Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations 4633

1 61 FR 7080 (Feb. 26, 1996).

2See 61 FR 19177 (May 1, 1996).

Wentzville, Missouri, extending upward

from 700 feet above the surface. The

cancellation of this SIAP on April 23,

1996, at Wentzville Airport has made

this proposal necessary.

The FAA has determined that this

regulation only involves an established

body of technical regulations for which

frequent and routine amendments are

necessary to keep them operationally

current. It, therefore, (1) is not a

‘‘significant regulatory action’’ under

Executive Order 12886; (2) is not a

‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

CFR 11034: February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this rule, when

promulgated, will not have a significant

economic impact on a substantial

number of small entities under the

criteria of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

Adoption of the Amendment

PART 71—[AMENDED]

1. The authority citation for part 71

continues to read:

Authority: 49 U.S.C. 106(g); 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR 1959–

1963 Comp., p. 389; 14 CFR 11.69.

§ 71.1 [Amended]

2. The incorporation be reference in

14 CFR 71.1 of Federal Aviation

Administration Order 7400.9D, Airspace

Designations and Reporting Points,

dated September 4, 1996, and effective

September 16, 1996, is amended as

follows:

Paragraph 6005 Class E areas extending

upward from 700 feet or more above the

surface of the Earth.

* * * * *

ACE MO E5 Wentzville, MO [Removed]

* * * * *

Issued in Kansas City, MO, on January 13,

1997.

Herman J. Lyons, Jr.,

Manager, Air Traffic Division Central Region.

[FR Doc. 97–2421 Filed 1–30–97; 8:45 am]

BILLING CODE 4910–13–M

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Parts 1, 3, 145 and 147

Financial Reporting and Debt-Equity

Ratio Requirements for Futures

Commission Merchants and

Introducing Brokers

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final rules.

SUMMARY: The Commodity Futures

Trading Commission (Commission or

CFTC) is amending several provisions of

its Rule 1.10 which governs financial

reporting requirements for futures

commission merchants (FCMs) and

introducing brokers (IBs). The

amendments require that financial

reports which need not be certified by

an independent public accountant be

filed within 17 business days of the end

of the reporting period (generally the

end of a month, a quarter or a six-month

period), rather than within 45 calendar

days as previously required. The

amendments provide a phase-in period

such that registrants have 30 calendar

days from the end of the reporting

period within which to file their

financial reports for reporting periods

ending on or between June 30, 1997 and

December 31, 1997. Certified financial

reports will continue to be required to

be filed within 90 calendar days of the

fiscal year end, rather than 60 days as

proposed, except that firms which are

also registered as securities brokerdealers will be required to file their

certified year end reports with the

Commission at the same time they are

required to file with the Securities and

Exchange Commission (SEC), which is

60 days after the year end. Further, all

registrants will now be required to file

an uncertified financial report with the

Commission for the final quarter (or

semiannual period in the case of IBs) of

each fiscal year within 17 business days

(or 30 calendar days during the phasein period) from the end of the quarter or

semiannual period, as discussed above.

Monthly capital computations required

under Rule 1.18(b) also will be required

to be available for inspection within 17

business days from month end, rather

than 10 business days as proposed, with

an initial phase-in period that will allow

firms to continue to prepare the

computations within 30 calendar days,

as currently required. In addition, the

Commission is deleting the provision

which permits a self-regulatory

organization (SRO) to allow its member

FCMs to file financial reports on a

semiannual rather than a quarterly

basis. Further, the Commission is

amending the debt-equity ratio rule

such that the 30 percent minimum

equity requirement would apply to all of

a firm’s capital, rather than only to that

portion of a firm’s capital necessary to

meet the minimum financial

requirement.

EFFECTIVE DATE: June 30, 1997.

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, 1155 21st Street N.W.,

Washington, DC 20581. Telephone:

(202) 418–5439.

SUPPLEMENTARY INFORMATION:

I. Financial Reporting Requirements for

FCMs and IBs

A. Background

On February 26, 1996, the

Commission published for comment

proposed amendments to several of its

financial reporting requirements for

FCMs and IBs set forth in Commission

Rule 1.10 and to the Commission’s debtequity ratio requirement set forth in

Rule 1.17(d) (the ‘‘Proposals’’).1 These

proposed rule amendments were

intended to conform the Commission’s

rules with those of the SEC as part of the

Commission’s ongoing efforts to

harmonize its rules with those of the

SEC to the extent practicable. These

amendments are part of a series of

rulemaking proceedings related to the

discussions at the Commission’s

roundtable on capital issues held in

September 1995.2 At that roundtable,

the general consensus among the

industry and academic experts present

was that the Commission should

conform its rules concerning the

financial reporting cycle and debtequity ratio requirements with those of

the SEC.

The Proposals were: (1) To reduce the

current time periods (a) for filing

uncertified financial reports from 45 (or

30, for FCMs subject to monthly

reporting under ‘‘early warning’’

requirements) calendar days to 17

business days, (b) for filing certified

financial reports from 90 to 60 calendar

days, and (c) for preparing monthly

capital computations from 30 calendar

to 10 business days; (2) to delete the

provisions which (a) permit an SRO to

allow member FCMs to file financial

reports semiannually rather than

quarterly, (b) require a guaranteed IB

(IBG) to file a copy of a guarantee

agreement with the Commission, and (c)
4634 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations

3See proposed amendments to Commission Rules

1.10(b)(1) (i) and (ii), 61 FR 7080, 7085–86.

permit an IB which is also a country

elevator to use a compilation report

prepared in accordance with

requirements of the U.S. Department of

Agriculture in lieu of Form 1–FR–IB;

and (3) to amend the debt-equity ratio

rule to apply the 30 percent minimum

equity requirement to all of a firm’s

capital.

The 30 day public comment period on

the Proposals expired on March 27,

1996. The Commission received 22

written comments on the Proposals,

including 12 from FCMs, three from

contract markets, three from trade

associations, three from accounting

firms, and one from a bank that has a

subsidiary registered as an independent

IB (IBI). In general, most commenters

voiced concerns about the impact of

reduced time periods within which to

file financial reports on the business

operations of firms and on the accuracy

of the reports prepared. A number of the

commenters proposed alternative filing

periods to those contained in the

Proposals. These comments and

alternatives are discussed more fully

below.

The Commission has considered

carefully the comments received. The

Commission has determined generally

to adopt as proposed the amendments

which require those financial reports

which need not be certified by an

independent public accountant to be

filed within 17 business days of the end

of the reporting period, rather than

within 45 calendar days as currently

required. As the Commission realizes

that certain firms may require a period

of time to prepare for the change in

reporting deadline, the final rules do not

become effective until June 30, 1997 and

thereafter are phased in over a sixmonth period. This phase-in period

provides that for reporting periods

ending on or between June 30, 1997 and

December 31, 1997, financial reports

which are not required to be certified

must be filed within 30 calendar days of

the end of the reporting period.

With respect to those financial reports

which must be certified by an

independent public accountant, the

Commission has determined, based

upon a review of the comments, not to

adopt at this time the provision of the

Proposals that would have reduced from

90 calendar days to 60 calendar days the

time period within which registrants

must file their fiscal year end financial

reports. Instead, the Commission has

determined to require registrants to file

an uncertified financial report for the

final quarter (or semiannual period, in

the case of IBIs) of the fiscal year within

17 business days (or 30 calendar days

for fiscal years ending on or between

June 30, 1997 and December 31, 1997)

and continue to allow 90 days within

which registrants may file their annual

certified reports. If material differences

exist between the capital computation

and the segregation and secured amount

schedules contained in the certified

report and the uncertified fourth quarter

(or, for IBIs, the second semiannual)

report, the certified report must include

a reconciliation with appropriate

explanations. If no such material

differences exist, there must be a

statement so indicating. Further, the

Commission will require firms that are

also registered with the SEC and thereby

required to file certified financial

reports within 60 days of the fiscal year

end to file copies of such reports

simultaneously with the Commission.

The Commission also has determined,

based upon a review of the comments

and its own reconsideration of the issue,

to modify its proposed amendment to

Rule 1.18(b) concerning the completion

of monthly capital computations, such

that monthly capital computations will

be required to be completed and

available for inspection within 17

business days from month end rather

than within 10 business days as

proposed or within 30 calendar days as

required currently. In so doing, the

Commission reminds registrants that the

Commission interprets Rule 1.17(a)(4) to

require FCMs and IBIs to have a system

in place to determine whether they are

in capital compliance at all times and to

be able on demand of the Commission

or an SRO to prepare a pro forma

calculation subject to the Commission’s

or SRO’s discretion to permit up to 10

days to complete the same. The

Commission will provide, similar to

what is provided for uncertified

financial reports discussed above, a

phase-in period during which 30

calendar days will continue to be

allowed for preparation of the monthly

computation. Further, the Commission

has determined to adopt its proposal to

delete the provision which permits an

SRO to allow its member FCMs to file

financial reports on a semiannual rather

than a quarterly basis. Finally, the

Commission has determined to adopt as

proposed the amendment to Rule

1.17(d), the Commission’s debt-equity

ratio rule, such that the 30 percent

minimum equity requirement will apply

to all of a firm’s capital rather than only

to that portion of a firm’s capital

necessary to meet the minimum

financial requirement.

B. Rule Amendments

1. Financial Reporting Cycle

The Commission proposed to amend

its financial reporting requirements for

FCMs and IBIs such that interim

unaudited financial reports would be

due within 17 business days, rather than

the current 45 calendar days, of the ‘‘as

of’’ date, and the certified financial

report as of the fiscal year end would be

due within 60, rather than 90, calendar

days of the fiscal year end.3 Sixteen of

the commenters addressed the issues

concerning a shortening of the filing

period for uncertified reports while

eighteen addressed the issues

concerning a shortening of the filing

period for certified reports. Two

commenters addressed all of the

proposed changes generally. One

commenter, a bank with an IBI

subsidiary, supported all of the

Commission’s amendments stating,

among other things, that financial

reporting should be accelerated so as to

prevent the reporting of stale data and

that conforming Commission

regulations with those of the SEC would

ease the regulatory expense and burden

of compliance. The remaining

commenters, however, were concerned

generally about the effect that

shortening the filing deadlines would

have upon firm resources and the

accuracy of financial reports.

As noted above, participants in the

September 1995 roundtable on capital,

including representatives from the

industry SROs, urged the Commission

to adopt the rule changes embodied in

the Proposals.

a. Uncertified Reports. With respect to

uncertified filings, ten commenters cited

an increase in hardship as a result of

necessary workload reallocations and an

increase in expense due to the potential

need for hiring additional staff as

reasons for not changing the filing

deadline. Four commenters stated that

Commission Rule 1.12(g), which

requires notification by an FCM within

two business days of a twenty percent

or greater reduction in the firm’s net

capital compared to that last reported in

a financial report filed with the

Commission, provides adequate timely

information of an FCM’s financial

difficulty. Additionally, ten

commenters, including the three

contract markets, two trade associations

and five FCMs, suggested that a 30

calendar day filing deadline would be

more reasonable.

Although the Commission realizes

that a shortening of the time period in
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations 4635

4As of November 30, 1996, almost one-half of

FCMs (115 out of 240) and more than one-third of

IBIs (141 out of 376) were dually registered with the

SEC.

5See 61 FR 7080, 7081 n.6.

6See 61 FR 7080, 7081–82.

7This amendment is adopted as part of Rule

1.12(b)(4). In the Proposals, this amendment was

proposed as an amendment to Rule 1.12(b)(3) but

when the Commission amended Rule 1.12 in May

1996, it redesignated Rule 1.12(b)(3) as Rule

1.12(b)(4). See 61 FR 7080, 7081 n.8; 61 FR 19177,

19185.

8See 61 FR 7080, 7083.

9Both the Chicago Mercantile Exchange (CME)

and Chicago Board of Trade (CBT) require the filing

of an uncertified financial report for the fourth

quarter in addition to the certified financial report

as of the fiscal year end. More than 40 percent of

FCMs are members of either CME or CBT.

which to file uncertified financial

reports may require a period of

adjustment for some firms, the

Commission believes that this

additional burden is warranted when

weighed in the balance with the need to

obtain financial information in a timely

manner. Indeed, exchange traded

derivatives positions change frequently;

hence, the more current relevant

financial information is the more useful

it is in appropriately monitoring

financial integrity on an ongoing basis.

It would therefore be anomalous for

FCMs to have longer reporting

timeframes than securities brokerdealers. As a change to a 17 business

day filing period will conform the

Commission’s rules with those of the

SEC in this area, no additional burden

should be created for the large number

of firms that are dually registered with

the Commission and the SEC.4

Under these final rules, interim

uncertified financial reports will be due

within 17 business days (about 24

calendar days) of the end of the

reporting period. However, in light of

the potential adjustment necessary for

some firms to come into full compliance

with this rule change, the rules provide

a phase-in period, whereby firms will

have 30 calendar days from the end of

the reporting period in which to file

their interim reports for reporting

periods ending on or between June 30,

1997 and December 31, 1997, the first

six months during which the

amendments are effective. Two trade

associations commented that should the

Commission and the SEC replace

Commission Form 1–FR and the SEC

Financial and Operational Combined

Uniform Single (FOCUS) Report with a

single financial reporting form that

would be adopted by both agencies, any

greater detail that might be required in

such a form might make a 17 business

day filing deadline difficult to comply

with. In this regard, the Commission

notes that if such a combined form were

to require statements and schedules in

addition to those currently required, the

agencies intend to revisit the filing

timetables at least with respect to the

additional schedules but would

continue to pursue harmonization of

filing deadlines to the extent

practicable.5

Similarly, as proposed, the

Commission will require that FCMs

subject to the ‘‘early warning’’

requirement 6 of monthly financial

reports, which are now due within 30

calendar days of the month end, file

such reports within 17 business days of

the month end. This requirement is also

being phased in so that for months

ending on or between June 30, 1997 and

December 31, 1997, the filing

requirement will be 30 calendar days as

at present.7 One trade association

commenter objected to this proposed

amendment. However, the Commission

believes that FCMs subject to the early

warning requirements—that is, FCMs

with adjusted net capital of less than

150 percent of the minimum

requirement—should not have a longer

period within which to file uncertified

financial reports than is provided

generally.8 This is because such firms

are intended to be subject to increased

regulatory and self-regulatory scrutiny.

The only amendments with respect to

filing uncertified financial reports that

are not being phased in concern the

uncertified financial report which a new

applicant, or an IBG seeking to become

an IBI, can file if it also submits a

certified financial report that is no more

than one year old. An uncertified report

accompanying a certified report which

is less than one year old in such

circumstances must be filed within 17

business days of the ‘‘as of’’ date, rather

than the current 45 calendar days. See

amendments to Rules 1.10 (a)(2)(i)(B),

(a)(2)(ii)(B), (j)(8)(i)(B) and (j)(8)(ii)(B).

These are alternative filings made at the

firm’s option in lieu of filing only a

recent certified financial report. Thus,

the firm has some choice as to the

timing of the uncertified financial

statement in this context. Moreover, this

option is likely to be used by a firm

already making regulatory filings which

require annual certified financial

statements, such as a securities brokerdealer. None of the commenters

specifically addressed this aspect of the

Proposals. The Commission has

therefore determined to adopt the

amendments to Rules 1.10 (a)(2)(i)(B),

(a)(2)(ii)(B), (j)(8)(i)(B) and (j)(8)(ii)(B) as

proposed.

b. Certified Reports. With respect to

the Commission’s proposed rule

amendment to shorten the time period

for filing annual certified financial

reports, commenters voiced similar

concerns to those raised concerning

shortening the time period for filing

uncertified interim reports. Specifically,

six commenters stated that firm

resources would have to be shifted to

meet new deadlines and small firms

would not have sufficient staff to meet

these new demands. Eight commenters,

including the three contract market

commenters and two trade associations,

noted that adopting the proposal would

cause audit expenses to increase as a

result of a greater demand for

accounting services during peak periods

and the need for additional in-house

staff. As an alternative to the

Commission’s proposal, two contract

markets and an FCM suggested that the

Commission could meet its objective of

obtaining more timely financial

information by requiring firms to file an

unaudited financial statement within 30

or 45 days of the fiscal year end

followed by filing the certified report

within 90 days.9 One of the contract

markets and the FCM suggested that

firms provide a reconciliation between

their certified and uncertified reports.

Two additional commenters suggested

that if the Proposal is adopted, the

Commission should permit an

automatic 30 day extension upon a

request which includes an unaudited

fourth quarter financial report and an

auditor’s statement that based upon the

part of the audit completed to date,

there are no known material

inadequacies in the firm’s accounting

system or internal controls or failures to

comply with the Commission’s

minimum capital or segregation

requirements.

Based upon the Commission’s review

of the comments received and

reconsideration of this aspect of the

Proposals, the Commission has

determined to leave unchanged the time

period within which FCMs and IBIs

must file their annual certified financial

reports. Thus, FCMs and IBIs continue

to have 90 calendar days within which

to file their annual certified financial

statements, except for those firms

already filing certified financial reports

with the SEC within 60 calendar days

because they are securities brokerdealers. Such firms will be required,

pursuant to provisos added to

paragraphs (b)(1)(ii) and (b)(2)(ii)(A) of

Rule 1.10, to file copies of such certified

reports with the Commission at the

same time the reports are filed with the

SEC. The Commission does not believe

this will create any added burden for

such firms since they have been filing

certified reports with the SEC on the
4636 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations

10The redesignated paragraph requires that a

certified financial report include ‘‘[i]n addition to

the information expressly required, such further

material information as may be necessary to make

the required statements not misleading.’’

11See 17 CFR 240.17a–5(d)(4) (1996).

12The Commission has confirmed this to be the

case.

13 61 FR 7080, 7081 & n.3.

14The geographic coverage of jurisdiction of the

Commission’s regional offices is set forth in 17 CFR

140.2 (1996).

15The Commission has separately proposed

further amendment of Rule 1.10(c) as part of rule

amendments concerning electronic filing of

financial reports and attestation requirements

related thereto. 61 FR 55235 (Oct. 25, 1996).

shorter timeframe. Further, paragraphs

(b)(1)(i) and (b)(2)(i) of Rule 1.10 have

been amended to make clear that each

FCM must file an uncertified report

covering the firm’s fourth quarter within

17 business days of the end of the

quarter and each IBI must file an

uncertified report covering the firm’s

second semiannual period within 17

business days of the end of the period,

respectively. The Commission has also

redesignated paragraph (d)(2)(vi) of Rule

1.10 as paragraph (d)(2)(vii) 10 and

added a new paragraph (d)(2)(vi) to

require that the year end certified

financial report, as suggested by certain

commenters as noted above, contain a

reconciliation between that report and

the fourth quarter (or, in the case of IBIs,

second semiannual) uncertified report if

material differences exist in the net

capital computation, segregation

schedules or secured amount schedules.

The reconciliation must include

appropriate explanations. If there are no

material differences between the

reports, there must be a statement so

indicating in the certified report. This is

consistent with SEC rules.11 In

conformity with the Commission’s

amendments with respect to other

uncertified filings, Rules 1.10 (b)(1)(i)

and (b)(2)(i) provide a phase-in period

such that for quarters (with respect to

FCMs) or semiannual periods (with

respect to IBIs) ending on or between

June 30, 1997 and December 31, 1997,

firms have 30 calendar days from the

end of the quarter or semiannual period

within which to file their uncertified

reports.

2. Monthly Computation

The monthly computation of adjusted

net capital and minimum financial

requirement which FCMs and IBIs must

prepare in accordance with Commission

Rule 1.18 is currently required to be

made available for inspection within 30

days. The Commission proposed to

shorten this time period to 10 business

days since these computations do not

involve the preparation of all of the

statements and schedules included in a

Form 1–FR–FCM or a Form 1–FR–IB.

The Commission also noted in its

proposal that this shorter time period

would conform the requirement

pertaining to monthly capital

computations to the SEC’s requirement

for filing Part I of the FOCUS Report.

The Commission received fourteen

comment letters concerning the

proposed amendment of Rule 1.18. All

of these commenters stated that 10

business days is too short a period of

time in which to prepare the monthly

computation. Five commenters noted

that a formal capital computation

requires the same review and

reconciliation process that is needed to

prepare a financial report and, therefore,

the time period for completing such a

computation should not be any shorter

than that provided for filing a financial

report. Additionally, two contract

markets, two trade associations and an

FCM stated that securities brokerdealers who file Part I of FOCUS are

often provided an extension of time

through their respective designated

examining authority,12 such that the

filing of their monthly capital

computations is generally due within 17

business days from month end. In

consideration of these comments, Rule

1.18(b) as adopted provides that firms

must complete and make available for

inspection formal computations of their

adjusted net capital and minimum

financial requirements within 17

business days from month end. As is

true with respect to the Commission’s

other amendments discussed above,

amended Rule 1.18(b) contains a phasein period, such that firms continue to

have 30 calendar days from month end

in which to complete their monthly

computations for all months ending on

or before December 31, 1997.

The Commission also notes that an

FCM or IB must maintain compliance

with the Commission’s minimum

financial requirements at all times.

Thus, although Rule 1.18(b) provides 17

business days for an FCM or IBI to

complete a formal capital computation,

a firm must nonetheless be able to

demonstrate its compliance with the

Commission’s minimum capital

requirement prior to this deadline if

requested by the Commission.13 The

Commission encourages the SROs to use

monthly calculations in their financial

monitoring systems and notes that the

CME, CBT and the New York Stock

Exchange, Inc. now require clearing

member firms to file as well as to

calculate capital monthly.

3. Other Amendments

The Commission further proposed to

delete that portion of Rule 1.52(a) which

permits an SRO to allow its member

FCMs to file financial reports

semiannually rather than quarterly. In

the Proposals, the Commission stated

that it believes this rule amendment is

consistent with the concept that the

existing reporting timeframe should be

accelerated so that the financial data

reported and used by regulators for

monitoring purposes is reasonably

current. Additionally, the Commission

noted that relatively few firms (less than

ten percent of FCMs, approximately 20

in all) are now filing only semiannually,

so the rule amendment would not cause

undue hardship for a substantial

number of FCMs. All six of the

commenters who addressed this aspect

of the Proposals supported this rule

amendment and the Commission is

adopting it as proposed.

The Commission also proposed two

other minor amendments to the

financial reporting requirements in Rule

1.10, both of which pertain to IBs.

Currently, an applicant for registration

as an IB that intends to operate pursuant

to a guarantee agreement with an FCM

must file a copy of the guarantee

agreement with the regional office of the

Commission nearest the principal place

of business of the applicant (except that

an applicant under the jurisdiction of

the Commission’s Western Regional

Office in Los Angeles must file a copy

with the Commission’s Southwestern

Regional Office in Kansas City).14 This

requirement is in addition to the

requirement to file the original of the

guarantee agreement with the

registration application submitted to

National Futures Association (NFA).

The Commission proposed to amend

Rule 1.10(c) to eliminate the

requirement that a copy of a guarantee

agreement be filed with a Commission

regional office. An IB’s status as an IBG

can be readily discerned by Commission

staff from contacting NFA’s Information

Center or by accessing the registration

database. An IBG has no ongoing

financial reporting requirements, so the

Commission believes that no purpose is

served by continuing to maintain copies

of guarantee agreements in its regional

offices. The Commission further

believes that this amendment to Rule

1.10(c) will ease filing burdens on IB

applicants and record maintenance

burdens on the Commission’s staff. The

Commission received no comments

specifically addressing this issue and

has determined to adopt the amendment

to Rule 1.10(c) as proposed.15

In addition, the Commission proposed

to amend the financial reporting
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations 4637

16 48 FR 35248, 35263, 35282 (Aug. 3, 1983).

17See deletions of Rules 1.10(g)(3),

145.5(d)(1)(i)(G) and 147.3(b)(4)(i)(A)(7) as well as

amendments to Rules 1.10(g)(5), 1.18(a) and (b), and

3.33(c)(1).

18 In addition to certain subordinated debt as

described more fully below, equity capital includes

the following:

(1) In the case of a corporation, the sum of its par

or stated value of capital stock, paid in capital in

excess of par, retained earnings, unrealized profit

and loss, and other capital accounts;

(2) In the case of a partnership, the sum of its

capital accounts of partners (inclusive of such

partners’ commodity interest and securities

accounts subject to the provisions of Rule 1.17(e)

concerning restrictions on withdrawals of equity

capital), and unrealized profit and loss; and

(3) In the case of a sole proprietorship, the sum

of its capital accounts and unrealized profit and

loss.

‘‘Debt-equity total’’ means equity capital as

described above plus the outstanding principal

amount of subordinated debt which does not

qualify as equity capital. The ‘‘required debt-equity

total’’ means debt-equity total less the amount by

which a firm’s adjusted net capital exceeds the

minimum required. 17 CFR 1.17(d)(1996).

19 17 CFR 1.17(h) (1996), as amended by 61 FR

19177, 19186–87 (May 1, 1996).

20 42 FR 27166, 27177 (May 26, 1977).

21 43 FR 39956, 39965, 39976 (Sept. 8, 1978).

22This is the recommendation of Working Party

No. 3 of the Technical Committee of the

International Organization of Securities

Commissions (IOSCO). See Report of the Technical

Committee of IOSCO, ‘‘Capital Requirements for

Multinational Securities Firms,’’ XV Annual

Conference of IOSCO, Santiago, Chile 1990.

23 61 FR 7080, 7083–84, 7086.

24The Commission also noted that the SEC

definition of equity capital does not include, in the

case of a partnership, partners’ securities accounts.

See 17 CFR 240.15c3–1(d)(1996).

25Subordinated debt entered into today with a

maturity date of December 31, 2000 could,

therefore, qualify as equity capital if all other

requirements were met. On January 1, 2000,

however, such subordinated debt would no longer

be counted as equity capital unless an extension of

the maturity date had been agreed to by the parties,

since the remaining term of the debt would be less

than one year at that time.

requirements to eliminate Rule 1.10(i).

Rule 1.10(i) provides that an IBI or an

applicant which is also a country

elevator can satisfy its financial

reporting obligation by filing, in lieu of

filing a Form 1–FR–IB, a copy of a

compilation report of financial

statements of warehousemen for

purposes of Uniform Grain Storage

Agreements, prepared in accordance

with requirements of the U.S.

Department of Agriculture. This

alternative filing provision was adopted

when the Commission first adopted

rules to govern IBs in 1983 16 and has

never been utilized. No comments

specifically addressed this issue. The

Commission believes that it is

appropriate to delete this provision as a

means of streamlining and simplifying

Rule 1.10. References to Rule 1.10(i) in

other Commission rules have likewise

been eliminated.17

II. Amendments to Debt-Equity Ratio

Requirements

Commission Rule 1.17(d) sets forth

the debt-equity ratio requirement, which

states that at least 30 percent of an

FCM’s or IBI’s required debt-equity total

must consist of equity capital.18 Thus, if

an FCM’s required debt-equity total

amount is $1 million, it must maintain

equity capital as defined in the

Commission’s rules of $300,000. No

matter how much adjusted net capital is

actually maintained by an FCM or IBI,

the thirty percent equity requirement

currently applies only to the amount of

required debt-equity total. Accordingly,

if an FCM has a $1 million adjusted net

capital requirement and actually

maintains $5 million in adjusted net

capital (i.e., it has $4 million in

‘‘excess’’ adjusted net capital), the entire

$4 million amount above the minimum

requirement could consist of debt

subject to satisfactory subordination

agreements in accordance with

Commission Rule 1.17(h).19

When the Commission originally

proposed what is now Rule 1.17(d) in

1977, the debt-equity ratio requirement

was patterned upon the SEC rule and

would have applied to a firm’s debtequity total.20 However, in response to

comments that ‘‘it would be

inappropriate to penalize a firm that

maintains capital in the form of

satisfactory subordination agreements,

which is in excess of the minimum

required by the regulations,’’ the

Commission revised its proposal. As

adopted in 1978, Rule 1.17(d) provides

that the required debt-equity total to

which the 30 percent equity capital

requirement applies means a firm’s

debt-equity total less its excess adjusted

net capital.21

Several of the panelists at the capital

roundtable on September 18, 1995 urged

the Commission to pursue greater

harmonization between CFTC and SEC

financial rules and related reporting

requirements and the debt-equity ratio

requirement was one area referred to in

this regard. The Commission also notes

that the general international standard is

to apply the debt-equity ratio

requirement to all of a firm’s capital.22

The Commission believes that it is

important for its rules to conform to

international standards with respect to

the quality of capital.

Accordingly, in light of these

developments and its own

reconsideration of the issue, the

Commission determined to propose an

amendment to Rule 1.17(d) to require

that the 30 percent debt-equity ratio

requirement apply to an FCM’s or IBI’s

debt-equity total.23 In making this

proposal, the Commission noted that a

large proportion of FCMs and IBIs are

also securities brokers or dealers and

thus already subject to the SEC rule

concerning the debt-equity ratio.24

The Commission further noted that

Rule 1.17(d)(1) provides that certain

subordinated debt may qualify as equity

capital if specified conditions are met,

in addition to those which apply to

subordinated debt in general. These

additional conditions are: (1) The lender

must be a partner or stockholder of the

FCM or IBI; (2) the initial term of the

debt must be at least three years, and

there must be a remaining term of not

less than twelve months; 25 (3) the

governing subordination agreement does

not contain most of the otherwise

permissible provisions relating to

accelerated maturity; (4) the governing

subordination agreement allows no

special prepayment of the debt (i.e.,

prepayment before one year from the

date such subordination agreement

becomes effective); and (5) the debt in

question is maintained as equity capital

subject to the provisions on withdrawal

of equity capital contained in

Commission Rule 1.17(e). If a firm is

organized as a partnership, however,

additional conditions (3) and (4) need

not be met for subordinated debt to

qualify as equity capital, if the

partnership agreement provides that the

capital contributed pursuant to a

satisfactory subordination agreement as

defined in Commission Rule 1.17(h)

shall in all respects be partnership

capital subject to the provisions

restricting the withdrawal thereof set

forth in Commission Rule 1.17(e).

Eight commenters addressed this

aspect of the Commission’s Proposals

and all of them supported the

amendment to Rule 1.17(d) to require

application of the 30 percent debtequity ratio requirement to a firm’s debtequity total. Based upon these

comments and the Commission’s further

consideration of this issue, the

amendment to Rule 1.17(d) is being

adopted as proposed.

The Commission also addressed

another issue in connection with the

debt-equity ratio requirement in the

Proposals, in response to a letter

submitted by the CME on behalf of the

Intermarket Financial Surveillance

Group, an organization composed of

representatives of U.S. commodity and

securities organizations. The CME letter,

addressed to the Commission’s Division

of Trading and Markets and dated

October 31, 1995, supported the goal of

conforming the rules of the Commission

and the SEC concerning the debt-equity
4638 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations

26CME stated in its letters that it was making this

request because, by definition, goodwill is an

intangible asset acquired in a business combination

which represents the excess ‘‘going concern’’ value

over the fair value of a firm’s net assets, it lacks

separability from the firm itself, and its value is

often indefinite, indeterminate and subject to wide

fluctuation.

27NYMEX stated that such an amendment should

only be adopted in conjunction with a similar

amendment to the SEC’s rule to assure consistent

treatment.

28 61 FR 7080, 7084.

29These amendments covered (1) early warning

reporting, (2) required minimum dollar amount of

capital, (3) prepayment of subordinated debt, (4)

gross collection of exchange-set margin for omnibus

accounts, and (5) the capital charge on receivables

from foreign brokers. 61 FR 19177.

30See 47 FR 18618, 18619 (Apr. 30, 1982). 31See 48 FR 35248, 35275–78 (Aug. 3, 1983).

ratio requirement. CME also requested

in that letter, and in a similar letter of

the same date to the SEC’s Division of

Market Regulation, that the financial

rules of each agency be amended such

that goodwill net of amortization could

be subtracted from the denominator

when a firm calculates its debt-equity

ratio.26 Since the SEC had not yet made

such a change in its rule and since the

Commission’s intention in making its

February 1996 proposal was to conform

its rule to that of the SEC concerning the

debt-equity ratio requirement, the

Commission did not propose to

incorporate the CME’s request in the

proposed amendment to Rule 1.17(d).

However, the Commission specifically

requested comment upon the CME’s

suggestion and whether the Commission

should adopt such a rule amendment in

conjunction with or irrespective of

action taken by the SEC. The

Commission also noted that its staff

would discuss this matter with staff of

the SEC.

In addition to the CME, two other

futures exchanges, the CBT and the New

York Mercantile Exchange (NYMEX),

and an FCM supported elimination of

goodwill from the debt-equity

calculation.27 However, the Securities

Industry Association (SIA), the trade

association for securities firms,

commented that it is not appropriate for

the Commission to subtract goodwill

from the debt-equity calculation because

the number of firms reporting goodwill

as an asset is insignificant and to do so

would create disparity with the SEC.

The Commission had noted, when it

issued the Proposals, that information

provided by CME based upon studies of

several SROs indicated that the number

of firms reporting goodwill as an asset

was quite small.28 The Commission

understood that the original requests

concerning goodwill were made

primarily in an effort to accommodate

certain large firms dually registered as

FCMs and as securities broker-dealers.

Discussions between Commission staff

and SEC staff have revealed that the SEC

continues to consider the matter but an

amendment to the SEC’s rule in this

area is not imminent. Further, as noted

above, the securities industry’s trade

association has commented in

opposition to the elimination of

goodwill from the debt-equity

calculation. Accordingly, the

Commission has determined not to

amend Rule 1.17(d) in this regard at this

time. The Commission nonetheless

believes that if goodwill is reported as

an asset the better rule is to subtract it

from the denominator when a firm

calculates its debt-equity ratio and the

Commission intends to continue to

pursue this matter with the SEC.

III. Ongoing Process

The Commission’s adoption of the

amendments discussed herein and its

adoption of amendments in May 1996 29

accomplish the Commission’s short

term goals arising out of the September

1995 roundtable on capital. Some of the

other issues discussed at that roundtable

are necessarily longer term projects that

will require further study, such as

whether the second prong of the current

minimum financial requirement, based

upon four percent of the sum of

segregated customer funds and the

secured amount, should be amended in

an effort to make an FCM’s minimum

adjusted net capital requirement reflect

more closely the risks to an FCM caused

by carrying open positions. The

Commission intends to continue its

consultation with industry

representatives and other interested

parties concerning the minimum

financial and related reporting

requirements.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),

5 U.S.C. 601 et seq., requires that

agencies, in proposing rules, consider

the impact of those rules on small

businesses. The rule amendments

adopted herein would affect FCMs and

IBIs. The Commission has previously

determined that, based upon the

fiduciary nature of FCM/customer

relationships, as well as the requirement

that FCMs meet minimum financial

requirements, FCMs should be excluded

from the definition of small entity.30

With respect to IBs, the Commission

has stated that it is appropriate to

evaluate within the context of a

particular rule proposal whether some

or all IBs should be considered to be

small entities and, if so, to analyze the

economic impact on such entities at that

time.31 The amendments to Rules 1.10

and 1.18 relate to the time within which

financial reports must be filed and

monthly financial computations must be

prepared. The requirements related to

filing certified financial reports as of the

fiscal year end will not be amended as

proposed and the amendments being

adopted to other provisions of the rules

are to be phased in over a period of

approximately one year so that firms

can make any necessary adjustments. In

addition, the amendment to Rule 1.17(d)

for an IBI conforms the Commission’s

requirement to that of the SEC. More

than one-third of the IBIs are also

subject to the jurisdiction of the SEC

and therefore the amendment to Rule

1.17(d) should have no impact on the

financial operations of these IBIs. Thus,

the Chairperson certifies that these

amendments should not have a

significant economic impact on a

substantial number of small entities.

B. Paperwork Reduction Act

When publishing final rules, the

Paperwork Reduction Act of 1995 (Pub.

L. 104–13 (May 13, 1995)) imposes

certain requirements on federal agencies

(including the Commission) in

connection with their conducting or

sponsoring any collection of

information as defined by the

Paperwork Reduction Act. In

compliance with the Act, this final rule

informs the public of:

(1) The reasons the information is planned

to be and/or has been collected; (2) the way

such information is planned to be and/or has

been used to further the proper performance

of the functions of the agency; (3) an

estimate, to the extent practicable, of the

average burden of the collection (together

with a request that the public direct to the

agency any comments concerning the

accuracy of this burden estimate and any

suggestions for reducing this burden); (4)

whether responses to the collection of

information are voluntary, required to obtain

or retain a benefit, or mandatory; (5) the

nature and extent of confidentiality to be

provided, if any; and (6) the fact that an

agency may not conduct or sponsor, and a

person is not required to respond to, a

collection of information unless it displays a

currently valid OMB control number.

On February 26, 1996, the

Commission published proposed rules

dealing with this matter stating that the

information collection burden would be

unchanged if the rules were adopted as

proposed. However, because the

Commission has determined, in

response to comments on the Proposals,

to leave unchanged the filing

requirement for the certified financial

report due as of the fiscal year end and
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations 4639

to explicitly require an uncertified

financial report as of the last quarter, the

paperwork burden under Rule 1.10 will

increase.

The Commission has submitted this

rule and its associated information

collection requirements to the Office of

Management and Budget. The burden

associated with this entire collection

(3038–0024), including this final rule, is

as follows:

Average burden hours per response:

18.00.

Number of Respondents: 1,662.00.

Frequency of response: 19.00.

The burden associated with this

specific final rule is as follows:

Average burden hours per response:

4.00.

Number of Respondents: 500.00.

Frequency of response: 9.00.

Persons wishing to comment on the

information required by this final rule

should contact the Desk Officer, CFTC,

Office of Management and Budget,

Room 10202, NEOB, Washington, DC

20503, (202) 395–7340. Copies of the

information collection submission to

OMB are available from the CFTC

Clearance Officer, 1155 21st Street

N.W., Washington, DC 20581, (202)

418–5160.

List of Subjects

17 CFR Part 1

Commodity futures, Minimum

financial requirements.

17 CFR Part 3

Commodity futures, Reporting and

recordkeeping requirements.

17 CFR Part 145

Freedom of information, Exceptions.

17 CFR Part 147

Sunshine Act, Exceptions.

In consideration of the foregoing and

pursuant to the authority contained in

the Commodity Exchange Act and, in

particular, Sections 4f, 4g and 8a(5)

thereof, 7 U.S.C. 6f, 6g and 12a(5), the

Commission hereby amends 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 1.10 is amended by revising

paragraphs (a)(2)(i)(A) and (B),

(a)(2)(ii)(A) and (B), (a)(3)(i),

(a)(3)(ii)(A), (b)(1), (b)(2)(i), (b)(2)(ii)(A),

(c) and (d)(2)(v), by redesignating

paragraph (d)(2)(vi) as paragraph

(d)(2)(vii) and by adding a new

paragraph (d)(2)(vi), by revising

paragraphs (d)(3), (f) heading, and (f)(1),

by removing and reserving paragraph

(g)(3), by revising paragraph (g)(5), by

removing and reserving paragraph (i),

and by revising paragraphs (j)(8)(i)(B)

and (j)(8)(ii)(B) to read as follows:

§ 1.10 Financial reports of futures

commission merchants and introducing

brokers.

(a) * * *

(2) * * *

(i) * * *

(A) A Form 1–FR–FCM certified by an

independent public accountant in

accordance with § 1.16 as of a date not

more than 45 days prior to the date on

which such report is filed; or

(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 1 year prior to the date on

which such report is filed.

* * * * *

(ii) * * *

(A) A Form 1–FR–IB certified by an

independent public accountant in

accordance with § 1.16 as of a date not

more than 45 days prior to the date on

which such report is filed; or

(B) A Form 1–FR–IB 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–IB certified by an

independent public accountant in

accordance with § 1.16 as of a date not

more than 1 year prior to the date on

which such report is filed; or

* * * * *

(3)(i) The provisions of paragraph

(a)(2) of this section do not apply to any

person succeeding to and continuing the

business of another futures commission

merchant. Each such person who files

an application for registration as a

futures commission merchant and who

is not so registered in that capacity at

the time of such filing must file a Form

1–FR–FCM as of the first month end

following the date on which his

registration is approved. Such report

must be filed with the National Futures

Association, the Commission and the

designated self-regulatory organization,

if any, not more than 17 business days

after the date for which the report is

made.

(ii) * * *

(A) Each such person who succeeds to

and continues the business of an

introducing broker which was not

operating pursuant to a guarantee

agreement, or which was operating

pursuant to a guarantee agreement and

was also a securities broker or dealer at

the time of succession, who files an

application for registration as an

introducing broker, and who is not so

registered in that capacity at the time of

such filing, must file with the National

Futures Association either a guarantee

agreement with his application for

registration or a Form 1–FR–IB as of the

first month end following the date on

which his registration is approved. Such

Form 1–FR–IB must be filed not more

than 17 business days after the date for

which the report is made.

* * * * *

(b) Filing of financial reports. (1)(i)

Except as provided in paragraphs (b)(3)

and (h) of this section, each person

registered as a futures commission

merchant must file a Form 1–FR–FCM

for each fiscal quarter of each fiscal

year, including the final fiscal quarter of

each fiscal year, unless the futures

commission merchant elects, pursuant

to paragraph (e)(2) of this section, to file

a Form 1–FR–FCM for each calendar

quarter of each calendar year, including

the final calendar quarter of each

calendar year. Each Form 1–FR–FCM

must be filed no later than 17 business

days after the date for which the report

is made: Provided, however, That for

each fiscal or calendar quarter ending

between June 30, 1997 and December

31, 1997, inclusive, each Form 1–FR–

FCM must be filed no later than 30

calendar days after the date for which

the report is made.

(ii) In addition to the financial reports

required by paragraph (b)(1)(i) of this

section, each person registered as a

futures commission merchant must file

a Form 1–FR–FCM as of the close of its

fiscal year (even if it files quarterly

reports as of each calendar quarter)

which must be certified by an

independent public accountant in

accordance with § 1.16 no later than 90

days after the close of each futures

commission merchant’s fiscal year:

Provided, however, that a registrant

which is registered with the Securities

and Exchange Commission as a

securities broker or dealer must file this

report not later than the time permitted

for filing an annual audit report under

§ 240.17a–5(d)(5) of this title.

(2)(i) Except as provided in

paragraphs (b)(3) and (h) of this section,

and except for an introducing broker

operating pursuant to a guarantee

agreement which is not also a securities

broker or dealer, each person registered

as an introducing broker must file a

Form 1–FR–IB semiannually as of the
4640 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations

middle and the close of each fiscal year

unless the introducing broker elects

pursuant to paragraph (e)(2) of this

section to file a Form 1–FR–IB

semiannually as of the middle and the

close of each calendar year. Each Form

1–FR–IB must be filed no later than 17

business days after the date for which

the report is made: Provided, however,

That for each reporting period ending

between June 30, 1997 and December

31, 1997, inclusive, each Form 1–FR–IB

must be filed no later than 30 calendar

days after the date for which the report

is made.

(ii) (A) In addition to the financial

reports required by paragraph (b)(2)(i) of

this section, each person registered as

an introducing broker must file a Form

1–FR–IB as of the close of its fiscal year

(even if it files semiannual reports on a

calendar year basis) which must be

certified by an independent public

accountant in accordance with § 1.16 no

later than 90 days after the close of each

introducing broker’s fiscal year:

Provided, however, that a registrant

which is registered with the Securities

and Exchange Commission as a

securities broker or dealer must file this

report not later than the time permitted

for filing an annual audit report under

§ 240.17a–5(d)(5) of this title.

* * * * *

(c) Where to file reports. The reports

provided for in this section will be

considered filed when received by the

regional office of the Commission

nearest the principal place of business

of the registrant (except that a registrant

under the jurisdiction of the

Commission’s Western Regional Office

must file such reports with the Southwestern Regional Office) and by the

designated self-regulatory organization,

if any; and reports required to be filed

by this section by an applicant for

registration will be considered filed

when received by the National Futures

Association and by the regional office of

the Commission nearest the principal

place of business of the applicant

(except that an applicant under the

jurisdiction of the Commission’s

Western Regional Office must file such

reports with the South western Regional

Office): Provided, however, That

information required of a registrant

pursuant to paragraph (b)(4) of this

section need be furnished only to the

self-regulatory organization requesting

such information and the Commission,

and that information required of an

applicant pursuant to paragraph (b)(4) of

this section need be furnished only to

the National Futures Association and

the Commission: And, provided further,

That any guarantee agreement entered

into between a futures commission

merchant and an introducing broker in

accordance with the provisions of this

section need be filed only with and will

be considered filed when received by

the National Futures Association.

(d) * * *

(2) * * *

(v) Appropriate footnote disclosures;

(vi) A reconciliation, including

appropriate explanations, of the

statement of the computation of the

minimum capital requirements pursuant

to § 1.17 and, for a futures commission

merchant only, the statements of

segregation requirements and funds in

segregation for customers trading on

U.S. commodity exchanges and for

customers’ dealer option accounts, and

the statement of secured amounts and

funds held in separate accounts for

foreign futures and foreign options

customers in accordance with § 30.7 of

this chapter, in the certified Form 1–FR

with the applicant’s or registrant’s

corresponding uncertified most recent

Form 1–FR filing when material

differences exist or, if no material

differences exist, a statement so

indicating; and

* * * * *

(3) The statements required by

paragraphs (d)(2)(i) and (d)(2)(ii) of this

section may be presented in accordance

with generally accepted accounting

principles in the certified reports filed

as of the close of the registrant’s fiscal

year pursuant to paragraphs (b)(1)(ii) or

(b)(2)(ii) of this section or accompanying

the application for registration pursuant

to paragraph (a)(2) of this section, rather

than in the format specifically

prescribed by these regulations:

Provided, the statement of financial

condition is presented in a format as

consistent as possible with the Form 1–

FR and a reconciliation is provided

reconciling such statement of financial

condition to the statement of the

computation of the minimum capital

requirements pursuant to § 1.17. Such

reconciliation must be certified by an

independent public accountant in

accordance with § 1.16.

* * * * *

(f) Extension of time for filing

uncertified reports. (1) In the event a

registrant finds that it cannot file its

report for any period within the time

specified in paragraphs (b)(1)(i), (b)(2)(i)

or (b)(4) of this section or § 1.12(b)

without substantial undue hardship, it

may file with the principal office of the

Commission in Washington, D.C., an

application for an extension of time to

a specified date which may not be more

than 90 days after the date as of which

the financial statements were to have

been filed. The application must state

the reasons for the requested extension

and must contain an agreement to file

the report on or before the specified

date. The application must be received

by the Commission before the time

specified in paragraphs (b)(1)(i), (b)(2)(i)

or (b)(4) of this section or § 1.12(b) for

filing the report. Notice of such

application must be given to the

designated self-regulatory organization,

if any, concurrently with the filing of

such application with the Commission.

Within ten calendar days after receipt of

the application for an extension of time,

the Commission shall: (i) Notify the

registrant of the grant or denial of the

requested extension; or (ii) indicate to

the registrant that additional time is

required to analyze the request, in

which case the amount of time needed

will be specified. (See § 1.16(f) for

extension of the time for filing certified

financial statements.)

* * * * *

(g) * * *

(3) [Reserved]

* * * * *

(5) The independent accountant’s

opinion and a guarantee agreement filed

pursuant to this section will be deemed

public information.

* * * * *

(i) [Reserved]

(j) * * *

(8) * * *

(i) * * *

(B) A Form 1–FR–IB as of a date not

more than 17 business days prior to the

date on which the report is filed and a

Form 1–FR–IB certified by an

independent public accountant in

accordance with § 1.16 as of a date not

more than one year prior to the date on

which the report is filed.

* * * * *

(ii) * * *

(B) A Form 1–FR–IB as of a date not

more than 17 business days prior to the

date on which the report is filed and a

Form 1–FR–IB certified by an

independent public accountant in

accordance with § 1.16 as of a date not

more than one year prior to the date on

which the report is filed.

* * * * *

3. Section 1.12 is amended by revising

paragraph (b)(4) to read as follows:

§ 1.12 Maintenance of minimum financial

requirements by futures commission

merchants and introducing brokers.

* * * * *

(b) * * *

(4) For securities brokers or dealers,

the amount of net capital specified in

Rule 17a–11(b) of the Securities and

Exchange Commission (17 CFR
Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations 4641

240.17a–11(b)), must file written notice

to that effect as set forth in paragraph (g)

of this section within five (5) business

days of such event. Such applicant or

registrant must also file a Form 1–FR–

FCM (or, if such applicant or registrant

is registered with the Securities and

Exchange Commission as a securities

broker or dealer, it may file, in

accordance with § 1.10(h), a copy of its

Financial and Operational Combined

Uniform Single Report under the

Securities Exchange Act of 1934, Part II,

in lieu of Form 1–FR–FCM) or such

other financial statement designated by

the National Futures Association, in the

case of an applicant, or by the

Commission or the designated selfregulatory organization, if any, in the

case of a registrant, as of the close of

business for the month during which

such event takes place and as of the

close of business for each month

thereafter until three (3) successive

months have elapsed during which the

applicant’s or registrant’s adjusted net

capital is at all times equal to or in

excess of the minimums set forth in this

paragraph (b) which are applicable to

such applicant or registrant. Each

financial statement required by this

paragraph (b) must be filed within 17

business days after the end of the month

for which such report is being made:

Provided, however, That for each month

ending between June 30, 1997 and

December 31, 1997, inclusive, for which

a financial statement is required by this

paragraph (b), such financial statement

must be filed within 30 calendar days

after the end of the month for which

such report is being made.

* * * * *

4. Section 1.17 is amended by revising

the introductory text of paragraph (d)

and by removing paragraph (d)(3) to

read as follows:

§ 1.17 Minimum financial requirements for

futures commission merchants and

introducing brokers.

* * * * *

(d) Each applicant or registrant shall

have equity capital (inclusive of

satisfactory subordination agreements

which qualify under this paragraph (d)

as equity capital) of not less than 30

percent of the debt-equity total,

provided, an applicant or registrant may

be exempted from the provisions of this

paragraph (d) for a period not to exceed

90 days or for such longer period which

the Commission may, upon application

of the applicant or registrant, grant in

the public interest or for the protection

of investors. For the purposes of this

paragraph (d):

* * * * *

5. Section 1.18 is amended by revising

paragraphs (a) and (b) to read as follows:

§ 1.18 Records for and relating to financial

reporting and monthly computation by

futures commission merchants and

introducing brokers.

(a) No person shall be registered as a

futures commission merchant or as an

introducing broker under the Act

unless, commencing on the date his

application for such registration is filed,

he prepares and keeps current ledgers or

other similar records which show or

summarize, with appropriate references

to supporting documents, each

transaction affecting his asset, liability,

income, expense and capital accounts,

and in which (except as otherwise

permitted in writing by the

Commission) all his asset, liability and

capital accounts are classified into

either the account classification

subdivisions specified on Form 1–FR–

FCM or Form 1–FR–IB, respectively, or,

if such person is registered with the

Securities and Exchange Commission as

a securities broker or dealer and he files

(in accordance with § 1.10(h)) a copy of

his Financial and Operational

Combined Uniform Single Report under

the Securities Exchange Act of 1934,

Part II or Part IIA, in lieu of Form 1–FR–

FCM or Form 1–FR–IB, the account

classification subdivisions specified on

such Report, or categories that are in

accord with generally accepted

accounting principles. Each person so

registered shall prepare and keep

current such records.

(b) Each applicant or registrant must

make and keep as a record in

accordance with § 1.31 formal

computations of its adjusted net capital

and of its minimum financial

requirements pursuant to § 1.17 or the

requirements of the designated selfregulatory organization to which it is

subject as of the close of business each

month. An applicant or registrant which

is also registered as a securities broker

or dealer with the Securities and

Exchange Commission may meet the

computation requirements of this

paragraph (b) by completing the

Statement of Financial and Operational

Combined Uniform Single Report under

the Securities Exchange Act of 1934,

Part II or Part IIA. Such computations

must be completed and made available

for inspection by any representative of

the National Futures Association, in the

case of an applicant, or of the

Commission or designated selfregulatory organization, if any, in the

case of a registrant, within 17 business

days after the date for which the

computations are made, commencing

the first month end after the date the

application for registration is filed:

Provided, however, That for each month

ending between June 30, 1997 and

December 31, 1997, inclusive, such

computations must be completed and

made available for inspection within 30

calendar days after the date for which

the computations are made.

* * * * *

6. Section 1.52 is amended by revising

paragraph (a) to read as follows:

§ 1.52 Self-regulatory organization

adoption and surveillance of minimum

financial requirements.

(a) Each self-regulatory organization

must adopt, and submit for Commission

approval, rules prescribing minimum

financial and related reporting

requirements for all its members who

are registered futures commission

merchants. Each self-regulatory

organization other than a contract

market must adopt, and submit for

Commission approval, rules prescribing

minimum financial and related

reporting requirements for all its

members who are registered introducing

brokers. Each contract market which

elects to have a category of membership

for introducing brokers must adopt, and

submit for Commission approval, rules

prescribing minimum financial and

related reporting requirements for all its

members who are registered introducing

brokers. Each self-regulatory

organization shall submit for

Commission approval any modification

or other amendments to such rules.

Such requirements must be the same as,

or more stringent than, those contained

in §§ 1.10 and 1.17 and the definition of

adjusted net capital must be the same as

that prescribed in § 1.17(c): Provided,

however, A designated self-regulatory

organization may permit its member

registrants which are registered with the

Securities and Exchange Commission as

securities brokers or dealers to file (in

accordance with § 1.10(h)) a copy of

their Financial and Operational

Combined Uniform Single Report under

the Securities Exchange Act of 1934,

Part II or Part IIA, in lieu of Form 1–FR:

And, provided further, A designated

self-regulatory organization may permit

its member introducing brokers to file a

Form 1–FR–IB in lieu of a Form 1–FR–

FCM.

* * * * *

PART 3—REGISTRATION

7. The authority citation for Part 3 is

revised to read as follows:

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a,

2, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i,

6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c,

16a, 18, 19, 21, 23.
4642 Federal Register / Vol. 62, No. 21 / Friday, January 31, 1997 / Rules and Regulations

Subpart A—Registration

8. Section 3.33 is amended by revising

paragraph (c)(1) to read as follows:

§ 3.33 Withdrawal from registration.

* * * * *

(c)(1) Where a futures commission

merchant or an introducing broker

which is not operating pursuant to a

guarantee agreement is requesting

withdrawal from registration in that

capacity and the basis for withdrawal

under paragraph (a)(1) of this section is

that it has ceased engaging in activities

requiring registration, the request for

withdrawal must be accompanied by a

Form 1–FR–FCM or a Form 1–FR–IB,

respectively, which contains the

information specified in § 1.10(d)(1) of

this chapter as of a date not more than

30 days prior to the date of the

withdrawal request: Provided, however,

That if such registrant is also registered

with the Securities and Exchange

Commission as a securities broker or

dealer, it may file a copy of its Financial

and Operational Combined Uniform

Single Report under the Securities

Exchange Act of 1934, Part II or Part IIA

(in accordance with § 1.10(h) of this

chapter), in lieu of Form 1–FR–FCM or

Form 1–FR–IB. Any financial report

submitted pursuant to this paragraph

(c)(1) must contain the information

specified in § 1.10(d)(1) of this chapter

as of a date not more than 30 days prior

to the date of the withdrawal request.

* * * * *

PART 145—COMMISSION RECORDS

AND INFORMATION

9. The authority citation for Part 145

continues to read as follows:

Authority: Pub. L. 89–554, 80 Stat. 383,

Pub. L. 90–23, 81 Stat. 54, Pub. L. 93–502,

88 Stat. 1561–1564 (5 U.S.C. 552); Sec.

101(a), Pub. L. 93–463, 88 Stat. 1389 (5

U.S.C. 4a(j)); Pub. L. 99–570, unless

otherwise noted.

§ 145.5 [Amended]

10. Section 145.5 is amended by

removing and reserving paragraph

(d)(1)(i)(G).

PART 147—OPEN COMMISSION

MEETINGS

11. The authority citation for Part 147

continues to read as follows:

Authority: Sec. 3(a), Pub. L. 94–409, 90

Stat. 1241 (5 U.S.C. 552b); Sec. 101(a)(11),

Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j)

(Supp. V 1975)), unless otherwise noted.

§ 147.3 [Amended]

12. Section 147.3 is amended by

removing and reserving paragraph

(b)(4)(i)(A)(7).

Issued in Washington, D.C. on January 21,

1997 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–2251 Filed 1–30–97; 8:45 am]

BILLING CODE 6351–01–P

TENNESSEE VALLEY AUTHORITY

18 CFR Part 1301

Privacy Act Regulations;

Implementation

AGENCY: Tennessee Valley Authority.

ACTION: Final rule.

SUMMARY: The Tennessee Valley

Authority (TVA) amends its regulations

implementing the Privacy Act of 1974

(the Act), 5 U.S.C. 552a. These

amendments are needed to modify

existing TVA regulations to exempt a

system of records known as TVA Police

Records (TVA–37) from certain

provisions of the Act and corresponding

agency regulations.

EFFECTIVE DATE: January 31, 1997.

FOR FURTHER INFORMATION: Wilma H.

McCauley, (423) 751–2523.

SUPPLEMENTARY INFORMATION: These

amendments allow exemptions

authorized by the Act, 5 U.S.C.

552a(j)(2) and (k)(2), for the TVA Police

Records—TVA system of records under

5 U.S.C. 552a(k)(2). Under subsections

(j)(2) and (k)(2) of the Act, TVA, through

rulemaking, may exempt those systems

of records maintained by a component

of TVA that performs as its principal

function any activity pertaining to the

enforcement of criminal laws from

certain provisions of the Act, if the

system of records is used for certain law

enforcement purposes.

The TVA Police is a component of

TVA that performs as one of its

principal functions investigations into

violations of criminal law in connection

with TVA’s programs and operations,

pursuant to the Violent Crime Control

and Law Enforcement Act of 1994, as

amended, the TVA Police Records

system of records falls within the scope

of subsections (j)(2); i.e., information

compiled for the purpose of criminal

investigation, reports relating to any

stage of the enforcement process, and

information compiled for the

identification of individual criminals,

and (k)(2); i.e., investigatory material

compiled for law enforcement purposes,

other than material within the scope of

(k)(2) above.

The (j)(2) and (k)(2) exemptions for

criminal law enforcement records

remove restrictions on the manner in

which information may be collected and

the type of information that may be

collected by the TVA Police in the

course of a criminal investigation, limit

certain notice requirements, and exempt

the system of records from civil

remedies for violations of the Act. These

additional exemptions are necessary

primarily to avoid premature disclosure

of sensitive information, including, but

not limited to, the existence of a

criminal investigation, that may

compromise or impede the

investigation.

A more complete explanation of each

exemption follows, as required by the

Act.

TVA adds the following to the current

exemptions contained in 18 CFR

1301.24.

Exemptions Pursuant to (j)(2) and (k)(2)

TVA has determined that the TVA

Police Records should be exempt from

the following provisions of the Privacy

Act and corresponding agency

regulations. These exemptions are

necessary and appropriate to maintain

the integrity and confidentiality of

criminal investigations.

TVA will use the (j)(2) and (k)(2)

exemptions for the following reasons:

(a) 5 U.S.C. 552a(c)(3) requires an

agency to make the accounting of each

disclosure of records available to the

individual named in the record at his/

her request. This accounting must state

the date, nature and purpose of each

disclosure of a record and the name and

address of the recipient. Accounting for

each disclosure could alert the subject

of an investigation to the existence and

nature of the investigation and reveal

investigative or prosecutive interest by

other agencies, particularly in a jointinvestigation situation. This could

seriously impede or compromise the

investigation and case preparation by

prematurely revealing its existence and

nature; compromise or interfere with

witnesses or make witnesses reluctant to

cooperate with the investigators; lead to

suppression, alteration, fabrication, or

destruction of evidence; and endanger

the physical safety of confidential

sources, witnesses, law enforcement

personnel and their families.

(b) 5 U.S.C. 552a(c)(4) requires an

agency to inform outside parties of

correction of and notation of disputes

about information in a system in

accordance with subsection (d) of the

Privacy Act. Since this system of

records is already exempted from the

access provisions of subsection (d) of

the Privacy Act, this section is not

properly applicable.

(c) 5 U.S.C. 552a (d) and (f) require an

agency to provide access to records,

make corrections and amendments to