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[Federal Register: August 17, 2001 (Volume 66, Number 160)]
[Rules and Regulations]
[Page 43080-43083]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17au01-12]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 170


Notice Registration as a Futures Commission Merchant or
Introducing Broker for Certain Securities Brokers or Dealers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: In accordance with certain provisions of the Commodity Futures
Modernization Act of 2000 ("CFMA"), the Commodity Futures Trading
Commission ("Commission" or "CFTC") is amending its regulation,
which specifies the information that various applicants for
registration must file. The amendment provides for notice registration
as a futures commission merchant ("FCM") or introducing broker
("IB"), as applicable, in the case of a broker or dealer ("BD")
registered with the Securities and Exchange

[[Page 43081]]

Commission ("SEC") that, among other things, limits its involvement
with commodity futures contracts to security futures products. In
accordance with certain other provisions of the CFMA, the Commission is
amending its regulation which requires each registered FCM to be a
member of a registered futures association. The amendment exempts
notice-registered BDs from this requirement.

DATES: Effective: September 17, 2001.

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Assistant Chief
Counsel, or Lawrence B. Patent, Associate Chief Counsel, Division of
Trading and Markets, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581, (202)
418-5450, electronic mail: [email protected], or [email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Background

    On December 21, 2000, the CFMA was signed into law.\1\ Among other
things, the CFMA removed the restriction in the Commodity Exchange Act
("CEA") on the trading of futures contracts on individual equity
securities and narrow-based indices of equity securities.\2\ Under the
revised law, security futures products \3\ may be traded on a
designated contract market or on a registered derivatives transaction
execution facility.\4\
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    \1\ Pub. L. 106-554, 114 Stat. 2763. The text of the CFMA may be
accessed on the Internet at http://agriculture.house.gov/txt5660.pdf.
    \2\ See section 251(a) of the CFMA. This trading previously had
been prohibited by Section 2(a)(1)(B)(v) of the CEA.
    \3\ The term "security futures product" is defined in section
1a(32) of the CEA to mean "a security future or any put, call,
straddle, option, or privilege on any security future." The term
"security future" is defined in section 1a(31) of the CEA. Because
the CFMA also provides that options on security futures cannot be
traded until at least December 21, 2003, security futures are the
only security futures product that may be available for trading
during the next 27 months.
    \4\ The CFMA also specifically prescribes certain dates on which
security futures trading can commence. For example, retail
transactions cannot commence until December 21, 2001. Section 202(a)
of the CFMA; section 6(g)(5) of the Securities Exchange Act of 1934.
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    New section 4f(a)(2) of the CEA now provides that any BD that is
registered with the SEC \5\ shall be registered as an FCM or IB, as
applicable, "effective contemporaneously with the submission of
notice," if--

    \5\ Because the CFMA speaks in terms of a "broker or dealer,"
the term "BD" as used in this release applies equally to a broker,
a dealer or a person registered as both a broker and a dealer.

    (A) the broker or dealer limits its solicitation of orders,
acceptance of orders, or execution of orders, or placing of orders
on behalf of others involving any contracts of sale of any commodity
for future delivery, on or subject to the rules of any contract
market or registered derivatives transaction execution facility to
security future products;
    (B) the broker or dealer files written notice with the
Commission in such form as the Commission, by rule, may prescribe
containing such information as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or for
the protection of investors;
    (C) the registration of the broker or dealer is not suspended
pursuant to an order of the Securities and Exchange Commission; and
    (D) the broker or dealer is a member of a national securities
association registered pursuant to section 15A(a) of the Securities
Exchange Act of 1934.

Moreover, new section 4f(a)(4)(C)(i) of the CEA provides that a BD that
is registered as an FCM pursuant to notice registration shall not be
required to become a member of a registered futures association.
Accordingly, on May 14, 2001 the Commission proposed to amend Rule 3.10
to provide for FCM and IB notice registration thereunder and to amend
Rule 170.15 to exclude from its scope BDs notice-registered as FCMs
(the "CFTC Proposal").\6\
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    \6\ 66 FR 27476 (May 17, 2001). The comment period on the CFTC
Proposal originally was due to expire June 18, 2001. In response to
a request it received, the Commission extended the comment period to
July 11, 2001. 66 FR 33494 (June 22, 2001).
    The Commission did not similarly propose (and is not now
adopting) notice registration under Rule 3.12 for the APs of those
BDs notice-registered as FCMs and IBs under Rule 3.10, because the
CFMA exempts these APs from registration altogether. Specifically,
section 252(d) of the CFMA amends section4k of the CEA to provide
that:
    Any associated person of a broker or dealer that is registered
with the Securities and Exchange Commission, and who limits its
solicitation of orders, acceptance of orders, or execution of
orders, or placing of orders on behalf of others involving any
contracts of sale of any commodity for future delivery or any
options on such a contract, on or subject to the rules of any
contract market or registered derivatives transaction execution
facility to security futures products, shall be exempt from [Section
4k(1)] of this Act and the rules thereunder.
    Commission rules referred to herein are found at 17 CFR Ch. I
(2001).
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    Among other things, the CFTC Proposal provided that this notice
registration would be made "by following such procedures for notice
registration as may be specified" by the National Futures Association
("NFA").\7\ As the Commission explained, this was consistent with the
Commission's previous delegations of registration authority to NFA and
with the study on regulation of intermediaries required of the
Commission by section 125 of the CFMA.\8\ Subsequent to the publication
of the CFTC Proposal, NFA submitted, and the Commission approved, a
notice registration rule and related form.\9\ In a separate release
published elsewhere in today's edition of the Federal Register, the
Commission is announcing its delegation to NFA of the processing of
notice forms filed by BDs for registration as an FCM or IB.
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    \7\ NFA is a futures association registered under section 17 of
the CEA.
    \8\ See 66 FR 27476 at 27478.
    \9\ Specifically, this was done by way of Commission approval of
NRA's amendment to its Rule 204 on August 10, 2001.
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B. Comments

    Three comment letters were filed on the CFTC Proposal: one by NFA,
one by the Chicago Mercantile Exchange Inc. ("CME"), and one by the
Futures Industry Association ("FIA"). While all of these commenters
supported the CFTC Proposal (and the Commission's contemplated notice
registration delegation to NFA), two of them took exception to the
corresponding CFMA-mandated proposal of the SEC that would provide for
notice registration as a BD of certain registered FCMs and IBs for the
limited purpose of effecting transactions in security futures products
("SEC Proposal").\10\ Specifically, CME and FIA commented that while
the notice registration form proposed by NFA was simple and
straightforward, the SEC Proposal appeared to have taken a different
approach and would discriminate against FCMs and IBs seeking to notice
register as BDs.\11\ CME stated that the notice registration procedures
for the CFTC and the SEC should be virtually identical and urged the
Commission to defer implementation of notice registration rules until
it could more closely and fairly coordinate its rules and those of the
SEC in this area. FIA also stated that it saw no reason why the SEC
could not adopt a procedure similar to the CFTC proposal and FIA
encouraged the Commission to consult with the SEC to that end.
Additionally, CME and FIA objected to the provision in the SEC Proposal
that would prohibit notice-registered FCMs from becoming members of a
national securities exchange for the limited purpose of effecting
securities futures products on that exchange. Here, too, they claimed
that this would result in disparate

[[Page 43082]]

treatment for FCMs notice-registered as BDs.
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    \10\ 66 FR 34041 (June 26, 2001).
    \11\ Briefly stated, the NFA registration form is on one piece
of paper, with one side asking for basic identifying information and
necessary certifications and the other side providing instructions.
The SEC Proposal would have an FCM or IB complete and file Form BD,
which is the form an applicant currently must complete and file to
register as a "full service" BD.
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    In response to these comments, the Commission notes that it has
conferred with the SEC on these issues and that it continues to do so
in this area as well as others concerning security futures products.
Nonetheless, the Commission continues to believe that, as stated by
FIA, its BD notice registration procedures (i.e., the NFA notice
registration procedures that the Commission has approved) are
"consistent with the relevant provisions of the CFMA and . . . the
spirit underlying it." Accordingly, in light of that belief and the
deadlines imposed by the CFMA, the Commission has determined not to
defer final action on the CFTC Proposal and is adopting the amendments
to Rules 3.10 and 170.15 as proposed.

II. The Rule Amendments

A. Rule 3.10

    As proposed, the Commission is amending Rule 3.10 in several ways.
First, paragraph (a)(1)(i) is being revised to alert applicants for
registration that there is a special, limited registration procedure
under new Rule 3.10(a)(3). Second, paragraph (a)(3) is being added.
Captioned "Notice registration as a futures commission merchant or
introducing broker for certain securities brokers or dealers," it adds
an exception to the FCM and IB registration requirements of Rule
3.10(a) for BDs who meet the criteria of new section 4f(a)(2) of the
CEA. Registration under paragraph (a)(3) is to be made "by following
such procedures for notice registration as may be specified" by NFA.
This registration will be effective upon the filing of the notice
prescribed by NFA, as mandated by section 252(b)(2) of the CFMA.
Finally, paragraph (d) is being amended to relieve these notice
registrants from the annual update requirement.
    The Commission similarly is amending as proposed Rule 170.15. The
amendment adds a provision to exempt FCMs registered in accordance with
Rule 3.10(a)(3) from the requirement to become and remain a member of a
registered futures association.

III. 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 discussed herein
would affect persons seeking to be registered under notice registration
procedures as an FCM or IB pursuant to new section 4f(a)(2). The
Commission has previously established certain definitions of "small
entities" to be used by the Commission in evaluating the impact of its
rules on such entities in accordance with the RFA.\12\ The Commission
previously determined that registered FCMs are not small entities for
the purpose of the RFA.\13\ With respect to IBs, the Commission has
stated that it would evaluate within the context of a particular rule
proposal whether all or some affected IBs would be considered to be
small entities and, if so, the economic impact on them of any rule.\14\
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    \12\ 47 FR at 18618-21 (April 30, 1982).
    \13\ 47 FR at 18619-20.
    \14\ 47 FR at 18618, 18620.
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    As noted in the CFTC Proposal, these amendments would provide
exemptive relief from provisions of the Commission's rules that
otherwise will be applicable to such persons. Consequently, the
Commission believes that the adoption of these rule amendments would
reduce the burden of compliance by persons seeking to be registered as
an FCM or IB. No comments were received in response to the Commission's
specific request for comments on this issue.

B. Paperwork Reduction Act

    This rulemaking contains information collection requirements within
the meaning of the Paperwork Reduction Act of 1995 ("PRA").\15\ As
required by the PRA, the Commission has submitted a copy of this part
to the Office of Management and Budget ("OMB") for its review. In
response to the Commission's invitation in the notice of proposed
rulemaking to comment on any potential paperwork burdens associated
therewith, no comments were received.
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    \15\ 44 U.S.C. 3501 et. seq.
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    The final rule does not contain any disclosure requirements or any
consumer reporting requirements. It does, however, require the
collection of certain information from BDs seeking to be notice-
registered as an FCM or IB. The Commission may not conduct or sponsor,
and a person is not required to respond to, an information collection
unless it displays a currently valid OMB control number. The Commission
has received a control number for this information collection from OMB.

C. Cost-Benefit Analysis

    Section 119 of the CFMA amended section 15 of the CEA to require
that the Commission, before promulgating a rule or issuing an order
under the CEA, consider the costs and benefits of the Commission's
action in light of five criteria.\16\ As explained in the preamble of
the CFTC proposal, the main relevant considerations with respect to
notice registration are the first two considerations set forth in the
CEA, "protection of market participants and the public" and
"efficiency, competitiveness and financial integrity of the futures
markets."\17\ The Commission then expressed its views that: (1)
Persons who are registered as BDs with the SEC are appropriate subjects
for notice registration where their futures-related activity is
restricted to security futures products; and (2) these additional
registrants may promote the efficiency and competitiveness of those
markets on which security future products may be traded and that their
presence as intermediaries in these markets may serve to promote the
financial integrity of those markets, and further noted that the CFMA
specifically mandates that registered BDs be noticed-registered with
the Commission as an FCM or IB.\18\ The Commission did not receive any
comments on this cost-benefit analysis.
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    \16\ These considerations include: (A) Protection of market
participants and the public; (B) efficiency, competitiveness, and
financial integrity of futures markets; (C) price discovery; (D)
sound risk management practices; and (E) other public interest
considerations.
    \17\ 66 FR 27476 at 27478.
    \18\ Id.
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List of Subjects

17 CFR Part 3

    Brokers, Commodity futures, Reporting and recordkeeping
requirements.

17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures.

    For the reasons discussed in the preamble, the Commission hereby
amends Chapter I of Title 17 of the Code of Federal Regulations as
follows:

PART 3--REGISTRATION

    1. The authority citation for part 3 continues to read as follows:

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c,
16, 18, 19, 21, 23.

    2. Section 3.10 is amended as follows:
    A. By revising paragraph (a)(1)(i),
    B. By adding a new paragraph (a)(3), and
    C. By revising the first sentence of paragraph (d).
    The revisions and addition to read as follows:

[[Page 43083]]

Sec. 3.10  Registration of futures commission merchants, introducing
brokers, commodity trading advisors, commodity pool operators and
leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in
paragraph (a)(3) of this section, application for registration as a
futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator or leverage transaction merchant must
be on Form 7-R, completed and filed with the National Futures
Association in accordance with the instructions thereto.
* * * * *
    (3) Notice registration as a futures commission merchant or
introducing broker for certain securities brokers or dealers. (i) Any
broker or dealer that is registered with the Securities and Exchange
Commission may be registered as a futures commission merchant or
introducing broker, as applicable, by following such procedures for
notice registration as may be specified by the National Futures
Association, if--
    (A) The broker or dealer limits its solicitation of orders,
acceptance of orders, or execution of orders, or placing of orders on
behalf of others involving any contracts of sale of any commodity for
future delivery, on or subject to the rules of any contract market or
registered derivatives transaction execution facility, to security
futures products as defined in section 1a(32) of the Act;
    (B) The registration of the broker or dealer is not suspended
pursuant to an order of the Securities and Exchange Commission; and
    (C) The broker or dealer is a member of a national securities
association registered pursuant to section 15A(a) of the Securities
Exchange Act of 1934.
    (ii) The registration will be effective upon the filing of the
notice prescribed by the National Futures Association in accordance
with the instructions thereto.
* * * * *
    (d) Annual filing. Any person registered as a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator or leverage transaction merchant in accordance with paragraph
(a)(1) and (a)(2) of this section must file with the National Futures
Association a Form 7-R, completed in accordance with the instructions
thereto, annually on a date specified by the National Futures
Association. * * *

PART 170--REGISTERED FUTURES ASSOCIATIONS

    3. The authority citation for Part 170 continues to read as
follows:

    Authority: 7 U.S.C. 6p, 12a and 21, unless otherwise noted.

Subpart C--Membership in a Registered Futures Association

    4. Section 170.15 is revised to read as follows:


Sec. 170.15  Futures Commission Merchants.

    (a) Except as provided in paragraph (b) of this section, each
person required to register as a futures commission merchant must
become and remain a member of at least one futures association which is
registered under section 17 of the Act and which provides for the
membership therein of such futures commission merchant, unless no such
futures association is so registered.
    (b) The requirements of paragraph (a) of this section shall not
apply to a futures commission merchant registered in accordance with
Sec. 3.10(a)(3) of this chapter.

    Issued in Washington, DC on August 10, 2001 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-20628 Filed 8-16-01; 8:45 am]
BILLING CODE 6351-01-P
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