39008 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

Core Principle #15: Competition: Recognized

futures exchanges should avoid

unreasonable restraints of trade or impose

any burden on competition not necessary or

appropriate in furtherance of the objectives

of the Act or the regulations thereunder

(a) Application Guidance. A recognized

futures exchange should avoid unreasonable

restraints of trade in any terms and

conditions of access or provision of services

or any non-compete clauses or limitations on

future activity.

(b) Acceptable Practices. [Reserved]

PART 100—[REMOVED AND

RESERVED]

12. Part 100 is proposed to be

removed and reserved.

PART 170—REGISTERED FUTURES

ASSOCIATIONS

13. The authority citation for Part 170

continues to read as follows:

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

14. Section 170.8 is proposed to be

revised to read as follows:

§ 170.8 Settlement of customer disputes

(section 17(b)(10) of the Act).

A futures association must be able to

demonstrate its capacity to promulgate

rules and to conduct proceedings which

provide a fair, equitable and expeditious

procedure, through arbitration or

otherwise, for the voluntary settlement

of a customer’s claim or grievance

brought against any member of the

association or any employee of a

member of the association. Such rules

shall conform to and be consistent with

section 17(b)(10) of the Act and be

consistent with the guidelines and

acceptable practices for dispute

resolution found within Appendix A

and Appendix B to Part 38 of this

chapter.

PART 180—ARBITRATION OR OTHER

DISPUTE SETTLEMENT PROCEDURES

[REMOVED]

15. Part 180 is proposed to be

removed.

Issued in Washington, DC, this 8th day of

June, 2000, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 00–14914 Filed 6–21–00; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Parts 1, 3, 4, 140, 155 and 166

RIN 3038–AB56

Rules Relating to Intermediaries of

Commodity Interest Transactions

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rules.

SUMMARY: On February 22, 2000, a staff

task force of the Commodity Futures

Trading Commission (‘‘CFTC’’ or

‘‘Commission’’) submitted a report to

the CFTC’s Congressional oversight

committees entitled A New Regulatory

Framework. To further the regulatory

reform process, the Commission is

proposing to revise its rules relating to

intermediation of commodity futures

and commodity options (‘‘commodity

interest’’) transactions.

The proposed new rules would

provide greater flexibility in several

areas. To ease barriers to entry for

persons seeking registration as futures

commission merchants (‘‘FCMs’’) or

introducing brokers (‘‘IBs’’), the

Commission would: Provide a

simplified registration procedure for

those persons wishing to operate as

FCMs or IBs only on recognized

derivatives transaction facilities ‘‘DTFs’’

for institutional customers, and who are

regulated by other federal financial

regulatory agencies; and eliminate the

requirement to submit a certified

financial report as part of the standard

registration application for FCMs and

IBs. For all registrants, the Commission

would eliminate its rule requiring ethics

training, replacing it with a Statement of

Acceptable Practices. In addition, the

Commission would respond favorably to

a rule change of the National Futures

Association (‘‘NFA’’) that would relieve

sales personnel dealing only with

institutional customers of the

requirement to pass a proficiency test.

The Commission is also proposing to

amend the definition of the term

‘‘principal’’ in Rule 3.1(a), mainly to

eliminate inclusion of certain types of

officers of a firm, and to make

conforming amendments to other rules.

Account opening procedures would

be simplified to allow for all required

disclosures (with the exception of

arbitration agreements) to be

acknowledged with a single signature,

which may be an electronic signature.

The obligation for FCMs and IBs to

provide a specific disclosure statement

would also be eliminated for a greater

number of spohisticated customers.

Electronic transmission of account

statements would also be permitted, and

the Commission’s rules as to close-out

of offsetting positions would be

streamlined to allow for customer

choice.

Further, the Commission proposes to

expand the range of instruments in

which FCMs may invest customer

funds. The Commission also requests

comment concerning whether customers

should be allowed to ‘‘opt out’’ of the

rules requiring segregation of customer

funds, and whether FCMs should be

allowed to maintain, in the same

customer segregated account, funds

used for the purpose of securing or

margining instruments other than those

currently permitted. Finally, the

Commission is considering the issuance

of a separate order revising its previous

pronouncements regarding the

treatment of customer funds on deposit

with FCMs for the purpose of trading on

foreign markets.

DATES: Comments must be received on

or before August 7, 2000.

ADDRESSES: Comments on the proposed

rules should be sent to Jean A. Webb,

Secretary, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW., Washington, DC

20581. Comments may be sent by

facsimile transmission to (202) 418–

5521, or by e-mail to secretary@cftc.gov.

Reference should be made to ‘‘Proposed

Rules Concerning Intermediaries.’’

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, Paul H. Bjarnason, Jr., Special

Advisor for Accounting Policy (with

respect to Rule 1.25 concerning

investment of customer funds), or

Andrew J. Shipe, Attorney-Advisor,

Division of Trading and Markets,

Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581. Telephone: (202) 418–5450.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Proposed Rules

A. Core Principle One: Registration

1. Definition of the Term ‘‘Principal’’

2. Special Procedures Available to Firms

Subject to Securities or Banking

Regulation

3. Standard Application Procedures for

FCMs and IBs

B. Core Principles Two and Six: Fitness

and Supervision

1. Proficiency Testing and Ethics Training

for Individual Registrants

2. Reforms Relating to Statutory

Disqualification From Registration

C. Core Principle Three: Financial

Requirements

1. Trading by Non-Institutional Customers

on DTFs

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39009

1–3As noted elsewhere in this edition of the

Federal Register, the Commission is proposing a

new market structure, an exempt multilateral

transaction execution facility (‘‘MTEF’’), wholly

exempt from Commission regulation, except for the

antifraud and antimanipulation provisions of the

Commodity Exchange Act (‘‘Act’’). Intermediaries

would generally not be subject to regulation as to

their activities on such an exempt MTEF.

Accordingly, the proposals discussed in this release

are applicable generally only to intermediaries on

RFEs, DTFs and contract markets. It should also be

noted that some DTFs may permit trading only on

a principal-to-principal basis. Since the rule

amendments proposed herein relate only to

intermediaries, they would not be applicable to

such a market structure.

4See Interpretative No. 4–2, CFTC Staff Letter 99–

32, [1998–1999 Transfer Binder] Comm. Fut. L. Rep.

(CCH) ¶27,745 (August 20, 1999).

2. Segregation of Funds

3. Investment of Customer Funds

D. Core Principle Four: Risk Disclosure and

Account Statements

E. Core Principle Five: Trading Standards

F. Core Principle Seven: Reporting

Requirements

G. Core Principle Eight: Recordkeeping

1. General

2. Customer Account Statements; CloseOut of Offsetting Positions

III. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

I. Introduction

As announced elsewhere in this

edition of the Federal Register, the

Commission has proposed a new

regulatory structure that is intended to

adapt to the changing needs of the

modern marketplace. In reviewing its

regulatory structure, the Commission

has identified eight Core Principles that

it believes are fundamental to assuring

proper conduct by intermediaries of

commodity interest transactions. While

the Commission is not proposing to

adopt these Core Principles as rules,

they have guided the Commission in its

regulatory reform efforts. The

Commission has reviewed all of its rules

related to intermediaries in light of the

Core Principles. To the extent that an

existing rule is not discussed herein,

and no amendment thereto is being

proposed, the rule would apply to

intermediaries transacting business on

behalf of customers on contract markets,

recognized futures exchanges (‘‘RFEs’’)

and DTFs.

In accordance with these Core

Principles, the Commission now

proposes reforms contemplating greater

flexibility for intermediaries and their

customers via a regulatory structure that

acknowledges the different levels of

safeguards appropriate to the types of

instruments, customers and markets

involved.1–3 While the Commission, in

this release, is announcing certain

proposed changes in its regulatory

structure that would be applicable to all

categories of Commission registrants

(e.g., the principal definition and ethics

training requirements discussed below),

the Commission is aware that certain

proposals would mainly affect FCMs

and IBs, and would not be applicable to

commodity pool operators (‘‘CPOs’’) and

commodity trading advisors (‘‘CTAs’’).

Nevertheless, the Commission seeks

comment on these proposals from all

categories of Commission registrant.

The Commission also wishes to make

clear that its regulatory reform efforts

are an ongoing process. Thus, for

example, as a part of the regulatory

reform process, the Division of Trading

and Markets recently permitted

designated self-regulatory organizations

(‘‘DSROs’’) to conduct ‘‘risk-based’’

auditing and thereby take into account

a firm’s business practices in

establishing the scope and timing of

audits.4 Similarly, the Commission is

considering various changes to the

capital requirements for FCMs,

including a risk-based approach.

The Commission also intends to

consider further rulemaking proposals

at a subsequent date that may focus

more directly upon Part 4 of the

Commission’s rules, which govern the

activities of CPOs and CTAs. As

examples of its reform efforts with

regard to such persons, the Commission

has recently proposed to bring more

persons within the definition of a

‘‘qualified eligible client’’ of a CTA or a

‘‘qualified eligible participant’’ of a

commodity pool, see 65 FR 11253

(March 2, 2000), which would lessen

the disclosure, recordkeeping and

reporting requirements for CTAs and

CPOs, and to permit CTAs to compute

the rate of return for partially funded

accounts (also known as ‘‘notionally

funded accounts’’) by dividing net

performance by the agreed-upon

nominal account size, see 64 FR 41843

(Aug. 2, 1999).

Industry representatives have

indicated that they would prefer

uniform standards for intermediaries

dealing with institutional customers

without regard to the type of facility on

which a trade is executed. Many of the

proposals contained herein would have

that effect. The Commission requests

comment on whether there are other

specific requirements that should be

modified toward that end.

The Core Principles applicable to

intermediaries, which relate to

registration, fitness of registrants,

financial requirements, risk disclosure,

trading standards, supervision of

personnel, large position reporting

requirements, and recordkeeping, are as

follows:

1. Registration Required.

Any person or entity intermediating a

transaction on an RFE, or on a DTF that

permits intermediation of trading, must

be registered in the appropriate capacity

with the Commission as an FCM, IB,

CTA, CPO, AP of any of the foregoing,

or floor broker (‘‘FB’’). In addition, a

person trading solely for his or her own

account on an RFE or DTF with a

trading floor must register as a floor

trader (‘‘FT’’).

2. Fitness of Registrants

Intermediaries and FTs in all MTEF

markets recognized by the CFTC must

be and remain fit.

3. Financial

FCMs must keep and safeguard

customer money and FCMs and IBs

must have sufficient capital to ensure

their capacity to meet their obligations

to customers.

4. Risk Disclosure

Intermediaries must provide to

customers risk disclosure appropriate to

the particular instrument and the

customer.

5. Trading Standards

Intermediaries and their affiliated

persons are prohibited from misusing

knowledge of their customers’ orders.

6. Supervision

All intermediaries, including APs

having supervisory responsibilities,

must diligently supervise all commodity

interest accounts that they carry,

operate, advise, introduce, handle or

trade, as well as all of the other

activities that arise in their business as

intermediaries. All intermediaries must

establish and maintain supervisory

procedures.

7. Reporting of Positions

All intermediaries must report to the

Commission, RFE or DTF information

that permits the Commission, RFE or

DTF to identify concentrations of

positions and market composition.

Reports of transactions on RFEs would

be required on a routine and nonroutine

basis as is the case for transactions on

contract markets. Reports of transactions

on DTFs would be required only on a

non-routine basis.

8. Recordkeeping

All intermediaries (and FTs) must

keep full books and records of all

activities related to their business as an

FCM, IB, CPO, CTA, FB or FT, in a form

39010 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

5Rule 3.1(a) defines ‘‘principal’’ for purposes of

the Commission’s Part 3 rules, which govern

registration. Rule 4.10(e) defines ‘‘principal’’ for

purposes of the Commission’s Part 4 rules, which

apply to the activities of commodity pool operators

(‘‘CPOs’’) and commodity trading advisors

(‘‘CTAs’’). The rules are substantially equivalent,

although Rule 3.1(a)(1) contains the final clause ‘‘to

exercise a controlling influence over its activities

which are subject to regulation by the Commission’’

while Rule 4.10(e)(1)(i) concludes ‘‘to exercise a

controlling influence over the activities of the

entity.’’ This distinction has not been significant in

the Commission’s analysis of whether a given

person is a principal. The Commission nevertheless

proposes to conform these definitions, as detailed

herein, to remove any possible ambiguity.

6See, e.g., CFTC Rule 3.10(a)(2) (principals must

complete a Form 8–R and submit a fingerprint

card); Rules 4.24(e)(1), 4.24(f)(1)(v) and 4.24(j)(1)(v),

applicable to CPOs, and 4.34(e)(1), 4.34(f)(1)(ii), and

4.34(j)(1)(iv), applicable to CTAs (identity of

principals, business background of those principals

who participate in making trading or operational

decisions or supervise persons so engaged, and

information about any conflicts of interest regarding

principals must be disclosed in the Disclosure

Document); Rules 4.23(b)(2)(ii) and 4.33(b)(2)(ii),

applicable to CPOs and CTAs, respectively

(recordkeeping requirements for transactions of

principals); Rules 4.25(a)(8)(ii)(A), 4.25(b)(2),

4.25(c)(2)(i)(B), 4.25(c)(2)(ii), applicable to CPOs,

and Rules 4.35(a)(7)(ii)(A) and 4.35(b), applicable to

CTAs (disclosure requirements for performance of

accounts or pools owned or controlled by

principals).

7See, e.g., CFTC Staff Letter No. 76–15, [1975–

1977 Transfer Binder] Comm. Fut. L. Rep. (CCH)

¶ 20,194 (Office of General Counsel, Aug. 2, 1976)

(the term ‘‘individual principals’’ includes officers,

directors, principal shareholders and any other

person who, directly or indirectly, controls the

CTA); CFTC Staff Letter No. 95–19, [1994–1996

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,346

(Division of Trading and Markets, Feb. 24, 1995)

(CTA required to list corporate secretary as a

principal despite contention that her duties were

clerical); CFTC Staff Letter No. 98–29, [1996–1998

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,312

(Division of Trading and Markets, Apr. 1, 1998)

(CTA required to list sixteen employees who were

either vice presidents, senior vice presidents or

executive vice presidents as principals).

8As an indication of the importance of the chief

financial officer, the Commission notes that for

purposes of filing a Notice of Claim of Exemption

(‘‘Notice’’) under Rules 4.7, 4.12 or 4.13, if the

registrant is organized as a corporation, the rules

provide that the chief financial officer may sign the

Notice. The Commission also notes that the

attestation to the truth and correctness of

information contained in a financial report can be

made by a chief financial officer. Rule 1.10(d)(4)

(applicable to FCMs and IBs).

9The portion of the principal definition

concerning contribution of capital retains the

current provisions of Rule 3.1(a)(3), which does not

appear in this release because it is not being

amended.

10The proposed amendments would also result in

the redesignation of Rule 3.10(a)(2)(i) as Rule

3.10(a)(2) and conforming modifications to Rule

3.32(a)(2).

and manner acceptable to the

Commission for a period of five years.

Such information must be readily

available during the first two years and

be produced to the Commission at the

expense of the person required to keep

the books or records. All such books and

records shall be open to inspection by

any representative of the Commission or

the U.S. Department of Justice.

II. Proposed Rules

A. Core Principle One: Registration

1. Definition of the Term ‘‘Principal’’

The second proviso to Section 8a(2) of

the Act states that a principal shall

mean a general partner of a partnership,

any officer, director or beneficial owner

of at least ten percent of the voting

shares of a corporation, ‘‘and any other

person that the Commission by rule,

regulation or order determines has the

power, directly or indirectly, through

agreement or otherwise, to exercise a

controlling influence over the activities

of [a firm] which are subject to

regulation by the Commission.’’

The Commission has implemented

this statutory provision by adopting a

definition of ‘‘principal’’ in its

registration rules that includes certain

specified persons, such as corporate

officers and directors, as well as persons

who have the power ‘‘directly or

indirectly, through agreement or

otherwise, to exercise a controlling

influence’’ over the activities of a firm.5

The identification of an applicant’s or

registrant’s principals is crucial to

enabling the Commission or the

National Futures Association (‘‘NFA’’),

which performs various registration

functions for the Commission pursuant

to delegations of authority, to perform a

fitness assessment under the Act. It also

provides information about individuals

and firms who provide commodity

interest services to market participants.

Because of the important role principals

play in the Commission’s regulatory

structure, CFTC rules impose various

listing, disclosure, and recordkeeping

requirements on a registrant with regard

to its principals.6

The Commission staff’s current

interpretation of Rules 3.1(a)(1) and

4.10(e)(1)(i) is to treat all officers and

directors of a registrant as principals,

pursuant to the language of the second

proviso to Section 8a(2) of the Act.7 The

Commission recognizes, however, that

there have been changes in management

structures over the last 20 years. The

Commission further notes that it has

received requests from registrants that

certain employees, such as some vice

presidents, not be considered principals

because they do not exercise a

controlling influence over the registrant

or any of its activities subject to

Commission regulation. While the

Commission believes that, under its

rules, certain officers should continue to

be listed as principals, it also recognizes

that listing may be unnecessary for some

mid-level officers. The Commission

therefore believes it appropriate to

amend its rules so that not all of a

registrant’s officers will be considered to

be principals, while ensuring that

appropriate personnel remain listed as

such.

The Commission proposes to amend

Rule 3.1(a)(1) by defining as principals

persons within a given organizational

structure who hold specific offices.

Thus, the principal definition would

include, if the entity is organized as a

sole proprietorship, the proprietor; if a

partnership, any general partner

(including individuals and entities,

such as corporations); if a corporation,

any director, the president, chief

executive officer, chief operating officer,

chief financial officer.8 and any person

in charge of a principal business unit,

division or function subject to

regulation by the Commission; and, if a

limited liability company or limited

liability partnership, any director, the

president, chief executive officer, chief

operating officer, chief financial officer,

the manager, managing member or those

members vested with management

authority for the entity, and any person

in charge of a principal business unit,

division or function subject to

regulation by the Commission. Thus, a

registrant would no longer

automatically be required to treat every

officer as a principal, but only those

who met the criteria of the rule.

The principal definition would also

include an individual who directly or

indirectly, through agreement, holding

company, nominee, trust or otherwise:

(1) Is the owner of ten percent or more

of any class of a firm’s securities; (2) is

entitled to vote ten percent or more of

any class of a firm’s voting securities; (3)

has the power to sell or direct the sale

of ten percent or more of any class of a

firm’s voting securities; (4) has

contributed ten percent or more of a

firm’s capital (excluding unaffiliated

banks and insurance companies); or (5)

is entitled to receive ten percent or more

of a firm’s profits. Further, the principal

definition would include an entity that

is the direct owner of ten percent or

more of any class of a firm’s securities

or that has directly contributed ten

percent or more of a firm’s capital.9

These proposed amendments would

permit the deletion of Rule 3.10(a)(2)(ii),

which has proved somewhat unwieldy

in practice.10

Finally, the principal definition

would continue to include the general

provision that defines as a principal any

person occupying a similar status or

performing similar functions, having the

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39011

11While the Commission recognizes that what

constitutes ‘‘a controlling influence’’ is best left for

determination on a case-by-case basis, such

influence would be ascribed to, among others, those

persons who have policymaking or managerial

authority over the activities of an applicant or

registrant that are subject to Commission regulation.

12The existing paragraphs (a)(1)(vi) and (a)(1)(vii)

of Rule 3.32 would be redesignated as paragraphs

(a)(1)(vii) and (a)(1)(viii), respectively.

13Re-registration can be avoided by following the

procedures in paragraph (e)(1) of Rule 3.32, which

require a registrant to file a Form 3–R to amend its

Form 7–R, and to include a Form 8–R and

fingerprint card for the new officer, manager or

member, unless a current Form 8–R is already on

file for that person. These documents must be

submitted to the NFA prior to the date of the change

in personnel, which is not considered effective

until the NFA provides the registrant with written

approval. Therefore, some advance planning by

registrants should make this a relatively

straightforward process.

14Although Rule 4.10(e) was amended in 1981 to

conform more closely to the wording of Rule

3.1(a)(1)–(a)(3), the terminology in the Rules

remained slightly different. When Rule 4.10(e)(1)

was adopted, the Commission explained that

‘‘[b]ecause the term ‘principal’ is employed in both

Part 3 and Part 4 to obtain similar critical

information about certain persons associated with

a CPO or a CTA, the Commission has determined

to use the same term in both parts. To serve the

objectives of Part 4, however, the term ‘principal’

does not need to be defined as broadly as it is in

§ 3.1(a).’’ 46 FR 26004, 26005 (May 8, 1981).

Because the amendments to Rule 3.1(a) proposed

herein will restrict the definition of principal so

that, for example, not all officers of a corporate

registrant will be included, the Commission

believes it is no longer appropriate to have different

definitions of the term ‘‘principal’’ in Parts 3 and

4.

15That rule provides an exemption from AP

registration for certain principals provided that,

among other requirements, the sponsoring firm’s

revenue from commodity interest related activity

for customers is no more than ten percent of its total

revenue on an annual basis.

16See, e.g., Section 4m(1) of the Act, Commission

Rules 3.10(c), 4.13 and 4.14.

17Commission Rule 170.15. NFA is currently the

only registered futures association. NFA Bylaw

1101 essentially provides that no NFA member may

deal with another person with respect to an

account, order or transaction where the other

person is acting in a capacity that requires

registration, unless that other person is also a

member of a registered futures association. The

combination of Commission Rule 170.15 and NFA

Bylaw 1101 therefore requires most registrants to

become members of NFA.

18The Commission proposes a definition of the

term ‘‘institutional customer’’ in Rule 1.3(g), which

would be the same as the definition of ‘‘eligible

participant’’ in Rule 35.1(b) that is set forth in one

of the Commission’s other Federal Register notices

published today.

power, directly or indirectly, through

agreement or otherwise, to exercise a

controlling influence over a firm’s

activities that are subject to regulation

by the Commission.11

The Commission also proposes to

amend Rule 3.1(a) to conform it with

certain provisions of Rule 3.32, which

governs re-registration and specifies

certain events or changes within a firm’s

management that require a new

registration. Absent this proposed

amendment, the interplay of Rule 3.32

and Rule 3.1 could create an anomaly

when, for example, under Rule 3.1, a

firm would not be required to list a

person as a principal, but under Rule

3.32 would be required, because of that

person, to obtain a new registration.

Thus, to conform to Rule 3.1(a)(1),

paragraph (a)(1)(v) of Rule 3.32,

addressing corporate registrants, would

be amended to include any person who

becomes ‘‘the president, chief executive

officer, chief operating officer or chief

financial officer of a corporate

registrant, or becomes in charge of a

principal business unit, division or

function subject to regulation by the

Commission, or comes to occupy a

position of similar status or perform a

similar function.’’ Similarly, with

respect to limited liability companies

and limited liability partnerships, a new

paragraph (a)(1)(vi) would be added so

that re-registration would also be

required when there is a new person

who becomes ‘‘a director, president,

chief executive officer, chief operating

officer, chief financial officer, manager,

managing member or member vested

with management authority for the

registrant, or * * * in charge of a

principal business unit, division or

function subject to regulation by the

Commission, or comes to occupy a

position of similar status or perform a

similar function.’’ 12 In line with new

paragraph (a)(1)(vi) of Rule 3.32, which

brings within the ambit of the rule

changes affecting the management of a

limited liability company or limited

liability partnership, Rule 3.32(a)(1)(i)

would be amended to delete the word

‘‘corporate’’ before ‘‘registrant’s voting

securities’’ so as to permit a broader

application of that paragraph to

registrants other than corporate

registrants. To conform Rule

3.32(a)(1)(v) and (a)(1)(vi) to Rule

3.32(e)(1), the latter would be amended

by adding a reference to the former.13

In addition, the Commission proposes

to amend Rule 4.10(e)(1) to incorporate

by reference the definition of

‘‘principal’’ in amended Rule 3.1(a). 14

Finally, the Commission proposes to

amend Rules 4.24(f)(1)(v),

4.25(a)(8)(ii)(A) and 4.25(c)(2)(i)(B),

applicable to CPOs and 4.34(f)(1)(ii) and

4.35(a)(7)(ii)(A), applicable to CTAs, to

conform these rules to proposed Rule

3.1(a)(1), as incorporated by reference in

amended Rule 4.10(e)(1). Thus, a

registrant would only be required to

provide business backgrounds and

proprietary trading results for those

principals who participate in making

trading or operational decisions, or

supervise persons so engaged, and not

all officers.

The Commission’s intent in proposing

these amendments is to provide a

uniform definition and treatment of

principals under its rules. The

amendments would require the filing of

fewer individual registration forms

(Forms 8–R) and fingerprint cards, and

would also require less disclosure by

CPOs and CTAs. The Commission does

not intend to alter the application of any

other CFTC rule that provides relief

from registration requirements. For

example, the exemption from

registration as an associated person

(‘‘AP’’) that is available to the chief

operating officer, general partner or

other person in the supervisory chainof-command of a registrant under Rule

3.12(h)(1)(iii) would remain intact.15

2. Special Procedures Available to Firms

Subject to Securities or Banking

Regulation

As reflected in the Core Principles,

intermediaries and FTs in all CFTC

recognized markets, absent an

exemption, are and will be required to

be registered with the CFTC under the

Act. Registration requirements,

however, could be eased in several

ways, depending on the particular

markets on which the intermediary

transacts business.

Under the proposed rules, persons

who intermediate transactions on or

subject to the rules of an RFE must be

registered under the Act as FCMs, IBs,

CPOs, CTAs, APs of any of the

foregoing, or FBs, or qualify for an

existing statutory or regulatory

exemption from registration.16 If such

persons are required to register as FCMs,

they must also become and remain a

member of a registered futures

association.17 In addition, persons who

trade for their own account on the floor

of an exchange must register as FTs.

Persons whose business is limited

exclusively to transactions conducted

on or subject to the rules of a DTF also

would be required to register as FCMs,

IBs, CPOs, CTAs, FBs or FTs, if they

perform those functions. Registration as

an FCM or IB, however, would be

simplified for persons that conduct

business solely for institutional

customers 18 on a DTF, if they were

already registered with the Securities

and Exchange Commission (‘‘SEC’’) in a

similar registration category or they

were authorized to perform these

functions by a federal banking authority.

Under the proposed changes to Rule

3.10, such applicants would be

39012 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

19The Commission will, naturally, consult with

other agencies to solicit their views and determine

the most appropriate method of effecting this

proposal.

20See Rule 170.15. The Commission may

consider not requiring NFA membership in the

future if reciprocal arrangements were made by the

primary regulators of other financial industry

segments to recognize CFTC registration without

requiring corresponding SRO membership.

21 Intermediaries engaged in transactions on DTFs

that are not registered or licensed by another

regulator would be subject to the CFTC’s minimum

financial requirements, even if all of the

transactions they are involved in occur on or

subject to the rules of a DTF. It should also be noted

that these rule amendments relate only to

intermediaries, and are thus inapplicable to persons

who participate in transactions on DTFs solely on

a principal-to-principal basis in accordance with

DTF rules.

22Those IB applicants who do not raise their own

capital would continue to be required to file a

guarantee agreement entered into with an FCM with

their registration application.

registered in the corresponding CFTC

registration category (FCM or IB) upon

filing notice with the NFA of their

intent to undertake such limited

activities, together with a certification

that they are registered or authorized to

engage in a similar function by, and are

in good standing with, the SEC or a

federal banking authority.19 This would

avoid the need to file CFTC registration

forms and fingerprints. A firm acting in

the capacity of an FCM would, however,

be required to become a member of a

registered futures association.20 Because

it would be difficult to track individual

sales personnel of these firms without

registration forms, individuals acting in

the capacity of APs for such FCMs or

IBs would not be required to be

registered or listed, and would not be

subject to proficiency testing or ethics

training requirements. Finally, such

firms and their salespersons would, of

course, remain subject to antifraud

provisions.

The Commission believes that this

proposed structure is appropriate

because (i) firms and individuals

involved would be permitted to deal

only with institutional customers, (ii)

they would be subject to oversight by

other federal regulatory authorities, and

(iii) the Commission anticipates that

they will conduct most of their business

in the securities or banking fields, with

only a minor portion of their activities

involving commodity interests.

Nevertheless, the Commission wishes to

stress that its reform efforts are an

ongoing process, and that it seeks

comment on all facets of the proposal.

In order to implement these changes,

the text of Rule 3.10 would be revised

by redesignating paragraph (a)(1)(i) as

(a)(1)(i)(A), and a new paragraph

(a)(1)(i)(B) would be added. The new

paragraph would provide that an

applicant for registration as an FCM or

IB that will conduct transactions

exclusively on or subject to the rules of

a DTF for institutional customers, and

who is registered with the SEC as a

securities broker or dealer or is a bank

or any other financial depository

institution subject to regulation by the

United States, may apply for registration

by filing with NFA notice of its

intention to undertake transactions

exclusively on or subject to the rules of

a DTF for institutional customers,

together with a certification of

registration and good standing with the

appropriate authority or of authorization

to engage in such transactions by said

authority.

Further, paragraph (d) of Rule 3.10 is

proposed to be amended by replacing

the existing cross-reference to

‘‘paragraph (a)’’ with a conforming

cross-reference to ‘‘paragraph

(a)(1)(i)(A)’’ so that those registrants

who choose to follow these newly

proposed registration procedures will

not be required to file an annual update

of the basic registration form for firms,

Form 7–R.

The Commission also proposes not to

require such ‘‘passported’’ registrants to

meet the Commission’s minimum

financial requirements if (i) they meet

the appropriate net capital requirements

of their primary regulator, (ii) their

activities are limited to serving

institutional customers trading

exclusively on DTFs that do not require

compliance with CFTC minimum

financial requirements, and (iii) they

conform to minimum financial

standards and related reporting

requirements set by such DTF in its

bylaws, rules, regulations or

resolutions.21 In this regard the

Commission seeks comment on the

propriety of such reforms.

The Commission is therefore

proposing to add a new paragraph (iii)

to Rule 1.17(a)(2), which currently

contains two exemptions from the

Rule’s adjusted net capital

requirements. The new paragraph

would provide that the basic minimum

financial requirements would not apply

to an FCM registered under the new

‘‘passporting’’ procedures in proposed

Rule 3.10(a)(1)(i)(B) whose business is

limited to transacting business on behalf

of institutional customers on a DTF, and

who conforms to minimum financial

standards and related reporting

requirements set by such DTF in its

bylaws, rules, regulations or resolutions.

A conforming amendment would be

added to Rule 1.52 by adding a new

paragraph (m) to relieve a DTF from the

requirement that it adopt minimum

adjusted net capital standards that are

modeled on those of the Commission

with respect to these ‘‘passported’’

firms.

The Commission notes that as it

proposes to simplify the registration

process for SEC registrants that may

wish to conduct the limited activities in

futures markets described above, it

encourages the SEC to consider

reciprocal amendments to its rules to

accommodate FCMs and IBs that are not

now dually registered as securities

brokers or dealers, but that may wish to

act as intermediaries in the securities

markets.

Finally, the Commission is

considering updating and making more

flexible its standard minimum net

capital requirements with respect to

FCMs by permitting the application of

risk-based net capital requirements. At

this time, the Commission is not

proposing changes to its requirements in

this area. Rather, the Commission

wishes to solicit input from commenters

regarding the most effective approach to

developing changes to these rules.

3. Standard Application Procedures for

FCMs and IBs

In order to lower a potential barrier to

entry for new firms and to conform

CFTC practice more closely with that of

the SEC, the Commission proposes to

streamline further its current

application requirements for the

registration of FCMs and IBs. Current

Commission Rules 3.10(a)(1)(ii) and

1.10(a)(2) require new applicants for

registration as FCMs and IBs to file

Form 1–FR–FCM or 1–FR–IB,

respectively, with their applications.

Pursuant to Rule 1.10(a)(2), these forms

must be certified by an independent

public accountant.

The Commission is proposing that

applicants for registration as FCMs or

IBs who raise their own capital to satisfy

minimum financial requirements would

not be required to provide these

certified financial statements with their

registration applications.22 Rather, such

applicants would be permitted to file an

unaudited financial report indicating

satisfaction of the minimum

requirements. A firm taking advantage

of this new procedure would be subject

to an on-site review within six months

of registration by the firm’s DSRO or, at

the DSRO’s discretion, a conference

between appropriate staff of the firm

and the DSRO at the DSRO’s offices.

This alternative procedure is modeled

on similar procedures in the securities

industry. An applicant would remain

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39013

23Of course, a DSRO retains the authority to

inspect its member firms at any time.

free to follow the existing rules

concerning the filing of a certified

financial statement with its application

and thereby delay the initial DSRO

review.23 Appropriate rule changes

would be made by adding new

paragraphs (a)(2)(i)(C) and (a)(2)(ii)(D) to

Rule 1.10.

B. Core Principles Two and Six: Fitness

and Supervision

1. Proficiency Testing and Ethics

Training for Individual Registrants

The second of the Core Principles for

intermediaries identified by the

Commission is that intermediaries in

commodity interest markets must be

and remain fit. This requirement is

reflected by various provisions of the

Act. Section 4p(a) of the Act permits the

Commission to require written

proficiency examinations for individual

applicants for registration. Section 17(p)

of the Act further requires that any

futures association registered under the

Act must submit to the Commission for

approval rules to establish training

standards and proficiency testing for

persons involved in solicitations of

transactions, their supervisors and all

persons for whom the association has

registration responsibilities. The NFA

administers this testing program

through the facilities of the National

Association of Securities Dealers, Inc.

NFA rules that the Commission has

approved generally require that all

applicants for AP registration present

evidence of passage of a proficiency test,

the basic test being the National

Commodity Futures Examination

(commonly known as the ‘‘Series 3

Test’’). In keeping with the

recommendations of A New Regulatory

Framework, the Commission believes

that those APs dealing only with

institutional customers need not pass a

specific proficiency examination, and it

would consider an NFA rule change to

this effect. The Commission notes that

under Sections 4p(a) and 17(p) of the

Act and Rule 170.10, NFA is currently

allowed to adopt such rules as it may

deem appropriate, subject to

Commission approval. Therefore, no

changes to the Commission’s rules are

deemed necessary to effect these

changes.

Section 4p(b) of the Act requires the

Commission to issue regulations

requiring new registrants to attend

ethics training sessions within six

months of registration, and requiring all

registrants to attend such training on a

periodic basis. The Commission has

issued Rule 3.34 to fulfill this statutory

mandate. Rule 3.34 specifies the

frequency and duration of such training,

the suggested curriculum, qualifications

of instructors, and the necessary proof

of attendance at such classes.

In order to provide flexibility and ease

compliance for all registrants, the

Commission proposes to delete Rule

3.34. In place of that rule, the

Commission proposes to implement

Congressional intent through a

Statement of Acceptable Practices

consistent with its second Core

Principle, which requires intermediaries

to be and remain fit. The Commission

believes that the maintenance of

professional ethical standards is a key

element of a registrant’s fitness. Further,

training standards in the field of ethics

are relevant to adherence to the sixth

Core Principle, requiring adequate

supervision of handling accounts by a

firm and its personnel. The Commission

therefore proposes to issue this

Statement of Acceptable Practices as an

Appendix to Part 3 of its Rules. The

Commission believes that Section 4p(b)

of the Act expresses Congressional

intent that futures industry

professionals remain abreast of their

responsibilities to the public under the

Act and rules thereunder. The

Commission further believes that there

can be greater flexibility concerning

acceptable practices to achieve this

objective than is permitted under the

existing rule. For registrants seeking

guidance as to the maintenance of

proper ethics training procedures in

keeping with the purposes of the Core

Principles, the Statement of Acceptable

Practices would function as a ‘‘safe

harbor.’’

For instance, under the Statement of

Acceptable Practices, registrants may

engage in ethics training programs

sponsored by the registrants themselves,

their DSROs, trade associations or

others. The format of such training,

whether by personal or recorded

instruction, or by circulation of written

materials such as legal cases,

interpretative letters or advisories,

would also be left to the discretion of

registrants and DSROs. It would also be

permissible to require training on

whatever periodic basis the registrant

and DSROs deem appropriate. Thus, the

Commission would not specify any

particular programs or procedures that

must be followed.

2. Reforms Relating to Statutory

Disqualification From Registration

The grounds for statutory

disqualification from registration, which

establish fitness standards based upon

disciplinary history, are set forth in

Sections 8a(2) and (3) of the Act. One

of those provisions states that

registration can be denied or

conditioned based upon, in addition to

specific matters such as revocation of a

previous registration or a felony

conviction, ‘‘other good cause’’ (see

Section 8a(3)(M) of the Act). In an effort

to provide greater clarity in this area,

the Commission recently revised the

‘‘Guidance Letter’’ issued to NFA

concerning the treatment of selfregulatory organization (‘‘SRO’’)

disciplinary actions in assessing the

fitness of FBs, FTs or applicants in

either category. See CFTC Letter No. 00–

56 (April 13, 2000); CFTC Guidance to

NFA Concerning Floor Broker and Floor

Trader Registration Actions, [1996–1998

Transfer Binder] Comm. Fut. L. Rep.

¶ 27,202 (Dec. 4, 1997). The

Commission considers these letters to be

part of its overall regulatory reform

efforts and intends to publish both as an

accompanying statement when it

publishes final rules. The Commission

requests comment as to any further

changes that should be considered in

this area.

C. Core Principal Three: Financial

Requirements

1. Trading by Non-Institutional

Customers on DTFs

As noted above, the Commission’s

proposed new regulatory framework

contemplates the recognition of a new

form of trading facility that is subject to

an intermediate degree of regulatory

oversight, the DTF. Under the proposed

rules, trading on DTFs generally would

be limited to futures and options on

specified commodities. In addition,

DTFs could permit trading on any

commodities if trading is limited to

qualifying commercial participants.

Thus, although trading on DTFs

would generally be limited to

institutional or commercial customers,

under certain conditions a DTF might

permit non-institutional customers to

enter into transactions thereon. Because

of the lower regulatory protections

offered to participants in these markets,

and the higher degree of risk associated

therewith, the Commission is proposing

that such non-institutional customers’

business be transacted through FCMs

that are more capable of properly

maintaining such accounts and

handling the associated risk. This is in

accordance with the third Core

Principle, which requires intermediaries

to maintain adequate capital to ensure

they are able to meet their obligations to

customers. Thus, non-institutional

customers who desire to conduct

transactions on or subject to the rules of

39014 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

24 7 U.S.C. 6d(2) (1994).

25See, e.g., Commission Order, In the Matter of

the Chicago Mercantile Exchange Proposal to

Expand its Cross-Margining Program with the

Options Clearing Corporation to Include the CrossExchange Net Margining of the Positions of Market

Professionals, (November 26, 1991), reprinted in 56

FR 61404 (December 3, 1991); Commission Order,

In the Matter of The Intermarket Clearing

Corporation Proposal to Expand its Cross-Margining

Program with the Options Clearing Corporation to

Include the Cross-Exchange Net Margining of the

Positions of Market Professionals (November 26,

1991), reprinted in 56 FR 61406 (December 3, 1991).

For each of these programs, the SEC approved

parallel rules of the Options Clearing Corporation.

a DTF would be required to do so

through a registered FCM that (1) is a

clearing member of at least one

designated contract market or RFE, and

(2) has a minimum adjusted net capital

of at least $20 million (the basic

minimum requirement for FCMs is

$250,000). The Commission notes that

this would not prevent a DTF from

including any similar or greater

restrictions in its own rules or bylaws.

Further, in order to provide guidance to

such customers and their FCMs, NFA

will issue a Statement of Acceptable

Practices regarding additional

disclosures to be made to noninstitutional customers trading on DTFs

and on related issues involving price

dissemination. The Commission

presumes that this would be

forthcoming as DTFs come into

existence. Since DTFs do not yet exist,

and it is not known how such

institutions would choose to operate,

the Commission believes that it is

premature at this time to propose a

Statement of Acceptable Practices in

this area.

Therefore, the Commission proposes

to amend Rule 1.17, to add a new

paragraph (a)(1)(ii) and to redesignate

current paragraph (a)(1)(ii) as (a)(1)(iii).

The new paragraph (a)(1)(ii) would

provide that an FCM engaged in

soliciting or accepting orders and

customer funds related thereto from a

non-institutional customer for the

purchase or sale of any commodity for

future delivery on or subject to the rules

of a DTF must be a clearing member of

a contract market or an RFE and must

maintain adjusted net capital at least

equal to the greater of $20 million or the

other amounts specified in Rule 1.17.

2. Segregation of Funds

The futures industry has a long

history of keeping customer funds safe.

The Commission believes that

segregation of customer funds has

worked well and should continue to be

required for the funds of all customers

trading on an RFE and the funds of all

non-institutional customers trading on a

DTF that permits such customers.

Nevertheless, the Commission is

considering whether, and under what

circumstances, to permit other

customers to ‘‘opt out’’ of segregation.

Before proposing any rule changes in

this area, however, the Commission

seeks comment as to how, if at all, this

change should be implemented.

Commenters may wish to address

several issues in this area, including:

• Whether opting out of segregation should

be permitted;

• If so, whether it should be limited to the

accounts of institutional customers;

• Where such non-segregated funds should

be held;

• How such funds would be accounted for,

especially for purposes of establishing

minimum capital requirements, and

computing a firm’s adjusted net capital;

• How accounts that have opted out of

segregation would be treated under Part 190

of the Commission’s rules, and under the

Bankruptcy Code;

• What the effects of similar practices have

been in other jurisdictions; and

• What an FCM’s disclosure obligations

should be in this area.

The Commission notes that certain

industry participants have also

suggested that the Commission revise its

regulations to permit FCMs to maintain,

in the same customer segregated

account, various instruments, such as

over-the-counter (‘‘OTC’’) derivatives,

equity securities, and other cash market

positions, as well as the funds used for

the purpose of securing or margining

such products and positions. The

Commission notes that, pursuant to its

authority under the second proviso of

Section 4d(2) of the Act,24 it has

previously permitted futures and

securities options to be held in the same

customer segregated account pursuant

to cross-margining arrangements.25 The

Commission believes that, under

Section 4d(2) of the Act, the segregation

requirements could be modified to

permit such additional instruments and

funds to be held in a single segregated

account at both the FCM and the

clearing organization level. As with the

concept of ‘‘opting out’’ of segregation,

the Commission believes, however, that

further consideration is necessary in

this area before a formal proposal can be

made. Therefore, the Commission seeks

comment as to how such changes might

be implemented. Commenters may wish

to address several issues in this area,

including:

• What protections would be necessary in

order to permit FCMs and clearing

organizations to maintain, in the same

customer segregated account, additional

instruments and products and the funds used

for the purpose of securing or margining such

instruments and products;

• Whether such practices should be

limited to the accounts of institutional

customers;

• Whether, if this is permitted, it would be

desirable to permit ‘‘opting out’’ of

segregation;

• How such funds would be accounted for,

especially for purposes of establishing

minimum capital requirements and

computing a firm’s adjusted net capital;

• How such accounts would be treated

under Part 190 of the Commission’s Rules,

and under the Bankruptcy Code;

• What the effects of similar practices have

been in other jurisdictions; and

• What an FCM’s disclosure obligations

should be in this area.

3. Investment of Customer Funds

The Commission also is proposing to

amend Rule 1.25, which sets forth the

types of instruments in which FCMs

and clearing organizations are permitted

to invest (the permitted investments)

cash segregated for the benefit of

regulated commodity customers

pursuant to Section 4d(2) of the Act.

Currently, Rule 1.25 permits an FCM or

clearing organization to invest

segregated funds only in obligations of

the U.S., in general obligations of any

State or of any political subdivison

thereof, or in obligations fully

guaranteed as to principal and interest

by the U.S. The Commission believes

that an expanded list of permitted

investments could enhance the yield

available to FCMs, clearing

organizations and their customers,

without compromising the safety of

customer funds.

Subject to specific risk-limiting

features contained in the proposal, the

following additional investments would

be permitted: (1) Obligations issued by

any agency sponsored by the United

States; (2) certificates of deposit issued

by a bank, as defined in Section 3(a)(6)

of the Securities Exchange Act of 1934,

or a domestic branch of a foreign bank

insured by the Federal Deposit

Insurance Corporation; (3) commercial

paper; (4) corporate notes; and (5)

interests in money market mutual funds.

In addition, it is proposed than an FCM

or a clearing organization may both buy

and sell the permitted investments

pursuant to agreements for resale or

repurchase of the instruments.

The proposal includes several

provisions intended to minimize credit

risk, volatility risk and liquidity risk.

These features include: (i) A

requirement that the investments be

highly-rated by a nationally-recognized

statistical rating agency (NRSRO),

except for U.S. government securities

and those money market mutual funds

that are not required to be rated; (ii) a

requirement that the dollar-weighted

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39015

26 1 Comm. Fut. L. Rep. ¶ 7112A (December 15,

1993).

27CFTC Staff Letter No. 97–45, [1996–1998

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,085

(May 5, 1997).

average of the time remaining to

maturity of the debt securities held in

the segregated portfolio not exceed 24

months, excluding investment in money

market mutual funds; (iii) concentration

limits on the percentage of the portfolio

that may be comprised of the securities

of individual issuers; (iv) specific

prohibitions against leverage, embedded

derivatives, and options; and (v) a

requirement that the daily value and

gains and losses on each investment be

recorded in the records of the FCM or

clearing organization. The Commission

recognizes that events beyond the

control of an FCM or clearing

organization could cause a portfolio to

exceed the time-to-maturity and

concentration requirements.

Accordingly, the Commission would

permit portfolios to be adjusted within

a reasonable period of time to meet

these requirements. The Commission

plans to modify the segregation

computation schedule, which is

prepared by FCMs every day, to reflect

changes in value of the investments.

As noted above, in addition to

expanding the list of permitted

investments, the proposal would allow

investments to be bought and sold

pursuant to agreements for repurchase

or resale of the instruments. These

transactions are usually simply referred

to as ‘‘repurchase transactions.’’ This

part of the proposal essentially

incorporates Division of Trading and

Markets Financial and Segregation

Interpretation No. 2–1 (Interp. 2–1) 26

with three significant modifications.

First, in order to increase the liquidity

of the segregated portfolio, repurchase

transactions will be permitted for the

first time. (Interp. 2–1 currently only

permits reverse repurchase

transactions.) Second, the 180-day cap

on the time-to-maturity of collateral

subject to reverse repurchase

agreements, contained in footnote No.

13 of Interp. 2–1, has been deleted. The

Commission has been persuaded by

comment received regarding Interp. 2–1

that collateral of any maturity would

serve adequately, subject to other

regulatory protections in place such as

capital charges. Third, the Depository

Trust Corporation has been added as a

permitted depository for securities. If

this rule proposal is adopted by the

Commission, it will take the place of

Interp. 2–1, which will be rescinded.

The Commission notes that the

specific safeguards applicable to the

permitted investments set forth in Rule

1.25 will not be the only protections in

place. The Commission’s proposed Rule

1.25 would take its place as part of a

broad set of protections built into the

system intended to guard against

financial risk at FCMs. First, FCMs

generally must meet the Commission’s

net capital and segregation

requirements, as well as SRO

requirements. An FCM that is a contract

market clearing member also will likely

have capital requirements that are

higher than those set by the

Commission. Second, Commission

regulations require firms to keep current

books and records, prepare a daily

segregation computation and a formal,

monthly capital calculation, among

other things. Further, an early-warning

system requires FCMs to report certain

events to the Commission and the SROs.

These requirements serve as elements of

the overall system of controls to protect

segregated funds.

The Commission recognizes that some

adjustments may be desirable before the

proposal is adopted in final form.

Accordingly, the Commission seeks

industry and public comment on a

number of issues:

• Whether the proposed list of investments

is appropriate for segregated funds

investments, considering the primary

objective of safety of principal;

• Whether the proposed list of investments

would create any risks that are not properly

contained by the risk-limiting features of the

proposed rule and, if so, what additional

features should be provided for in the rule;

• The proposed rule contains credit-rating

standards and a cap on the dollar-weighted

average for the time-to-maturity of

investments held in the portfolio. The

Commission notes that certain types of

structured notes may have significant

prepayment and other risks, because they

offer a large variety of payment obligations

and, therefore, present substantial market

and liquidity risks in addition to credit risk.

Does the rule sufficiently address this type of

exposure?;

• Whether the proposed standards for

money market funds are appropriate;

• Whether there are other categories of

funds that could be included, and, if so,

pursuant to what standards; and

• As is currently the case under Interp. 2–

1, the proposed rule limits the permitted

counterparties in purchases or sales of

securities subject to a repurchase agreement.

The Commission requests comment on

whether the class of permitted counterparties

should be expanded and, if so, to what

extent.

The Commission is also proposing to

amend Rules 1.20(a) and 1.26(a) to

eliminate the requirement that an FCM

obtain a written acknowledgment, from

each clearing organization where the

FCM has deposited customer funds or

instruments purchased with customer

funds, that the clearing organization was

informed that the customer funds or

instruments purchased with customer

funds and deposited therein belong to

customers and are being held in

accordance with the provisions of the

Act and rules thereunder. The proposed

elimination of the requirement that an

FCM obtain a clearing organization

acknowledgment is conditioned upon

the clearing organization’s adoption and

submission to the Commission of rules

that provide for the segregation as

customer funds, in accordance with all

relevant provisions of the Act and the

rules and orders promulgated

thereunder, of all funds held on behalf

of customers and all instruments

purchased with customer funds. These

proposed rule amendments would

codify a staff no-action letter issued

three years ago.27 An FCM’s obligation

to obtain written acknowledgments from

banks, trust companies and other FCMs,

and a clearing organization’s obligation

to obtain written acknowledgments from

banks and trust companies, concerning

the treatment of customer funds would

be unaffected.

D. Core Principle Four: Risk Disclosure

and Account Statements

As reflected in the fourth Core

Principle, the disclosure of risks by

intermediaries is an important customer

protection. Over the years, however,

certain persons have suggested that

customers would be better protected by

receiving risk disclosures more attuned

to their relative level of sophistication

and to the particular instruments they

trade. Other commenters have suggested

that disclosure obligations could be

simplified and streamlined.

In keeping with these observations,

the Commission proposes that noninstitutional customers continue to

receive the risk disclosures regarding

futures and options trading that are

currently required. Thus, intermediaries

will continue to be required to obtain

prior acknowledgement by noninstitutional customers of their receipt

of the basic risk disclosure statements

relating to futures and options in

accordance with Rules 1.55 and 33.7.

The Commission is proposing that the

account opening process be streamlined,

however, in certain areas. The

Commission would permit certain

required disclosures, such as those

concerning consent to allow cross-trades

or to transfer funds out of segregated

accounts to another account (such as a

money market account), to be included

in a customer agreement and

acknowledged through a ‘‘single

39016 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

28 65 FR 12466 (March 9, 2000). 29This would reverse existing Commission

policy. See 58 FR 17495, 17499 (April 5, 1993). 30See proposed changes to Rule 1.33, below. 31Part 180 is proposed to be deleted in its

entirety, as detailed elsewhere in today’s Federal

Register. The Commission is also proposing to add

a new Rule 166.5 to govern the use of pre-dispute

arbitration agreements for customer claims and

grievances arising out of transactions executed on

or subject to the rules of a contract market, an RFE

or a DTF. Proposed Rule 166.5 restates current Rule

180.3, while taking into account the additional

trading facilities that may be available to customers.

Proposed Rule 166.5 also expands the use of the

‘‘single-signature’’ format for account opening

agreements to include, in addition to entities that

are excluded from the definition of a commodity

pool operator under Rule 4.5 and ‘‘qualified eligible

participants’’ as defined in Rule 4.7, institutional

customers as defined in proposed Rule 1.3(g) and

‘‘qualified eligible clients’’ as defined in Rule 4.7.

Since certain of the persons currently eligible to use

the single signature format are included within the

proposed definition of institutional customer, the

provisions of proposed Rule 166.5(c)(2) contain

modifications of rule 180.3(b)(2) so as to avoid

duplication. The Commission is also proposing to

include within the group of persons who need not

separately endorse the provisions of a pre-dispute

arbitration agreement persons other than those who

would be defined as institutional customers. The

Commission is making this proposal because the

institutional customer definition would not include

all of those now eligible for the single signature

treatment under Rule 180.3(b)(2) (e.g., a foreign

insurance company or a qualified eligible

participant) and the Commission does not intend to

restrict, but rather intends to expand, this aspect of

the rule. The proposed rule further recognizes that

a registered futures association may be authorized

to act as a decision-maker in customer dispute

resolution proceedings involving floor brokers that

are not members of the registered futures

association and makes additional stylistic changes

designed to make the rule more readable.

32 In this regard, the Commission would, with

industry input, issue a Statement of Acceptable

Practices on disclosure to institutional customers at

a later date.

33 63 FR 8566, 8568 (February 20, 1998).

Particular governmental entities and trade

associations for such entities are, of course, free to

establish their own restrictions concerning futures

trading through statute, regulation or Statements of

Acceptable Practices.

34As noted above, the DTF is at this point a

proposed new institution, and it is not known how

such institutions would choose to operate. Such

institutions may choose to sponsor trading in a

traditional open-outcry pit trading system with

natural persons acting as FBs or FTs. On the other

hand, some DTFs may choose a purely automated,

electronic trading format, or a combination of open

outcry and electronic trading. Because it cannot be

known at this time how such entities will choose

to organize themselves, and what policies they will

wish to pursue, the Commission is not at this time

issuing a Statement of Acceptable Practices in this

area.

signature’’ (which could include an

electronic signature as provided for in

recently-adopted Commission Rules

1.3(tt) and 1.4),28 rather than the

multiple signatures that are currently

required.29 In order to enhance the

‘‘single-signature’’ format for account

opening agreements, the Commission

would amend Rules 1.55(d)(1) and (2)

by expanding the list of disclosures and

consents that may be provided in a

single document and acknowledged

with a single signature to include: (1)

The disclosures required by new Rule

1.33(g) (relating to electronic

transmission of statements); 30 (2) the

consent referenced in Rule 155.3(b)(2)

(relating to customer permission for

FCMs to take the opposite side of an

order); and (3) a provision for

preauthorization of transfers of funds

from a customer’s segregated account to

another account of that customer.

Disclosure concerning arbitration of

disputes, however, would continue to

require a separate signed

acknowledgment by non-institutional

customers, pursuant to proposed new

Rule 166.5 (this proposed new rule

would replace and is modeled on

current Rule 180.3).31 The Commission

specifically requests comment on

whether to continue to require a

separate signed acknowledgment by

non-institutional customers of a predispute arbitration agreement.

In contrast, for institutional

customers, as provided in Rule 1.55(f),

there would continue to be no specific

disclosure requirements.32 Because the

definition of institutional customer

referred to above would include

governmental entities, these entities

would not be required to receive and to

acknowledge a disclosure statement.

This reverses the position that the

Commission took when it last amended

its risk disclosure rules two years ago.33

Finally, the Commission is

considering developing more

streamlined disclosure requirements for

domestic exchange-traded options

under Rule 33.7. The Commission

therefore seeks comments regarding

how such disclosure may be more

effectively presented to customers while

reducing the associated burdens on

registrants.

E. Core Principle Five: Trading

Standards

Under the Core Principles,

intermediaries and their affiliated

persons are prohibited from misusing

knowledge of their customers’ orders.

Currently, FCMs and IBs are required to

establish and to maintain supervisory

procedures to assure that neither they

nor any affiliated persons (as defined in

Rule 155.1) abuse their knowledge of

customer orders to the customer’s

disadvantage. These rules have proven

effective in the Commission’s efforts to

curb such practices as ‘‘front-running,’’

‘‘trading ahead,’’ ‘‘bucketing,’’ taking the

opposite side of customer orders, or

improper disclosure of customer orders

to third parties. Indeed, the Commission

has found that these rules have

generated few comments from industry

professionals. The Commission

therefore proposes that Rules 155.1,

155.3 and 155.4 will continue to apply

to intermediation of trades at contract

markets, RFEs, and for non-institutional

customers’ trades at DTFs. See proposed

new Rule 155.6(a).

For intermediation of trades by

institutional customers at DTFs, the

Commission is proposing a new Rule

155.6(b) setting forth a general standard

of practice in this area. The rule would

simply parallel the language of the Core

Principle prohibiting the misuse of

knowledge of customer orders.

Although the proposed new Rule

155.6(b) would not include as much

detail as the current trading standards

rules, it is nevertheless intended to

proscribe the same trade practice abuses

as Rules 155.1–155.5. Such practices as

‘‘front-running,’’ ‘‘trading ahead,’’

‘‘bucketing,’’ taking the opposite side of

customer orders, or disclosure of

customer orders to third parties, would

thus be deemed to be misuse of

knowledge of customer orders and

violations of Rule 155.6. The

Commission will consider the

development of a Statement of

Acceptable Practices to be issued at a

later date, with the consultation of

DTFs, regarding appropriate procedures

that should be employed in order to

ensure compliance with the general

standard.34

F. Core Principle Seven: Reporting

Requirements

The Commission has found that its

reporting system provides a valuable

bulwark against illegitimate trade

practices. Accordingly, the Commission

would continue, and apply to

intermediaries on RFEs, its large trader

reporting requirements. Thus, FCMs

would be required to report to the

Commission and RFEs information that

permits the identification of

concentrations of positions and market

composition on a routine and

nonroutine basis, and information to

detect manipulation, price distortion

and disruptions of the delivery or cash

settlement process.

With respect to intermediaries

transacting business on DTFs, however,

because of the nature of the instruments

traded or the limited access granted

thereto for non-institutional traders, the

Commission would reduce its reporting

requirements. Such intermediaries

would only be subject to large trader

reporting requirements by special call.

These proposed reforms are detailed

elsewhere in today’s Federal Register.

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39017

35An FCM must take into consideration positions

in separate accounts of the same customer that it

is carrying in applying Rule 1.46. 57 FR 55082,

55083 n. 2 (November 24, 1992), citing U.S.

Department of Agriculture, Commodity Exchange

Authority Administrative Determination No. 134

(May 25, 1948).

36 47 FR 18618–18621 (April 30, 1982).

37 47 FR 18619–18620 (discussing FCMs and

CPOs); 54 FR 19556, 19557 (May 8, 1989)

(discussing LTMs); and 63 FR 18821, 18830 (April

16, 1998) (discussing ATOMs).

G. Core Principal Eight: Recordkeeping

1. General

The Core Principles maintain that all

registrants must keep full books and

records of their activities related to their

business. Thus, the Commission would

maintain recordkeeping requirements as

they relate to intermediaries, while

considering whether greater use may be

made of information technology in this

regard. The Commission notes that Rule

1.31 was recently revised to provide for

enhanced electronic recordkeeping

similar to SEC recordkeeping

requirements. See 64 FR 36568 (July 7,

1999); 64 FR 28735 (May 27, 1999). The

Commission seeks comments regarding

Rule 1.31 and on how greater use of

information technology may be made in

the future for recordkeeping purposes.

2. Customer Account Statements; CloseOut of Offsetting Positions

In keeping with changes in

technology and commercial practices,

the Commission is proposing to codify

its previous Advisory relating to the

electronic transmission of account

statements, 62 FR 31507 (June 10, 1997),

in a new Rule 1.33(g). Thus, an FCM

would be permitted, with customer

consent, to deliver required

confirmation, purchase-and-sale, and

monthly account statements

electronically in lieu of mailing a paper

copy. In keeping with the abovereferenced Advisory, FCMs would need

only to retain the daily confirmation

statement as of the end of the trading

session, provided that it reflects all

trades made during that session, to

satisfy recordkeeping obligations.

Proposed Rule 1.33(g) also provides,

as did the above-referenced Advisory,

that an FCM must, prior to the

transmission of any statement by means

of electronic media, disclose (1) The

electronic medium or source through

which statements will be delivered, (2)

the duration, whether indefinite or not,

of the period during which consent will

be effective, (3) any charges for such

service, (4) the information that will be

delivered electronically, and (5) that

consent to electronic delivery may be

revoked at any time. In the case of a

non-institutional customer, an FCM

must obtain the non-institutional

customer’s signed consent

acknowledging disclosure of this

information prior to the transmission of

any statement by means of electronic

media. This acknowledgment can be

included in a customer account

agreement and acknowledged through a

single signature in accordance with Rule

1.55. Institutional customers would not

need to provide written consent, and the

Commission recommends that FCMs

confirm procedures relating to

electronic transmission of statements to

institutional customers as described in

the above-referenced Advisory. The

Commission specifically requests

comment, however, as to whether FCMs

may treat non-institutional customers in

the same manner as institutional

customers are proposed to be treated in

this area. Any statement required to be

furnished to a person other than a

customer in accordance with paragraph

(d) of Rule 1.33 would also be permitted

to be furnished by electronic media.

The Commission also proposes to

revise Rule 1.46 so that its general

standard would function as a default

rule in the absence of instruction by a

customer or account controller. The

Rule currently requires, absent one of

several exceptions, that an FCM close

out offsetting positions on a first-in,

first-out basis, looking across all

accounts it carries for the same

customer.35 Under the proposed rule,

any customer or account controller

could instruct the FCM otherwise, so

that offsetting positions could be held

open or closed out on other than a firstin, first-out basis. CPOs and CTAs

would be required to disclose if they

operate in this fashion, by amending

Rules 4.24(h)(2) (which applies to CPOs)

and 4.34(h) (which applies to CTAs) to

include reference to the CPO’s or CTA’s

instructions to FCMs concerning

application of offsetting positions

pursuant to Rule 1.46.

In order to implement this revision of

Rule 1.46, the Commission proposes to

amend the rule by inserting, after the

words ‘‘omnibus accounts’’ in paragraph

(a), the phrase ‘‘or where the customer

or account controller has instructed

otherwise.’’ Rule 1.46 also would be

amended by revising paragraph (e) to

correspond to proposed new Rule

1.33(g) (the substance of the current

paragraph (e) of Rule 1.46 would be

deleted because it currently relates back

to paragraph (d)(6), which is being

removed and reserved) to read: ‘‘The

statements required by paragraph (a) of

this section may be furnished to the

customer or the person described in

§ 1.33(d) by means of electronic

transmission, in accordance with

§ 1.33(g).’’

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act

(‘‘RFA’’), 5 U.S.C. 601 et seq. (1994 &

Supp. II 1996), requires federal agencies,

in proposing rules, to consider the

impact of those rules on small

businesses. The rule amendments

discussed herein would affect FCMs,

IBs, CPOs, CTAs, FBs, FTs, leverage

transaction merchants (‘‘LTMs’’) and

agricultural trade option merchants

(‘‘ATOMs’’), as well as principals

thereof. The Commission has previously

established certain definitions of ‘‘small

entities’’ to be used by the Commission

in evaluating the impact of its rules on

small entities in accordance with the

RFA.36 The Commission has previously

determined that registered FCMs, CPOs,

LTMs and ATOMs are not small entities

for the purpose of the RFA.37 With

respect to IBs, CTAs, FBs and FTs, the

Commission has stated that it is

appropriate to evaluate within the

context of a particular rule proposal

whether some or all of the affected

entities should be considered small

entities and, if so, to analyze the

economic impact on them of any rule.

The amendments proposed herein

would not require any registrant to

change its current method of doing

business. For many registrants, the

proposed revisions should decrease the

number of persons within the

registrant’s organization who would be

considered principals under the CFTC

rules. Further, the proposed revisions

should reduce, rather than increase, the

regulatory requirements that apply to

registrants and applicants for

registration, regardless of size.

Accordingly, pursuant to 5 U.S.C.

605(b), the Chairman, on behalf of the

Commission, certifies that these

proposed amendments will not have a

significant economic impact on a

substantial number of small entities.

B. Paperwork Reduction Act

As required by the Paperwork

Reduction Act of 1995 [44 U.S.C.

3507(d)], the Commission has submitted

a copy of these proposed amendments

to its rules to the Office of Management

and Budget for its review.

Collection of Information

Rules Relating to the Operations and

Activities of Commodity Pool Operators

and Commodity Trading Advisors and

to Monthly Reporting by Futures

39018 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

Commission Merchants, OMB Control

Number 3038–0005.

The Commission believes that the

amendments to Part 4 of its regulations

impose no burden. While these

proposed rule amendments have no

burden, the group of rules (3038–0005)

of which the rules proposed to be

amended are a part, has the following

burden:

Average burden hours per response:

7.25.

Number of respondents: 7,362.

Frequency of response: Monthly,

Quarterly, Annually, On Occasion.

Rules Pertaining to Contract Markets

and Their Members, OMB Control

Number 3038–0022.

The Commission believes that the

amendments to Parts 1 and 155 of its

regulations impose no burden. While

these proposed rule amendments have

no burden, the group of rules (3038–

0022) of which the rules proposed to be

amended are a part, has the following

burden:

Average burden hours per response: 2.

Number of respondents: 15,894.

Frequency of response: On Occasion.

Rules, Regulations and Forms for

Domestic and Foreign Futures and

Options Relating to Registration with

the Commission, OMB Control Number

3038–0023.

The expected effect of the proposed

amended rule will be to reduce the

burden previously approved by OMB for

this collection by 5,521.8 hours.

Specifically: The burden associated

with Commission Rule 3.10(a) as

applied to FCMs is expected to be

decreased by 2 hours:

Estimated number of respondents

(after proposed amendment): 6.

Annual responses by each

respondent: 1.

Estimated average hours per response:

0.5.

Annual reporting burden: 3 hours.

The burden associated with

Commission Rule 3.10(a) as applied to

IBs is expected to be decreased by 54.8

hours:

Estimated number of respondents

(after proposed amendment): 343.

Annual responses by each

respondent: 1.

Estimated average hours per response:

0.4.

Annual reporting burden: 137.2

hours.

The burden associated with Form 8-

R is expected to be decreased by 132

hours:

Estimated number of respondents

(after proposed amendment): 2,400.

Annual responses by each

respondent: 1.

Estimated average hours per response:

0.33.

Annual reporting burden: 792 hours.

The burden associated with

Commission Rule 3.32 is expected to be

decreased by 1 hour:

Estimated number of respondents

(after proposed amendment): 10.

Annual responses by each

respondent: 1.

Estimated average hours per response:

0.2.

Annual reporting burden: 2 hours.

The recordkeeping and reporting

burdens associated with Commission

Rule 3.34 are expected to be decreased

by 5,332 hours:

Estimated number of respondents

(after proposed amendment): 0.

Annual responses by each

respondent: 0.

Estimated average hours per response:

0.

Annual reporting burden: 0 hours.

Regulations and Forms Pertaining to

the Financial Integrity of the

Marketplace, OMB Control Number

3038–0024.

The expected effect of the proposed

amended rule will be to reduce the

burden previously approved by OMB for

this collection by 7.5 hours.

Specifically: The burden associated

with Commission Rule 1.10 is expected

to be decreased by 7.5 hours:

Estimated number of respondents

(after proposed amendment): 15.

Annual responses by each

respondent: 1.

Estimated average hours per response:

1.

Annual reporting burden: 15 hours.

Copies of the information collection

submission to OMB are available from

the CFTC Clearance Officer, 1155 21st

Street NW., Washington, DC 20581,

(202) 418–5160.

Persons wishing to comment on the

information collection requirements that

would be required by these proposed

rules 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 for the Commodity Futures

Trading Commission.

The Commission considers comments

by the public on this proposed

collection of information in—

• Evaluating whether the proposed

collection of information is 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 the 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.

OMB is required to make a decision

concerning the collection of information

contained in these proposed regulations

between 30 and 60 days after

publication of this 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 to comment to

the Commission on the proposed

regulations.

Copies of the information collection

submission to OMB are available from

the CFTC Clearance Officer, 1155 21st

Street NW, Washington, DC 20581 (202)

418–5160.

Lists of Subjects

17 CFR Part 1

Brokers, Commodity futures,

Consumer protection, Reporting and

recordkeeping requirements.

17 CFR Part 3

Administrative practice and

procedure, Brokers, Commodity futures,

Reporting and recordkeeping

requirements, Registration, Principals.

17 CFR Part 4

Advertising, Commodity futures,

Consumer protection, Reporting and

recordkeeping requirements, Principals,

Commodity pool operators, Commodity

trading advisors, Disclosure.

17 CFR Part 140

Authority delegations (Government

agencies), Conflict of interests,

Organization and functions

(Government agencies).

17 CFR Part 155

Brokers, Commodity futures,

Reporting and recordkeeping

requirements.

17 CFR Part 166

Brokers, Commodity futures,

Consumer protection, Reporting and

recordkeeping requirements.

In consideration of the foregoing, and

pursuant to the authority contained in

the Commodity Exchange Act, and in

particular, Sections 2, 4b, 4d, 4f, 4m, 4n,

8a, and 19 thereof, 7 U.S.C. 2, 6b, 6d,

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39019

6f, 6m, 6n, 12a and 23, the Commission

hereby proposes to amend Parts 1, 3, 4,

140, 155 and 166 of 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, 6g, 6h, 6i, 6j, 6k, 6l, 6m,

6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,

13a–1, 16, 16a, 19, 21, 23 and 24.

2. Section 1.3 is proposed to be

amended by adding a new paragraph (g)

to read as follows:

§ 1.3 Definitions.

* * * * *

(g) Institutional customer. This term

has the same meaning as ‘‘eligible

participant’’ as defined in § 35.1(b) of

this chapter.

* * * * *

3. Section 1.10 is proposed to be

amended as follows:

a. Revising paragraph (a)(2)(i)(B);

b. Adding paragraph (a)(2)(i)(C);

c. Designating the undesignated

paragraph following paragraph

(a)(2)(i)(B) as paragraph (a)(2)(i)(D) and

revising it;

d. Designating the undesignated

paragraph following paragraph

(a)(2)(ii)(C) as paragraph (a)(2)(ii)(E) and

revising it;

e. Redesignating paragraph

(a)(2)(ii)(C) as (a)(2)(ii)(D) and revising

it; and

f. Adding a new paragraph

(a)(2)(ii)(C).

The revisions and additions read as

follows:

§ 1.10 Financial reports of futures

commission merchants and introducing

brokers.

(a) * * *

(2) * * *

(i) * * *

(B) 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 in

accordance with § 1.16 as of a date not

more than one year prior to the date on

which such report is filed; or

(C) A Form 1–FR–FCM, Provided

however, that such applicant shall be

subject to a review by the applicant’s

designated self-regulatory organization

within six months of being granted

registration.

(D) 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.

(ii) * * *

(C) A Form 1–FR–IB, Provided

however, that such applicant shall be

subject to a review by the applicant’s

designated self-regulatory organization

within six months of registration; or

(D) A guarantee agreement.

(E) Each person filing in accordance

with paragraphs (a)(2)(ii) (A), (B) or (C)

of this section 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.

* * * * *

4. Section 1.17 is proposed to be

amended by redesignating paragraph

(a)(1)(ii) as (a)(1)(iii) and by adding new

paragraphs (a)(1)(ii) and (a)(2)(iii) to

read as follows:

§ 1.17 Minimum financial requirements for

futures commission merchants and

introducing brokers.

(a) * * *

(1) * * *

(ii) Each person registered as a futures

commission merchant engaged in

soliciting or accepting orders and

customer funds related thereto for the

purchase or sale of any commodity for

future delivery on or subject to the rules

of a derivatives transaction facility from

any non-institutional customer must be

a clearing member of a designated

contract market or recognized futures

exchange, and must maintain adjusted

net capital in the amount of the greater

of $20,000,000 or the amounts otherwise

specified in paragraph (a)(1)(i) of this

section.

* * * * *

(2) * * *

(iii) The requirements of paragraph

(a)(1) of this section shall not be

applicable if the registrant is a futures

commission merchant or introducing

broker registered in accordance with

§ 3.10(a)(1)(i)(B) of this chapter, whose

business is limited to transacting

business on behalf of institutional

customers on a derivatives transaction

facility, and who conforms to minimum

financial standards and related

reporting requirements set by such

derivatives transaction facility in its

bylaws, rules, regulations or resolutions.

* * * * *

5. Section 1.20 is proposed to be

amended by revising paragraphs (a) and

(c) to read as follows:

§ 1.20 Customer funds to be segregated

and separately accounted for.

(a) All customer funds shall be

separately accounted for and segregated

as belonging to commodity or option

customers. Such customer funds when

deposited with any bank, trust

company, clearing organization or

another futures commission merchant

shall be deposited under an account

name which clearly identifies them as

such and shows that they are segregated

as required by the Act and this part.

Each registrant shall obtain and retain in

its files for the period provided in § 1.31

a written acknowledgment from such

bank, trust company, clearing

organization, or futures commission

merchant, that it was informed that the

customer funds deposited therein are

those of commodity or option customers

and are being held in accordance with

the provisions of the Act and this part:

Provided, however, that an

acknowledgment need not be obtained

from a clearing organization that has

adopted and submitted to the

Commission rules that provide for the

segregation as customer funds, in

accordance with all relevant provisions

of the Act and the rules and orders

promulgated thereunder, of all funds

held on behalf of customers. Under no

circumstances shall any portion of

customer funds be obligated to a

clearing organization, any member of a

contract market, a futures commission

merchant, or any depository except to

purchase, margin, guarantee, secure,

transfer, adjust or settle trades, contracts

or commodity option transactions of

commodity or option customers. No

person, including any clearing

organization or any depository, that has

received customer funds for deposit in

a segregated account, as provided in this

section, may hold, dispose of, or use any

such funds as belonging to any person

other than the option or commodity

customers of the futures commission

merchant which deposited such funds.

* * * * *

(c) Each futures commission merchant

shall treat and deal with the customer

funds of a commodity customer or of an

option customer as belonging to such

commodity or option customer. All

customer funds shall be separately

accounted for, and shall not be

commingled with the money, securities

or property of a futures commission

merchant or of any other person, or be

used to secure or guarantee the trades,

contracts or commodity options, or to

secure or extend the credit, of any

person other than the one for whom the

same are held: Provided, however, That

customer funds treated as belonging to

39020 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

the commodity or option customers of a

futures commission merchant may for

convenience be commingled and

deposited in the same account or

accounts with any bank or trust

company, with another person

registered as a futures commission

merchant, or with a clearing

organization, and that such share

thereof as in the normal course of

business is necessary to purchase,

margin, guarantee, secure, transfer,

adjust, or settle the trades, contracts or

commodity options of such commodity

or option customers or resulting market

positions, with the clearing organization

or with any other person registered as a

futures commission merchant, may be

withdrawn and applied to such

purposes, including the payment of

premiums to option grantors,

commissions, brokerage, interest, taxes,

storage and other fees and charges,

lawfully accruing in connection with

such trades, contracts or commodity

options: Provided, further, That

customer funds may be invested in

instruments described in § 1.25.

6. Section 1.25 is proposed to be

revised to read as follows:

§ 1.25 Investment of customer funds.

(a) Permitted investments. (1) Subject

to the terms and conditions set forth in

this section, a futures commission

merchant or a clearing organization may

invest customer funds in the following

instruments (permitted investments):

(i) Obligations of the United States

and obligations fully guaranteed as to

principal and interest by the United

States (U.S. government securities);

(ii) General obligations of any State or

of any political subdivision thereof

(municipal securities);

(iii) Obligations issued by any agency

sponsored by the United States

(government sponsored agency

securities);

(iv) Certificates of deposit issued by a

bank (certificates of deposit) as defined

in section 3(a)(6) of the Securities

Exchange Act of 1934, or a domestic

branch of a foreign bank insured by the

Federal Deposit Insurance Corporation;

(v) Commercial paper;

(vi) Corporate notes; and

(vii) Interests in money market mutual

funds.

(2) In addition, a futures commission

merchant or a clearing organization may

buy and sell the permitted investments

listed in paragraphs (a)(1)(i) through

(vii) of this section pursuant to

agreements for resale or repurchase of

the instruments, in accordance with the

provisions of paragraph (d) of this

section.

(b) General terms and conditions. A

futures commission merchant or a

clearing organization is required to

manage the permitted investments

consistent with the objectives of

preserving principal and maintaining

liquidity and according to the following

specific requirements.

(1) Ratings—(i) Initial requirement.

Instruments that are required to be rated

by this section must be rated by a

nationally recognized statistical rating

organization (NRSRO), as that term is

defined in § 270.2a–7 of this title.

Ratings are required for permitted

investments as follows:

(A) U.S. government securities need

not be rated;

(B) Municipal securities, government

sponsored agency securities, certificates

of deposit, commercial paper, and

corporate notes, except notes that are

asset-backed, must have the highest

short-term rating of an NRSRO or one of

the two highest long-term ratings of an

NRSRO;

(C) Corporate notes that are assetbacked must have the highest rating of

an NRSRO; and

(D) Money market mutual funds that

are rated by an NRSRO must be rated at

the highest rating of the NRSRO or, if

the fund is not rated, investments made

by the fund must comply with the

requirements applicable to direct

investments under this section.

(ii) Effect of downgrade. If an NRSRO

lowers the rating of an instrument that

was previously a permitted investment

to below the minimum rating required

under this section, the value of the

instrument recognized for segregation

purposes will be the lesser of:

(A) The current market value of the

instrument; or

(B) The market value of the

instrument on the business day

preceding the downgrade, reduced by

20 percent of that value for each

business day that has elapsed since the

downgrade.

(2) Restrictions on instrument

features. (i) With the exception of

money market mutual funds, no

permitted investment may contain an

embedded derivative of any kind,

including but not limited to a call

option, put option, or collar, cap or floor

on interest paid.

(ii) No instrument may contain

interest-only payment features.

(iii) No instrument may provide

payments linked to a commodity,

currency, reference instrument, index,

or benchmark except as provided in

paragraph (b)(2)(iv) of this section.

(iv) Variable-rate securities are

permitted, provided the interest rates

paid correlate closely and on an

unleveraged basis to a benchmark of

either the Federal Funds target or

effective rate, the prime rate, the threemonth Treasury Bill rate, or the onemonth or three-month LIBOR rate.

(v) Certificates of deposit, if

negotiable, must be able to be liquidated

within one business day or, if not

negotiable, must be redeemable at the

issuing bank within one business day,

with any penalty for early withdrawal

limited to any accrued interest earned.

(3) Concentration. (i) The aggregate

investment in U.S. government

securities or in money market mutual

funds shall not be subject to a

concentration limit.

(ii) The aggregate investment in the

securities of any one issuer, or related

issuers, of government sponsored

agency securities shall not exceed 25

percent of the total assets held in

segregation by the futures commission

merchant or the clearing organization.

Securities issued by an entity that

directly or indirectly constitute an

interest in securities issued by a

government sponsored agency shall be

combined and treated as the securities

of a single issuer for the purpose of

determining the concentration limit.

(iii) The aggregate investment in the

obligations of any one issuer, or related

issuers, of any permitted investments,

other than U.S. government securities,

money market mutual funds, and

government sponsored agency

instruments, may not exceed five

percent of the total assets held in

segregation by the futures commission

merchant or the clearing organization.

(4) Time-to-maturity. Except for

investments in money market mutual

funds, the dollar-weighted average of

the time-to-maturity of the portfolio, as

that average is computed pursuant to

§ 270.2a–7 of this title, may not exceed

24 months.

(5) Investments in instruments issued

by affiliates. (i) Except as provided in

paragraph (b)(5)(ii) of this section, a

futures commission merchant shall not

invest customer funds in obligations of

an entity affiliated with the futures

commission merchant, and a clearing

organization shall not invest customer

funds in obligations of an entity

affiliated with the clearing organization.

An affiliate includes parent companies,

including all entities through the

ultimate holding company, subsidiaries

to the lowest level, and companies

under common ownership of such

parent company or affiliates.

(ii) A futures commission merchant or

clearing organization may invest

customer funds in a fund affiliated with

that futures commission merchant or

clearing organization provided that the

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39021

fund itself does not invest in any

instrument issued by the futures

commission merchant, clearing

organization or affiliate thereof.

(6) Recordkeeping. A futures

commission merchant and a clearing

organization shall prepare and maintain

a record that will show for each

business day with respect to each type

of investment made pursuant to this

section, the following information:

(i) The type of instruments in which

customer funds have been invested;

(ii) The original cost of the

instruments; and

(iii) The current market value of the

instruments.

(c) Money market mutual funds. The

following provisions will apply to the

investment of customer funds in money

market mutual funds (the fund).

(1) Generally, the fund must be

registered with the Securities and

Exchange Commission as a money

market mutual fund, in compliance with

applicable requirements. A fund

sponsor, however, may petition the

Commission for an exemption from this

requirement. The Commission may

grant such an exemption provided that

the fund can demonstrate that it will

operate in a manner designed to

preserve principal and to maintain

liquidity. The application for exemption

must describe how the fund’s structure,

operations and financial reporting are

expected to differ from the requirements

contained in § 270.2a–7 of this title and

the risk-limiting provisions for direct

investments contained in this section.

The fund must also specify the

information that the fund would make

available to the Commission on an

ongoing basis.

(2) The fund must be sponsored by a

federally-regulated financial institution,

a bank as defined in section 3(a)(6) of

the Securities Exchange Act of 1934, or

a domestic branch of a foreign bank

insured by the Federal Deposit

Insurance Corporation, except for a fund

exempted in accordance with paragraph

(c)(1) of this section.

(3) A futures commission merchant or

clearing organization shall hold its

shares of the fund in a custody account

in accordance with § 1.26(a). If the

futures commission merchant or the

clearing organization holds its shares of

the fund with the fund’s shareholder

servicing agent, the sponsor of the fund

and the fund itself are required to

provide the acknowledgment letter

required by § 1.26.

(4) The net asset value of the fund

must be computed daily by 9 a.m. of

each business day and made available to

the futures commission merchant or

clearing organization by that time.

(5) An interest in a fund must be able

to be liquidated by the business day

following a request to liquidate by the

futures commission merchant or

clearing organization.

(6) The agreement pursuant to which

the futures commission merchant or

clearing organization has acquired and

is holding its interest in a fund must

contain no provision that would prevent

the pledging or transferring of shares.

(d) Repurchase and reverse

repurchase agreements. A futures

commission merchant or clearing

organization may buy and sell the

permitted investments pursuant to

agreements for resale or repurchase of

the securities (repurchase transactions),

provided the agreements for resale or

repurchase conform to the following

requirements:

(1) The securities are specifically

identified by coupon rate, par amount,

market value, maturity date, and CUSIP

number.

(2) Counterparties are limited to a

bank as defined in section 3(a)(6) of the

Securities Exchange Act of 1934, a

domestic branch of a foreign bank

insured by the Federal Deposit

Insurance Corporation, a securities

broker or dealer, or a government

securities broker or government

securities dealer registered with the

Securities and Exchange Commission or

which has filed notice pursuant to

section 15C(a) of the Government

Securities Act of 1986.

(3) The transaction is made pursuant

to a written agreement signed by the

parties to the agreement, which is

consistent with the conditions set forth

in paragraphs (d)(1) through (d)(11) of

this section and which states that the

parties thereto intend the transaction to

be treated as a purchase and sale of

securities.

(4) The term of the agreement is no

more than one business day, or reversal

of the transaction is possible on

demand.

(5) The securities transferred under

the agreement are held in a safekeeping

account with a bank as referred to in

paragraph (d)(2) of this section, a

clearing organization or the Depository

Trust Corporation in an account that

complies with the requirements of

§ 1.26.

(6) The futures commission merchant

or the clearing organization may not use

securities received under the agreement

in another similar transaction and may

not otherwise hypothecate or pledge

such securities, except securities may be

pledged on behalf of customers at

another futures commission merchant or

clearing organization. Substitution of

securities is allowed, provided,

however, that:

(i) The qualifying securities being

substituted and original securities are

specifically identified by date of

substitution, market values substituted,

coupon rates, par amounts, maturity

dates and CUSIP numbers;

(ii) Substitution is made on a

‘‘delivery versus delivery’’ basis; and

(iii) The market value of the substituted

securities is at least equal to that of the

original securities.

(7) The transfer of securities is made

on a delivery versus payment basis in

immediately available funds. The

transfer is not recognized as

accomplished until the funds and/or

securities are actually received by the

custodian of the futures commission

merchant’s or clearing organization’s

customer funds or securities purchased

on behalf of customers. The transfer or

credit of securities covered by the

agreement to the futures commission

merchant’s or clearing organization’s

customer segregated custodial account

is made simultaneously with the

disbursement of funds from the futures

commission merchant’s or clearing

organization’s customer segregated cash

account at the custodian bank. On the

sale or resale of securities, the futures

commission merchant’s or clearing

organization’s customer segregated cash

account at the custodian bank must

receive same-day funds credited to such

segregated account simultaneously with

the delivery or transfer of securities

from the customer segregated custodial

account.

(8) A written confirmation to the

futures commission merchant or

clearing organization specifying the

terms of the agreement and a

safekeeping receipt are issued

immediately upon entering into the

transaction and a confirmation to the

futures commission merchant or

clearing organization is issued once the

transaction is reversed.

(9) The transactions effecting the

agreement are recorded in the record

required to be maintained under § 1.27

of investments of customer funds, and

the securities subject to such

transactions are specifically identified

in such record as described in paragraph

(d)(1) of this section and further

identified in such record as being

subject to repurchase and reverse

repurchase agreements.

(10) An actual transfer of securities by

book entry is made consistent with

Federal or State commercial law, as

applicable. At all times, securities

received subject to an agreement are

reflected as ‘‘customer property.’’

39022 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

(11) The agreement makes clear that,

in the event of the bankruptcy of the

futures commission merchant or

clearing organization, any securities

purchased with customer funds that are

subject to an agreement may be

immediately transferred. The agreement

also makes clear that, in the event of a

futures commission merchant or

clearing organization bankruptcy, the

counterparty has no right to compel

liquidation of securities subject to an

agreement or to make a priority claim

for the difference between current

market value of the securities and the

price agreed upon for resale of the

securities to the counterparty, if the

former exceeds the latter.

(e) A futures commission merchant

shall not be prohibited from directly

depositing unencumbered securities of

the type specified in this section, which

it owns for its own account, into a

segregated safekeeping account or from

transferring any such securities from a

segregated account to its own account,

up to the extent of its residual financial

interest in customers’ segregated funds;

provided, however, that such

investments, transfers of securities, and

disposition of proceeds from the sale or

maturity of such securities are recorded

in the record of investments required to

be maintained by § 1.27. All such

securities may be segregated in

safekeeping only with a bank, trust

company, clearing organization, or other

registered futures commission

merchant. Furthermore, for purposes of

§§ 1.25, 1.26, 1.27, 1.28 and 1.29,

investments permitted by § 1.25 that are

owned by the futures commission

merchant and deposited into such a

segregated account shall be considered

customer funds until such investments

are withdrawn from segregation.

7. Section 1.26 is proposed to be

revised to read as follows:

§ 1.26 Deposit of instruments purchased

with customer funds.

(a) Each futures commission merchant

who invests customer funds in

instruments described in § 1.25 shall

separately account for such instruments

and segregate such instruments as

belonging to such commodity or option

customers. Such instruments, when

deposited with a bank, trust company,

clearing organization or another futures

commission merchant, shall be

deposited under an account name

which clearly shows that they belong to

commodity or option customers and are

segregated as required by the Act and

this part. Each futures commission

merchant upon opening such an

account shall obtain and retain in its

files an acknowledgment from such

bank, trust company, clearing

organization or other futures

commission merchant that it was

informed that the instruments belong to

commodity or option customers and are

being held in accordance with the

provisions of the Act and this part.

Provided, however, that an

acknowledgment need not be obtained

from a clearing organization that has

adopted and submitted to the

Commission rules that provide for the

segregation as customer funds, in

accordance with all relevant provisions

of the Act and the rules and orders

promulgated thereunder, of all funds

held on behalf of customers and all

instruments purchased with customer

funds. Such acknowledgment shall be

retained in accordance with § 1.31. Such

bank, trust company, clearing

organization or other futures

commission merchant shall allow

inspection of such obligations at any

reasonable time by representatives of

the Commission.

(b) Each clearing organization which

invests money belonging or accruing to

commodity or option customers of its

clearing members in instruments

described in § 1.25 shall separately

account for such instruments and

segregate such instruments as belonging

to such commodity or option customers.

Such instruments, when deposited with

a bank or trust company, shall be

deposited under an account name

which will clearly show that they

belong to commodity or option

customers and are segregated as

required by the Act and this part. Each

clearing organization upon opening

such an account shall obtain and retain

in its files a written acknowledgment

from such bank or trust company that it

was informed that the instruments

belong to commodity or option

customers of clearing members and are

being held in accordance with the

provisions of the Act and this part. Such

acknowledgment shall be retained in

accordance with § 1.31. Such bank or

trust company shall allow inspection of

such instruments at any reasonable time

by representatives of the Commission.

§§ 1.27, 1.28 and 1.29 [Amended]

8. Sections 1.27, 1.28 and 1.29 are

proposed to be amended by revising the

word ‘‘obligations’’ to read

‘‘instruments’’ each time it appears.

9. Section 1.33 is proposed to be

amended by adding a new paragraph (g)

to read as follows:

§ 1.33 Monthly and confirmation

statements.

* * * * *

(g) Electronic transmission of

statements. (1) The statements required

by this section, and by § 1.46, may be

furnished to anyt customer by means of

electronic media if the customer so

requests, Provided, however, that a

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.

(2) In the case of a non-institutional

customer, a futures commission

merchant must obtain the noninstitutional customer’s signed consent

acknowledging disclosure of the

information set forth in paragraph (g)(1)

of this section prior to the transmission

of any statement by means of electronic

media.

(3) Any statement required to be

furnished to a person other than a

customer in accordance with paragraph

(d) of this section may be furnished by

electronic media.

(4) A futures commission merchant

who furnishes statements to any

customer by means of electronic media

must retain a daily confirmation

statement for such customer as of the

end of the trading session, reflecting all

transactions made during that session

for the customer, in accordance with

§ 1.31.

10. Section 1.46 is proposed to be

amended as follows:

a. By revising paragraph (a),

introductory text,

b. By removing and reserving

paragraphs (d)(4) through (d)(7),

c. By removing paragraph (d)(9) and

d. By revising paragraph (e) to read as

follows:

§ 1.46 Application and closing out of

offsetting long and short positions.

(a) Application of purchases and

sales. Except with respect to purchases

or sales which are for omnibus

accounts, or where the customer has

instructed otherwise, any futures

commission merchant who, on or

subject to the rules of a contract market:

* * * * *

(e) The statements required by

paragraph (a) of this section may be

furnished to the customer or the person

described in § 1.33(d) by means of

electronic transmission, in accordance

with § 1.33(g).

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39023

11. Section 1.52 is proposed to be

amended by adding a new paragraph

(m) to read as follows:

§ 1.52 Self-regulatory organization

adoption and surveillance of minimum

financial requirements.

* * * * *

(m) Nothing in this section shall

apply to the activities of a derivatives

transaction facility or the minimum

adjusted net capital requirements it may

require of persons operating thereon

pursuant to § 1.17(a)(2)(iii).

12. Section 1.55 is proposed to be

amended by revising paragraphs (d) and

(f) to read as follows:

§ 1.55 Distribution of ‘‘Risk Disclosure

Statement’’ by futures commission

merchants and introducing brokers.

* * * * *

(d) Any futures commission

merchant, or in the case of an

introduced account any introducing

broker, may open a commodity futures

account for a customer without

obtaining the separate acknowledgments

of disclosure and elections required by

this section and by § 1.33(g), and by

§§ 33.7, 155.3(b)(2), and 190.06 of this

chapter, provided that:

(1) Prior to the opening of such

account, the futures commission

merchant or introducing broker obtains

an acknowledgment from the customer,

which may consist of a single signature

at the end of the futures commission

merchant’s or introducing broker’s

customer account agreement, or on a

separate page, of the disclosure

statements and elections specified in

this section and § 1.33(g), and in §§ 33.7,

155.3(b)(2), and 190.06 of this chapter,

and which may include authorization

for the transfer of funds from a

segregated customer account to another

account of such customer, as listed

directly above the signature line,

provided the customer has

acknowledged by check or other

indication next to a description of each

specified disclosure statement or

election that the customer has received

and understood such disclosure

statement or made such election;

(2) The acknowledgment referred to in

paragraph (d)(1) of this section must be

accompanied by and executed

contemporaneously with delivery of the

disclosures and elective provisions

required by this section and § 1.33(g),

and by §§ 33.7, 155.3(b)(2), and 190.06

of this chapter.

* * * * *

(f) A futures commission merchant or,

in the case of an introduced account an

introducing broker, may open a

commodity futures account for an

institutional customer without

furnishing such institutional customer

the disclosure statements or obtaining

the acknowledgements required under

paragraph (a) of this section, §§ 1.33(g)

and 1.65(a)(3), and §§ 30.6(a), 33.7(a),

155.3(b)(2), and 190.10(c) of this

chapter.

* * * * *

PART 3—REGISTRATION

13. The authority citation for Part 3 is

revised to read as follows:

Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a,

2, 4, 4a, 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.

14. Section 3.1 is proposed to be

amended by revising paragraphs (a)(1)

and (a)(2) to read as follows:

§ 3.1 Definitions.

(a) * * *

(1) If the entity is organized as a sole

proprietorship, the proprietor; if a

partnership, any general partner; if a

corporation, any director, the president,

chief executive officer, chief operating

officer, chief financial officer, and any

person in charge of a principal business

unit, division or function subject to

regulation by the Commission; if a

limited liability company or limited

liability partnership, any director, the

president, chief executive officer, chief

operating officer, chief financial officer,

the manager, managing member or those

members vested with the management

authority for the entity, and any person

in charge of a principal business unit,

division or function subject to

regulation by the Commission; and, in

addition, any person occupying a

similar status or performing similar

functions, having the power, directly or

indirectly, through agreement or

otherwise, to exercise a controlling

influence over the entity’s activities that

are subject to regulation by the

Commission;

(2)(i) Any individual who directly or

indirectly, through agreement, holding

company, nominee, trust or otherwise,

is the owner of ten percent or more of

the outstanding shares of any class of

stock, is entitled to vote or has the

power to sell or direct the sale of ten

percent or more of any class of voting

securities, or is entitled to receive ten

percent or more of the profits; or

(ii) Any person other than an

individual that is the direct owner of ten

percent or more of any class of

securities; or

* * * * *

15. Section 3.10 is proposed to be

amended by revising paragraph (a)(1)(i),

by redesignating paragraph (a)(2)(i) as

paragraph (a)(2), by removing paragraph

(a)(2)(ii), and by revising paragraph (d)

to read as follows:

§ 3.10 Registration of futures commission

merchants, introducing brokers, commodity

trading advisors, commodity pool operators

and leverage transaction merchants.

(a) Application for Registration.

(1)(i)(A) Except as provided in

paragraph (a)(1)(i)(B) of this section,

application for registration as a futures

commission merchant, 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.

(B) An applicant for registration as a

futures commission merchant or

introducing broker that will conduct

transactions exclusively on or subject to

the rules of a derivatives transaction

facility for institutional customers, and

which is registered with the Securities

and Exchange Commission as a

securities broker or dealer, or is a bank

or any other financial depository

institution subject to regulation by the

United States, may apply for registration

by filing with the National Futures

Association notice of its intention to

undertake transactions exclusively on or

subject to the rules of a derivatives

transaction facility for institutional

customers, together with a certification

of registration and good standing with

the appropriate authority or of

authorization to engage in such

transactions by said authority.

* * * * *

(d) Annual filing. Any person

registered as a futures commission

merchant, introducing broker,

commodity trading advisor, commodity

pool operator or leverage transaction

merchant in accordance with paragraph

(a)(1)(i)(A) of this section must file with

the National Futures Association a Form

7–R, completed in accordance with the

instructions thereto, annually on a date

specified by the National Futures

Association. The failure to file the Form

7–R within thirty days following such

date shall be deemed to be a request for

withdrawal from registration. On at least

thirty days written notice, and following

such action, if any, deemed to be

necessary by the Commission or the

National Futures Association, the

National Futures Association may grant

the request for withdrawal from

registration.

16. Section 3.32 is proposed to be

amended as follows:

a. Adding paragraphs

(a)(1)(i)(A) and (B);

39024 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

b. Revising paragraphs (a)(1)(ii) and

(a)(1)(v);

c. Redesignating paragraphs

(a)(1)(vi)and (a)(1)(vii) as paragraphs

(a)(1)(vii) and (a)(1)(viii), respectively;

d. Adding a new paragraph (a)(1)(vi);

e. Revising paragraph (a)(2)(i); and

f. Revising paragraph (e)(1).

The revisions and additions read as

follows:

§ 3.32 Changes requiring new registration;

addition of principals.

(a)(1) * * *

(i) * * *

(A) As an individual, directly or

indirectly, through agreement, holding

company, nominee, trust or otherwise,

becomes the owner of ten percent or

more of the outstanding shares of any

class of stock or acquires the right to

vote or the power to sell or to direct the

sale of ten percent or more of the

registrant’s voting securities;

(B) Any person other than an

individual that becomes the direct

owner of ten percent or more of any

class of a registrant’s securities;

(ii) As an individual becomes entitled

to receive ten percent or more of the

registrant’s profits;

* * * * *

(v) Becomes the president, chief

executive officer, chief operating officer

or chief financial officer of the corporate

registrant, or becomes in charge of a

principal business unit, division or

function subject to regulation by the

Commission, or comes to occupy a

position of similar status or perform a

similar function;

(vi) Becomes a director, president,

chief executive officer, chief operating

officer, chief financial officer, manager,

managing member or a member vested

with the management authority for the

registrant or becomes in charge of a

principal business unit, division or

function subject to regulation by the

Commission, or comes to occupy a

position of similar status or perform a

similar function in the case of a limited

liability company or limited liability

partnership;

* * * * *

(2)(i) If a person becomes a principal

of the registrant because of an event

described in paragraph (a)(1)(i)(B) of

this section, the registrant’s registration

shall not be deemed to terminate and a

new Form 7–R need not be filed:

Provided, however, that within twenty

days of the occurrence of the event

described in paragraph (a)(1)(i)(B) of

this section, the registrant must notify

the National Futures Association of the

name of such added principal on Form

3–R and must file written certifications

with the National Futures Association

stating:

(A) The ultimate day-to-day control of

the registrant remains the same,

(B) The addition of the new principal

will not affect the conduct or the dayto-day operations of the registrant, and

(C) The insertion of the new principal

into the chain of ownership is not being

done for the purpose, and will not have

the effect, of limiting any liability of the

registrant.

* * * * *

(e)(1) Except where a registrant

chooses to file an application pursuant

to paragraph (d) of this section, if

applicable, in the event of a change as

described in paragraph (a)(1)(v) or

(a)(1)(vi) of this section, a new

registration will not be required if the

registrant submits a written notice on

Form 3–R to the National Futures

Association prior to the date of such

change in control (and such change does

not occur until the registrant receives

written approval from the National

Futures Association) and includes with

such notice a Form 8–R, completed in

accordance with the instructions thereto

and executed by the person referred to

in paragraph (a)(1)(v) or (a)(1)(vi) of this

section. The Form 8–R for such

individual must be accompanied by the

fingerprints of that individual on a

fingerprint card provided for that

purpose by the National Futures

Association: Provided, however, That a

fingerprint card need not be provided

under this paragraph for any individual

who has a current Form 8–R on file with

the National Futures Association or the

Commission.

* * * * *

§ 3.34 [Removed]

17. Section 3.34 is proposed to be

removed.

18. Part 3 is proposed to be amended

by adding Appendix B to read as

follows:

Appendix B to Part 3—Statement of

Acceptable Practices With Respect to

Ethics Training

(a) The provisions of Section 4p(b) of the

Act (7 U.S.C. 6p(b) (1994)) set forth

requirements regarding training of registrants

as to their responsibilities to the public. This

section requires the Commission to issue

regulations requiring new registrants to

attend ethics training sessions within six

months of registration, and all registrants to

attend such training on a periodic basis.

Consistent with the will of Congress, the

Commission believes that a Core Principle for

all persons intermediating transactions in

recognized multilateral trade execution

facilities is fitness. The awareness and

maintenance of professional ethical

standards are essential elements of a

registrant’s fitness. Further, the use of ethics

training programs is relevant to a registrant’s

maintenance of adequate supervision, itself a

Core Principle, and a requirement under Rule

166.3.

(b)(1) The Commission recognizes that

technology has provided new, faster means of

sharing and distributing information. In view

of the foregoing, the Commission has chosen

to allow registrants to develop their own

ethics training programs. Nevertheless,

futures industry professionals may want

guidance as to the role of ethics training.

Registrants may wish to consider what ethics

training should be retained, its format, and

how it might best be implemented. Therefore,

the Commission finds it appropriate to issue

this Statement of Acceptable Practices

regarding appropriate training for registrants,

as interpretative guidance for intermediaries

on fitness and supervision. Commission

registrants may look to this Statement of

Acceptable Practices as a ‘‘safe harbor’’

concerning acceptable procedures in this

area.

(2) The Commission believes that section

4p(b) of the Act reflects an intent by Congress

that industry professionals be aware, and

remain abreast, of their continuing

obligations to the public under the Act and

the regulations thereunder. The text of the

Act provides guidance as to the nature of

these responsibilities. As expressed in

section 4p(b) of the Act, personnel in the

industry have an obligation to the public to

observe the Act, the rules of the Commission,

the rules of any appropriate self-regulatory

organizations or contract markets (which

would also include recognized futures

exchanges and recognized derivatives

transactions facilities), or other applicable

federal or state laws or regulations. Further,

section 4p(b) acknowledges that registrants

have an obligation to the public to observe

‘‘just and equitable principles of trade.’’

(3) Additionally, section 4p(b) reflects

Congress’ intent that registrants and their

personnel retain an up-to-date knowledge of

these requirements. The Act requires that

registrants receive training on a periodic

basis. Thus, it is the intent of Congress that

Commission registrants remain current with

regard to the ethical ramifications of new

technology, commercial practices,

regulations, or other changes.

(c) The Commission believes that training

should be focused to some extent on a

person’s registration category, although there

will obviously be certain principles and

issues common to all registrants and certain

general subjects that should be taught. Topics

to be addressed include:

(1) An explanation of the applicable laws

and regulations, and the rules of selfregulatory organizations or contract markets,

recognized futures exchanges and derivatives

transaction facilities;

(2) The registrant’s obligation to the public

to observe just and equitable principles of

trade;

(3) How to act honestly and fairly and with

due skill, care and diligence in the best

interests of customers and the integrity of the

market;

(4) How to establish effective supervisory

systems and internal controls;

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39025

(5) Obtaining and assessing the financial

situation and investment experience of

customers;

(6) Disclosure of material information to

customers; and

(7) Avoidance, proper disclosure and

handling of conflicts of interest.

(d) An acceptable ethics training program

would apply to all of a firm’s associated

persons and its principals to the extent they

are required to register as associated persons.

Additionally, personnel of firms that rely on

their registration with other regulators, such

as the Securities and Exchange Commission,

should be provided with ethics training to

the extent the Act and the Commission’s

regulations apply to their business.

(e) As to the providers of such training, the

Commission believes that classes sponsored

by independent persons, firms, or industry

associations would be acceptable. It would

also be permissible to conduct in-house

training programs. Further, registrants should

ascertain the credentials of any ethics

training providers they retain. Thus, persons

who provide ethics training should be

required to provide proof of satisfactory

completion of the proficiency testing

requirements applicable to the registrant and

evidence of three years of relevant industry

or pedagogical experience in the field. This

industry experience might include the

practice of law in the fields of futures or

securities, or employment as a trader or risk

manager at a brokerage or end-user firm.

Likewise, the Commission believes that

registrants should employ as ethics training

providers only those persons they reasonably

believe in good faith are not subject to any

investigations or to bars to registration or to

service on a self-regulatory organization

governing board or disciplinary panel.

(f)(1) With regard to the frequency and

duration of ethics training, it is permissible

for a firm to require training on whatever

periodic basis and duration the registrant

(and relevant self-regulatory organizations)

deems appropriate. It may even be

appropriate not to require any such specific

requirements as, for example, where ethics

training could be termed ongoing. For

instance, a small entity, sole proprietorship,

or even a small section in an otherwise large

firm, might satisfy its obligation to remain

current with regard to ethics obligations by

distribution of periodicals, legal cases, or

advisories. Use of the latest information

technology, such as Internet websites, can be

useful in this regard. In such a context, there

would be no structured classes, but the goal

should be a continuous awareness of

changing industry standards. A corporate

culture to maintain high ethical standards

should be established on a continuing basis.

(2) On the other hand, larger firms which

transact business with a larger segment of the

public may wish to implement a training

program that requires periodic classwork. In

such a situation, the Commission believes it

appropriate for registrants to maintain such

records as evidence of attendance and of the

materials used for training. In the case of a

floor broker or floor trader, the applicable

contract market, recognized futures exchange

or derivatives transaction facility should

maintain such evidence on behalf of its

member. This evidence of ethics training

could be offered to demonstrate fitness and

overall compliance during audits by selfregulatory organizations, and during reviews

of contract market, recognized futures

exchange or derivatives transaction facility

operations.

(g) The methodology of such training may

also be flexible. Recent innovations in

information technology have made possible

new, fast, and cost-efficient ways for

registrants to maintain their awareness of

events and changes in the commodity

interest markets. In this regard, the

Commission recognizes that the needs of a

firm will vary according to its size,

personnel, and activities. No format of

classes will be required. Rather, such training

could be in the form of formal class lectures,

video presentation, Internet transmission, or

by simple distribution of written materials.

These options should provide sufficiently

flexible means for adherence to

Congressional intent in this area.

(h) Finally, it should be noted that selfregulatory organizations and industry

associations will have a significant role in

this area. Such organizations may have

separate ethics and proficiency standards,

including ethics training and testing

programs, for their own members.

PART 4—COMMODITY POOL

OPERATORS AND COMMODITY

TRADING ADVISORS

19. 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.

20. Section 4.10 is proposed to be

amended by revising paragraph (e)(1) to

read as follows:

§ 4.10 Definitions.

* * * * *

(e)(1) Principal, when referring to a

person that is a principal of a particular

entity, shall have the same meaning as

the term principal under § 3.1(a) of this

chapter.

* * * * *

21. Section 4.24 is proposed to be

amended by revising paragraphs (f)(1)(v)

and (h)(2) to read as follows:

§ 4.24 General Disclosures required.

* * * * *

(f) * * *

(1) * * *

(v) Each principal of the foregoing

persons who participates in making

trading or operational decisions for the

pool or who supervises persons so

engaged.

* * * * *

(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 carrying the

pool’s accounts shall treat offsetting

positions pursuant to § 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;

* * * * *

22. Section 4.34 is proposed to be

amended by revising paragraphs

(f)(1)(ii) and (h) to read as follows:

§ 4.34 General Disclosures required.

* * * * *

(f) * * *

(1) * * *

(ii) Each principal of the trading

advisor who participates in making

trading or operational decisions for the

trading advisor or supervises persons so

engaged.

* * * * *

(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

carrying accounts it manages shall treat

offsetting positions pursuant to § 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.

* * * * *

PART 140—ORGANIZATION,

FUNCTIONS AND PROCEDURES OF

THE COMMISSION

23. The authority citation for Part 140

continues to read as follows:

Authority: 7 U.S.C. 4a, 12a.

24. Section 140.91 is proposed to be

amended by adding a new paragraph

(a)(7) to read as follows:

§ 140.91 Delegation of authority to the

Director of the Division of Trading and

Markets.

(a) * * *

(7) All functions reserved to the

Commission in § 1.25 of this chapter.

* * * * *

39026 Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules

PART 155—TRADING STANDARDS

25. The authority citation for Part 155

continues to read as follows:

Authority: 7 U.S.C. 6b, 6c, 6g, 6j and 12a

unless otherwise noted.

26. Sections 155.2, 155.3, 155.4 and

155.5 are proposed to be amended by

adding the words ‘‘or recognized futures

exchange’’ after the words ‘‘contract

market’’ each time they appear.

27. Section 155.6 is proposed to be

added to read as follows:

§ 155.6. Trading Standards for the

Transaction of Business on Derivatives

Transaction Facilities.

(a) A futures commission merchant, or

affiliated person thereof, transacting

business on behalf of a non-institutional

customer on a derivatives transaction

facility shall comply with the provisions

of § 155.3.

(b) No futures commission merchant,

introducing broker or affiliated person

thereof shall misuse knowledge of any

institutional customer’s order for

execution on a derivatives transaction

facility.

PART 166—CUSTOMER PROTECTION

RULES

28. The authority citation for Part 166

is proposed to be amended to read as

follows:

Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6d, 6g,

6h, 6k, 6l, 6o, 7a, 12a, 21 and 23, unless

otherwise noted.

29. Section 166.5 is proposed to be

added to read as follows:

§ 166.5 Dispute settlement procedures.

(a) Definitions.

(1) The term claim or grievance as

used in this section shall mean any

dispute that

(i) Arises out of any transaction

executed on or subject to the rules of a

contract market, a recognized futures

exchange or a derivatives transaction

facility,

(ii) Is executed or effected through a

member of such facility, a participant

transacting on or through such facility

or an employee of such facility, and

(iii) Does not require for adjudication

the presence of essential witnesses or

third parties over whom the facility

does not have jurisdiction and who are

not otherwise available.

(iv) The term claim or grievance does

not include disputes arising from cash

market transactions that are not a part

of or directly connected with any

transaction for the purchase or sale of

any commodity for future delivery or

commodity option.

(2) The term customer as used in this

section includes an option customer (as

defined in § 1.3(jj) of this chapter) and

any person for or on behalf of whom a

member of a contract market, a

recognized futures exchange or a

derivatives transaction facility or a

participant transacting on or through

such market, exchange or facility effects

a transaction on or through such market,

exchange or facility, except another

member of or participant in such

market, exchange or facility.

(3) The term Commission registrant as

used in this section means a person

registered under the Act as a futures

commission merchant, introducing

broker, floor broker, commodity pool

operator, commodity trading advisor, or

associated person.

(b) Voluntariness. The use by

customers of dispute settlement

procedures shall be voluntary as

provided in paragraph (c) of this

section.

(c) Pre-Dispute Arbitration

Agreements. No Commission registrant

shall enter into any agreement or

understanding with a customer in

which the customer agrees, prior to the

time a claim or grievance arises, to

submit such claim or grievance to any

settlement procedure except as follows:

(1) Signing the agreement must not be

made a condition for the customer to

utilize the services offered by the

Commission registrant.

(2) If the agreement is contained as a

clause or clauses of a broader

agreement, the customer must

separately endorse the clause or clauses

containing the cautionary language and

provisions specified in this section. A

futures commission merchant or

introducing broker may obtain such

endorsement as provided in § 1.55(d) of

this chapter for the following classes of

customers only:

(i) An institutional customer as

defined in § 1.3(g) of this chapter;

(ii) A plan defined as a government

plan or church plan in section 3(32) or

section 3(33) of title I of the Employee

Retirement Income Security Act of 1974,

or a foreign person performing a similar

role or function subject as such to

comparable foreign regulation; and

(iii) A person who is a ‘‘qualified

eligible participant’’ or a ‘‘qualified

eligible client’’ as defined in § 4.7 of this

chapter.

(3) The agreement may not require the

customer to waive the right to seek

reparations under section 14 of the Act

and part 12 of this chapter. Accordingly,

the customer must be advised in writing

that he or she may seek reparations

under section 14 of the Act by an

election made within 45 days after the

Commission registrant notifies the

customer that arbitration will be

demanded under the agreement. This

notice must be given at the time when

the Commission registrant notifies the

customer of an intention to arbitrate.

The customer must also be advised that

if he or she seeks reparations under

section 14 of the Act and the

Commission declines to institute

reparation proceedings, the claim or

grievance will be subject to the preexisting arbitration agreement and must

also be advised that aspects of the claim

or grievance that are not subject to the

reparations procedure (i.e., do not

constitute a violation of the Act or rules

thereunder) may be required to be

submitted to the arbitration or other

dispute settlement procedure set forth

in the pre-existing arbitration

agreement.

(4) The agreement must advise the

customer that, at such time as he or she

may notify the Commission registrant

that he or she intends to submit a claim

to arbitration, or at such time as such

person notifies the customer of its intent

to submit a claim to arbitration, the

customer will have the opportunity to

elect a qualified forum for conducting

the proceeding.

(5) Election of forum. (i) Within ten

business days after receipt of notice

from the customer that he or she intends

to submit a claim to arbitration, or at the

time a Commission registrant notifies

the customer of its intent to submit a

claim to arbitration, the Commission

registrant must provide the customer

with a list of organizations whose

procedures meet Acceptable Practices

established by the Commission for

customer dispute resolution, together

with a copy of the rules of each forum

listed. The list must include:

(A) The contract market, recognized

futures exchange or derivatives

transaction facility, if available, upon

which the transaction giving rise to the

dispute was executed or could have

been executed;

(B) A registered futures association;

and

(C) At least one other organization

that will provide the customer with the

opportunity to select the location of the

arbitration proceeding from among

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

contract market, recognized futures

exchange or derivatives transaction

facility or employee thereof, and that are

not otherwise associated with the

contract market, recognized futures

exchange or derivatives transaction

Federal Register / Vol. 65, No. 121 / Thursday, June 22, 2000 / Proposed Rules 39027

facility (mixed panel): 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.

(ii) The customer shall, within fortyfive days after receipt of such list, notify

the opposing party of the organization

selected. A customer’s failure to provide

such notice shall give the opposing

party the right to select an organization

from the list.

(6) Fees. The agreement must

acknowledge that the Commission

registrant will pay any incremental fees

that may be assessed by a qualified

forum for provision of a mixed panel,

unless the arbitrators in a particular

proceeding determine that the customer

has acted in bad faith in initiating or

conducting that proceeding.

(7) Cautionary Language. The

agreement must include the following

language printed in large boldface type:

THREE FORUMS EXIST FOR THE

RESOLUTION OF COMMODITY

DISPUTES: CIVIL COURT

LITIGATION, REPARATIONS AT THE

COMMODITY FUTURES TRADING

COMMISSION (CFTC) AND

ARBITRATION CONDUCTED BY A

SELF-REGULATORY OR OTHER

PRIVATE ORGANIZATION.

THE CFTC RECOGNIZES THAT THE

OPPORTUNITY TO SETTLE DISPUTES

BY ARBITRATION MAY IN SOME

CASES PROVIDE MANY BENEFITS TO

CUSTOMERS, INCLUDING THE

ABILITY TO OBTAIN AN

EXPEDITIOUS AND FINAL

RESOLUTION OF DISPUTES

WITHOUT INCURRING

SUBSTANTIAL COSTS. THE CFTC

REQUIRES, HOWEVER, THAT EACH

CUSTOMER INDIVIDUALLY

EXAMINE THE RELATIVE MERITS OF

ARBITRATION AND THAT YOUR

CONSENT TO THIS ARBITRATION

AGREEMENT BE VOLUNTARY.

BY SIGNING THIS AGREEMENT,

YOU: (1) MAY BE WAIVING YOUR

RIGHT TO SUE IN A COURT OF LAW;

AND (2) ARE AGREEING TO BE

BOUND BY ARBITRATION OF ANY

CLAIMS OR COUNTERCLAIMS

WHICH YOU OR [NAME] MAY

SUBMIT TO ARBITRATION UNDER

THIS AGREEMENT. YOU ARE NOT,

HOWEVER, WAIVING YOUR RIGHT

TO ELECT INSTEAD TO PETITION

THE CFTC TO INSTITUTE

REPARATIONS PROCEEDINGS

UNDER SECTION 14 OF THE

COMMODITY EXCHANGE ACT WITH

RESPECT TO ANY DISPUTE THAT

MAY BE ARBITRATED PURSUANT

TO THIS AGREEMENT. IN THE EVENT

A DISPUTE ARISES, YOU WILL BE

NOTIFIED IF [NAME] INTENDS TO

SUBMIT THE DISPUTE TO

ARBITRATION. IF YOU BELIEVE A

VIOLATION OF THE COMMODITY

EXCHANGE ACT IS INVOLVED AND

IF YOU PREFER TO REQUEST A

SECTION 14 ‘‘REPARATIONS’’

PROCEEDING BEFORE THE CFTC,

YOU WILL HAVE 45 DAYS FROM THE

DATE OF SUCH NOTICE IN WHICH

TO MAKE THAT ELECTION.

YOU NEED NOT SIGN THIS

AGREEMENT TO OPEN OR

MAINTAIN AN ACCOUNT WITH

[NAME]. SEE 17 CFR 166.5.

(d) Enforceability. A dispute

settlement procedure may require

parties utilizing such procedure to

agree, under applicable state law,

submission agreement or otherwise, to

be bound by an award rendered in the

procedure, provided that the agreement

to submit the claim or grievance to the

procedure was made in accordance with

paragraph (c) of this section or that the

agreement to submit the claim or

grievance was made after the claim or

grievance arose. Any award so rendered

shall be enforceable in accordance with

applicable law.

(e) Time limits for submission of

claims. The dispute settlement

procedure established by a contract

market, recognized futures exchange or

derivatives transaction facility shall not

include any unreasonably short

limitation period foreclosing submission

of customers’ claims or grievances or

counterclaims.

(f) Counterclaims. A procedure

established by a contract market,

recognized futures exchanges or

derivatives transaction facility under the

Act for the settlement of customers’

claims or grievances against a member

or employee thereof may permit the

submission of a counterclaim in the

procedure by a person against whom a

claim or grievance is brought. The

contract market, recognized futures

exchanges or derivatives transaction

facility may permit such a counterclaim

where the counterclaim arises out of the

transaction or occurrence that is the

subject of the customer’s claim or

grievance and does not require for

adjudication the presence of essential

witnesses, parties or third persons over

whom the contract market, recognized

futures exchanges or derivatives

transaction facility does not have

jurisdiction. Other counterclaims are

permissible only if the customer agrees

to the submission after the counterclaim

has arisen, and if the aggregate monetary

value of the counterclaim is capable of

calculation.

Issued in Washington, DC on June 8, 2000,

by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 00–14915 Filed 6–21–00; 8:45 am]

BILLING CODE 6351–01–U

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 39

RIN 3038–AB57

A New Regulatory Framework for

Clearing Organizations

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed Rulemaking.

SUMMARY: The Commodity Futures

Trading Commission (Commission) is

proposing a new Part 39 of its rules that

would apply to clearing organizations,

as defined in the proposed rules. This

proposal, centered on broad, flexible,

core principles, is part of an initiative

described in separate companion

releases published in this edition of the

Federal Register proposing a new

regulatory framework applicable to

multilateral transaction execution

facilities and market intermediaries, in

addition to clearing organizations.

These notices propose far-reaching and

fundamental changes to modernize

Federal regulation of commodity futures

and option markets.

DATE: Comments must be received by

August 7, 2000.

ADDRESSES: Comments should be sent to

the Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW, Washington, DC

20581, attention: Office of the

Secretariat. Comments may be sent by

facsimile transmission to (202) 418–

5521 or, by e-mail to secretary@cftc.gov.

Reference should be made to ‘‘clearing

organizations reinvention.’’

FOR FURTHER INFORMATION CONTACT: Paul

M. Architzel, Chief Counsel, Division of

Economic Analysis, Alan L. Seifert,

Deputy Director, Division of Trading

and Markets, or Lois J. Gregory, Special

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW, Washington, DC

20581. Telephone (202) 418–5260 or email [PArchitzel@cftc.gov],

[ASeifert@cftc.gov], or

[LGregory@cftc.gov].

SUPPLEMENTARY INFORMATION: