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[Federal Register: August 17, 2001 (Volume 66, Number 160)]
[Notices]
[Page 43227-43229]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17au01-61]

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COMMODITY FUTURES TRADING COMMISSION


Performance of Notice Registration Processing Functions by
National Futures Association With Respect to Certain Securities Brokers
and Dealers

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
authorizing the National Futures Association (``NFA''), effective
September 17, 2001, to process notice registration filings as a futures
commission merchant (``FCM'') or introducing broker (``IB'') in the
case of a securities broker or dealer (``BD'') registered with the
Securities and Exchange Commission (``SEC'') that, among other things,
limits its involvement with commodity futures contracts to security
futures products. In

[[Page 43228]]

addition, the Commission also is authorizing NFA (1) to terminate any
such registration in the event the criteria upon which it was based are
no longer satisfied, (2) to maintain, on behalf of the Commission,
records regarding BDs notice-registered as an FCM or IB, and (3) to
serve as the official custodian of those Commission records. This Order
does not, however, authorize NFA to grant conditional registrations to
BDs notice-registered as an FCM or IB or, except as stated above, to
deny, revoke, suspend or take any other adverse actions with respect to
such registrations. This Order also does not authorize NFA to accept or
act upon requests for exemption, ``no-action'' or interpretative
letters with respect to applicable registration requirements.

EFFECTIVE DATE: 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. Authority and Background

    In a separate notice published elsewhere today in the Federal
Register, the Commission is amending its rules to implement the
Congressional mandate in section 252(b) of the Commodity Futures
Modernization Act of 2000 (``CFMA'') \1\ requiring notice registration
as an FCM or IB of certain SEC-registered BDs if:
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    \1\ Pub. L. 106-554, 114 Stat. 2763. The provision in question
will be codified at Section 4f(a)(2) of the Commodity Exchange Act
(``CEA''), 7 U.S.C. 6f(a)(2).
    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 futures 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.

    Specifically, the Commission is amending Rule 3.10 by adding
paragraph (a)(3) to provide for such notice registration.\2\
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    \2\ Commission rules referred to herein generally are found in
17 CFR Ch. I (2001).
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    As proposed and as adopted, Rule 3.10(a)(3) provides that this
notice registration may be made ``by following such procedures . . . as
may be specified'' by NFA. As the Commission explained in proposing
paragraph (a)(3), this is consistent with the Commission's previous
delegations of registration authority to NFA under Rule 3.2 and through
various Commission orders.\3\ The Commission further explained that
this also is consistent with section 125 of the CFMA, which requires
the Commission to report to Congress later this year on a study of the
CEA and the Commission's rules, regulations and orders governing the
conduct of persons required to be registered under the CEA. In this
regard, the Commission noted that one area that the study must identify
is ``the regulatory functions the Commission currently performs that
can be delegated to a registered futures association.'' \4\
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    \3\ See, e.g., 48 FR 15940 (April 13, 1983); 48 FR 35158 (August
3, 1983). Section 8a(10) of the Act, 7 U.S.C. 12a(10), provides that
the Commission may authorize any person to perform any portion of
the registration functions under the CEA, notwithstanding any other
provision of law, in accordance with rules adopted by such person
and submitted to the Commission for approval, or, if applicable, for
review pursuant to section 17(j) of the CEA, 7 U.S.C. 21(j), and
subject to the provisions of the CEA applicable to registrations
granted by the Commission. See also section 17(o) of the CEA, 7
U.S.C. 21(o).
    \4\ See 66 FR 27476 at 27478 (May 17, 2001).
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    NFA Registration Rule 204, like Commission Rule 3.10, concerns the
registration of persons as FCMs and IBs. On May 17, 2001, NFA's Board
of Directors approved a proposed amendment to Rule 204 so as to conform
NFA's rule to that proposed by the Commission for notice registration
of certain BDs as an FCM or IB.\5\
    Upon consideration, the Commission has determined to authorize NFA,
effective September 17, 2001, to perform notice registration functions
as set forth in Rule 3.10 in accordance with the standards established
by section 4f(a)(2) of the CEA. The Commission is further authorizing
NFA, under specified conditions, to terminate any such registration and
to perform records custodian functions with respect to notice
registration under Rule 3.10. Concurrently, the Commission is
separately approving on this date NFA's proposed amendment to its
Registration Rule 204.\6\
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    \5\ NFA's proposed amendments to Rule 204 also provide that
notice registration under that rule ``shall be terminated
immediately if any of the conditions set for [such] registration are
no longer satisfied.'' Inasmuch as the Commission adopted as
proposed the amendments to Rule 3.10, the Commission similarly
approved as proposed NFA's amendments to Rule 204.
    \6\ Notice registration will be made on Notice Form 7-R, which
was included in the NFA notice registration submission that the
Commission approved.
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    The Commission further notes that section 17(p)(1) of the CEA\7\
requires that each registered futures association (such as NFA)
``establish training standards and proficiency testing for * * * all
persons for which it has registration responsibilities.'' While this
provision of the CEA would appear to require NFA to establish testing
requirements for securities BD applicants for notice registration as an
FCM or IB, the Commission believes that it is not the intent of
Congress to require testing of these applicants. This is because
section 252(c) of the CFMA provides that a BD notice-registered as an
FCM or IB ``shall not be required to become a member of any futures
association registered under section 17.'' \8\ The Commission also
notes that testing requirements are generally intended to apply to
associated persons, and associated persons of BDs that notice register
as an FCM or IB are specifically exempted from registration under
section 4k(5) of the Act, as added by Section 252(d) of the CFMA. In
light of the foregoing, the Commission has determined to adopt a ``no-
action'' position with respect to the establishment by NFA of a
proficiency testing requirement for BDs who notice register as FCMs or
IBs. Accordingly, the Commission will not institute any enforcement
action under section 17(p)(1) of the CEA against NFA based solely upon
NFA's failure to establish training standards and proficiency testing
for these BDs even though NFA is being authorized to perform certain
registration functions with respect to these BDs.\9\
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    \7\ 7 U.S.C. 21(p)(1).
    \8\ This provision has been codified at section 4f(a)(4)(C) of
the CEA. In proposing amendments to Rule 3.10 the Commission
explained that: (a)lthough the Commission cannot require NFA to
perform registration functions for persons that are not NFA members,
the Commission may authorize NFA to perform any registration
function. Commission staff have discussed this matter with NFA, and
NFA has agreed to undertake the function of processing notice
registrations for BDs as discussed herein. If the Commission adopts
these amendments to Rule 3.10, it expects to issue an order
authorizing NFA to perform this function. 66 FR 27476 at 27478.
    \9\ This treatment of NFA concerning testing requirements for
these BDs is similar to the Commission's position regarding testing
requirements for floor traders. See 58 FR 19657 at 19658 (April 15,
1993). The Commission further notes, however, that the futures and
securities industry self-regulatory organizations, including NFA,
are developing enhancements to existing proficiency examinations, as
well as training modules for existing registrants, so that industry
professionals will be aware of their responsibilities to the public
concerning security futures products.

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[[Page 43229]]

    Section 17(o)(2) of the CEA provides that the Commission may
authorize NFA, in performing Commission registration functions, to
deny, condition, suspend, restrict or revoke any registration, subject
to Commission review.\10\ As stated above, NFA Registration Rule 204,
which the Commission has today approved, provides that BD notice
registration as an FCM or IB ``shall be terminated immediately if the
other conditions set for [such] registration are no longer satisfied.''
The Commission is not at this time, however, authorizing NFA to take
any other adverse registration actions with respect to the BD notice
registration applications that it processes pursuant to this Order.
This is consistent with Section 252 of the CFMA.
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    \10\ 7 U.S.C. 21(o)(2).
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    By prior orders, the Commission has authorized NFA to maintain
various other Commission registration records and certified NFA as the
official custodian of such records for this agency.\11\ The Commission
has now determined, in accordance with its authority under section
8a(10) of the CEA,\12\ to authorize NFA to maintain and serve as
official custodian of the Commission's registration records with
respect to BDs notice-registered as an FCM or IB.
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    \11\ See, e.g., 49 FR 39593 (October 9, 1984).
    \12\ 7 U.S.C. 12a(10).
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    In maintaining the Commission's registration records pursuant to
this Order, NFA shall be subject to all other requirements and
obligations imposed upon it by the Commission in existing or future
Orders or regulations.\13\ In this regard, NFA shall also implement
such additional procedures (or modify existing procedures) as are
necessary to ensure the security and integrity of the BD notice-
registered records in NFA's custody as acceptable to the Commission; to
facilitate prompt access to those records by the Commission and its
staff, particularly as described in other Commission Orders or rules;
to facilitate disclosure of public or nonpublic information in those
records when permitted by Commission Orders or rules and to keep logs
as required by the Commission concerning disclosure of nonpublic
information; and otherwise to safeguard the confidentiality of the
records.
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    \13\ See, e.g., 49 FR 35953 at 39595- 97.
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II. Conclusion and Order

    The Commission has determined, in accordance with the provisions of
Section 8a(10) of the CEA, to authorize NFA, effective September 17,
2001, to perform the following registration functions:

    (1) To receive and maintain filings for notice registration
under the Commodity Exchange Act as a futures commission merchant or
introducing broker by those brokers and dealers registered with the
Securities and Exchange Commission who meet the requirements of NFA
Registration Rule 204;
    (2) To terminate the notice registration of a registered broker
or dealer as a futures commission merchant or introducing broker
where the broker or dealer no longer meets the requirements of NFA
Registration Rule 204; and
    (3) To maintain records regarding brokers and dealers notice-
registered as a futures commission merchant or introducing broker
and to serve as the official custodian of those Commission records.

    NFA shall perform these functions in accordance with the standards
established by the CEA and the regulations promulgated thereunder.
    These determinations are based upon the Congressional intent
expressed in sections 8a(10) and 17(o) of the CEA and section 125 of
the CFMA. This Order does not, however, authorize NFA to accept or act
upon requests for exemption from registration, to render ``no-action''
or interpretative letters with respect to applicable registration
requirements, to grant conditional registrations, or, except as stated
in item (2) above, to deny or take any other adverse action with
respect to such registrations.
    Nothing in this Order or in sections 8a(10) or 17 of the CEA or in
section 125 of the CFMA shall affect the Commission's authority to
review the performance by NFA of Commission registration functions.\14\
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    \14\ See also section 17(o)(3) of the CEA, 7 U.S.C. 21(o)(3).

    Issued in Washington, DC on August 10, 2001.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-20630 Filed 8-16-01; 8:45 am]
BILLING CODE 6351-01-P
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