[Federal Register Volume 71, Number 181 (Tuesday, September 19, 2006)]
[Proposed Rules]
[Pages 54789-54792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7739]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AC34


Financial Reporting Requirements for Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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

DATES: Comments must be received on or before October 19, 2006.

ADDRESSES: You may submit comments, identified by 3038-AC34, by any of 
the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#e695838594839287949fa685809285c8818990"><span class="__cf_email__" data-cfemail="bccfd9dfced9c8ddcec5fcdfdac8df92dbd3ca">[email protected]</span></a>. Include ``Proposed Amendments 
to Rules 1.10 and 1.31'' in the subject line of the message.
    <bullet> Fax: (202) 418-5521.
    <bullet> Mail: Send to Eileen Donovan, Acting Secretary of the 
Commission, Commodity Futures Trading Commission, 1155 21st Street, 
NW., Washington, DC 20581.
    <bullet> Courier: Same as Mail above.
    All comments received will be posted without change to http://www.cftc.gov, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and 
Chief Accountant, at (202) 418-5430 or Jennifer C.P. Bauer, Special 
Counsel, at (202) 418-5472, Division of Clearing and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: 
(<a href="/cdn-cgi/l/email-protection#ee9a9d83879a86ae8d889a8dc0898198"><span class="__cf_email__" data-cfemail="2652554b4f524e664540524508414950">[email protected]</span></a>) or (<a href="/cdn-cgi/l/email-protection#b2d8d0d3c7d7c0f2d1d4c6d19cd5ddc4"><span class="__cf_email__" data-cfemail="a3c9c1c2d6c6d1e3c0c5d7c08dc4ccd5">[email protected]</span></a>).

SUPPLEMENTARY INFORMATION:

I. Background

    Section 4f(b) of the Commodity Exchange Act (``Act'') authorizes 
the Commission to adopt regulations imposing minimum financial 
requirements on IBs.\1\ Commission Regulation 1.10(a)(2)(ii)(A) \2\ 
requires each person filing an application for registration as an IB to 
file a financial Form 1-FR-IB \3\ certified by an independent public 
accountant concurrently with the application. IBs that also are 
registered with the SEC as a B/D may file a FOCUS Report in lieu of a 
Form 1-FR-IB. The application for registration, and the certified Form 
1-FR-IB or FOCUS Report, must be filed with the National Futures 
Association (``NFA'') in paper form.\4\
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    \1\ 7 U.S.C. 6f(b).
    \2\ The regulations of the Commission cited in this release may 
be found at 17 CFR Ch. I (2006).
    \3\ The Form 1-FR-IB is a financial report that includes a 
statement of financial condition, a statement of income or loss, a 
statement of minimum net capital, and appropriate footnote 
disclosures.
    \4\ NFA is a registered futures association under Section 17 of 
the Commodity Exchange Act, 7 U.S.C. 21, and has been delegated 
responsibility for processing the Commission's registration 
function. NFA also is a self-regulatory organization, as defined in 
Regulation 1.3(ee).
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    Regulation 1.10(b)(2)(ii)(A) requires each registered IB to 
annually file a certified Form 1-FR-IB as of the close of the IB's 
fiscal year with NFA. IBs that are registered with the SEC as B/Ds may 
file an annual FOCUS Report with NFA in lieu of the Form 1-FR-IB. 
Regulation 1.10(b)(2)(iii) requires that certified Forms 1-FR-IB, or 
FOCUS Reports, must be filed in paper form with NFA and may not be 
filed electronically. Regulation 1.10(d)(4) requires that

[[Page 54790]]

Forms 1-FR-IB, or FOCUS reports filed in lieu thereof, be accompanied 
by an oath or affirmation from specified persons that the information 
in the filing is true and correct.
    The Commission previously has approved rules submitted by NFA that 
require IBs to submit uncertified Forms 1-FR-IB, or FOCUS Reports, 
electronically using the NFA EasyFile electronic filing system.\5\ NFA 
implemented electronic filing of the uncertified Form 1-FR for IBs 
beginning in 2002 by providing them with the WinJammer software 
utilized by other self-regulatory organizations and the Commission for 
the Forms 1-FR and FOCUS Reports filed electronically by futures 
commission merchants (``FCMs''). The EasyFile system was developed by 
NFA as a Web-based alternative to WinJammer using the same security 
procedure available under NFA's On-line Registration System, or ORS.\6\
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    \5\ By letter dated June 1, 2004, NFA submitted to the 
Commission for its review and approval, pursuant to Section 17(j) of 
the Act (7 U.S.C. 21(j)), amendments to Section 5 of NFA Financial 
Requirements, regarding IB financial requirements, which amendments 
were approved by the Commission on an expedited basis and were 
effective June 30, 2004.
    \6\ The firm's security manager can establish users and assign 
them abilities to enter data and/or submit the report in the NFA 
EasyFile system. This ``Security Manager'' procedure is part of 
NFA's existing electronic system for registration processing.
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    Based partly on the successful implementation of EasyFile for 
uncertified filings on Form 1-FR-IB, NFA petitioned the Commission for 
rule amendments in 2005 to enable NFA to implement mandatory electronic 
filing of commodity pool certified annual reports using the same Web-
based structure as the EasyFile system, which amendments were adopted 
by the Commission and became effective in March 2006.\7\ As a result of 
these amendments and NFA's rules, currently all certified commodity 
pool annual reports must be received by NFA in electronic files in 
Portable Document Format (``.pdf format'').
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    \7\ 71 FR 8939 (Feb. 22, 2006).
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    NFA's current petition to amend Commission regulations would permit 
NFA to expand the EasyFile electronic 1-FR-IB submissions of IBs to 
include the mandatory filing of certified Form 1-FR-IBs through an 
electronic file in the same .pdf format. However, NFA has not requested 
the amendment of regulations to require mandatory electronic filing of 
certified FOCUS Reports from IBs that are SEC registered B/Ds as NFA 
currently does not have the systems capability through WinJammer to 
accept .pdf files. However, as NFA has indicated that it will develop a 
mechanism to receive certified FOCUS Reports from IBs electronically in 
the future, the amendments proposed herein provide that such reports 
are required to be submitted in accordance with NFA rules, either 
electronically in .pdf format or in paper form.
    NFA's electronic filing system for certified financial statements 
from IBs would require the IB to submit a PDF file version of the 
entire certified statement, including the financial information, 
footnotes, auditors' statement, and any necessary reconciliation of the 
IB's certified financial statement and most recent unaudited 1-FR. 
Because the IB would have already entered the detailed figures from the 
unaudited Form 1-FR-IB into the system, the IB would not have to enter 
the figures from the certified statement unless that statement includes 
a reconciliation. If it does not include a reconciliation, the system 
would carry over the figures from the uncertified statement for NFA 
staff's use in analyzing the certified statement. When the IB submits 
the electronic filing, NFA's system prompts the submitter to read and 
to indicate agreement to an electronic oath or affirmation. The 
submitter will have already securely accessed NFA's system through the 
input of a personal identification number (PIN). This oath or 
affirmation is made with respect to the PDF file of the annual report 
and any information entered into the system from the certified 
statement, and is patterned after NFA's existing EasyFile system for 
IBs' unaudited financial reports. The IB's Security Manager can 
establish users and assign them abilities to enter data and/or submit 
the report and data in the NFA electronic filing system. However, only 
persons duly authorized to bind the IB in accordance with Rule 
1.10(d)(4) may submit the data by entering a PIN and making the 
required oath or affirmation. The IB is responsible for ensuring that 
only persons who are duly authorized to bind the IB, in accordance with 
Rule 1.10(d)(4), are granted the ability to submit the IB's financial 
information to the NFA. The electronic version of the oath or 
affirmation will appear in dialog boxes when reports or data are 
submitted, and completion of the submission will require an affirmative 
acceptance of the oath or affirmation by a user who has accessed the 
system with a secure PIN number and has been granted permission to 
submit the IB's financial information.

II. Proposed Amendments

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

[[Page 54791]]

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies, in proposing regulations, consider the impact 
of those regulations on small businesses. The Commission previously has 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its regulations on such entities 
in accordance with the RFA.\8\ The proposed rule amendments will not 
place any additional burdens upon introducing brokers that are small 
businesses since all such parties are already subject to the financial 
reporting requirements under Regulation 1.10 and already comply with 
the electronic filing of uncertified reports through NFA's electronic 
filing system. Accordingly, the Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b) that the action proposed 
to be taken herein will not have a significant economic impact on a 
substantial number of small entities. However, the Commission invites 
the public to comment on this finding.
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    \8\ 47 FR 18618 (April 30, 1982).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \9\ imposes certain 
requirements on federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. The proposed rule amendments do not 
require a new collection of information on the part of any entities 
subject to the proposed rule amendments. The amendments being proposed 
would, if promulgated in final form, alter the method of collection of 
some of the information required for certain introducing brokers under 
Regulation 1.10.
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    \9\ 44 U.S.C. 3507(d).
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    Collection Of Information. (Regulations and Forms Pertaining to the 
Financial Integrity of the Marketplace, OMB Control Number 3038-0024.) 
Although the amendments, if promulgated in final form, would alter the 
method of collection of some of the information required in the above-
referenced collection, the estimated burden associated with the 
collection is not expected to increase or decrease as a result. All 
such affected entities already must comply with and use NFA's 
electronic filing system, and the amendment would simply substitute 
electronic submission for the mailing of a paper filing. The paper 
filing would thereafter be required to be retained, but the retention 
of one certified financial report per year is not expected to increase 
the estimated recordkeeping burden under the collection. Accordingly, 
for purposes of the PRA, the Commission certifies that the proposed 
rule amendments, if promulgated in final form, would not impact the 
total annual reporting or recordkeeping burden associated with the 
above-referenced collection of information, which has been approved 
previously by OMB. Pursuant to the PRA, the Commission has submitted a 
copy of this section to the Office of Management and Budget (``OMB'') 
for its review.
    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. 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 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 
submission of responses.
    Organizations and individuals desiring to submit comments on the 
information collection should contact the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Room 10235, New 
Executive Office Building, Washington, DC 20503, Attn: Desk Officer of 
the Commodity Futures Commission. 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.

C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by Section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new Regulation under the Act. By its terms, 
Section 15(a) as amended does not require the Commission to quantify 
the costs and benefits of a new Regulation or to determine whether the 
benefits of the Regulation outweigh its costs. Rather, Section 15(a) 
simply requires the Commission to ``consider the costs and benefits'' 
of its action.
    Section 15(a) of the Act further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: Protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular regulation was necessary or appropriate to protect the 
public interest or to effectuate any of the provisions or to accomplish 
any of the purposes of the Act.
    The proposed amendments to Regulation 1.10 and 1.31 would require 
IBs to electronically file certified Form 1-FR with NFA and would 
required IBs which file FOCUS Reports in lieu of Form 1-FR to file in 
paper form or electronically in accordance with the instruction of NFA, 
with any electronically filed certified reports required to be 
maintained by the IB in hard copy paper form with the original manually 
signed certification.
    The Commission is considering the costs and benefits of this 
proposed regulation in light of the specific provisions of Section 
15(a) of the Act, as follows:
    1. Protection of market participants and the public. The proposed 
amendment should not affect the protection of market participants and 
the public as it provides an alternate method of delivery of 
information contained in certified annual reports of IBs but does not 
substantively alter the character of such information available to the 
Commission and NFA.
    2. Efficiency and competition. The Commission anticipates that the 
proposed amendment will benefit efficiency by permitting NFA to 
streamline its process for receiving certified financial reports from 
IBs. The proposed amendment is considered by

[[Page 54792]]

the Commission as benefiting efficiency and not impacting competition.
    3. Financial integrity of futures markets and price discovery. The 
proposed amendment should have no effect, from the standpoint of 
imposing costs or creating benefits, on the financial integrity of 
futures markets or the price discovery function of such markets.
    4. Sound risk management practices. The proposed amendment should 
have no effect, from the standpoint of imposing costs or creating 
benefits, on sound risk management practices.
    5. Other public interest considerations. The Commission believes 
that the proposed regulation requiring electronic filing for the 
submission by IBs of certified Forms 1-FR, and the requirement that IBs 
filing certified FOCUS Reports comply with NFA instructions as to 
filing in paper form or electronically, is beneficial in that it should 
streamline the timeliness of delivery and electronic accessibility of 
such reports, and permit NFA to retain such reports in a more 
streamlined and accessible manner.
    After considering these factors, the Commission has determined to 
propose the amendments discussed above. The Commission invites public 
comment on its application of the cost-benefit provision. Commenters 
also are invited to submit any data that they may have quantifying the 
costs and benefits of the proposal with their comment letters.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

    Accordingly, 17 CFR part 1 is proposed to be amended 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, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a[dash]1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).

    2. Section 1.10 is proposed to be amended by:
    a. Revising paragraph (b)(2)(iii);
    b. Revising paragraph (d)(4)(ii);
    c. Adding paragraph (d)(4)(iii); and
    d. Revising paragraph (h), to read as follows:


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

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


Sec.  1.31  Books and records; keeping and inspection.

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

    Issued in Washington, DC, on September 13, 2006 by the 
Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. 06-7739 Filed 9-18-06; 8:45 am]
BILLING CODE 6351-01-P


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