[Federal Register Volume 62, Number 21 (Friday, January 31, 1997)]
[Rules and Regulations]
[Pages 4633-4642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2251]


=======================================================================
-----------------------------------------------------------------------

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 broker-dealers 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 
phase-in 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 debt-
equity ratio requirement set forth in Rule 1.17(d) (the 
``Proposals'').<SUP>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.<SUP>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 debt-equity ratio 
requirements with those of the SEC.
---------------------------------------------------------------------------

    \1\ 61 FR 7080 (Feb. 26, 1996).
    \2\ See 61 FR 19177 (May 1, 1996).
---------------------------------------------------------------------------

    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)

[[Page 4634]]

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 six-month 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.<SUP>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.
---------------------------------------------------------------------------

    \3\ See proposed amendments to Commission Rules 1.10(b)(1) (i) 
and (ii), 61 FR 7080, 7085-86.
---------------------------------------------------------------------------

    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

[[Page 4635]]

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 broker-dealers. 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.<SUP>4
---------------------------------------------------------------------------

    \4\ As 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.
---------------------------------------------------------------------------

    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.<SUP>5
---------------------------------------------------------------------------

    \5\ See 61 FR 7080, 7081 n.6.
---------------------------------------------------------------------------

    Similarly, as proposed, the Commission will require that FCMs 
subject to the ``early warning'' requirement <SUP>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.<SUP>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.<SUP>8 This is 
because such firms are intended to be subject to increased regulatory 
and self-regulatory scrutiny.
---------------------------------------------------------------------------

    \6\ See 61 FR 7080, 7081-82.
    \7\ This 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.
    \8\ See 61 FR 7080, 7083.
---------------------------------------------------------------------------

    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 broker-dealer. 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.<SUP>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.
---------------------------------------------------------------------------

    \9\ Both 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.
---------------------------------------------------------------------------

    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 broker-dealers. 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

[[Page 4636]]

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) <SUP>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.<SUP>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.
---------------------------------------------------------------------------

    \10\ The 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.''
    \11\ See 17 CFR 240.17a-5(d)(4) (1996).
---------------------------------------------------------------------------

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 
broker-dealers who file Part I of FOCUS are often provided an extension 
of time through their respective designated examining authority,<SUP>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 phase-in 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.
---------------------------------------------------------------------------

    \12\ The Commission has confirmed this to be the case.
---------------------------------------------------------------------------

    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.<SUP>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.
---------------------------------------------------------------------------

    \13\ 61 FR 7080, 7081 & n.3.
---------------------------------------------------------------------------

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).<SUP>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.<SUP>15
---------------------------------------------------------------------------

    \14\ The geographic coverage of jurisdiction of the Commission's 
regional offices is set forth in 17 CFR 140.2 (1996).
    \15\ The 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).
---------------------------------------------------------------------------

    In addition, the Commission proposed to amend the financial 
reporting

[[Page 4637]]

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 <SUP>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.<SUP>17
---------------------------------------------------------------------------

    \16\ 48 FR 35248, 35263, 35282 (Aug. 3, 1983).
    \17\ See 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).
---------------------------------------------------------------------------

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.<SUP>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).<SUP>19
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 debt-equity total.<SUP>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.<SUP>21
---------------------------------------------------------------------------

    \20\ 42 FR 27166, 27177 (May 26, 1977).
    \21\ 43 FR 39956, 39965, 39976 (Sept. 8, 1978).
---------------------------------------------------------------------------

    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.<SUP>22 The Commission believes that it is important for its 
rules to conform to international standards with respect to the quality 
of capital.
---------------------------------------------------------------------------

    \22\ This 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.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>24
---------------------------------------------------------------------------

    \23\ 61 FR 7080, 7083-84, 7086.
    \24\ The 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).
---------------------------------------------------------------------------

    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; <SUP>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).
---------------------------------------------------------------------------

    \25\ Subordinated 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.
---------------------------------------------------------------------------

    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 debt-equity ratio requirement to 
a firm's debt-equity 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

[[Page 4638]]

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.<SUP>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.
---------------------------------------------------------------------------

    \26\ CME 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.
---------------------------------------------------------------------------

    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.<SUP>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.
---------------------------------------------------------------------------

    \27\ NYMEX stated that such an amendment should only be adopted 
in conjunction with a similar amendment to the SEC's rule to assure 
consistent treatment.
---------------------------------------------------------------------------

    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.<SUP>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.
---------------------------------------------------------------------------

    \28\ 61 FR 7080, 7084.
---------------------------------------------------------------------------

III. Ongoing Process

    The Commission's adoption of the amendments discussed herein and 
its adoption of amendments in May 1996 <SUP>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.
---------------------------------------------------------------------------

    \29\ These 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.
---------------------------------------------------------------------------

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.<SUP>30
---------------------------------------------------------------------------

    \30\ See 47 FR 18618, 18619 (Apr. 30, 1982).
---------------------------------------------------------------------------

    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.<SUP>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.
---------------------------------------------------------------------------

    \31\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).
---------------------------------------------------------------------------

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

[[Page 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:


Sec. 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 Sec. 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 
Sec. 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 Sec. 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 
Sec. 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 Sec. 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 
Sec. 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

[[Page 4640]]

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 Sec. 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 Sec. 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 South-western 
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 Sec. 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 Sec. 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 Sec. 1.17. Such reconciliation must be certified by an 
independent public accountant in accordance with Sec. 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 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 
Sec. 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:


Sec. 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

[[Page 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 Sec. 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 self-regulatory 
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:


Sec. 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:


Sec. 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 
Sec. 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 Sec. 1.31 formal computations of its adjusted net 
capital and of its minimum financial requirements pursuant to Sec. 1.17 
or the requirements of the designated self-regulatory 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 self-regulatory 
organization, if any, in the case of a registrant, within 17 business 
days after the date for which the computations are made, commencing the 
first month end after the date the application for registration is 
filed: 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:


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

    (a) Each self-regulatory organization must adopt, and submit for 
Commission approval, rules prescribing minimum financial and related 
reporting requirements for all its members who are registered futures 
commission merchants. 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 Secs. 1.10 
and 1.17 and the definition of adjusted net capital must be the same as 
that prescribed in Sec. 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 Sec. 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.

[[Page 4642]]

Subpart A--Registration

    8. Section 3.33 is amended by revising paragraph (c)(1) to read as 
follows:


Sec. 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 
Sec. 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 Sec. 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 Sec. 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.


Sec. 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.


Sec. 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