See, 7 U.S.C. 2(c)(2)(B)(iv)(III) and 7 U.S.C. 
2(c)(2)(C)(iii)(III).
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    Pursuant to this authority, the Commission is proposing a scheme 
that would put in place requirements for, among other things, 
registration, disclosure, recordkeeping, financial reporting, minimum 
capital, and other operational standards, based on both the CFTC's 
existing regulations for commodity interest transactions and commodity 
interest intermediaries, as well as rules of the National Futures 
Association (``NFA'') that are already existing with respect to retail 
forex transactions offered by NFA's members.
    Subject to certain exceptions (e.g., for certain regulated 
financial intermediaries not under the Commission's jurisdiction as 
established in the CRA), the Proposal would require persons offering to 
be or acting as counterparties to retail forex transactions but not 
primarily or substantially engaged in the exchange traded futures 
business, to register as retail foreign exchange dealers (``RFEDs'') 
with the CFTC. Registered futures commission merchants (``FCMs'') that 
are ``primarily or substantially'' (as defined in the Proposal) engaged 
in the activities set forth in the Act's definition of an FCM would be 
permitted to engage in retail forex transactions without also 
registering as RFEDs.
    The Proposal would further require certain entities other than 
RFEDs and FCMs that intermediate retail forex transactions to register 
with the Commission as introducing brokers (``IBs''), commodity trading 
advisors (``CTAs''), commodity pool operators (``CPOs''), or associated 
persons (``APs'') of such entities, as appropriate, and to be subject 
to the Act and regulations applicable to that registrant category. In 
addition, the Proposal would require any IB that introduces retail 
forex transactions to an RFED or FCM to be guaranteed by that RFED or 
FCM.
    The Proposal would also implement the $20 million minimum net 
capital standard established in the CRA for registering as an RFED or 
offering retail forex transactions as an FCM; propose an additional 
volume-based minimum capital threshold calculated on the amount an FCM 
or RFED owes as counterparty to retail forex transactions; and require 
RFEDs or FCMs engaging in retail forex transactions to collect security 
deposits in a minimum amount in order to prudentially limit the 
leverage available to their retail

[[Page 3283]]

customers on such transactions at 10 to 1.

I. Background

A. The Commodity Futures Trading Commission Act of 1974

    Congress created the Commission in 1974 as an independent agency 
with the mandate to regulate commodity futures and option markets in 
the United States by the enactment of the Commodity Futures Trading 
Commission Act of 1974.\4\ While the bill was being considered, the 
Department of the Treasury (``Treasury'') sent a letter to the Senate 
Committee with jurisdiction over the bill, expressing concerns that 
Treasury had regarding the effect that passage would have on the off-
exchange foreign currency (``forex'') market that existed at the time 
between large, institutional customers.\5\ The letter contained 
proposed language for the bill which would have maintained the status 
quo for institutional off-exchange forex trading, leaving jurisdiction 
over on-exchange trading in futures and options contracts on forex with 
the newly-created Commission. The bill was subsequently amended to add 
the suggested language contained in Treasury's letter, which was 
intended to give the Commission jurisdiction over retail forex 
transactions and to exclude from the Commission's jurisdiction the off-
exchange, institutional ``interbank'' market in foreign currencies. 
This language, which has come to be known as the ``Treasury 
Amendment,'' provided that:

    \4\ Public Law 93-643, 88 Stat. 1389 (1974).
    \5\ See, Letter from Donald L.E. Ritger, Acting General Counsel, 
Department of the Treasury, to the Hon. Herman E. Talmadge (July 30, 
1974), reprinted at 1974 U.S.C.C.A.N. 5843, 5887-89.

    Nothing in this Act shall be deemed to govern or in any way be 
applicable to transactions in foreign currency * * * unless such 
transactions involve the sale thereof for future delivery conducted 
on a board of trade.\6\
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    \6\ Id. at 51.

As is discussed below, over time, and on numerous occasions, the 
Commission and the courts have opined on the proper boundaries of this 
exclusion.
    The Commission first addressed the possible scope of the Treasury 
Amendment with regard to off-exchange transactions in securities issued 
by the Government National Mortgage Association (``GNMA''). In an 
interpretive letter issued by the Commission's Office of General 
Counsel, Commission staff stated that the remarks by the Senate 
Committee were

    an expression that regulation by the Commission is unnecessary 
where there exists an informal market among institutional 
participants in transactions for future delivery in the specified 
financial instruments only so long as it is supervised by those 
agencies having regulatory responsibility over those participants. 
However, where that market is not supervised and where those 
transactions are conducted with participation by members of the 
general public, we do not understand the Committee to have intended 
that a regulatory gap should exist. In these circumstances, we 
believe the Commodity Exchange Act should be construed broadly to 
assure that the public interest will be protected by Commission 
regulation of those transactions.\7\
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    \7\ Dealers in GNMA Certificates as a Board of Trade, CFTC Staff 
Interpretive Letter No. 77-12, [1977-1980 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) ] 20,467 (Aug. 17, 1977).

    The scope of the exclusion, again with regard to off-exchange 
transactions in GNMA securities, was addressed by the U.S. Court of 
Appeals for the Seventh Circuit (``Seventh Circuit'') when it 
determined that the Treasury Amendment did not exclude options on 
government securities from the Commission's authority.\8\ Specifically, 
the court determined that although trading in GNMA securities was 
excluded from the Commission's jurisdiction, trading in options on such 
instruments was within the Commission's authority. As the court stated:
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    \8\ Board of Trade of Chicago v. SEC, 677 F. 2d 1137, 1154 (7th 
Cir. 1982), vacated as moot, 459 U.S. 1026 (1982).

    From the legislative history, it is quite clear that the 
Treasury Amendment was adopted by Congress only to prevent dual 
regulation by the CFTC and bank regulatory agencies of the banks and 
other sophisticated institutions that ordinarily trade in financial 
instruments.\9\
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    \9\ Id. at 1154.

    Following that discussion, in 1985, the Commission issued a 
Statutory Interpretation concerning the Treasury Amendment that 
specifically dealt with forex.\10\ Responding to reports that forex 
futures contracts were being offered to retail customers on an off-
exchange basis, under the assumption that such transactions were 
excluded from the Commission's jurisdiction, the Commission reaffirmed 
and republished its views, as follows:
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    \10\ Trading in Foreign Currencies for Future Delivery, 50 FR 
42983 (Oct. 23, 1985).

    [T]he Commission wishes to make very clear that any marketing to 
the general public of futures transactions in foreign currencies 
conducted outside the facilities of a contract market is strictly 
outside the scope of the [Treasury] Amendment. As a result, such an 
off-exchange offer or sale of futures contracts involving foreign 
currencies is unlawful under section 4(a) of the Act, 7 U.S.C. 6(a) 
(1982).\11\
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    \11\ Id. at 42985.

    The boundaries of the Treasury Amendment were again tested in 
Salomon Forex v. Tauber,\12\ where a sophisticated investor sought to 
invalidate a multi-million dollar trading debt by claiming that the 
Treasury Amendment only excluded spot or forward forex transactions 
from the Commission's jurisdiction, and that trading in off-exchange 
futures and options were within the Commission's regulatory authority. 
If such transactions were deemed to be within the Commission's 
authority, then the transactions could only occur legally on an 
approved exchange. The Court determined that the Treasury Amendment 
excluded off-exchange trading in futures and options as well as 
``spot'' and ``forward'' transactions from the Commission's authority, 
if it involved ``sophisticated, large-scale foreign currency traders.'' 
\13\ Although this holding has sometimes been misinterpreted to imply 
that off-exchange forex transactions with the general public were 
outside the Commission's jurisdiction, this holding concerned only 
large-scale traders and banks that made up the informal network of the 
foreign currency ``interbank'' market. Indeed, the Court itself noted 
that: ``[t]his case does not involve mass marketing to small investors, 
which would appear to require trading through an exchange and our 
holding in no way implies that such marketing is exempt from the CEA.'' 
\14\
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    \12\ 795 F. Supp. 768 (E.D. Va. 1992), aff'd, 8 F.3d 966 (4th 
Cir. 1993).
    \13\ Id. at 978.
    \14\ Id.
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B. The Futures Trading Practices Act of 1992

    The Futures Trading Practices Act of 1992 reorganized certain 
sections of the Commodity Exchange Act, 7 U.S.C. 1, et seq. (2000) (the 
``Act'') and gave the Commission significant exemptive authority over 
the activities of a wide variety of persons, including FCMs, CTAs, and 
CPOs.
    It was pursuant to this exemptive authority that the Commission 
addressed some aspects of the over-the-counter (``OTC'') markets by 
adopting Part 35 of its regulations, which provides an exemption from 
regulation for certain swap agreements.\15\ However, the Commission did 
not use its newly-

[[Page 3284]]

granted exemptive authority in the context of retail forex.\16\
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    \15\ See, Exemption for Certain Swap Agreements, 58 FR 5587 
(Jan. 22, 1993).
    \16\ See, e.g., Sections 4(c) and 4(d) of the Act, 7 U.S.C. 6(c) 
and 6(d).
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    Rather, the Commission's efforts were directed to combating forex 
fraud activities through increased enforcement and public awareness. In 
response to increased fraud activity in the forex markets, the CFTC 
issued a fraud advisory to the public on March 30, 1998.\17\ 
Notwithstanding the Commission's guidance and the legislative history, 
the ambiguity of the Treasury Amendment continued to present 
opportunities for defendants to challenge the Commission's jurisdiction 
in the courts, which consumed much of the Commission staff's time and 
resources.\18\ Unfortunately, these challenges would persist until the 
adoption of the Commodity Futures Modernization Act of 2000 
(``CFMA'').\19\
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    \17\ Fraud Advisory from the CFTC: Foreign Currency Trading 
(Forex) Fraud, available at: http://www.cftc.gov/customerprotection/fraudawarenessandprevention/fraudadvisories/fraudadv_forex.html. 
The Commission also issued brochures to alert customers to the 
possible scams involving forex fraud. See CFTC Brochure on Forex 
Fraud, available at: http://www.cftc.gov/enf/enf-forex.htm and 
http://www.cftc.gov/stellent/groups/public/@cpfraudawarenessandprotection/documents/file/enfforexbrochure.pdf 
(last visited Oct. 15, 2009).
    \18\ For instance, in Dunn & Delta Consultants, Inc. v. CFTC, 
519 U.S. 465, 469 (1997), the U.S. Supreme Court held that foreign 
currency options were ``transactions in foreign currency'' within 
the meaning of the Treasury Amendment.
    \19\ Consolidated Appropriations Act of 2001, Public Law 106-
554, App. E, 114 Stat. 2763 (2000), available at Commodity Futures 
Modernization Act of 2000, [2000-2002 Transfer Binder] Comm. Fut. L. 
Rep. (CCH) ] 28,433 (Dec. 21, 2000).
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    Under the Treasury Amendment, retail forex transactions were 
excluded from the Commission's jurisdiction unless they were conducted 
on a ``board of trade.'' This broad phrase caused further confusion 
when courts tried to interpret its meaning in order to delineate where 
the Commission's jurisdiction ended. The U.S. Court of Appeals for the 
Ninth Circuit (``Ninth Circuit'') relied on the language in the Senate 
Committee report to interpret the clause and believed that a proper 
reading of the Treasury Amendment excluded all off-exchange forex 
transactions--even with retail customers--from the Commission's 
jurisdiction and that the Commission only had jurisdiction over forex 
transactions traded on organized exchanges.\20\ Other courts 
interpreting the same clause came to the conclusion that retail off-
exchange forex transactions were within the Commission's jurisdiction 
and that the legislative history indicates that only large 
institutional trades were intended to be excluded from the Commission's 
oversight.\21\
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    \20\ CFTC v. Frankwell Bullion Ltd., 99 F. 3d 299 (9th Cir. 
1996).
    \21\ See, CFTC v. Baragosh, 278 F.3d 319 (4th Cir. 2002), which 
relied on the Conference Committee Report, not mentioned in 
Frankwell Bullion, to arrive at the opposite conclusion from the 
Ninth Circuit; See also, CFTC v. Standard Forex, No. CV-93-0088 
(CPS). 1993 WL 809966 (E.D.N.Y. Aug. 9, 1993).
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C. The Commodity Futures Modernization Act of 2000

    The CFMA amended the Act to clarify the jurisdiction of the 
Commission in the area of forex futures and options trading. For the 
first time, off-exchange retail forex transactions were expressly 
permitted, provided the counterparty was one of certain enumerated, 
regulated entities listed in the Act--e.g., a registered FCM.\22\ 
Transactions between certain institutional entities (eligible contract 
participants, or ``ECPs'' \23\) remained outside the Commission's 
jurisdiction altogether, based on several provisions of the Act and the 
Commission's regulations.\24\ Shortly after the adoption of the CFMA, 
however, the Commission and the National Futures Association (``NFA'') 
\25\ noted that firms were registering as FCMs but not engaging in any 
exchange-traded activities. Rather, they were limiting their activities 
solely to retail forex. Additionally, the Commission noted that firms 
were registering as FCMs but conducting retail forex transactions 
through unregistered affiliates. Nothing in the Act or CFMA's 
amendments to the Act prohibited these ``shell FCMs'' from conducting 
business through their unregistered affiliates.
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    \22\ See, 7 U.S.C. 2(c)(2)(B). Broadly stated, these entities 
included: (1) A financial institution; (2) a registered broker/
dealer (``B-D'') or FCM; (3) an insurance company; (4) a financial 
holding company; and (5) an investment bank holding company.
    \23\ Section 1(c)(12) of the Act defines the term ``eligible 
contract participant.'' Entities classified as ECPs include 
financial institutions, insurance companies, certain commodity pools 
and individuals who meet certain asset thresholds. Non-ECPs, 
generally speaking, are retail customers.
    \24\ For example, Section 2(d) provides that most sections of 
the Act do not apply to derivative transactions between ECPs; 
Section 2(g) provides that most sections of the Act do not apply to 
swap transactions between ECPs; and the Part 35 safe harbor for swap 
agreements, which pre-dates the CFMA, provides another basis for 
excluding jurisdiction.
    \25\ NFA is a registered futures association, pursuant to 
Section 17(b) of the Act. It is an industry-wide, self-regulatory 
organization for the U.S. futures industry.
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    Although the CFMA provided some additional clarity for off-exchange 
retail forex transactions, it did not provide the Commission with 
rulemaking authority, and the Commission was thus required to provide 
guidance to allow participants to navigate the statute. For instance, 
Advisory 06-01 made clear that the Commission had jurisdiction over 
retail forex and only certain financial institutions that are 
enumerated in the Act could act as counterparties for retail customers 
in that regard. Similarly, Commission staff issued an Advisory in 2002 
which sets out parameters for unlicensed intermediaries, such as pool 
operators, account managers and introducers, in retail forex 
transactions.\26\ Most recently, in August 2007, Commission staff 
issued an Advisory that addressed the following areas: registration of 
associated persons (``APs'') of FCMs, CPOs and introducing brokers 
(``IBs''); permissible unregistered forex affiliates; segregated funds; 
guaranteed IBs; combined account statements for forex and exchange-
traded futures; and forex trading platforms.\27\
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    \26\ Division of Trading and Markets Advisory Concerning Foreign 
Currency Trading by Retail Customers, available at: http://www.cftc.gov/stellent/groups/public/@cpfraudawarenessandprotection/documents/file/forex_advisoryretailcustomers.pdf (last visited Oct. 
13, 2009).
    \27\ Division of Clearing and Intermediary Oversight Advisory 
Concerning Retail Off-Exchange Foreign Currency Trading, available 
at: http://www.cftc.gov/stellent/groups/public/@cpfraudawarenessandprotection/documents/file/forex_advretailcustomers2007.pdf (last updated August 30, 2007).
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    Following passage of the CFMA, legal challenges to the Commission's 
jurisdiction persisted and certain courts began to analyze the elements 
of a futures contract--the basis of the Commission's jurisdiction over 
off-exchange retail forex transactions--using new criteria. Some firms 
began offering to retail customers transactions that had the elements 
of futures contracts, but that were marketed as ``spot'' transactions. 
However, unlike true spot transactions where delivery is contemplated, 
these transactions were ``rolled over'' at expiration (generally within 
a few days) and carried forward indefinitely. These ``rolling spot'' or 
``look-alike'' contracts were the basis of many forex fraud cases 
brought by the Commission. However, the Commission's ability to pursue 
fraud in this area was put in doubt by the decision of the Seventh 
Circuit in CFTC v. Zelener.\28\ The Zelener case

[[Page 3285]]

introduced a different framework for analyzing what constitutes a 
``spot'' transaction and created confusion about the applicability of 
the CFMA to certain retail forex transactions. This departed from a 
line of previous non-forex cases that distinguished between futures and 
spot or forward contracts based on a multi-factor analysis of the 
economic elements in the contract.\29\
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    \28\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004), reh'g and 
reh'g en banc denied, CFTC v. Zelener, 387 F.3d 624 (7th Cir. 2004). 
The U.S. Court of Appeals for the Sixth Circuit relied on Zelener 
when it issued its opinion in CFTC v. Erskine, 512 F.3d 309 (6th 
Cir. 2008), determining that the foreign currency contracts at issue 
were not futures contracts and upholding the district court's 
summary judgment against the Commission for lack of jurisdiction.
    \29\ See, e.g. CFTC v. Co Petro Mktg. Group, Inc. 680 F.2d 573 
(9th Cir. 1982).
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    The court in Zelener determined that the contracts at issue were 
not off-exchange futures contracts, but rather contracts in the 
commodity itself, and thus excluded from the Commission's jurisdiction. 
The Seventh Circuit declined to rehear the case en banc and a split of 
authority among the circuits was created. Some courts continued to 
follow the traditional multifactor test while others followed the 
Zelener approach and only considered the language within the four 
corners of the contract.\30\
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    \30\ See, e.g., CFTC v. UForex Consulting, LLC, 551 F.Supp.2d 
513 (W.D.La. 2008); CFTC v. Erskine, 512 F. 3d 309 (6th Cir. 2008).
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D. The Commodity Futures Trading Commission Reauthorization Act of 2008

    The CRA \31\ was intended, among other things, to further clarify 
the Commission's jurisdiction in the area of retail forex, particularly 
in light of the proliferation of look-alike forex transactions such as 
those in the Zelener and Erskine cases, and to give the Commission 
additional authority to regulate retail forex transactions and to 
register persons involved in intermediating these products with members 
of the public. To remedy the large number of fraud cases where 
jurisdiction had been questioned, the CRA gave the Commission 
jurisdiction over certain leveraged retail foreign exchange contracts 
without regard to whether it could prove the contracts were off-
exchange futures contracts.\32\ The CRA thus grants the Commission 
anti-fraud authority in leveraged retail forex transactions even if the 
transactions at issue are not futures or options. This allows the 
Commission to protect the public from fraud and provides a workable 
solution to the split in the decisions in the Federal appellate courts 
regarding when a so-called ``spot'' contract is a futures contract.
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    \31\ Food, Conservation, and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1651. 2189-2204 (2008).
    \32\ See, 7 U.S.C. 2(c)(2)(C)(iv).
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    The CRA also created a new category of registrant, the retail 
foreign exchange dealer, or ``RFED,'' and gave the Commission 
rulemaking authority over, and required registration of, intermediaries 
engaging in retail forex.\33\ The CRA provided that RFEDs and these 
other intermediaries must be NFA members and must register with the 
Commission subject to such terms as the Commission may prescribe.\34\ 
Among other requirements, the CRA established a $20 million minimum 
capital requirement for RFEDs and FCMs that offer retail forex.\35\
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    \33\ Previously, firms serving as counterparties to retail forex 
typically registered as FCMs (if they were not included in any of 
the other permissible categories), even though they did not engage 
in exchange-traded futures business, and thus did not meet the 
statutory definition of an FCM.
    \34\ See, 7 U.S.C. (2)(c)(2)(B)(i)(II)(gg). The Commission plans 
on delegating the registration function for RFEDs to NFA, as is the 
case with the registration of FCMs, IBs, CTAs, CPOs and APs.
    \35\ See, 7 U.S.C. (2)(c)(2)(B)(ii).
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    The grant of authority over look-alike forex contracts is very 
broad and is intended to encompass transactions that do not result in 
actual delivery, or for which no legitimate business purpose exists for 
the customer to enter into the transaction. It is not intended to 
interfere with the large, sophisticated interbank market or to place 
additional requirements on businesses with a need to engage in forex 
transactions in connection with their legitimate business activities.
    The CRA further provides that look-alike forex contracts are 
subject to the CFTC's authority if they are offered on a leveraged or 
margined basis, or financed by the offeror, counterparty, or someone 
acting with the offeror or counterparty.\36\ The Commission's 
authority, however, does not extend to securities, or to contracts that 
result in actual delivery within two days or that create an enforceable 
obligation to deliver between buyer and seller that have the ability to 
deliver or accept delivery in connection with their line of 
business.\37\ Thus, the CRA charges the Commission with regulating 
speculative forms of retail forex trading, but excludes from the 
Commission's purview true spot transactions that have a legitimate 
business purpose or that result in actual delivery.
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    \36\ See, 7 U.S.C. 2(c)(2)(C)(i)(I)(bb).
    \37\ See, 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA); H.R. Rep. No. 110-
627, at 979 (2008) (Conf. Rep.).
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    The Commission is proposing these regulations pursuant to separate 
authority provisions of the CRA with respect to the participants in the 
forex market and with respect to the transactions themselves. Off-
exchange forex futures and options transactions are subject to numerous 
provisions of the Act including sections 4(b), 4b, 4c(b), 4o, 6(c) and 
6(d),\38\ 6c, 6d, 8(a), 13(a), 13(b), if they are offered or entered 
into by an FCM, an RFED, or an affiliate of an FCM that is not one of 
the otherwise regulated entities specified in the Act.\39\ The same 
provisions apply to look-alike forex transactions.\40\
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    \38\ Although the Commission had jurisdiction with regard to 
market manipulation in prior versions of the Act, the CRA removed 
that authority with regard to sections 6(c) and 6(d). All other 
cited sections remain in full effect.
    \39\ See, 7 U.S.C. (2)(c)(2)(B)(iii). In addition to the 
sections included in the CFMA for forex futures and options 
transactions, the CRA adds sections 4(b), 4o, 13(a), and 13(b).
    \40\ See, 7 U.S.C. (2)(c)(2)(C)(ii)(II).
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    Notwithstanding the grant of authority with regard to certain 
sections of the Act specified above, the Commission has full rulemaking 
authority over the agreements, contracts or transactions in retail 
forex where ``reasonably necessary to effectuate any of the provisions 
or to accomplish any of the purposes of [the] Act.'' \41\ The 
Commission has full rulemaking authority over the futures and options 
transactions where such transactions are offered or entered into by 
FCMs, their affiliates or RFEDs; \42\ and retains rulemaking authority 
with regard to look-alike transactions only where such transactions are 
offered or entered into by RFEDs.\43\
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    \41\ See, 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v); 
(2)(c)(2)(C)(ii)(III); (2)(c)(2)(C)(iii)(III).
    \42\ See, 7 U.S.C. (2)(c)(2)(B)(v).
    \43\ See, 7 U.S.C. (2)(c)(2)(C)(ii)(III).
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E. The Commission's Proposed Rules

    In proposing the following rules, the Commission has endeavored, 
wherever possible, to apply the principles that have guided it in the 
regulation of on-exchange instruments. Thus, many of the concepts in 
the proposed rules will be familiar to industry participants and 
practitioners. There are, however, essential differences between the 
trading of futures contracts on designated contract markets (``DCMs'') 
that are cleared through Commission registered derivatives clearing 
organizations (``DCOs'') and off-exchange transactions between forex 
firms and retail customers. Many of the statutory and regulatory 
safeguards that are a critical feature of the trading and clearance of 
transactions in futures and options on futures on DCMs and DCOs, 
respectively, simply are not present in off-exchange retail forex 
transactions.
    The Commission's proposed regulations are designed to deal with 
those differences, including the principal-to-principal nature of the 
transactions and the inherent conflicts of interest between the retail 
customer and the marketmaker/counterparty. In

[[Page 3286]]

the nine years since the passage of the CFMA, the Commission has 
observed a number of improper practices that have raised concern, among 
them solicitation fraud, a lack of transparency in the pricing and 
execution of transactions, unresponsiveness to customer complaints, and 
the targeting of unsophisticated, elderly, low net worth and other 
vulnerable individuals.\44\
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    \44\ Between December 2000 and September 2009, the Commission 
has filed 114 forex-related enforcement actions on behalf of more 
than 26,000 customers. Those efforts have thus far resulted in the 
award of approximately $476 million in restitution and disgorgement, 
and $576 million in civil monetary penalties. An overwhelming 
majority of these cases have involved solicitation fraud.
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    In addition to the regulations explicitly mandated by the CRA--
including new registration requirements \45\ and enhanced financial 
requirements--the proposed regulations will require forex registrants 
to maintain records of customer complaints; require forex 
counterparties to guarantee the performance of all persons who 
introduce accounts to the counterparty; require counterparties to 
disclose, with the Risk Disclosure Statement, the percentage of 
profitable nondiscretionary forex customer accounts; and require forex 
counterparties to designate a chief compliance officer to be 
responsible for development and implementation of customer protection 
policies and procedures.
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    \45\ The Commission's proposed regulations include registration 
requirements for all persons engaged in the solicitation or 
acceptance of orders for retail forex transactions involving non-
ECPs, the exercise of discretionary trading authority in such 
transactions, or the operation or solicitation of funds for pooled 
investment vehicles in connection with such transactions. 
Accordingly, the proposed rules include requirements that such 
persons become registered as CTAs, CPOs or IBs, as appropriate. The 
Commission is aware that the statutory definitions of these entities 
do not anticipate persons engaged in off-exchange activities. The 
Commission has determined, however, that pursuant to its plenary 
power to regulate such off-exchange retail forex transactions in 
section 2(c) of the Act, it will entrust such transactions only to 
persons registered as CTAs, CPOs and IBs, inasmuch as these are 
categories of registrants with which the Commission and the public 
are already familiar. This will allow the Commission to regulate 
off-exchange retail forex transactions efficiently and effectively. 
For example, the proposed regulations would make use of the 
established standards for registration and denial of registration 
contained in the Act as well as the Commission's previous 
interpretations of these standards. See 41 FR 44560 at 44561-62 
(Oct. 6, 1976).
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    As noted above, the Commission believes that these additional 
requirements are militated both by the essential differences between 
on-exchange transactions and off-exchange retail forex transactions, 
and the history of fraudulent practices in this sector of the forex 
market.

II. Section-by-Section Analysis

A. Structure and Approach

    The CRA requires the Commission to register and regulate specified 
persons who intermediate off-exchange retail forex transactions. In 
order to comply with this mandate, the Commission must adopt 
regulations providing for the registration of RFEDs and other off-
exchange retail forex intermediaries not excluded from Commission 
jurisdiction, and must specify the financial, operational and other 
requirements applicable to persons so registered. To the extent 
practicable, the Commission has endeavored to assemble the new off-
exchange retail forex provisions in a single new part of the 
Commission's regulations, proposed to be designated part 5.\46\ The 
goal is to provide a single convenient location for regulations 
applicable to off-exchange retail forex transactions and 
intermediaries. Unfortunately, developing a completely self-contained 
part of the Commission's regulations that would contain all of the off-
exchange retail forex regulations is not practicable because it has 
also been necessary to draft amendments to various provisions of 
existing regulations maintained in other parts of 17 CFR Chapter 1. 
Among the reasons for these proposed additional amendments are the 
following: (1) Some regulatory provisions of general application name 
the specific registration categories they affect, and do not presently 
refer to RFEDs; (2) persons registered under certain existing 
registration categories (e.g., FCMs) will be able to engage in off-
exchange retail forex transactions under those existing registrations, 
subject to additional requirements, and restating the requirements 
pertaining to those registration categories in part 5 would be 
unwieldy; \47\ and (3) certain existing regulatory provisions that 
should apply to off-exchange retail forex transactions and to the 
persons engaging in them are worded in terms of on-exchange futures and 
commodity options transactions, and not in a way that would encompass 
off-exchange retail forex transactions.
---------------------------------------------------------------------------

    \46\ Former part 5 (Designation of and Continuing Compliance by 
Contract Markets) was removed and reserved. 66 FR 42256 (Aug. 10, 
2001).
    \47\ For example, essentially replicating the text of part 4 
(which concerns CPOs and CTAs) within the new part 5 in order to 
cover providers of forex trading advice and operators of pooled 
forex trading vehicles would have needlessly increased the volume of 
the Commission's regulations, when a simple incorporation of the 
same requirements by reference accomplishes the same purpose.
---------------------------------------------------------------------------

B. Proposed Amendments to Existing Regulations

    Many of the proposed amendments to regulations outside of proposed 
part 5 amount to merely adding references to off-exchange retail forex 
transactions, off-exchange retail forex customers and/or RFEDs to 
existing regulations.\48\ Accordingly, those proposed amendments will 
not be separately discussed. Other proposed amendments, however, 
involve a substantive change to the existing regulation because the 
existing regulation must operate differently in the context of off-
exchange retail forex trading.\49\ These substantive changes are 
discussed below.
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    \48\ See, proposed amendments to Regulations 1.4, 1.35, 1.36, 
1.37, 1.40, 1.52, 1.65, 3.1, 3.4, 3.10, 3.12, 3.21, 3.30, 3.31, 
3.33, 3.44, 3.45, 3.50, 3.60, 4.23, 4.25, 4.30, 4.33, 10.1, 160.1, 
160.3, 160.4, 160.30 and 166.2.
    \49\ See, proposed amendments to Regulations 1.1, 1.3, 1.10, 
1.46, 3.1, 4.7, 4.12, 4.13, 4.14, 4.24, 4.34 and 166.5. In several 
instances, staff took the opportunity of this review and proposed 
rulemaking to propose deletion of obsolete material that either 
refers to already deleted regulatory provisions or has become 
outdated due to the passage of time. See proposed amendments to 
Regulations 1.52, 3.12, 3.31 and 160.18.
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1. Part 1 of the Commission's Regulations--General Regulations
    a. Regulation 1.1--Fraud in or in connection with transactions in 
foreign currency subject to the Commodity Exchange Act.
    This existing provision is specific to off-exchange retail forex 
transactions. Consistent with the concept of a self-contained off-
exchange retail forex part of the regulations, existing Regulation 1.1 
is proposed to be deleted and its content to be incorporated into 
Regulation 5.2 of proposed part 5.
    b. Regulation 1.3--Definitions.
    The definition of ``guarantee agreement'' is proposed to be amended 
to take account of IBs who may be guaranteed by RFEDs.\50\ The 
definition of ``commodity interest'' is proposed to be amended to 
include off-exchange retail forex transactions over which the 
Commission has jurisdiction by virtue of the CRA.\51\ Including off-
exchange retail forex transactions within the ``commodity interest'' 
definition permits a wide range of provisions, especially within part 4 
of the Commission's regulations, to apply to such transactions without 
the need to separately revise each provision to expressly address off-
exchange retail forex, as well as futures contracts and commodity 
options.\52\
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    \50\ Regulation 1.3(nn).
    \51\ Regulation 1.3(yy).
    \52\ See, e.g., Regulation 4.6 as well as various provisions of 
Regulations 4.22 (reporting to pool participants), 4.23 and 4.33 
(recordkeeping), and 4.24 and 4.34 (required disclosures).

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[[Page 3287]]

    c. Regulation 1.10--Financial reports of futures commission 
merchants and introducing brokers.
    Proposed new provisions would require all IBs and all applicants 
for registration as IBs in connection with retail off-exchange forex 
transactions to enter into a guarantee agreement with an RFED or an 
FCM.\53\ To date, those persons who have introduced off-exchange retail 
forex customers to counterparties have not been required to register as 
IBs, and fraudulent solicitation and sales practices have been 
commonplace. See supra note 46. The Commission believes that by 
requiring guarantee agreements between all off-exchange retail forex 
IBs and the FCM/RFED counterparties to which they introduce off-
exchange retail forex customers, the counterparties will be forced to 
more carefully vet the persons who solicit business on their behalf and 
the practices those persons employ.
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    \53\ Regulations 1.10(a)(4), 1.10(j)(3), 1.10(j)(9)(i)(A)(2) and 
1.10(j)(9)(i)(B)(2). See also, Proposed Regulation 5.18(h).
---------------------------------------------------------------------------

    The Commission will be preparing a new Part C guarantee agreement 
to the Form 1-FR-IB, modeled on the guarantee agreement existing in 
Part B of Form 1-FR-IB, that will provide that FCMs and RFEDs that 
guarantee performance by an introducing broker that introduces off-
exchange retail forex transactions will be jointly and severally liable 
for all obligations of the introducing broker under the Act and 
Commission regulations with respect to the solicitation of, and 
transactions involving, all retail forex customer accounts of the 
introducing broker entered into on or after the effective date of the 
guarantee agreement. The Commission believes that the guarantee 
requirement serves the public's interest in a marketplace where 
improper practices by IBs are discouraged while still permitting FCMs 
and RFEDs to make use of outside salespeople. An IB that is guaranteed 
by an FCM or RFED will not be subject to the minimum capital 
requirements set forth in Regulation 1.17(a)(1)(iii).
    d. Regulation 1.46--Application and closing out of offsetting long 
and short positions.
    Like FCMs engaging in on-exchange futures and option transactions 
under the existing regulation, RFEDs and FCMs engaging in off-exchange 
retail forex transactions would be required to close out offsetting 
long and short positions in an off-exchange retail forex customer's 
account. But unlike existing Regulation 1.46, the requirement on RFEDs 
and FCMs engaging in off-exchange retail forex transactions to close 
out offsetting positions would apply regardless of whether the off-
exchange retail forex customer has instructed otherwise.\54\ Also, 
unlike the existing provision for transactions in on-exchange futures 
and option contracts, no exception is proposed for omnibus accounts 
because they are not used in off-exchange retail forex trading. An RFED 
or FCM could, if permitted by the rules of a self-regulatory 
organization (``SRO'') of which the RFED or FCM is a member, offset at 
the retail forex customer's request off-exchange retail forex 
transactions of the same size, if the retail forex customer holds other 
transactions of a different size, but the RFED or FCM would be required 
to offset a transaction against the oldest transaction of the same 
size.\55\
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    \54\ NFA's experience supports the conclusion that keeping open 
long and short positions in a retail forex customer's account 
removes the opportunity for the customer to profit on the 
transactions, increases the fees paid by the customer and invites 
abuse.
    \55\ Regulation 1.46(a)(2).
---------------------------------------------------------------------------

2. Part 4 of the Commission's Regulations--CPOs and CTAs
    a. Regulation 4.7--Exemption from certain part 4 requirements for 
commodity pool operators with respect to offerings to qualified 
eligible persons and for commodity trading advisors with respect to 
advising qualified eligible persons.
    As proposed, in determining whether a person is a ``qualified 
eligible person'' (``QEP'') the NFA-specified minimum security deposit 
for off-exchange retail forex transactions would be included in the 
calculation of the portfolio requirement.\56\ Such amounts are roughly 
equivalent to exchange-specified initial margin and option premium. In 
addition, in order to treat RFEDs and FCMs comparably, RFEDs would be 
included among the persons that do not have to meet the portfolio 
requirement to be QEPs.\57\
---------------------------------------------------------------------------

    \56\ Regulation 4.7(a)(1)(v)(B).
    \57\ Regulation 4.7(a)(2)(i)(B).
---------------------------------------------------------------------------

    b. Regulation 4.12--Exemption from provisions of part 4.
    As proposed, the NFA-specified minimum security deposit for off-
exchange retail forex transactions would be included among the amounts 
that cannot exceed 10 percent of the fair market value of a pool's 
assets in order for the operator to claim exemption under Regulation 
4.12(b). Again, such amounts are roughly equivalent to on-exchange 
initial margin and option premiums.\58\
---------------------------------------------------------------------------

    \58\ Regulation 4.12(b)(i)(C).
---------------------------------------------------------------------------

    c. Regulation 4.13--Exemption from registration as a commodity pool 
operator.
    As proposed, the NFA-specified minimum security deposit for off-
exchange retail forex transactions would be included among the amounts 
that cannot exceed 5 percent of the liquidation value of the pool's 
portfolio in order for the operator to claim exemption from 
registration under Regulation 4.13(a)(3). Again, such amounts are 
roughly equivalent to initial margin and option premiums.\59\
---------------------------------------------------------------------------

    \59\ Regulation 4.13(a)(3)(ii).
---------------------------------------------------------------------------

    d. Regulation 4.14--Exemption from registration as a commodity 
trading advisor.
    As proposed, an RFED that provided trading advice solely in 
connection with its business as an RFED would be exempt from 
registration as a CTA. This is consistent with treating FCMs and RFEDs 
comparably, where appropriate.\60\
---------------------------------------------------------------------------

    \60\ Regulation 4.14(a)(7)(ii). As noted in the Conference 
Report that accompanied the CRA, ``To the extent their risk profiles 
are similar, the managers intend for FCMs and RFEDs to be regulated 
substantially equivalently in terms of their off-exchange retail 
foreign currency business.'' H.R. Rep. No. 110-627, at 980 (2008) 
(Conf. Rep.). The Conference Report is available via the Internet on 
the CFTC's website.
---------------------------------------------------------------------------

    e. Regulations 4.24 and 4.34--General disclosures required for CPO 
and CTA Disclosure Documents.
    As proposed, the prescribed risk disclosure language for the front 
of the Disclosure Document would be required to include language 
warning that off-exchange retail forex transactions may not be given 
the same preferential treatment as commodity customer claims under the 
Bankruptcy Code.\61\ This warning is necessary because definitions for 
such terms as ``commodity contract,'' ``customer'' and ``customer 
property'' in Subchapter IV of Chapter 7 of the Bankruptcy Code do not 
include or refer to off-exchange transactions, generally, or to off-
exchange retail forex transactions or customers engaged in such 
transaction, specifically.\62\
---------------------------------------------------------------------------

    \61\ Regulations 4.24(b) and 4.34(b).
    \62\ 11 U.S.C. 761 et seq.
---------------------------------------------------------------------------

3. Part 166 of the Commission's Regulations--Customer Protection Rules
    a. Section 166.5--Dispute settlement procedures.
    As proposed, the section of the Commission's customer protection 
regulations dealing with dispute settlement procedures would be amended 
to expressly apply where a claim or grievance arises out of a retail 
forex transaction and the defined term customer would be amended to 
include

[[Page 3288]]

a retail forex customer.\63\ The existing text could be read to exclude 
customer claims arising out of retail forex transactions from coverage 
under Regulation 166.5.
---------------------------------------------------------------------------

    \63\ Regulations 166.5(a)(1) and (a)(2).
---------------------------------------------------------------------------

C. New Part 5

    As noted earlier, the proposed new part 5 to the Commission's 
regulations is intended to permit, as much as possible, reference to a 
single portion of the regulations for matters concerning off-exchange 
retail forex. Although it has been necessary to make changes to 
provisions elsewhere in the regulations, the Commission believes that 
in most cases, initial reference to part 5 should be sufficient to 
resolve questions (or to direct the reader by cross-reference to the 
appropriate provision elsewhere).
1. Proposed Regulation 5.1--Definitions
    Proposed part 5 begins with a set of definitions of terms specific 
to off-exchange retail forex and to the regulatory requirements that 
apply to off-exchange retail forex. ``Retail forex transaction'' is 
defined by reference to the description in sections 2(c)(2)(B) and 
2(c)(2)(C) of the Act. The proposed definition expressly excludes 
futures and commodity option contracts traded on a designated contract 
market or derivatives transaction execution facility.\64\ ``Retail 
foreign exchange dealer'' is defined as anyone who offers to be or who 
is a counterparty to a retail forex transaction, except for those 
persons excluded from the definition by the CRA.\65\ In order to apply 
the IB, CPO, CTA and AP registration and other requirements to 
analogous retail forex market participants, notwithstanding that 
statutory and regulatory definitions of the identifying terms do not 
necessarily comprehend involvement in retail forex trading, the terms 
are separately defined for the purposes of part 5.\66\ ``Affiliated 
person of a futures commission merchant'' (a term not previously 
defined in the Commission's regulations) and an AP of such a person are 
defined by reference to section 2(c)(2)(B)(i)(II)(cc)(BB) of the 
Act.\67\ ``Primarily or substantially'' is defined for use in 
determining whether a registered FCM is primarily or substantially 
engaged in FCM activities, such that it need not also register as an 
RFED in order to conduct retail forex business.\68\ Certain terms used 
in determining the financial and reporting requirements applicable to 
persons engaged in retail forex business are also defined in Regulation 
5.1 to clarify their use elsewhere in part 5.\69\
---------------------------------------------------------------------------

    \64\ See, proposed Regulation 5.1(m).
    \65\ See, proposed Regulation 5.1(h).
    \66\ See, proposed Regulations 5.1(d), (e) and (f).
    \67\ See, proposed Regulations 5.1(a) and (c).
    \68\ See, proposed Regulation 5.1(g)
    \69\ See, proposed Regulations 5.1(b), (i), (j), (k) and (l).
---------------------------------------------------------------------------

2. Proposed Regulation 5.2--Prohibited Transactions: Antifraud
    As noted above, under the proposal, existing Regulation 1.1 
prohibiting fraud in connection with foreign currency transactions 
would be removed and replaced with new Regulation 5.2, which, in 
addition to prohibiting fraudulent conduct in connection with retail 
forex transactions, now prohibits anyone from acting as the 
counterparty for a retail forex transaction in an account for which 
that person has discretionary trading authority.
3. Proposed Regulation 5.3--Registration
    The CRA amends the Act to require that certain intermediaries for 
forex futures and options and for look-alike contracts (i.e., those at 
issue in Zelener) register in such capacity as the Commission shall 
determine and become members of a registered futures association.\70\ 
The Commission has determined that the appropriate registration 
categories for those intermediaries are as follows. Persons who solicit 
or accept orders for an RFED, an FCM, or an affiliate of an FCM should 
be registered as IBs. Persons who exercise discretionary trading 
authority over accounts should be registered as CTAs. Persons who 
operate or solicit funds or property for a pooled investment vehicle 
should be registered as CPOs. Finally, associated persons of the 
foregoing should be registered as APs. The proposed regulations include 
provisions to implement this part of the CRA.
---------------------------------------------------------------------------

    \70\ See, 7 U.S.C. 2(c)(2)(B)(iv) and 2(c)(2)(C)(iii).
---------------------------------------------------------------------------

    Prior to the passage of the CRA, many entities registered as FCMs 
solely to engage in retail forex transactions. The CRA provides that 
registered FCMs who currently trade retail forex may continue to do so 
as FCMs, or may be required to register as RFEDs, depending on their 
circumstances. A traditional FCM that is primarily or substantially 
engaged in exchange-traded futures business may continue to engage in 
retail forex as an FCM, and need not register as an RFED.\71\ Currently 
registered FCMs who solely trade in retail forex, or FCMs who are not 
primarily or substantially dealing in exchange-traded futures, will be 
required to register as RFEDs. Because there will be two categories of 
registrants competing for these customers, the stated Congressional 
intent is that an entity should not be advantaged or disadvantaged as a 
result of registering as an RFED instead of an FCM.\72\ The Commission 
has therefore endeavored to draft regulations that provide equivalent 
treatment of FCMs and RFEDs wherever possible.
---------------------------------------------------------------------------

    \71\ The Commission is directed to determine, through notice and 
comment rulemaking such as this, what ``primarily or substantially'' 
means in this context. H.R. Rep. No. 110-627, at 980 (2008) (Conf. 
Rep.); see also, Proposed Regulation 5.1(g).
    \72\ See, H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.).
---------------------------------------------------------------------------

    The enactment of the CFMA permitted registered FCMs and certain of 
their unregistered affiliates to act as counterparties to retail forex 
transactions, but it did not specifically require that intermediaries 
such as introducing brokers, account managers or pool operators be 
registered in order to engage in forex transactions with retail 
participants. This created problems when unregistered entities began 
soliciting retail customers. The lack of vetting by a regulatory agency 
or an SRO created a situation where members of the general public were 
being solicited by entities and persons regarding whom they were unable 
to obtain any background information. In some cases, persons banned 
from registering in the futures industry as a result of past misconduct 
were operating as unregistered intermediaries in retail forex 
transactions because of the lack of minimum requirements to operate in 
the forex business. Pursuant to the CRA, certain affiliates of FCMs may 
continue to be proper forex counterparties if the affiliated FCM makes 
and keeps the risk assessment records required in Section 4f(c)(2)(B) 
of the Act and the affiliate has at least $20 million in adjusted net 
capital.\73\ However, under the proposed regulations, the affiliates 
will have to register in the appropriate capacity in order to serve as 
a counterparty.
---------------------------------------------------------------------------

    \73\ See, 7 U.S.C. 2(c)(2)(B)(i)(II)(cc)(BB).
---------------------------------------------------------------------------

    Proposed Regulation 5.3 imposes the registration requirements 
called for by the CRA upon specified categories of persons 
intermediating retail forex transactions. RFEDs are required to 
register as such.\74\ FCMs not ``primarily or substantially'' engaged 
in FCM business are required to register as RFEDs,\75\ and FCM-
affiliated persons that serve as retail forex counterparties are also 
required to register as RFEDs.\76\ Persons introducing forex accounts 
are required to register as IBs.\77\ Operators

[[Page 3289]]

of pooled investment vehicles that engage in retail forex transactions 
are required to register as CPOs, and persons providing forex trading 
advice are required to register as CTAs.\78\ Finally, associated 
persons of all of the foregoing are required to register as APs.
---------------------------------------------------------------------------

    \74\ See, proposed Regulation 5.3(a)(6).
    \75\ See, proposed Regulation 5.3(a)(4).
    \76\ See, proposed Regulation 5.3(a)(1).
    \77\ See, proposed Regulation 5.3(a)(5).
    \78\ See, proposed Regulations 5.3(a)(2) and 5.3(a)(3).
---------------------------------------------------------------------------

    The CRA's registration requirements do not apply to certain 
otherwise regulated entities (e.g., broker-dealers), their associated 
persons, or persons who would be exempt from registration if they were 
engaging in such transactions on or subject to the rules of a contract 
market with regard to forex futures or options \79\ or look-alike 
contracts.\80\ This is consistent with the original intent of the 
Treasury Amendment that entities engaging in forex transactions should 
not be subject to regulation by multiple regulators concerning the same 
activity. Proposed Regulation 5.3 excludes from the registration 
requirement the persons specified in the CRA.
---------------------------------------------------------------------------

    \79\ See, 7 U.S.C. 2(c)(2)(B)(iv)(II).
    \80\ See, 7 U.S.C. 2(c)(2)(C)(iii)(II).
---------------------------------------------------------------------------

4. Proposed Regulation 5.4--Operative Requirements for CPOs and CTAs
    Proposed Regulation 5.4 applies all of the disclosure, 
recordkeeping, reporting and other existing requirements currently 
applicable to CPOs and CTAs in the context of on-exchange futures and 
commodity option contracts to persons defined as, and required to 
register as, CPOs and CTAs because those persons operate pooled 
investment vehicles that engage in retail forex transactions or because 
they provide retail forex trading advice.
5. Proposed Regulation 5.5--Risk Disclosure by FCMs, RFEDs and IBs
    Proposed Regulation 5.5 requires RFEDs, FCMs and IBs to provide 
retail forex customers with a risk disclosure statement similar to that 
currently required by Regulation 1.55, but tailored to address the 
risks, conflicts of interest and unique characteristics of retail forex 
trading. For example, the required risk disclosure statement would also 
be required to disclose the number of non-discretionary retail forex 
accounts maintained by an RFED or FCM, the percentage of such accounts 
that were profitable for each of the four most recent quarters, and a 
statement that past performance is not necessarily indicative of future 
results.\81\
---------------------------------------------------------------------------

    \81\ See, proposed Regulation 5.5(e).
---------------------------------------------------------------------------

    Under Section 2(c) of the Act, the Commission's jurisdiction with 
regard to off-exchange forex transactions extends to transactions 
involving entities that are not eligible contract participants as 
defined in Section 1a of the Act (i.e., retail customers). These 
transactions serve no broad price discovery function, and the 
Commission believes both that the vast majority of retail customers who 
enter these transactions do so solely for speculative purposes, and 
that relatively few of these participants trade profitably. Whether or 
not this is actually the case, the Commission believes that disclosure 
of the percentage of profitable accounts maintained by RFEDs and FCMs 
engaging in off-exchange retail forex will provide the retail customer 
with vital information when deciding whether or not to engage in such 
transactions.
6. Proposed Regulations 5.6 and 5.7--Minimum Financial Requirements
    Under proposed Regulation 5.7, RFEDs and FCMs engaging in retail 
forex trading are required to meet the minimum net capital requirements 
prescribed in the CRA.\82\ Proposed Regulation 5.6 sets forth the 
``early warning'' notification requirements pursuant to which RFEDs and 
FCMs engaging in retail forex trading are required to notify SROs and 
the Commission if an RFED or an FCM engaging in retail forex trading 
has experienced declines in capital, has discovered a material 
inadequacy in internal controls or has become undercapitalized.\83\ 
Because there is no equivalent to the futures regime of strict 
segregation of customer funds in off-exchange retail foreign currency 
dealing, the notice requirement for RFEDs with respect to 
undersegregation is not included in the proposed regulation. However, a 
requirement has been proposed that an RFED or FCM engaging in off-
exchange retail forex transactions give notice if it is holding liquid 
assets less than the aggregate retail forex obligation (as defined). 
The aggregate retail forex obligation is proposed to be the net 
obligation to all off-exchange retail foreign currency customers at all 
times (excluding deficit accounts).
---------------------------------------------------------------------------

    \82\ Analogous to Regulation 1.17 for FCMs trading only futures 
and commodity options.
    \83\ The proposed requirement is analogous to existing 
Regulation 1.12 for FCMs that trade only on-exchange futures and 
commodity option contracts.
---------------------------------------------------------------------------

    The minimum net capital regulation for RFEDs and FCMs offering off-
exchange retail forex is proposed based on the significantly higher 
minimum net capital level for RFEDs and FCMs offering retail forex 
established in the CRA. The Commission believes that the higher level 
of $20 million reflects Congressional intent to ensure that 
substantially undercapitalized ``shell'' FCM off-exchange retail forex 
dealers and their affiliates, from whom it may be impossible to recover 
funds in the event of customer claims, do not engage in off-exchange 
retail forex activity. The existing regulation for the calculation of 
FCM net capital has been proposed for the calculation of net capital 
for RFEDs and FCMs offering off-exchange retail forex, with the intent 
that an FCM offering retail forex should only have one calculation of 
its adjusted net capital. However, the CRA's higher dollar threshold of 
minimum capital required, $20 million, will apply, as well as an 
additional early warning requirement of 110%, resulting in a notice 
reporting net capital level of $22 million. The proposed early warning 
level of 110% is lower than the FCM early warning level of 150% due to 
the substantially higher minimum dollar threshold established in the 
CRA, which results in an adequate minimum early warning ``buffer'' of 
no less than $2 million.
    An amount of minimum net capital in addition to the minimum $20 
million is proposed to the extent that an FCM or RFED has a total 
retail forex obligation in excess of $10,000,000. After that threshold, 
as proposed the FCM or RFED must have net capital of no less than 
$20,000,000 plus five percent of the total retail forex obligation in 
excess of $10,000,000. This proposal is intended to address concerns 
that, although the capital level contained in the CRA is believed to be 
high at $20,000,000, at particularly high levels of retail customer 
obligations there should be commensurate increases in an entity's 
minimum required net capital. The NFA has enacted a similar requirement 
applicable to all its forex dealer members except those that only 
provide ``straight through processing.'' The Commission's proposal has 
no exceptions for FCMs engaging in off-exchange retail forex or for 
RFEDs.
    Under the existing net capital regulation for FCMs contained in 
Commission Regulation 1.17, an FCM that becomes undercapitalized must 
immediately cease business and transfer its customers' positions to 
another FCM, unless the Commission believes that it will be able to 
quickly remedy the situation, in which case the Commission may provide 
up to an additional 10 business days to return to compliance before 
ceasing business. Because the retail forex contracts at issue are not 
exchange-traded, and therefore, positions are not fungible among retail 
forex FCMs and RFEDs, should an RFED become undercapitalized, the

[[Page 3290]]

Commission proposes that it either liquidate or transfer all off-
exchange retail forex accounts (with a transfer envisioned as a full 
novation of the retail forex contracts for such accounts by assignment 
and assumption of the contracts by another RFED or FCM) under the 
direction and supervision of the Commission or the entity's designated 
self-regulatory organization (``DSRO''). The same 10 business day 
period has been proposed for the Commission or DSRO to delay such 
liquidation or transfer if determined appropriate. The proposal 
requires the refund or transfer of all funds associated with off-
exchange retail forex accounts contemporaneous with the liquidation or 
transfer. The possibility of an entity needing to refund all customers' 
accounts and liquidate all positions in such circumstances makes it 
necessary to include a proposal to require such entity to maintain 
liquid assets available equal to the amount owed to off-exchange retail 
forex customers.
    Although not permissible to be counted as a liquid asset for 
fulfilling the requirement of Regulation 5.8, under the proposed net 
capital regulation, the unsecured receivable resulting from an RFED or 
FCM offsetting currency exposure with one of several enumerated parties 
(regulated financial intermediaries or foreign equivalents approved by 
NFA) will be treated as a current asset. The Commission proposes this, 
with the counterparty limitation, to balance an RFED's or FCM's need to 
hedge its net position from offering off-exchange retail forex with the 
concern that such receivables are collectible for net capital purposes. 
Without this proposed addition to the net capital calculation, RFEDs 
and FCMs would have to take a 100% capital charge for such unrealized 
gains. The Commission understands that NFA, under subparagraph (c) of 
its Section 11 Financial Requirements for Forex Dealer Members, has 
been permitting existing forex dealer members to not take such a charge 
to the extent the counterparty has been considered regulated and 
approved by NFA, and is not an affiliate of the Forex Dealer Member. 
Thus, the Commission proposes that a DSRO be afforded the continuing 
ability to assess the appropriateness of counterparties for this 
purpose going forward, while making explicit the ability of an entity 
to cover the net exposure without the burden of a 100% net capital 
charge being applied. Also, the existing net capital charge with 
respect to options has been applied to off-exchange retail forex 
transactions that are options. This net capital charge, with respect to 
the existing net capital regulation for FCMs, is derived from the SEC's 
net capital charges for options that are not options on futures. 
Because these retail forex transactions are, by nature, off-exchange 
transactions, the resulting charge under the SEC rule would be the 
charge for ``unlisted'' options. This charge is based on the notional 
transactional size of the option which may result in a very significant 
capital implication for retail forex transactions which are options. 
However, this result is consistent with the existing requirements for 
all off-exchange or unlisted foreign exchange options for existing FCMs 
and broker-dealers.
7. Proposed Regulation 5.8--Aggregate Retail Forex Assets
    Proposed Regulation 5.8 requires RFEDs and FCMs engaging in retail 
forex transactions to compute the net credit balance resulting from 
combining all money, securities and property deposited by retail forex 
customers into their accounts, adjusted for realized and unrealized net 
profit or loss, and not including any accounts that contain net 
liquidating balances (the ``retail forex obligation'' of the RFED or 
FCM).\84\ Under proposed Regulation 5.8(a) each RFED or FCM engaging in 
retail forex transactions is required to hold assets of the type 
permitted under Regulation 1.25 equal to the retail forex obligation. 
Such assets would have to be maintained at one or more qualifying 
institutions in the U.S., or in money center countries (as defined in 
Regulation 1.49) where such countries have agreements acceptable to NFA 
that authorize sharing account information with NFA.
---------------------------------------------------------------------------

    \84\ Defined in proposed Regulation 5.1(l).
---------------------------------------------------------------------------

    The requirement to hold assets equal to the retail forex obligation 
is separate from the adjusted net capital requirement. In computing 
their adjusted net capital, pursuant to proposed Regulation 5.8(d), 
RFEDs and FCMs could not include assets held for purposes of complying 
with proposed Regulation 5.8(a) as current assets, or otherwise 
recording any property received from retail forex customers as an asset 
without recording a corresponding liability to such customers.
    The requirement to maintain assets equal to or in excess of the 
retail forex obligation is intended to provide some degree of 
protection for customers in the absence of the protections afforded by 
the segregation of customer funds that is required in the context of 
futures and commodity options trading.\85\ The Commission recognizes 
that the retail forex obligation is not an equivalent substitute for 
the segregated funds regime, which cannot be replicated in the context 
of off-exchange retail forex trading. Unlike segregation of customer 
funds deposited for futures trading, such amounts would not be provided 
any preferential treatment to unsecured creditors in a bankruptcy, and 
would not be held in separately titled accounts under the CEA. Because 
of the lack of bankruptcy preference with respect to the funds of 
retail forex customers held at FCMs or RFEDs, the Commission does not 
intend to propose a separation of funds requirement which may be 
misconstrued as being similar to the protections that are afforded to 
customers engaged in exchange-traded futures and options. As previously 
discussed, Regulation 5.8 has been proposed to ensure that RFEDs and 
FCMs hold liquid assets in appropriate jurisdictions should they be 
required to be refunded to customers or seized to compensate customers. 
NFA first established under Section 14 of its Financial Requirements 
its version of this requirement, due to its difficulty in ultimately 
obtaining any funds for restitution with respect to failures of forex 
dealers and cases of fraud. The proposal follows the NFA's rule in this 
regard while further requiring that the types of assets held to meet 
the requirement must also be of the kind and character permitted for 
the investments of futures customer funds under existing Commission 
Regulation 1.25. These types of assets are limited to generally liquid 
financial instruments, which the Commission believes to be an 
appropriate limitation, should it become necessary to liquidate retail 
forex accounts, transfer funds, or seize or freeze funds in the event 
of fraud.
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    \85\ The retail forex obligation is also a factor in one of the 
options for computation of the RFED's or FCM's net capital 
requirement. See, proposed Regulation 5.7(a)(1)(i)(B).
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8. Proposed Regulation 5.9--Security Deposits for Retail Forex 
Transactions
    Proposed Regulation 5.9(a) would require each RFED and each FCM 
that engages in retail forex transactions, in advance of any such 
transaction, to collect from the retail forex customer a security 
deposit (in cash or in financial instruments that meet the requirements 
of Regulation 1.25) equal to ten percent of the notional value of the 
retail forex transaction, ten percent of the notional value of short 
retail forex options in addition to the premium received, or the full 
premium received for long options,

[[Page 3291]]

as the case may be. Pursuant to proposed Regulation 5.9(b), the RFED or 
FCM would be required to collect additional security deposit or to 
liquidate the retail forex customer's position if the amount of 
security deposit collected fails to meet the requirements of paragraph 
(a).
    The extreme volatility of the foreign currency markets exposes 
retail forex customers to substantial risk. Forex dealers currently 
extend leverage to their customers at ratios of between 25:1 to 400:1 
or higher, which allows customers to control contracts worth 
significantly more than their cash investment. Given these high 
leverage ratios, even minor fluctuations in currency rates can 
exponentially increase a customer's losses and gains. Even a small move 
against a customer's position can result in a significant loss. Under 
current practices, customer positions are usually closed out once the 
losses in an account exceed the initial investment. However, if, for 
any reason, the positions are not closed out at a zero balance, the 
customer could be liable for additional losses.
    Customers also face counterparty risk, as there is no central 
counterparty for forex transactions. Customers may not know that 
customer funds held by a forex counterparty do not receive the 
bankruptcy protections applicable to funds held by an FCM engaged in 
on-exchange trading on the customers behalf.\86\ Given the risks that 
inhere in the trading of off-exchange forex contracts by retail 
customers, the only funds that should be invested in the off-exchange 
retail forex market are those that the investor can afford to lose. The 
Commission's proposed regulation regarding security deposits is 
intended both to mitigate the risk to which customers are exposed and 
to provide some capital to cover customer funds held by a failing firm 
(albeit without the bankruptcy preference applicable to funds held in 
segregation for exchange-traded contracts). In determining the 
appropriate leverage or security deposit level to propose, the 
Commission considered current industry practices, as well as NFA's 
current leverage restrictions of 100 to 1 on major currencies and 25 to 
1 on non-major currencies, and the proposal by the Financial Industry 
Regulatory Authority (``FINRA'') to limit the maximum leverage on 
certain retail forex transactions offered by broker-dealers to 4 to 
1.\87\
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    \86\ As discussed above, an FCM holding customer funds for 
trading on-exchange futures contracts is required to have, at all 
times, in its possession and control, segregated property sufficient 
to pay all customers with credit balances, without deduction for 
customer debit balances (which must be made up from the FCM's own 
capital). In an FCM bankruptcy, customers share the segregated 
property pro rata in proportion to their claims, without any support 
from a compensation fund. See, generally, Part 190 of the 
Commission's Regulations, 17 CFR Part 190 (2009).
    \87\ NFA leverage rules are set forth in Section 12, ``Security 
Deposits for Forex Transactions with FDMs'', of the NFA rules. On 
June 4, 2009, FINRA submitted to the U.S. Securities and Exchange 
Commission a proposed rule change to adopt FINRA Rule 2380 to limit 
the leverage ratio offered by broker-dealers for certain forex 
transactions to be a maximum of 1.5:1. 74 FR 32022 (July 6, 2009). 
FINRA subsequently adopted 2 amendments to this proposal, the second 
of which revised the maximum leverage ratio from 1.5:1 to 4:1. See 
SR-FINRA-2009-40 available on FINRA's website at http://www.finra.org/Industry/Regulation/RuleFilings/2009/P118864.
---------------------------------------------------------------------------

9. Proposed Regulations 5.10 and 5.11--Risk Assessment
    Proposed Regulation 5.10 imposes risk assessment recordkeeping 
requirements, and Regulation 5.11 establishes risk assessment reporting 
requirements, for RFEDs. These sections are patterned on the 
corresponding existing requirements for FCMs in existing Regulations 
1.14 and 1.15, because the same rationale behind risk assessment 
procedures for FCMs applies equally to RFEDs.
10. Proposed Regulation 5.12--Financial Reporting to Regulators
    Proposed Regulation 5.12 requires applicants for registration as 
RFEDs to submit their applications for registration with a Form 1-FR-
FCM, the same financial reporting form that FCMs are required to file, 
certified by an independent public accountant.\88\ Registered RFEDs 
would be required to file Form 1-FR-FCM monthly and annually. In 
addition, RFEDs, like FCMs, when notified in writing by NFA or the 
Commission, would have to file Form 1-FR-FCM or such other financial 
information as NFA or the Commission may request at such other times as 
may be specified in the notice.\89\ The proposed regulation for RFED 
financial reporting is intended to require the substantial equivalent 
of independent IB and FCM financial reporting to the Commission and 
DSROs, with certified financial reports required from independent 
auditors qualified under existing Commission Regulation 1.16 and 
similar reports on material inadequacies by such auditors. The existing 
reporting requirements as separately proposed to be amended for FCMs, 
including methods of receiving reports, determining fiscal year ends 
and permitting extensions of time to file, have been proposed for 
RFEDs.
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    \88\ See, Regulation 1.10.
    \89\ See, Regulation 1.10(b)(4).
---------------------------------------------------------------------------

11. Proposed Regulation 5.13--Reporting to Customers
    RFEDs and FCMs engaging in retail forex transactions are required 
by proposed Regulation 5.13 to furnish each retail forex customer with 
monthly statements and confirmation statements in a manner comparable 
to that required of FCMs under Regulation 1.33. The Commission believes 
that proposed Regulation 5.13 has been drafted in such a manner as to 
make the required statements meaningful and useful to customers in 
light of the distinctive characteristics of retail forex transactions 
relative to exchange-traded futures and commodity option transactions. 
FCMs could combine their forex monthly and/or confirmation statements 
with statements they may otherwise be required by Regulation 1.33 to 
furnish, so long as the futures and commodity options information and 
the retail forex information are each properly identified as such. The 
proposed section also provides that the required statements can be 
furnished electronically with the customer's (revocable) consent, and 
RFEDs are required to keep copies of monthly and confirmation 
statements in accordance with the requirements of Regulation 1.31.
12. Proposed Regulation 5.14--Financial Recordkeeping
    Proposed Regulation 5.14(a) requires RFEDs to keep the same ledgers 
or similar records as FCMs are required to keep under Regulation 1.18, 
showing transactions affecting assets, liabilities, income, expense and 
capital accounts, classified in the manner set forth in Form 1-FR-FCM, 
or in categories consistent with generally accepted accounting 
principles. Proposed Regulation 5.14(b) requires recordkeeping 
regarding net capital computations, comparable to existing Regulation 
1.18(b) for FCMs.
13. Proposed Regulations 5.15 and 5.16--Unlawful Representations and 
Prohibitions of Guarantees Against Loss
    As with CPOs and CTAs dealing only in futures and commodity 
options, RFEDs, FCMs, IBs, CPOs and CTAs subject to Part 5, as well as 
their principals and those who solicit for them, are prohibited by 
proposed Regulation 5.15 from representing that the Commission or the 
Federal government has sponsored, recommended or approved them in any

[[Page 3292]]

way.\90\ RFEDs, FCMs and IBs are prohibited under proposed Regulation 
5.16 from guaranteeing against or limiting customer losses, from 
failing to collect margin or security deposits, or from representing 
that they will do any of those things.\91\ This prohibition does not 
prevent an RFED, FCM or IB from sharing in a loss resulting from error 
or mishandling of an order, and guarantees entered into prior to 
effectiveness of the prohibition will only be affected if an attempt is 
made to extend, modify or renew them.
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    \90\ Similar prohibitions already apply to CPOs and CTAs 
(section 4o(b) of the Act) and to leverage transaction merchants 
(Regulation 31.19). See also NFA Compliance Rule 2-22 which speaks 
to all NFA members. The Commission believes that a broad statement 
of the prohibition is appropriate here to ensure that customers do 
not misapprehend the implications of registration as previously 
unregistered off-exchange retail forex market participants come into 
compliance with the registration requirements imposed on them by the 
CRA.
    \91\ See, Regulation 1.56 for the existing prohibition affecting 
FCMs and IBs engaged in futures and commodity option transactions.
---------------------------------------------------------------------------

14. Proposed Regulation 5.17--Authorization to Trade
    Proposed Regulation 5.17 requires RFEDs, FCMs, IBs and their APs to 
have specific authorization by the customer before effecting a retail 
forex transaction. For the most part, proposed Regulation 5.17 follows 
existing Regulation 166.2 for on-exchange futures and commodity option 
transactions. The Commission believes that registrants acting as off-
exchange retail forex counterparties should have to obtain 
authorization for each transaction like other registrants.
15. Proposed Regulation 5.18--Trading Standards
    Proposed Regulation 5.18 contains provisions specific to retail 
forex transactions that were developed to prevent some of the deceptive 
or unfair practices identified by the Commission and NFA in recent 
years. Each retail forex counterparty \92\ would be required to 
establish and enforce internal rules, procedures and controls: (1) To 
prevent ``front running,'' where transactions in accounts of the retail 
forex counterparty or its related persons \93\ are executed before a 
like customer order; (2) to establish settlement prices fairly and 
objectively; and (3) to record and maintain transaction records and 
make them available to customers (including time and price information, 
account records, trading platform price changes and volume, and any 
algorithm used to determine bid and ask prices). Paragraph (c) of the 
proposed Regulation prohibits a retail forex counterparty from 
disclosing that it holds another person's order unless disclosure is 
necessary for execution. Paragraphs (d) and (e) ensure that related 
persons of retail forex counterparties do not open accounts with other 
retail forex counterparties without the knowledge and authorization of 
the account surveillance personnel of the retail forex counterparties 
with which they are related. Paragraph (f) prohibits retail forex 
counterparties from: (1) Entering a retail forex transaction to be 
executed at a price that is not at or near prices at which other retail 
forex customers have executed transactions with the retail forex 
counterparty during the same time period unless done pursuant to NFA 
rules; (2) changing prices after execution unless pursuant to NFA 
rules; (3) providing a customer a new bid price that is higher (or 
lower) than previously without providing a new asked price that is 
higher (or lower) as well; and (4) establishing a new position for a 
customer (except to offset an existing position) if the retail forex 
counterparty holds one or more outstanding orders of other retail forex 
customers for the same currency pair at a comparable price.
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    \92\ ``Retail forex counterparty'' is defined for purposes of 
Regulation 5.18 to include RFEDs, FCMs and affiliated persons of 
FCMs.
    \93\ ``Related person'' of a forex counterparty is defined for 
purposes of Regulation 5.18 as a general partner, officer, director, 
owner of more than a ten percent interest, associated person, 
employee, relative or spouse of the foregoing or relative of a 
spouse who shares the same home.
---------------------------------------------------------------------------

    Additionally, paragraph (g) of proposed Regulation 5.18 would 
require each retail forex counterparty and each CPO, CTA and IB subject 
to part 5 to maintain records of all communications they receive 
concerning possible violations of the Act or Commission regulations 
involving their retail forex business. The required records would 
include the complainant's identity (if provided), the date of the 
transaction or contract at issue, and the name of the person who 
received the communication. The retail forex counterparty, CPO, CTA or 
IB would be required to provide copies of such records to the 
Commission.
    The Commission believes that, given the volume of cases it has 
prosecuted in recent years involving retail forex fraud, requiring the 
maintenance of detailed records of customer complaints will provide 
such intermediaries with a comprehensive view of the types and numbers 
of problems that exist within their operations, and will provide the 
Commission with ready access to information regarding such problems.
    Paragraph (h) of proposed Regulation 5.18 would require each person 
who applies for registration as an IB in order to solicit or accept 
off-exchange retail forex orders, and each person who succeeds to the 
business of an IB that solicits or accepts retail forex orders to enter 
into a guarantee agreement with an FCM or an RFED. As discussed above 
in relation to revisions to Commission Regulation 1.10, the Commission 
believes that the requirement that RFEDs and FCMs enter a guarantee 
agreement with the IBs that solicit business on their behalf serves the 
public's interest by discouraging FCMs and RFEDs from associating with 
IBs without regard to the sales practices they employ.
    Paragraph (i) of proposed Regulation 5.18 would require retail 
forex counterparties to calculate on a quarterly basis the percentage 
of non-discretionary accounts that were profitable, and to maintain 
records of those calculations together with supporting data for five 
years in accordance with Regulation 1.31. As discussed above, Proposed 
Regulation 5.5 requires that RFEDs, FCMs and IBs provided retail forex 
customers with a risk disclosure statement that includes the percentage 
of accounts that were profitable for each of the four most recent 
quarters. Proposed Regulation 5.8 buttresses this requirement by 
directing retail forex counterparties to make such calculations on a 
quarterly basis and maintain records reflecting the calculation.
    Finally, paragraph (j) would require each retail forex counterparty 
to designate at least one principal to serve as its chief compliance 
officer, who would be required to certify annually to the Commission 
and to NFA that the retail forex counterparty had in place policies and 
procedures reasonably designed to achieve compliance with the Act and 
the Commission's regulations. The Commission intends that retail forex 
counterparties adhere to the highest professional standards and that 
they take their compliance responsibilities seriously. With the 
requirement of a high level compliance officer and annual 
certification, Commission registrants will be expected to meet these 
standards and required to identify the person within the entity 
responsible for meeting them.
16. Proposed Regulation 5.19--Pending Legal Proceedings
    Proposed Regulation 5.19 requires RFEDs, FCMs CPOs, CTAs and IBs to 
disclose pending legal matters and specifies the manner in which such 
matters are to be reported to the Commission, as well as the criteria 
for determining which proceedings are

[[Page 3293]]

required to be disclosed. As discussed above, given the high incidence 
of fraud in connection with retail forex transactions, the Commission 
desires to monitor legal actions taken against registrants. Requiring 
reporting of such actions is one of the most direct ways of determining 
where problems exist and what registrants may have failed to deal 
fairly with customers.
17. Proposed Regulation 5.20--Special Calls for Information
    Proposed Regulation 5.20 is patterned on existing Regulations 21.00 
through 21.03. The purpose of proposed Regulation 5.20 is to ensure 
that the Commission has the authority to obtain information regarding 
retail forex accounts and transactions when such information is 
necessary to enable the Commission to carry out its responsibilities 
under the Act, and to set forth the responsibilities and duties of 
RFEDs, FCMs, and IBs when a special call is issued.
18. Proposed Regulation 5.21--Supervision of Retail Forex Accounts
    Proposed Regulation 5.21 imposes the same supervision requirements 
set forth in existing Regulation 166.3 upon Commission registrants 
subject to Part 5. A separate provision for retail forex is included in 
order to avoid any question whether the same duties apply to persons 
with supervisory responsibilities in the context of retail forex 
trading activity.
19. Proposed Regulation 5.22--Registered Futures Association Membership
    In addition to registering with the Commission, the CRA provides 
that RFEDs and persons who provide retail forex trading advice, operate 
retail forex pools or solicit retail forex customers or accounts must 
also become members of a registered futures association.\94\ 
Accordingly, proposed Regulation 5.22 requires registered futures 
association membership for RFEDs, and for each person (1) required to 
register as an IB because the person accepts orders for retail forex 
transactions; (2) required to register as a CPO because the person 
operates, or solicits funds, securities or property for, a pooled 
investment vehicle that engages in retail forex transactions; or (3) 
required to register as a CTA because the person exercises 
discretionary trading authority, or obtains written authority over, an 
account in connection with retail forex transactions.
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    \94\ See, 7 U.S.C. 2(c)(2)(B)(i)(II)(gg); 2(c)(2)(B)(iv); 
2(c)(2)(C)(i)(II)(aa); and 2(c)(2)(C)(iii).
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20. Proposed Regulation 5.23--Bulk Transfers and Bulk Liquidations
    Proposed Regulation 5.23 is patterned generally upon existing 
Regulation 1.65, but has been modified to take into account certain 
rules of the National Futures Association, that have been approved by 
the Commission, that govern the transfer or liquidation of the accounts 
of retail forex customers.\95\ Proposed Regulation 5.23 permits 
transfers that are requested by the retail forex customer or expressly 
consented to by the retail forex customer's prior, specific consent in 
writing, or those done in accordance with rules adopted by the DSRO of 
the RFED, FCM or IB, as the case may be, and approved by the Commission 
that establish notice and other requirements for such assignments and 
transfers. The proposed regulation also duplicates, for the most part, 
the requirements applicable to bulk transfer notices to the Commission 
under Regulation 1.65. However, the draft regulation requires notice 
not only of bulk transfers, but also bulk liquidations, and effectively 
defines the term ``bulk'' to mean the transfer or liquidation of 50 
percent or more of the total retail forex customer accounts carried by 
the RFED, FCM or IB.\96\
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    \95\ See, proposed Regulation 5.23(a)(1).
    \96\ See, proposed Regulation 5.23(a)(2).
---------------------------------------------------------------------------

21. Proposed Regulation 5.24--Applicability of Other Parts of the 
Commission's Regulations
    Proposed Regulation 5.24 states that, insofar as consistent with 
the requirements of part 5, the requirements of other parts of the 
Commission's regulations that apply to a person shall apply to that 
person as though those provisions were expressly set forth in part 5. 
For example, Regulation 1.31 sets forth the Commission's generally 
applicable recordkeeping requirements and speaks in terms of 
``persons.'' Proposed Regulation 5.24 is intended to incorporate such 
provisions by reference to the extent that part 5 does not impose 
contradictory requirements.
22. Proposed Regulation 5.25--Applicability of Act
    Proposed Section 5.25 incorporates various provisions of the Act 
which apply generally to registrants, specifying that the provisions of 
those sections are to be read to include the categories of forex 
registrants identified in proposed Section 5.1, and that the provisions 
of those sections are to be read to include off-exchange retail forex 
transactions and those that that engage in them. Specifically, the 
provisions of Sections 4b, 4c(b), 4f, 4g, 4k, 4m, 4n, 4o, 6(c)-(e), 6b, 
6c, 8(a)-(e), 8a, and 12(f) apply to off-exchange retail forex 
transactions just as they do to exchange-traded transactions.

III. Related Matters

A. Regulatory Flexibility Act

    FCMs and CPOs: The Regulatory Flexibility Act (``RFA'') \97\ 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses.\98\ The Commission has already 
established certain definitions of ``small entities'' to be used in 
evaluating the impact of its rules on such small entities in accordance 
with the RFA.\99\ In that statement, the Commission concluded that 
neither FCMs nor registered CPOs should be considered to be small 
entities for purposes of the RFA. With respect to FCMs, the 
Commission's determination was based in part upon their obligation to 
meet the capital requirement established by the Commission and the 
purposes of protecting financial integrity.\100\
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    \97\ 5 U.S.C. et seq.
    \98\ By its terms, the RFA does not apply to ``individuals.'' 
See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons 
must be individuals, (see Commission Regulation 1.3(aa) and proposed 
Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does 
not apply to APs and no analysis of the economic impact of this rule 
proposal on such persons is required.
    \99\ 47 FR 18618 (April 30, 1982).
    \100\ Id. at 18619.
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    As for CPOs, the Commission determined that registered CPOs are not 
small entities based upon its existing regulatory standard for 
exempting certain small CPOs from the requirement to register under the 
Act.\101\ (A CPO need not register with the Commission if the gross 
capital contributions for all pools under its management do not exceed 
$400,000 and there are not more than fifteen participants in any one of 
those pools.\102\)
---------------------------------------------------------------------------

    \101\ Id. at 18619-20.
    \102\ 17 CFR 4.13(a)(2) (2009).
---------------------------------------------------------------------------

    Thus, with respect to FCMs and registered CPOs, the Commission 
believes that the Proposal will not have a significant economic impact 
on a substantial number of small entities.
    CTAs: The Commission has previously decided to evaluate, within the 
context of a particular rule proposal, whether all or some CTAs should 
be considered to be small entities, and if so, to then analyze the 
economic impact on them of any such rule.\103\ CTAs

[[Page 3294]]

wishing to advise retail forex customers may include both currently 
registered CTAs and previously unregistered persons who now will be 
required to register. As to the first group, there should be no 
significant new economic impact. As to the second group, registration 
will require the submission of application forms, fingerprinting of 
principals, and payment of registration fees. To the extent that CTAs 
can be considered to be small entities, the Commission does not 
consider either the proposed registration fee or the proposed 
fingerprinting requirement for newly registered CTAs to have 
significant economic impact.\104\
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    \103\ 47 FR at 18620.
    \104\ 48 FR 35248 at 35276 (August 3, 1983).
---------------------------------------------------------------------------

    IBs: In its 1982 policy statement, the Commission proposed that for 
purposes of the RFA and future rulemakings, the Commission would not 
consider introducing brokers to be ``small entities'' for essentially 
the same reasons that FCMs had previously been determined not to be 
small entities.\105\ However, this determination was based, in part, on 
the fact that IBs, like FCMs, are required to maintain a specified 
level of adjusted net capital. Under the proposal, retail forex IBs 
would not be subject to a capital requirement; rather, they would have 
to operate pursuant to a guarantee agreement. Nevertheless, as 
discussed above with regard to CTAs, registration of previously 
unregistered entities will require the submission of application forms, 
fingerprinting of principals, and payment of registration fees. To the 
extent that IBs can be considered to be small entities, the Commission 
does not consider either the proposed registration fee or the proposed 
fingerprinting requirement for IBs subject to Part 5 to have 
significant economic impact.
---------------------------------------------------------------------------

    \105\ 47 FR at 18619.
---------------------------------------------------------------------------

    RFEDs: RFEDs are a new category of registrant. Accordingly, the 
Commission has not addressed the question of whether such persons are, 
in fact, small entities for purposes of the RFA. The Commission does 
not believe that there are regulatory alternatives to those being 
proposed which would be consistent with the statutory mandate to 
provide protection to the public against irresponsible or fraudulent 
business practices. For purposes of the RFA and future rulemakings, the 
Commission is hereby proposing that RFEDs not be considered to be 
``small entities'' for essentially the same reasons that FCMs have 
previously been determined not to be small entities.\106\ As with FCMs, 
a requirement to maintain a specified level of adjusted net capital 
would be imposed upon RFEDs to ensure that they maintain sufficient 
capital resources to guarantee their financial accountability and to 
promote responsible and reliable business operations. Moreover, the 
Commission has sought to fashion its proposed regulatory program for 
RFEDs in a manner which is responsive to the function, purposes, and 
size of the entity being regulated consistent with the objective of the 
RFA. In particular, the minimum capital requirement required by the CRA 
effectuates the Congressional purpose that RFEDs maintain sufficient 
reserve of capital to remain economically viable. For the reasons 
stated above, the Commission hereby proposes not to define RFEDs as 
small entities for RFA purposes.
---------------------------------------------------------------------------

    \106\ Id.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Proposal contains information collection requirements. The 
Paperwork Reduction Act of 1995 (``PRA'') \107\ imposes certain 
requirements of federal agencies (including the Commission) in 
conducting or sponsoring any collection of information as defined by 
the PRA. The Commission has submitted to the Director of the Office of 
Management and Budget (``OMB''), pursuant to the provisions of the PRA, 
an explanation and details of the information collection and 
recordkeeping requirements which would be necessary to implement the 
Proposal.
---------------------------------------------------------------------------

    \107\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

1. Collection of Information
    If adopted, the Proposal would require existing and new registrants 
in the FCM, RFED, CTA, CPO and IB categories to submit certain filings 
to the Commission which had not been previously required; these 
collections of information are found primarily in the new part 5 of the 
proposed regulations. To the extent industry participants are currently 
registered as CTAs, CPOs, IBs or FCMs, and intend to engage in retail 
forex transactions, the obligations imposed by the proposed rules would 
not be significantly altered, but the existing collections will be 
amended to reflect additional, new registrants within these categories, 
and the part 5 collection will include any additional information 
collections not captured in existing collections. The estimated numbers 
of respondents, annual responses by each, average hours per response 
and annual reporting burden reflected in section 2 immediately below 
represent estimates from the last update of the collection plus new 
respondents, responses and a new calculation of associated burdens. 
Since several of the proposals contained herein consist of proposed 
amendments to rules which have already been assigned OMB control 
numbers, the Commission assumes that the amended rules will be assigned 
the same OMB control number. Similarly, the Commission is proposing 
that the new registrants use amendments to existing forms in order to 
comply with registration and financial reporting requirements, those 
forms, as amended, will in all likelihood retain the same OMB control 
number which they have at present. Finally, as to RFEDs, a new category 
of registrant, new OMB control numbers will be assigned to new 
collections; to the extent existing regulations have been amended to 
include RFEDs, the collections associated with those regulations will 
be amended to reflect the new category of registrant. Each effected 
collection and the new part 5 collection are discussed separately 
below.
2. Existing Collections
a. Collection 3038-0024 (Part 1 of the Regulations)
    Generally speaking, collections occurring by operation of part 1 
regulations affect FCMs and IBs. Those entities that will be required 
to register as RFEDs are currently registered as FCMs, so existing 
Collection 3038-0024 has been amended, where appropriate, to reflect 
fewer FCM respondents. The collection has also been amended, where 
appropriate, to reflect additional IB registrants, who were not 
previously required to register to conduct off-exchange retail forex 
business and now will be.
    Estimated number of respondents: 2,160.
    Annual responses by each respondent: 38,894.
    Estimated average hours per response: 1.9.
    Annual reporting burden: 21,229.
b. Collection 3038-0023 (Part 3 of the Regulations)
    Part 3 of the Commission's regulations concern registration 
requirements. Existing Collection 3038-0023 has been amended to reflect 
the obligations associated with the registration of new entrants, such 
as CTAs, CPOs, IBs, and APs, that had not previously been required to 
register in order to conduct off-exchange retail forex transactions. 
Since the registration requirements are in all respects the same as for 
current registrants, the collection has been amended only insofar as it 
concerns the increased estimated number of respondents and the 
corresponding estimated annual burden.

[[Page 3295]]

    Estimated number of respondents: 71,857.
    Annual responses by each respondent: 73,694.
    Estimated average hours per response: 0.09.
    Annual reporting burden: 6,632.
c. Collection 3038-0005 (Part 4 of the Commission's Regulations)
    Part 4 of the Commission's regulations concerns the operations of 
CTAs and CPOs, and the circumstances under which they may be exempted 
from registration. As discussed above, the estimated average time spent 
per response has not been altered. However, adjustments have been made 
to the collection to account for additional CPOs and CTAs: filing for 
exemptions from the Part 4 rules, developing and distributing required 
disclosure documents; complying with required reporting requirements.
    Estimated number of respondents: 9,486.
    Annual responses by each respondent: 37,930.
    Estimated average hours per response: 17.
    Annual reporting burden: 183,700.\108\
---------------------------------------------------------------------------

    \108\ Due to a mathematical error in the previous Collection 
3038-0005, the current estimated numbers reflect a large increase in 
the burden to respondents. The estimated increase in the annual 
responses to by each respondent is increased by 721 as a result of 
this rulemaking. The estimated annual increase in the hours of 
reporting burden is increased by 4,833 as a result of this 
rulemaking.
---------------------------------------------------------------------------

d. Collection 3038-0055 (Part 160 of the Regulations)
    Part 160 requires financial institutions to provide notice to 
customers regarding privacy policies and practices. As discussed above, 
the estimated average time spent per response has not been amended; 
rather, the collection has been amended to reflect new registrants that 
will have to comply with the part 160 requirements.
    Estimated number of respondents: 4,066.
    Annual responses by each respondent: 96.
    Estimated average hours per response: 0.24.
    Annual reporting burden: 6,186.
3. New Collection 3038--NEW (Proposed Part 5 of the Regulations)
    Part 5 of the proposed regulations requires various information 
collections by various registrants. The Commission is seeking a new and 
separate control number for collections occurring pursuant to part 5. 
Among the sections requiring information collections in the new part 5 
is Regulation 5.5, which would require the development and distribution 
of risk disclosure documents by RFEDs, FCMs and IBs transacting off-
exchange retail forex. Regulation 5.6 would require reporting by RFEDs 
that fail to meet minimum financial requirements or are otherwise 
required to provide early warning notices. Regulation 5.11 would 
require annual risk assessment reporting by RFEDs, and Regulation 5.12 
would require financial reports of RFEDs applying for registration. 
Regulation 5.13 concerns reporting to customers by RFEDS and FCMs. 
Regulation 5.18 generally concerns trading and operational standards 
for retail forex counterparties and intermediaries. Among the sections 
within Regulation 5.18 requiring collections of information are 
5.18(g), which requires all counterparties and intermediaries to 
forward to the Commission records of communications received concerning 
facts giving rise to possible violations of the Act or Regulations, and 
5.18(j), which requires forex counterparties to provide the Commission 
with an annual compliance certification. Regulation 5.19 would require 
all forex counterparties and intermediaries to provide the Commission 
with notice of legal proceedings to which they are parties. Finally, 
Regulation 5.23 concerns the notices that must be given in the event of 
bulk transfers or liquidations.
    OMB Control Number 3038--NEW.
    Estimated number of respondents: 1,156.
    Annual responses by each respondent: 4,493.
    Estimated average hours per response: 1.8.
    Annual reporting burden: 4,202.
    Copies of the information collection submission to OMB are 
available from the CFT Clearance Officer, 1155 21st Street, NW., 
Washington, DC 20581, (202) 418-5160. The Commission considers comments 
by the public on this proposed collection of information in--
    Evaluating whether the proposed collections of information are 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    Evaluating the accuracy of the Commission's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
    Enhancing the quality, utility and clarity of the information to be 
collected; and
    Minimizing the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submissions of responses.
    Organizations and individuals desiring to submit comments on the 
information collection should contact the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Room 10235, New 
Executive Office Building, Washington, DC 20503, ATTN: Desk Officer of 
the Commodity Futures Trading Commission. OMB is required to make a 
decision concerning the collection of information contained in the 
Proposal between 30 and 60 days after publication of his document in 
the Federal Register. Therefore, a comment to OMB is best assured of 
having its full effect if OMB receives it within 30 days of 
publication. This does not affect the deadline for the public comment 
to the Commission on the proposed rules.

C. Cost-Benefit Analysis

    Section 15(a) of the Act \109\ requires the Commission to consider 
the costs and benefits of its action before issuing new regulations 
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) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern, 
enumerated below. 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.
---------------------------------------------------------------------------

    \109\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    As discussed in more detail above, the Proposal would create a 
comprehensive scheme to implement the requirements of the CRA. It would 
put in place requirements including registration, disclosure, 
recordkeeping, financial reporting, minimum capital and other 
operational standards. This would be achieved through both amendments 
to existing regulations and the creation of a new, free-standing part 
to the Commission's regulations. The Commission is considering the 
costs

[[Page 3296]]

and benefits of the Proposal in light of the specific provisions of 
section 15(a) as follows:
    1. Protection of market participants and the public. The Proposal 
should enhance considerably the protection of market participants and 
the public because it requires, for the first time, the registration of 
several categories of market participants and requires adherence to 
operational standards that had not previously applied. The benefits 
that inhere in the imposition of these requirements to a sector of the 
off-exchange market that has been largely unregulated to this point, 
and which is geared towards the retail public, are manifest.
    2. Efficiency and competition. In its Conference Report, Congress 
indicated that the Commission should avoid creating two different 
regulatory regimes for similar business models with respect to FCMs or 
RFEDs engaging in off-exchange retail forex transactions.\110\ 
Accordingly, the Commission has endeavored to ensure that these 
entities be treated in comparable fashion relative to one another. 
Moreover, the Commission has endeavored, wherever possible, to propose 
regulations in the proposed part 5 that are analogous to regulations 
imposed upon intermediaries engaged in on-exchange transactions. 
Accordingly, the Commission believes that it has provided an evenhanded 
regulatory scheme that will be familiar to industry participants.
---------------------------------------------------------------------------

    \110\ As noted in the Conference Report that accompanied the 
CRA, ``To the extent their risk profiles are similar, the managers 
intend for FCMs and RFEDs to be regulated substantially equivalently 
in terms of their off-exchange retail foreign currency business.'' 
H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference 
Report is available via the Internet on the CFTC's Web site.
---------------------------------------------------------------------------

    3. Financial integrity of futures markets and price discovery. The 
Proposal's regulations concern retail, off-exchange markets. These 
markets serve primarily as a vehicle for members of the retail public 
to engage in speculative transactions. Accordingly, the Commission does 
not perceive a significant intersection between the operations of these 
markets and the financial integrity or price discovery functions of the 
markets generally.
    4. Sound risk management practices. The Proposal includes 
requirements regarding capital, financial reporting, risk assessment 
recordkeeping, and risk assessment reporting that are comparable to 
those required of entities engaged in on-exchange trading. The 
Commission believes that the benefits of these risk management 
requirements--which strive to ensure the financial soundness of firms--
have been borne out on the exchange-traded side and will be of 
significant benefit with regard to its oversight of retail forex 
counterparties.
    5. Other public interest considerations. The retail, off-exchange 
forex market has been largely unregulated until now. The Commission 
believes that the Proposal is beneficial in that will provide needed 
protections for members of the public engaging in these transactions. 
The Proposal will also bring much needed oversight to the forex 
counterparties and intermediaries that interact with the public.
    After considering these factors, the Commission has determined to 
issue the Proposal. 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 of the Proposal with their comment letters.

List of Subjects

17 CFR Part 1

    Definitions, Minimum financial and reporting requirements. 
Recordkeeping requirements, Prohibited transactions in commodity 
options, Miscellaneous.

17 CFR Part 3

    Definitions, Customer protection, Licensing, Registration.

17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Exemption from 
registration, Reporting and recordkeeping requirements.

17 CFR Part 5

    Bulk transfers, Commodity pool operators, Commodity trading 
advisors, Consumer protection, Customer's money, securities and 
property, Definitions, Foreign exchange, Minimum financial and 
reporting requirements, Prohibited transactions in retail foreign 
exchange, Recordkeeping requirements, Retail foreign exchange dealers, 
Risk assessment, Special calls, Trading practices.

17 CFR Part 10

    Adjudicatory proceedings, Rules of practice.

17 CFR Part 140

    Authority delgations (Government agencies, Conflict of interests, 
Organization and functions (Government agencies).

17 CFR Part 145

    Confidential business information, Freedom of information.

17 CFR Part 147

    Sunshine Act.

17 CFR Part 160

    Consumer financial information, Definitions, Nonpublic personal 
information, Privacy.

17 CFR Part 166

    Arbitration, Authorization to trade, Customer protection, 
Definitions, Dispute settlement; Litigation; Reparations.

    For the reasons presented above, the Commission hereby proposes to 
amend Chapter I of Title 17 of the Code of Federal Regulations as 
follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    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, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 
13a, 13a-1, 16, 16a, 19, 21, 23 and 24.


Sec.  1.1  [Removed and Reserved]

    2. Section 1.1 is removed and reserved.
    3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to 
read as follows:


Sec.  1.3  Definitions.

* * * * *
    (nn) Guarantee agreement. This term means an agreement of guaranty 
in the form set forth in part B or C of Form 1-FR, executed by a 
registered futures commission merchant or retail foreign exchange 
dealer, as appropriate, and by an introducing broker or applicant for 
registration as an introducing broker on behalf of an introducing 
broker or applicant for registration as an introducing broker in 
satisfaction of the alternative adjusted net capital requirement set 
forth in Sec.  1.17(a)(1)(iii).
* * * * *
    (yy) Commodity Interest. This term means:
    (1) Any contract for the purchase or sale of a commodity for future 
delivery;
    (2) Any contract, agreement or transaction subject to Commission 
regulation under section 4c or 19 of the Act; and
    (3) Any contract, agreement or transaction subject to Commission 
jurisdiction under section 2(c)(2) of the Act.
    4. Section 1.4 is revised to read as follows:

[[Page 3297]]

Sec.  1.4  Use of electronic signatures.

    For purposes of complying with any provision in the Commodity 
Exchange Act or the rules or regulations in this Chapter I that 
requires a document to be signed by a customer of a futures commission 
merchant or introducing broker, a retail forex customer of a retail 
foreign exchange dealer or futures commission merchant, a pool 
participant or a client of a commodity trading advisor, an electronic 
signature executed by the customer, participant or client will be 
sufficient, if the futures commission merchant, retail foreign exchange 
dealer, introducing broker, commodity pool operator or commodity 
trading advisor elects generally to accept electronic signatures; 
Provided, however, That the electronic signature must comply with 
applicable Federal laws and other Commission rules; And, Provided 
further, That the futures commission merchant, retail foreign exchange 
dealer, introducing broker, commodity pool operator or commodity 
trading advisor must adopt and utilize reasonable safeguards regarding 
the use of electronic signatures, including at a minimum safeguards 
employed to prevent alteration of the electronic record with which the 
electronic signature is associated, after such record has been 
electronically signed.
    5. Section 1.10 is amended by revising paragraph (j) to read as 
follows:


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

* * * * *
    (j) Requirements for guarantee agreement. (1) A guarantee agreement 
filed pursuant to this section must be signed in a manner sufficient to 
be a binding guarantee under local law by an appropriate person on 
behalf of the futures commission merchant or retail foreign exchange 
dealer and the introducing broker, and each signature must be 
accompanied by evidence that the signatory is authorized to enter the 
agreement on behalf of the futures commission merchant, retail foreign 
exchange dealer, or introducing broker and is such an appropriate 
person. For purposes of this paragraph (j), an appropriate person shall 
be the proprietor, if the firm is a sole proprietorship; a general 
partner, if the firm is a partnership; and either the chief executive 
officer or the chief financial officer, if the firm is a corporation; 
and, if the firm is a limited liability company or limited liability 
partnership, either the chief executive officer, the chief financial 
officer, the manager, the managing member, or those members vested with 
the management authority for the limited liability company or limited 
liability partnership.
    (2) No futures commission merchant or retail foreign exchange 
dealer may enter into a guarantee agreement if:
    (i) It knows or should have known that its adjusted net capital is 
less than the amount set forth in Sec.  1.12(b) of this part or Sec.  
5.6(b) of this chapter, as applicable; or
    (ii) There is filed against the futures commission merchant or 
retail foreign exchange dealer an adjudicatory proceeding brought by or 
before the Commission pursuant to the provisions of sections 6(c), 
6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec.  3.55, 3.56 or 3.60 of 
this chapter.
    (3) A retail foreign exchange dealer may enter into a guarantee 
agreement only with an introducing broker as defined in Sec.  
5.1(f)(1). A retail foreign exchange dealer may not enter into a 
guarantee agreement with an introducing broker as defined in Sec.  
1.3(mm) of this part.
    (4) A guarantee agreement filed in connection with an application 
for initial registration as an introducing broker in accordance with 
the provisions of Sec.  3.10(a) of this chapter shall become effective 
upon the granting of registration or, if appropriate, a temporary 
license, to the introducing broker. A guarantee agreement filed other 
than in connection with an application for initial registration as an 
introducing broker shall become effective as of the date agreed to by 
the parties.
    (5)(i) If the registration of the introducing broker is suspended, 
revoked, or withdrawn in accordance with the provisions of this 
chapter, the guarantee agreement shall expire as of the date of such 
suspension, revocation or withdrawal.
    (ii) If the registration of the futures commission merchant or 
retail foreign exchange dealer is suspended or revoked, the guarantee 
agreement shall expire 30 days after such suspension or revocation, or 
at such earlier time as may be approved by the Commission, the 
introducing broker, and the introducing broker's designated self-
regulatory organization.
    (6) A guarantee agreement may be terminated at any time during the 
term thereof:
    (i) By mutual written consent of the parties, signed by an 
appropriate person on behalf of each party, with prompt written notice 
thereof, signed by an appropriate person on behalf of each party, to 
the Commission and to the designated self-regulatory organizations of 
the futures commission merchant or retail foreign exchange dealer and 
the introducing broker;
    (ii) For good cause shown, by either party giving written notice of 
its intention to terminate the agreement, signed by an appropriate 
person, to the other party to the agreement, to the Commission, and to 
the designated self-regulatory organizations of the futures commission 
merchant or retail foreign exchange dealer and the introducing broker; 
or
    (iii) By either party giving written notice of its intention to 
terminate the agreement, signed by an appropriate person, at least 30 
days prior to the proposed termination date, to the other party to the 
agreement, to the Commission, and to the designated self-regulatory 
organizations of the futures commission merchant or retail foreign 
exchange dealer and the introducing broker.
    (7) The termination of a guarantee agreement by a futures 
commission merchant, retail foreign exchange dealer or an introducing 
broker, or the expiration of such an agreement, shall not relieve any 
party from any liability or obligation arising from acts or omissions 
which occurred during the term of the agreement.
    (8) An introducing broker may not simultaneously be a party to more 
than one guarantee agreement: Provided, however, That the provisions of 
this paragraph (j)(8) shall not be deemed to preclude an introducing 
broker from entering into a guarantee agreement with another futures 
commission merchant or retail foreign exchange dealer if the 
introducing broker, futures commission merchant or retail foreign 
exchange dealer which is a party to the existing agreement has provided 
notice of termination of the existing agreement in accordance with the 
provisions of paragraph (j)(6) of this section, and the new guarantee 
agreement does not become effective until the day following the date of 
termination of the existing agreement: And, provided further, That the 
provisions of this paragraph (j)(8) shall not be deemed to preclude an 
introducing broker from entering into a guarantee agreement with 
another futures commission merchant or retail foreign exchange dealer 
if the futures commission merchant or retail foreign exchange dealer 
which is a party to the existing agreement ceases to remain registered 
and the existing agreement would therefore expire in accordance with 
the provisions of paragraph (j)(6)(ii) of this section.
    (9)(i)(A) An introducing broker that is a party to a guarantee 
agreement that has been terminated in accordance with the provisions of 
paragraph (j)(6) of this

[[Page 3298]]

section, or that is due to expire in accordance with the provisions of 
paragraph (j)(5)(ii) of this section, must cease doing business as an 
introducing broker on or before the effective date of such termination 
or expiration unless, on or before 10 days prior to the effective date 
of such termination or expiration or such other period of time as the 
Commission or the designated self-regulatory organization may allow for 
good cause shown, the introducing broker files with its designated 
self-regulatory organization either a new guarantee agreement effective 
as of the day following the date of termination of the existing 
agreement, or, in the case of a guarantee agreement that is due to 
expire in accordance with the provisions of paragraph (j)(4)(ii) of 
this section, a new guarantee agreement effective on or before such 
expiration, or either:
    (1) A Form 1-FR-IB certified by an independent public accountant in 
accordance with Sec.  1.16 as of a date not more than 45 days prior to 
the date on which the report is filed; or
    (2) A Form 1-FR-IB as of a date not more than 17 business days 
prior to the date on which the report is filed and a Form 1-FR-IB 
certified by an independent public accountant in accordance with Sec.  
1.16 as of a date not more than one year prior to the date on which the 
report is filed: Provided, however, that an introducing broker as 
defined in Sec.  5.1(f)(1) of this chapter that is party to a guarantee 
agreement that has been terminated or that has expired must cease doing 
business as an introducing broker on or before the effective date of 
such termination or expiration unless, on or before 10 days prior to 
the effective date of such termination or expiration or such other 
period of time as the Commission or the designated self-regulatory 
organization may allow for good cause shown, the introducing broker 
files with its designated self-regulatory organization a new guarantee 
agreement effective on or before the termination or expiration date of 
the terminating or expiring guarantee agreement.
    (B) Each person filing a Form 1-FR-IB in accordance with this 
section must include with the financial report a statement describing 
the source of his current assets and representing that his capital has 
been contributed for the purpose of operating his business and will 
continue to be used for such purpose.
    (ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of 
this section or of Sec.  1.17(a), an introducing broker that is a party 
to a guarantee agreement that has been terminated in accordance with 
the provisions of paragraph (j)(6)(ii) of this section shall not be 
deemed to be in violation of the minimum adjusted net capital 
requirement of Sec.  1.17(a)(1)(iii) or (a)(2) for 30 days following 
such termination. Such an introducing broker must cease doing business 
as an introducing broker on or after the effective date of such 
termination, and may not resume doing business as an introducing broker 
unless and until it files a new agreement or either:
    (1) A Form 1-FR-IB certified by an independent public accountant in 
accordance with Sec.  1.16 as of a date not more than 45 days prior to 
the date on which the report is filed; or
    (2) A Form 1-FR-IB as of a date not more than 17 business days 
prior to the date on which the report is filed and a Form 1-FR-IB 
certified by an independent public accountant in accordance with Sec.  
1.16 as of a date not more than one year prior to the date on which the 
report is filed: Provided, however, that an introducing broker as 
defined in Sec.  5.1(f)(1) of this chapter that is party to a guarantee 
agreement that has been terminated must cease doing business as an 
introducing broker from and after the effective date of such 
termination, and may not resume doing business as an introducing broker 
as defined in Sec.  5.1(f)(1) of this chapter unless and until it files 
a new guarantee agreement.
    (B) Each person filing a Form 1-FR-IB in accordance with this 
section must include with the financial report a statement describing 
the source of his current assets and representing that his capital has 
been contributed for the purpose of operating his business and will 
continue to be used for such purpose.
* * * * *
    6. Section 1.35 is amended by revising paragraphs (a), (a-1) and 
(b) to read as follows:


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

    (a) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and members of contract markets. Each futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, and member of a contract market shall keep full, complete, and 
systematic records, together with all pertinent data and memoranda, of 
all transactions relating to its business of dealing in commodity 
futures, retail forex transactions, commodity options, and cash 
commodities (including currencies). Each futures commission merchant, 
retail foreign exchange dealer, introducing broker, and member of a 
contract market shall retain the required records, data, and memoranda 
in accordance with the requirements of Sec.  1.31, and produce them for 
inspection and furnish true and correct information and reports as to 
the contents or the meaning thereof, when and as requested by an 
authorized representative of the Commission or the United States 
Department of Justice. Included among such records shall be all orders 
(filled, unfilled, or canceled), trading cards, signature cards, street 
books, journals, ledgers, canceled checks, copies of confirmations, 
copies of statements of purchase and sale, and all other records, data 
and memoranda, which have been prepared in the course of its business 
of dealing in commodity futures, retail forex transactions, commodity 
options, and cash commodities. Among such records each member of a 
contract market must retain and produce for inspection are all 
documents on which trade information is originally recorded, whether or 
not such documents must be prepared pursuant to the rules or 
regulations of either the Commission or the contract market. For 
purposes of this section, such documents are referred to as ``original 
source documents.''
    (a-1) Futures commission merchants, retail foreign exchange 
dealers, introducing brokers, and members of contract markets: 
Recording of customers' and option customers' orders. (1) Each futures 
commission merchant, each retail foreign exchange dealer and each 
introducing broker receiving a customer's, retail forex customer's or 
option customer's order, as applicable, shall immediately upon receipt 
thereof prepare a written record of the order including the account 
identification, except as provided in paragraph (a-1)(5) of this 
section, and order number, and shall record thereon, by timestamp or 
other timing device, the date and time, to the nearest minute, the 
order is received, and in addition, for option customers' orders, the 
time, to the nearest minute, the order is transmitted for execution.
    (2)(i) Each member of a contract market who on the floor of such 
contract market receives a customer's or option customer's order which 
is not in the form of a written record including the account 
identification, order number, and the date and time, to the nearest 
minute, the order was transmitted or received on the floor of such 
contract market, shall immediately upon receipt thereof prepare a 
written record of the order in nonerasable ink, including the account 
identification, except as provided in paragraph (a-1)(5) of this 
section or appendix C to this part, and order number and shall record 
thereon,

[[Page 3299]]

by timestamp or other timing device, the date and time, to the nearest 
minute, the order is received.
    (ii) Except as provided in paragraph (a-1)(3) of this section:
    (A) Each contract market member who on the floor of such contract 
market receives an order from another member present on the floor which 
is not in the form of a written record shall, immediately upon receipt 
of such order, prepare a written record of the order or obtain from the 
member who placed the order a written record of the order, in non-
erasable ink including the account identification and order number and 
shall record thereon, by time-stamp or other timing device, the date 
and time, to the nearest minute, the order is received; or
    (B) When a contract market member present on the floor places an 
order, which is not in the form of a written record, for his own 
account or an account over which he has control, with another member of 
such contract market for execution:
    (1) The member placing such order immediately upon placement of the 
order shall record the order and time of placement to the nearest 
minute on a sequentially-numbered trading card maintained in accordance 
with the requirements of paragraph (d) of this section;
    (2) The member receiving and executing such order immediately upon 
execution of the order shall record the time of execution to the 
nearest minute on a trading card or other record maintained pursuant to 
the requirements of paragraph (d) of this section; and
    (3) The member receiving and executing the order shall return such 
trading card or other record to the member placing the order. The 
member placing the order then must submit together both of the trading 
cards or other records documenting such trade to contract market 
personnel or the clearing member, in accordance with contract market 
rules adopted pursuant to paragraph (j)(1) of this section.
    (iii) Each contract market may adopt rules, which must be submitted 
to the Commission pursuant to section 5a(a)(12)(A) of the Act and 
Commission Regulation 1.41, that provide alternative requirements to 
those contained in paragraph (a-1)(2)(ii) of this section. Such rules 
shall, at a minimum, require that the contemporaneous written records:
    (A) Contain the terms of the order;
    (B) Include reliable timing data for the initiation and execution 
of the order which would permit complete and effective reconstruction 
of the order placement and execution; and
    (C) Be submitted to contract market personnel or clearing members 
in accordance with contract market rules adopted pursuant to paragraph 
(j)(1) of this section.
    (3)(i) The requirements of paragraph (a-1)(2)(ii) of this section 
will not apply if a contract market maintains in effect rules which 
have been submitted to the Commission pursuant to section 5a(a)(12)(A) 
of the Act and Commission Regulation 1.41, which provide for an 
exemption where:
    (A) A contract market member places with another member of such 
contract market an order that is part of a spread transaction;
    (B) The member placing the order personally executes one or more 
legs of the spread; and
    (C) The member receiving and executing such order immediately upon 
execution of the order records the time of execution to the nearest 
minute on his trading card or other record maintained in accordance 
with the requirements of paragraph (d) of this section.
    (ii) Each contract market shall, as part of its trade practice 
surveillance program, conduct surveillance for compliance with the 
recordkeeping and other requirements under paragraphs (a-1) (2) and (3) 
of this section, and for trading abuses related to the execution of 
orders for members present on the floor of the contract market.
    (4) Each member of a contract market reporting the execution from 
the floor of the contract market of a customer's or option customer's 
order or the order of another member of the contract market received in 
accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this 
section, shall record on a written record of the order, including the 
account identification, except as provided in paragraph (a-1)(5) of 
this section, and order number, by timestamp or other timing device, 
the date and time to the nearest minute such report of execution is 
made. Each member of a contract market shall submit the written records 
of customer orders or orders from other contract market members to 
contract market personnel or to the clearing member responsible for the 
collection of orders prepared pursuant to this paragraph as required by 
contract market rules adopted in accordance with paragraph (j)(1) of 
this section. The execution price and other information reported on the 
order tickets must be written in nonerasable ink.
    (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.

[[Page 3300]]

    (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.
    (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.
* * * * *
    (b) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and clearing members of contract markets. Each 
futures commission merchant, each retail foreign exchange dealer, and 
each clearing member of a contract market and, for purposes of 
paragraph (b)(3) of this section, each introducing broker, shall, as a 
minimum requirement, prepare regularly and promptly, and keep 
systematically and in permanent form, the following:
    (1) A financial ledger record which will show separately for each 
customer or retail forex customer or option customer all charges 
against and credits to such customer's or retail forex customer's or 
option customer's account, including but not limited to customer or 
retail forex customer funds deposited, withdrawn, or transferred, and 
charges or credits resulting from losses or gains on closed 
transactions;
    (2) A record of transactions which will show separately for each 
account (including proprietary accounts):
    (i) All commodity futures transactions executed for such account, 
including the date, price, quantity, market, commodity and future;
    (ii) All retail forex transactions executed for such account, 
including the date, price, quantity, and currency; and
    (iii) All commodity option transactions executed for such account, 
including the date, whether the transaction involved a put or call, 
expiration date, quantity, underlying contract for future delivery or 
underlying physical, strike price, and details of the purchase price of 
the option, including premium, mark-up, commission and fees; and
    (3) A record or journal which will separately show for each 
business day complete details of:
    (i) All commodity futures transactions executed on that day, 
including the date, price, quantity, market, commodity, future and the 
person for whom such transaction was made;
    (ii) All retail forex transactions executed on that day for such 
account, including the date, price, quantity, currency and the person 
for whom such transaction was made; and
    (iii) All commodity option transactions executed on that day, 
including the date, whether the transaction involved a put or call, the 
expiration date, quantity, underlying contract for future delivery, or 
underlying physical, strike price, details of the purchase price of the 
option, including premium, mark-up, commission and fees and the person 
for whom the transaction was made; and
    (iv) In the case of an introducing broker, the record or journal 
required by this paragraph (b)(3) shall also include the futures 
commission merchant or retail foreign exchange dealer carrying the 
account for which each commodity futures, retail forex and commodity 
option transaction was executed on that day. Provided, however, that 
where reproductions on microfilm, microfiche or optical disk are 
substituted for hard copy in accordance with the provisions of Sec.  
1.31(b) of this part, the requirements of paragraphs (b)(1) and (b)(2) 
of this section will be considered met if the person required to keep 
such records is ready at all times to provide, and immediately provides 
in the same city as that in which such person's commodity' retail forex 
or commodity option books and records are maintained, at the expense of 
such person, reproduced copies which show the records as specified in 
paragraphs (b)(1) and (b)(2) of this section, on request of any 
representatives of the Commission or the U.S. Department of Justice.
* * * * *
    7. Section 1.36 is amended by revising paragraph (a) to read as 
follows:


Sec.  1.36  Record of securities and property received from customers 
and option customers.

    (a) Each futures commission merchant and each retail foreign 
exchange dealer shall maintain, as provided in Sec.  1.31, a record of 
all securities and property received from customers, retail forex 
customers or option customers in lieu of money to margin, purchase, 
guarantee, or secure the commodity, retail forex or commodity option 
transactions of such customers, retail forex customers or option 
customers. Such record shall show separately for each customer, retail 
forex customer or option customer: a description of the securities or 
property received; the name and address of such customer, retail forex 
customer or option customer; the dates when the securities or property 
were received; the identity of the depositories or other places where 
such securities or property are segregated or held; the dates of 
deposits and withdrawals from such depositories; and the dates of 
return of such securities or property to such customer, retail forex 
customer or option customer, or other disposition thereof, together 
with the facts and circumstances of such other disposition. In the 
event any futures commission

[[Page 3301]]

merchant deposits with the clearing organization of a contract market, 
directly or with a bank or trust company acting as custodian for such 
clearing organization, securities and/or property which belong to a 
particular customer or option customer, such futures commission 
merchant shall obtain written acknowledgment from such clearing 
organization that it was informed that such securities or property 
belong to customers or option customers of the futures commission 
merchant making the deposit. Such acknowledgment shall be retained as 
provided in Sec.  1.31.
* * * * *
    8. Section 1.37 is amended by revising paragraph (a)(1) to read as 
follows:


Sec.  1.37  Customer's or option customer's name, address, and 
occupation recorded; record of guarantor or controller of account.

    (a)(1) Each futures commission merchant, retail foreign exchange 
dealer, introducing broker, and member of a contract market shall keep 
a record in permanent form which shall show for each commodity futures, 
retail forex or option account carried or introduced by it the true 
name and address of the person for whom such account is carried or 
introduced and the principal occupation or business of such person as 
well as the name of any other person guaranteeing such account or 
exercising any trading control with respect to such account. For each 
such commodity option account, the records kept by such futures 
commission merchant, introducing broker, and member of a contract 
market must also show the name of the person who has solicited and is 
responsible for each option customer's account or assign account 
numbers in such a manner to identify that person.
* * * * *
    9. Section 1.40 is revised to read as follows:


Sec.  1.40  Crop, market information letters, reports; copies required.

    Each futures commission merchant, each retail foreign exchange 
dealer, each introducing broker and each member of a contract market 
shall, upon request, furnish or cause to be furnished to the Commission 
a true copy of any letter, circular, telegram, or report published or 
given general circulation by such futures commission merchant, retail 
foreign exchange dealer, introducing broker or member which concerns 
crop or market information or conditions that affect or tend to affect 
the price of any commodity or exchange rate, and the true source of or 
authority for the information contained therein.
    10. Section 1.46 is amended by revising paragraphs (a) and (b) to 
read as follows:


Sec.  1.46  Application and closing out of offsetting long and short 
positions.

    (a) Application of purchases and sales. (1) Except with respect to 
purchases or sales which are for omnibus accounts, or where the 
customer or account controller has instructed otherwise, any futures 
commission merchant who, on or subject to the rules of a designated 
contract market or registered derivatives transaction execution 
facility:
    (i) Purchases any commodity for future delivery for the account of 
any customer when the account of such customer at the time of such 
purchase has a short position in the same future of the same commodity 
on the same market;
    (ii) Sells any commodity for future delivery for the account of any 
customer when the account of such customer at the time of such sale has 
a long position in the same future of the same commodity on the same 
market;
    (iii) Purchases a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
purchase has a short put or call option position with the same 
underlying futures contract or same underlying physical, strike price, 
expiration date and contract market as that purchased; or
    (iv) Sells a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
sale has a long put or call option position with the same underlying 
futures contract or same underlying physical, strike price, expiration 
date and contract market as that sold--shall on the same day apply such 
purchase or sale against such previously held short or long futures or 
option position, as the case may be, and shall, for futures 
transactions, promptly furnish such customer a statement showing the 
financial result of the transactions involved and, if applicable, that 
the account was introduced to the futures commission merchant by an 
introducing broker and the names of the futures commission merchant and 
introducing broker.
    (2) Any futures commission merchant or retail foreign exchange 
dealer who:
    (i) Engages in a retail forex transaction involving the purchase of 
any currency for the account of any retail forex customer when the 
account of such retail forex customer at the time of such purchase has 
an open retail forex transaction for the sale of the same currency;
    (ii) Engages in a retail forex transaction involving the sale of 
any currency for the account of any retail forex customer when the 
account of such retail forex customer at the time of such sale has an 
open retail forex transaction for the purchase of the same currency;
    (iii) Purchases a put or call option involving foreign currency for 
the account of any option customer when the account of such option 
customer at the time of such purchase has a short put or call option 
position with the same underlying currency, strike price, and 
expiration date as that purchased; or
    (iv) Sells a put or call option involving foreign currency for the 
account of any option customer when the account of such option customer 
at the time of such sale has a long put or call option position with 
the same underlying currency, strike price, and expiration date as that 
sold--shall immediately apply such purchase or sale against such 
previously held opposite transaction, and shall promptly furnish such 
retail forex customer a statement showing the financial result of the 
transactions involved and, if applicable, that the account was 
introduced to the futures commission merchant or retail foreign 
exchange dealer by an introducing broker and the names of the futures 
commission merchant or retail foreign exchange dealer, and the 
introducing broker.
    (b) Close-out against oldest open position. In all instances 
wherein the short or long futures, retail forex transaction or option 
position in such customer's, retail forex customer's or option 
customer's account immediately prior to such offsetting purchase or 
sale is greater than the quantity purchased or sold, the futures 
commission merchant or retail foreign exchange dealer shall apply such 
offsetting purchase or sale to the oldest portion of the previously 
held short or long position: Provided, That upon specific instructions 
from the customer or option customer the offsetting transaction shall 
be applied as specified by the customer or option customer without 
regard to the date of acquisition of the previously held position; and 
Provided, further, that a futures commission merchant or retail foreign 
exchange dealer, if permitted by the rules of a registered futures 
association, may offset, at the customer's request, retail forex 
transactions of the same size, even if the customer holds other 
transactions of a different size, but in each case must offset the 
transaction against the oldest

[[Page 3302]]

transaction of the same size. Such instructions may also be accepted 
from any person who, by power of attorney or otherwise, actually 
directs trading in the customer's, retail forex customer's or option 
customer's account unless the person directing the trading is the 
futures commission merchant or retail foreign exchange dealer 
(including any partner thereof), or is an officer, employee, or agent 
of the futures commission merchant or retail foreign exchange dealer. 
With respect to every such offsetting transaction that, in accordance 
with such specific instructions, is not applied to the oldest portion 
of the previously held position, the futures commission merchant or 
retail foreign exchange dealer shall clearly show on the statement 
issued to the customer, retail forex customer or option customer in 
connection with the transaction, that because of the specific 
instructions given by or on behalf of the customer, retail forex 
customer or option customer the transaction was not applied in the 
usual manner, i.e., against the oldest portion of the previously held 
position. However, no such showing need be made if the futures 
commission merchant or retail foreign exchange dealer has received such 
specific instructions in writing from the customer, retail forex 
customer or option customer for whom such account is carried.
* * * * *
    11. Section 1.52 is amended by:
    a. Revising paragraphs (a) and (c);
    b. Revising paragraphs (g)(3) and (g)(4); and
    c. Revising paragraphs (h), (j), and (k) to read as follows:


Sec.  1.52  Self-regulatory organization adoption and surveillance of 
minimum financial requirements.

    (a) Each self-regulatory organization must adopt, and submit for 
Commission approval, rules prescribing minimum financial and related 
reporting requirements for all its members who are registered futures 
commission merchants or registered retail foreign exchange dealers. 
Each self-regulatory organization other than a contract market must 
adopt, and submit for Commission approval, rules prescribing minimum 
financial and related reporting requirements for all its members who 
are registered introducing brokers. Each contract market which elects 
to have a category of membership for introducing brokers must adopt, 
and submit for Commission approval, rules prescribing minimum financial 
and related reporting requirements for all its members who are 
registered introducing brokers. Each self-regulatory organization shall 
submit for Commission approval any modification or other amendments to 
such rules. Such requirements must be the same as, or more stringent 
than, those contained in Sec. Sec.  1.10 and 1.17, for futures 
commission merchants and introducing brokers, and Sec.  5.7 for retail 
foreign exchange dealers. The definition of adjusted net capital must 
be the same as that prescribed in Sec.  1.17(c) for futures commission 
merchants and introducing brokers, and Sec.  5.7(b)(2) for futures 
commission merchants offering or engaging in retail forex transactions 
and for retail foreign exchange dealers: Provided, however, A 
designated self-regulatory organization may permit its member 
registrants which are registered with the Securities and Exchange 
Commission as securities brokers or dealers to file (in accordance with 
Sec.  1.10(h)) a copy of their Financial and Operational Combined 
Uniform Single Report under the Securities Exchange Act of 1934, Part 
II, Part IIA, or Part II CSE, in lieu of Form 1-FR: And, provided 
further, A designated self-regulatory organization may permit its 
member introducing brokers to file a Form 1-FR-IB in lieu of a Form 1-
FR-FCM.
* * * * *
    (c) Any two or more self-regulatory organizations may file with the 
Commission a plan for delegating to a designated self-regulatory 
organization, for any registered futures commission merchant, any 
registered retail foreign exchange dealer, or any registered 
introducing broker which is a member of more than one such self-
regulatory organization, the responsibility of:
    (1) Monitoring and auditing for compliance with the minimum 
financial and related reporting requirements adopted by such self-
regulatory organizations in accordance with paragraph (a) of this 
section; and
    (2) Receiving the financial reports necessitated by such minimum 
financial and related reporting requirements.
* * * * *
    (g) * * *
    (3) Reduces multiple monitoring and auditing for compliance with 
the minimum financial rules of the self-regulatory organizations 
submitting the plan for any futures commission merchant, retail foreign 
exchange dealer, or introducing broker which is a member of more than 
one self-regulatory organization;
    (4) Reduces multiple reporting of the financial information 
necessitated by such minimum financial and related reporting 
requirements by any futures commission merchant, retail foreign 
exchange dealer, or introducing broker which is a member of more than 
one self-regulatory organization; * * *
    (h) After the Commission has approved a plan or part of one under 
Sec.  1.52(g), a self-regulatory organization relieved of 
responsibility must notify each of its members which is subject to such 
a plan:
    (1) Of the limited nature of its responsibility for such a member's 
compliance with its minimum financial and related reporting 
requirements; and
    (2) Of the identity of the designated self-regulatory organization 
which has been delegated responsibility for such a member.
* * * * *
    (j) Whenever a registered futures commission merchant, a registered 
retail foreign exchange dealer, or a registered introducing broker 
holding membership in a self-regulatory organization ceases to be a 
member in good standing of that self-regulatory organization, such 
self-regulatory organization must, on the same day that event takes 
place, give telegraphic notice of that event to the principal office of 
the Commission in Washington, DC, and send a copy of that notification 
to such futures commission merchant, retail foreign exchange dealer, or 
such introducing broker.
    (k) Nothing in this section shall preclude the Commission from 
examining any futures commission merchant, retail foreign exchange 
dealer, or introducing broker for compliance with the minimum financial 
and related reporting requirements to which such futures commission 
merchant, retail foreign exchange dealer, or introducing broker is 
subject.
* * * * *

PART 3--REGISTRATION

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

    Authority:  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 
and 23.

    13. Section 3.1 is amended by revising paragraph (c) to read as 
follows:


Sec.  3.1  Definitions.

* * * * *
    (c) Sponsor. Sponsor means the futures commission merchant, retail 
foreign exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant which makes 
the certification required by Sec.  3.12 of this part for the 
registration of an associated person of such sponsor.
* * * * *
    14. Section 3.4 is amended by revising paragraph (a) to read as 
follows:

[[Page 3303]]

Sec.  3.4  Registration in one capacity not included in registration in 
any other capacity.

    (a) Except as may be otherwise provided in the Act or in any rule, 
regulation, or order of the Commission, each futures commission 
merchant, retail foreign exchange dealer, floor broker, floor trader, 
associated person, commodity trading advisor, commodity pool operator, 
introducing broker, and leverage transaction merchant must register as 
such under the Act. Registration in one capacity under the Act shall 
not include registration in any other capacity: Provided, however, That 
a registered floor broker need not also register as a floor trader in 
order to engage in activity as a floor trader.
* * * * *
    15. Section 3.10 is amended by:
    a. Revising the heading;
    b. Revising paragraph (a)(1);
    c. Revising paragraph (b); and
    d. Revising paragraph (d) to read as follows:


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

    (a) Application for registration. (1)(i) Except as provided in 
paragraph (a)(3) of this section, application for registration as a 
futures commission merchant, retail foreign exchange dealers, 
introducing broker, commodity trading advisor, commodity pool operator 
or leverage transaction merchant must be on Form 7-R, completed and 
filed with the National Futures Association in accordance with the 
instructions thereto.
    (ii) Applicants for registration as a futures commission merchant, 
retail foreign exchange dealer or introducing broker must accompany 
their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in 
accordance with the provisions of Sec.  1.10 of this chapter: Provided, 
however, That an applicant for registration as a futures commission 
merchant or introducing broker which is registered with the Securities 
and Exchange Commission as a securities broker or dealer may accompany 
its Form 7-R with a copy of its Financial and Operational Combined 
Uniform Single Report under the Securities Exchange Act of 1934, Part 
II or Part II A, in accordance with the provisions of Sec.  1.10(h) of 
this chapter.
* * * * *
    (b) Duration of registration. (1) A person registered as a futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, commodity trading advisor, commodity pool operator or leverage 
transaction merchant in accordance with paragraph (a) of this section 
will continue to be so registered until the effective date of any 
revocation or withdrawal of such registration. Such person will be 
prohibited from engaging in activities requiring registration under the 
Act or from representing himself to be a registrant under the Act or 
the representative or agent of any registrant during the pendency of 
any suspension of such registration.
    (2) A person registered as an introducing broker who was a party to 
a guarantee agreement with a futures commission merchant or retail 
foreign exchange dealer in accordance with Sec.  1.10(j) of this 
chapter will have its registration cease thirty days after the 
termination of such guarantee agreement unless the procedures set forth 
in Sec.  1.10(j)(8) of this chapter are followed.
* * * * *
    (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, retail foreign exchange dealer, 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).
* * * * *
    16. Section 3.12 is amended by
    a. Revising the heading;
    b. Revising paragraph (a);
    c. Revising paragraph (f)(1)(iii)(E);
    d. Revising paragraph (f)(4);
    e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and
    f. Removing paragraph (j)
    The revisions read as follows:


Sec.  3.12  Registration of associated persons of futures commission 
merchants, retail foreign exchange dealers, introducing brokers, 
commodity trading advisors, commodity pool operators and leverage 
transaction merchants.

    (a) Registration required. It shall be unlawful for any person to 
be associated with a futures commission merchant, retail foreign 
exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant as an 
associated person unless that person shall have registered under the 
Act as an associated person of that sponsoring futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator or leverage transaction 
merchant in accordance with the procedures in paragraphs (c), (d), (f), 
or (i), of this section or is exempt from such registration pursuant to 
paragraph (h) of this section.
* * * * *
    (f) * * *
    (1) * * *
    (iii) * * *
    (E) Associated person's supervision of any person or persons 
engaged in any of the foregoing solicitations or acceptances, with 
respect to any customers common to it and any other futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator, or leverage transaction 
merchant with which the associated person is associated.
* * * * *
    (4) If a person is associated with a futures commission merchant, 
with a retail foreign exchange dealer, or with an introducing broker 
and he directs customers seeking a managed account to use the services 
of a commodity trading advisor(s) approved by the futures commission 
merchant, retail foreign exchange dealer or introducing broker and all 
such customers' accounts solicited or accepted by the associated person 
are carried by the futures commission merchant, retail foreign exchange 
dealer or introduced by the introducing broker with which the 
associated person is associated, such a person shall be deemed to be 
associated solely with the futures commission merchant, retail foreign 
exchange dealer or introducing broker and may not also register as an 
associated person of the commodity trading advisor(s).
* * * * *
    (h) * * *
    (1) * * *
    (i) Registered under the Act as a futures commission merchant, 
retail foreign exchange dealer, floor broker, or as an introducing 
broker;
* * * * *
    (iii) The chief operating officer, general partner or other person 
in the supervisory chain-of-command, provided the futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator, or leverage transaction 
merchant engages in commodity interest related activity for customers 
as no more

[[Page 3304]]

than ten percent of its total revenue on an annual basis, the firm is 
not subject to a pending proceeding brought by the Commission or a 
self-regulatory organization alleging fraud or failure to supervise, 
and has not been found in such a proceeding to have committed fraud or 
failed to supervise, as required by the Act, the rules promulgated 
thereunder or the rules of a self-regulatory organization, the person 
for whom exemption is sought and the person designated in accordance 
with paragraphs (h)(1)(iii)(C) or (h)(1)(iii)(D) of this section are 
listed as principals of the firm, the fitness examination conducted by 
the National Futures Association with respect to these persons 
discloses no derogatory information that would disqualify any of such 
persons as a principal or as an associated person, and the firm files 
with the National Futures Association corporate or partnership 
resolutions stating that:
    (A) Such supervisory person is not authorized to:
    (1) Solicit or accept customers', retail forex customers', or 
leverage customers' orders,
    (2) Solicit a client's or prospective client's discretionary 
account,
    (3) Solicit funds, securities or property for a participation in a 
commodity pool, or
    (4) Exercise any line supervisory authority over those persons so 
engaged;
    (B) Such supervisory person has no authority with respect to 
hiring, firing or other personnel matters involving persons engaged in 
activities subject to regulation under the Act;
    (C) Another person (or persons) designated therein, who is 
registered as an associated person(s) or who has applied for 
registration as an associated person(s) and is not subject to a pending 
proceeding brought by the Commission or a self-regulatory organization 
alleging fraud or failure to supervise, and has not been found in such 
a proceeding to have committed fraud or failed to supervise, as 
required by the Act, the rules promulgated thereunder or the rules of a 
self-regulatory organization, holds and exercises full and final 
supervisory authority, including authority to hire and fire personnel, 
over the customer commodity interest related activities of the firm; 
and
    (D) If the person (or persons) so designated in accordance with 
paragraph (h)(1)(iii)(C) of this section ceases to have the authority 
referred to therein, the firm will notify the National Futures 
Association within twenty days of such occurrence by means of a 
subsequent resolution which resolution must also include the name of 
another associated person (or persons) who has been vested with full 
supervisory authority, including authority to hire and fire personnel, 
over the customer commodity interest related activities of the firm in 
the event that all of those previously designated in accordance with 
paragraph (h)(1)(iii)(C) of this section have been relieved of such 
authority. Subsequent changes in supervisory authority shall be 
reported in the same manner; or
* * * * *
    17. Section 3.21 is amended by:
    a. Revising paragraph (b)(3); and
    b. Revising paragraph (c)(1) through (3) and (c)(4)(i) to read as 
follows:


Sec.  3.21  Exemption from fingerprinting requirement in certain cases.

* * * * *
    (b) * * *
    (3) With respect to the fingerprints of a principal. An officer, if 
the futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator, introducing broker, 
or leverage transaction merchant with which the principal will be 
affiliated is a corporation, a general partner, if a partnership, or 
the sole proprietor, if a sole proprietorship.
    (c) Outside directors. Any futures commission merchant, retail 
foreign exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant that has a 
principal who is a director but is not also an officer or employee of 
the firm may, in lieu of submitting a fingerprint card in accordance 
with the provisions of Sec. Sec.  3.10(a)(2) and 3.31(a)(2), file a 
``Notice Pursuant to Rule 3.21(c)'' with the National Futures 
Association. Such notice shall state, if true, that such outside 
director:
    (1) Is not engaged in:
    (i) The solicitation or acceptance of customers' orders or retail 
forex customers' orders,
    (ii) The solicitation of funds, securities or property for a 
participation in a commodity pool,
    (iii) The solicitation of a client's or prospective client's 
discretionary account,
    (iv) The solicitation or acceptance of leverage customers' orders 
for leverage transactions;
    (2) Does not regularly have access to the keeping, handling or 
processing of:
    (i) Commodity interest transactions;
    (ii) Customer funds, retail forex customer funds, leverage customer 
funds, foreign futures or foreign options secured amount, or adjusted 
net capital; or
    (3) Does not have direct supervisory responsibility over persons 
engaged in the activities referred to in paragraphs (c)(1) and (c)(2) 
of this section; and
    (4) * * *:
    (i) The name of the futures commission merchant, retail foreign 
exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator, leverage transaction merchant, or applicant 
for registration in any of these capacities of which the person is an 
outside director;
* * * * *
    18. Section 3.30 is amended by revising paragraph (a) to read as 
follows:


Sec.  3.30  Current address for purpose of delivery of communications 
from the Commission or the National Futures Association.

    (a) The address of each registrant, applicant for registration and 
principal, as submitted on the application for registration (Form 7-R 
or Form 8-R) or as submitted on the biographical supplement (Form 8-R) 
shall be deemed to be the address for delivery to the registrant, 
applicant or principal for any communications from the Commission or 
the National Futures Association, including any summons, complaint, 
reparation claim, order, subpoena, special call, request for 
information, notice, and other written documents or correspondence, 
unless the registrant, applicant or principal specifies another address 
for this purpose: Provided, That the Commission or the National Futures 
Association may address any correspondence relating to a biographical 
supplement submitted for or on behalf of a principal to the futures 
commission merchant, retail foreign exchange dealer, commodity trading 
advisor, commodity pool operator, introducing broker, or leverage 
transaction merchant with which the principal is affiliated and may 
address any correspondence relating to the registration of an 
associated person to the futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant with which the 
associated person or the applicant for registration is or will be 
associated as an associated person.
* * * * *
    19. Section 3.31 is amended by revising paragraphs (a)(1), (b), 
(c), and (d) to read as follows:


Sec.  3.31  Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission 
merchant, retail foreign exchange dealer, commodity

[[Page 3305]]

trading advisor, commodity pool operator, introducing broker, or 
leverage transaction merchant shall, in accordance with the 
instructions thereto, promptly correct any deficiency or inaccuracy in 
Form 7-R or Form 8-R which no longer renders accurate and current the 
information contained therein. Each such correction shall be made on 
Form 3-R and shall be prepared and filed in accordance with the 
instructions thereto. Provided, however, that where a registrant is 
reporting a change in the form of organization from or to a sole 
proprietorship, the registrant must file a Form 7-W regarding the pre-
existing organization and a Form 7-R regarding the newly formed 
organization.
* * * * *
    (b) Each applicant or registrant as a floor broker, floor trader or 
associated person, and each principal of a futures commission merchant, 
retail foreign exchange dealer, commodity trading advisor, commodity 
pool operator, introducing broker, or leverage transaction merchant 
must, in accordance with the instructions thereto, promptly correct any 
deficiency or inaccuracy in the Form 8-R or supplemental statement 
thereto which renders no longer accurate and current the information 
contained in the Form 8-R or supplemental statement. Each such 
correction must be made on Form 3-R and must be prepared and filed in 
accordance with the instructions thereto.
    (c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf 
of any person for the purpose of permitting that person to be an 
associated person of a futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator, 
introducing broker, or a leverage transaction merchant, that futures 
commission merchant, retail foreign exchange dealer, commodity trading 
advisor, commodity pool operator, introducing broker or leverage 
transaction merchant must, within thirty days after the occurrence of 
either of the following, file a notice thereof with the National 
Futures Association indicating:
    (i) The failure of that person to become associated with the 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator, introducing broker, or 
leverage transaction merchant, and the reasons therefor; or
    (ii) The termination of the association of the associated person 
with the futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator, introducing broker, 
or leverage transaction merchant, and the reasons therefor.
    (2) Each person registered as, or applying for registration as, a 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator, introducing broker or 
leverage transaction merchant must, within thirty days after the 
termination of the affiliation of a principal with the registrant or 
applicant, file a notice thereof with the National Futures Association.
    (3) Any notice required by paragraph (c) of this section must be 
filed on Form 8-T or on a Uniform Termination Notice for Securities 
Industry Registration.
    (d) Each contract market or derivatives transaction execution 
facility that has granted trading privileges to a person who is 
registered, has received a temporary license, or has applied for 
registration as a floor broker or floor trader, must notify the 
National Futures Association within sixty days after such person has 
ceased having trading privileges on such contract market or derivatives 
transaction execution facility.


(Approved by the Office of Management and Budget under control number 
3038-0023)

    20. Section 3.33 is amended by revising paragraphs (a) introductory 
text, (b) introductory text, (b)(6), and (e) to read as follows:


Sec.  3.33  Withdrawal from registration.

    (a) A futures commission merchant, retail foreign exchange dealer, 
introducing broker, commodity trading advisor, commodity pool operator, 
leverage transaction merchant, floor broker or floor trader may request 
that its registration be withdrawn in accordance with the requirements 
of this section if:
* * * * *
    (b) A request for withdrawal from registration as a futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, commodity trading advisor, commodity pool operator, or leverage 
transaction merchant must be made on Form 7-W, and a request for 
withdrawal from registration as a floor broker or floor trader must be 
made on Form 8-W, completed and filed with National Futures Association 
in accordance with the instructions thereto. The request for withdrawal 
must be made by a person duly authorized by the registrant and must 
specify:
* * * * *
    (6) If a basis for withdrawal from registration under paragraph 
(a)(1) of this section is that the registrant has ceased engaging in 
activities requiring registration, then, with respect to each capacity 
for which the registrant has ceased such activities:
    (i) That all customer, retail forex customer or option customer 
agreements, if any, have been terminated;
    (ii) That all customer, retail forex customer or option customer 
positions, if any, have been transferred on behalf of customers or 
option customers or closed;
    (iii) That all customer, retail forex customer or option customer 
cash balances, securities, or other property, if any, have been 
transferred on behalf of customers, retail forex customers or option 
customers or returned, and that there are no obligations to customers, 
retail forex customers or option customers outstanding;
    (iv) In the case of a commodity pool operator, that all interests 
in, and assets of, any commodity pool have been redeemed, distributed, 
or transferred, on behalf of the participants therein, and that there 
are no obligations to such participants outstanding;
    (v) In the case of a leverage transaction merchant:
    (A) Either that all leverage customer agreements, if any, and all 
leverage contracts have been terminated, and that all leverage customer 
cash balances, securities or other property, if any, have been 
returned, or
    (B) Alternatively, that pursuant to Commission approval, the 
leverage contract obligations of the leverage transaction merchant have 
been assumed by another leverage transaction merchant and all leverage 
customer cash balances, securities or other property, if any, have been 
transferred to such leverage transaction merchant on behalf of leverage 
customers or returned, and that there are no obligations to leverage 
customers outstanding;
    (vi) The nature and extent of any pending customer, retail forex 
customer, option customer, leverage customer, or commodity pool 
participant claims against the registrant, and, to the best of the 
registrant's knowledge and belief, the nature and extent of any 
anticipated or threatened customer, option customer, leverage customer, 
or commodity pool participant claims against the registrant; and
    (vii) In the case of a futures commission merchant or a retail 
foreign

[[Page 3306]]

exchange dealer which is a party to a guarantee agreement, that all 
such agreements have been or will be terminated in accordance with the 
provisions of Sec.  1.10(j) of this chapter not more than thirty days 
after the filing of the request for withdrawal from registration.
* * * * *
    (e) A request for withdrawal from registration as a futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, commodity trading advisor, commodity pool operator, leverage 
transaction merchant on Form 7-W, and a request for withdrawal from 
registration as a floor broker or floor trader on Form 8-W, must be 
filed with the National Futures Association and a copy of such request 
must be sent by the National Futures Association within three business 
days of the receipt of such withdrawal request to the Commodity Futures 
Trading Commission, Division of Clearing and Intermediary Oversight, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In 
addition, any floor broker or floor trader requesting withdrawal from 
registration must file a copy of his Form 8-W with each contract market 
that has granted him trading privileges. Within three business days of 
any determination by the National Futures Association under Sec.  
3.10(d) to treat the failure by a registrant to file an annual Form 7-R 
as a request for withdrawal, the National Futures Association shall 
send the Commission notice of that determination.
* * * * *
    21. Section 3.44 is amended by revising paragraphs (a)(1) through 
(5) to read as follows:


Sec.  3.44  Temporary licensing of applicants for guaranteed 
introducing broker registration.

    (a) * * *
    (1) A properly completed guarantee agreement (Form 1-FR part B) 
from a futures commission merchant or retail foreign exchange dealer 
which is eligible to enter into such an agreement pursuant to Sec.  
1.10(j)(2) of this chapter;
    (2) A Form 7-R properly completed in accordance with the 
instructions thereto;
    (3) A Form 8-R for the applicant, if a sole proprietor, and each 
principal (including each branch office manager) thereof, properly 
completed in accordance with the instructions thereto, all of whom 
would be eligible for a temporary license if they had applied as 
associated persons.
    (4) A certification executed by a person duly authorized by the 
futures commission merchant or retail foreign exchange dealer that has 
executed the guarantee agreement required by paragraph (a)(1) of this 
section, stating that:
    (i) The futures commission merchant or retail foreign exchange 
dealer has verified the information on the Forms 8-R filed pursuant to 
paragraph (a)(3) of this section which relate to education and 
employment history of the applicant's principals (including each branch 
office manager) thereof during the preceding three years; and
    (ii) To the best of the futures commission merchant's or retail 
foreign exchange dealer's knowledge, information, and belief, all of 
the publicly available information supplied by the applicant and its 
principals and each branch office manager of the applicant on the Form 
7-R and Forms 8-R, as appropriate, is accurate and complete; and
    (5) The fingerprints of the applicant, if a sole proprietor, and of 
each principal (including each branch office manager) thereof on 
fingerprint cards provided by the National Futures Association for that 
purpose: Provided, that a principal who has a current Form 8-R on file 
with the National Futures Association or the Commission is not required 
to submit a fingerprint card.
* * * * *
    22. Section 3.45 is amended by revising paragraph (b) to read as 
follows:


Sec.  3.45  Restrictions upon activities.

* * * * *
    (b) An applicant for registration as an introducing broker who has 
received a temporary license may be guaranteed by a futures commission 
merchant or retail foreign exchange dealer other than the futures 
commission merchant or retail foreign exchange dealer which provided 
the initial guarantee agreement described in Sec.  3.44(a)(1) of this 
subpart: Provided, That, at least 10 days prior to the effective date 
of the termination of the existing guarantee agreement in accordance 
with the provisions of Sec.  1.10 (j)(4)(ii) or (j)(5) of this chapter, 
or such other period of time as the National Futures Association may 
allow for good cause shown, the applicant files with the National 
Futures Association--
    (1) Written notice of such termination and
    (2) A new guarantee agreement with another futures commission 
merchant or retail foreign exchange dealer effective the day following 
the last effective date of the existing guarantee agreement.
    23. Section 3.50 is amended by revising paragraph (b)(2) to read as 
follows:


Sec.  3.50  Service.

* * * * *
    (b) * * *
    (2) Any futures commission merchant or retail foreign exchange 
dealer which has entered into a guarantee agreement in accordance with 
Sec.  1.10(j) of this chapter, if the applicant or registrant is 
registered as or applying for registration as an introducing broker.
* * * * *
    24. Section 3.60 is amended by revising paragraph (b)(2)(i)(B) to 
read as follows:


Sec.  3.60  Procedure to deny, condition, suspend, revoke or place 
restrictions upon registration pursuant to sections 8a(2), 8a(3) and 
8a(4) of the Act.

* * * * *
    (b) * * *
    (2)(i) * * *
    (B) In the case of a sponsor which is a futures commission 
merchant, a retail foreign exchange dealer or a leverage transaction 
merchant, the sponsor is not subject to the reporting requirements of 
Sec.  1.12(b), Sec.  5.6(b) or Sec.  31.7(b) of this chapter, 
respectively; and
* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    25. The authority citation for part 4 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 
23.

    26. Section 4.7 is amended by:
    a. Revising paragraph (a)(1)(v)(B); and
    b. Revising paragraph (a)(2)(i) to read as follows:


Sec.  4.7  Exemption from certain part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons 
and for commodity trading advisors with respect to advising qualified 
eligible persons.

* * * * *
    (a) * * *
    (1) * * *
    (v) * * *
    (B) Has had on deposit with a futures commission merchant, for its 
own account at any time during the six-month period preceding either 
the date of sale to that person of a pool participation in the exempt 
pool or the date that the person opens an exempt account with the 
commodity trading advisor, at least $200,000 in exchange-specified 
initial margin and option premiums, together with NFA-specified minimum 
security deposit for retail forex transactions (as defined in section 
5.1(m) of this chapter) for commodity interest transactions; or
* * * * *

[[Page 3307]]

    (2) * * *
    (i)(A) A futures commission merchant registered pursuant to section 
4d of the Act, or a principal thereof;
    (B) A retail foreign exchange dealer registered pursuant to section 
2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;
* * * * *
    27. Section 4.12 is amended by revising paragraph (b)(1)(i)(C) to 
read as follows:


Sec.  4.12  Exemption from provisions of part 4.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (C) Will not enter into commodity interest transactions for which 
the aggregate initial margin and premiums, and NFA-specified minimum 
security deposit for retail forex transactions (as defined in Sec.  
5.1(m) of this chapter) exceed 10 percent of the fair market value of 
the pool's assets, after taking into account unrealized profits and 
unrealized losses on any such contracts it has entered into; Provided, 
however, That in the case of an option that is in-the-money at the time 
of purchase, the in-the-money amount as defined in Sec.  190.01(x) may 
be excluded in computing such 10 percent; and
* * * * *
    28. Section 4.13 is amended by:
    a. Revising paragraph (a)(3)(ii)(A): and
    b. Revising paragraph (a)(3)(ii)(B)(1) to read as follows:


Sec.  4.13  Exemption from registration as a commodity pool operator.

* * * * *
    (a) * * *
    (3) * * *
    (ii) * * *
    (A) The aggregate initial margin, premiums, and NFA-specified 
minimum security deposit for retail forex transactions (as defined in 
section 5.1(m) of this chapter) required to establish such positions, 
determined at the time the most recent position was established, will 
not exceed 5 percent of the liquidation value of the pool's portfolio, 
after taking into account unrealized profits and unrealized losses on 
any such positions it has entered into; Provided, That in the case of 
an option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Sec.  190.01(x) of this chapter may be 
excluded in computing such 5 percent; or
    (B) * * *
    (1) The term ``notional value'' shall be calculated for each such 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units (taking into account any multiplier 
specified in the contract), by the current market price per unit, and 
for each such option position by multiplying the number of contracts by 
the size of the contract, adjusted by its delta, in contract units 
(taking into account any multiplier specified in the contract), by the 
strike price per unit, and for each such retail forex transaction, by 
calculating the value in U.S. Dollars of such transaction, at the time 
the transaction was established, excluding for this purpose the value 
in U.S. Dollars of offsetting long and short transactions, if any; and
* * * * *
    29. Section 4.14 is amended by revising paragraph (a)(7) to read as 
follows:


Sec.  4.14  Exemption from registration as a commodity trading advisor.

* * * * *
    (a) * * *
    (7)(i) It is registered under the Act as a leverage transaction 
merchant and the person's trading advice is solely in connection with 
its business as a leverage transaction merchant;
    (ii) It is registered under the Act as a retail foreign exchange 
dealer and the person's trading advice is solely in connection with its 
business as a retail foreign exchange dealer.
* * * * *
    30. Section 4.23 is amended by:
    a. Revising paragraph (a)(1);
    b. Revising paragraph (a)(7); and
    c. Revising paragraph (b)(1) and (2) to read as follows:


Sec.  4.23  Recordkeeping.

    (a) Concerning the commodity pool: (1) An itemized daily record of 
each commodity interest transaction of the pool, showing the 
transaction date, quantity, commodity interest, and, as applicable, 
price or premium, delivery month or expiration date, whether a put or a 
call, strike price, underlying contract for future delivery or 
underlying physical, the futures commission merchant and/or retail 
foreign exchange dealer carrying the account and the introducing 
broker, if any, whether the commodity interest was purchased, sold 
(including, in the case of a retail forex transaction, offset), 
exercised, expired (including, in the case of a retail forex 
transaction, whether it was rolled forward), and the gain or loss 
realized.
* * * * *
    (7) Copies of each confirmation of a commodity interest transaction 
of the pool, each purchase and sale statement and each monthly 
statement for the pool received from a futures commission merchant or 
retail foreign exchange dealer.
* * * * *
    (b) Concerning the commodity pool operator: (1) An itemized daily 
record of each commodity interest transaction of the commodity pool 
operator and each principal thereof, showing the transaction date, 
quantity, commodity interest, and, as applicable, price or premium, 
delivery month or expiration date, whether a put or a call, strike 
price, underlying contract for future delivery or underlying physical, 
the futures commission merchant or retail foreign exchange dealer 
carrying the account and the introducing broker, if any whether the 
commodity interest was purchased, sold, exercised, or expired, and the 
gain or loss realized.
    (2) Each confirmation of a commodity interest transaction, each 
purchase and sale statement and each monthly statement furnished by a 
futures commission merchant or retail foreign exchange dealer to:
    (i) The commodity pool operator relating to a personal account of 
the pool operator; and
    (ii) Each principal of the pool operator relating to a personal 
account of such principal.
* * * * *
    31. Section 4.24 is amended by:
    a. Revising paragraph (b)(1) introductory text and the first three 
sentences of the Risk Disclosure Statement in paragraph (b)(1);
    b. Adding paragraph (b)(4);
    c. Revising paragraph (e)(6);
    d. Revising paragraph (g);
    e. Revising paragraphs (h)(2) and (h)(4)(iii);
    f. Revising paragraph (i)(2)(ii);
    g. Redesignating paragraph (i)(2)(xii) as paragraph (i)(2)(xiii) 
and adding new paragraph (i)(2)(xii);
    h. Revising paragraphs (j)(1)(vi) and (j)(3); and
    i. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and 
(l)(2)(i).
    The addition and revisions to read as follows:


Sec.  4.24  General disclosures required.

* * * * *
    (b) Risk Disclosure Statement. (1) The following Risk Disclosure 
Statement must be prominently displayed immediately following any 
disclosures required to appear on the cover page of the Disclosure 
Document as provided by the Commission, by any applicable federal or 
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions.

[[Page 3308]]

RISK DISCLOSURE STATEMENT
    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION 
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD 
BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE 
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET 
ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN 
THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR 
ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. * * *
* * * * *
    (4) If the pool may engage in retail Forex transactions, the Risk 
Disclosure Statement must further state:
    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN 
OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN 
THE INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE 
FOREIGN CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS 
USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION 
CONTRACTS. IF THE POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT 
COUNTERPARTY BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED 
OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE 
TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF 
CHAPTER 7 OF THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE 
POOL MAY BE A GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH 
THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE 
AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY 
KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF 
PRIORITY AND OTHER GENERAL CREDITORS.
* * * * *
    (e) * * *
    (6) If known, the futures commission merchant and/or retail foreign 
exchange dealer through which the pool will execute its trades, and, if 
applicable, the introducing broker through which the pool will 
introduce its trades to the futures commission merchant and/or retail 
foreign exchange dealer.
* * * * *
    (g) Principal risk factors. A discussion of the principal risk 
factors of participation in the offered pool. This discussion must 
include, without limitation, risks relating to volatility, leverage, 
liquidity, counterparty creditworthiness, as applicable to the types of 
trading programs to be followed, trading structures to be employed and 
investment activity (including retail forex transactions) expected to 
be engaged in by the offered pool.
    (h) * * *
    (2) A description of the trading and investment programs and 
policies that will be followed by the offered pool, including the 
method chosen by the pool operator concerning how futures commission 
merchants and/or retail foreign exchange dealers carrying the pool's 
accounts shall treat offsetting positions pursuant to Sec.  1.46 of 
this chapter, if the method is other than to close out all offsetting 
positions or to close out offsetting positions on other than a first-
in, first-out basis, and any material restrictions or limitations on 
trading required by the pool's organizational documents or otherwise. 
This description must include, if applicable, an explanation of the 
systems used to select commodity trading advisors, investee pools and 
types of investment activity to which pool assets will be committed;
* * * * *
    (4) * * *
    (iii) If assets deposited by the pool as margin or as security 
deposit generate income, to whom that income will be paid.
    (i) * * *
    (2) * * *
    (ii) Brokerage fees and commissions, including interest income paid 
to futures commission merchants, and any fees incurred to maintain an 
open position in retail forex transactions;
* * * * *
    (xii) Any costs or fees included in the spread between bid and 
asked prices for retail forex transactions; and
* * * * *
    (j) * * *
    (1) * * *
    (vi) Any other person providing services to the pool or soliciting 
participants for the pool, or acting as a counterparty to the pool's 
retail forex transactions (as defined in section 5.1(m) of this 
chapter).
* * * * *
    (3) Included in the description of such conflicts must be any 
arrangement whereby a person may benefit, directly or indirectly, from 
the maintenance of the pool's account with the futures commission 
merchant and/or retail foreign exchange dealer, or from the 
introduction of the pool's account to a futures commission merchant 
and/or retail foreign exchange dealer by an introducing broker (such as 
payment for order flow or soft dollar arrangements) or from an 
investment of pool assets in investee pools or funds or other 
investments.
* * * * *
    (l) * * *
    (1) * * *
    (iii) The pool's futures commission merchants and/or retail foreign 
exchange dealers and its introducing brokers, if any.
    (2) With respect to a futures commission merchant and/or retail 
foreign exchange dealer or an introducing broker, an action will be 
considered material if:
    (i) The action would be required to be disclosed in the notes to 
the futures commission merchant's, retail foreign exchange dealer's or 
introducing broker's financial statements prepared pursuant to 
generally accepted accounting principles;
* * * * *
    32. Section 4.25 is amended by revising paragraph (c)(3)(ii) to 
read as follows:


Sec.  4.25  Performance disclosures.

* * * * *
    (c) * * *
    (3) * * *
    (ii) If a major commodity trading advisor has not previously traded 
accounts, the pool operator must prominently display the following 
statement:
    (Name of the major commodity trading advisor), A COMMODITY TRADING 
ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of 
the pool's funds available for commodity interest trading allocated to 
that trading advisor) PERCENT OF THE POOL'S COMMODITY INTEREST TRADING 
HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.
* * * * *

Subpart C--Commodity Trading Advisors

    33. Section 4.30 is revised to read as follows:


Sec.  4.30  Prohibited activities.

    No commodity trading advisor may solicit, accept or receive from an 
existing or prospective client funds,

[[Page 3309]]

securities or other property in the trading advisor's name (or extend 
credit in lieu thereof) to purchase, margin, guarantee or secure any 
commodity interest of the client; Provided, however, That this section 
shall not apply to a future commission merchant that is registered as 
such under the Act or to a leverage transaction merchant that is 
registered as a commodity trading advisor under the Act or to a retail 
foreign exchange dealer that is registered as such under the Act.
    34. Section 4.33 is amended by:
    a. Revising paragraph (a)(6); and
    b. Revising paragraphs (b)(1) and (2) to read as follows:


Sec.  4.33  Recordkeeping.

* * * * *
    (a) * * *
    (6) Copies of each confirmation of a commodity interest 
transaction, each purchase and sale statement and each monthly 
statement received from a futures commission merchant or a retail 
foreign exchange dealer.
* * * * *
    (b) Concerning the commodity trading advisor:
    (1) An itemized daily record of each commodity interest transaction 
of the commodity trading advisor, showing the transaction date, 
quantity, commodity interest, and, as applicable, price or premium, 
delivery month or expiration date, whether a put or a call, strike 
price, underlying contract for future delivery or underlying physical, 
the futures commission merchant and/or retail foreign exchange dealer 
carrying the account and the introducing broker, if any, whether the 
commodity interest was purchased, sold (including, in the case of a 
retail forex transaction, offset), exercised, expired (including, in 
the case of a retail forex transaction, whether it was rolled forward), 
and the gain or loss realized.
    (2) Each confirmation of a commodity interest transaction, each 
purchase and sale statement and each monthly statement furnished by a 
futures commission merchant or retail foreign exchange dealer to:
    (i) The commodity trading advisor relating to a personal account of 
the trading advisor; and
    (ii) Each principal of the trading advisor relating to a personal 
account of such principal.
* * * * *
    35. Section 4.34 is amended by:
    a. Revising paragraph (b);
    b. Revising paragraph (e)(2);
    c. Revising paragraphs (g) and (h);
    d. Revising paragraph (i)(2);
    e. Revising paragraphs (j)(1) and (j)(3);
    f. Revising paragraphs (k)(1)(ii), (k)(1)(iii), (k)(2) introductory 
text, and (k)(2)(i) to read as follows:


Sec.  4.34  General disclosures required.

* * * * *
    (b) Risk Disclosure Statement. (1) The following Risk Disclosure 
Statement must be prominently displayed immediately following any 
disclosures required to appear on the cover page of the Disclosure 
Document as provided by the Commission, by any applicable federal or 
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions:
RISK DISCLOSURE STATEMENT
    THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. 
YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS 
SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING 
WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU 
SHOULD BE AWARE OF THE FOLLOWING:
    IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF 
THE PREMIUM AND OF ALL TRANSACTION COSTS.
    IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A 
COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU 
MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY 
DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO 
ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR 
POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A 
SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN 
ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED 
FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A 
LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.
    UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR 
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN 
THE MARKET MAKES A ``LIMIT MOVE.''
    THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, 
SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY 
LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY 
MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
    A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG'' 
OR ``SHORT'' POSITION.
    THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY 
INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF 
LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
    IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO 
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE 
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE 
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR 
ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page 
number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR 
ACCOUNT BY THE COMMODITY TRADING ADVISOR.
    THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER 
SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD 
THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY 
INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE 
PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page 
number).
    (2)(i) If the commodity trading advisor may trade foreign futures 
or options contracts pursuant to the offered trading program, the Risk 
Disclosure Statement must further state the following:
    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY 
ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON 
MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY 
LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH 
OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES 
REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE 
RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES 
JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE 
YOU SHOULD

[[Page 3310]]

INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR CONTEMPLATED 
TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO TRADE FOR 
DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR LOCAL AND 
OTHER RELEVANT JURISDICTIONS.
    (ii) If the commodity trading advisor may engage in retail forex 
transactions pursuant to the offered trading program, the Risk 
Disclosure Statement must further state the following:
    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY 
ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT 
CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A 
COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME 
PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED 
FUTURES AND OPTION CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND 
YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON 
TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A 
COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF 
THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL 
CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER 
GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY 
CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM 
ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER 
GENERAL CREDITORS.
    FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN 
THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR 
RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.
    (3) If the commodity trading advisor is not also a registered 
futures commission merchant or a registered retail foreign exchange 
dealer, the trading advisor must make the additional following 
statement in the Risk Disclosure Statement, to be included as the last 
paragraph thereof:
    THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING 
FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY 
INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM 
DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE 
DEALER, AS APPLICABLE.
* * * * *
    (e) * * *
    (2) The futures commission merchant and/or retail foreign exchange 
dealer with which the commodity trading advisor will require the client 
to maintain its account or, if the client is free to choose the futures 
commission merchant or retail foreign exchange dealer with which it 
will maintain its account, the trading advisor must make a statement to 
that effect; and
* * * * *
    (g) Principal risk factors. A discussion of the principal risk 
factors of this trading program. This discussion must include, without 
limitation, risks due to volatility, leverage, liquidity, and 
counterparty creditworthiness, as applicable to the trading program and 
the types of transactions and investment activity expected to be 
engaged in pursuant to such program (including retail forex 
transactions, if any).
    (h) Trading program. A description of the trading program, which 
must include the method chosen by the commodity trading advisor 
concerning how futures commission merchants and/or retail foreign 
exchange dealers carrying accounts it manages shall treat offsetting 
positions pursuant to Sec.  1.46 of this chapter, if the method is 
other than to close out all offsetting positions or to close out 
offsetting positions on other than a first-in, first-out basis, and the 
types of commodity interests and other interests the commodity trading 
advisor intends to trade, with a description of any restrictions or 
limitations on such trading established by the trading advisor or 
otherwise.
    (i) * * *
    (2) Where any fee is determined by reference to a base amount 
including, but not limited to, ``net assets,'' ``gross profits,'' ``net 
profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading 
advisor must explain how such base amount will be calculated. Where any 
fee is based on the difference between bid and asked prices on retail 
forex transactions (as defined in Sec.  5.1 of this chapter), the 
trading advisor must explain how such fee will be calculated;
* * * * *
    (j) Conflicts of interest. (1) A full description of any actual or 
potential conflicts of interest regarding any aspect of the trading 
program on the part of:
    (i) The commodity trading advisor;
    (ii) Any futures commission merchant and/or retail foreign exchange 
dealer with which the client will be required to maintain its commodity 
interest account;
    (iii) Any introducing broker through which the client will be 
required to introduce its account to a futures commission merchant and/
or retail foreign exchange dealer; and
    (iv) Any principal of the foregoing.
* * * * *
    (3) Included in the description of any such conflict must be any 
arrangement whereby the trading advisor or any principal thereof may 
benefit, directly or indirectly, from the maintenance of the client's 
commodity interest account with a futures commission merchant and/or 
retail foreign exchange dealer, or the introduction of such account 
through an introducing broker (such as payment for order flow or soft 
dollar arrangements).
    (k) * * *
    (1) * * *
    (ii) Any futures commission merchant or retail foreign exchange 
dealer with which the client will be required to maintain its commodity 
interest account; and
    (iii) Any introducing broker through which the client will be 
required to introduce its account to the futures commission merchant 
and/or retail foreign exchange dealer.
    (2) With respect to a futures commission merchant, retail foreign 
exchange dealer or introducing broker, an action will be considered 
material if:
    (i) The action would be required to be disclosed in the notes to 
the futures commission merchant's, retail foreign exchange dealer's or 
introducing broker's financial statements prepared pursuant to 
generally accepted accounting principles;
* * * * *
    36. Part 5 is added to read as follows:

PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

Sec.
5.1 Definitions.
5.2 Prohibited transactions.
5.3 Registration of persons engaged in retail forex transactions.
5.4 Applicability of part 4 of this chapter to commodity pool 
operators and commodity trading advisors.
5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign 
exchange dealers, futures commission merchants and introducing 
brokers regarding retail forex transactions.
5.6 Maintenance of minimum financial requirements by retail foreign 
exchange dealers and futures commission

[[Page 3311]]

merchants offering or engaging in retail forex transactions.
5.7 Minimum financial requirements for retail foreign exchange 
dealers and futures commission merchants offering or engaging in 
retail forex transactions.
5.8 Aggregate retail forex assets.
5.9 Security deposits for retail forex transactions.
5.10 Risk assessment recordkeeping requirements for retail foreign 
exchange dealers.
5.11 Risk assessment reporting requirements for retail foreign 
exchange dealers.
5.12 Financial reports of retail foreign exchange dealers.
5.13 Reporting to customers of retail foreign exchange dealers and 
futures commission merchants; monthly and confirmation statements.
5.14 Records to be kept by retail foreign exchange dealers and 
futures commission Merchants.
5.15 Unlawful representations.
5.16 Prohibition of guarantees against loss.
5.17 Authorization to trade.
5.18 Trading and operational standards.
5.19 Pending legal proceedings.
5.20 Special calls for account and transaction information.
5.21 Supervision.
5.22 Registered futures association membership.
5.23 Notice of bulk transfers and bulk liquidations.
5.24 Applicability of other parts of this chapter.
5.25 Applicability of the Act.

    Authority:  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.


Sec.  5.1   Definitions.

    (a) Affiliated person of a futures commission merchant means a 
person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;
    (b) Aggregate retail forex assets means an amount of liquid assets 
held in accordance with section 5.8 of this part;
    (c) Associated person of an affiliated person of a futures 
commission merchant means any natural person associated with an 
affiliated person of a futures commission merchant as a partner, 
officer or employee (or any natural person occupying a similar status 
or performing similar functions), in any capacity which involves:
    (1) The solicitation or acceptance of retail forex customers' 
orders (other than in a clerical capacity); or
    (2) The supervision of any person or persons so engaged;
    (d)(1) Commodity pool operator, for purposes of this part, means 
any person who operates or solicits funds, securities, or property for 
a pooled investment vehicle that is not an eligible contract 
participant as defined in section 1a(12) of the Act, and that engages 
in retail forex transactions;
    (2) Associated person of a commodity pool operator, for purposes of 
this part, means any natural person associated with a commodity pool 
operator as defined in paragraph (d)(1) of this section as a partner, 
officer, employee, consultant or agent (or any natural person occupying 
a similar status or performing similar functions), in any capacity 
which involves:
    (i) The solicitation of funds, securities, or property for a 
participation in a pooled investment vehicle; or
    (ii) The supervision of any person or persons so engaged;
    (e)(1) Commodity trading advisor, for purposes of this part, means 
any person who exercises discretionary trading authority or obtains 
written authorization to exercise discretionary trading authority over 
any account for or on behalf of any person that is not an eligible 
contract participant as defined in section 1a(12) of the Act, in 
connection with retail forex transactions;
    (2) Associated person of a commodity trading advisor, for purposes 
of this part, means any natural person associated with a commodity 
trading advisor as defined in paragraph (e)(1) of this section as a 
partner, officer, employee, consultant or agent (or any natural person 
occupying a similar status or performing similar functions), in any 
capacity which involves:
    (i) The solicitation of a client's or prospective client's 
discretionary account; or
    (ii) The supervision of any person or persons so engaged;
    (f)(1) Introducing broker, for purposes of this part, means any 
person who solicits or accepts orders from a customer that is not an 
eligible contract participant as defined in section 1a(12) of the Act, 
in connection with retail forex transactions;
    (2) Associated person of an introducing broker, for purposes of 
this part, means any natural person associated with an introducing 
broker as defined in paragraph (g)(1) of this section as a partner, 
officer, employee, or agent (or any natural person occupying a similar 
status or performing similar functions), in any capacity which 
involves:
    (i) The solicitation or acceptance of retail forex customers' 
orders (other than in a clerical capacity); or
    (ii) The supervision of any person or persons so engaged;
    (g) Primarily or substantially means, when used to describe the 
extent of a futures commission merchant's engagement in the activities 
described in section 1a(20) of the Act, that:
    (1) Such activities account for more than fifty percent of the 
futures commission merchant's gross revenues, computed in accordance 
with generally accepted accounting principles, on an annual basis;
    (2) The futures commission merchant receives gross revenues, 
computed in accordance with generally accepted accounting principles, 
from such activities in excess of $500,000 in any twelve month period; 
or
    (3) The futures commission merchant is a clearing member of a 
registered derivatives clearing organization.
    (h)(1) Retail foreign exchange dealer means any person that is, or 
that offers to be, the counterparty to a retail forex transaction, 
except for a person described in sub-paragraph (aa), (bb), (cc)(AA), 
(dd), (ee) or (ff) of section 2(c)(2)(B)(i)(II) of the Act;
    (2) Associated person of a retail foreign exchange dealer means any 
natural person associated with a retail foreign exchange dealer as 
defined in paragraph (i)(1) of this section as a partner, officer or 
employee (or any natural person occupying a similar status or 
performing similar functions), in any capacity which involves:
    (i) The solicitation or acceptance of retail forex customers' 
orders (other than in a clerical capacity); or
    (ii) The supervision of any person or persons so engaged;
    (i) Retail forex account means the account of a person who is not 
an eligible contract participant as defined in section 1a(12) of the 
Act, established with a retail foreign exchange dealer or a futures 
commission merchant, in which account retail forex transactions 
(including options on contracts for the purchase or sale of foreign 
currency) with such retail foreign exchange dealer or futures 
commission merchant as counterparty are undertaken, or which account is 
established in order to enter into such transactions.
    (j) Retail forex account agreement means the contractual agreement 
between a futures commission merchant or retail foreign exchange dealer 
and any person who is not an eligible contract participant as defined 
in section 1a(12) of the Act, which agreement contains the terms 
governing the person's retail forex account with such futures 
commission merchant or retail foreign exchange dealer.
    (k) Retail forex customer means a person, other than an eligible 
contract participant as defined in section 1a(12) of the Act, acting on 
its own behalf and trading in any account, agreement, contract or 
transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.

[[Page 3312]]

    (l) Retail forex obligation means the net credit balance at a 
retail foreign exchange dealer or futures commission merchant that 
would be obtained by combining all money, securities and property 
deposited by a retail forex customer into a retail forex account or 
accounts, adjusted for the realized and unrealized net profit or loss, 
if any, accruing on the open trades, contracts or transactions in the 
retail forex account or accounts, without including any retail forex 
customers' accounts that contain negative net liquidating balances.
    (m) Retail forex transaction means any account, agreement, contract 
or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the 
Act. A retail forex transaction does not include an account, agreement, 
contract or transaction in foreign currency that is a contract of sale 
of a commodity for future delivery (or an option thereon) that is 
executed, traded on or otherwise subject to the rules of a contract 
market designated pursuant to section 5(a) of the Act or a derivatives 
transaction execution facility registered pursuant to section 5a(c) of 
the Act.


Sec.  5.2   Prohibited transactions.

    (a) Scope. The provisions of this section shall be applicable to 
any retail forex transaction.
    (b) Fraudulent conduct prohibited. It shall be unlawful for any 
person, by use of the mails or by any means or instrumentality of 
interstate commerce, directly or indirectly, in or in connection with 
any retail forex transaction:
    (1) To cheat or defraud or attempt to cheat or defraud any person;
    (2) Willfully to make or cause to be made to any person any false 
report or statement or cause to be entered for any person any false 
record; or
    (3) Willfully to deceive or attempt to deceive any person by any 
means whatsoever.
    (c) Acting as counterparty and exercising discretion prohibited. 
(1) No person who acts as the counterparty for any retail forex 
transaction may do so for an account for which the person or any 
affiliate of the person is authorized (by contract, power of attorney 
or otherwise) to cause transactions to be effected without the client's 
specific authorization.
    (2) For purposes of this paragraph (c), an ``affiliate'' of a 
person means a person controlling, controlled by or under common 
control with, the first person.


Sec.  5.3  Registration of persons engaged in retail forex 
transactions.

    (a) Subject to paragraph (b) of this section, each of the following 
is subject to the registration provisions under the Act and to part 3 
of this chapter:
    (1)(i) Any affiliated person of a futures commission merchant, as 
defined in section 5.1(a) of this part, which affiliated person:
    (A) Solicits or accepts orders from any person that is not an 
eligible contract participant in connection with any retail forex 
transaction; or
    (B) Accepts money, securities, or property (or extends credit in 
lieu thereof) in connection with such solicitation or acceptance of 
orders in order to engage in any retail forex transaction, is required 
to register as a retail foreign exchange dealer; and
    (ii) Any associated person of an affiliated person of a futures 
commission merchant, as defined in Sec.  5.1(c) of this part, is 
required to register as an associated person of an affiliated person of 
a futures commission merchant.
    (2)(i) Any commodity pool operator, as defined in Sec.  5.1(d)(1) 
of this part, is required to register as a commodity pool operator;
    (ii) Any associated person of a commodity pool operator, as defined 
in Sec.  5.1(d)(2) of this part, is required to register as an 
associated person of a commodity pool operator;
    (3)(i) Any commodity trading advisor, as defined in Sec.  5.1(e)(1) 
of this part, is required to register as a commodity trading advisor;
    (ii) Any associated person of a commodity trading advisor, as 
defined in Sec.  5.1(e)(2) of this part, is required to register as an 
associated person of a commodity trading advisor;
    (4)(i) Any person registered as a futures commission merchant:
    (A) That is not primarily or substantially engaged in the business 
activities described in section 1a(20) of the Act;
    (B) That solicits or accepts orders from any person that is not an 
eligible contract participant in connection with any retail forex 
transaction; and
    (C) That accepts money, securities, or property (or extends credit 
in lieu thereof) in connection with such solicitation or acceptance of 
orders in order to engage in retail forex transactions, is required to 
register as a retail foreign exchange dealer;
    (ii) Any associated person of a futures commission merchant 
described in paragraph (a)(4)(i) of this section is required to 
register as an associated person of a futures commission merchant;
    (5)(i) Any introducing broker, as defined in Sec.  5.1(f)(1) of 
this part, is required to register as an introducing broker;
    (ii) Any associated person of an introducing broker, as defined in 
Sec.  5.1(f)(2) of this part, is required to register as an associated 
person of an introducing broker;
    (6)(i) Any retail foreign exchange dealer, as defined in Sec.  
5.1(h)(1) of this part is required to register as a retail foreign 
exchange dealer;
    (ii) Any associated person of a retail foreign exchange dealer, as 
defined in Sec.  5.1(h)(2) of this part, is required to register as an 
associated person of a retail foreign exchange dealer;
    (b) Any person described in paragraph (a) of this section that is 
already registered in the required capacity specified in paragraph (a) 
is not required under this section to register twice in the same 
capacity; Provided, however, that a person already registered as an 
associated person of one class of registrant may also be required to 
register as an associated person of another class of registrant in 
order to comply with this section.


Sec.  5.4  Applicability of part 4 of this chapter to commodity pool 
operators and commodity trading advisors.

    Part 4 of this chapter applies to any person required pursuant to 
the provisions of this part 5 to register as a commodity pool operator 
or as a commodity trading advisor. Failure by any such person to comply 
with the requirements of part 4 will constitute a violation of this 
section and the relevant section of part 4.


Sec.  5.5  Distribution of ``Risk Disclosure Statement'' by retail 
foreign exchange dealers, futures commission merchants and introducing 
brokers regarding retail forex transactions.

    (a) Except as provided in Sec.  5.23 of this part, no retail 
foreign exchange dealer, futures commission merchant, or in the case of 
an introduced account no introducing broker, may open an account that 
will engage in retail forex transactions for a retail forex customer, 
unless the retail foreign exchange dealer, futures commission merchant 
or introducing broker first:
    (1)(i) In the case of a retail foreign exchange dealer or a person 
required to register as an introducing broker solely by reason of this 
part, furnishes the retail forex customer with a separate written 
disclosure statement containing only the language set forth in 
paragraph (b) of this section and the disclosure required by paragraph 
(e) of this section;
    (ii) In the case of a futures commission merchant or a person 
required to register as an introducing broker because it engages in the 
activities described in Sec.  1.3(mm) of this chapter, furnishes the 
retail forex

[[Page 3313]]

customer with a separate written disclosure statement containing only 
the language set forth in paragraph (b) of this section and the 
disclosure required by paragraph (e) of this section; Provided, 
however, that the disclosure statement may be attached to other 
documents as the initial page(s) of such documents and as the only 
material on such page(s); and
    (2) Receives from the retail forex customer an acknowledgment 
signed and dated by the retail forex customer that he received and 
understood the disclosure statement.
    (b) The language set forth in the written disclosure statement 
required by paragraph (a) of this section shall be as follows:
Risk Disclosure Statement
    OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED 
TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A 
FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR 
COUNTERPARTY.
    BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN 
RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY 
LOSE MORE THAN YOU DEPOSIT.
    YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS 
BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
    (1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER 
IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE 
YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM 
THE REGISTRATION STATUS OF YOUR COUNTERPARTY.
    The off-exchange foreign currency trading you are entering into is 
not conducted on an interbank market, nor is it conducted on a futures 
exchange subject to regulation as a designated contract market by the 
Commodity Futures Trading Commission. The foreign currency trades you 
transact are trades with the futures commission merchant or retail 
foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER 
IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when 
you lose money trading, your dealer is making money on such trades, in 
addition to any fees, commissions, or spreads the dealer may charge.
    (2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY 
TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR 
ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE 
GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.
    Any trading platform that you may use to enter off-exchange foreign 
currency transactions is only connected to your futures commission 
merchant or retail foreign exchange dealer. You are accessing that 
trading platform only to transact with your dealer. You are not trading 
with any other entities or customers of the dealer by accessing such 
platform. The availability and operation of any such platform, 
including the consequences of the unavailability of the trading 
platform for any reason, is governed only by the terms of your account 
agreement with the dealer.
    (3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.
    All of your rights associated with your retail forex trading, 
including the manner and denomination of any payments made to you, are 
governed by the contract terms established in your account agreement 
with the futures commission merchant or retail foreign exchange dealer. 
Funds deposited by you with a futures commission merchant or retail 
foreign exchange dealer for trading off-exchange foreign currency 
transactions are not subject to the customer funds protections provided 
to customers trading on a contract market that is designated by the 
Commodity Futures Trading Commission. Your dealer may commingle your 
funds with its own operating funds or use them for other purposes. In 
the event your dealer becomes bankrupt, any funds the dealer is holding 
for you in addition to any amounts owed to you resulting from trading, 
whether or not any assets are maintained in separate deposit accounts 
by the dealer, may be treated as an unsecured creditor's claim.
    (4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY 
TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR 
MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.
    Your ability to close your transactions or offset positions is 
limited to what your dealer will offer to you, as there is no other 
market for these transactions. Your dealer may offer any prices it 
wishes, and it may offer prices derived from outside sources or not in 
its discretion. Your dealer may establish its prices by offering 
spreads from third party prices, but it is under no obligation to do so 
or to continue to do so. Your dealer may offer different prices to 
different customers at any point in time on its own terms. The terms of 
your account agreement alone govern the obligations your dealer has to 
you to offer prices and offer offset or liquidating transactions in 
your account and make any payments to you. The prices offered by your 
dealer may or may not reflect prices available elsewhere at any 
exchange, interbank, or other market for foreign currency.
    (5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS
    The futures commission merchant or retail foreign exchange dealer 
may compensate introducing brokers for introducing your account in ways 
which are not disclosed to you. Such paid solicitors are not required 
to have, and may not have, any special expertise in trading, and may 
have conflicts of interest based on the method by which they are 
compensated. Solicitors working on behalf of futures commission 
merchants and retail foreign exchange dealers are required to register. 
You should confirm that they are, in fact registered. You should 
thoroughly investigate the manner in which all such solicitors are 
compensated and be very cautious in granting any person or entity 
authority to trade on your behalf. You should always consider obtaining 
dated written confirmation of any information you are relying on from 
your dealer or a solicitor in making any trading or account decisions.
    FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY 
DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR 
CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS 
MAY INDICATE POTENTIAL SALES FRAUD.
    THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND 
OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS 
WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
    I hereby acknowledge that I have received and understood this risk 
disclosure statement.

-----------------------------------------------------------------------
Date
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Signature of Customer


[[Page 3314]]


    (c) The acknowledgment required by paragraph (a) of this section 
must be retained by the retail foreign exchange dealer, futures 
commission merchant or introducing broker in accordance with Sec.  1.31 
of this chapter.
    (d) This section does not relieve a retail foreign exchange dealer, 
futures commission merchant or introducing broker from any other 
disclosure obligation it may have under applicable law.
    (e)(1) Immediately following the language set forth in paragraph 
(b) of this section, the statement required by paragraph (a) of this 
section shall include, for each of the most recent four quarters during 
which the counterparty maintained retail forex accounts:
    (i) The total number of non discretionary retail forex accounts 
maintained by the retail foreign exchange dealer or futures commission 
merchant;
    (ii) The percentage of such accounts that were profitable; and
    (iii) the percentage of such accounts that were not profitable.
    (2) Identification of retail forex accounts for purposes of this 
disclosure and calculation of each such account's profit or loss must 
be made in accordance with Sec.  5.18(i) of this part. Such statement 
of profitable trades shall include the following legend: PAST 
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each 
retail foreign exchange dealer or futures commission merchant shall 
provide, upon request, to any retail forex customer or prospective 
retail forex customer the total number of non discretionary retail 
forex accounts maintained by such retail foreign exchange dealer or 
futures commission merchant, the percentage of such accounts that were 
profitable, and the percentage of such accounts that were unprofitable, 
calculated in accordance with Sec.  5.18(i) of this part, for each 
quarter during the most recent five year period during which such 
retail foreign exchange dealer or futures commission merchant 
maintained non discretionary retail forex accounts.


Sec.  5.6  Maintenance of minimum financial requirements by retail 
foreign exchange dealers and futures commission merchants offering or 
engaging in retail forex transactions.

    (a) Each futures commission merchant offering or engaging in retail 
forex transactions or who files an application for registration as a 
futures commission merchant that will offer or engage in retail forex 
transactions and each person registered as a retail foreign exchange 
dealer or who files an application for registration as a retail foreign 
exchange dealer, who knows or should have known that its adjusted net 
capital at any time is less than the minimum required by Sec.  5. 7 of 
this part or by the capital rule of a registered futures association of 
which it is a member, must:
    (1) Give telephonic notice, to be confirmed in writing by facsimile 
notice, that the applicant's or registrant's adjusted net capital is 
less than that required by Sec.  5.7 of this part. The notice must be 
given immediately after the applicant or registrant knows or should 
know that its adjusted net capital is less than that required by any of 
the aforesaid rules to which the applicant or registrant is subject; 
and
    (2) Provide together with such notice documentation in such form as 
necessary to adequately reflect the applicant's or registrant's capital 
condition as of any date such person's adjusted net capital is less 
than the minimum required. The applicant or registrant must provide 
similar documentation for other days as the Commission may request.
    (b) Each applicant or registrant, who knows or should have known 
that its adjusted net capital at any time is less than the greatest of:
    (1) $22,000,000;
    (2) 110 percent of the amount required by Sec.  5.7(a)(1)(i)(B) of 
this part; or
    (3) 110 percent of the amount of adjusted net capital required by a 
registered futures association of which the futures commission merchant 
or retail foreign exchange dealer is a member, must file written notice 
to that effect within 24 hours of such event.
    (c) If an applicant or registrant at any time fails to make or keep 
current the books and records required by these regulations, such 
applicant or registrant must, on the same day such event occurs, 
provide facsimile notice of such fact, specifying the books and records 
which have not been made or which are not current, and within 48 hours 
after giving such notice file a written report stating what steps have 
been and are being taken to correct the situation.
    (d) Whenever any applicant or registrant discovers or is notified 
by an independent public accountant, pursuant to Sec.  1.16(e)(2) of 
this chapter, of the existence of any material inadequacy, as specified 
in Sec.  1.16(d)(2) of this chapter, such applicant or registrant must 
give facsimile notice of such material inadequacy within 24 hours, and 
within 48 hours after giving such notice file a written report stating 
what steps have been and are being taken to correct the material 
inadequacy.
    (e) Whenever any self-regulatory organization learns that a member 
registrant has failed to file a notice or written report as required by 
Sec.  5.6 of this part, that self-regulatory organization must 
immediately report this failure by telephone, confirmed in writing 
immediately by facsimile notice, as provided in paragraph (h) of this 
section.
    (f) A retail foreign exchange dealer or a futures commission 
merchant offering or engaging in retail forex transactions shall 
provide written notice of a substantial reduction in capital as 
compared to that last reported in a financial report filed with the 
Commission pursuant to Sec.  5.12 of this part. This notice shall be 
provided as follows:
    (1) If any event or series of events, including any withdrawal, 
advance, loan or loss cause, on a net basis, a reduction in net capital 
of 20 percent or more, notice must be provided within two business days 
of the event or series of events causing the reduction; and
    (2) If the equity capital of the retail foreign exchange dealer or 
futures commission merchant offering or engaging in retail forex 
transactions or the equity capital of a subsidiary or affiliate of the 
retail foreign exchange dealer or futures commission merchant offering 
or engaging in retail forex transactions consolidated pursuant to Sec.  
1.17(f) of this chapter would be withdrawn by action of a stockholder 
or a partner or a limited liability company member or by redemption or 
repurchase of shares of stock by any of the consolidated entities or 
through the payment of dividends or any similar distribution, or an 
unsecured advance or loan would be made to a stockholder, partner, sole 
proprietor, limited liability company member, employee or affiliate, 
such that the withdrawal, advance or loan would cause, on a net basis, 
a reduction in excess adjusted net capital of 30 percent or more, 
notice must be provided at least two business days prior to the 
withdrawal, advance or loan that would cause the reduction: Provided, 
however, That the provisions of paragraphs (f)(1) and (f)(2) of this 
section do not apply to any retail foreign exchange transaction in the 
ordinary course of business between a retail foreign exchange dealer 
and any affiliate where the retail foreign exchange dealer makes 
payment to or on behalf of such affiliate for such transaction and then 
receives payment from such affiliate for such transaction within two 
business days from the date of the transaction.

[[Page 3315]]

    (3) Upon receipt of such notice from a futures commission merchant 
offering or engaging in retail forex transactions or a retail foreign 
exchange dealer, the Director of the Division of Clearing and 
Intermediary Oversight or the Director's designee may require that the 
futures commission merchant offering or engaging in retail forex 
transactions or retail foreign exchange dealer provide or cause a 
Material Affiliated Person (as that term is defined in Sec.  5.10(a)(2) 
of this part) to provide, within three business days from the date of 
the request or such shorter period as the Director or designee may 
specify, such other information as the Director or designee determines 
to be necessary based upon market conditions, reports provided by the 
retail foreign exchange dealer or futures commission merchant offering 
or engaging in retail forex transactions, or other available 
information.
    (g) Whenever a person registered as a futures commission merchant 
offering or engaging in retail forex transactions or a retail foreign 
exchange dealer knows or should know that the total amount of its 
retail forex obligation exceeds the amount of the aggregate retail 
forex assets the registrant maintains in accordance with the provisions 
of Sec.  5.8 of this chapter, the registrant must report such 
deficiency immediately by telephone notice, confirmed immediately in 
writing by facsimile notice.
    (h) Every notice and written report required to be given or filed 
with the Commission by this section by an applicant must be filed with 
the regional office of the Commission with jurisdiction over the state 
in which the applicant's principal place of business is located, and 
with the National Futures Association. Every notice and written report 
required to be given or filed with the Commission by this section by a 
registrant or self-regulatory organization must be filed with the 
regional office of the Commission with jurisdiction over the state in 
which the registrant's principal place of business is located, and with 
the registrant's designated self-regulatory organization. In addition, 
every notice and written report required to be given by this section 
must also be filed with the Chief Accountant of the Division of 
Clearing and Intermediary Oversight at the Commission's principal 
office in Washington, DC.
    (i) In lieu of filing paper copies with the Commission, all filings 
or other notices prepared by a futures commission merchant or retail 
foreign exchange dealer pursuant to this section may be submitted to 
the Commission in electronic form using a form of user authentication 
assigned in accordance with procedures established by or approved by 
the Commission, and otherwise in accordance with instructions issued by 
or approved by the Commission, if the futures commission merchant, 
retail foreign exchange dealer or a designated self-regulatory 
organization has provided the Commission with the means necessary to 
read and to process the information contained in such report. Any such 
electronic submission must clearly indicate the registrant or applicant 
on whose behalf such filing is made and the use of such user 
authentication in submitting such filing will constitute and become a 
substitute for the manual signature of the authorized signer.


Sec.  5.7  Minimum financial requirements for retail foreign exchange 
dealers and futures commission merchants offering or engaging in retail 
forex transactions.

    (a)(1)(i) Each futures commission merchant offering or engaging in 
retail forex transactions and each retail foreign exchange dealer must 
maintain adjusted net capital equal to or in excess of the greatest of:
    (A) $20,000,000;
    (B) $20,000,000 plus five percent of the futures commission 
merchant's or retail foreign exchange dealer's total retail forex 
obligation in excess of $10,000,000;
    (C) any amount required under Sec.  1.17 of this chapter, as 
applicable; or
    (D) the amount of adjusted net capital required by a registered 
futures association of which the futures commission merchant or retail 
foreign exchange dealer is a member.
    (ii) Section 1.17 of this chapter shall apply to retail foreign 
exchange dealers as if such retail foreign exchange dealers were 
futures commission merchants, or as applicable, applicants or 
registrants, as stated in Sec.  1.17 for the purpose of determining the 
adjusted net capital under this section. For the purpose of applying 
this section, ``applicant'' or ``registrant'' shall include retail 
foreign exchange dealers and futures commission merchants offering or 
engaging in retail forex transactions and applicants therefore.
    (2) No person applying for registration as a retail foreign 
exchange dealer or a futures commission merchant that will engage in 
retail forex transactions shall be so registered unless such person 
affirmatively demonstrates to the satisfaction of a registered futures 
association that it complies with the financial requirements of this 
section.
    (3) Each registrant must be in compliance with this section at all 
times and must be able to demonstrate such compliance to the 
satisfaction of the Commission or the registrant's designated self-
regulatory organization.
    (4) A registrant who is not in compliance with this section, or is 
unable to demonstrate such compliance as required by paragraph (a)(3) 
of this section, shall, as directed by and under the supervision of the 
Commission or the registrant's designated self-regulatory organization, 
either liquidate or transfer all retail forex accounts (including the 
novation of retail forex contracts) and refund or transfer all funds 
associated with such retail forex accounts and immediately cease 
offering or engaging in retail forex transactions until such time as 
the firm is able to demonstrate to the Commission or the registrant's 
designated self-regulatory organization such compliance: Provided, 
however, That if such registrant immediately demonstrates to the 
satisfaction of the Commission or the registrant's designated self-
regulatory organization the ability to achieve compliance, the 
Commission or the registrant's designated self-regulatory organization 
may in its discretion allow such registrant up to a maximum of 10 
business days, or such additional time as determined by the Commission, 
in which to achieve compliance without having to liquidate positions or 
transfer accounts and cease doing business as required above. Nothing 
in this paragraph (a)(4) shall be construed as preventing the 
Commission or the registrant's designated self-regulatory organization 
from taking action against a registrant for non-compliance with any of 
the provisions of this section.
    (b) For the purposes of this section:
    (1) Where the applicant or registrant has an asset or liability 
which is defined in Securities Exchange Act Rule 15c3-1 (Sec.  
240.15c3-1 of this title) the inclusion or exclusion of all or part of 
such asset or liability for the computation of adjusted net capital 
shall be in accordance with Sec.  240.15c3-1 of this title, unless 
specifically stated otherwise in this section or in Sec.  1.17 of this 
chapter.
    (2) The adjusted net capital of an applicant or registrant for the 
purpose of this section shall be determined by the application of Sec.  
1.17 pursuant to paragraph (a)(1)(ii) of this section, with the 
following additions:
    (i) All positions in retail forex accounts and other financial 
positions and instruments of the applicant or registrant must be marked 
to market and adjusted daily by referencing to current market prices or 
rates of exchange.

[[Page 3316]]

    (ii) Current assets must exclude any retail forex account which 
liquidates to a deficit or contains a debit ledger balance only and is 
not secured in accordance with Sec.  1.17(c)(3).
    (iii) Current assets must exclude any unsecured receivable accrued 
from any over-the-counter transaction in foreign currency, options on 
foreign currency or options on contracts for the purchase or sale of 
foreign currency, or arising from the deposit of collateral or 
compensating balances with respect to such transactions, unless such 
unsecured receivable is from a person who is an eligible contract 
participant that also is:
    (A) A bank or trust company regulated by a United States banking 
regulator;
    (B) A broker-dealer registered with the Securities and Exchange 
Commission and a member of the Financial Industry Regulatory Authority;
    (C) A futures commission merchant registered with the Commission 
and a member of the National Futures Association;
    (D) A retail foreign exchange dealer registered with the Commission 
and a member of the National Futures Association;
    (E) An entity regulated as a foreign equivalent of any of the 
persons listed in paragraphs (b)(2)(iii)(A) through (D) of this 
section, if such person is regulated in a money center country as 
defined in Sec.  1.49 of this chapter and recognized by the futures 
commission merchant's or retail foreign exchange dealer's designated 
self-regulatory organization as a foreign equivalent;
    (F) Any other entity approved by the futures commission merchant's 
or retail foreign exchange dealer's designated self-regulatory 
organization.
    (iv) The value attributed to any retail forex transaction that is 
an option shall be the difference between the option's exercise value 
or striking value and the market value of the underlying. In the case 
of a call, if the market value of the underlying is less than the 
exercise value or striking value of such call, it shall be given no 
value; and, in the case of a put, if the market value of the underlying 
is more than the exercise value or striking value of the put, it shall 
be given no value.
    (v)(A) In computing adjusted net capital, the capital deductions 
set forth in Sec.  1.17(c)(5)(ii) of this chapter shall apply to retail 
forex transactions other than options. The capital deductions which 
apply are six percent for net positions in Euros, British pounds, 
Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net 
positions in all other foreign currencies, Provided, however, That 
there shall be no capital deductions for retail forex transactions 
covered (as defined in Sec.  1.17(j) of this chapter) by the applicant 
or registrant by open futures contracts to the extent such futures 
contracts are not otherwise designated as cover for any other net 
capital purposes. For purposes of this paragraph (b)(2)(v)(A), such 
retail forex transactions shall be treated as if they were inventory 
and cover were therefore applicable. A retail foreign exchange dealer 
or futures commission merchant may not use an affiliate (unless 
approved by the firm's designated self-regulatory organization) or any 
person that is considered unregulated under the rules of the firm's 
designated self-regulatory organization to cover its currency positions 
for purposes of this section.
    (B) In computing adjusted net capital, the capital deductions set 
forth in Sec.  1.17(c)(5)(vi) of this chapter shall apply to all retail 
forex transactions that are options.
    (C) For the purpose of applying capital deductions on open 
proprietary futures positions under Sec.  1.17(c)(5)(x) of this 
chapter, net or individual positions in retail forex transactions shall 
not constitute cover under Sec.  1.17(j) for the purpose of applying 
such charges.
    (c) An applicant or registrant must prepare, and keep current, 
ledgers or other similar records which show or summarize, with 
appropriate references to supporting documents, each transaction 
affecting the applicant's or registrant's asset, liability, income, 
expense and capital accounts, and in which (except as otherwise 
permitted in writing by the Commission) all the applicant's or 
registrant's asset, liability and capital accounts are classified into 
the account classification subdivisions specified on Form 1-FR-FCM. 
Each applicant or registrant shall prepare and keep current such 
records.
    (d) An applicant or registrant must make and keep as a record in 
accordance with Sec.  5.14 of this part formal computations of its 
adjusted net capital and of its minimum financial requirements pursuant 
to this section as of the close of business each month and on other 
such dates called for by the Commission, the National Futures 
Association, or another self-regulatory organization of which the firm 
is a member. Such computations must be completed and made available for 
inspection by any representative of the Commission, the National 
Futures Association, a self-regulatory organization of which the firm 
is a member, or the United States Department of Justice commencing the 
first month-end after the date the application for registration is 
filed.


Sec.  5.8  Aggregate retail forex assets.

    (a) Each retail foreign exchange dealer and futures commission 
merchant offering or engaging in retail forex transactions shall 
calculate its total retail forex obligation and shall at all times hold 
assets solely of the type permissible under Sec.  1.25 of this chapter 
equal to or in excess of the total retail forex obligation at one or 
more qualifying institutions in the United States or money center 
countries as defined in Sec.  1.49 of this chapter.
    (b) For assets held in the United States, a qualifying institution 
is:
    (1) A bank or trust company regulated by a United States banking 
regulator;
    (2) A broker-dealer registered with the Securities and Exchange 
Commission and a member of the Financial Industry Regulatory Authority; 
or
    (3) A futures commission merchant registered with the Commission 
and a member of the National Futures Association.
    (c) For assets held in a money center country, a qualifying 
institution is:
    (1) A bank or trust company regulated in a money center country, 
Provided that the bank or trust company has regulatory capital in 
excess of $1 billion;
    (2) An entity regulated in a money center country as an equivalent 
of a broker-dealer or futures commission merchant as determined by the 
retail foreign exchange dealer's or futures commission merchant's 
designated self-regulatory organization, Provided that the entity 
maintains regulatory capital in excess of $100 million; or
    (3) A futures commission merchant registered with the Commission 
and a member of the National Futures Association.
    (d) Assets held in a money center country are not eligible to meet 
the requirements of paragraph (a) of this section unless the retail 
foreign exchange dealer or futures commission merchant has entered into 
an agreement that is acceptable to the firm's designated self-
regulatory organization and that authorizes the qualifying institution 
to provide account information to the Commission and the firm's 
designated self-regulatory organization.
    (e) In computing its adjusted net capital pursuant to Sec.  5.7 of 
this part, a retail foreign exchange dealer or futures commission 
merchant may not include aggregate retail forex assets as current 
assets or otherwise record any property received from retail forex 
customers as an asset without recording a corresponding liability to 
the retail forex customers.

[[Page 3317]]

Sec.  5.9  Security deposits for retail forex transactions.

    (a) Each futures commission merchant engaging, or offering to 
engage, in retail forex transactions and each retail foreign exchange 
dealer must collect from each retail forex customer a minimum security 
deposit in the form of cash or other financial instruments that comply 
with the requirements specified in Sec.  1.25 of this chapter for each 
retail forex transaction equal to:
    (1) Ten percent of the notional value of the retail forex 
transaction;
    (2) For short options, ten percent of the notional value of the 
retail forex transaction, plus the premium received by the futures 
commission merchant or retail foreign exchange dealer; or
    (3) For long options, the full premium charged and received by the 
futures commission merchant or retail foreign exchange dealer.
    (b) A futures commission merchant or retail foreign exchange dealer 
is required to collect additional security deposits from a retail forex 
customer or liquidate the retail forex customer's positions if the 
amount of the retail forex customer's security deposits maintained with 
the futures commission merchant or retail foreign exchange dealer are 
not sufficient to meet the requirements in paragraph (a) of this 
section.


Sec.  5.10  Risk assessment recordkeeping requirements for retail 
foreign exchange dealers.

    (a) Requirement to maintain and preserve information. (1) Each 
retail foreign exchange dealer registered with the Commission pursuant 
to section 2(c)(2)(B)(i)(II)(gg) of the Act shall prepare, maintain and 
preserve the following information:
    (i) An organizational chart which includes the retail foreign 
exchange dealer and each of its affiliated persons. Included in the 
organizational chart shall be a designation of which affiliated persons 
are ``Material Affiliated Persons'' as that term is used in paragraph 
(a)(2) of this section, which Material Affiliated Persons file routine 
financial or risk exposure reports with the Securities and Exchange 
Commission, a federal banking agency, an insurance commissioner or 
other similar official or agency of a state, or a foreign regulatory 
authority, and which Material Affiliated Persons are dealers in 
financial instruments with off-balance sheet risk and, if a Material 
Affiliated Person is such a dealer, whether it is also an end-user of 
such instruments;
    (ii) Written policies, procedures, or systems concerning the retail 
foreign exchange dealer's:
    (A) Method(s) for monitoring and controlling financial and 
operational risks to it resulting from the activities of any of its 
affiliated persons;
    (B) Financing and capital adequacy, including information regarding 
sources of funding, together with a narrative discussion by management 
of the liquidity of the material assets of the retail foreign exchange 
dealer, the structure of debt capital, and sources of alternative 
funding;
    (C) Establishing and maintaining internal controls with respect to 
market risk, credit risk, and other risks created by the retail foreign 
exchange dealer's trading activities, including systems and policies 
for supervising, monitoring, reporting and reviewing trading activities 
in forex transactions, securities, futures contracts, commodity 
options, forward contracts and financial instruments; policies for 
hedging or managing risks created by trading activities or supervising 
accounts carried for affiliates, including a description of the types 
of reviews conducted to monitor positions; and policies relating to 
restrictions or limitations on trading activities: Provided, however, 
that if the retail foreign exchange dealer has no such written 
policies, procedures or systems, it must so state in writing;
    (iii) Fiscal year-end consolidated and consolidating balance sheets 
for the highest level Material Affiliated Person within the retail 
foreign exchange dealer's organizational structure, which shall include 
the retail foreign exchange dealer and its other Material Affiliated 
Persons, prepared in accordance with generally accepted accounting 
principles, which consolidated balance sheets shall be audited by an 
independent certified public accountant if an annual audit is performed 
in the ordinary course of business, but which otherwise may be 
unaudited, and which shall include appropriate explanatory notes. The 
consolidating balance sheets may be those prepared by the retail 
foreign exchange dealer's highest level Material Affiliated Person as 
part of its internal financial reporting process. Any additional 
information required to be filed under Sec.  5.11(a)(2)(iii) of this 
part shall also be maintained and preserved; and
    (iv) Fiscal year-end consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the retail foreign exchange dealer's 
organizational structure, which shall include the retail foreign 
exchange dealer and its other Material Affiliated Persons, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary 
course of business, but which otherwise may be unaudited, and which 
shall include appropriate explanatory notes. The consolidating 
statements may be those prepared by the retail foreign exchange 
dealer's highest level Material Affiliated Person as part of its 
internal financial reporting process. Any additional information 
required to be filed under Sec.  5.11(a)(2)(iii) shall also be 
maintained and preserved.
    (2) The determination of whether an affiliated person of a retail 
foreign exchange dealer is a Material Affiliated Person shall involve 
consideration of all aspects of the activities of, and the relationship 
between, both entities, including without limitation, the following 
factors:
    (i) The legal relationship between the retail foreign exchange 
dealer and the affiliated person;
    (ii) The overall financing requirements of the retail foreign 
exchange dealer and the affiliated person, and the degree, if any, to 
which the retail foreign exchange dealer and the affiliated person are 
financially dependent on each other;
    (iii) The degree to which the retail foreign exchange dealer and 
the affiliated person directly or indirectly engage in over-the-counter 
transactions with each other;
    (iv) The degree, if any, to which the retail foreign exchange 
dealer or its customers rely on the affiliated person for operational 
support or services in connection with the retail foreign exchange 
dealer's business;
    (v) The level of market, credit or other risk present in the 
activities of the affiliated person; and
    (vi) The extent to which the affiliated person has the authority or 
the ability to cause a withdrawal of capital from the retail foreign 
exchange dealer.
    (3) For purposes of this section and Sec.  5.11 of this part, the 
term Material Affiliated Person does not include a natural person.
    (4) The information, reports and records required by this section 
shall be maintained and preserved, and made readily available for 
inspection, in accordance with the provisions of Sec.  1.31 of this 
chapter.
    (b) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic regulators. A retail 
foreign exchange dealer shall be deemed to be in compliance with the 
recordkeeping requirements of paragraphs (a)(1)(i), (iii)

[[Page 3318]]

and (iv) of this section with respect to a Material Affiliated Person 
if:
    (1) The Material Affiliated Person is required to maintain and 
preserve information pursuant to Sec.  240.17h-1T of this title, or 
such other risk assessment regulations as the Securities and Exchange 
Commission may adopt, and the retail foreign exchange dealer maintains 
and makes available for inspection by the Commission in accordance with 
the provisions of this section copies of the records and reports 
maintained and filed on Form 17-H (or such other forms or reports as 
may be required) by the Material Affiliated Person with the Securities 
and Exchange Commission pursuant to Sec. Sec.  240.17h-1T and 240.17h-
2T of this title, or such other risk assessment regulations as the 
Securities and Exchange Commission may adopt;
    (2) In the case of a Material Affiliated Person (including a 
foreign banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the retail foreign 
exchange dealer or such Material Affiliated Person maintains and makes 
available for inspection by the Commission in accordance with the 
provisions of this section copies of all reports submitted by such 
Material Associated Person to the Federal banking agency pursuant to 
section 5211 of the Revised Statutes, section 9 of the Federal Reserve 
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) 
of the Home Owners' Loan Act, or section 5 of the Bank Holding Company 
Act of 1956; or
    (3) In the case of a Material Affiliated Person that is subject to 
the supervision of an insurance commissioner or other similar official 
or agency of a state, the retail foreign exchange dealer or such 
Material Affiliated Person maintains and makes available for inspection 
by the Commission in accordance with the provisions of this section 
copies of the annual statements with schedules and exhibits prepared by 
the Material Affiliated Person on forms prescribed by the National 
Association of Insurance Commissioners or by a state insurance 
commissioner.
    (c)(1) Special provisions with respect to Material Affiliated 
Persons subject to the supervision of a Foreign Regulatory Authority. A 
retail foreign exchange dealer shall be deemed to be in compliance with 
the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of 
this section with respect to a Material Affiliated Person if such 
retail foreign exchange dealer maintains and makes available, or causes 
such Material Affiliated Person to make available, for inspection by 
the Commission in accordance with the provisions of this section copies 
of any financial or risk exposure reports filed by such Material 
Affiliated Person with a foreign futures authority or other foreign 
regulatory authority, provided that:
    (i) The retail foreign exchange dealer agrees to use its best 
efforts to obtain from the Material Affiliated Person and to cause the 
Material Affiliated Person to provide, directly or through its foreign 
futures authority or other foreign regulatory authority, any 
supplemental information the Commission may request and there is no 
statute or other bar in the foreign jurisdiction that would preclude 
the retail foreign exchange dealer, the Material Affiliated Person, the 
foreign futures authority or other foreign regulatory authority from 
providing such information to the Commission; or
    (ii) The foreign futures authority or other foreign regulatory 
authority with whom the Material Affiliated Person files such reports 
has entered into an information-sharing agreement with the Commission 
which is in effect as of the retail foreign exchange dealer's fiscal 
year-end and which will allow the Commission to obtain the type of 
information required herein.
    (2) The retail foreign exchange dealer shall maintain a copy of the 
original report and a copy translated into the English language. For 
the purposes of this section, the term ``Foreign Futures Authority'' 
shall have the meaning set forth in section 1a(10) of the Act.
    (d) Exemptions. The Commission may exempt any retail foreign 
exchange dealer from any provision of this section if it finds that the 
exemption is not contrary to the public interest and the purposes of 
the provisions from which the exemption is sought. The Commission may 
grant the exemption subject to such terms and conditions as it may find 
appropriate.
    (e) Location of records. A retail foreign exchange dealer required 
to maintain records concerning Material Affiliated Persons pursuant to 
this section may maintain those records either at the principal office 
of the Material Affiliated Person or at a records storage facility, 
provided that, except as set forth in paragraph (c) of this section, 
the records are located within the boundaries of the United States and 
the records are kept and available for inspection in accordance with 
Sec.  1.31 of this chapter. If such records are maintained at a place 
other than the retail foreign exchange dealer's principal place of 
business, the Material Affiliated Person or other entity maintaining 
the records shall file with the Commission a written undertaking, in a 
form acceptable to the Commission, signed by a duly authorized person, 
to the effect that the records will be treated as if the retail foreign 
exchange dealer were maintaining the records pursuant to this section 
and that the entity maintaining the records will permit examination of 
such records at any time, or from time to time during business hours, 
by representatives or designees of the Commission and promptly furnish 
the Commission representative or its designee true, correct, complete 
and current hard copy of all or any part of such records. The election 
to maintain records at the principal place of business of the Material 
Affiliated Person or at a records storage facility pursuant to the 
provisions of this paragraph shall not relieve the retail foreign 
exchange dealer required to maintain and preserve such records from any 
of its responsibilities under this section or Sec.  5.11 of this part.
    (f) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a retail foreign 
exchange dealer concerning a Material Affiliated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (g) Implementation schedule. Each retail foreign exchange dealer 
who is subject to the requirements of this section shall maintain and 
preserve the information required by paragraphs (a)(1)(i) and (ii) of 
this section commencing 60 calendar days after registration becomes 
effective and the information required by paragraphs (a)(1)(iii) and 
(iv) of this section commencing 105 calendar days following the first 
fiscal year-end occurring after registration becomes effective.


Sec.  5.11  Risk assessment reporting requirements for retail foreign 
exchange dealers.

    (a) Reporting requirements with respect to information required to 
be maintained by section 5.10 of this part. (1) Each retail foreign 
exchange dealer registered with the Commission pursuant to Section 
2(c)(2)(B)(i)(II)(gg) of the Act shall file the following with the 
regional office of the Commission with which it files periodic 
financial reports within 60 calendar days after the effective date of 
such registration:
    (i) A copy of the organizational chart maintained by the retail 
foreign exchange dealer pursuant to Sec.  5.10(a)(l)(i) of this part. 
Where there is a material change in information provided, an updated 
organizational

[[Page 3319]]

chart shall be filed within sixty calendar days after the end of the 
fiscal quarter in which the change has occurred; and
    (ii) Copies of the financial, operational, and risk management 
policies, procedures and systems maintained by the retail foreign 
exchange dealer pursuant to Sec.  5.10(a)(l)(ii) of this part. If the 
retail foreign exchange dealer has no such written policies, procedures 
or systems, it must file a statement so indicating. Where there is a 
material change in information provided, such change shall be reported 
within sixty calendar days after the end of the fiscal quarter in which 
the change has occurred.
    (2) Each retail foreign exchange dealer registered with the 
Commission pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act shall 
file the following with the regional office with which it files 
periodic financial reports within 105 calendar days after the end of 
each fiscal year or, if a filing is made pursuant to a written notice 
issued under paragraph (a)(2)(iii) of this section, within the time 
period specified in the written notice:
    (i) Fiscal year-end consolidated and consolidating balance sheets 
for the highest level Material Affiliated Person within the retail 
foreign exchange dealer's organizational structure, which shall include 
the retail foreign exchange dealer and its other Material Affiliated 
Persons, prepared in accordance with generally accepted accounting 
principles, which consolidated balance sheets shall be audited by an 
independent certified public accountant if an annual audit is performed 
in the ordinary course of business, but which otherwise may be 
unaudited, and which consolidated balance sheets shall include 
appropriate explanatory notes. The consolidating balance sheets may be 
those prepared by the retail foreign exchange dealer's highest level 
Material Affiliated Person as part of its internal financial reporting 
process;
    (ii) Fiscal year-end annual consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the retail foreign exchange dealer's 
organizational structure, which shall include the retail foreign 
exchange dealer and its other Material Affiliated Persons, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary 
course of business, but which otherwise may be unaudited, and which 
consolidated statements shall include appropriate explanatory notes. 
The consolidating statements may be those prepared by the retail 
foreign exchange dealer's highest level Material Affiliated Person as 
part of its internal financial reporting process; and
    (iii) Upon receiving written notice from any representative of the 
Commission and within the time period specified in the written notice, 
such additional information which the Commission determines is 
necessary for a complete understanding of a particular affiliate's 
financial impact on the retail foreign exchange dealer's organizational 
structure.
    (3) For the purposes of this section, the term Material Affiliated 
Person shall have the meaning used in Sec.  5.10 of this part.
    (4) The reports required to be filed pursuant to paragraphs (a)(1) 
and (2) of this section shall be considered filed when received by the 
regional office of the Commission with whom the retail foreign exchange 
dealer files financial reports pursuant to Sec.  5.12 of this part.
    (b) Exemptions. The Commission may exempt any retail foreign 
exchange dealer from any provision of this section if it finds that the 
exemption is not contrary to the public interest and the purposes of 
the provisions from which the exemption is sought. The Commission may 
grant the exemption subject to such terms and conditions as it may find 
appropriate.
    (c) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic regulators. (1) In the 
case of a Material Affiliated Person that is required to maintain and 
preserve information pursuant to section 240.17h-1T of this title, or 
such other risk assessment regulations as the Securities and Exchange 
Commission may adopt, the retail foreign exchange dealer shall be 
deemed to be in compliance with the reporting requirements of paragraph 
(a)(2) of this section with respect to such Material Affiliated Person 
if the retail foreign exchange dealer maintains and makes available for 
inspection by the Commission in accordance with the provisions of this 
section copies of the records and reports maintained and filed on Form 
17-H (or such other forms or reports as may be required) by the 
Material Affiliated Person with the Securities and Exchange Commission 
pursuant to Sec. Sec.  240.17h-1T and 240.17h-2T of this title, or such 
other risk assessment regulations as the Securities and Exchange 
Commission may adopt;
    (2) In the case of a Material Affiliated Person (including a 
foreign banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the retail foreign 
exchange dealer shall be deemed to be in compliance with the reporting 
requirements of paragraph (a)(2) of this section with respect to such 
Material Affiliated Person if the retail foreign exchange dealer or 
such Material Affiliated Person maintains in accordance with Sec.  5.10 
of this part copies of all reports filed by the Material Affiliated 
Person with the Federal banking agency pursuant to section 5211 of the 
Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of 
the Federal Deposit Insurance Act, section 10(b) of the Home Owners' 
Loan Act, or section 5 of the Bank Holding Company Act of 1956.
    (3) In the case of a retail foreign exchange dealer that has a 
Material Affiliated Person that is subject to the supervision of an 
insurance commissioner or other similar official or agency of a state, 
such retail foreign exchange dealer shall be deemed to be in compliance 
with the reporting requirements of paragraph (a)(2) of this section 
with respect to the Material Affiliated Person if:
    (i) With respect to a Material Affiliated Person organized as a 
mutual insurance company or a non-public stock company, the retail 
foreign exchange dealer or such Material Affiliated Person maintains in 
accordance with Sec.  5.14 of this part copies of the annual statements 
with schedules and exhibits prepared by the Material Affiliated Person 
on forms prescribed by the National Association of Insurance 
Commissioners or by a state insurance commissioner; and
    (ii) With respect to a Material Affiliated Person organized as a 
public stock company, the retail foreign exchange dealer or such 
Material Affiliated Person maintains, in addition to the annual 
statements with schedules and exhibits required to be maintained 
pursuant to Sec.  1.14 of this chapter, copies of the filings made by 
the Material Affiliated Person pursuant to sections 13 or 15 of the 
Securities Exchange Act of 1934 and the Investment Company Act of 1940.
    (4) No retail foreign exchange dealer shall be required to furnish 
to the Commission any examination report of any Federal banking agency 
or any supervisory recommendations or analyses contained therein with 
respect to a Material Affiliated Person that is subject to the 
regulation of a Federal banking agency. All information received by the 
Commission pursuant to this section concerning a Material Affiliated 
Person that is subject to examination by or the reporting

[[Page 3320]]

requirements of a Federal banking agency shall be deemed confidential 
for the purposes of section 8 of the Act.
    (5) The furnishing of any information or documents by a retail 
foreign exchange dealer pursuant to this section shall not constitute 
an admission for any purpose that a Material Affiliated Person is 
otherwise subject to the Act.
    (d) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of a Foreign Regulatory Authority. A retail 
foreign exchange dealer shall be deemed to be in compliance with the 
reporting requirements of paragraph (a)(2) of this section with respect 
to a Material Affiliated Person if such retail foreign exchange dealer 
furnishes, or causes such Material Affiliated Person to make available, 
in accordance with the provisions of this section, copies of any 
financial or risk exposure reports filed by such Material Affiliated 
Person with a foreign futures authority or other foreign regulatory 
authority, provided that:
    (1) The retail foreign exchange dealer agrees to use its best 
efforts to obtain from the Material Affiliated Person and to cause the 
Material Affiliated Person to provide, directly or through its foreign 
futures authority or other foreign regulatory authority, any 
supplemental information the Commission may request and there is no 
statute or other bar in the foreign jurisdiction that would preclude 
the retail foreign exchange dealer, the Material Affiliated Person, the 
foreign futures authority or other foreign regulatory authority from 
providing such information to the Commission; or
    (2) The foreign futures authority or other foreign regulatory 
authority with whom the Material Affiliated Person files such reports 
has entered into an information sharing agreement with the Commission 
which is in effect as of the retail foreign exchange dealer's fiscal 
year-end and which will allow the Commission to obtain the type of 
information required herein. The retail foreign exchange dealer shall 
file a copy of the original report and a copy translated into the 
English language. For the purposes of this section, the term ``Foreign 
Futures Authority'' shall have the meaning set forth in section 1a(10) 
of the Act.
    (e) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a retail foreign 
exchange dealer concerning a Material Associated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (f) Implementation schedule. Each retail foreign exchange dealer 
who is subject to the requirements of this section shall file the 
information required by paragraph (a)(1) of this section within 60 
calendar days after registration is granted, and the information 
required by paragraph (a)(2) of this section within 105 calendar days 
after registration is granted.


Sec.  5.12  Financial reports of retail foreign exchange dealers.

    (a)(1) Each person who files an application for registration as a 
retail foreign exchange dealer with the National Futures Association 
shall submit, concurrently with the filing of such application, either:
    (i) A Form 1-FR-FCM certified by an independent public accountant 
as of a date not more than 45 days prior to the date on which such 
report is filed; or
    (ii) A Form 1-FR-FCM as of a date not more than 17 business days 
prior to the date on which such report is filed and a Form 1-FR-FCM 
certified by an independent public accountant as of a date not more 
than one year prior to the date on which such report is filed.
    (2) Each such person must include with such financial report a 
statement describing the source of his current assets and representing 
that his capital has been contributed for the purpose of operating his 
business and will continue to be used for such purpose.
    (3) The provisions of paragraph (a)(1) of this section do not apply 
to any person succeeding to and continuing the business of another 
retail foreign exchange dealer.
    (b)(1) Each person registered as a retail foreign exchange dealer 
must file a Form 1-FR-FCM as of the close of business each month. Each 
Form 1-FR must be filed no later than 17 business days after the date 
for which the report is made.
    (2) In addition to the monthly financial reports required by 
paragraph (b)(1) of this section, each person registered as a retail 
foreign exchange dealer must file a Form 1-FR-FCM as of the close of 
its fiscal year, which must be certified by an independent public 
accountant and must be filed no later than 90 days after the close of 
the retail foreign exchange dealer's fiscal year.
    (3) A Form 1-FR-FCM required to be certified by an independent 
public accountant which is filed by a retail foreign exchange dealer 
must be filed in paper form and may not be filed electronically with 
the Commission. A Form 1-FR-FCM required to be certified by an 
independent public accountant which is filed by an applicant for 
registration as a retail foreign exchange dealer with the National 
Futures Association must be filed electronically in accordance with 
electronic filing procedures established by the National Futures 
Association, however a paper copy of any such filing with the original 
manually signed certification must be maintained by the applicant for 
registration as a retail foreign exchange dealer in accordance with 
Sec.  1.31.
    (c) Each Form 1-FR-FCM required by the provisions of paragraphs 
(a)(1) and (b)(2) of this section to be certified by an independent 
public accountant must be certified in accordance with Sec.  1.16 of 
this chapter, and must be accompanied by the accountant's report on 
material inadequacies in accordance with the provisions of Sec.  
1.16(c)(5) of this chapter. In all other respects, the independent 
public accountant shall act in accordance with the provisions of Sec.  
1.16 (except paragraph (f)) of this chapter: Provided, however, that 
the term ``Sec.  5.7'' shall be substituted for the term ``Sec.  
1.17,'' and the term ``retail foreign exchange dealer'' shall be 
substituted for the term ``futures commission merchant.''
    (d) Upon receiving written notice from any representative of the 
Commission, National Futures Association, or any self-regulatory 
organization of which the firm is a member, a retail foreign exchange 
dealer or applicant for such registration, must, monthly or at such 
times as specified, furnish the Commission, National Futures 
Association, or self-regulatory organization a Form 1-FR-FCM or such 
other financial information requested in the written notice. Each such 
Form 1-FR-FCM or such other information must be furnished within the 
time period specified in the written notice, and in accordance with the 
provisions of paragraph (i) of this section.
    (e)(1) Each Form 1-FR-FCM filed pursuant to this Sec.  5.12 which 
is not required to be certified by an independent public accountant 
must be completed in accordance with the instructions to the form and 
contain:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) A statement of income (loss) for the period between the date 
of the most recent statement of financial condition filed with the 
Commission and the date for which the report is made;
    (iii) A statement of changes in ownership equity for the period 
between the date of the most recent statement of financial condition 
filed with the Commission and the date for which the report is made;
    (iv) A statement of changes in liabilities subordinated to claims 
of general creditors for the period between

[[Page 3321]]

the date of the most recent statement of financial condition filed with 
the Commission and the date for which the report is made;
    (v) A statement of the computation of the minimum capital 
requirements pursuant to Sec.  5.7 of this part as of the date for 
which the report is made; and
    (vi) In addition to the information expressly required, such 
further material information as may be necessary to make the required 
statements and schedules not misleading.
    (2) Each Form 1-FR-FCM filed pursuant to this Sec.  5.12 which is 
required to be certified by an independent public accountant must be 
completed in accordance with the instructions to the form and contain:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) Statements of income (loss), cash flows, changes in ownership 
equity, and changes in liabilities subordinated to claims of general 
creditors, for the period between the date of the most recent certified 
statement of financial condition filed with the Commission and the date 
for which the report is made: Provided, That for an applicant filing 
pursuant to paragraph (a) of this section the period must be the year 
ending as of the date of the statement of financial condition;
    (iii) A statement of the computation of the minimum capital 
requirements pursuant to Sec.  5.7 of this part as of the date for 
which the report is made;
    (iv) Appropriate footnote disclosures;
    (v) A reconciliation, including appropriate explanations, of the 
statement of the computation of the minimum capital requirements 
pursuant to Sec.  5.7 of this part, in the certified Form 1-FR-FCM with 
the applicant's or registrant's corresponding uncertified most recent 
Form 1-FR-FCM filing when material differences exist or, if no material 
differences exist, a statement so indicating; and
    (vi) In addition to the information expressly required, such 
further material information as may be necessary to make the required 
statements not misleading.
    (3) The statements required by paragraphs (e)(2)(i) and (ii) of 
this section may be presented in accordance with generally accepted 
accounting principles in the certified reports filed as of the close of 
the registrant's fiscal year pursuant to paragraph (b)(2) of this 
section or accompanying the application for registration pursuant to 
paragraph (a)(1) of this section, rather than in the format 
specifically prescribed by these regulations: Provided, the statement 
of financial condition is presented in a format as consistent as 
possible with the Form 1-FR-FCM and a reconciliation is provided 
reconciling such statement of financial condition to the statement of 
the computation of the minimum capital requirements pursuant to Sec.  
5.7 of this part. Such reconciliation must be certified by an 
independent public accountant in accordance with Sec.  1.16 of this 
chapter.
    (4) Attached to each Form 1-FR-FCM filed pursuant to this section 
must be an oath or affirmation that to the best knowledge and belief of 
the individual making such oath or affirmation the information 
contained in the Form 1-FR-FCM is true and correct. The individual 
making such oath or affirmation must be: If the registrant or applicant 
is a sole proprietorship, the proprietor; if a partnership, any general 
partner; if a corporation, the chief executive officer or chief 
financial officer; and, if a limited liability company or limited 
liability partnership, the chief executive officer, the chief financial 
officer, the manager, the managing member, or those members vested with 
the management authority for the limited liability company or limited 
liability partnership.
    (f) Election of fiscal year. (1) An applicant wishing to establish 
a fiscal year other than the calendar year may do so by notifying the 
National Futures Association of its election of such fiscal year, in 
writing, concurrently with the filing of the Form 1-FR-FCM pursuant to 
paragraph (a)(1) of this section, but in no event may such fiscal year 
end more than one year from the date of the Form 1-FR-FCM filed 
pursuant to paragraph (a)(1) of this section. An applicant that does 
not so notify the National Futures Association will be deemed to have 
elected the calendar year as its fiscal year.
    (2)(i) A registrant must continue to use its elected fiscal year, 
calendar or otherwise, unless a change in such fiscal year has been 
approved pursuant to this paragraph (f)(2).
    (ii) A registrant may file with its designated self-regulatory 
organization an application to change its fiscal year, a copy of which 
the registrant must file with the Commission. The application shall be 
approved or denied in writing by the registrant's designated self-
regulatory organization. The registrant must file immediately with the 
Commission a copy of any notice it receives from its designated self-
regulatory organization to approve or deny the registrant's application 
to change its fiscal year. A written notice of approval shall become 
effective upon the filing by the registrant of a copy with the 
Commission, and a written notice of denial shall be effective as of the 
date of the notice.
    (g) In the event a retail foreign exchange dealer or applicant for 
registration as a retail foreign exchange dealer finds that it cannot 
file its Form 1-FR-FCM for any period within the time specified in 
paragraph (b)(1) or (2) of this section without substantial undue 
hardship, it may request approval for an extension of time by filing an 
application for an extension of time with, in the case of a registrant, 
its designated self-regulatory organization, or, in the case of an 
applicant, the National Futures Association. The registrant or 
applicant also must file a copy of its application for an extension of 
time with the Commission. The application shall be approved or denied 
in writing by the National Futures Association or designated self-
regulatory organization, as applicable. The registrant or applicant 
must file immediately with the Commission a copy of any notice it 
receives approving or denying the request for extension of time. A 
written notice of approval shall become effective upon the filing by 
the registrant or applicant of a copy with the Commission, and a 
written notice of denial shall be effective as of the date of the 
notice.
    (h) Public availability of reports. (1) Forms 1-FR-FCM filed 
pursuant to this section will be treated as exempt from mandatory 
public disclosure for purposes of the Freedom of Information Act and 
the Government in the Sunshine Act and parts 145 and 147 of this 
chapter, except for the information described in paragraph (i)(2) of 
this section.
    (2) The following information in Forms 1-FR-FCM will be publicly 
available:
    (i) The amount of the applicant's or registrant's adjusted net 
capital; the amount of its minimum net capital requirement under Sec.  
5.7 of this chapter; the amount of its adjusted net capital in excess 
of its minimum net capital requirement; and the amount of the retail 
forex obligation owed to its retail forex customers; and
    (ii) The Statement of Financial Condition and the opinion of the 
independent public accountant in the certified annual financial reports 
of retail foreign exchange dealers.
    (3) All information that is exempt from mandatory public disclosure 
under paragraph (h)(1) of this section will, however, be available for 
official use by any official or employee of the United States or any 
State, by the National Futures Association or any other self-

[[Page 3322]]

regulatory organization of which the person filing such report is a 
member, and by any other person to whom the Commission believes 
disclosure of such information is in the public interest. Nothing in 
this paragraph (h) will limit the authority of any self-regulatory 
organization to request or receive any information relative to its 
members' financial condition.
    (i)(1) In the case of an applicant, all filings or other notices 
provided for in this section will be considered filed when received by 
the regional office of the Commission with jurisdiction over the state 
in which the applicant's principal place of business is located and by 
the National Futures Association. In the case of a registrant, all 
filings or other notices provided for in this section will be 
considered filed when received by the regional office of the Commission 
with jurisdiction over the state in which the registrant's principal 
place of business is located and by the registrant's designated self-
regulatory organization. Any copy that under paragraph (f)(2) or (g) is 
required to be filed with the Commission shall be filed with the 
regional office of the Commission with jurisdiction over the state in 
which the registrant's principal place of business is located.
    (2) All filings or other notices filed pursuant to this section 
which need not be certified in accordance with Sec.  1.16 may be 
submitted to the Commission in electronic form using a form of user 
authentication assigned in accordance with procedures established by or 
approved by the Commission, and otherwise in accordance with 
instructions issued by or approved by the Commission, if the retail 
foreign exchange dealer or a designated self regulatory organization 
has provided the Commission with the means necessary to read and to 
process the information contained in such report. Any such electronic 
submission must clearly indicate the registrant or applicant on whose 
behalf such filing is made and the use of such user authentication in 
submitting such filing will constitute and become a substitute for the 
manual signature of the authorized signer. In the case of a Form 1-FR 
filed via electronic transmission in accordance with procedures 
established by or approved by the Commission, such transmission must be 
accompanied by the user authentication assigned to the authorized 
signer under such procedures, 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 oath or affirmation 
referred to in paragraph (e)(4) of this section.
    Sec.  5.13 Reporting to customers of retail foreign exchange 
dealers and futures commission merchants; monthly and confirmation 
statements.
    (a) Monthly statements. Each retail foreign exchange dealer or 
futures commission merchant must promptly furnish in writing to each 
retail forex customer, as of the close of the last business day of each 
month or as of any regular monthly date selected, except for accounts 
in which there are neither open positions at the end of the statement 
period nor any changes to the account balance since the prior statement 
period, but in any event not less frequently than once every three 
months, a statement which clearly shows:
    (1) For each retail forex customer:
    (i) The open retail forex transactions with prices at which 
acquired;
    (ii) The net unrealized profits or losses in all open retail forex 
transactions marked to the market; and
    (iii) Any money, securities or other property carried with the 
retail foreign exchange dealer or futures commission merchant; and
    (iv) A detailed accounting of all financial charges and credits to 
such retail forex accounts during the monthly reporting period, 
including money, securities or property received from or disbursed to 
such customer and realized profits and losses; and
    (2) For each retail forex customer engaging in forex option 
transactions:
    (i) All forex options purchased, sold, exercised, or expired during 
the monthly reporting period, identified by underlying retail forex 
transaction or underlying currency, strike price, transaction date, and 
expiration date;
    (ii) The open forex option positions carried for such customer as 
of the end of the monthly reporting period, identified by underlying 
retail forex transaction or underlying currency, strike price, 
transaction date, and expiration date;
    (iii) All open forex option positions marked to the market and the 
amount each position is in the money, if any;
    (iv) Any money, securities or other property carried with the 
retail foreign exchange dealer or futures commission merchant; and
    (v) A detailed accounting of all financial charges and credits to 
such retail forex account(s) during the monthly reporting period, 
including money, securities and property received from or disbursed to 
such customer, premiums charged and received, and realized profits and 
losses.
    (b) Confirmation statement. Each retail foreign exchange dealer or 
futures commission merchant must, not later than the next business day 
after any retail forex or forex option transaction, furnish:
    (1) To each retail forex customer, a written confirmation of each 
retail forex transaction caused to be executed by it for the customer, 
including offsetting transactions executed during the same business day 
and the rollover of an open retail forex transaction to the next 
business day.
    (2) To each retail forex customer engaging in forex option 
transactions, a written confirmation of each forex option transaction, 
containing at least the following information:
    (i) The retail forex customer's account identification number;
    (ii) A separate listing of the actual amount of the premium, as 
well as each mark-up thereon, if applicable, and all other commissions, 
costs, fees and other charges incurred in connection with the forex 
option transaction;
    (iii) The strike price;
    (iv) The underlying retail forex transaction or underlying 
currency;
    (v) The final exercise date of the forex option purchased or sold; 
and
    (vi) The date the forex option transaction was executed.
    (3) To each retail forex customer engaging in forex option 
transactions, upon the expiration or exercise of any forex option, a 
written confirmation statement thereof, which statement shall include 
the date of such occurrence, a description of the forex option 
involved, and, in the case of exercise, the details of the retail forex 
or physical currency position which resulted therefrom including, if 
applicable, the final trading date of the retail forex transaction 
underlying the option.
    (4) Notwithstanding the provisions of paragraphs (b)(1) through (3) 
of this section, a retail forex transaction or forex option transaction 
that is caused to be executed for a pooled investment vehicle that 
engages in retail forex transactions need be confirmed only to the 
operator of such pooled investment vehicle.
    (c) Controlled accounts. With respect to any account controlled by 
any person other than the retail forex customer or forex option 
customer for whom such account is carried, each retail foreign exchange 
dealer or futures commission merchant shall promptly furnish in writing 
to such other person the information required by paragraphs (a) and (b) 
of this section.
    (d) Recordkeeping. Each retail foreign exchange dealer or futures 
commission merchant shall retain, in accordance

[[Page 3323]]

with Sec.  1.31 of this chapter, a copy of each monthly statement and 
confirmation required by this section.
    (e) Introduced accounts. Each statement provided pursuant to the 
provisions of this section must, if applicable, show that the account 
for which the retail foreign exchange dealer or futures commission 
merchant is providing the statement was introduced by an introducing 
broker and the names of the retail foreign exchange dealer or futures 
commission merchant and introducing broker.
    (g) Electronic transmission of statements. (1) The statements 
required by this section may be furnished to a retail forex customer by 
means of electronic media if the retail forex customer so consents, 
Provided, however, that a retail foreign exchange dealer or futures 
commission merchant must, prior to the transmission of any statement by 
means of electronic media, disclose the electronic medium or source 
through which statements will be delivered, the duration, whether 
indefinite or not, of the period during which consent will be 
effective, any charges for such service, the information that will be 
delivered by such means, and that consent to electronic delivery may be 
revoked at any time, and provided, further, that a retail foreign 
exchange dealer or futures commission merchant must obtain the retail 
forex customer's signed consent acknowledging such disclosure prior to 
the transmission of any statement by means of electronic media.
    (2) Any statement required to be furnished to a person other than a 
retail forex customer in accordance with paragraph (g) of this section 
may be furnished by electronic media.
    (3) A retail foreign exchange dealer or futures commission merchant 
who furnishes statements to a retail forex customer by means of 
electronic media must retain a daily confirmation statement for such 
retail forex customer as of the end of the trading session, reflecting 
all transactions made during that session for the customer, in 
accordance with Sec.  1.31 of this chapter.
    (h) Combination with other statements. Any futures commission 
merchant required to deliver statements to retail forex customers in 
accordance with Sec.  1.33 of this chapter may combine into one monthly 
statement or confirmation statement, as the case may be, the 
information required by this section and the information required by 
Sec.  1.33, provided that retail forex account information is 
separately identified from any other trading or account activity of the 
retail forex customer.


Sec.  5.14  Records to be kept by retail foreign exchange dealers and 
futures commission merchants.

    (a) No person shall be registered as a retail foreign exchange 
dealer under the Act unless, commencing on the date his application for 
such registration is filed, he prepares and keeps current ledgers or 
other similar records which show or summarize, with appropriate 
references to supporting documents, each transaction affecting his 
asset, liability, income, expense and capital accounts, and in which 
(except as otherwise permitted in writing by the Commission) all his 
asset, liability and capital accounts are classified into either the 
account classification subdivisions specified on Form 1-FR-FCM or 
categories that are in accord with generally accepted accounting 
principles as applicable. Each person so registered shall prepare and 
keep current such records.
    (b) Each applicant or registrant must make and keep as a record in 
accordance with Sec.  1.31 of this chapter formal computations of its 
adjusted net capital and of its minimum financial requirements pursuant 
to Sec.  1.17 or Sec.  5.7 of this chapter, or the requirements of the 
designated self-regulatory organization to which it is subject, as 
applicable, as of the close of business each month. Such computations 
must be completed and made available for inspection by any 
representative of the National Futures Association, in the case of an 
applicant, or of the Commission or designated self-regulatory 
organization, if any, in the case of a registrant, within 17 business 
days after the date for which the computations are made, commencing the 
first month end after the date the application for registration is 
filed.


Sec.  5.15  Unlawful representations.

    It shall be unlawful for any person registered pursuant to the 
requirements of this part to represent or imply in any manner 
whatsoever that such person has been sponsored, recommended or 
approved, or that its abilities or qualifications have been reviewed or 
evaluated, by the Commission, the Federal government or any agency 
thereof.


Sec.  5.16  Prohibition of guarantees against loss.

    (a) No retail foreign exchange dealer, futures commission merchant 
or introducing broker may in any way represent that it will, with 
respect to any retail foreign exchange transaction in any account 
carried by a retail foreign exchange dealer or futures commission 
merchant for or on behalf of any person:
    (1) Guarantee such person against loss;
    (2) Limit the loss of such person; or
    (3) Not call for or attempt to collect security deposits, margin, 
or other deposits as established for retail forex customers.
    (b) No person may in any way represent that a retail foreign 
exchange dealer, futures commission merchant or introducing broker will 
engage in any of the acts or practices described in paragraph (a) of 
this section.
    (c) This section shall not be construed to prevent a retail foreign 
exchange dealer, futures commission merchant or introducing broker from 
assuming or sharing in the losses resulting from an error or 
mishandling of an order.
    (d) This section shall not affect any guarantee entered into prior 
to [effective date of final rule], but this section shall apply to any 
extension, modification or renewal thereof entered into after such 
date.


Sec.  5.17  Authorization to trade.

    No retail foreign exchange dealer, futures commission merchant, 
introducing broker or any of their associated persons may directly or 
indirectly effect a retail forex transaction for the account of any 
customer unless before the transaction the customer, or person 
designated by the customer to control the account specifically 
authorized the retail foreign exchange dealer, futures commission 
merchant, introducing broker or any of their associated persons to 
effect the transaction. A transaction is ``specifically authorized'' if 
the customer or person designated by the customer to control the 
account specifies:
    (a) The precise retail forex transaction to be effected;
    (b) The exact amount of the foreign currency to be purchased or 
sold; and
    (c) In the case of an option, the identity of the foreign currency 
or contract that underlies the option.


Sec.  5.18  Trading and operational standards.

    (a) For purposes of this section:
    (1) The term retail forex counterparty includes, as appropriate:
    (i) A retail foreign exchange dealer as defined in Sec.  5.1 of 
this part;
    (ii) A futures commission merchant as defined in section 1a(20) of 
the Act; and
    (iii) An affiliated person of a futures commission merchant as 
defined in Sec.  5.1 of this part.
    (2) The term related person when used in reference to a retail 
forex counterparty means any general partner, officer, director, owner 
of more than ten percent of the equity interest, associated person or 
employee of the retail forex

[[Page 3324]]

counterparty, and any relative or spouse of any of the foregoing 
persons, or any relative of such spouse, who shares the same home as 
any of the foregoing persons.
    (b) Prior to engaging in a retail forex transaction, each retail 
forex counterparty shall, at a minimum, establish and enforce internal 
rules, procedures and controls to:
    (1) Ensure, to the extent possible, that each order received from a 
retail forex customer which order is executable at or near the price 
that the retail forex counterparty has quoted to the customer is 
entered for execution before any order in any retail forex transaction 
for any proprietary account, any other account in which a related 
person of the retail forex counterparty has an interest, or any account 
for which such a related person may originate orders without the prior 
specific consent of the account owner (if such related person has 
gained knowledge of the retail forex customer's order prior to the 
transmission of an order for a proprietary account), an account in 
which such a related person has an interest, or an account in which 
such a related person may originate orders without the prior specific 
consent of the account owner; and
    (2) Prevent related persons of forex counterparties from placing 
orders, directly or indirectly, with another person in a manner 
designed to circumvent the provisions of paragraph (b)(1) of this 
section;
    (3) Fairly and objectively establish settlement prices for retail 
forex transactions; and
    (4) Record and maintain essential information regarding customer 
orders and account activity, and to provide such information to 
customers upon request. Such information shall include:
    (i) Transaction records for the customer's account, including:
    (A) The date and time each order is received by the retail forex 
counterparty;
    (B) The price at which each order is placed, or, in the case of an 
option, the premium paid;
    (C) If the transaction was entered into by means of a trading 
platform, the price quoted on the trading platform when the order was 
placed, or, in the case of an option, the premium quoted;
    (D) The customer account identification information;
    (E) The currency pair;
    (F) The size of the transaction;
    (G) Whether the order was a buy or sell order;
    (H) The type of order, if the order was not a market order;
    (I) If a trading platform is used, the date and time the order is 
transmitted to the trading platform;
    (J) If a trading platform is used, the date and time the order is 
executed;
    (K) The size and price at which the order is executed, or in the 
case of an option, the amount of the premium paid for each option 
purchased, or the amount credited for each option sold; and
    (L) For options, whether the option is a put or call, the strike 
price, and expiration date.
    (ii) Account records that contain the following information:
    (A) The funds in the account, net of any commissions and fees;
    (B) The net profits and losses on open trades; and
    (C) The funds in the account plus or minus the net profits and 
losses on open trades. (In the case of open option positions, the 
account balance should be adjusted for the net option value);
    (iii) If a trading platform is used, daily logs showing each price 
change on the platform, the time of the change to the nearest second, 
and the trading volume at that time and price; and
    (iv) Any method or algorithm used to determine the bid or asked 
price for any retail forex transaction or the prices at which customer 
orders are executed, including, but not limited to, any markups, fees, 
commissions or other items which affect the profitability or risk of 
loss of a retail forex customer's transaction.
    (c) No retail forex counterparty shall disclose that an order of 
another person is being held by the retail forex counterparty, unless 
such disclosure is necessary to the effective execution of such order 
or is made at the request of an authorized representative of the 
Commission, or a futures association registered with the Commission 
pursuant to section 17 of the Act.
    (d) No retail forex counterparty shall knowingly handle the account 
of any related person of another retail forex counterparty unless it:
    (1) Receives written authorization from a person designated by such 
other retail forex counterparty with responsibility for the 
surveillance over such account pursuant to paragraph (b)(2) of this 
section;
    (2) Prepares immediately upon receipt of an order for such account 
a written record of such order, including the account identification 
and order number, and records thereon to the nearest minute, by time-
stamp or other timing device, the date and time the order is received; 
and
    (3) Transmits on a regular basis to such other retail forex 
counterparty copies of all statements for such account and of all 
written records prepared upon the receipt of orders for such account 
pursuant to paragraph (b)(2) of this section.
    (e) No related person of a retail forex counterparty shall have an 
account, directly or indirectly, with another retail forex counterparty 
unless:
    (1) It receives written authorization to maintain such an account 
from a person designated by the retail forex counterparty of which it 
is a related person with responsibility for the surveillance over such 
account pursuant to paragraph (b)(2) of this section; and
    (2) Copies of all statements for such account and of all written 
records prepared by such other retail forex counterparty upon receipt 
of orders for such account pursuant to paragraph (d)(2) of this section 
are transmitted on a regular basis to the retail forex counterparty of 
which it is a related person.
    (f) No retail forex counterparty shall:
    (1) Enter into a retail forex transaction, to be executed pursuant 
to a market or limit order at a price that is not at or near the price 
at which other retail forex customers, during that same time period, 
have executed retail forex transactions with the retail forex 
counterparty; Provided, however, that this paragraph (f)(1) shall not 
prohibit such practice if done in accordance with the rules of a 
registered futures association, and of which such retail foreign 
exchange dealer, futures commission merchant or affiliated person of a 
futures commission merchant is a member;
    (2) Adjust or alter prices for a retail forex transaction after the 
transaction has been confirmed to the retail forex customer; Provided, 
however, that this paragraph (f)(2) shall not prohibit such practice if 
in accordance with the rules of a registered futures association, and 
of which such retail foreign exchange dealer, futures commission 
merchant or affiliated person of a futures commission merchant is a 
member;
    (3)(i) Provide a retail forex customer a new bid price for a retail 
forex transaction that is higher than its previous bid without 
providing a new asked price that is also higher than its previous asked 
price by a similar amount;
    (ii) Provide a retail forex customer a new bid price for a retail 
forex transaction that is lower than its previous bid without providing 
a new asked price that is also lower than its previous asked price by a 
similar amount; or
    (4) Establish a new position for a retail forex customer (except 
one that

[[Page 3325]]

offsets an existing position for that retail forex customer) where the 
retail forex counterparty holds outstanding orders of other retail 
forex customers for the same currency pair at a comparable price.
    (g)(1) Each retail forex counterparty and each CPO, CTA and IB 
subject to this Part 5 shall maintain a record of all communications 
received by such person concerning facts giving rise to possible 
violations of the Act, rules, regulations or orders thereunder, related 
to their retail forex business. The record shall contain the name of 
the complainant, if provided, the date of the communication, the 
agreement, contract or transaction, the substance of the communication, 
and the name of the person who received the communication.
    (2) Each retail forex counterparty and each CPO, CTA and IB subject 
to this Part 5 shall provide to the Division of Enforcement of the 
Commission, electronically, a copy of the record of each communication 
received pursuant to paragraph (g)(1) of this section. Such copy shall 
be provided to the Division of Enforcement of the Commission no later 
than 30 calendar days after the communication is received: Provided, 
however, that in the case of a communication concerning facts giving 
rise to possible fraud under the Act or Commission regulations, such 
copy shall be provided to the Division of Enforcement of the Commission 
within three business days after the communication is received.
    (h) An introducing broker as defined in Sec.  5.11(a)(1) of this 
part, or an applicant for registration as an introducing broker as 
defined in Sec.  5.1(f)(1) of this part, or any person succeeding to 
and continuing the business of another introducing broker as defined in 
Sec.  5.1(f)(1) of this part, must enter into a guarantee agreement 
with a retail foreign exchange dealer or futures commission merchant.
    (i) Each retail forex counterparty shall prepare and maintain on a 
quarterly basis a calculation of the percentage of non discretionary 
retail forex accounts open for any period of time during the quarter 
that earned a profit, and the percentage of such accounts that 
experienced a loss. The calculation of profit or loss for each retail 
forex account must be net of fees, commissions, any other expenses, 
trading losses, customer funds deposited, and customer funds withdrawn. 
Retail forex counterparties shall maintain such calculations along with 
all data supporting such calculations for five years in accordance with 
Sec.  1.31.
    (j) Each retail forex counterparty shall designate one or more 
principals to serve as a chief compliance officer(s). The chief 
compliance officer(s) shall certify to the Commission and a registered 
national futures association annually that the retail forex 
counterparty has in place processes to establish, maintain, review, 
modify and test policies and procedures reasonably designed to achieve 
compliance with the Act, rules, regulations and orders thereunder. The 
certification shall include a statement that the counterparty has in 
place compliance processes, and that the chief compliance officer(s) 
has apprised the chief executive officer of the compliance efforts to 
date and identify and address significant compliance problems and plans 
to address those problems.


Sec.  5.19  Pending legal proceedings.

    (a) Every retail foreign exchange dealer or futures commission 
merchant and each CPO, CTA or IB subject to this Part 5 shall submit to 
the Commission copies of any dispositive or partially dispositive 
decision for which a notice of appeal has been filed, the notice of 
appeal and such further documents as the Commission may thereafter 
request filed in any material legal proceeding to which the retail 
foreign exchange dealer, futures commission merchant, CPO, CTA or IB is 
a party or to which its property or assets is subject with respect to 
retail forex transactions.
    (b) Every retail foreign exchange dealer or futures commission 
merchant and each CPO, CTA or IB subject to this Part 5 shall submit to 
the Commission copies of any dispositive or partially dispositive 
decision concerning which a notice of appeal has been filed, the notice 
of appeal, and such further documents as the Commission may thereafter 
request filed in any material legal proceeding instituted against any 
person who is a principal of the retail foreign exchange dealer, 
futures commission merchant, CPO, CTA or IB (as the term ``principal'' 
is defined in Sec.  3.1(a) of this chapter) arising from conduct in 
such person's capacity as a principal of the retail foreign exchange 
dealer, futures commission merchant, CPO, CTA or IB and alleging 
violations, with regard to retail forex transactions, of:
    (1) The Act or any rule, regulation, or order thereunder; or
    (2) Provisions of state law relating to a duty or obligation owed 
by such a principal.
    (c) All documents required by this section to be submitted to the 
Commission shall be mailed via first-class or submitted by other more 
expeditious means to the Commission's headquarters office in 
Washington, DC, Attention: Director, Division of Enforcement. All 
documents required by this section to be submitted to the Commission as 
to matters pending on [effective date of final rule] shall be mailed to 
the Commission within 45 days of that effective date. Thereafter, all 
decisions and notices of appeal required to be submitted by retail 
foreign exchange dealers, futures commission merchants, CPOs, CTAs or 
IBs shall be mailed within 10 days of the filing or receipt by the 
retail foreign exchange dealer or futures commission merchant of the 
relevant notice of appeal. For purposes of paragraph (a) and (b) of 
this section, a ``material legal proceeding'' includes but is not 
limited to actions involving alleged violations of the Commodity 
Exchange Act or the Commission's regulations. However, a legal 
proceeding is not ``material'' for the purposes of this rule if the 
proceeding is not in a federal or state court or if the Commission is a 
party.


Sec.  5.20  Special calls for account and transaction information.

    (a) Preparation and transmission of information upon special call. 
All information required upon special call shall be prepared in such 
form and manner and in accordance with such instructions, and shall be 
transmitted at such time and to such office of the Commission, as may 
be specified in the call.
    (b) Special calls for information on controlled accounts from 
retail foreign exchange dealers, futures commission merchants and 
introducing brokers. Upon call by the Commission, each retail foreign 
exchange dealer, futures commission merchant and introducing broker 
shall file with the Commission the names and addresses of all persons 
who, by power of attorney or otherwise, exercise trading control over 
any customer's account in retail forex transactions.
    (c) Special calls for information on open transactions in accounts 
carried or introduced by retail foreign exchange dealers, futures 
commission merchants, and introducing brokers. Upon special call by the 
Commission for information relating to retail forex transactions held 
or introduced on the dates specified in the call, each retail foreign 
exchange dealer, futures commission merchant, or introducing broker 
shall furnish to the Commission the following information concerning 
accounts of traders owning or controlling such retail forex transaction 
positions, as may be specified in the call:

[[Page 3326]]

    (1) The name, address, and telephone number of the person for whom 
each account is carried;
    (2) The principal business or occupation of the person for whom 
each account is introduced or carried, as specified in the call;
    (3) The name, address and principal business or occupation of any 
person who controls the trading of each account;
    (4) The name and address of any person having a financial interest 
of ten percent or more in each account;
    (5) The number of open retail forex transaction positions 
introduced or carried in each account, as specified in the call; and
    (6) The total number of retail forex transactions against which 
delivery has been made.
    (d) Delegation of authority to the Director of the Division of 
Clearing and Intermediary Oversight and the Director of the Division of 
Market Oversight. The Commission hereby delegates, until the Commission 
orders otherwise, to the Director of the Division of Clearing and 
Intermediary Oversight and the Director of the Division of Market 
Oversight, or to the respective Director's designees, the authority set 
forth in this section to make special calls for information on 
controlled accounts from retail foreign exchange dealers, futures 
commission merchants and from introducing brokers, and to make special 
calls for information on open contracts in accounts carried or 
introduced by futures commission merchants, introducing brokers, and 
foreign brokers. Either Director may submit to the Commission for its 
consideration any matter that has been delegated pursuant to this 
section. Nothing in this section shall be deemed to prohibit the 
Commission, at its election, from exercising the authority delegated in 
this section to the Directors.


Sec.  5.21  Supervision.

    Each Commission registrant subject to this Part 5, except an 
associated person who has no supervisory duties, must diligently 
supervise the handling by its partners, officers, employees and agents 
(or persons occupying a similar status or performing a similar 
function) of all retail forex accounts carried, operated, advised or 
introduced by the registrant and all other activities of its partners, 
officers, employees and agents (or persons occupying a similar status 
or performing a similar function) relating to its business as a 
Commission registrant.


Sec.  5.22  Registered futures association membership.

    (a) Each person registered as a retail foreign exchange dealer must 
become and remain a member of at least one futures association that is 
registered under section 17 of the Act and that provides for the 
membership therein of such retail foreign exchange dealer.
    (b) Each person required to register as:
    (1) An introducing broker, because the person solicits or accepts 
orders for retail forex transactions;
    (2) A commodity pool operator because the person operates, or 
solicits funds, securities, or property for, a pooled investment 
vehicle that engages in retail forex transactions; or
    (3) A commodity trading advisor because the person exercises 
discretionary trading authority, or obtains written authorization to 
exercise discretionary trading authority over, an account in connection 
with retail forex transactions, must become and remain a member of at 
least one futures association that is registered under section 17 of 
the Act and that provides for the membership therein of such person.


Sec.  5.23  Notice of bulk transfers and bulk liquidations.

    (a) Notice and Disclosure to Retail Forex Customers of a Bulk 
Transfer. (1) A retail foreign exchange dealer, futures commission 
merchant or introducing broker must obtain the written prior and 
specific consent of its retail forex customer to the assignment of any 
position or transfer of any account of the retail forex customer to 
another retail foreign exchange dealer, futures commission merchant or 
introducing broker, unless made at the retail forex customer's request.
    (2) Absent a request of the retail forex customer or the consent 
described in paragraph (a)(1) of this section, assignments of positions 
and transfers of accounts of retail forex customers may be permitted 
under rules of the retail forex dealer's, futures commission 
merchant's, or introducing broker's designated self-regulatory 
organization that establish notice and other requirements with respect 
to the assignment of positions and transfers of accounts of retail 
forex customers. If such rules permit implied consent as a result of 
the failure of the retail forex customer to object after having 
received notice of the proposed assignment or transfer, such rules must 
provide that the notice must include a statement that the retail forex 
customer is not required to accept the proposed assignment or transfer 
and may direct the transferor firm to liquidate the positions of the 
retail forex customer or transfer the account to a firm of the retail 
forex customer's selection.
    (3) For assignments and transfers made under this section, other 
than at the retail forex customer's request, the transferee retail 
foreign exchange dealer, futures commission merchant or introducing 
broker must provide to the retail forex customer the risk disclosure 
statements and forms of acknowledgment required by Part 5 of this 
chapter and receive the required signed acknowledgments within sixty 
days of such assignments or transfers. This requirement shall not 
apply:
    (i) If the transferee retail foreign exchange dealer, futures 
commission merchant or introducing broker has clear written evidence 
that the retail forex customer has received and acknowledged receipt of 
the required disclosure statements; or
    (ii) If the transfer of accounts is made from one introducing 
broker to another introducing broker guaranteed by the same retail 
foreign exchange dealer or futures commission merchant pursuant to a 
guarantee agreement in accordance with the requirements of Sec.  
1.10(j) of this chapter and such retail foreign exchange dealer or 
futures commission merchant maintains the relevant acknowledgments 
required by Part 5 of this chapter.
    (b) Notice to the Commission. Each retail foreign exchange dealer, 
futures commission merchant or introducing broker shall file with the 
Commission prior notice of any transfer of accounts of any retail forex 
customer that is not initiated at the request of the customer, where 
the transfer involves 50 percent or more of the transferor's total 
number of retail forex customer accounts.
    (c) Contents of Notice to the Commission. The notice required by 
paragraph (b) of this section shall include:
    (1) The name, principal business address and telephone number of 
the transferor futures retail foreign exchange dealer, futures 
commission merchant or introducing broker;
    (2) The name, principal business address and telephone number of 
each transferee retail foreign exchange dealer, futures commission 
merchant or introducing broker;
    (3) The designated self-regulatory organization for the transferor 
and transferee firms;
    (4) A brief statement as to the reasons for the transfer;
    (5) A copy of any notices to customers regarding the transfers; and
    (6) A statement of the number of accounts to be transferred.

[[Page 3327]]

    (d) Notice of the Bulk Liquidation of Retail Forex Transactions. A 
retail foreign exchange dealer or futures commission merchant may not 
initiate the bulk liquidation of properly margined retail forex 
transactions unless such liquidation complies with the rules and 
procedures of the retail forex dealer's or futures commission 
merchant's designated self-regulatory organization and the retail forex 
dealer or futures commission merchant provides the Commission with 
prior written notice of the liquidation.
    (e) Contents of Notice of Bulk Liquidation. The notice required by 
paragraph (d) of this section shall include:
    (1) The name, principal business address and telephone number of 
the initiating retail foreign exchange dealer or futures commission 
merchant;
    (2) A brief statement of the reasons for the liquidation;
    (3) A copy of any notices to customers regarding the liquidation; 
and
    (4) A statement of the number of accounts to be liquidated.
    (f) Filing of Notices. The notice required by paragraph (b) and (d) 
of this section shall be filed five business days prior to the transfer 
or liquidation of the retail forex transaction with the Deputy 
Director, Compliance and Registration Section, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; the 
National Futures Association Attn: Vice President-Compliance; and the 
designated self-regulatory organization for the transferor firm.
    (g) No effect on other obligations. The requirements of this 
section shall not affect the obligations of a retail foreign exchange 
dealer, futures commission merchant or introducing broker under the 
rules of a self-regulatory organization or applicable customer account 
agreement with respect to assignments of positions or transfers of 
accounts or liquidation of positions.
    (h) Corrective notice. If a proposed transfer is not completed in 
accordance with the notice required to be filed by paragraph (b) of 
this section, a corrective notice shall be filed within five business 
days of the date such proposed transfer was to occur explaining why the 
proposed transfer was not completed.


Sec.  5.24  Applicability of other parts of this chapter.

    Insofar as it is consistent with the requirements of this part, all 
other provisions of this chapter that apply to a person shall apply to 
such person as though such provisions were expressly set forth in this 
part.


Sec.  5.25  Applicability of the Act.

    Except as otherwise specified in this part and unless the context 
otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k, 
4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall 
apply to retail forex transactions that are subject to the requirements 
of this part as though such provisions were set forth herein and 
included specific references to retail forex transactions and the 
persons defined in Sec.  5.1 of this part.

PART 10--RULES OF PRACTICE

    37. The authority citation for part 10 continues to read as 
follows:

    Authority:  Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7 
U.S.C. 2a(12).

    38. Section 10.1 is amended by revising paragraph (a) to read as 
follows:


Sec.  10.1  Scope and applicability of rules of practice.

* * * * *
    (a) Denial, suspension, revocation, conditioning, restricting or 
modifying of registration as a futures commission merchant, retail 
foreign exchange dealer, introducing broker, or associated person, 
floor broker, floor trader, commodity pool operator, commodity trading 
advisor or leverage transaction merchant pursuant to sections 6(c), 
8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 U.S.C. 9 and 15, 12a(2), 
12a(3), 12a(4) and 12(a)(11), or denial, suspension, or revocation of 
designation as a contract market pursuant to sections 6(a) and 6(b) of 
the Act, 7 U.S.C. 8;
* * * * *

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEEDINGS OF THE 
COMMISSION

    39. The authority citation for part 140 continues to read as 
follows:

    Authority:  7 U.S.C. 2 and 12a.

    40. Section 140.94 is amended by adding to read as follows:


Sec.  140.94  Delegation of authority to the Director of the Division 
of Clearing and Intermediary Oversight.

    (a) The Commission hereby delegates, until such time as the 
Commission orders otherwise, the following functions to the Director of 
the Division of Clearing and Intermediary Oversight and to such members 
of the Commission's staff acting under his direction as he may 
designate from time to time:
    (1) All functions reserved to the Commission in Sec.  5.7 of this 
chapter;
    (2) All functions reserved to the Commission in Sec.  5.10 of this 
chapter;
    (3) All functions reserved to the Commission in Sec.  5.11 of this 
chapter;
    (4) All functions reserved to the Commission in Sec.  5.12 of this 
chapter, except for those relating to nonpublic treatment of reports 
set forth in Sec.  5.12(i) of this chapter; and
    (5) All functions reserved to the Commission in Sec.  5.14 of this 
chapter.
    (b) The Director of the Division of Clearing and Intermediary 
Oversight may submit any matter which has been delegated to him under 
paragraph (a) of this section to the Commission for its consideration.
    (c) Nothing in this section may prohibit the Commission, at its 
election, from exercising the authority delegated to the Director of 
the Division of Clearing and Intermediary Oversight under paragraph (a) 
of this section.

PART 145--COMMISSION RECORDS AND INFORMATION

    41. The authority citation for part 145 continues to read as 
follows:

    Authority:  Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80 
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat. 
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389 
(5 U.S.C. 4a(j)); unless otherwise noted.

    42. Section 145.5 is amended by revising paragraphs (d)(1)(viii) 
and (h) to read as follows:


Sec.  145.5  Disclosure of nonpublic records.

* * * * *
    (d) * * *
    (1) * * *
    (viii) The following reports and statements that are also set forth 
in paragraph (h) of this section, except as specified in 17 CFR 
1.10(g)(2), 17 CFR 31.13(m), or 17 CFR 5.12(h): Forms 1-FR required to 
be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are 
filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR 
required to be filed pursuant to 17 CFR 31.13; the accountant's report 
on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); 
and all reports and statements required to be filed pursuant to 17 CFR 
1.17(c)(6);
* * * * *
    (h) Contained in or related to examinations, operating, or 
condition reports prepared by, on behalf of, or for the use of the 
Commission or any other agency responsible for the regulation or 
supervision of financial institutions, including, but not limited to 
the following reports and statements that are also set forth in 
paragraph (d)(1)(viii) of this section, except as specified in 17

[[Page 3328]]

CFR 1.10(g)(2), 17 CFR 5.12(h) or 17 CFR 31.13(m): Forms 1-FR required 
to be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that 
are filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR 
required to be filed pursuant to 17 CFR 31.13; the accountant's report 
on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); 
and all reports and statements required to be filed pursuant to 17 CFR 
1.17(c)(6); and
* * * * *

PART 147--OPEN COMMISSION MEETINGS

    43. The authority citation for part 147 continues to read as 
follows:

    Authority:  Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C. 
552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C. 
4a(j) (Supp. V, 1975)), unless otherwise noted.

    44. Section 147.3 is amended by revising paragraphs (b)(4)(i)(H) 
and (b)(8) to read as follows:


Sec.  147.3  General requirement of open meetings; grounds upon which 
meetings may be closed.

* * * * *
    (b) * * *
    (4) * * *
    (i) * * *
    (H) The following reports and statements that are also set forth in 
paragraph (b)(8) of this section, except as specified in 17 CFR 
1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to be 
filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 31.13(m); 
FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR 
1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the 
accountant's report on material inadequacies filed in accordance with 
17 CFR 1.16(c)(5); and all reports and statements required to be filed 
pursuant to 17 CFR 1.17(c)(6);
* * * * *
    (8) Disclose information contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of the Commission or any other agency responsible for the 
regulation or supervision of financial institutions, including, but not 
limited to the following reports and statements that are also set forth 
in paragraph (b)(4)(i)(H) of this section, except as specified in 17 
CFR 1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to 
be filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 
31.12(m); FOCUS reports that are filed in lieu of Forms 1-FR pursuant 
to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 
31.13; the accountant's report on material inadequacies filed in 
accordance with 17 CFR 1.16(c)(5); and all reports and statements 
required to be filed pursuant to 17 CFR 1.17(c)(6);
* * * * *

PART 160--PRIVACY OF CONSUMER FINANCIAL INFORMATION

    45. The authority citation for part 160 continues to read as 
follows:

    Authority:  7 U.S.C. 7b-2 and 12a(5); 15 U.S.C. 6801, et seq.

    46. Section 160.1 is amended by revising paragraph (b) to read as 
follows:


Sec.  160.1  Purpose and scope.

* * * * *
    (b) Scope. This part applies only to nonpublic personal information 
about individuals who obtain financial products or services primarily 
for personal, family, or household purposes from the institutions 
listed below. This part does not apply to information about companies 
or about individuals who obtain financial products or services 
primarily for business, commercial, or agricultural purposes. This part 
applies to all futures commission merchants, retail foreign exchange 
dealers, commodity trading advisors, commodity pool operators and 
introducing brokers that are subject to the jurisdiction of the 
Commission, regardless whether they are required to register with the 
Commission. These entities are hereinafter referred to in this part as 
``you.'' This part does not apply to foreign (non-resident) futures 
commission merchants, retail foreign exchange dealers, commodity 
trading advisors, commodity pool operators and introducing brokers that 
are not registered with the Commission. Nothing in this part modifies, 
limits or supersedes the standards governing individually identifiable 
health information promulgated by the Secretary of Health and Human 
Services under the authority of sections 262 and 264 of the Health 
Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d-
1320d-8.
    47. Section 160.3 is amended by:
    a. Revising paragraph (a) introductory text and paragraph (a)(2);
    b. Redesignating paragraphs (k)(2)(i)(B) through (F) as paragraphs 
(k)(2)(i)(C) through (G) and republishing them, and adding new 
paragraph (k)(2)(i)(B);
    c. Revising paragraphs (n)(1)(i) and (n)(2)(i);
    d. Revising paragraph (o)(1)(i);
    e. Revising paragraph (u)(2)(i)(A);
    f. Redesignating paragraphs (w)(2) through (4) as paragraphs (w)(3) 
through (5) and adding new paragraph (w)(2); and
    g. Adding new paragraph (x) to read as follows:


Sec.  160.3  Definitions.

* * * * *
    (a) Affiliate of a futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator or 
introducing broker means any company that controls, is controlled by, 
or is under common control with a futures commission merchant, retail 
foreign exchange dealer, commodity trading advisor, commodity pool 
operator or introducing broker that is subject to the jurisdiction of 
the Commission. In addition, a futures commission merchant, retail 
foreign exchange dealer, commodity trading advisor, commodity pool 
operator or introducing broker subject to the jurisdiction of the 
Commission will be deemed an affiliate of a company for purposes of 
this part if:
* * * * *
    (2) Rules adopted by the Federal Trade Commission or another 
federal functional regulator under Title V of the GLB Act treat the 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator or introducing broker as an 
affiliate of that company.
* * * * *
    (k) * * *
    (2) * * *
    (i) * * *
    (B) You are a retail foreign exchange dealer with whom a consumer 
has opened an account, or that effects or engages in retail forex 
transactions with or for a consumer, even if you do not hold any assets 
of the consumer.
    (C) You are an introducing broker that solicits or accepts specific 
orders for trades;
    (D) You are a commodity trading advisor with whom a consumer has a 
contract or subscription, either written or oral, regardless of whether 
the advice is standardized, or is based on, or tailored to, the 
commodity interest or cash market positions or other circumstances or 
characteristics of the particular consumer;
    (E) You are a commodity pool operator, and you accept or receive 
from the consumer, funds, securities, or property for the purpose of 
purchasing an interest in a commodity pool;
    (F) You hold securities or other assets as collateral for a loan 
made to the consumer, even if you did not make the loan or do not 
effect any transactions on behalf of the consumer; or

[[Page 3329]]

    (G) You regularly effect or engage in commodity interest 
transactions with or for a consumer even if you do not hold any assets 
of the consumer.
* * * * *
    (n)(1) * * *
    (i) Any futures commission merchant, retail foreign exchange 
dealer, commodity trading advisor, commodity pool operator or 
introducing broker that is registered with the Commission as such or is 
otherwise subject to the Commission's jurisdiction; and
* * * * *
    (2) * * *
    (i) Any person or entity, other than a futures commission merchant, 
retail foreign exchange dealer, commodity trading advisor, commodity 
pool operator or introducing broker that, with respect to any financial 
activity, is subject to the jurisdiction of the Commission under the 
Act.
* * * * *
    (o)(1) * * *
    (i) Any product or service that a futures commission merchant, 
retail foreign exchange dealer, commodity trading advisor, commodity 
pool operator, or introducing broker could offer that is subject to the 
Commission's jurisdiction; and
* * * * *
    (u) * * *
    (2) * * *
    (i) * * *
    (A) Information a consumer provides to you on an application to 
open a commodity interest trading account, to invest in a commodity 
pool, or to obtain another financial product or service;
* * * * *
    (w) * * *
    (2) Any retail foreign exchange dealer;
* * * * *
    (x) Retail foreign exchange dealer has the same meaning as in Sec.  
5.3(i)(1) of this chapter.
    48. Section 160.4 is amended by:
    a. Revising paragraph (c)(2)(ii); and
    b. Revising paragraph (e)(1)(iv) to read as follows:


Sec.  160.4  Initial privacy notice to consumers required.

* * * * *
    (c) * * *
    (2) * * *
    (ii) Opens a retail forex account, or opens a commodity interest 
account through an introducing broker or with a futures commission 
merchant that clears transactions for its customers through you on a 
fully-disclosed basis;
* * * * *
    (e) * * *
    (1) * * *
    (iv) You have established a customer relationship with a customer 
in a bulk transfer in accordance with Sec.  1.65, if you are a 
transferee futures commission merchant, retail foreign exchange dealer 
or introducing broker.
* * * * *
    49. Section 160.30 is amended by revising the introductory text to 
read as follows:


Sec.  160.30  Procedures to safeguard customer records and information.

    Every futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator and introducing 
broker subject to the jurisdiction of the Commission must adopt 
policies and procedures that address administrative, technical and 
physical safeguards for the protection of customer records and 
information. These policies and procedures must be reasonably designed 
to:
* * * * *

PART 166--CUSTOMER PROTECTION RULES

    50. The authority citation for part 166 remains as follows:

    Authority:  7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7, 
12a and 23, as amended by the Commodity Futures Modernization Act of 
2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

    51. Section 166.2 is revised as follows:


Sec.  166.2  Authorization to trade.

    No futures commission merchant, retail foreign exchange dealer, 
introducing broker or any of their associated persons may directly or 
indirectly effect a transaction in a commodity interest for the account 
of any customer unless before the transaction the customer, or person 
designated by the customer to control the account:
    (a) With respect to any commodity interest as defined in Sec.  
1.3(yy)(1) through (3) of this chapter, specifically authorized the 
futures commission merchant, retail foreign exchange dealer, 
introducing broker or any of their associated persons to effect the 
transaction (a transaction is ``specifically authorized'' if the 
customer or person designated by the customer to control the account 
specifies--
    (1) The precise commodity interest to be purchased or sold and
    (2) The exact amount of the commodity interest to be purchased or 
sold); or
    (b) With respect to any commodity interest as defined in Sec.  
1.3(yy)(1) or (2) of this chapter, authorized in writing the futures 
commission merchant, introducing broker or any of their associated 
persons to effect transactions in commodity interests for the account 
without the customer's specific authorization; Provided, however, That 
if any such futures commission merchant, introducing broker or any of 
their associated persons is also authorized to effect transactions in 
foreign futures or foreign options without the customer's specific 
authorization, such authorization must be expressly documented.
    52. Section 166.5 is amended by:
    a. Removing paragraph (a)(1)(iv), redesignating paragraphs 
(a)(1)(i) through (a)(1)(iii) as paragraphs (a)(1)(i)(A) through 
(a)(1)(i)(C), and adding new paragraph (a)(1)(ii);
    b. Revising paragraphs (a)(2) and (a)(3);
    c. Revising paragraphs (c)(5)(i)(A) and (c)(5)(i)(C) to read as 
follows:


Sec.  166.5  Dispute settlement procedures.

    (a) * * *
    (ii) Arises out of any retail forex transaction (as defined in 
Sec.  5.1(m) of this chapter).
    (2) The term customer as used in this section includes an option 
customer (as defined in Sec.  1.3(jj) of this chapter), a retail forex 
customer (as defined in Sec.  5.1(k) of this chapter) and any person 
for or on behalf of whom a member of a designated contract market, or a 
participant transacting on or through such designated contract market, 
effects a transaction on such contract market, except another member of 
or participant in such designated contract market; Provided, however, a 
person who is an ``eligible contract participant'' as defined in 
section 1a(12) of the Act shall not be deemed to be a customer within 
the meaning of this section.
    (3) The term Commission registrant as used in this section means a 
person registered under the Act as a futures commission merchant, 
retail foreign exchange dealer, introducing broker, floor broker, 
commodity pool operator, commodity trading advisor, or associated 
person.
* * * * *
    (c) * * *
    (5) * * *
    (i) * * *
    (A) The designated contract market, if applicable and if available, 
upon which the transaction giving rise to the dispute was executed or 
could have been executed;
* * * * *
    (C) At least one other organization that will provide the customer 
with the opportunity to select the location of the arbitration 
proceeding from among

[[Page 3330]]

several major cities in diverse geographic regions and that will 
provide the customer with the choice of a panel or other decision-maker 
composed of at least one or more persons, of which at least a majority 
are not members or associated with a member of the designated contract 
market, if applicable, or employee thereof, and that are not otherwise 
associated with the designated contract market (mixed panel), if 
applicable: Provided, however, that the list of qualified organizations 
provided by a Commission registrant that is a floor broker need not 
include a registered futures association unless a registered futures 
association has been authorized to act as a decision-maker in such 
matters.
* * * * *

    Issued in Washington, DC, on January 7, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-456 Filed 1-19-10; 8:45 am]
BILLING CODE P