[Federal Register Volume 63, Number 108 (Friday, June 5, 1998)]
[Proposed Rules]
[Pages 30668-30675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14805]



[[Page 30668]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1


Recordkeeping

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing to amend its Regulation 1.31 to maximize 
the cost-reduction and time-savings arising from technological 
developments in the area of electronic storage media while maintaining 
necessary safeguards to ensure the reliability of the recordkeeping 
process. Specifically, the Commission proposes to expand the category 
of required records for which an affected person may employ electronic 
storage media to meet the recordkeeping obligations imposed by the 
Commodity Exchange Act (``Act'' or ``CEA'') and Commission regulations. 
In addition, the Commission proposes to eliminate the current 
requirement that paper records eligible for transfer to micrographic 
storage media be maintained in hard copy form for two years. The 
Commission is also seeking comment on several recordkeeping-related 
issues.

DATES: Comments must be received on or before August 4, 1998.

ADDRESSES: Comments should be mailed to Jean A. Webb, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW, Washington, DC 20581; transmitted by facsimile to (202) 
418-5521; or transmitted electronically to (<a href="/cdn-cgi/l/email-protection#7e0d1b1d0c1b0a1f0c073e1d180a1d50191108"><span class="__cf_email__" data-cfemail="780b1d1b0a1d0c190a01381b1e0c1b561f170e">[email protected]</span></a>). 
Reference should be made to ``Recordkeeping''.

FOR FURTHER INFORMATION CONTACT: Edson G. Case, Counsel, or Robert B. 
Wasserman, Special Counsel, Division of Trading and Markets, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW, Washington, DC 20581. Telephone (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

    Commission Regulation 1.31 sets forth certain recordkeeping 
requirements imposed by the CEA or Commission regulations. For example, 
it mandates that record required to be kept by the Act or Commission 
regulations (``required records'') be maintained for a period of five 
years and be kept in a ``readily accessible'' manner for the first two 
years of this period. Regulation 1.31 also defines the rights of 
representatives of the Commission and Department of Justice to inspect 
and obtain copies of required records.\1\
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    \1\ For example, Regulation 1.31(a) provides that all required 
records shall be open to inspection by such representatives and 
imposes on the person required to maintain the records a duty to 
provide a copy (at the person's expense) of any required record 
requested by such representatives. In addition, the regulation 
states that the person shall provide all copies or originals 
``promptly.''
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    Regulation 1.31 takes into account some technological advances in 
the development of recordkeeping systems. For example, it defines the 
circumstances under which a reproduction of a paper record on microfilm 
or microfiche may be substituted for the original paper record,\2\ as 
well as the circumstances under which a computer, accounting machine or 
business machine generated record nay be transferred to and retained on 
optical disk media or microfilm/microfiche media.\3\ It also imposes 
special inspection-related requirements for persons who choose to 
maintain their records on these media.\4\
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    \2\ The regulation requires that all paper required records be 
maintained in hard-copy form for the first two years of the mandated 
five-year period, after which they may be transferred to microfilm 
and microfiche, except for trading cards and written customers 
orders, which must be maintained in hard-copy form and for the full 
five-year period.
    \3\ The regulation permits immediate transfer of computer or 
machine generated records to microfilm/microfiche media and permits 
immediate transfer of computer generated records to defined class of 
optical storage media.
    \4\ For Example, persons maintaining records in these media must 
maintain indexes of the records as well as facilities that permit 
representatives of the Commission and the Department of Justice to 
view and obtain hard copies of the records immediately. For records 
stored on the specified optical storage media, Regulation 
1.31(c)(1)(iii) also mandates that a copy of each record be 
immediately provided ``on Commission compatible machine-readable 
media as defined in [Commission Regulation] 15.00(1) . . . .''
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    The Commission has recently undertaken a series of steps to 
facilitate the use of electronic media technology where adequate 
measures exist to safeguard regulatory interests.\5\ Various issues 
implicating the Commission's recordkeeping requirements under 
Regulation 1.31 have arisen in the context of these Commission 
initiatives. Indeed, in a February 20, 1997 Federal Register release, 
the Commission specifically acknowledged that ``it may be necessary to 
amend Regulation 1.31 to account for further technological 
developments.'' \6\
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    \5\ See, e.g., 62 FR 39104 (July 22, 1997) (interpreting 
Commission requirements affecting the use of electronic media by 
commodity pool operators (``CPOs'') and commodity trading advisors 
(``CTAs'') and amending Part 4 of the Commission's Rules in light of 
the interpretion); 62 FR 31507 (June 10, 1997) (issuing guidance 
regarding a futures commission merchant's (`'FCM's'') electronic 
delivery of confirmation, purchase-and-sale, and monthly statements 
to customers and the related recordkeeping requirements); 62 FR 
18265 (April 15, 1997) (adopting a voluntary program for CPOs and 
CTAs to use electronic means to file disclosure with the 
Commission); 62 FR 10441 (March 7, 1997) (providing for use of 
personal identification numbers for FCMs and introducing brokers 
(``IBs'') that use electronic means to file attested financial 
reports with the Commission); 62 FR 7675 (February 20, 1997) 
(permitting the use of electronic records of customer orders 
generated by an electronic order-routing system).
    \6\ 62 FR 7677, n. 26.
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    In recognition of both the need for interim relief and the number 
of Commission registrants that are also subject to the recordkeeping 
requirements of the Securities and Exchange Commission (``SEC''), the 
Commission has had occasion to rely on the recordkeeping rules the SEC 
adopted in February 1997.\7\ For example, in August 1997, the 
Commission adopted revisions to Part 4 addressing the use of electronic 
media by commodity pool operators (``CPOs'') and commodity trading 
advisors (``CTAs'') for delivery of disclosure documents and other 
materials.\8\ Several of the comments during this rulemaking raised 
questions about the practicality of the Commission's current 
recordkeeping requirements in the context of electronic media. In 
response to these comments, the Commission permitted CPOs and CTAs to 
use the guidelines set forth in the SEC's rulemaking in lieu of the 
requirements of Regulation 1.31.\9\ The Commission took this step 
``[t]o facilitate CPOs' and CTAs' use of electronic media when possible 
and to avoid imposing duplicative or inconsistent requirements on 
registrants who may also be registered with the SEC. . . .''\10\
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    \7\ 62 FR 6469. The SEC's rulemaking involved reporting 
requirements for brokers or dealers under the Securities Exchange 
Act of 1934.
    \8\ 62 FR 39104.
    \9\ The Commission adopted a similar approach in its advisory 
permitting FCMs to deliver confirmations, purchase and sale 
statements, and monthly statements electronically. 62 FR 31507 (June 
10, 1997), and its advisory concerning compliance with the 
``written'' record requirements of Commission Regulations 1.35. 62 
FR 7675 (February 20, 1997).
    \10\ 62 FR 39112. The Commission's concern about the regulatory 
cost imposed on dual registrants is consistent with its traditional 
focus on minimizing unnecessary regulatory costs. For example, the 
Commission has adopted several rules that permit dual-registrant 
FCMs to fulfill Commission regulatory requirements in the same 
manner they fulfill SEC regulatory requirements. See, e.g., 
Commission Rules 1.10(h), 1.12(b)(4), 1.14(b)(1), 1.15(d)(1), 
1.16(c)(5), 1.17(a)(1)(ii)(C), 1.18(a), 1.52(a).
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    Consistent with these goals, experience with registrants' 
maintaining records in accordance with the SEC's rules, and a 
commitment to maximizing the cost-reduction and time-savings arising 
from technological developments in the area of electronic

[[Page 30669]]

storage media while maintaining necessary safeguards to assure the 
reliability of the recordkeeping process, the Commission is proposing 
amendments to Regulation 1.31.

II. Discussion

    The proposed rules would make several changes to the current 
requirements of Regulation 1.31. The proposed rules would shift the 
Commission's approach to recordkeeping technology from the current 
rule's focused specification of a particular class of optical disk or 
micrographic media to a more generic, performance-based approach to the 
definition of permissible technology. As a result, persons subject to 
the Commission's recordkeeping requirements would have more freedom to 
take advantage of technological advances and to tailor their 
recordkeeping systems to individual business needs. The proposed rules 
would also expand the class of required records that may be maintained 
on micrographic or electronic storage media for the full five-year 
period. The Commission anticipates that this change will permit the 
type of simplification and streamlining of recordkeeping systems likely 
to result in both a reduction in costs and improvements in system 
reliability. The Commission also anticipates that the proposed rules 
will foster improvements in the security and availability of required 
records. For example, the proposed rules would require that there be a 
duplicate copy of all records maintained on micrographic or electronic 
storage media and that the duplicate be stored at a location separate 
from the original.\11\ As a result, incidents of loss of access to 
required records due to fire, flood, or other catastrophic 
circumstances should be reduced to a minimum.\12\ The proposed 
regulation would also create a procedure that should allow the 
Commission to obtain access to required records maintained on 
electronic storage media even if the owner of the records has ceased 
doing business and, despite Commission regulations,\13\ cannot be 
located.
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    \11\ The proposal does not specify how ``separate'' the location 
of the original records must be from the location of the duplicate 
records. The Commission anticipates that persons required to 
maintain records will use their business judgment in selecting a 
location for the duplicate records that is sufficiently distant to 
make it unlikely that both sets of documents could be destroyed by a 
single catastrophic event (such as a fire or flood) but sufficiently 
close to ensure that duplicate records may be accessed and retrieved 
promptly should the original documents be destroyed.
    \12\ During the week of October 28, 1996, a fire destroyed a 
Chicago warehouse operated by Brambles Information Services. As a 
result, records that Commission registrants were required to 
maintain under Regulation 1.31 were damaged and destroyed, and the 
Commission developed a special procedure for the affected 
registrants to obtain relief from their obligations under that 
regulation. See Commission Advisory 96-62, [Current Transfer Binder] 
Comm. Fut. L. Rep. (CCH) para. 26,907 (December 18, 1996).
    \13\ See 17 C.F.R. 3.30(b), 3.33(b)(4).
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A. Definitions of Micrographic and Electronic Storage Median

    The proposed rules would include new definitions of both 
micrographic media and electronic storage media. The former definition 
would include microfilm and microfiche, which are permitted under the 
current regulation, but would open the definition to additional 
developments in this area by including ``any similar medium.'' The 
latter definition would extend to any digital storage system that meets 
four general criteria: (1) it preserves records exclusively in a non-
rewritable, non-erasable format; (2) it verifies automatically the 
quality and accuracy of the recording process; (3) it serializes \14\ 
the units of storage media and creates a time-date record whenever 
information is placed on the storage media; and (4) it permits the 
immediate downloading of indexes and records maintained on the storage 
media to any of the media permitted by the regulation (paper, 
micrographic media or electronic media). These generic requirements 
(which establish performance criteria similar to those in the present 
rule) are designed to permit the use of the broadest range of available 
technology while maintaining safeguards necessary to assure both the 
reliability of the stored information and immediate access to the 
stored information by representatives of the Commission and the 
Department of Justice.\15\
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    \14\ To ``serialize'' a unit of storage media (such as a disk or 
a trading ticket) is to assign it a unique, consecutive number so 
that (1) an additional, forged unit cannot be surreptitiously 
inserted and (2) a ``true'' unit cannot be surreptitiously removed.
    \15\ The Commission is not proposing an approval process for 
persons who wish to convert from their current storage format to a 
system that maintains records on electronic storage media. Prior to 
any conversion to an electronic storage system, however, an affected 
person must submit a representation to the Commission that the 
selected electronic storage system meets the requirements set forth 
in paragraph (b) of Regulation 1.31.
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B. Conditions on the Use of Micrographic and Electronic Storage Media

    The proposed conditions on the use of micrographic and electronic 
storage media are intended to maintain the ease of access necessary to 
the Commission's regulatory interests and to ensure that the 
Commission's access will not be compromised by catastrophic events. 
Affected persons who wish to use these types of storage media must 
index all stored information and keep available facilities allowing for 
immediate production of both easily readable images of the stored 
records and easily readable hard-copy images. Affected persons must 
also waive any privilege, claim of confidentiality or other objection 
to disclosure of non-Commission-required information stored on the same 
individual medium (e.g., the same disk or sheet of microfiche) with 
Commission-required records. In addition, such persons must store a 
duplicate of each record, in any of the media acceptable under the 
regulation, as well as a duplicate of each index, at a location 
separate from the original.

C. Additional Conditions on the Use of Electronic Storage Media

    The nature and capabilities of electronic storage media foster an 
efficient approach to record production that can benefit both the 
Commission and persons subject to Regulation 1.31's record-production 
requirements. The Commission is proposing to retain the current 
requirement that, upon request by an appropriate representative, 
persons maintaining required records on electronic storage media 
immediately provide copies of such records on Commission compatible 
machine-readable media (as defined by Commission Regulation 
15.00(1)).\16\
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    \16\ The copies must use a format and coding structure (e.g., 
ASCII) specified in the request. ASCII is the American Standard Code 
For Information Interchange, a scheme for arranging bits (one or 
zero) in groupings of eight-bit ``bytes,'' each of which represents 
a character.
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    The nature and capabilities of electronic storage media raise 
special concerns about the Commission's ability to detect both 
inadvertent errors during the transfer and storage process and 
intentional alteration of the stored record. To address these concerns, 
the Commission is proposing that persons who maintain documents on 
electronic storage media develop and maintain written operational 
procedures and controls (an ``audit system'') \17\ designed to provide 
accountability over both the initial storage of data on the electronic 
storage media and the entry of any

[[Page 30670]]

subsequent change to such data.\18\ Both the written procedures and the 
results of the audit system must be available to representatives of the 
Commission and the Department of Justice at all times for immediate 
examination and must be maintained for the time period applicable to 
the records stored on the electronic storage media.
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    \17\ The Commission is not specifying the contents of this audit 
system, but data regarding the inputting of records and changes to 
existing records will be a part of the system. Data must be captured 
systematically on a computer or in hard copy form. The Commission 
envisions that the identities of individuals actually inputting 
records and making particular changes, and the identity of both new 
documents created and documents changed, are the kind of information 
that must be collected either automatically or systematically.
    \18\ Because an eligible electronic storage medium creates 
records that are non-rewritable and non-erasable, both the original 
input transaction and the correcting transaction will be retained.
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    The range of available electronic storage media raises concerns 
about the Commission's ability to access stored information when a 
person who maintains documents on electronic storage media fails to 
comply as required by Regulation 1.31. Paper records and records 
maintained on micrographic storage can usually be accessed and 
understood without specific cooperation from the originator. In 
contrast, electronically stored data may be difficult to access or 
understand without information concerning the format in which the data 
has been stored. To address this concern, the Commission is proposing 
that persons who maintain required records on electronic storage media 
take steps to ensure that the Commission has a continuous source of the 
information necessary to access the records and indexes stored on that 
media.\19\ Such persons must either (1) maintain, keep current, and 
make available such information to representatives of the Commission 
and the Department of Justice or (2) place in escrow and keep current a 
copy of the necessary information.\20\
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    \19\ The proposal does not specify a list of information that 
the Commission will invariably consider ``necessary.'' However, the 
Commission envisions that the necessary information will include the 
physical and logical format of the electronic storage media, the 
file format of all different information types maintained on the 
electronic storage media, and any source code, related 
documentation, and other information necessary to access the records 
and indexes maintained on the electronic storage media. The term 
``physical format'' refers to the physical characteristics of the 
media and the equipment from which the information was transferred 
to the media (e.g., a 3.5'' high-density diskette created on an IBM-
compatible personal computer). The term ``logical format'' refers to 
the type and version of the data management software, such as a 
database management system (e.g., Oracle version 8) or file storage 
system (e.g., DOS file allocation table, Windows-NT file store 
(NTFS)). The term ``file format of all information types'' refers to 
record from format information, descriptions of data fields, and the 
relationships between fields and/or records. The term ``source 
code'' refers to a computer program in a format that can be 
understood by humans. Source code is read by a specialized program, 
known as a compiler, and converted into ``object code,'' which is 
the format in which the program is understood by a computer. Other 
information which may be necessary to access the records and indexes 
stored on electronic storage media might include password 
information required to access either the equipment or the 
information, or the type and version of the operating system used on 
the equipment which created the media (e.g., Solaris version 2.6).
    \20\ Escrow arrangements are a common feature of software 
licensing agreements. For example, in a ``source code escrow,'' the 
licensor deposits with an independent third party escrow company a 
copy of the software's sources code and system documentation and 
covenants to update the code and documentation as necessary. The 
escrow agreement describes in detail the situations which will 
trigger release by the escrow company to the licensee of the 
materials deposited in escrow. See D. Bender, ``Software 
Development, Licensing, and Protection: Strategies for Evolving 
Technology,'' 9 No. 1 J. Proprietary Rts. 9 (Jan. 1997).
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    The issue of ready access takes on particular importance when 
electronic storage media are the sole media used to maintain required 
records. For example, if a recordkeeper ceases doing business and 
cannot be located, gaining access to records maintained solely on 
electronic storage media would be costly and time-consuming, if not 
particularly impossible.\21\ To ensure access to records in the 
circumstances, the SEC's current rules requires that records be 
available through an alternative source whenever a recordkeeper 
maintains documents solely on electronic storage media. Specifically, 
those rules require that brokers and dealers using electronic storage 
media as their sole media to maintain require records enter into an 
arrangement with a third-party that has access to such persons' 
electronic storage media and the ability to download information from 
such media to any medium acceptable to the SEC. The third party must 
undertake to take reasonable steps to provide the SEC with access to 
the information contained on the recordkeeper's electronic storage 
media including, as appropriate, arrangements for the downloading of 
required records in a format designated by the SEC.
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    \21\ The level of difficulty would vary with the nature of the 
electronic storage system used and the availability of the 
information such as the physical and logical file format of the 
electronic storage media, the file format of all different 
information types maintained on the electronic storage media, and 
the source code and related documentation. While the proposed rule 
would requires that the listed information be kept available to the 
Commission, a recordkeeper which has ceased doing business and (in 
violation of Commission regulations) disappeared may also fail to 
meet this requirement.
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    The Commission is proposing a similar requirement for persons 
required to maintain records under the Act or Commission regulations. 
The Commission invites comments regarding the likely cost of this 
requirement.\22\ The Commission also invites comment on any practical 
alternative that will ensure access to the records of uncooperative 
recordkeepers without imposing undue costs on recordkeepers that 
cooperate in the manner contemplated by Regulation 1.31.
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    \22\ Because the conversion to an electronic storage system is 
voluntary, and the requirement at issue would only apply to persons 
which maintain some or all of their records solely on electronic 
storage media, the Commission expects that an affected person would 
only convert to a recordkeeping system based solely on electronic 
storage media when the cost of obtaining the services of a qualified 
third party is less than the cost of maintaining a duplicate hard 
copy of all required records. Given these circumstances, the 
Commission invites comment on both the cost of obtaining the 
services of a qualified third party and the cost of maintaining a 
duplicate hard copy of required records
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D. Retention of Trading Cards and Written Customer Orders

    The Commission intends to maintain the current requirement that 
trading cards and written customer orders be retained in hard-copy form 
for the full five-year period. When the Commission considered issues 
related to the unique status of these records in 1993, there was a 
consensus that transferring these records to alternative media for 
storage was not common in the industry.\23\ Moreover, the three futures 
exchanges that commented at that time agreed that electronic storage 
media should have limited application to trading cards and written 
customer orders.\24\
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    \23\ 58 FR 27465, 27466 (May 10, 1993).
    \24\ Id.
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    There have been significant changes in the industry since 1993, 
including an increase in order flow through electronic order routing 
systems.\25\ Similar changes in the securities industry led to the 
SEC's 1997 decision to permit almost all handwritten records, including 
customer orders, to be maintained on either micrographic or electronic 
storage media.\26\ The SEC acknowledged the need for caution in this 
area, however, and rested its decision largely on its conclusion that 
``many of the larger broker-dealers no longer create traditional order 
tickets (with or without handwritten notations) because such broker-
dealers enter most orders directly through electronic systems which 
automatically retain an electronic record of the trade entry.'' \27\
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    \25\ See generally 62 FR 7675.
    \26\ 62 FR 6471.
    \27\ Id.
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    At the present time, electronic order routing in the futures 
industry is not as prevalent as in the securities industry. Moreover, 
the Commission has only limited experience with the transfer of written 
records to electronic storage media. Given these circumstances and the 
importance of trading cards and written order tickets to an effective

[[Page 30671]]

audit trail for trades, the Commission believes it would be premature 
to permit these records to be stored on either micrographic or 
electronic storage media.
    The Commission proposes to clarify the description of the class of 
records that must be retained in hard copy form for the full five-year 
period. Currently, Regulation 1.31 refers to ``written customer 
orders'' required to be kept pursuant to Regulation 1.35(a-1)(1), (a-
1)(2) and (d) (emphasis supplied). Written order tickets for trades 
initiated by persons who may not be regarded as customers under these 
provisions can plan an important role in an effective audit system. 
Regulation 1.35(a) currently requires future commission merchants, 
introducing brokers, and members of contract markets to retain ``all 
orders (filled, unfilled or canceled) * * *'' Given these 
circumstances, the Commission proposes that the class of records that 
must be retained in hard copy form for the full five-year period be 
clarified by referring to ``written orders'' rather than ``written 
customer orders.''
    Regulation 1.31 also refers to ``trading cards'' in its description 
of the class of records that must be retained in hard copy form for the 
full five-year period. The Commission proposes to clarify this 
reference by also including documents on which trade information is 
originally recorded in writing. These documents fall within the class 
of ``original source documents'' that Commission Regulation 1.35(a) 
requires to be retained and produced. The purpose of this clarification 
is to ensure that the Commission has access to written hard copy 
documents necessary to assure an effective audit trail.

E. Related Issues for Comment

    The Commission invites comment on the issues raised by its proposed 
amendments to Regulation 1.31. The Commission also seeks comments on 
several related issues. The first involves the scope of the duty to 
permit inspection imposed by Regulation 1.31. As noted above, 
subsection (a)(1) provides that all required records shall be ``readily 
accessible'' during the first two years of the five-year maintenance 
period. Subsection (a)(2) mandates that an affected person promptly 
provide (at the affected person's expense) a copy of any required 
record requested by a representative of the Commission or the 
Department of Justice.\28\ Nothing in these subsections, however, 
specifies how ``readily accessible'' a record must be to ensure prompt 
production in response to a request by a representative of the 
Commission or the Department of Justice.
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    \28\ In the alternative, the regulation provides that the 
affected person may promptly provide the original book or record for 
reproduction.
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    Subsections (b), (c), and (d) of Regulation 1.31 govern the use of 
eligible ``reproductions'' as substitutes for hard copy records. As 
discussed above, the current regulations provide that, under 
appropriate circumstances, reproductions on microfilm, microfiche and 
optical disk may be substituted for hard copy records. As one of the 
conditions for permitting such a substitution, subsection (c) requires 
that affected persons, among other things, have on their premises 
``facilities for immediately producing complete, accurate and easily 
readable'' hard copy images of the required records. Again, nothing in 
this subsection specifies how ``readily accessible'' a record must be 
to ensure immediate production in response to a request by a 
representative of the Commission or the Department of Justice.
    The regulatory history of Regulation 1.31 does provide limited 
guidance regarding the difference between the standard governing 
production under subsection (a)--promptly--and the standard governing 
production under subsections (b), (c), and (d)--immediately. The 
requirement that copies of eligible reproductions be provided 
``immediately'' was inherited from regulations promulgated by the 
Commission's regulatory predecessors, the Department of Agriculture and 
the Commodity Exchange Commission.\29\ Subsection (a)'s requirement 
that an original hard copy record (or a copy of the record) be provided 
``promptly'' upon request was adopted by the Commission in January 
1981.\30\ The Commission had initially proposed to permit a 
representative of the Commission or Department of Justice to remove an 
original hard copy record for reproduction unless the person required 
to maintain the record provided a copy ``immediately.'' \31\ In 
amending the proposal to substitute the standard ``promptly,'' the 
Commission noted that, in some circumstances, hard copy records might 
not be ``readily accessible'' for the final three years of the five-
year storage period. The Commission acknowledged that this factor 
should be taken into account in formulating an appropriate standard and 
explained that, in such circumstances, production would be deemed 
prompt if the affected person ``retrieve[d] the documents requested as 
expeditiously as is reasonable in light of the circumstances.'' \32\ 
The Commission also noted that the extent and nature of a document 
request could be appropriate factors in assessing the promptness of a 
production, explaining that:

    \29\ See generally 41 FR 3192 (Jan. 21, 1976).
    \30\ 46 FR 21 (Jan. 2, 1981).
    \31\ 43 FR 50699 (Oct. 31, 1978).
    \32\ 46 FR 21 n. 6.
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    The recordkeeper is obligated by this requirement to furnish a 
copy of the original of a book or record as expeditiously as 
reasonably can be expected. This modification is not intended to 
permit any person to avoid the responsibility to provide any member 
of the Commission staff with prompt, complete access to any books 
and records required to be maintained. Rather, it is a recognition 
that in practice a requirement to furnish copies immediately in all 
instances, depending upon the extent or nature of a staff request, 
could impose an unwarranted burden upon the recordkeeper.\33\

    \33\ 46 FR 21 (footnote omitted).
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    Finally, the Commission specifically stated that the adoption of 
the ``promptly'' standard in subsection (a) did not affect a 
``recordkeeper's obligation under [subsection (c)] immediately to 
provide a `facsimile enlargement' of any records kept on microfilm as 
permitted by Rule 1.31.'' \34\
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    \34\ 46 FR 21 n. 6.
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    In a letter addressing technology issues facing the futures 
industry, the National Futures Association (``NFA'') has recommended 
that the Commission eliminate the timing standards from subsections 
(b), (c), and (d) of Regulation 1.31 and substitute a general standard 
providing that an affected person must be able to retrieve required 
records in a usable form by the next business day. Under this 
definition of ``readily accessible,'' production of both hard copy 
documents and eligible reproductions would be deemed prompt if copies 
were provided on the business day following the affected person's 
receipt of a request. In addition, NFA requests that the facility and 
equipment-related conditions subsections (c) and (d) impose on the 
substitution of eligible reproductions for hard copy records be limited 
to the two years when the original records must be readily accessible.
    NFA proposes a uniform standard which would eliminate the 
distinction in the existing regulation between records maintained in 
hard copy and those maintained in electronic or micrographic media. The 
regulatory history discussed above shows that, in establishing 
production requirements under regulation 1.31, the Commission always 
has distinguished between records maintained in hard copy form and 
records maintained in electronic or

[[Page 30672]]

micrographic format by requiring ``prompt'' production of hard copies 
and ``immediate'' production of copies of electronic and micrographic 
records. This distinction recognizes that the reduced space and storage 
requirements for electronic and micrographic records, as compared with 
hard copy records, enable recordkeepers to keep such required records 
on their premises, rather than in a separate storage facility, and 
accordingly, to make immediate production of such records upon request 
of a representative of the Commission or the Department of Justice.
    Indeed, electronic recordkeeping technology continues to improve, 
enhancing the ability of registrants to meet their recordkeeping 
obligations, while further reducing their costs. Thus, it may remain 
appropriate to impose different production standards for hard copy 
records and electronic or micrographic records. Similarly, it may 
remain appropriate to require immediate production of electronic 
records, rather than next day production, acknowledging the 
technological improvements that make compliance with that standard 
reasonable.
    Moreover, the Commission is unaware of any practical problems 
arising out of the production standards currently set forth in 
Regulation 1.31. Nevertheless, the Commission invites comment on NFA's 
recommendation, with particular attention to the existence of such 
problems, the benefits that might be incident to a uniform standard and 
how such a uniform standard could be implemented without compromising 
the Commission's regulatory interest in expeditious production of 
required records.
    NFA's letter also raises questions about current Regulation 1.31's 
selective treatment of security/integrity issues raised by records 
maintained on electronic storage media. NFA correctly notes that 
current Regulation 1.31 does not include any requirements for the 
security/integrity of paper records, but has fairly detailed 
requirements for records stored on optical disks.\35\ It recommends 
that the Commission move to a unified approach that mandates that all 
affected persons have and enforce reasonable procedures to keep their 
records from being altered or destroyed.
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    \35\ The Commission addressed the security/integrity issue when 
it amended Rule 1.31 in 1993. The Commission explained that: The 
Commission's concern in this area relates to the trustworthiness of 
documents that may be relied upon by the Commission in conducting 
investigations and entered into evidence in administrative and 
judicial proceedings. In this respect, microfilm records are 
considered trustworthy, since the image cannot be readily altered 
and firms use documented procedures that are performed in the 
ordinary course of business. The Commission believes under specified 
conditions, optical disk storage can be as trustworthy as microfilm 
and paper records. 58 FR 27460.
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    The Commission agrees that all affected persons must have and 
enforce procedures to keep their records from being altered or 
destroyed. Even apart from regulatory duties, maintenance of such a 
system serves important business interests of Commission registrants. 
As a regulatory duty, it is implicit in registrants' duty to supervise 
pursuant to Commission Regulation 166.3.\36\ The Commission solicits 
comment on whether Regulation 1.31 could be improved by specifying the 
nature of this duty in the context of records maintained in hard copy 
form or on micrographic media.
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    \36\ Regulation 166.3 requires each Commission registrant other 
than associated persons with no supervisory duties to diligently 
supervise the ``handling by its partners, officers, employees and 
agents (or persons occupying a similar status or performing a 
similar function ) of * * * all * * * activities of its partners, 
officers, employees and agents (or persons occupying a similar 
status or performing a similar function) relating to its business as 
a Commission registrant.''
---------------------------------------------------------------------------

    The Commission believes that it is important that Regulation 1.31 
take into account the special security/integrity issues raised by 
electronic storage media. Given the variety of electronic storage 
systems available and the pace of technological change in such systems, 
the Commission believes that it is prudent to require that persons who 
utilize such systems meet specific security/integrity standards, at 
least until the Commission gains more experience with such systems. The 
Commission solicits comment on whether the security/integrity standards 
in the proposed amendments to Regulation 1.31 can be made more 
practical or cost-effective while serving the Commission's regulatory 
interest in the maintenance of secure and accurate records.
    Finally, NFA's letter raises an issue arising out of the 
Commission's February 1997 advisory on alternatives for complying with 
the written record requirements of Commission Regulation 1.35. In that 
advisory's discussion of electronic order-routing systems, the 
Commission referred to several ``no-action'' letters issued by the 
Commission's Division of Trading and Markets (``Division''). Those 
letters, in turn, discussed the capacity of particular electronic 
order-routing systems to capture the time a particular order was 
executed.\37\ When the Commission described the general criteria for 
systems covered by the advisory in the latter portion of the document, 
it made the following statement:

    \37\ Commission Regulation 1.35 requires that written customer 
orders be time-stamped with the date and time ``to the nearest 
minute.'' In this regard, the Division's no-action letters for two 
specific electronic order-routing systems noted that the systems had 
the capacity to capture execution times to the nearest second.
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    All order-related times required under Commission Regulation 
1.35, as well as the times for all modifications, are to be captured 
to the highest level of precision achievable by the operating 
system. In this regard, the Commission's experience is that these 
systems have the capability, at a minimum, to capture times to the 
second. Therefore, the Commission is requiring that such times must 
be accurate at least to the second.\38\

    \38\ 62 FR 7677.
---------------------------------------------------------------------------

    In its conclusion, the Commission's advisory again described the 
time an eligible system should capture as ``at least to the second.'' 
\39\
---------------------------------------------------------------------------

    \39\ 62 FR 7678.
---------------------------------------------------------------------------

    In its letter, NFA notes that this guidance does not sufficiently 
specify the appropriate increment of time a registrant's system must 
capture. It recommends that the Commission determine the appropriate 
increment of time all electronic time-recording systems should meet and 
apply this increment without regard to the particular system's 
capacity. In this regard, NFA contends that the regulatory benefit to 
mandating more precise time-stamping diminishes as the time increment 
approaches a fraction of a second.
    The Commission intends that electronic time-recording systems 
covered by the advisory meet a one-second performance standard. 
However, for business-related reasons, affected persons may choose to 
operate systems that capture times at a more-refined level. If an 
affected person does operate its system in a manner that captures time 
increments of less than a second, it must make that information 
available at the request of a representative of the Commission or the 
Department of Justice. Put simply, an affected person may not fulfill 
its recordkeeping duties by providing the Commission with timing data 
less refined than the data its system has actually captured.
    While the Commission believes this clarification addresses the 
issue raised by NFA, comment is invited on the role system capacity 
should play in assessing an affected person's recordkeeping 
responsibilities under the Act and Commission regulations.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. Sec. 601, et 
seq., 611,

[[Page 30673]]

requires that, in adopting rules and regulations, all federal agencies 
consider their impact on small entities. In accordance with Section 
601(3) of the RFA, the Commission published a ``Policy Statement of 
Definitions of Small Entities for Purposes of the Regulatory 
Flexibility Act,'' 47 FR 18618 (Apr. 30, 1982). In that statement,\40\ 
the Commission indicated that some classes of persons were excluded 
from the definition of small entities. These include: futures 
commission merchants registered or required to be registered; floor 
brokers employed by registered futures commission merchants; commodity 
pool operators registered or required to be registered and large 
traders in the futures market. The Commission considers other entities 
to be small under particular facts and circumstances. These may 
include: futures commission merchants exempt from registration; 
commodity pool operators exempt from registration; introducing brokers; 
floor brokers not employed by futures commission merchants; floor 
traders and commodity trading advisors. Because the rules discussed 
herein will affect the full spectrum of Commission registrants, it is 
likely that small entities within the meaning of the RFA will be 
affected.
---------------------------------------------------------------------------

    \40\ The Commission subsequently clarified some of the 
definitions. See 48 FR 35276 (Aug. 3, 1983); 55 FR 13550 (Apr. 11, 
1990); 58 FR 40347 (Jul. 28, 1993).
---------------------------------------------------------------------------

    The proposed regulation amendments would generally expand the 
category of record storage systems permissible under the Commission's 
rules. The Commission anticipates that, if the proposed rules are 
adopted, small entities will have more freedom to tailor their record 
storage systems to the overall needs of their businesses. For example, 
the proposed rules would have no impact on a small entity that chooses 
to maintain a paper-based record storage system. For a small entity 
that chooses to use micrographic storage media for its record storage 
system, the proposed rules would permit the small entity to take 
advantage of technological advances. The only additional cost would be 
that of creating a duplicate record and storing it at a location 
separate from the original record. The bulk of this cost could be 
avoided by moving the hard copies of the records transferred to 
micrographic media to a separate location.
    For a small entity that chooses to use electronic storage media, 
the proposed regulation would eliminate the current rule's requirement 
that the small entity use a limited class of optical storage 
technology. This change would permit small entities to select 
electronic storage systems that may be less costly and simpler to 
manage. The proposed rules would impose limited additional costs on 
small entities that use electronic storage technology. The new costs 
would include requirements that the affected person: (1) provide a 
representation that the system meets pertinent regulatory requirements 
prior to converting to an electronic storage system; (2) create a 
duplicate of both required records and an index of those records, and 
maintain the duplicate at a separate location; (3) create and maintain 
an audit system for transferring records to electronic storage media; 
(4) take steps to ensure Commission access to information necessary to 
download records from the electronic storage media; and (5) provide an 
independent source for the downloading of records that are maintained 
solely on electronic storage media. The Commission anticipates that 
small entities will not convert their recordkeeping systems to 
electronic storage media unless the accompanying costs are outweighed 
by the financial savings and operational efficiency that would result 
from the change to electronic storage media.
    The Chairperson, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the action taken herein will not have 
a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    When publishing proposed rules, the Paperwork Reduction Act of 1995 
\41\ (``PRA'') imposes certain requirements on federal agencies 
(including the Commission) in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. In 
compliance with the PRA, the Commission through this rule proposal, 
solicits comments to:

    \41\ Pub. L. 104-13 (May 13, 1995).
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    (1) evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including the validity of the methodology and assumptions used; (2) 
evaluate the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (3) enhance the quality, utility 
and clarity of the information to be collected; and (4) minimize the 
burden of the collection of information on those who are to respond, 
including through the use of appropriate automated, electronic, 
mechanical or other technological collection techniques or other 
forms of information technology (e.g., permitting electronic 
submission of responses.

    The Commission has submitted this proposal and its associated 
information collection requirements to the Office of Management and 
Budget. The burden associated with this entire collection (3038-0022), 
including the proposed rule, is as follows:

Average burden hours per response: 3,551.89
Number of respondents: 15,682
Frequency of response: On occasion

    The burden associated with this specific proposed rule, is as 
follows:

Average burden hours per response: 17.50
Number of respondents: 3412
Frequency of response: On occasion

    Persons wishing to comment on the information that would be 
required by this proposal 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 in 17 CFR Part 1

    Recordkeeping requirements.

    Accordingly, 17 CFR part 1 is proposed to be amended as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 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, 24.

    2. Section 1.31 is amended by revising paragraphs (b), (c), and (d) 
to read as follows:


Sec. 1.31  Books and records, keeping and inspection.

* * * * *
    (b) Except as provided in paragraph (d) of this section, immediate 
reproductions on either ``micrographic media'' (as defined in paragraph 
(b)(1)(i) of this section) or ``electronic storage media'' (as defined 
in paragraph (b)(1)(ii) this section) may be kept in that form for the 
required time period under the conditions set forth in this paragraph 
(b).
    (1) For purposes of this section:
    (i) The term ``micrographic media'' means microfilm or microfiche 
or any similar medium.

[[Page 30674]]

    (ii) The term ``electronic storage media'' means any digital 
storage medium or system that:
    (A) Preserves the records exclusively in a non-rewritable, non-
erasable format;
    (B) Verifies automatically the quality and accuracy of the storage 
media recording process;
    (C) Serializes the original and, if applicable, duplicate units of 
storage media and creates a time-date record for the required period of 
retention for the information placed on such electronic storage media; 
and
    (D) Permits the immediate downloading of indexes and records 
preserved on the electronic storage media onto paper, microfilm, 
microfiche or other medium acceptable under this paragraph upon the 
request of representatives of the Commission or the Department of 
Justice.
    (2) Persons who use either micrographic media or electronic storage 
media to maintain records in accordance with this section must:
    (i) Have available at all times, for examination by representatives 
of the Commission or the Department of Justice, facilities for 
immediate, easily readable projection or production of micrographic 
media or electronic storage media images;
    (ii) Be ready at all times to provide, and immediately provide at 
the expense of the person required to keep such records, any easily 
readable hard-copy image that representatives of the Commission or 
Department of Justice may request.
    (iii) Waive any privilege, claim of confidentiality, or other 
objection to disclosure of non-Commission-required information stored 
on the same individual medium (e.g. the same disk or sheet of 
microfiche) as Commission-required records;
    (iv) Store a duplicate of the record, in any medium acceptable 
under this section, at a location separate from the original for the 
period of time required for maintenance of the original; and
    (v) Organize and maintain an accurate index of all information 
maintained on both the original and duplicate storage media such that:
    (A) The location of any particular record stored on the media may 
be immediately ascertained;
    (B) The index is available at all times for immediate examination 
by representatives of the Commission or the Department of Justice;
    (C) A duplicate of the index is stored at a location separate from 
the original index; and
    (D) Both the original index and the duplicate index are preserved 
for the time period required for the records included in the index.
    (3) In addition to the conditions in paragraph (b)(2) of this 
section, persons using electronic storage media must:
    (i) Be ready at all times to provide, and immediately provide at 
the expense of the person required to keep such records, copies of such 
records on such approved machine-readable media as defined in 
Sec. 15.00(l) of this chapter which any representative of the 
Commission or the Department of Justice may request. Records must use a 
format and coding structure specified in the request.
    (ii) Develop and maintain written operational procedures and 
controls (an ``audit system'') designed to provide accountability over 
both the initial entry of required records to the electronic storage 
media and the entry of each change made to any original or duplicate 
record maintained on the electronic storage media such that:
    (A) The results of such audit system are available at all times for 
immediate examination by representatives of the Commission or the 
Department of Justice;
    (B) The audit results are preserved for the time period required 
for the records maintained on the electronic storage media; and
    (C) The written operational procedures and controls are available 
at all times for immediate examination by representatives of the 
Commission or the Department of Justice.
    (iii) Either:
    (A) Maintain, keep current, and make available at all times for 
immediate examination by representatives of the Commission or 
Department of Justice all information necessary to access records and 
indexes maintained on the electronic storage media; or
    (B) Place in escrow and keep current a copy of the physical and 
logical format of the electronic storage media, the file format of all 
different information types maintained on the electronic storage media 
and the source code, documentation, and information necessary to access 
the records and indexes maintained on the electronic storage media.
    (4) In addition to the foregoing conditions, any person who uses 
only electronic storage media to preserve some or all of its required 
records (``Electronic Recordkeeper'') shall, prior to the media's use, 
enter into an arrangement with at least one third party technical 
consultant (``Technical Consultant'') who has the technical and 
financial capability to perform the undertakings described in this 
paragraph (b)(4). The arrangement shall provide that the Technical 
Consultant will have access to and the ability to download information 
from the Electronic Recordkeeper's electronic storage media to any 
media to any medium acceptable under this section.
    (i) The Technical Consultant must file with the Commission on 
undertaking in a form acceptable to the Commission, signed by the 
Technical Consultant or a person duly authorized by the Technical 
Consultant. An acceptable undertaking must include the following 
provision with respect to the Electronic Recordkeeper:

    With respect to any books and records maintained or preserved on 
behalf of the Recordkeeper, the undersigned hereby undertakes to 
furnish promptly to any representative of the United States 
Commodity Futures Trading Commission or the United States Department 
of Justice (the ``Representative''), upon reasonable request, such 
information as is deemed necessary by the Representative to download 
information kept on the Electronic Recordkeeper's electronic storage 
media to any medium acceptable under 17 CFR 1.31. The undersigned 
also undertakes to take reasonable steps to provide access to 
information contained on the Electronic Recordkeeper's electronic 
storage media, including, as appropriate, arrangements for the 
downloading of any record required to be maintained under the 
Commodity Exchange Act or the rules, regulations, or orders of the 
United States Commodity Futures Trading Commission, in a format 
acceptable to the Representative. Such arrangements will provide 
specifically that in the event the Electronic Recordkeeper fails to 
download a record into a readable format and after reasonable notice 
to the Electronic Recordkeeper, upon being provided with the 
appropriate electronic storage medium, the undersigned will 
undertake to do so, at no charge to the United States, as the 
Representative may request.

    (c) Persons employing an electronic storage system shall provide a 
representation to the Commission prior to the initial use of the 
system. The representation shall be made by the person required to 
maintain the records, the storage system vendor, or another third party 
with appropriate expertise and shall state that the selected electronic 
storage system meets the requirements set forth in paragraph (b)(1)(ii) 
of this section. Persons employing an electronic storage system using 
media other than optical disk or CD-ROM technology shall so state. The 
representation shall be accompanied by the type of oath or affirmation 
described in Sec. 1.10(d)(4) of this chapter.
    (d) Trading cards, documents on which trade information is 
originally recorded in writing, and written orders required to be kept 
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d), must be

[[Page 30675]]

retained in hard-copy for the required time period.

    Issued in Washington, DC on may 29, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-14805 Filed 6-4-98; 8:45 am]
BILLING CODE 6351-01-M


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