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[Federal Register: September 28, 2005 (Volume 70, Number 187)]
[Proposed Rules]
[Page 56608-56611]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28se05-19]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038--AC20


Definition of ``Client'' of a Commodity Trading Advisor

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing to amend Rule 1.3(bb) by adding to that rule a definition
of the term ``client,'' as it relates to commodity trading advisors
(CTAs) (Proposal). This would clarify inconsistencies in the
Commission's regulations concerning the advisees of CTAs. The Proposal
would also reflect the Commission's longstanding view that its
antifraud authority extends to all CTAs, irrespective of whether they
provide advice on a personalized or nonpersonalized basis.

DATES: Comments must be received on or before November 28, 2005.

ADDRESSES: Comments on the Proposal should be sent to Jean A. Webb,
Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be
sent by facsimile transmission to (202) 418-5528, or by e-mail to [email protected]. Reference should be made to ``Proposed Rule

Regarding the Definition of `Client' of a Commodity Trading Advisor.''
Comments may also be submitted by connecting to the Federal eRulemaking
Portal at  href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov and following the comment

submission instructions.

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,
or R. Stephen Painter, Jr., Staff Attorney, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581,
telephone number: (202) 418-5450 or (202) 418-5416, respectively;
facsimile number: (202) 418-5528; and electronic mail: [email protected]
or [email protected], respectively.

SUPPLEMENTARY INFORMATION:

I. The Proposal

A. Background

    Section 1a(6)(A) of the Commodity Exchange Act (Act) \1\ defines
the term ``commodity trading advisor'' to mean any person who:
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    \1\ 7 U.S.C. 1a(6) (2000). The Act and the Commission's
regulations issued thereunder can be accessed at  href="http://frwebgate5.access.gpo.gov/cgi-bin/TEXTgate.cgi?WAISdocID=59218411834+0+1+0&WAISaction=retrieve" shape="rect">http://frwebgate5.access.gpo.gov/cgi-bin/TEXTgate.cgi?WAISdocID=59218411834+0+1+0&WAISaction=retrieve and
 href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.gpoaccess.gov/ecfr" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.gpoaccess.gov/ecfr, respectively.


    (i) For compensation or profit, engages in the business of
advising others, either directly or through publications, writings,
or electronic media, as to the value of or the advisability of
trading in--
    (I) Any contract of sale of a commodity for future delivery made
or to be made on or subject to the rules of a contract market or
derivatives transaction execution facility;
    (II) Any commodity option authorized under section 4c; or
    (III) Any leverage transaction authorized under section 19; or
    (ii) For compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning any
of the activities referred to in clause (i).

    Under the language of Section 1a(6)(A) of the Act, the term
``commodity trading advisor'' can include advisors who provide
nonpersonalized advice, such as publishers of advisory newsletters or
Web sites, as well as advisors who provide advice tailored to the needs
of particular persons and advisors who direct other persons' trading
pursuant to a power of attorney or other written

[[Page 56609]]

authorization. Section 1a(6)(B) of the Act excludes certain persons
from the CTA definition where, as provided for in Section 1a(6)(C) of
the Act, their furnishing of advice with respect to trading in
commodity futures and options is solely incidental to the conduct of
their business or profession.\2\
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    \2\ These excluded persons include, among others, teachers and
publishers. In this regard, the Commission notes that, for a teacher
or publisher to claim the exclusion from the CTA definition in
Section 1a(6)(B) of the Act, the trading advice activity may not be
the sole teaching or publishing activity, but instead must be solely
incidental to the teacher's or publisher's other teaching and
publishing activities. See e.g., In the Matter of Armstrong, et al.,
[1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 25,657 (CFTC
Feb. 8, 1993) (holding that publishers of standardized advice are
not excluded from the definition of CTA where publication is
``largely devoted to advice about trading commodity futures or
options contracts'').
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    Rule 1.3(bb) \3\ contains essentially the same definition of the
term ``commodity trading advisor'' as that contained in section 1a(6)
of the Act.\4\ However, neither the Act nor the Commission's
regulations issued thereunder define who the ``others'' are that are
advised by CTAs. Moreover, neither the Act nor the regulations are
consistent when referring to these advisees. Although most of the
relevant provisions refer solely to ``clients,'' \5\ a few of the
provisions refer to ``clients and subscribers.'' \6\ The Proposal is
intended to clarify these inconsistencies.\7\ Specifically, the
Proposal is intended to clarify that, as used in provisions of the Act
and the regulations relating to CTAs, the term ``client'' refers to all
customers of a CTA, including persons who receive advice by subscribing
to a newsletter or other information service. A ``subscriber,'' then,
as used in these statutory provisions and rules, is one type of
``client.'' \8\
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    \3\ Commission rules cited to herein are found at 17 CFR Ch. I
(2005).
    \4\ The Commodity Futures Modernization Act of 2000 (CFMA)
amended the statutory definition of ``commodity trading advisor'' to
take account of the new type of trading facility known as a
``derivatives transaction execution facility.'' See Commodity
Futures Modernization Act of 2000, Pub. L. 106-554, Appendix E, 114
Stat. 2763, Section 123(a)(1)(A). The Commission intends to make a
conforming change to its rules in connection with final action on
the Proposal. The CFMA can be accessed through the Commission's Web
site:  href="http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/ogc/ogchr5660.pdf" shape="rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/ogc/ogchr5660.pdf.

    \5\ The Act refers solely to ``clients'' of CTAs in, for
example, Section 4k(3)(i), 7 U.S.C. 6k(3)(i) (registration of
persons associated with CTAs), and 4o(1)(A) and (B), 7 U.S.C.
6o(1)(A) and (B) (antifraud provisions applicable to CTAs). The
regulations refer solely to ``clients'' of CTAs in, for example,
Rules 4.30 (prohibited activities of CTAs) and 4.41(a) (advertising
by CTAs).
    \6\ For example, Section 4n(3)(A) of the Act, 7 U.S.C. 6n(3)(A),
and Rule 4.33 (recordkeeping requirements for CTAs) refer to
``clients'' and ``subscribers'' of CTAs.
    The Act also refers to ``subscribers'' other than advisees of
CTAs, but these provisions are not relevant for the purposes of the
Proposal. See, e.g., Section 1a(1)(C) of the Act, 7 U.S.C. 1a(1)(C)
(definition of alternative trading system) and Section 5f(b) of the
Act, 7 U.S.C. 7b-1(b) (designation of securities exchanges and
associations as contract markets).
    \7\ When Congress originally defined the term ``commodity
trading advisor'' in 1974, the definition included any person
providing trading advice ``either directly or through publications
or writings.'' With the advent of various electronic media, Congress
expanded the CTA definition in 1982 to include ``publications,
writings or electronic media.'' Pub. L. 97-444, 96 Stat. 2294, Sec.
201 (Jan. 11, 1983) (emphasis added). Since 1982, these electronic
media have proliferated, now including the Internet, email, and any
number of software programs developed by CTAs. By defining
``client'' of a CTA using the terms of the statutory CTA definition,
the Commission intends to update the scope of that term to include
subscribers to, and other advisees of, the various electronic or
print media now available.
    \8\ The usual presumption that different terms in a statute have
separate meanings is rebutted as to the terms ``client'' and
``subscriber'' in the provisions of the Act regulating CTAs, by the
language of the introductory provision, Section 4l(1), which lists
``subscriptions'' as one of the ``arrangements with clients''
entered into by CTAs. This language implies that, in connection with
CTAs, a person who arranges for a subscription, in other words a
``subscriber,'' is a type of ``client.'' Moreover, a definition of
``client'' that excludes ``subscribers'' would not make sense in
light of the language of Section 1a(6)(A)(i) of the Act defining a
``commodity trading advisor'' to include a person who provides
advice ``through publications, writings, or electronic media.'' The
customers of such CTAs could reasonably be described as
``subscribers,'' but there is no logical reason for such customers
to receive less protection under the statute than other customers of
CTAs.
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    In addition, the Commission believes that defining the term
``client'' of a CTA is necessary as a result of several court cases in
which various CTAs have argued that, because the antifraud provisions
of Section 4o of the Act \9\ refer to ``client'' rather than ``client
or subscriber,'' those provisions apply only to CTAs who provide advice
on a personalized basis.\10\ As explained more fully below, the
proposed definition would clarify that Section 4o applies to all CTAs,
and not just to those who provide advice on a personalized basis. In
this regard, the Commission notes that the only federal appeals court
to have reached the merits of the meaning of the term ``client'' in
Section 4o, the Seventh Circuit in Commodity Trend Service,\11\
deferred to the Commission's interpretation of Section 4o, finding that
the Commission's position was a reasonable interpretation of the
statutory language and that it appeared to effectuate Congressional
intent. The court held that the use of the term ``client'' in Section
4o does not connote only a personalized relationship. Instead,
according to the court, the term ``client'' ``can refer to * * * those
who receive tailored advice from professionals or those who receive any
kind of service regardless of whether it is personalized.'' \12\
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    \9\ 7 U.S.C. 6o.
    \10\ Commodity Trend Serv., Inc. v. CFTC, 233 F.3d 981 (7th Cir.
2000); R & W Technical Servs. Ltd. v. CFTC, 205 F.3d 165 (5th Cir.
2000); CFTC v. Vartuli, 228 F.3d 94 (2d Cir. 2000).
    \11\ Commodity Trend Serv., 233 F.3d at 981.
    \12\ Id. at 991.
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B. Proposed Rule 1.3(bb)(2)

    The Commission is proposing to add paragraph (bb)(2) to Rule 1.3,
which would define the term ``client,'' as it relates to a CTA, as
including:

    Any person (i) to whom a commodity trading advisor provides
advice, for compensation or profit, either directly or through
publications, writings, or electronic media, as to the value of, or
the advisability of trading in, any contract of sale of a commodity
for future delivery made or to be made on or subject to the rules of
a contract market or derivatives transaction execution facility, any
commodity option authorized under section 4c of the Act, or any
leverage transaction authorized under section 19 of the Act; or (ii)
to whom, for compensation or profit, and as part of a regular
business, the commodity trading advisor issues or promulgates
analyses or reports concerning any of the activities referred to
[above]. The term `client' includes, without limitation, any
subscriber of a commodity trading advisor.

    The proposed definition, then, would include clients to whom a CTA
provides personalized trading advice as well as clients to whom a CTA
provides nonpersonalized trading advice. Such nonpersonalized advice
would include, among other things, standardized advice provided by
newsletters, seminars, tutorials, periodicals, computer software,
Internet Web sites, voicemail recordings, e-mails, and facsimiles. The
definition also would cover advice provided over a period of time
pursuant to a subscription arrangement or on a one-time basis.
    Because the proposed definition of ``client'' of a CTA would
include a person to whom the CTA provides advice on either a
personalized or nonpersonalized basis, it would make clear that the
antifraud provisions of Section 4o of the Act apply to all persons who
come within the statutory definition of the term ``commodity trading
advisor,'' and not, for example, just to those who provide personalized
trading advice or who direct their clients' trading--i.e., CTAs who
must register as such with the Commission pursuant to Section 4m(1) of
the Act.\13\ This view is consistent with the Commission's longstanding
interpretation of the provisions of Section 4o of the Act.
Specifically, more than 25 years ago, in explaining why it

[[Page 56610]]

adopted certain exemptions from CTA registration--as opposed to
exclusions from the CTA definition--the Commission rejected the notion
that Section 4o applies solely to CTAs who have a personalized
relationship with their advisees, stating:
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    \13\ 7 U.S.C. 6m(1).

    Section 4o should remain applicable to the persons covered by
the rule because * * * their clients and subscribers are entitled to
the protections of the antifraud provisions whether or not these
persons remain obligated to be registered[.] \14\
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    \14\ 43 FR 32291, 32292 (July 26, 1978) (emphasis added).
    The Commission additionally explained that ``Section 4o
basically makes it unlawful, among other things, for any CTA to
defraud an existing or prospective client or subscriber.'' Id. at
n.2 (emphasis added).

    More recently, in connection with its adoption of Rule 4.14(a)(9),
the Commission expressly noted that a CTA exempt from registration by
virtue of its offering nonpersonalized advice and its not directing
client accounts nevertheless remains subject to the provisions of the
Act that apply to all CTAs, including the antifraud provisions of
Section 4o.\15\
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    \15\ 65 FR 12938, 12941 (March 10, 2000); see also 68 FR 47221,
47222 (Aug. 8, 2003) (providing for additional CTA registration
exemptions, but noting that ``regardless of registration status, all
persons who come within the * * * CTA definition are subject to * *
* provisions of the Act and the Commission's rules prohibiting fraud
that apply to * * * CTAs''; see also 68 FR 34790, 34791 (June 11,
2003) (expanding the class of account managers permitted to bunch
orders to include, among others, CTAs who are exempt from the
registration requirement, but noting that ``the Commission will
retain antifraud and antimanipulation authority over account
managers who are exempt from registration.'')
    The Commission has consistently enforced the antifraud
provisions of Section 4o against both registered CTAs and CTAs not
required to register under the Act. E.g., In the Matter of Stephen
Alan Pierce, CFTC Docket No. 02-15 (January 21, 2003) (``Section 4o
of the Act prohibits both registered and unregistered CTAs from
defrauding their clients.''); In the Matter of Michael Radcliffe,
CFTC Docket No. 02-04 (June 10, 2002); In the Matter of CTS Fin.
Publ'g, Inc., et al., CFTC Docket No. 00-34 (July 5, 2001).
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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \16\ requires that agencies,
in proposing rules, consider the impact of those rules on small
businesses. 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.\17\
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    \16\ 5 U.S.C. 601 et seq.
    \17\ 47 FR 18618 (April 30, 1982).
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    With respect to CTAs, the Commission has previously stated that it
would evaluate within the context of a particular rule proposal whether
all or some affected CTAs would be considered to be small entities and,
if so, the economic impact on them of the proposal.\18\ The Commission
does not believe that proposed Rule 1.3(bb)(2) would have a significant
impact on affected CTAs. This is because the only burden imposed by the
proposed amendment would be the obligation to comply with the antifraud
provisions of Section 4o of the Act. Assuming arguendo, however, that
compliance with Section 4o would constitute a significant burden, the
burden is neither new nor additional, because proposed Rule 1.3(bb)(2)
is consistent with the Commission's longstanding interpretation of
Section 4o as applicable to all CTAs.
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    \18\ Id. at 18620.
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    Accordingly, the Chairman, on behalf of the Commission, certifies
pursuant to Section 605(b) of the RFA \19\ that the proposed rule will
not have a significant economic impact on a substantial number of small
entities. However, the Commission invites the public to comment on this
finding.
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    \19\ 5 U.S.C. 605(b).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``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. The proposed rule amendment does not
require a new collection of information on the part of any entities.
Accordingly, for purposes of the PRA, the Commission certifies that the
proposed rule amendment, if promulgated in final form, would not impose
any new reporting or recordkeeping requirements.

C. Cost-Benefit Analysis

    Section 15(a) of the Act \20\ requires the Commission to consider
the costs and benefits of its action before issuing a new regulation
under the Act. By its terms, Section 15(a) does not require the
Commission to quantify the costs and benefits of a new regulation or to
determine whether the benefits of the proposed regulation outweigh its
costs. Rather, Section 15(a) simply requires the Commission to
``consider the costs and benefits'' of its action.
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    \20\ 7 U.S.C. 19(a).
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    Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
    The Proposal is intended to define the term ``client'' of a CTA and
to clarify that all CTAs are within the purview of the antifraud
provisions of Section 4o of the Act. The Commission is considering the
costs and benefits of this rule in light of the specific provisions of
Section 15(a) of the Act as follows:
1. Protection of Market Participants and the Public
    Because the Proposal expressly brings all CTAs within the purview
of the antifraud provision of Section 4o of the Act, the Proposal
should enhance the Commission's ability to protect market participants
and the public.
2. Efficiency and Competition
    The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
    The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on the financial integrity or price
discovery function of the commodity futures and option markets.
4. Sound Risk Management Practices
    The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on the available range of sound risk
management alternatives.
5. Other Public Interest Considerations
    The Proposal should have no effect, from the standpoint of imposing
costs or creating benefits, on any other public interest
considerations.
    After considering these factors, the Commission has determined to
propose the amendment discussed above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit any data that they may have quantifying the
costs and benefits of the Proposal with their comment letters.

[[Page 56611]]

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.

    For the reasons presented above, the Commission proposes to amend
17 CFR part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,
13a-1, 16, 16a, 19, 21, 23 and 24, as amended by the Commodity
Futures Modernization Act of 2000, appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).

    2. Section 1.3 is proposed to be amended by adding new paragraph
(bb)(2) to read as follows:


Sec.  1.3  Definitions.

* * * * *
    (bb)(1) * * *
    (2) Client. This term, as it relates to a commodity trading
advisor, means any person (i) to whom a commodity trading advisor
provides advice, for compensation or profit, either directly or through
publications, writings, or electronic media, as to the value of, or the
advisability of trading in, any contract of sale of a commodity for
future delivery made or to be made on or subject to the rules of a
contract market or derivatives transaction execution facility, any
commodity option authorized under section 4c of the Act, or any
leverage transaction authorized under section 19 of the Act; or (ii) to
whom, for compensation or profit, and as part of a regular business,
the commodity trading advisor issues or promulgates analyses or reports
concerning any of the activities referred to in paragraph (bb)(2)(i) of
this section. The term ``client'' includes, without limitation, any
subscriber of a commodity trading advisor.
* * * * *

    Issued in Washington, DC, on September 22, 2005 by the
Commission.
Catherine D. Daniels,
Assistant Secretary of the Commission.
[FR Doc. 05-19323 Filed 9-27-05; 8:45 am]

BILLING CODE 6351-01-M
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