[Federal Register Volume 80, Number 177 (Monday, September 14, 2015)]
[Rules and Regulations]
[Pages 55022-55029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-23046]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 170

RIN 3038-AE09


Membership in a Registered Futures Association

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting a new rule (``Final Rule'') to require that all 
persons registered with the Commission as introducing brokers (``IB''), 
commodity pool operators (``CPO''), or commodity trading advisors 
(``CTA''), subject to an exception for those persons who are exempt 
from registration as a CTA pursuant to a particular provision of the 
Commission's regulations, must, in each case, become and remain a 
member of at least one registered futures association (``RFA'').

DATES: The Final Rule will become effective November 13, 2015. All 
persons subject to the Final Rule must comply with the Final Rule by 
not later than December 31, 2015.

FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate Chief

[[Page 55023]]

Counsel, 202-418-5544, [email protected]; or Jacob Chachkin, Special 
Counsel, 202-418-5496, [email protected], Division of Swap Dealer and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    Part 170 of the Commission's regulations relates to RFAs. An RFA is 
an association of persons registered with the Commission as such 
pursuant to Section 17 of the Commodity Exchange Act (``CEA'' or 
``Act'').\1\ Subject to Commission oversight, RFAs serve a vital self-
regulatory role by functioning as frontline regulators of their members 
(which members also remain subject to Commission oversight).
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    \1\ 7 U.S.C. 21.
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    An RFA cannot enforce its rules over Commission registrants who are 
not members of the RFA.\2\ As such, the Commission promulgated 
regulations 170.15 and 170.16 to require each registered futures 
commission merchant (``FCM''), and each registered swap dealer (``SD'') 
and major swap participant (``MSP''), respectively, to be an RFA 
member, subject to an exception for certain notice registered 
securities brokers or dealers.\3\ Because the National Futures 
Association (``NFA'') was the only RFA under Section 17(a) of the CEA 
\4\ at the time Sec.  170.15 and Sec.  170.16, respectively, were 
promulgated, these registered FCMs, SDs, and MSPs were required to be 
NFA members and, thus, were subject to NFA's rules. The Commission did 
not promulgate regulations requiring other Commission registrants, 
including IBs,\5\ CPOs,\6\ and CTAs,\7\ to be members of an RFA. One of 
the NFA rules to which NFA members are subject, however, is NFA's Bylaw 
1101. NFA Bylaw 1101 requires that, generally, no NFA member may 
``carry an account, accept an order or handle a transaction in 
commodity futures contracts'' for, or on behalf of, any non-member of 
NFA that is required to be registered with the Commission as, among 
other things, an IB, CPO, or CTA.\8\ Accordingly, any IB, CPO, or CTA 
required to be registered with the Commission that desires to conduct 
business with respect to commodity futures contracts directly with an 
FCM that is an NFA member must also become an NFA member, and 
derivatively, must ensure that it only conducts such business with 
those IBs, CPOs, or CTAs that also are NFA members. Therefore, Sec.  
170.15, at the time it was promulgated, operated in conjunction with 
NFA Bylaw 1101 ``to assure essentially complete NFA membership from the 
universe of commodity professionals: [FCMs, CPOs, CTAs, and IBs].'' \9\
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    \2\ Those Commission registrants that are not RFA members are 
nevertheless subject to the rules and regulations of the Commission. 
See 7 U.S.C. 21(e), which specifies that any person registered under 
the CEA, who is not an RFA member, ``in addition to the other 
requirements and obligations of [the CEA] and the regulations 
thereunder shall be subject to such other rules and regulations as 
the Commission may find necessary to protect the public interest and 
promote just and equitable principles of trade.''
    \3\ 17 CFR 170.15 and 170.16. See also Registration of Swap 
Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).
    \4\ 7 U.S.C. 21(a). NFA remains the only RFA under Section 17(a) 
of the CEA and is also a self-regulatory organization (``SRO''). Per 
Commission regulation 1.3(ee), SROs are designated contract markets, 
swap execution facilities, and registered futures associations. 17 
CFR 1.3(ee). Certain SROs maintain and update, among other things, a 
standardized audit program and coordinate audit and financial 
statement surveillance activities over certain types of firms that 
are members of more than one SRO. See 17 CFR 1.52.
    \5\ IB is defined, subject to certain exclusions and additions, 
in CEA Section 1a(31) as any person (except an individual who elects 
to be and is registered as an associated person of a futures 
commission merchant) (i) who (I) is engaged in soliciting or in 
accepting orders for (aa) the purchase or sale of any commodity for 
future delivery, security futures product, or swap; (bb) any 
agreement, contract, or transaction described in Section 
2(c)(2)(C)(i) or Section 2(c)(2)(D)(i); (cc) any commodity option 
authorized under Section 4c; or (dd) any leverage transaction 
authorized under Section 19; and (II) does not accept any money, 
securities, or property (or extend credit in lieu thereof) to 
margin, guarantee, or secure any trades or contracts that result or 
may result therefrom; or (ii) who is registered with the Commission 
as an IB. 7 U.S.C. 1a(31).
    IB is further defined, subject to certain exclusions and 
additions, in Commission regulation 1.3(mm) as (1) Any person who, 
for compensation or profit, whether direct or indirect: (i) Is 
engaged in soliciting or in accepting orders (other than in a 
clerical capacity) for the purchase or sale of any commodity for 
future delivery, security futures product, or swap; any agreement, 
contract or transaction described in Section 2(c)(2)(C)(i) or 
Section 2(c)(2)(D)(i) of the Act; any commodity option transaction 
authorized under Section 4c; or any leverage transaction authorized 
under Section 19; or who is registered with the Commission as an IB; 
and (ii) Does not accept any money, securities, or property (or 
extend credit in lieu thereof) to margin, guarantee, or secure any 
trades or contracts that result or may result therefrom. 17 CFR 
1.3(mm).
    IBs are subject to registration with the Commission under CEA 
Section 4d(g) and Commission regulation 3.4(a). 7 U.S.C. 6d(g) and 
17 CFR 3.4(a).
    \6\ CPO is defined, subject to certain exclusions and additions, 
in CEA Section 1a(11) as any person (i) engaged in a business that 
is of the nature of a commodity pool, investment trust, syndicate, 
or similar form of enterprise, and who, in connection therewith, 
solicits, accepts, or receives from others, funds, securities, or 
property, either directly or through capital contributions, the sale 
of stock or other forms of securities, or otherwise, for the purpose 
of trading in commodity interests, including any (I) commodity for 
future delivery, security futures product, or swap; (II) agreement, 
contract, or transaction described in Section 2(c)(2)(C)(i) or 
Section 2(c)(2)(D)(i); (III) commodity option authorized under 
Section 4c; or (IV) leverage transaction authorized under Section 
19; or (ii) who is registered with the Commission as a CPO. 7 U.S.C. 
1a(11).
    CPO is further defined, subject to certain exclusions and 
additions, in Commission regulation 1.3(cc) as any person engaged in 
a business which is of the nature of a commodity pool, investment 
trust, syndicate, or similar form of enterprise, and who, in 
connection therewith, solicits, accepts, or receives from others, 
funds, securities, or property, either directly or through capital 
contributions, the sale of stock or other forms of securities, or 
otherwise, for the purpose of trading in commodity interests, 
including any commodity for future delivery, security futures 
product, or swap; any agreement, contract or transaction described 
in Section 2(c)(2)(C)(i) or Section 2(c)(2)(D)(i) of the Act; any 
commodity option authorized under Section 4c of the Act; any 
leverage transaction authorized under Section 19 of the Act; or any 
person who is registered with the Commission as a CPO, but does not 
include such persons not within the intent of the definition as the 
Commission may specify by rule or regulation or by order. 17 CFR 
1.3(cc).
    CPOs are subject to registration with the Commission under CEA 
Section 4m and Commission regulation 3.4(a). 7 U.S.C. 6m and 17 CFR 
3.4(a).
    \7\ CTA is defined, subject to certain exclusions and additions, 
in CEA Section 1(a)(12) as any person who (i) for compensation or 
profit, engages in the business of advising others, either directly 
or through publications, writings, or electronic media, as to the 
value of or the advisability of trading in (I) any contract of sale 
of a commodity for future delivery, security futures product, or 
swap; (II) any agreement, contract, or transaction described in 
Section 2(c)(2)(C)(i) or Section 2(c)(2)(D)(i); (III) any commodity 
option authorized under Section 4c; or (IV) any leverage transaction 
authorized under Section 19; (ii) for compensation or profit, and as 
part of a regular business, issues or promulgates analyses or 
reports concerning any of the activities referred to in clause (i); 
(iii) is registered with the Commission as a CTA; or (iv) the 
Commission, by rule or regulation, may include if the Commission 
determines that the rule or regulation will effectuate the purposes 
of the Act. 7 U.S.C. 1a(12).
    CTA is further defined, subject to certain exclusions and 
additions, in Commission regulation 1.3(bb) as any person who, for 
compensation or profit, engages in the business of advising others, 
either directly or through publications, writings or electronic 
media, as to the value of or the advisability of trading in any 
contract of sale of a commodity for future delivery, security 
futures product, or swap; any agreement, contract or transaction 
described in Section 2(c)(2)(C)(i) or Section 2(c)(2)(D)(i) of the 
Act; any commodity option authorized under Section 4c of the Act; 
any leverage transaction authorized under Section 19 of the Act; any 
person registered with the Commission as a CTA; or any person, who, 
for compensation or profit, and as part of a regular business, 
issues or promulgates analyses or reports concerning any of the 
foregoing. 17 CFR 1.3(bb).
    CTAs are subject to registration with the Commission under CEA 
Section 4m and Commission regulation 3.4(a). 7 U.S.C. 6m and 17 CFR 
3.4(a).
    \8\ NFA Bylaw 1101 is available at: http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=BYLAW%201101&Section=3.
    \9\ Futures Associations: Futures Commission Merchants: 
Mandatory Membership, 48 FR 26304, 26306 and n.22 (June 7, 1983).
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    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') amended the

[[Page 55024]]

CEA to establish a comprehensive new regulatory framework for swaps and 
security-based swaps.\10\ The new regulatory framework provides that, 
among other things, persons that engage in regulated activity with 
respect to swaps will be required to register with the Commission as 
IBs, CPOs, or CTAs, as appropriate. Because of these definitional 
amendments, the intersection of Sec.  170.15 and NFA Bylaw 1101 no 
longer assures NFA membership for IBs, CPOs, or CTAs that are required 
to register with the Commission because, as noted above, NFA Bylaw 1101 
relates only to commodity futures contracts.\11\
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    \10\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010).
    \11\ For example, as noted in the Proposal, currently 
Commission-registered CTAs, CPOs, and IBs engaging solely in swap-
related activities are not captured by the intersection of Sec.  
170.15 and NFA Bylaw 1101 and, thus, are not required to be NFA 
members. As such, these registrants, to the extent that they have 
not voluntarily become NFA members, are not being supervised in the 
same manner as Commission registrants engaging in similar activities 
relating to commodity futures contracts, which registrants are 
effectively required to be NFA members.
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II. Proposed Rule

    On November 8, 2013, the Commission proposed to amend part 170 by 
adding Sec.  170.17, which would, if adopted, have required each IB, 
CPO, and CTA registered with the Commission to become and remain a 
member of at least one RFA (``Proposal'').\12\
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    \12\ See Membership in a Registered Futures Association, 78 FR 
67078 (Nov. 8, 2013).
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    In the Proposal, the Commission specifically solicited comments 
regarding, among other things, the impact of the Proposal on CTAs that 
are registered with the Commission despite being eligible to rely on 
the exemption from registration set forth in Commission regulation 
4.14(a)(9) (``Sec.  4.14(a)(9) Exempted CTAs'').\13\ Regulation 
4.14(a)(9) provides that a person is not required to register with the 
Commission as a CTA if it does not: (i) Direct any client accounts; or 
(ii) provide commodity trading advice based on, or tailored to, the 
commodity interest or cash market positions or other circumstances or 
characteristics of particular clients.\14\ When the Commission 
promulgated regulation 4.14(a)(9), it stated that ``[a] CTA exempt 
under rule 4.14(a)(9) that wishes to apply for registration or retain 
its current registration may do so.'' \15\ Therefore, CTAs that may 
avail themselves of the exemption from registration in regulation 
4.14(a)(9) may be currently registered with the Commission and may so 
register in the future.
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    \13\ 78 FR 67080 (Nov. 8, 2013).
    \14\ 17 CFR 4.14(a)(9). This exemption from CTA registration 
generally pertains to persons only providing advice to the general 
public, such as in a newsletter, and not to specific clients.
    \15\ See Exemption from Registration as a Commodity Trading 
Advisor, 65 FR 12938, 12941 (March 10, 2000).
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    The comment period for the Proposal ended on January 7, 2014.\16\ 
The Commission received two substantive comments in response to the 
Proposal \17\ and, in consideration of those comments, is adopting the 
Proposal subject to certain changes, as noted below.
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    \16\ The Proposal inaccurately stated the comment period ended 
on January 17, 2014. To reflect the accurate date, the Federal 
Register published a correction that the comment period ended on 
January 7, 2014. See 78 FR 67985 (Nov. 13, 2013). Nonetheless, the 
Commission considered all comments received by January 17, 2014.
    \17\ See http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1424.
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III. Summary of Comments

    In response to the Proposal, the Commission received two 
substantive comments, one from NFA and one from James W. Lovely, Esq. 
(``Lovely'').\18\ Both comments related to the impact of the Proposal 
on CTAs. No comments were received in response to the CPO and IB 
aspects of the Proposal.
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    \18\ NFA Comment Letter and James Lovely, Esq. Comment Letter.
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A. NFA Comment

    NFA supported the Proposal as an appropriate and effective way to 
require IBs, CPOs, and CTAs engaging in swaps activities that otherwise 
are not captured by the intersection of NFA Bylaw 1101 or NFA 
Compliance Rule 2-36 \19\ to become and remain NFA members, and comply 
with the applicable NFA requirements. However, NFA recommended that the 
Commission exclude Sec.  4.14(a)(9) Exempted CTAs from the Proposal. In 
support of its position, NFA stated that its existing rules focus 
primarily on an intermediary's conduct with respect to clients and thus 
have little applicability to CTAs that do not direct client accounts or 
otherwise exercise discretion (i.e., Sec.  4.14(a)(9) Exempted CTAs).
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    \19\ Clause (d) of NFA Compliance Rule 2-36 applies to forex 
transactions and requires that no NFA member carry a forex account 
for, accept a forex order or account from, handle a forex 
transaction for or on behalf of, receive compensation (directly or 
indirectly) for forex transactions from, or pay compensation 
(directly or indirectly) for forex transactions to any non-member of 
NFA, or suspended member, that is required to be registered with the 
Commission as, among other things, an FCM, IB, CPO, or CTA in 
connection with its forex activities. NFA Compliance Rule 2-36 is 
available at: http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=RULE%202-36&Section=4.
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B. Lovely Comment

    Conversely, Lovely generally stated that the Proposal ``while well-
intentioned, is ill-founded in many respects'' and argued that the 
costs associated with further requiring registered CTAs to become and 
remain RFA members would be disproportionate to any regulatory benefit.
    Lovely discussed those CTAs that register with the Commission even 
though they may not be required to so register (e.g., because they may 
avail themselves of a registration exception or exclusion provided 
under Commission regulation 4.14(a) or Sections 1a(12)(B) or 4m(1) of 
the CEA, respectively). According to Lovely, these CTAs register for 
legal comfort in light of the ``practical ambiguities around concepts 
[related to CTA registration requirements] such as `solely incidental', 
`principal business or profession', `holding out' and `tailored 
advice''' but do not have to become NFA members, so long as such CTAs 
do not manage or exercise discretion over customer accounts or 
funds.\20\ He argues that these CTAs' voluntary registration benefits 
the CFTC and that such persons will likely deregister if the Commission 
adopts the Proposal.\21\
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    \20\ Presumably Lovely means that such CTAs would not be 
captured by the intersection of Sec.  170.15 and NFA Bylaw 1101.
    \21\ In this regard, Lovely also asserted that if the Commission 
adopts the Proposal, the First Amendment rights of these CTAs could 
be jeopardized, and, in some cases, such CTAs may drop their CFTC 
registration entirely ``in reliance on . . . [their] commercial free 
speech rights under the U.S. Constitution.''
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    Lovely further stated that the CFTC ``significantly underestimates 
the cost of NFA [membership]'' for these CTAs who are not currently 
required to become NFA members. He noted that most of such CTAs ``have 
only incidental involvement with commodity interests'' and, if required 
to become NFA members, ``would need to retain external legal counsel or 
compliance consultants to try to ascertain [which NFA rules] apply to 
their activities and, if so, how to comply with the same.'' 
Notwithstanding that Lovely argues that many NFA rules are not 
applicable to such CTAs,\22\ he estimates that ``external

[[Page 55025]]

legal and compliance assistance . . . could easily cost [such a CTA] 
$15,000.00 to $20,000.00 per year.''
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    \22\ Lovely provided a non-exhaustive list of what he believes 
to be inapposite NFA member rules including rules regarding: (1) 
Account opening, risk disclosure and trading authority; (2) bunched 
orders and order allocation; (3) suitability or churning security 
futures products; (4) CTA program and performance disclosure for 
managed accounts or pools; (5) solicitation and execution of 
customer orders; (6) disaster recovery protocols (other than in 
connection with CFTC mandated record retention); (7) trading 
programs, performance and related promotional materials; (8) anti-
money laundering; and (9) quarterly reporting of assets under 
management, trading programs, performance, carrying brokers and the 
like.
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IV. Final Rule

    The Commission, in consideration of the comments received by it on 
the Proposal, is adopting the Proposal but excluding Sec.  4.14(a)(9) 
Exempted CTAs from the Final Rule.\23\ The Final Rule will help ensure 
the integrity of the swaps and futures market and its participants by 
subjecting all registered IBs, CPOs, and CTAs, except for Sec.  
4.14(a)(9) Exempted CTAs, to NFA's developed set of rules and oversight 
capabilities.\24\ As such, the Commission believes that the markets are 
better served, and the public better protected, by having persons 
subject to the requirements of the Final Rule become RFA members.\25\
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    \23\ Notwithstanding this exclusion, if a person is a Sec.  
4.14(a)(9) Exempted CTA and registered as an IB or CPO, then such 
person shall still be subject to the requirements of the Final Rule 
in its capacity as a registered IB or CPO, as the case may be.
    \24\ The Commission notes that, as a result of the Final Rule, 
any person not required to register, and not registered, with the 
CFTC would not subsequently become subject to any NFA-imposed 
requirement unless such person voluntarily elects to become so 
registered. Any adverse financial, commercial, or other impact, 
including the potential chilling effect on free speech, which could 
result from the Final Rule for such CTAs, could be avoided simply by 
relying on the proper regulatory exclusion or exemption without 
having to even incur the cost of filing a notice with the CFTC or 
NFA.
    \25\ This is consistent with the Commission's rationale for 
Sec.  170.15; that there should be essentially complete NFA 
membership from the universe of commodity professionals. See supra 
at n.10.
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    After considering the comments, the Commission is persuaded by 
Lovely and NFA that NFA's rules have little applicability to Sec.  
4.14(a)(9) Exempted CTAs and, thus, there would be little benefit from 
requiring Sec.  4.14(a)(9) Exempted CTAs to become and remain RFA 
members.
    The Commission, however, is not persuaded that other registered 
CTAs, regardless of whether such CTAs are required to register with the 
Commission, should be excluded from the requirements of the Final Rule. 
Any registered CTA that does not meet the requirements of Sec.  
4.14(a)(9) would, by definition, be engaged in either (i) directing 
client accounts, or (ii) providing commodity trading advice based on, 
or tailored to, the commodity interest or cash market positions or 
other circumstances or characteristics of particular clients. As noted 
above, and consistent with Sec.  170.15, the Commission believes that 
RFA supervision of registered CTAs engaging in these activities is 
beneficial to the markets and the clients of such CTAs.
    In addition, the Commission believes that Lovely's cost estimates 
are very high for retaining advisors in relation to NFA's rules. 
Assuming a CTA was to contact an attorney familiar with Commission 
regulations and NFA rules applicable to CTAs, the Commission believes 
that determining which NFA rules are applicable to such a CTA would be 
a routine task that would not take a substantial amount of time.\26\
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    \26\ As noted above, Lovely himself refers to many of these 
rules as ``inapposite.'' Such a description belies Lovely's argument 
that any substantial legal review would be required to determine 
whether NFA rules would apply to one of the CTAs about which Lovely 
comments.
    Moreover, the Commission believes the costs of compliance review 
in subsequent years would be significantly less than the initial 
review costs, because it is likely that only the changes to NFA 
rules that took place during the prior year would need to be 
considered.
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    Furthermore, with respect to those CTAs that opt into CFTC 
registration to avoid making determinations as to their activities in 
relation to their eligibility for the exceptions or exclusions from the 
CTA registration requirements noted in Lovely's comments, such persons 
should review available guidance from the Commission and consult with 
their advisors and Commission staff, as necessary, to determine if 
registration is required.\27\
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    \27\ The Commission notes that it is not of the view that making 
such a definitive determination is impossible or exceedingly 
difficult, as Lovely's comment suggests. However, the Commission 
does recognize that, once this determination has been made, and 
depending on the determination, a Commission registrant may need 
time to review and possibly reorganize its business in order to 
ensure its compliance with NFA's rules or undertake the 
deregistration process, as the case may be. Therefore, the 
Commission is providing the extended compliance period described in 
the DATES section above.
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    In support of the Final Rule, Section 4p of the CEA authorizes the 
Commission to ``specify by rules and regulations appropriate standards 
with respect to training, experience, and such other qualifications as 
the Commission finds necessary or desirable to insure the fitness of 
persons required to be registered with the Commission.'' \28\
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    \28\ 7 U.S.C. 6p. Also, Section 8a(5) of the CEA authorizes the 
Commission ``to make and promulgate such rules and regulations as, 
in the judgment of the Commission, are reasonably necessary to 
effectuate any of the provisions or to accomplish any of the 
purposes'' of the CEA.
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    The Final Rule also provides a means for assuring that the purpose 
of Section 17(m) of the CEA,\29\ allowing for compulsory RFA 
membership, is achieved.\30\ The Commission believes that the Final 
Rule is reasonably necessary and desirable to effectuate comprehensive 
and effective market oversight by NFA in its capacity as an SRO. As the 
only RFA, NFA serves as the frontline regulator of its members, subject 
to Commission oversight. Without such mandatory membership in NFA or 
another RFA, effective implementation of the programs required by 
Section 17 of the CEA and NFA's self-regulatory programs could be 
impeded.\31\
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    \29\ 7 U.S.C. 21(m).
    \30\ See Futures Associations: Futures Commission Merchants: 
Mandatory Membership, 48 FR 26304 (June 7, 1983).
    \31\ The Commission notes that in addition to the authority 
discussed herein, as noted previously, CPOs and CTAs are subject to 
registration with the Commission under Section 4m of the CEA, and 
IBs are subject to such registration under Section 4d(g) of the CEA. 
7 U.S.C. 6m and 6d(g).
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    In summary, by mandating RFA membership by each registered IB, CPO, 
and CTA, except Sec.  4.14(a)(9) Exempted CTAs, the Final Rule enables 
the Commission to further ensure the fitness, and provide for direct 
NFA oversight, of these Commission registrants.

V. Administrative Compliance

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \32\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. An agency may not conduct or 
sponsor, and a registered entity is not required to respond to, a 
collection of information unless it displays a currently valid control 
number by the Office of Management and Budget (``OMB'').
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    \32\ 44 U.S.C. 3501 et seq.
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    In connection with the Proposal, the Commission anticipated that, 
if adopted, the Final Rule would simply require an amendment to the 
number of respondents included in OMB Collection 3038-0023.\33\ The 
basis for this preliminary finding was that, at the time of the 
Proposal, NFA had indicated that certain CPOs, CTAs, and IBs were 
registered with the Commission, but not NFA members. Therefore, because 
registration and membership require the filing of Form 7-R, the 
Commission initially believed these respondents' paperwork burden would 
have been affected by the Proposal.
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    \33\ See OMB Control No. 3038-0023, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0023.
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    As discussed above, the Final Rule does not require IBs, CPOs, or 
CTAs to

[[Page 55026]]

register with the Commission. Rather, the Final Rule only requires that 
certain of such persons that register with the Commission become and 
remain an NFA member. To indicate NFA membership an applicant needs to 
``check a box'' on Form 7-R.\34\ Current OMB Collection 3038-0023 
captures the burdens associated with the registration process for these 
persons, including the filing of and updating of Form 7-R for 
registration purposes. Therefore, to comply with the Final Rule, such 
registrants that are not NFA members, would be required to ``check-the-
box'' on Form 7-R indicating their status as an NFA member.
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    \34\ The Commission has designated NFA to receive Form 7-R 
submissions on its behalf. The Commission notes that application for 
NFA membership is incorporated in Form 7-R.
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    Accordingly, because the burden associated with updating Form 7-R 
is currently captured in OMB Collection 3038-0023, and those persons 
who are directly impacted by the Final Rule are either currently 
registered with the Commission (i.e., have already filed a Form 7-R) or 
will be required to file a Form 7-R in connection with their 
registration with the Commission, no adjustment is necessary to take 
into account the number of Commission registrants who will have to 
become NFA members as a result of the Final Rule. Further, the 
Commission believes the additional burden of ``checking the box'' on 
Form 7-R to be non-substantive. Therefore, upon further review and for 
the reasons stated above, the Final Rule does not require amending 
existing OMB Collection 3038-0023.\35\
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    \35\ The Commission further believes that many Commission 
registrants' recordkeeping obligations associated with preparing for 
an NFA audit are already covered by other OMB control numbers. For 
example, Sec. Sec.  4.23 and 4.33 of the Commission's regulations 
are recordkeeping requirements associated with registered CPOs and 
CTAs, respectively, which are covered by OMB control number 3038-
0005.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \36\ requires federal agencies, in 
promulgating regulations, to consider the impact of those regulations 
on small entities. In the Proposal, the Commission certified that the 
Proposal would not have a significant economic impact on a substantial 
number of small entities.
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    \36\ 5 U.S.C. 601 et seq.
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1. CPOs
    The Commission has previously determined that CPOs are not small 
entities for purposes of the Regulatory Flexibility Act.\37\ 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the Final Rule will not have 
a significant economic impact on a substantial number of small entities 
with respect to CPOs.
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    \37\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982).
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2. IBs and CTAs
    The Commission has previously determined to evaluate within the 
context of a particular rule proposal whether all or some IBs or CTAs 
should be considered to be small entities and, if so, to analyze the 
economic impact on them of any such rule.\38\
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    \38\ See, with respect to CTAs, 47 FR at 18620 (Apr. 30, 1982); 
and see, with respect to IBs, Introducing Brokers and Associated 
Persons of Introducing Brokers, Commodity Trading Advisors and 
Commodity Pool Operators; Registration and Other Regulatory 
Requirements, 48 FR 35276 (Aug. 3, 1983).
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    Since there may be some small entities that are IBs or CTAs and 
would be required to become NFA members, the Commission has considered 
whether this rulemaking would have a significant economic impact on 
these entities.
    The Final Rule requires all IBs and CTAs, except Sec.  4.14(a)(9) 
Exempt CTAs, who register with the Commission to become RFA members. 
This would require such IBs and CTAs to pay membership dues, ``check a 
box'' on Form 7-R, and ensure that they are prepared for an NFA 
audit.\39\ As noted in the Proposal, the Commission is of the view that 
any costs associated with preparing for an audit by the NFA should not 
be substantially different from, or significantly exceed, the costs 
associated with preparing for an audit by the Commission, which every 
registered person would already be responsible to do.\40\ Moreover, 
because the Final Rule only pertains to Commission Registrants, any 
audit related costs incident to NFA membership would be negligible, and 
should not have a significant economic impact on IBs or CTAs that may 
be small entities. The Commission also stated its preliminary belief 
that NFA membership would impose few additional compliance costs on 
affected entities, because these entities are already subject to the 
majority of regulations that NFA enforces, whether or not they are NFA 
members. The Commission specifically requested comment on any 
additional compliance costs beyond those an entity would face as a 
result of it being registered with the Commission.
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    \39\ See 78 FR 67083 (Nov. 8, 2013). As stated in the booklet 
titled ``NFA Regulatory Requirements: For FCMs, IBs, CPOs, and 
CTAs,'' NFA audits have two major objectives: (1) To determine 
whether the firm is maintaining records in accordance with NFA rules 
and applicable CFTC regulations; and (2) to ensure that the firm is 
being operated in a professional manner and that customers are 
protected against unscrupulous activities and fraudulent or high-
pressure sales practices.
    \40\ As noted above, the Commission believes that many of the 
recordkeeping obligations associated with preparing for an NFA audit 
are already required for Commission registrants. Moreover, given the 
average periodicity for NFA audits, the magnitude of annual audit-
related costs is limited.
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a. Comments on Costs to CTAs
    In response to the Proposal, a comment from Lovely stated that most 
CTAs that opt into CFTC registration and do not manage or exercise 
discretion over customer accounts or funds are ``small or one-person 
operations or may have only incidental involvement with commodity 
interests.'' Further, Lovely asserts that, although many of NFA's rules 
are not relevant to such CTAs, the Commission understates the cost of 
required NFA membership, including that the costs to these CTAs of 
reviewing and complying with such rules would be approximately $15,000 
to $20,000 annually.
    As discussed above, the Commission believes that Lovely's 
compliance cost estimates are very high. Rather, the Commission 
believes that the costs faced by a CTA would, at most, be approximately 
$2,950 in the first year and $1,476 in subsequent years.\41\ The 
Commission does not believe that these amounts plus the $750 membership 
dues required of all NFA members that are CTAs, results in an 
unreasonable burden on any CTAs (including those that may be small 
entities under the Regulatory Flexibility Act).\42\ Further, as

[[Page 55027]]

discussed above, Sec.  4.14(a)(9) Exempted CTAs (i.e., those CTAs that 
neither manage nor exercise discretion over customer accounts or funds 
and that do provide clients advice described in Sec.  4.14(a)(9)(ii)) 
will not be required to become or remain RFA members pursuant to the 
Final Rule and, thus, will not face any compliance costs from the Final 
Rule.
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    \41\ This estimate is based on the following labor estimates for 
this determination: for the first year, 6 hours of an attorney; in 
subsequent years, 3 hours of an attorney, in each case at 
approximately $492.21/hour. The estimate of the hourly cost is from 
the Securities Industry and Financial Markets Association's Report 
on Management and Professional Earnings in the Securities Industry--
2013, modified by CFTC staff to account for an 1800-hour work-year 
and multiplied by 5.35 to account for firm size, employee benefits, 
and overhead. The Commission believes that the use of this 
multiplier is appropriate here because the Commission is assuming 
that persons retain outside advisors to assist in complying with NFA 
rules. The Commission rounds to two significant digits.
    \42\ Assuming that IBs would face similar compliance costs as 
CTAs, the Commission does not believe that these costs result in an 
unreasonable burden on any IBs (including those that may be small 
entities under the Regulatory Flexibility Act). Further, as of June 
30, 2015, all registered IBs that are not members of NFA are pending 
withdrawal of their Commission registration. Accordingly, the 
Commission believes that no currently registered IBs will be 
impacted by this rule.
    The Commission also notes that, pursuant to Section 17(d) of the 
Act, each CTA or IB that is registered with the Commission, but not 
an RFA member is required to ``. . . pay to the Commission such 
reasonable fees and charges [established by the Commission] as may 
be necessary to defray the costs of additional regulatory duties 
required to be performed by the Commission because such person is 
not a member of an [RFA].'' 7 U.S.C. 21(d). The Commission has not 
yet established any such fees or charges, but noted in the release 
for Sec.  170.15 that these charges are likely to be greater than 
the costs attendant to RFA membership. See 48 FR at 26311.
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b. Commission Determination
    Accordingly, for the reasons stated above, the Commission believes 
that the Final Rule will not have a significant economic impact on a 
substantial number of small entities. Therefore, the Chairman, on 
behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the Final Rule being published today by this Federal 
Register release will not have a significant economic impact on a 
substantial number of small entities.

C. Considerations of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
1. Background
    As discussed above, the Dodd-Frank Act amended the CEA to establish 
a comprehensive new regulatory framework for swaps markets and, in 
doing so, required IBs, CPOs, and CTAs acting in relation to swaps to 
register with the Commission. These newly registered persons, however, 
are not currently required to become NFA members because, as discussed 
above, they are not captured by the intersection of Sec.  170.15 and 
NFA Bylaw 1101.
    NFA cannot enforce its rules over Commission registrants who do not 
become NFA members, including IBs, CPOs, and CTAs active solely in 
relation to swap transactions, which are not currently required to 
become NFA members. Thus, the Final Rule requires registered IBs, CPOs, 
and CTAs, except Sec.  4.14(a)(9) Exempted CTAs, to become NFA members 
similarly to how Sec.  170.15 presently requires FCMs to become NFA 
members and how Sec.  170.16 requires the same of SDs and MSPs. In 
conjunction with Sec. Sec.  170.15 and 170.16, the Commission is 
intending to create an oversight regime that ensures more consistent 
treatment of its registered intermediaries. The Commission believes 
that the Final Rule is reasonably necessary to ensure the fitness and 
comprehensive regulation and appropriate oversight of such persons.
    In assessing the costs and benefits of the Final Rule, the 
Commission employs a status quo baseline. The Commission analyzes the 
cost and benefit to those registered persons that, but for the Final 
Rule, would not have to become RFA members. As of June 30, 2015, the 
following numbers of Commission registered IBs, CPOs, and CTAs 
(registered in the below categories) were not NFA members (``Non-member 
Registrants''): \43\
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    \43\ See NFA's daily directory of CFTC Registrants and Members 
available at: http://www.nfa.futures.org/NFA-registration/NFA-directories.HTML.

------------------------------------------------------------------------
                                                            Non-member
                  Registration category                     registrants
------------------------------------------------------------------------
IB only.................................................              21
CPO only................................................              61
CTA only................................................             573
IB & CPO................................................               1
IB & CTA................................................               2
CTA & CPO...............................................              41
FCM & CPO...............................................               1
                                                         ---------------
    Total...............................................             700
------------------------------------------------------------------------

Of these Non-member Registrants, however, approximately 138 are pending 
withdrawal of their Commission registration. The Commission is assuming 
that these Non-member Registrants will withdraw their registration and, 
thus, will not be impacted by the Final Rule. In addition, only 
approximately one percent of the Non-member Registrants registered 
solely as CTAs reported to the Commission in the most recent reporting 
cycle that they had directed client accounts.\44\ As such, the 
Commission believes that many of the Non-member Registrants registered 
solely as CTAs will be Sec.  4.14(a)(9) Exempted CTAs and, thus, will 
not be required to comply with the Final Rule.\45\ Accordingly, the 
Commission estimates that 296 \46\ persons registered with the CFTC as 
a CPO, CTA, or IB will be required to become and remain NFA members as 
a result of the Final Rule.\47\

    \44\ The Commission is assuming that all Non-member Registrants 
registered solely as CTAs have reported to the Commission the amount 
of assets they have directed, if any.
    \45\ For purposes of its analysis, the Commission is assuming 
that approximately half of the 573 Non-member Registrants registered 
solely as CTAs (286 Non-member Registrants) will be Sec.  4.14(a)(9) 
Exempted CTAs and will not be required to comply with the Final 
Rule, and 20 of these 286 Non-member Registrants will be pending 
withdrawal of their Commission registration.
    \46\ To arrive at the estimate, the 700 figure was reduced by 
the sum of (i) 138 (the Non-member Registrants whose withdrawal from 
Commission registration is pending) and (ii) 266 (the Non-member 
Registrants that the Commission assumes will be Sec.  4.14(a)(9) 
Exempted CTAs net of those pending withdrawal, as described above).
    \47\ For purposes of assessing the costs of this rule, the 
Commission is assuming that no Non-member Registrant is, absent the 
Final Rule, required to be an NFA member.
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    Because at this time the Commission cannot reasonably estimate the 
number of Non-member Registrants that may deregister with the 
Commission as a result of the Final Rule, the Commission is assuming 
that no Non-member Registrants will deregister as a result of the Final 
Rule. The Commission believes that this will lead to an overstatement 
of the compliance costs relating to the Final Rule.
2. Costs
a. Costs to IBs, CPOs, and CTAs
    As discussed above, the process for a Non-member Registrant to 
become an NFA member amounts to checking a box on the CFTC registration 
form and updating some contact information. Thus, the Commission 
believes the cost of filing for membership to be non-substantive.\48\
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    \48\ See Form 7-R, http://www.nfa.futures.org/NFA-registration/templates-and-forms/form7-r.HTML. Applications forms for NFA 
membership and Associate membership are incorporated in Forms 7-R 
and 8-R. See NFA Membership and Dues, http://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML.
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    Affected persons are also subject to certain membership fees. NFA 
imposes initial membership dues and annual membership dues for IBs, 
CPOs, and CTAs. Currently, such initial membership dues are $750 for 
the first year, and the annual dues to maintain membership are $750 per 
year

[[Page 55028]]

thereafter.\49\ Thus, the 296 affected Non-member Registrants, in the 
aggregate, will incur an initial and ongoing annual registration/
membership cost of approximately $222,000.\50\
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    \49\ See NFA Membership and Dues, http://www.nfa.futures.org/NFA-registration/NFA-membership-and-dues.HTML.
    \50\ To arrive at the monetary estimate, the 296 figure was 
multiplied by the $750.00 per-person annual membership dues.
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    The Commission agrees with Lovely that the Final Rule will also 
impose certain compliance costs on affected Non-member Registrants. 
However, as noted above, the Commission believes that, given the 
existing requirements imposed on such registrants, the compliance costs 
of becoming an NFA member and complying with NFA's rules (including 
preparing for an audit by NFA) will be partially offset by the costs 
already incurred by these registrants (i.e., the costs associated with 
complying with Commission regulations and preparing for examinations by 
the Commission). In that regard, as discussed above, the Commission 
disagrees with Lovely's cost estimates and estimates that an affected 
registrant may, at most, face additional compliance costs of 
approximately $2,950 initially and $1,476 in subsequent years, equating 
to an industry total of $873,200 in the first year and $436,896 in 
subsequent years,\51\ plus the indirect costs of the periodic audits. 
The Commission cannot reasonably provide an exact estimate of these 
costs due to the idiosyncratic nature of the indirect costs 
incurred.\52\
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    \51\ To arrive at the monetary estimate, the 296 figure was 
multiplied by the estimated per-person compliance costs.
    \52\ The Commission also considered that, in addition to the 
Non-member Registrants discussed above, the Final Rule will cause 
future persons registering with the Commission as IBs, CPOs, and 
CTAs because of their activities in relation to swaps to incur 
additional costs similar to those described above. The Commission 
expects that many persons will apply for registration under the 
Commission's swaps market regime in such capacities, but the 
Commission is not able to accurately estimate the exact number of 
new Commission registrants that will do so and, thus, be affected by 
the Final Rule.
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b. Other Market Costs
    In addition to the direct costs to Commission Registrants, the 
Commission considered other costs to the markets of the Final Rule. In 
particular, the Commission considered the impact the Final Rule will 
have on IBs, CPOs, and CTAs (i) election to not register with the 
Commission and (ii) optional deregistration, in each case, where such 
persons are not required to be registered with the Commission. Further, 
the Commission considered that the requirements of the Final Rule may 
cause fewer persons to elect to become IBs, CPOs, and CTAs because of 
the added burden of being an RFA member. The Commission is unable to 
estimate accurately how many IBs, CPOs, and CTAs will deregister with 
the Commission or elect not to so register in the future, or how many 
persons will choose to not become such an intermediary, in each case, 
as a result of the Final Rule. Further, the Commission believes that if 
a market participant has chosen not to register with the Commission, 
the costs incurred by that participant for not registering would be 
less than the costs that would have been incurred to register. 
Otherwise, the market participant would likely have chosen to register 
instead. However, the Commission cannot make a more accurate 
determination of costs beyond this overestimate without knowing more 
specifics about a particular market participant.
c. Consideration of the Proposal as an Alternative to the Final Rule
    The Commission believes the costs in a. and b. above, respectively, 
are reduced from those that would have resulted had the Proposal been 
adopted without modification (the Proposal would have required each 
registered IB, CPO, and CTA, without exception, to become and remain a 
member of an RFA), because the Commission has excepted Sec.  4.14(a)(9) 
Exempted CTAs from the requirements of the Final Rule. This exclusion 
limits the Commission's ability to oversee these persons through 
delegation to an RFA; however, the Commission has determined that this 
reduction in the Commission's oversight abilities is reasonable in 
light of the burden that the Proposal would otherwise impose on Sec.  
4.14(a)(9) Exempted CTAs and the markets. The Commission further notes 
that, as discussed above, Sec.  4.14(a)(9) Exempted CTAs that are not 
RFA members are still subject to the Commission's rules and 
regulations.
3. Benefits
    The Final Rule enables the Commission to (i) carry out its 
obligations pursuant to Section 17 of the CEA to delegate certain 
oversight responsibility for intermediaries, including IBs, CPOs, and 
CTAs, to an RFA, and (ii) ensure the fitness of its registrants as 
described under Section 4p of the CEA. The Commission believes that by 
requiring RFA membership, the Final Rule results in a more efficient 
deployment of agency resources which would otherwise have to be used to 
oversee these registrants who would, without the Final Rule, not be 
overseen by an RFA. Further, the Commission believes that the Final 
Rule enables NFA to apply its experience as a SRO to oversee and ensure 
the fitness of all registered IBs, CPOs, and CTAs, except Sec.  
4.14(a)(9) Exempt CTAs. The markets and the public will benefit from 
NFA's developed set of rules and oversight capabilities to ensure the 
integrity of the swaps market and its participants.
4. Section 15(a) Factors
    The Commission requested comment on all aspects of the Section 
15(a) factors. Except as discussed above, the Commission did not 
receive any comments relating to costs and benefits of the Final Rule.
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
    The Final Rule will protect the public by ensuring that registered 
IBs, CPOs, and CTAs, except Sec.  4.14(a)(9) Exempt CTAs, are subject 
to the same level of comprehensive NFA oversight.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Final Rule ensures that all registered IBs, CPOs, and CTAs, 
except Sec.  4.14(a)(9) Exempt CTAs, are subject to a similar level of 
oversight and regulatory responsibility. In so doing, the Commission 
believes the integrity of markets is enhanced. Furthermore, the 
Commission also believes that the Final Rule will promote public 
confidence in the integrity of derivatives markets by ensuring 
consistent and adequate regulation and oversight of registered IBs, 
CPOs, and CTAs, except Sec.  4.14(a)(9) Exempt CTAs.
c. Price Discovery
    The Commission has not identified an impact on price discovery as a 
result of the Final Rule.
d. Sound Risk Management
    The Commission has not identified an impact on the risk management 
decisions of market participants as a result of the Final Rule.
e. Other Public Interest Considerations
    The Commission has not identified an impact on other public 
interest considerations as a result of the Final Rule.

List of Subjects in 17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures, 
Membership in a Registered Futures

[[Page 55029]]

Association, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 170 as set forth below:

PART 170--REGISTERED FUTURES ASSOCIATIONS

0
1. The authority citation for part 170 is revised to read as follows:

    Authority:  7 U.S.C. 6d, 6m, 6p, 6s, 12a, and 21.


0
2. Add Sec.  170.17 to read as follows:


Sec.  170.17  Introducing brokers, commodity pool operators, and 
commodity trading advisors.

    Each person registered as an introducing broker, commodity pool 
operator, or commodity trading advisor 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 introducing 
brokers, commodity pool operators, or commodity trading advisors, as 
the case may be, unless no such futures association is so registered; 
provided, however that a person registered as a commodity trading 
advisor shall not be required to become or remain a member of such a 
futures association, solely in respect of its registration as a 
commodity trading advisor, if such person is eligible for the exemption 
from registration as such pursuant to Sec.  4.14(a)(9) of this chapter.

    Issued in Washington, DC, on September 9, 2015, by the 
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to Membership in a Registered Futures Association--Commission 
Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2015-23046 Filed 9-11-15; 8:45 am]
 BILLING CODE 6351-01-P