55410 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

1 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203 (2010). 

2Food, Conservation, and Energy Act of 2008, 

Public Law 110–246, 122 Stat. 1651, 2189–2204 

(2008). 

3Regulation of Off-Exchange Retail Foreign 

Exchange Transactions and Intermediaries, 75 FR 

3282 (Jan. 20, 2010). 

4See 75 FR 3282, 3283–3285. 

5See 75 FR 3282, 3285. 

6See 75 FR 3282, 3286. 

7See 75 FR 3282, 3286–3293. 

8See Wall Street Reform Act, Sec. 742. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 

147, 160, and 166 

RIN 3038–AC61 

Regulation of Off-Exchange Retail 

Foreign Exchange Transactions and 

Intermediaries 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rules. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting a comprehensive 

regulatory scheme to implement the 

provisions of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act of 2010 (‘‘Wall Street Reform Act’’) 1

and the CFTC Reauthorization Act of 

2008 (‘‘CRA’’) 2 with respect to offexchange transactions in foreign 

currency with members of the retail 

public (i.e., ‘‘retail forex transactions’’). 

The new regulations and amendments 

to existing regulations published today 

establish requirements for, among other 

things, registration, disclosure, 

recordkeeping, financial reporting, 

minimum capital, and other operational 

standards. 

DATES: Effective Date: October 18, 2010. 

FOR FURTHER INFORMATION CONTACT: For 

information regarding financial and 

related reporting requirements, contact: 

Thomas Smith, Chief Accountant and 

Deputy Director, Division of Clearing 

and Intermediary Oversight, 1155 21st 

Street, NW., Washington, DC 20581. 

Telephone number: 202–418–5495; 

facsimile number: 202–418–5547; and 

electronic mail: tsmith@cftc.gov. 

Jennifer Bauer, Special Counsel, 

Division of Clearing and Intermediary 

Oversight, Division of Clearing and 

Intermediary Oversight, 1155 21st 

Street, NW., Washington, DC 20581. 

Telephone number: 202–418–5472; 

facsimile number: 202–418–5547; and 

electronic mail: jbauer@cftc.gov. 

For all other information contact: 

William Penner, Deputy Director, 

Division of Clearing and Intermediary 

Oversight, 1155 21st Street, NW., 

Washington, DC 20581. Telephone 

number: 202–418–5450; facsimile 

number: 202–418–5547; and electronic 

mail: wpenner@cftc.gov. Christopher 

Cummings, Special Counsel, Division of 

Clearing and Intermediary Oversight, 

1155 21st Street, NW., Washington, DC 

20581. Telephone number (202) 418– 

5450; facsimile number: 202–418–5547; 

and electronic mail: 

ccummings@cftc.gov. Peter Sanchez, 

Special Counsel, Division of Clearing 

and Intermediary Oversight, 1155 21st 

Street, NW., Washington, DC 20581. 

Telephone number (202) 418–5450; 

facsimile number: 202–418–5547; and 

electronic mail: psanchez@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On January 20, 2010, the Commission 

published in the Federal Register 

proposed new regulations and 

amendments to existing regulations in 

response to the CRA (the ‘‘Proposing 

Release’’).3 The Proposing Release set 

forth in detail the historical background 

of the regulation of retail forex 

transactions, and the events, legislative 

and otherwise, that led up to the 

enactment of the CRA.4 The 

Commission explained that its proposed 

regulations were drawn up with the aim 

of applying the same principles that 

have guided the regulation of onexchange instruments, while taking into 

account the real differences between the 

trading of futures contracts on 

designated contract markets (‘‘DCMs’’) 

that are cleared through Commissionregistered derivatives clearing 

organizations (‘‘DCOs’’) on the one hand, 

and off-exchange transactions between 

forex firms and retail customers on the 

other hand.5

The proposed rule changes were of 

two general sorts. The first group 

included amendments to existing 

regulations to accommodate regulation 

of retail forex transactions and the new 

registration categories created under the 

CRA. The second group comprised a 

new part 5 of the Commission’s 

regulations, encompassing, to the extent 

practicable, the regulations pertaining 

specifically to persons engaging in retail 

forex transactions. For example, many 

of the operational or registration 

requirements in part 1 or part 3, 

respectively, of the Commission’s 

regulations referring to futures 

commission merchants (‘‘FCMs’’) would, 

as a result of the CRA, now apply also 

to retail foreign exchange dealers 

(‘‘RFEDs’’). Some of the disclosure, 

reporting and recordkeeping 

requirements in part 4 had to be 

modified to apply to operators of pooled 

investment vehicles and advisors that 

engage in retail forex transactions, as 

called for under the CRA. Other parts of 

the Commission’s regulations required 

their own adaptations in order to extend 

customer protection, privacy and 

procedural requirements to retail forex 

transactions. 

The Commission also noted in its 

Proposing Release that in addition to the 

regulations expressly called for by the 

CRA, it was proposing certain 

additional requirements prompted both 

by the essential differences between onexchange transactions and retail forex 

transactions, and by the history of 

fraudulent practices in the retail forex 

market.6 The proposed regulatory 

changes were discussed, section by 

section.7

Following the publication of the 

Proposing Release, the Wall Street 

Reform Act was enacted which, in 

relevant part, requires that specified 

Federal regulatory agencies, including 

the CFTC, promulgate rules regarding 

retail forex transactions. Consistent with 

the CRA, the Wall Street Reform Act 

directs that such rules prescribe 

appropriate requirements with respect 

to disclosure, recordkeeping, capital and 

margin, reporting, business conduct, 

and such other standards or 

requirements as the Federal regulatory 

agencies determine to be necessary.8

Thus, pursuant to the broad authority 

granted by the Wall Street Reform Act 

and the CRA, the Commission is 

implementing requirements for, among 

other things: Registration, disclosure, 

recordkeeping, financial reporting, 

minimum capital, and other operational 

standards, based on existing CFTC 

regulations for commodity interest 

transactions and commodity interest 

intermediaries, and on existing National 

Futures Association (‘‘NFA’’) rules with 

respect to retail forex transactions 

offered by NFA’s members. With certain 

exceptions, the Commission is adopting 

the rule changes delineated in the 

Proposing Release as proposed. 

Except for certain otherwise-regulated 

financial intermediaries excluded by the 

CRA from the Commission’s 

jurisdiction, persons offering to be or 

acting as counterparties to retail forex 

transactions, but not primarily or 

substantially engaged in the exchangetraded futures business, are required to 

register with the CFTC as RFEDs. 

Registered FCMs that are ‘‘primarily or 

substantially’’ (as defined in the new 

regulations) engaged in the activities set 

forth in the definition in the Commodity 

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Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 55411 

9 7 U.S.C. 1a(20) (2006). 

10See 7 U.S.C. 2(c)(2)(C)(iv). 

11See 75 FR 3282, 3284–3285. 

12The Comment letters referred to in this release 

are available through the Commission’s Web site: 

http://www.cftc.gov/LawRegulation/ 

PublicComments/10-001.html. 

13As noted above, several commenters 

maintained that the proposed Regulation 5.9 was 

inconsistent with security deposit levels set by NFA 

and approved by the Commission. In February 

2009, NFA proposed and the Commission approved 

amendments to Section 12 of NFA’s Financial 

Requirements. (See Letter from Thomas W. Sexton 

to David A. Stawick, dated February 23, 2009, 

regarding Forex Security Deposits—Proposed 

Amendments to NFA Financial Requirements 

Section 12 and Interpretive Notice Regarding Forex 

Transactions, available on NFA’s website at 

nfa.futures.org.) NFA’s amendments left in place 

requirements of a 1% security deposit for major 

currencies and a 4% deposit for all other 

currencies, but eliminated an exemption from these 

requirements for well-capitalized firms. As NFA 

noted in its proposed amendments, exempted firms 

had offered leverage of 200:1, 400:1 and even 700:1. 

NFA’s February 2009 amendments effectively 

reduced the amount of leverage available to retail 

forex customers. The Commission approved the 

amendments, in accordance with the standards set 

in Section 17(j) of the Act. 

Exchange Act (the ‘‘Act’’) of an FCM 9 are 

permitted to engage in retail forex 

transactions without also registering as 

RFEDs. Also, the $20 million minimum 

net capital standard established in the 

CRA for registering as an RFED or 

offering retail forex transactions as an 

FCM is incorporated in the new 

regulations. 

The new regulations also require 

certain entities other than RFEDs and 

FCMs that intermediate retail forex 

transactions to register with the 

Commission as introducing brokers 

(‘‘IBs’’), commodity trading advisors 

(‘‘CTAs’’), commodity pool operators 

(‘‘CPOs’’) or associated persons (‘‘APs’’) 

of such entities, as appropriate, and to 

be subject to the Act and regulations 

applicable to that registrant category. 

Finally, pursuant to the authority 

conferred by the CRA,10 and to address 

cases where the Commission’s 

jurisdiction has been challenged, the 

Commission is adopting the proposed 

regulatory provisions applicable to 

certain leveraged, off-exchange retail 

forex transactions commonly known as 

‘‘Zelener contracts.’’ 11

II. The Comments on the Proposing 

Release 

The Commission received in excess of 

9,100 comments 12 from a range of 

commenters, including individuals who 

trade forex, intermediaries, registered 

FCMs currently serving as 

counterparties in retail forex 

transactions, trade associations or 

coalitions of industry participants, one 

committee of a county lawyers’ 

association, a registered futures 

association, and numerous law firms 

representing institutional clients. Many 

commenters offered specific 

recommendations for clarification or 

modification of particular rules; other 

commenters objected generally to 

particular proposed rules. Overall, the 

bulk of the comments concerned four of 

the proposed rules: 

• Proposed Regulation 5.9, which 

would impose a 10 to 1 leverage 

limitation on retail forex transactions. 

(‘‘Security Deposit Proposal’’ or 

‘‘Leverage Proposal’’) 

• Proposed Regulation 5.18(h), which 

would require each IB that solicits or 

accepts off-exchange retail forex orders 

to enter into a guarantee agreement with 

the FCM or RFED to which the IB 

introduces the forex transactions. 

(‘‘Guaranteed IB Proposal’’) 

• Proposed Regulation 5.18(j), which 

would require all retail forex 

counterparties to calculate, on a 

quarterly basis, the percentage of nondiscretionary accounts that were 

profitable, to include the results of this 

calculation for the preceding four 

quarters in required disclosures to 

customers, and to maintain and make 

available upon request records reflecting 

such calculations for five years. 

(‘‘Disclosure Proposal’’) 

• Proposed Regulation 5.7, which 

would establish a minimum capital 

requirement for FCMs and RFEDs 

(‘‘Capital Proposal’’) 

The comments regarding these proposed 

rules and the Commission’s response 

are discussed immediately below. The 

Commission’s response to comments 

concerning other aspects of the 

proposed rules follows later. 

Given the volume of comments 

received, the Commission cannot 

respond to each and every comment or 

objection. However, the Commission 

has carefully reviewed and considered 

each letter and, in the sections that 

follow, has endeavored to address both 

the primary themes running throughout 

multiple letters and significant points 

raised by individual commenters. 

Security Deposit Proposal. In general 

terms, proposed Regulation 5.9 would 

have required FCMs and RFEDs 

engaging in retail forex transactions to 

collect from each retail forex customer 

a minimum security deposit equal to 10 

percent of the notional value of each 

retail forex transaction. This proposal is 

often referred to in the comment letters 

as a 10% or 10:1 leverage requirement 

(i.e., for every $10 of notional value, $1 

is required as a security deposit). 

The Commission received a 

significant number of comment letters 

regarding the Security Deposit Proposal 

with a substantial majority of the 

commenters objecting to the proposed 

level of 10%. Many of the letters 

submitted with regard to this issue 

appeared to be submitted by individual 

traders, were identical or nearly 

identical, and objected generally to the 

proposal. Within the large group of 

comments by such traders, whether in 

‘‘form’’ letter objections or otherwise, the 

most common objections were that the 

leverage proposal would drive business 

off-shore, would lead to the loss of jobs 

in the U.S., was unnecessarily 

restrictive and would inhibit small 

traders’ ability to trade profitably, or 

that the percentage required as a 

security deposit was arbitrary, 

capricious and anti-competitive. 

Other commenters noted that by 

increasing the security deposit level, 

retail forex customers are exposed to 

greater levels of market and credit risk. 

Many of these commenters believe that 

the amplification that is provided by 

increased leverage is necessary for 

clients to earn a profit from their 

positions. Still other commenters urged 

that NFA’s current levels be retained 

and asserted that the Commission had 

already approved these levels by 

allowing NFA’s proposed rule regarding 

leverage to become effective. 

Finally, one commenter encouraged 

the Commission to (1) recognize the 

different market risks and volatility 

posed by different currencies, (2) adopt 

requirements reflective of those 

differences just as contract markets do 

in establishing their margin levels, and 

(3) endorse or adopt some mechanism to 

allow for periodic review and 

adjustment of the requirements if 

necessary. 

The Commission’s proposed leverage 

restriction was conservative and was 

proposed in an effort to provide 

maximum customer protection. The 

Commission does not, however, believe 

it was arbitrary or contrary to previously 

approved NFA rules.13 Moreover, the 

Commission does not believe that most 

retail foreign exchange customers select 

a counterparty based solely on the 

maximum allowable leverage, otherwise 

these investors would have already 

migrated to foreign markets, some of 

which have no limitation on leverage. 

Nevertheless, after considering the 

concerns expressed and arguments 

made in the comments, the Commission 

has determined to adopt a revised 

security deposit requirement for FCMs 

engaging in retail forex transactions and 

for RFEDs. 

In developing the revised Regulation 

5.9, the Commission once again 

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55412 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

14NFA is currently the only futures association 

registered with the Commission. 15See 75 FR 3282, 3285. 

reviewed futures exchange margin 

levels, NFA’s current security deposit 

requirements, and comparable 

requirements found in other 

jurisdictions. Final Regulation 5.9 

permits the registered futures 

association (‘‘RFA’’) of which the FCM 

or RFED is a member to determine 

specific security deposit levels within 

parameters set forth by the Commission 

in the regulation.14 The Commission has 

provided minimum security deposit 

amounts of 2 percent of the notional 

value for major currency pairs and 5 

percent of the notional value for all 

other retail forex transactions. The 

Commission will periodically review 

the parameters it has set in light of 

market conditions and adjust them as 

necessary. Similarly, each RFA (i.e., 

NFA) will be required to designate 

which currencies are ‘‘major currencies,’’ 

and must review, no less frequently 

than annually, major currency 

designations and security deposit 

requirements, and must adjust the 

designations and requirements as 

necessary in light of changes in the 

volatility of currencies and other 

economic and market factors. It is the 

Commission’s view that revised 

Regulation 5.9 will provide a 

mechanism for setting security deposit 

levels that is both anchored in, and 

adaptable to, market conditions. 

Disclosure of Profitable vs. NonProfitable Accounts. As proposed, 

Regulation 5.5(e) required that the risk 

disclosure statement provided to every 

retail forex customer include disclosure 

of the number of non-discretionary 

accounts maintained by the FCM or 

RFED that were profitable and those that 

were not, during the four most recent 

calendar quarters. Commenters called 

the provision anti-competitive and 

doubted that measurement of profitable 

accounts could be done in a way that 

would permit comparison. Proposed 

Regulation 5.18(i) required that each 

retail forex counterparty prepare and 

maintain on a quarterly basis a 

calculation of the percentage of nondiscretionary retail forex accounts open 

for any period of time during the quarter 

that earned a profit, and the percentage 

of such accounts that experienced a 

loss. 

Some commenters asserted that the 

Commission did not provide adequate 

guidance or a standard methodology for 

calculating ‘‘winners’’ and ‘‘losers.’’ 

Commenters stated that the proposal 

was ambiguous and that the reported 

percentages may not be comparable 

across the industry. In addition, 

commenters thought that there was too 

much subjectivity in determining 

‘‘winners’’ and ‘‘losers’’ and that, 

therefore, the resulting disclosure would 

not be helpful for customers. Other 

commenters stated that by requiring 

retail forex firms to disclose the 

percentage of profitable accounts 

quarterly, the Commission would be 

unfairly singling out retail forex dealers, 

as this information is not required on 

the futures side or for broker-dealers. 

As noted in the Proposing Release, 

there are significant differences between 

trading futures contracts on an exchange 

and entering into off-exchange 

transactions between forex firms and 

retail customers.15 The Commission 

believes that as a result of the inherent 

conflicts embedded in the operations of 

the retail over-the-counter forex 

industry, such disclosure is necessary. 

To illustrate potential conflicts of 

interests in the off-exchange retail forex 

industry, the Commission in its 

Proposing Release pointed out that the 

retail forex counterparty: (i) Is the 

counterparty to the customer, which 

sets up a ‘‘zero-sum game’’ between the 

customer and the retail forex dealer; 

(ii) provides quotes to their customers, 

which may not be the best quote at the 

time and may not even be a competitive 

quote; and (iii) enters into a principalto-principal transaction with the nondiscretionary retail forex accountholder. 

At each stage of the transaction, the 

retail forex counterparty has an inherent 

conflict with its non-discretionary retail 

forex accountholders. By contrast, in 

exchange-traded futures markets, 

accountholders do not encounter the 

same level of conflicts that retail forex 

customers face, and, therefore, a 

requirement to disclose the percentage 

of non-discretionary retail accounts that 

were profitable and not profitable is 

appropriate in retail forex markets, 

while it may not be elsewhere. As a 

result of the industry structure and 

operational conflicts, the Commission 

believes that this disclosure is necessary 

to protect the non-discretionary retail 

forex accountholder. 

So while the Commission continues 

to believe in the value and effectiveness 

of such disclosures, it is adopting 

Regulation 5.5(e) and Regulation 5.18(i) 

with certain amendments, in order to 

address concerns regarding the 

implementation of the rule. As 

proposed, the calculation for 

determining whether a retail forex 

account was profitable or not during a 

quarter would be net of fees, 

commissions, any other expenses, 

trading results, customer funds 

deposited, and customer funds 

withdrawn. The regulation as adopted 

provides further guidance in response to 

commenters’ concerns. The final rule 

clarifies that a retail forex account will 

be considered either ‘‘profitable’’ or ‘‘not 

profitable,’’ with ‘‘not profitable’’ 

including accounts that break-even. 

The Commission is also clarifying the 

required time periods for which the 

required calculations in Regulation 

5.5(e)(1) and 5.5(e)(2) must be made and 

records maintained and made available. 

Regulation 5.5(e)(1) requires that 

information regarding profitable and not 

profitable accounts for the four most 

recent quarters be included in 

disclosure documents; Regulation 

5.5(e)(2) requires that similar quarterly 

information be maintained for five years 

and provided to requesting customers or 

potential customers. As to the 5.5(e)(1) 

information, once these regulations are 

effective, FCMs and RFEDs must 

provide the required information for the 

past four quarters. FCMs and RFEDs 

also must update this information going 

forward on a quarterly basis and 

disclose the most current four quarters 

in disclosure documents provided to 

potential customers. 

Regulation 5.5(e)(2) requires an RFED 

or FCM to provide to a customer or 

potential customer the same account 

information as set out in Regulation 

5.5(e)(1) for the most recent five-year 

period during which the RFED or FCM 

maintained non-discretionary retail 

forex customer accounts, but only at the 

request of the customer or potential 

customer. The Commission intends that 

this requirement to keep and make 

available five years worth of profitable 

and non-profitable account information 

be prospective; following the adoption 

of these rules, FCMs and RFEDs are 

required to keep and maintain such data 

going forward on a quarterly basis until 

such time as they have amassed five 

years worth of information, at which 

point they will have to keep and make 

available the information for the five 

most recent years. Furthermore, prior to 

amassing five years of performance 

information, an FCM or RFED is 

obligated to provide, upon request by a 

customer or prospective customer, the 

historical quarterly performance 

information for as many quarters as the 

FCM or RFED has available. 

In addition, to provide clarity 

regarding the type of accounts that must 

be used in making the calculation of 

profitable and unprofitable accounts, 

FCMs and RFEDS must use those retail 

forex accounts, as defined in Regulation 

5.1(i), that are non-discretionary 

accounts; Provided, that the retail forex 

account is not a proprietary account, as 

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Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 55413 

16NFA’s Financial Requirement Section 11 

currently contains such an exemption from an 

additional capital requirement for member firms 

using straight-through-processing for all customer 

transactions. 

17This argument is diminished by the recent 

enactment of the Wall Street Reform Act, which 

clearly indicates the intent of Congress that retail 

forex transactions in the United States either be 

comprehensively regulated or be prohibited 

outright. See Wall Street Reform Act, Sec. 742. 18See 46 Fed. Reg. 62841 (Dec. 29, 1981). 

defined in Regulation 5.18(i)(3). The 

Commission believes that excluding 

proprietary accounts will help minimize 

the possibility of skewed results 

stemming from differing methods of 

calculation. The Commission is also 

requiring that the data be calculated on 

a calendar year basis for all 

counterparties. 

Guarantee Requirement for IBs Who 

Introduce Retail Forex Business. The 

Commission proposed in Regulation 

5.18(h) to require that any person within 

the definition of an IB under Regulation 

5.1(f)(1) (or applicant for registration as 

such, or successor to the business of 

such) enter into a guarantee agreement 

with an FCM or an RFED. The IB would 

be permitted to enter such an agreement 

with only one FCM or RFED. The 

rationale behind this requirement was to 

make FCMs and RFEDs exercise care 

with regard to entities with which they 

do business by making them jointly and 

severally liable for all obligations of the 

IB under the Act and Commission 

Regulations with respect to the 

solicitation of retail forex transactions. 

This would, in turn, discourage them 

from associating with IBs without regard 

to the sales practices employed by those 

IBs. 

Commenters called the banning of 

independent IBs in the retail forex 

business harsh and said it could lead to 

less customer choice and poorer service. 

Others said that requiring a guarantee 

agreement was anticompetitive and 

unnecessary, as most enforcement 

activity concerns unregistered industry 

participants, and that guarantee 

agreements have been a substitute for 

minimum capital for as long as the IB 

registration category has existed. 

After considering the comments, the 

Commission has determined to permit 

IBs who register in order to transact 

retail forex business (like IBs who 

register to transact futures and 

commodity options business), to choose 

between entering into a guarantee 

agreement with an FCM or RFED, and 

maintaining the existing IB minimum 

net capital requirement. Accordingly, 

IBs, whether they register to do retail 

forex business, futures business, or both, 

must comply with the provisions in the 

Commission’s regulations that apply to 

IBs; Provided, that any IB that operates 

pursuant to a guarantee agreement 

meeting the requirements of Regulation 

1.10(j) need not meet the minimum net 

capital requirements set forth in 

Regulations 1.10, 1.12 and 1.17. 

Net Capital Requirements for FCMs 

and RFEDs. As proposed, Regulation 5.7 

implements the $20 million minimum 

net capital requirement for FCMs 

engaging in retail forex transactions and 

for RFEDs (as set forth in the CRA), and 

to the extent that the FCM’s or RFED’s 

total retail forex obligation to its 

customers exceeds $10 million, the 

regulation requires an additional five 

percent of that excess. Several 

comments urged the Commission to 

revise proposed Regulation 5.7 to 

include an exemption from the 

additional net capital requirement when 

the FCM or RFED uses ‘‘straight-through 

processing.’’ 16 Referring to the costs 

imposed by additional capital 

requirements, the commenters argued 

that such costs, in addition to the limits 

imposed by several of the other 

proposed regulatory requirements, 

would cause much of the retail forex 

business to be transferred to offshore 

jurisdictions without (or with 

substantially reduced) regulatory 

protections.17

The Commission considered but did 

not adopt NFA’s straight-through 

processing exemption in its proposal, 

specifically because the proposed 

additional capital requirement was 

intended to provide a capital 

requirement that directly relates to the 

size of a firm’s liability to retail forex 

customers. Some firms offering retail 

forex transactions have liabilities to 

their retail customers exceeding $10 

million. Straight-through processing, 

although mitigating market exposure for 

a firm, does not reduce in any way the 

total liability to retail forex customers 

who are direct counterparties to the firm 

and therefore exposed to the credit risk 

of such firm. Therefore, the Commission 

is adopting the capital provisions in 

Section 5.7 as originally proposed. 

Separately, a comment letter was 

received significantly after the comment 

period was closed objecting to the net 

capital charges applicable to retail 

foreign currency options set forth in 

proposed Regulation 5.7(b)(2)(v)(B). The 

Commission has determined to adopt 

that provision as proposed, and to 

clarify that for both FCMs and RFEDs 

unlisted retail forex options are subject 

to the existing net capital charges that 

are applicable to an FCM for any other 

unlisted foreign currency option that is 

entered into with any eligible contract 

participant (which treatment is also 

consistent with the treatment of all 

unlisted options, including foreign 

currency options, for securities brokerdealers). 

Requirement To Appoint a Chief 

Compliance Officer. Proposed 

Regulation 5.18(j) calls for each retail 

forex counterparty (defined to include a 

retail foreign exchange dealer, an FCM 

or an affiliated person of an FCM) to 

designate a Chief Compliance Officer. In 

proposing this requirement, the 

Commission sought to promote 

customer protection by focusing 

responsibility for an entity’s regulatory 

compliance. This requirement was 

criticized on the basis that potential 

personal liability for a Chief Compliance 

Office would discourage individuals 

from assuming that position, and 

because no comparable requirement 

exists for firms engaging in on-exchange 

transactions. 

The Commission continues to believe 

that, given the history of fraudulent and 

improper behavior in the retail forex 

business, requiring a Chief Compliance 

Officer is a reasonable way to ensure 

that retail forex counterparties observe 

the highest professional standards and 

take their compliance obligations 

seriously. Accordingly, this requirement 

is retained in final Regulation 5.18. 

Prohibition of Guarantees Against 

Customer Loss. Proposed Regulation 

5.16 would prohibit, among other 

things, the making of guarantees against 

loss to retail foreign exchange customers 

by FCMs, RFEDs and IBs. One currently 

registered FCM commented that firms 

should be allowed to guarantee that 

clients will not lose more than their 

account balance because technology 

allows for automatic liquidation of 

positions if the account balance falls 

below margin requirements. 

The Commission notes that not all 

retail forex counterparties have 

comparable capabilities to deal with 

events such as extremely volatile 

markets. Moreover, proposed regulation 

5.16 is based on Commission Regulation 

1.56, which prohibits FCMs and IBs 

engaged in futures and commodity 

option transactions from making similar 

guarantees. At the time the Commission 

proposed Regulation 1.56, it specifically 

noted that the use of limited-risk and 

guarantee-against-loss agreements had 

‘‘often been associated with patterns of 

allegedly unlawful conduct by FCMs or 

other registrants or with the financial 

instability of such persons.’’ 18 The 

Commission does not view these dual 

concerns—rooted in consumer 

protection and the financial stability of 

firms—as any less compelling today and 

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55414 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

19See 7 U.S.C. 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) 

regarding the scope of the Commission’s authority 

to write rules with regard to leveraged or margined 

foreign currency contracts offered to non-ECPs. 

has determined to issue the regulation 

as proposed. 

Specific Authorization for Trades. 

Two commenters expressed a concern 

regarding proposed Regulation 5.17, 

which requires RFEDs, FCMs, IBs, and 

their APs to have specific authorization 

by the customer before effecting a retail 

forex transaction. The concerns centered 

on the use of automated systems that 

generate orders based on the trader’s 

specifications. According to the 

commenters, both IBs and forex 

counterparties may run such software 

on their servers for traders. 

Neither commenter provided a great 

deal of detail regarding the mechanics of 

such automated trading programs, and 

the Commission cannot offer its view of 

any particular program. However, the 

Commission believes that if such 

programs are nothing more than 

automated order entry platforms, and all 

relevant trading parameters are set and 

controlled by the customer—including, 

for example, the designation of the 

currency pair to be traded, the amount 

of currency to be bought or sold, the 

price at which orders should be placed, 

and the amount of money to be 

committed to trading—then trades 

generated by such programs would 

originate from the customer and no 

additional authorization would be 

required. However, Commission staff 

will monitor the use of such programs. 

Any features that would appear to 

constitute discretion, strategy or advice 

on the behalf of the sponsoring entity 

would require a different analysis and, 

in addition to potentially triggering 

application of Regulation 5.17, may 

have additional registration 

implications. 

Requirement To Close Out Offsetting 

Positions. One commenter objected to 

the Commission’s proposed amendment 

to Regulation 1.46, which would require 

RFEDs and FCMs engaging in offexchange retail forex transactions to 

close out offsetting long and short 

positions in a retail forex customer’s 

account, regardless of whether a 

customer instructs otherwise. Citing the 

prevalence of spread trades in futures 

trading, the commenter maintained that 

there is no economic distinction 

between commodity futures and forex 

transactions with respect to offsetting 

long and short positions. 

The Commission continues to believe 

that maintaining open long and short 

positions in a retail forex customer’s 

account removes the opportunity for the 

customer to profit on the transaction, 

increases the fees paid by the customer, 

and invites abuse. Nothing submitted by 

any commenter has demonstrated 

otherwise. Moreover, spread trades 

executed on-exchange typically involve 

the purchase of one futures delivery 

month against the sale of another 

futures delivery month of the same 

commodity, or the purchase of one 

delivery month of one commodity 

against the sale of that same delivery 

month of a different commodity. 

Because retail forex contracts are not 

listed by delivery month, spread trades 

of this sort are not possible in retail 

forex accounts, and open long and short 

contracts in the same currency pair are 

truly offsetting. Accordingly, the 

Commission has determined to adopt 

Regulation 1.46 as proposed. 

Re-quoting. Two comments were 

received regarding Regulation 5.18(f), 

which would, among other things, 

prohibit retail forex counterparties from 

providing a customer a new bid (or 

asked) price that is higher (or lower) 

than a previous price without providing 

a new asked (or bid) price that is higher 

(or lower) as well. One commenter 

maintained that the proposed rule 

would not take into account that in the 

forex market, spreads can increase 

dramatically, which might cause the 

new bid price to be higher and the new 

ask price to be lower. 

While a fast-moving market may affect 

the spread, the Commission’s proposed 

rule is intended to apply to those 

situations where a customer is quoted 

one bid/asked price, and rather than fill 

the order, the FCM or RFED provides a 

second quote. In this situation, the 

Commission believes that if the forex 

dealer re-quotes the price, then at a 

minimum, the spread should remain the 

same. 

A second commenter suggested that 

the Commission clarify that all ‘‘requote’’ practices are required to be 

objective and evenhanded and that a 

counterparty that re-quotes a price must 

do so regardless of the direction the 

market moves. Further, the commenter 

suggested that the Commission require 

counterparties to disclose to customers 

how orders that reach the platform at a 

price no longer available are handled. 

The Commission believes the intent of 

proposed Regulation 5.18 is clear. It 

requires that, when re-quoting prices, 

forex counterparties are obligated to do 

so in a symmetrical fashion, so that the 

re-quoted prices do not represent an 

increase in the spread from the initially 

quoted prices, regardless of the 

direction the market moves. As to the 

objectiveness of the re-quote, the 

Commission believes that the 

requirement that both bid and asked 

prices be re-quoted symmetrically will 

encourage objectivity. Moreover, 

proposed Regulations 5.18(b)(3) and 

5.18(b)(iv) require, respectively, that 

forex counterparties establish and 

enforce internal rules, procedures and 

controls to ‘‘[f]airly and objectively 

establish settlement prices for retail 

forex transactions’’ and to maintain 

records reflecting ‘‘any method or 

algorithm used to determine the bid or 

asked price for any retail forex 

transaction or the prices at which the 

customer orders are executed * * *.’’ 

The Commission believes that this 

should provide adequate incentive for 

firms to deal fairly and objectively with 

their customers with regard to requoting. 

Finally, as to the suggested disclosure, 

as proposed, Regulation 5.5 would 

require FCMs, RFEDs and IBs engaged 

in retail forex transactions to distribute 

to retail forex customers a written 

disclosure statement containing, among 

other things, the following statement: 

Your ability to close your transactions or 

offset positions is limited to what your dealer 

will offer to you, as there is no other market 

for these transactions. Your dealer may offer 

any prices it wishes, and it may offer prices 

derived from outside sources or not in its 

discretion. Your dealer may establish its 

prices by offering spreads from third party 

prices, but it is under no obligation to do so 

or to continue to do so. Your dealer may offer 

different prices to different customers at any 

point in time on its own terms. The terms of 

your account agreement alone govern the 

obligations your dealer has to you to offer 

prices and offer offset or liquidating 

transactions in your account and make any 

payments to you. The prices offered by your 

dealer may or may not reflect prices available 

elsewhere at any exchange, interbank, or 

other market for foreign currency. 

While the proposed disclosure 

language does not require a statement 

regarding how re-quoted prices are 

handled, it does inform the customer 

that it is within the discretion of the 

forex dealer to set prices (provided they 

otherwise comply with the requirements 

of Regulation 5.18). For this reason, and 

those cited above, the Commission has 

determined to issue Regulation 5.18(f) 

as proposed. 

CFTC Authority To Regulate Zelener 

Contracts. One commenter, a law firm, 

argued that the CRA did not grant the 

Commission the authority to regulate, 

other than for fraud, FCMs that are 

primarily or substantially engaged in 

trading futures contracts on registered 

exchanges to the extent they also offer 

off-exchange Zelener, or ‘‘futures lookalike’’ forex, contracts.19 To the extent 

legislative history suggests that similarly 

situated RFEDs and FCMs should be 

subject to the same regulations, the 

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20See 7 U.S.C. 2(c)(2)(B)(iii). 

21See 7 U.S.C. 2(c)(2)(C)(ii)(I). 

22See 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v); 

2(c)(2)(C)(ii)(III); 2(c)(2)(C)(iii)(III). 

23See 7 U.S.C. 2(c)(2)(B)(v). 

24See 7 U.S.C. 12a(5) (2006). 

25See Wall Street Reform Act, Sec. 721(a)(13). 

26The Commission also disagrees with the 

argument that CRA Conference Report language is 

inapposite. The Conference Report states that ‘‘[t]o 

the extent their risk profiles are similar, the 

managers intend for FCMs and RFEDs to be 

regulated substantially equivalently in terms of 

their off-exchange retail foreign currency business. 

The managers do not intend for the Commission to 

provide either FCMs or RFEDs with a more 

favorable regulatory environment over the other or 

to create two significantly different regulatory 

regimes for similar business models—to the extent 

the financial risks posed by such operations are 

similar.’’ See H.R. Rep. No. 110–627 at 980 (Conf. 

Rep.) (emphasis added). 

27See, for example, 7 U.S.C. 2(c)(2)(B)(iii). 

28 75 FR 3282, 3285–86. 

29 7 U.S.C. 6(c) (2006). 

commenter maintains that this language 

is restricted to requirements relating to 

the financial soundness of the forex 

dealer and nothing else. 

The CRA contains several provisions 

that touch on the scope of the 

Commission’s jurisdiction over retail 

off-exchange foreign currency contracts, 

whether futures or look-alike, leveraged 

contracts. Retail off-exchange forex 

futures and options transactions are 

subject to numerous provisions of the 

Act including sections 4(b), 4b, 4c(b), 

4o, 6(c) and 6(d), 6c, 6d, 8(a), 13(a), 

13(b), if they are offered or entered into 

by an FCM, an RFED, or an affiliate of 

an FCM that is not one of the otherwise 

regulated entities specified in the Act.20

The same provisions apply to look-alike 

forex transactions.21 The CRA clearly 

gives the Commission full rulemaking 

authority over the agreements, contracts 

or transactions in retail forex where 

‘‘reasonably necessary to effectuate any 

of the provisions or to accomplish any 

of the purposes of [the] Act.’’ 22 On the 

other hand, however, while the CRA 

explicitly grants the Commission 

rulemaking authority over off-exchange 

retail futures and options transactions 

where such transactions are offered or 

entered into by FCMs, their affiliates or 

RFEDs,23 its rulemaking authority with 

regard to look-alike transactions does 

not explicitly include FCMs. Thus, the 

commenter concludes that language in 

Sections 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) 

limits the Commission’s authority in 

this area where FCMs are concerned. 

The Commission disagrees. Section 

8a(5) of the Act gives the Commission 

the broadest possible authority to ‘‘make 

and promulgate such rules and 

regulations as, in the judgment of the 

Commission, are reasonably necessary 

to effectuate any of the provisions or to 

accomplish any of the purposes of this 

Act[.]’’ 24 Under this authority, the 

Commission has promulgated rules 

covering the full scope of FCM activities 

generally. Furthermore, the recent Wall 

Street Reform and Consumer Protection 

Act of 2010 specifically defines FCMs as 

any ‘‘individual, association, 

partnership, corporation, or trust * * * 

that * * * is * * * acting as a 

counterparty in any agreement, contract 

or transaction described in Section 

2(c)(2)(C)(i)’’ of the Act,25 making it 

clear that the offering of ‘‘look-alike’’ 

transactions falls within the scope of 

regulated FCM activity. Accordingly, 

the Commission sees no deficiencies in 

its authority to fully regulate FCMs 

engaged in ‘‘look-alike’’ forex 

contracts.26

Definition of Retail Forex 

Transactions. One commenter pointed 

out that the definition of ‘‘retail forex 

transactions’’ found in proposed 

Regulation 5.1(m) refers to ‘‘any account, 

agreement, contract or transaction’’ 

described in Section 2(c)(2)(B) or 

2(c)(2)(C) of the Act and notes that the 

use of the word ‘‘account’’ in this context 

is confusing. 

Broad language in Section 2(c)(2)(B)(i) 

of the Act provides the Commission 

with jurisdiction over ‘‘an agreement, 

contract or transaction in foreign 

currency’’ that is a contract of sale of a 

commodity for future delivery (or an 

option on such a contract) or an option 

(other than one traded on a securities 

exchange). Elsewhere in Section 2(c), 

the statute states that certain of its 

provisions apply to ‘‘agreements, 

contracts or transactions * * * and 

accounts or pooled investment vehicles 

* * *.’’ 27 In order to accurately reflect 

the full scope of authority granted it 

under the Act, the Commission 

included the word ‘‘accounts’’ within 

the definition of ‘‘retail forex 

transactions.’’ The Commission does not 

view this as in any way inconsistent 

with language in Section 2(c), as 

amended by the CRA, and has 

determined to adopt the regulation as 

proposed. 

Anticompetitiveness. In addition to 

similar comments specifically 

referencing proposed Regulation 5.9 

(security deposits) and 5.18(h) 

(guaranteed IBs)—which are addressed 

above—the Commission received 

numerous comments arguing that 

various other sections of the proposed 

rules were ‘‘anticompetitive’’ insofar as 

there is no comparable requirement 

relative to those engaged in futures 

transactions on designated contract 

markets. As the Commission pointed 

out in its Proposing Release, it has, 

whenever possible, drawn upon the 

principles that have guided it in the 

regulation of on-exchange instruments. 

However, the Commission also noted 

that there are essential differences 

between the trading futures contracts on 

designated contract markets that are 

cleared through designated clearing 

organizations, on the one hand, and offexchange transactions between forex 

firms and retail customers, on the 

other.28

Given the principal-to-principal 

nature of retail forex transactions and 

the inherent conflicts of interest in the 

relationship between the retail customer 

and the dealer/counterparty, the lack of 

transparency in the pricing and 

execution of such transactions, and the 

volume of fraud the Commission has 

seen arising from such transactions, the 

Commission has determined to 

promulgate some regulations that are 

unique to, and tailored to, retail forex 

transactions. By way of example, the 

Commission’s proposed regulations 

included requirements that forex 

registrants maintain records of customer 

complaints; that counterparties disclose, 

with the Risk Disclosure Statement, the 

percentage of profitable 

nondiscretionary forex customer 

accounts; and that forex counterparties 

designate a chief compliance officer to 

be responsible for development and 

implementation of customer protection 

policies and procedures. To the extent 

the final rules published today do not 

track precisely with rules applicable to 

on-exchange futures trading, the 

Commission believes that the 

differences reflect meaningful 

differences in the market structure of 

retail forex transactions and that the 

rules issued today are no more 

restrictive or burdensome than 

necessary to address these differences. 

Scope of Commission’s Authority and 

Application of Other Rules. Several 

commenters lodged criticisms or made 

observations that go to the scope of the 

Commission’s authority, as provided in 

the Act and CRA, or otherwise. For 

example, several commenters 

maintained that the Commission should 

require segregation of customer funds by 

counterparties in order to provide some 

protection in the event of a counterparty 

insolvency. The Commission’s 

segregation requirements with regard to 

futures flow from Section 4d of the 

Act 29 which, generally speaking, 

requires that customer property for 

trading commodity contracts be kept 

apart, or segregated, from the FCM’s 

own funds. However, as noted in the 

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30 75 FR 3281, 3287 and 3290 (Jan. 20, 2010). 31 11 U.S.C. 761, et seq. 32See, for example, Section 2(c)(2)(B)(iv)(I) of the 

Act, 7 U.S.C. 2(c)(2)(B)(iv)(I), which provides the 

Commission with the authority to register and 

promulgate rules regarding specifically defined 

persons or entities. See also Section 2(c)(2)(B)(ii) of 

the Act which explicitly provides for a $20 million 

minimum capital requirement. 

33 5 U.S.C. 601, et seq. 

34By its terms, the RFA does not apply to 

‘‘individuals.’’ See 48 FR 14933, n. 115 (April 6, 

1983). Because associated persons must be 

individuals, (see Commission Regulation 1.3(aa) 

and proposed Regulations 5.1(c), (d)(2), (e)(2), (g)(2) 

and (i)(2)), the RFA does not apply to APs and no 

analysis of the economic impact of this rule 

proposal on such persons is required. 

35 47 FR 18618 (April 30, 1982). 

36 Id. at 18619. 

37 Id. at 18619–20. 

38 17 CFR 4.13(a)(2) (2009). 

39 47 FR 18618, 18620. 

40 48 FR 35248, 35276 (August 3, 1983) 

41 48 FR 14933, 14955 (Apr. 6, 1983). See also 47 

FR 18618, 18619. 

42 Id. 

43 44 U.S.C. 3501, et seq. 

Commission’s proposing release,30 a 

segregated funds regime cannot be 

replicated in the context of off-exchange 

retail forex trading. Unlike segregation 

of customer funds deposited for futures 

trading, under the relevant provisions of 

the Bankruptcy Code,31 such amounts 

held in connection with retail forex 

trading would not receive any 

preferential treatment to unsecured 

creditors in bankruptcy. 

Similarly, some commenters took 

issue with the definitions of certain 

intermediaries and the capital 

requirements, found in the Proposing 

Release. Here again, the Commission is 

bound by statutory language that defines 

the scope of its authority.32 While the 

Commission appreciates the concerns 

expressed by these commenters and the 

time they have taken to express them, it 

can do no more than its statutory 

authority permits. 

III. Related Matters 

A. Regulatory Flexibility Act 

FCMs and CPOs: The Regulatory 

Flexibility Act (‘‘RFA’’) 33 requires that 

agencies, in proposing rules, consider 

the impact of those rules on small 

businesses.34 The Commission has 

already established certain definitions 

of ‘‘small entities’’ to be used in 

evaluating the impact of its rules on 

such small entities in accordance with 

the RFA.35 In that statement, the 

Commission concluded that neither 

FCMs nor registered CPOs should be 

considered to be small entities for 

purposes of the RFA. With respect to 

FCMs, the Commission’s determination 

was based in part upon their obligation 

to meet the capital requirement 

established by the Commission and the 

purposes of protecting financial 

integrity.36

As for CPOs, the Commission 

determined that registered CPOs are not 

small entities based upon its existing 

regulatory standard for exempting 

certain small CPOs from the 

requirement to register under the Act.37

(A CPO need not register with the 

Commission if the gross capital 

contributions for all pools under its 

management do not exceed $400,000 

and there are not more than fifteen 

participants in any one of those 

pools.38) 

Thus, with respect to FCMs and 

registered CPOs, the Commission 

believes that these final rules will not 

have a significant economic impact on 

a substantial number of small entities. 

CTAs: The Commission has 

previously decided to evaluate, within 

the context of a particular rule proposal, 

whether all or some CTAs should be 

considered to be small entities, and if 

so, to then analyze the economic impact 

on them of any such rule.39 CTAs 

wishing to advise retail forex customers 

may include both currently registered 

CTAs and previously unregistered 

persons who now will be required to 

register. As to the first group, there 

should be no significant new economic 

impact. As to the second group, 

registration will require the submission 

of application forms, fingerprinting of 

principals, and payment of registration 

fees. To the extent that CTAs can be 

considered to be small entities, the 

Commission does not consider either 

the proposed registration fee or the 

proposed fingerprinting requirement for 

newly registered CTAs to have 

significant economic impact.40

IBs: In 1983, the Commission 

proposed that for purposes of the RFA 

and future rulemakings, it would not 

consider introducing brokers to be 

‘‘small entities’’ for essentially the same 

reasons that FCMs had previously been 

determined not to be small entities.41

This was based, in part, on the fact that 

IBs, like FCMs, are required to maintain 

a specified level of adjusted net capital. 

In the Proposing Release, retail forex IBs 

would not have been subject to a capital 

requirement; rather, they would have 

had to operate pursuant to a guarantee 

agreement. Under the final rules, retail 

forex IBs will be treated no differently 

than futures IBs. Accordingly, and in 

keeping with past Commission 

determinations, the Commission 

believes that the final rules with respect 

to IBs will not have a significant impact 

on a substantial number of small 

entities. 

RFEDs: RFEDs are a new category of 

registrant. The Commission does not 

believe that there are regulatory 

alternatives to those being proposed 

which would be consistent with the 

statutory mandate to provide protection 

to the public against irresponsible or 

fraudulent business practices. In the 

Proposing Release, the Commission 

proposed that RFEDs not be considered 

to be ‘‘small entities’’ for essentially the 

same reasons that FCMs have previously 

been determined not to be small 

entities.42 As with FCMs, a requirement 

to maintain a specified level of adjusted 

net capital would be imposed upon 

RFEDs to ensure that they maintain 

sufficient capital resources to guarantee 

their financial accountability and to 

promote responsible and reliable 

business operations. Moreover, the 

Commission has sought to fashion its 

proposed regulatory program for RFEDs 

in a manner which is responsive to the 

function, purposes, and size of the 

entity being regulated consistent with 

the objective of the RFA. In particular, 

the minimum capital requirement 

required by the CRA effectuates the 

Congressional purpose that RFEDs 

maintain sufficient reserve of capital to 

remain economically viable. For the 

reasons stated above, the Commission 

will not define RFEDs as small entities 

for RFA purposes. 

B. Paperwork Reduction Act 

Under the Paperwork Reduction Act 

of 1995 (‘‘PRA’’) 43 an agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number. The 

Commission’s final rules regarding retail 

forex transactions result in information 

collection requirements within the 

meaning of the PRA. The Commission 

submitted the proposing release along 

with supporting documentation to the 

Office of Management and Budget 

(‘‘OMB’’) for review in accordance with 

44 U.S.C. 3507(d) and 5 CFR 1320.11. 

The Commission requested that OMB 

approve, and with respect to the 

collections required under the new part 

5 of the Commission’s regulations, 

assign a new control number for, the 

collections of information required by 

the proposing release. The information 

collection burdens created by the 

Commission’s proposed rules, which 

were discussed in detail in the 

proposing release, are identical to the 

collective information collection 

burdens of the final rules. 

The Commission invited the public 

and other Federal agencies to comment 

on any aspect of the information 

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44 7 U.S.C. 19(a). 

45As noted in the Conference Report that 

accompanied the CRA, ‘‘To the extent their risk 

profiles are similar, the managers intend for FCMs 

and RFEDs to be regulated substantially 

equivalently in terms of their off-exchange retail 

foreign currency business.’’ H.R. Rep. No. 110–627, 

at 980 (2008) (Conf. Rep.). The Conference Report 

is available via the Internet on the CFTC’s Web site. 

collection requirements discussed 

above. The Commission received no 

comment on its burden estimates or on 

any other aspect of the information 

collection requirements contained in its 

proposing release. The affected 

collections are as follows: 

• Existing Collection 3038–0024 (part 

1 of the Commission’s regulations); 

• Existing Collection 3038–0023 (part 

3 of the Commission’s regulations); 

• Existing Collection 3038–0005 (part 

4 of the Commission’s regulations); 

• Existing Collection 3038–0055 (part 

160 of the Commission’s regulations); 

and 

• New Collection 3038–0062 (part 5 

of the Commission’s regulations). 

C. Cost-Benefit Analysis 

Section 15(a) of the Act 44 requires the 

Commission to consider the costs and 

benefits of its action before issuing new 

regulations 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 

regulation outweigh its costs. Rather, 

section 15(a) simply requires the 

Commission to ‘‘consider the costs and 

benefits’’ of its action. 

Section 15(a) further specifies that 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern, enumerated below. 

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. 

As discussed in more detail above, 

these amendments are intended to 

create a comprehensive scheme to 

implement the requirements of the CRA, 

and to put in place requirements 

including registration, disclosure, 

recordkeeping, financial reporting, 

minimum capital and other operational 

standards. This is to be achieved 

through both amendments to existing 

regulations and the creation of a new, 

free-standing part to the Commission’s 

regulations. The Commission is 

considering the costs and benefits of the 

amendments in light of the specific 

provisions of section 15(a) as follows: 

1. Protection of market participants 

and the public. The amendments should 

enhance considerably the protection of 

market participants and the public 

because they require, for the first time, 

the registration of several categories of 

market participants and require 

adherence to operational standards that 

have not previously applied. The 

benefits that inhere in the imposition of 

these requirements to a sector of the offexchange market that has been largely 

unregulated to this point, and which is 

geared towards the retail public, are 

manifest. 

2. Efficiency and competition. In its 

Conference Report, Congress indicated 

that the Commission should avoid 

creating two different regulatory regimes 

for similar business models with respect 

to FCMs or RFEDs engaging in offexchange retail forex transactions.45

Accordingly, the Commission has 

endeavored to ensure that these entities 

be treated in comparable fashion 

relative to one another. Moreover, the 

Commission has endeavored, wherever 

possible, to propose regulations in part 

5 that are analogous to regulations 

imposed upon intermediaries engaged 

in on-exchange transactions. 

Accordingly, the Commission believes 

that it has provided an even handed 

regulatory scheme that will be familiar 

to industry participants. 

3. Financial integrity of futures 

markets and price discovery. The 

amendments concern retail, offexchange markets. These markets serve 

primarily as a vehicle for members of 

the retail public to engage in speculative 

transactions. Accordingly, the 

Commission does not perceive a 

significant intersection between the 

operations of these markets and the 

financial integrity or price discovery 

functions of the markets generally. 

4. Sound risk management practices. 

The amendments include requirements 

regarding capital, financial reporting, 

risk assessment recordkeeping, and risk 

assessment reporting that are 

comparable to those required of entities 

engaged in on-exchange trading. The 

Commission believes that the benefits of 

these risk management requirements— 

which strive to ensure the financial 

soundness of firms—have been borne 

out on the exchange-traded side and 

will be of significant benefit with regard 

to its oversight of retail forex 

counterparties. 

5. Other public interest 

considerations. The retail, off-exchange 

forex market has been largely 

unregulated until now. The Commission 

believes that the amendments are 

beneficial in that they will provide 

needed protections for members of the 

public engaging in these transactions. 

The amendments will also bring much 

needed oversight to the forex 

counterparties and intermediaries that 

interact with the public. 

After considering these factors, the 

Commission has determined to adopt 

the proposed rule changes. The 

Commission did not receive any 

comments relative to its analysis of the 

cost-benefit provision. 

List of Subjects 

17 CFR Part 1 

Definitions, Minimum financial and 

reporting requirements. Recordkeeping 

requirements, Prohibited transactions in 

commodity options, Miscellaneous. 

17 CFR Part 3 

Definitions, Customer protection, 

Licensing, Registration. 

17 CFR Part 4 

Advertising, Brokers, Commodity 

futures, Commodity pool operators, 

Commodity trading advisors, Consumer 

protection, Exemption from registration, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 5 

Bulk transfers, Commodity pool 

operators, Commodity trading advisors, 

Consumer protection, Customer’s 

money, securities and property, 

Definitions, Foreign exchange, 

Minimum financial and reporting 

requirements, Prohibited transactions in 

retail foreign exchange, Recordkeeping 

requirements, Retail foreign exchange 

dealers, Risk assessment, Special calls, 

Trading practices. 

17 CFR Part 10 

Adjudicatory proceedings, Rules of 

practice. 

17 CFR Part 140 

Authority delgations (Government 

agencies, Conflict of interests, 

Organization and functions 

(Government agencies). 

17 CFR Part 145 

Confidential business information, 

Freedom of information. 

17 CFR Part 147 

Sunshine Act. 

17 CFR Part 160 

Consumer financial information, 

Definitions, Nonpublic personal 

information, Privacy. 

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17 CFR Part 166 

Arbitration, Authorization to trade, 

Customer protection, Definitions, 

Dispute settlement, Litigation, 

Reparations. 

■ For the reasons presented above, the 

Commission hereby amends Chapter I of 

Title 17 of the Code of Federal 

Regulations as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 

6b, 6c, 6d, 6e, 6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 

6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23 and 24. 

§ 1.1 [Removed and Reserved] 

■ 2. Section 1.1 is removed and 

reserved. 

■ 3. Section 1.3 is amended by revising 

paragraphs (nn) and (yy) to read as 

follows: 

§ 1.3 Definitions. 

* * * * * 

(nn) Guarantee agreement. This term 

means an agreement of guaranty in the 

form set forth in part B or C of Form 1– 

FR, executed by a registered futures 

commission merchant or retail foreign 

exchange dealer, as appropriate, and by 

an introducing broker or applicant for 

registration as an introducing broker on 

behalf of an introducing broker or 

applicant for registration as an 

introducing broker in satisfaction of the 

alternative adjusted net capital 

requirement set forth in § 1.17(a)(1)(iii). 

* * * * * 

(yy) Commodity interest. This term 

means: 

(1) Any contract for the purchase or 

sale of a commodity for future delivery; 

(2) Any contract, agreement or 

transaction subject to Commission 

regulation under section 4c or 19 of the 

Act; and 

(3) Any contract, agreement or 

transaction subject to Commission 

jurisdiction under section 2(c)(2) of the 

Act. 

■ 4. Section 1.4 is revised to read as 

follows: 

§ 1.4 Use of electronic signatures. 

For purposes of complying with any 

provision in the Commodity Exchange 

Act or the rules or regulations in this 

Chapter I that requires a document to be 

signed by a customer of a futures 

commission merchant or introducing 

broker, a retail forex customer of a retail 

foreign exchange dealer or futures 

commission merchant, a pool 

participant or a client of a commodity 

trading advisor, an electronic signature 

executed by the customer, participant or 

client will be sufficient, if the futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

commodity pool operator or commodity 

trading advisor elects generally to 

accept electronic signatures; Provided, 

however, That the electronic signature 

must comply with applicable Federal 

laws and other Commission rules; And, 

Provided further, That the futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

commodity pool operator or commodity 

trading advisor must adopt and utilize 

reasonable safeguards regarding the use 

of electronic signatures, including at a 

minimum safeguards employed to 

prevent alteration of the electronic 

record with which the electronic 

signature is associated, after such record 

has been electronically signed. 

■ 5. Section 1.10 is amended by revising 

paragraph (j) to read as follows: 

§ 1.10 Financial reports of futures 

commission merchants and introducing 

brokers. 

* * * * * 

(j) Requirements for guarantee 

agreement. (1) A guarantee agreement 

filed pursuant to this section must be 

signed in a manner sufficient to be a 

binding guarantee under local law by an 

appropriate person on behalf of the 

futures commission merchant or retail 

foreign exchange dealer and the 

introducing broker, and each signature 

must be accompanied by evidence that 

the signatory is authorized to enter the 

agreement on behalf of the futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

and is such an appropriate person. For 

purposes of this paragraph (j), an 

appropriate person shall be the 

proprietor, if the firm is a sole 

proprietorship; a general partner, if the 

firm is a partnership; and either the 

chief executive officer or the chief 

financial officer, if the firm is a 

corporation; and, if the firm is a limited 

liability company or limited liability 

partnership, either the chief executive 

officer, the chief financial officer, the 

manager, the managing member, or 

those members vested with the 

management authority for the limited 

liability company or limited liability 

partnership. 

(2) No futures commission merchant 

or retail foreign exchange dealer may 

enter into a guarantee agreement if: 

(i) It knows or should have known 

that its adjusted net capital is less than 

the amount set forth in § 1.12(b) of this 

part or § 5.6(b) of this chapter, as 

applicable; or 

(ii) There is filed against the futures 

commission merchant or retail foreign 

exchange dealer an adjudicatory 

proceeding brought by or before the 

Commission pursuant to the provisions 

of sections 6(c), 6(d), 6c, 6d, 8a or 9 of 

the Act or §§ 3.55, 3.56 or 3.60 of this 

chapter. 

(3) A retail foreign exchange dealer 

may enter into a guarantee agreement 

only with an introducing broker as 

defined in § 5.1(f)(1) of this chapter. A 

retail foreign exchange dealer may not 

enter into a guarantee agreement with 

an introducing broker as defined in 

§ 1.3(mm) of this part. 

(4) A guarantee agreement filed in 

connection with an application for 

initial registration as an introducing 

broker in accordance with the 

provisions of § 3.10(a) of this chapter 

shall become effective upon the granting 

of registration or, if appropriate, a 

temporary license, to the introducing 

broker. A guarantee agreement filed 

other than in connection with an 

application for initial registration as an 

introducing broker shall become 

effective as of the date agreed to by the 

parties. 

(5)(i) If the registration of the 

introducing broker is suspended, 

revoked, or withdrawn in accordance 

with the provisions of this chapter, the 

guarantee agreement shall expire as of 

the date of such suspension, revocation 

or withdrawal. 

(ii) If the registration of the futures 

commission merchant or retail foreign 

exchange dealer is suspended or 

revoked, the guarantee agreement shall 

expire 30 days after such suspension or 

revocation, or at such earlier time as 

may be approved by the Commission, 

the introducing broker, and the 

introducing broker’s designated selfregulatory organization. 

(6) A guarantee agreement may be 

terminated at any time during the term 

thereof: 

(i) By mutual written consent of the 

parties, signed by an appropriate person 

on behalf of each party, with prompt 

written notice thereof, signed by an 

appropriate person on behalf of each 

party, to the Commission and to the 

designated self-regulatory organizations 

of the futures commission merchant or 

retail foreign exchange dealer and the 

introducing broker; 

(ii) For good cause shown, by either 

party giving written notice of its 

intention to terminate the agreement, 

signed by an appropriate person, to the 

other party to the agreement, to the 

Commission, and to the designated selfregulatory organizations of the futures 

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commission merchant or retail foreign 

exchange dealer and the introducing 

broker; or 

(iii) By either party giving written 

notice of its intention to terminate the 

agreement, signed by an appropriate 

person, at least 30 days prior to the 

proposed termination date, to the other 

party to the agreement, to the 

Commission, and to the designated selfregulatory organizations of the futures 

commission merchant or retail foreign 

exchange dealer and the introducing 

broker. 

(7) The termination of a guarantee 

agreement by a futures commission 

merchant, retail foreign exchange dealer 

or an introducing broker, or the 

expiration of such an agreement, shall 

not relieve any party from any liability 

or obligation arising from acts or 

omissions which occurred during the 

term of the agreement. 

(8) An introducing broker may not 

simultaneously be a party to more than 

one guarantee agreement: Provided, 

however, That the provisions of this 

paragraph (j)(8) shall not be deemed to 

preclude an introducing broker from 

entering into a guarantee agreement 

with another futures commission 

merchant or retail foreign exchange 

dealer if the introducing broker, futures 

commission merchant or retail foreign 

exchange dealer which is a party to the 

existing agreement has provided notice 

of termination of the existing agreement 

in accordance with the provisions of 

paragraph (j)(6) of this section, and the 

new guarantee agreement does not 

become effective until the day following 

the date of termination of the existing 

agreement: And, provided further, That 

the provisions of this paragraph (j)(8) 

shall not be deemed to preclude an 

introducing broker from entering into a 

guarantee agreement with another 

futures commission merchant or retail 

foreign exchange dealer if the futures 

commission merchant or retail foreign 

exchange dealer which is a party to the 

existing agreement ceases to remain 

registered and the existing agreement 

would therefore expire in accordance 

with the provisions of paragraph 

(j)(6)(ii) of this section. 

(9)(i)(A) An introducing broker that is 

a party to a guarantee agreement that 

has been terminated in accordance with 

the provisions of paragraph (j)(6) of this 

section, or that is due to expire in 

accordance with the provisions of 

paragraph (j)(5)(ii) of this section, must 

cease doing business as an introducing 

broker on or before the effective date of 

such termination or expiration unless, 

on or before 10 days prior to the 

effective date of such termination or 

expiration or such other period of time 

as the Commission or the designated 

self-regulatory organization may allow 

for good cause shown, the introducing 

broker files with its designated selfregulatory organization either a new 

guarantee agreement effective as of the 

day following the date of termination of 

the existing agreement, or, in the case of 

a guarantee agreement that is due to 

expire in accordance with the 

provisions of paragraph (j)(4)(ii) of this 

section, a new guarantee agreement 

effective on or before such expiration, or 

either: 

(1) A Form 1–FR–IB certified by an 

independent public accountant in 

accordance with § 1.16 as of a date not 

more than 45 days prior to the date on 

which the report is filed; or 

(2) A Form 1–FR–IB as of a date not 

more than 17 business days prior to the 

date on which the report is filed and a 

Form 1–FR–IB certified by an 

independent public accountant in 

accordance with § 1.16 as of a date not 

more than one year prior to the date on 

which the report is filed: Provided, 

however, that an introducing broker as 

defined in § 5.1(f)(1) of this chapter that 

is party to a guarantee agreement that 

has been terminated or that has expired 

must cease doing business as an 

introducing broker on or before the 

effective date of such termination or 

expiration unless, on or before 10 days 

prior to the effective date of such 

termination or expiration or such other 

period of time as the Commission or the 

designated self-regulatory organization 

may allow for good cause shown, the 

introducing broker files with its 

designated self-regulatory organization a 

new guarantee agreement effective on or 

before the termination or expiration date 

of the terminating or expiring guarantee 

agreement. 

(B) Each person filing a Form 1–FR– 

IB in accordance with this section must 

include with the financial report a 

statement describing the source of his 

current assets and representing that his 

capital has been contributed for the 

purpose of operating his business and 

will continue to be used for such 

purpose. 

(ii)(A) Notwithstanding the provisions 

of paragraph (j)(9)(i) of this section or of 

§ 1.17(a), an introducing broker that is a 

party to a guarantee agreement that has 

been terminated in accordance with the 

provisions of paragraph (j)(6)(ii) of this 

section shall not be deemed to be in 

violation of the minimum adjusted net 

capital requirement of § 1.17(a)(1)(iii) or 

(a)(2) for 30 days following such 

termination. Such an introducing broker 

must cease doing business as an 

introducing broker on or after the 

effective date of such termination, and 

may not resume doing business as an 

introducing broker unless and until it 

files a new agreement or either: 

(1) A Form 1–FR–IB certified by an 

independent public accountant in 

accordance with § 1.16 as of a date not 

more than 45 days prior to the date on 

which the report is filed; or 

(2) A Form 1–FR–IB as of a date not 

more than 17 business days prior to the 

date on which the report is filed and a 

Form 1–FR–IB certified by an 

independent public accountant in 

accordance with § 1.16 as of a date not 

more than one year prior to the date on 

which the report is filed: Provided, 

however, that an introducing broker as 

defined in § 5.1(f)(1) of this chapter that 

is party to a guarantee agreement that 

has been terminated must cease doing 

business as an introducing broker from 

and after the effective date of such 

termination, and may not resume doing 

business as an introducing broker as 

defined in § 5.1(f)(1) of this chapter 

unless and until it files a new guarantee 

agreement. 

(B) Each person filing a Form 1–FR– 

IB in accordance with this section must 

include with the financial report a 

statement describing the source of his 

current assets and representing that his 

capital has been contributed for the 

purpose of operating his business and 

will continue to be used for such 

purpose. 

* * * * * 

■ 6. Section 1.35 is amended by revising 

paragraphs (a), (a–1) and (b) to read as 

follows: 

§ 1.35 Records of cash commodity, 

futures, and option transactions. 

(a) Futures commission merchants, 

retail foreign exchange dealers, 

introducing brokers, and members of 

contract markets. Each futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

and member of a contract market shall 

keep full, complete, and systematic 

records, together with all pertinent data 

and memoranda, of all transactions 

relating to its business of dealing in 

commodity futures, retail forex 

transactions, commodity options, and 

cash commodities (including 

currencies). Each futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, and member 

of a contract market shall retain the 

required records, data, and memoranda 

in accordance with the requirements of 

§ 1.31, and produce them for inspection 

and furnish true and correct information 

and reports as to the contents or the 

meaning thereof, when and as requested 

by an authorized representative of the 

Commission or the United States 

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Department of Justice. Included among 

such records shall be all orders (filled, 

unfilled, or canceled), trading cards, 

signature cards, street books, journals, 

ledgers, canceled checks, copies of 

confirmations, copies of statements of 

purchase and sale, and all other records, 

data and memoranda, which have been 

prepared in the course of its business of 

dealing in commodity futures, retail 

forex transactions, commodity options, 

and cash commodities. Among such 

records each member of a contract 

market must retain and produce for 

inspection are all documents on which 

trade information is originally recorded, 

whether or not such documents must be 

prepared pursuant to the rules or 

regulations of either the Commission or 

the contract market. For purposes of this 

section, such documents are referred to 

as ‘‘original source documents.’’ 

(a–1) Futures commission merchants, 

retail foreign exchange dealers, 

introducing brokers, and members of 

contract markets: Recording of 

customers’ and option customers’ 

orders. (1) Each futures commission 

merchant, each retail foreign exchange 

dealer and each introducing broker 

receiving a customer’s, retail forex 

customer’s or option customer’s order, 

as applicable, shall immediately upon 

receipt thereof prepare a written record 

of the order including the account 

identification, except as provided in 

paragraph (a–1)(5) of this section, and 

order number, and shall record thereon, 

by timestamp or other timing device, the 

date and time, to the nearest minute, the 

order is received, and in addition, for 

option customers’ orders, the time, to 

the nearest minute, the order is 

transmitted for execution. 

(2)(i) Each member of a contract 

market who on the floor of such contract 

market receives a customer’s or option 

customer’s order which is not in the 

form of a written record including the 

account identification, order number, 

and the date and time, to the nearest 

minute, the order was transmitted or 

received on the floor of such contract 

market, shall immediately upon receipt 

thereof prepare a written record of the 

order in nonerasable ink, including the 

account identification, except as 

provided in paragraph (a–1)(5) of this 

section or appendix C to this part, and 

order number and shall record thereon, 

by timestamp or other timing device, the 

date and time, to the nearest minute, the 

order is received. 

(ii) Except as provided in paragraph 

(a–1)(3) of this section: 

(A) Each contract market member who 

on the floor of such contract market 

receives an order from another member 

present on the floor which is not in the 

form of a written record shall, 

immediately upon receipt of such order, 

prepare a written record of the order or 

obtain from the member who placed the 

order a written record of the order, in 

non-erasable ink including the account 

identification and order number and 

shall record thereon, by time-stamp or 

other timing device, the date and time, 

to the nearest minute, the order is 

received; or 

(B) When a contract market member 

present on the floor places an order, 

which is not in the form of a written 

record, for his own account or an 

account over which he has control, with 

another member of such contract market 

for execution: 

(1) The member placing such order 

immediately upon placement of the 

order shall record the order and time of 

placement to the nearest minute on a 

sequentially-numbered trading card 

maintained in accordance with the 

requirements of paragraph (d) of this 

section; 

(2) The member receiving and 

executing such order immediately upon 

execution of the order shall record the 

time of execution to the nearest minute 

on a trading card or other record 

maintained pursuant to the 

requirements of paragraph (d) of this 

section; and 

(3) The member receiving and 

executing the order shall return such 

trading card or other record to the 

member placing the order. The member 

placing the order then must submit 

together both of the trading cards or 

other records documenting such trade to 

contract market personnel or the 

clearing member, in accordance with 

contract market rules adopted pursuant 

to paragraph (j)(1) of this section. 

(iii) Each contract market may adopt 

rules, which must be submitted to the 

Commission pursuant to section 

5a(a)(12)(A) of the Act and Commission 

Regulation 1.41, that provide alternative 

requirements to those contained in 

paragraph (a–1)(2)(ii) of this section. 

Such rules shall, at a minimum, require 

that the contemporaneous written 

records: 

(A) Contain the terms of the order; 

(B) Include reliable timing data for the 

initiation and execution of the order 

which would permit complete and 

effective reconstruction of the order 

placement and execution; and 

(C) Be submitted to contract market 

personnel or clearing members in 

accordance with contract market rules 

adopted pursuant to paragraph (j)(1) of 

this section. 

(3)(i) The requirements of paragraph 

(a–1)(2)(ii) of this section will not apply 

if a contract market maintains in effect 

rules which have been submitted to the 

Commission pursuant to section 

5a(a)(12)(A) of the Act and Commission 

Regulation 1.41, which provide for an 

exemption where: 

(A) A contract market member places 

with another member of such contract 

market an order that is part of a spread 

transaction; 

(B) The member placing the order 

personally executes one or more legs of 

the spread; and 

(C) The member receiving and 

executing such order immediately upon 

execution of the order records the time 

of execution to the nearest minute on 

his trading card or other record 

maintained in accordance with the 

requirements of paragraph (d) of this 

section. 

(ii) Each contract market shall, as part 

of its trade practice surveillance 

program, conduct surveillance for 

compliance with the recordkeeping and 

other requirements under paragraphs 

(a–1) (2) and (3) of this section, and for 

trading abuses related to the execution 

of orders for members present on the 

floor of the contract market. 

(4) Each member of a contract market 

reporting the execution from the floor of 

the contract market of a customer’s or 

option customer’s order or the order of 

another member of the contract market 

received in accordance with paragraphs 

(a–1)(2)(i) or (a–1)(2)(ii)(A) of this 

section, shall record on a written record 

of the order, including the account 

identification, except as provided in 

paragraph (a–1)(5) of this section, and 

order number, by timestamp or other 

timing device, the date and time to the 

nearest minute such report of execution 

is made. Each member of a contract 

market shall submit the written records 

of customer orders or orders from other 

contract market members to contract 

market personnel or to the clearing 

member responsible for the collection of 

orders prepared pursuant to this 

paragraph as required by contract 

market rules adopted in accordance 

with paragraph (j)(1) of this section. The 

execution price and other information 

reported on the order tickets must be 

written in nonerasable ink. 

(5) Post-execution allocation of 

bunched orders. Specific customer 

account identifiers for accounts 

included in bunched orders need not be 

recorded at time of order placement or 

upon report of execution if the 

requirements of paragraphs (a–1)(5)(i)– 

(iv) of this section are met. 

(i) Eligible account managers. The 

person placing and directing the 

allocation of an order eligible for postexecution allocation must have been 

granted written investment discretion 

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with regard to participating customer 

accounts. The following persons shall 

qualify as eligible account managers: 

(A) A commodity trading advisor 

registered with the Commission 

pursuant to the Act or excluded or 

exempt from registration under the Act 

or the Commission’s rules, except for 

entities exempt under § 4.14(a)(3) or 

§ 4.14(a)(6) of this chapter; 

(B) An investment adviser registered 

with the Securities and Exchange 

Commission pursuant to the Investment 

Advisers Act of 1940 or with a state 

pursuant to applicable state law or 

excluded or exempt from registration 

under such Act or applicable state law 

or rule; 

(C) A bank, insurance company, trust 

company, or savings and loan 

association subject to federal or state 

regulation; or 

(D) A foreign adviser that exercises 

discretionary trading authority solely 

over the accounts of non-U.S. persons, 

as defined in § 4.7(a)(1)(iv) of this 

chapter. 

(ii) Information. Eligible account 

managers shall make the following 

information available to customers upon 

request: 

(A) The general nature of the 

allocation methodology the account 

manager will use; 

(B) Whether accounts in which the 

account manager may have any interest 

may be included with customer 

accounts in bunched orders eligible for 

post-execution allocation; and 

(C) Summary or composite data 

sufficient for that customer to compare 

its results with those of other 

comparable customers and, if 

applicable, any account in which the 

account manager has an interest. 

(iii) Allocation. Orders eligible for 

post-execution allocation must be 

allocated by an eligible account manager 

in accordance with the following: 

(A) Allocations must be made as soon 

as practicable after the entire transaction 

is executed, but in any event account 

managers must provide allocation 

information to futures commission 

merchants no later than a time 

sufficiently before the end of the day the 

order is executed to ensure that clearing 

records identify the ultimate customer 

for each trade. 

(B) Allocations must be fair and 

equitable. No account or group of 

accounts may receive consistently 

favorable or unfavorable treatment. 

(C) The allocation methodology must 

be sufficiently objective and specific to 

permit independent verification of the 

fairness of the allocations using that 

methodology by appropriate regulatory 

and self-regulatory authorities and by 

outside auditors. 

(iv) Records. (A) Eligible account 

managers shall keep and must make 

available upon request of any 

representative of the Commission, the 

United States Department of Justice, or 

other appropriate regulatory agency, the 

information specified in paragraph 

(a–1)(5)(ii) of this section. 

(B) Eligible account managers shall 

keep and must make available upon 

request of any representative of the 

Commission, the United States 

Department of Justice, or other 

appropriate regulatory agency, records 

sufficient to demonstrate that all 

allocations meet the standards of 

paragraph (a–1)(5)(iii) of this section 

and to permit the reconstruction of the 

handling of the order from the time of 

placement by the account manager to 

the allocation to individual accounts. 

(C) Futures commission merchants 

that execute orders or that carry 

accounts eligible for post-execution 

allocation, and members of contract 

markets that execute such orders, must 

maintain records that, as applicable, 

identify each order subject to postexecution allocation and the accounts to 

which contracts executed for such order 

are allocated. 

(D) In addition to any other remedies 

that may be available under the Act or 

otherwise, if the Commission has reason 

to believe that an account manager has 

failed to provide information requested 

pursuant to paragraph (a–1)(5)(iv)(A) or 

(a–1)(5)(iv)(B) of this section, the 

Commission may inform in writing any 

designated contract market or 

derivatives transaction execution 

facility and that designated contract 

market or derivatives transaction 

execution facility shall prohibit the 

account manager from submitting orders 

for execution except for liquidation of 

open positions and no futures 

commission merchants shall accept 

orders for execution on any designated 

contract market or derivatives 

transaction execution facility from the 

account manager except for liquidation 

of open positions. 

(E) Any account manager that believes 

he or she is or may be adversely affected 

or aggrieved by action taken by the 

Commission under paragraph 

(a–1)(5)(iv)(D) of this section shall have 

the opportunity for a prompt hearing in 

accordance with the provisions of 

§ 21.03(g) of this chapter. 

* * * * * 

(b) Futures commission merchants, 

retail foreign exchange dealers, 

introducing brokers, and clearing 

members of contract markets. Each 

futures commission merchant, each 

retail foreign exchange dealer, and each 

clearing member of a contract market 

and, for purposes of paragraph (b)(3) of 

this section, each introducing broker, 

shall, as a minimum requirement, 

prepare regularly and promptly, and 

keep systematically and in permanent 

form, the following: 

(1) A financial ledger record which 

will show separately for each customer 

or retail forex customer or option 

customer all charges against and credits 

to such customer’s or retail forex 

customer’s or option customer’s 

account, including but not limited to 

customer or retail forex customer funds 

deposited, withdrawn, or transferred, 

and charges or credits resulting from 

losses or gains on closed transactions; 

(2) A record of transactions which 

will show separately for each account 

(including proprietary accounts): 

(i) All commodity futures transactions 

executed for such account, including 

the date, price, quantity, market, 

commodity and future; 

(ii) All retail forex transactions 

executed for such account, including 

the date, price, quantity, and currency; 

and 

(iii) All commodity option 

transactions executed for such account, 

including the date, whether the 

transaction involved a put or call, 

expiration date, quantity, underlying 

contract for future delivery or 

underlying physical, strike price, and 

details of the purchase price of the 

option, including premium, mark-up, 

commission and fees; and 

(3) A record or journal which will 

separately show for each business day 

complete details of: 

(i) All commodity futures transactions 

executed on that day, including the 

date, price, quantity, market, 

commodity, future and the person for 

whom such transaction was made; 

(ii) All retail forex transactions 

executed on that day for such account, 

including the date, price, quantity, 

currency and the person for whom such 

transaction was made; and 

(iii) All commodity option 

transactions executed on that day, 

including the date, whether the 

transaction involved a put or call, the 

expiration date, quantity, underlying 

contract for future delivery, or 

underlying physical, strike price, details 

of the purchase price of the option, 

including premium, mark-up, 

commission and fees and the person for 

whom the transaction was made; and 

(iv) In the case of an introducing 

broker, the record or journal required by 

this paragraph (b)(3) shall also include 

the futures commission merchant or 

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retail foreign exchange dealer carrying 

the account for which each commodity 

futures, retail forex and commodity 

option transaction was executed on that 

day. Provided, however, that where 

reproductions on microfilm, microfiche 

or optical disk are substituted for hard 

copy in accordance with the provisions 

of § 1.31(b) of this part, the requirements 

of paragraphs (b)(1) and (b)(2) of this 

section will be considered met if the 

person required to keep such records is 

ready at all times to provide, and 

immediately provides in the same city 

as that in which such person’s 

commodity retail forex or commodity 

option books and records are 

maintained, at the expense of such 

person, reproduced copies which show 

the records as specified in paragraphs 

(b)(1) and (b)(2) of this section, on 

request of any representatives of the 

Commission or the U.S. Department of 

Justice. 

* * * * * 

■ 7. Section 1.36 is amended by revising 

paragraph (a) to read as follows: 

§ 1.36 Record of securities and property 

received from customers and option 

customers. 

(a) Each futures commission merchant 

and each retail foreign exchange dealer 

shall maintain, as provided in § 1.31, a 

record of all securities and property 

received from customers, retail forex 

customers or option customers in lieu of 

money to margin, purchase, guarantee, 

or secure the commodity, retail forex or 

commodity option transactions of such 

customers, retail forex customers or 

option customers. Such record shall 

show separately for each customer, 

retail forex customer or option 

customer: A description of the securities 

or property received; the name and 

address of such customer, retail forex 

customer or option customer; the dates 

when the securities or property were 

received; the identity of the depositories 

or other places where such securities or 

property are segregated or held; the 

dates of deposits and withdrawals from 

such depositories; and the dates of 

return of such securities or property to 

such customer, retail forex customer or 

option customer, or other disposition 

thereof, together with the facts and 

circumstances of such other disposition. 

In the event any futures commission 

merchant deposits with the clearing 

organization of a contract market, 

directly or with a bank or trust company 

acting as custodian for such clearing 

organization, securities and/or property 

which belong to a particular customer or 

option customer, such futures 

commission merchant shall obtain 

written acknowledgment from such 

clearing organization that it was 

informed that such securities or 

property belong to customers or option 

customers of the futures commission 

merchant making the deposit. Such 

acknowledgment shall be retained as 

provided in § 1.31. 

* * * * * 

■ 8. Section 1.37 is amended by revising 

paragraph (a)(1) to read as follows: 

§ 1.37 Customer’s or option customer’s 

name, address, and occupation recorded; 

record of guarantor or controller of 

account. 

(a)(1) Each futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, and member 

of a contract market shall keep a record 

in permanent form which shall show for 

each commodity futures, retail forex or 

option account carried or introduced by 

it the true name and address of the 

person for whom such account is 

carried or introduced and the principal 

occupation or business of such person 

as well as the name of any other person 

guaranteeing such account or exercising 

any trading control with respect to such 

account. For each such commodity 

option account, the records kept by such 

futures commission merchant, 

introducing broker, and member of a 

contract market must also show the 

name of the person who has solicited 

and is responsible for each option 

customer’s account or assign account 

numbers in such a manner to identify 

that person. 

* * * * * 

■ 9. Section 1.40 is revised to read as 

follows: 

§ 1.40 Crop, market information letters, 

reports; copies required. 

Each futures commission merchant, 

each retail foreign exchange dealer, each 

introducing broker and each member of 

a contract market shall, upon request, 

furnish or cause to be furnished to the 

Commission a true copy of any letter, 

circular, telegram, or report published 

or given general circulation by such 

futures commission merchant, retail 

foreign exchange dealer, introducing 

broker or member which concerns crop 

or market information or conditions that 

affect or tend to affect the price of any 

commodity or exchange rate, and the 

true source of or authority for the 

information contained therein. 

■ 10. Section 1.46 is amended by 

revising paragraphs (a) and (b) to read 

as follows: 

§ 1.46 Application and closing out of 

offsetting long and short positions. 

(a) Application of purchases and 

sales. (1) Except with respect to 

purchases or sales which are for 

omnibus accounts, or where the 

customer or account controller has 

instructed otherwise, any futures 

commission merchant who, on or 

subject to the rules of a designated 

contract market or registered derivatives 

transaction execution facility: 

(i) Purchases any commodity for 

future delivery for the account of any 

customer when the account of such 

customer at the time of such purchase 

has a short position in the same future 

of the same commodity on the same 

market; 

(ii) Sells any commodity for future 

delivery for the account of any customer 

when the account of such customer at 

the time of such sale has a long position 

in the same future of the same 

commodity on the same market; 

(iii) Purchases a put or call option for 

the account of any option customer 

when the account of such option 

customer at the time of such purchase 

has a short put or call option position 

with the same underlying futures 

contract or same underlying physical, 

strike price, expiration date and contract 

market as that purchased; or 

(iv) Sells a put or call option for the 

account of any option customer when 

the account of such option customer at 

the time of such sale has a long put or 

call option position with the same 

underlying futures contract or same 

underlying physical, strike price, 

expiration date and contract market as 

that sold—shall on the same day apply 

such purchase or sale against such 

previously held short or long futures or 

option position, as the case may be, and 

shall, for futures transactions, promptly 

furnish such customer a statement 

showing the financial result of the 

transactions involved and, if applicable, 

that the account was introduced to the 

futures commission merchant by an 

introducing broker and the names of the 

futures commission merchant and 

introducing broker. 

(2) Any futures commission merchant 

or retail foreign exchange dealer who: 

(i) Engages in a retail forex transaction 

involving the purchase of any currency 

for the account of any retail forex 

customer when the account of such 

retail forex customer at the time of such 

purchase has an open retail forex 

transaction for the sale of the same 

currency; 

(ii) Engages in a retail forex 

transaction involving the sale of any 

currency for the account of any retail 

forex customer when the account of 

such retail forex customer at the time of 

such sale has an open retail forex 

transaction for the purchase of the same 

currency; 

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(iii) Purchases a put or call option 

involving foreign currency for the 

account of any option customer when 

the account of such option customer at 

the time of such purchase has a short 

put or call option position with the 

same underlying currency, strike price, 

and expiration date as that purchased; 

or 

(iv) Sells a put or call option 

involving foreign currency for the 

account of any option customer when 

the account of such option customer at 

the time of such sale has a long put or 

call option position with the same 

underlying currency, strike price, and 

expiration date as that sold—shall 

immediately apply such purchase or 

sale against such previously held 

opposite transaction, and shall promptly 

furnish such retail forex customer a 

statement showing the financial result 

of the transactions involved and, if 

applicable, that the account was 

introduced to the futures commission 

merchant or retail foreign exchange 

dealer by an introducing broker and the 

names of the futures commission 

merchant or retail foreign exchange 

dealer, and the introducing broker. 

(b) Close-out against oldest open 

position. In all instances wherein the 

short or long futures, retail forex 

transaction or option position in such 

customer’s, retail forex customer’s or 

option customer’s account immediately 

prior to such offsetting purchase or sale 

is greater than the quantity purchased or 

sold, the futures commission merchant 

or retail foreign exchange dealer shall 

apply such offsetting purchase or sale to 

the oldest portion of the previously held 

short or long position: Provided, That 

upon specific instructions from the 

customer or option customer the 

offsetting transaction shall be applied as 

specified by the customer or option 

customer without regard to the date of 

acquisition of the previously held 

position; and Provided, further, that a 

futures commission merchant or retail 

foreign exchange dealer, if permitted by 

the rules of a registered futures 

association, may offset, at the 

customer’s request, retail forex 

transactions of the same size, even if the 

customer holds other transactions of a 

different size, but in each case must 

offset the transaction against the oldest 

transaction of the same size. Such 

instructions may also be accepted from 

any person who, by power of attorney 

or otherwise, actually directs trading in 

the customer’s, retail forex customer’s or 

option customer’s account unless the 

person directing the trading is the 

futures commission merchant or retail 

foreign exchange dealer (including any 

partner thereof), or is an officer, 

employee, or agent of the futures 

commission merchant or retail foreign 

exchange dealer. With respect to every 

such offsetting transaction that, in 

accordance with such specific 

instructions, is not applied to the oldest 

portion of the previously held position, 

the futures commission merchant or 

retail foreign exchange dealer shall 

clearly show on the statement issued to 

the customer, retail forex customer or 

option customer in connection with the 

transaction, that because of the specific 

instructions given by or on behalf of the 

customer, retail forex customer or 

option customer the transaction was not 

applied in the usual manner, i.e., against 

the oldest portion of the previously held 

position. However, no such showing 

need be made if the futures commission 

merchant or retail foreign exchange 

dealer has received such specific 

instructions in writing from the 

customer, retail forex customer or 

option customer for whom such account 

is carried. 

* * * * * 

■ 11. Section 1.52 is amended by: 

■ a. Revising paragraphs (a), and (c) 

introductory text, (c)(1), and (c)(2); 

■ b. Revising paragraphs (g)(3) and 

(g)(4); and 

■ c. Revising paragraphs (h), (j), and (k) 

to read as follows: 

§ 1.52 Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements. 

(a) Each self-regulatory organization 

must adopt, and submit for Commission 

approval, rules prescribing minimum 

financial and related reporting 

requirements for all its members who 

are registered futures commission 

merchants or registered retail foreign 

exchange dealers. Each self-regulatory 

organization other than a contract 

market must adopt, and submit for 

Commission approval, rules prescribing 

minimum financial and related 

reporting requirements for all its 

members who are registered introducing 

brokers. Each contract market which 

elects to have a category of membership 

for introducing brokers must adopt, and 

submit for Commission approval, rules 

prescribing minimum financial and 

related reporting requirements for all its 

members who are registered introducing 

brokers. Each self-regulatory 

organization shall submit for 

Commission approval any modification 

or other amendments to such rules. 

Such requirements must be the same as, 

or more stringent than, those contained 

in §§ 1.10 and 1.17, for futures 

commission merchants and introducing 

brokers, and § 5.7 of this chapter for 

retail foreign exchange dealers. The 

definition of adjusted net capital must 

be the same as that prescribed in 

§ 1.17(c) for futures commission 

merchants and introducing brokers, and 

§ 5.7(b)(2) of this chapter for futures 

commission merchants offering or 

engaging in retail forex transactions and 

for retail foreign exchange dealers: 

Provided, however, A designated selfregulatory organization may permit its 

member registrants which are registered 

with the Securities and Exchange 

Commission as securities brokers or 

dealers to file (in accordance with 

§ 1.10(h)) a copy of their Financial and 

Operational Combined Uniform Single 

Report under the Securities Exchange 

Act of 1934, Part II, Part IIA, or Part II 

CSE, in lieu of Form 1–FR: And, 

provided further, A designated selfregulatory organization may permit its 

member introducing brokers to file a 

Form 1–FR–IB in lieu of a Form 1–FR– 

FCM. 

* * * * * 

(c) Any two or more self-regulatory 

organizations may file with the 

Commission a plan for delegating to a 

designated self-regulatory organization, 

for any registered futures commission 

merchant, any registered retail foreign 

exchange dealer, or any registered 

introducing broker which is a member 

of more than one such self-regulatory 

organization, the responsibility of: 

(1) Monitoring and auditing for 

compliance with the minimum financial 

and related reporting requirements 

adopted by such self-regulatory 

organizations in accordance with 

paragraph (a) of this section; and 

(2) Receiving the financial reports 

necessitated by such minimum financial 

and related reporting requirements. 

* * * * * 

(g) * * * 

(3) Reduces multiple monitoring and 

auditing for compliance with the 

minimum financial rules of the selfregulatory organizations submitting the 

plan for any futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker which is a 

member of more than one self-regulatory 

organization; 

(4) Reduces multiple reporting of the 

financial information necessitated by 

such minimum financial and related 

reporting requirements by any futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

which is a member of more than one 

self-regulatory organization; 

* * * * * 

(h) After the Commission has 

approved a plan or part of one under 

§ 1.52(g), a self-regulatory organization 

relieved of responsibility must notify 

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each of its members which is subject to 

such a plan: 

(1) Of the limited nature of its 

responsibility for such a member’s 

compliance with its minimum financial 

and related reporting requirements; and 

(2) Of the identity of the designated 

self-regulatory organization which has 

been delegated responsibility for such a 

member. 

* * * * * 

(j) Whenever a registered futures 

commission merchant, a registered retail 

foreign exchange dealer, or a registered 

introducing broker holding membership 

in a self-regulatory organization ceases 

to be a member in good standing of that 

self-regulatory organization, such selfregulatory organization must, on the 

same day that event takes place, give 

telegraphic notice of that event to the 

principal office of the Commission in 

Washington, DC, and send a copy of that 

notification to such futures commission 

merchant, retail foreign exchange 

dealer, or such introducing broker. 

(k) Nothing in this section shall 

preclude the Commission from 

examining any futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker for 

compliance with the minimum financial 

and related reporting requirements to 

which such futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker is subject. 

* * * * * 

PART 3—REGISTRATION 

■ 12. The authority citation for part 3 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 

6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 

12, 12a, 13b, 13c, 16a, 18, 19, 21 and 23. 

■ 13. Section 3.1 is amended by revising 

paragraph (c) to read as follows: 

§ 3.1 Definitions. 

* * * * * 

(c) Sponsor. Sponsor means the 

futures commission merchant, retail 

foreign exchange dealer, introducing 

broker, commodity trading advisor, 

commodity pool operator or leverage 

transaction merchant which makes the 

certification required by § 3.12 of this 

part for the registration of an associated 

person of such sponsor. 

* * * * * 

■ 14. Section 3.4 is amended by revising 

paragraph (a) to read as follows: 

§ 3.4 Registration in one capacity not 

included in registration in any other 

capacity. 

(a) Except as may be otherwise 

provided in the Act or in any rule, 

regulation, or order of the Commission, 

each futures commission merchant, 

retail foreign exchange dealer, floor 

broker, floor trader, associated person, 

commodity trading advisor, commodity 

pool operator, introducing broker, and 

leverage transaction merchant must 

register as such under the Act. 

Registration in one capacity under the 

Act shall not include registration in any 

other capacity: Provided, however, That 

a registered floor broker need not also 

register as a floor trader in order to 

engage in activity as a floor trader. 

* * * * * 

■ 15. Section 3.10 is amended by: 

■ a. Revising the heading; 

■ b. Revising paragraph (a)(1); 

■ c. Revising paragraph (b); and 

■ d. Revising paragraph (d) to read as 

follows: 

§ 3.10 Registration of futures commission 

merchants, retail foreign exchange dealers, 

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, retail foreign exchange 

dealers, 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. 

(ii) Applicants for registration as a 

futures commission merchant, retail 

foreign exchange dealer or introducing 

broker must accompany their Form 7–R 

with a Form 1–FR–FCM or Form 1–FR– 

IB, respectively, in accordance with the 

provisions of § 1.10 of this chapter: 

Provided, however, That an applicant 

for registration as a futures commission 

merchant or introducing broker which is 

registered with the Securities and 

Exchange Commission as a securities 

broker or dealer may accompany its 

Form 7–R with a copy of its Financial 

and Operational Combined Uniform 

Single Report under the Securities 

Exchange Act of 1934, Part II or Part II 

A, in accordance with the provisions of 

§ 1.10(h) of this chapter. 

* * * * * 

(b) Duration of registration. (1) A 

person registered as a futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

commodity trading advisor, commodity 

pool operator or leverage transaction 

merchant in accordance with paragraph 

(a) of this section will continue to be so 

registered until the effective date of any 

revocation or withdrawal of such 

registration. Such person will be 

prohibited from engaging in activities 

requiring registration under the Act or 

from representing himself to be a 

registrant under the Act or the 

representative or agent of any registrant 

during the pendency of any suspension 

of such registration. 

(2) A person registered as an 

introducing broker who was a party to 

a guarantee agreement with a futures 

commission merchant or retail foreign 

exchange dealer in accordance with 

§ 1.10(j) of this chapter will have its 

registration cease thirty days after the 

termination of such guarantee 

agreement unless the procedures set 

forth in § 1.10(j)(8) of this chapter are 

followed. 

* * * * * 

(d) On a date to be established by the 

National Futures Association, and in 

accordance with procedures established 

by the National Futures Association, 

each registrant as a futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, commodity 

trading advisor, commodity pool 

operator or leverage transaction 

merchant shall, on an annual basis, 

review and update registration 

information maintained with the 

National Futures Association. The 

failure to complete the review and 

update within thirty days following the 

date established by the National Futures 

Association shall be deemed to be a 

request for withdrawal from registration, 

which shall be processed in accordance 

with the provisions of § 3.33(f). 

* * * * * 

■ 16. Section 3.12 is amended by 

■ a. Revising the heading; 

■ b. Revising paragraph (a); 

■ c. Revising paragraph (f)(1)(iii)(E); 

■ d. Revising paragraph (f)(4); 

■ e. Revising paragraph (h)(1)(i) and 

paragraph (h)(1)(iii); and 

■ f. Removing paragraph (j). The 

revisions read as follows: 

§ 3.12 Registration of associated persons 

of futures commission merchants, retail 

foreign exchange dealers, introducing 

brokers, commodity trading advisors, 

commodity pool operators and leverage 

transaction merchants. 

(a) Registration required. It shall be 

unlawful for any person to be associated 

with a futures commission merchant, 

retail foreign exchange dealer, 

introducing broker, commodity trading 

advisor, commodity pool operator or 

leverage transaction merchant as an 

associated person unless that person 

shall have registered under the Act as an 

associated person of that sponsoring 

futures commission merchant, retail 

foreign exchange dealer, introducing 

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broker, commodity trading advisor, 

commodity pool operator or leverage 

transaction merchant in accordance 

with the procedures in paragraphs (c), 

(d), (f), or (i), of this section or is exempt 

from such registration pursuant to 

paragraph (h) of this section. 

* * * * * 

(f) * * * 

(1) * * * 

(iii) * * * 

(E) Associated person’s supervision of 

any person or persons engaged in any of 

the foregoing solicitations or 

acceptances, with respect to any 

customers common to it and any other 

futures commission merchant, retail 

foreign exchange dealer, introducing 

broker, commodity trading advisor, 

commodity pool operator, or leverage 

transaction merchant with which the 

associated person is associated. 

* * * * * 

(4) If a person is associated with a 

futures commission merchant, with a 

retail foreign exchange dealer, or with 

an introducing broker and he directs 

customers seeking a managed account to 

use the services of a commodity trading 

advisor(s) approved by the futures 

commission merchant, retail foreign 

exchange dealer or introducing broker 

and all such customers’ accounts 

solicited or accepted by the associated 

person are carried by the futures 

commission merchant, retail foreign 

exchange dealer or introduced by the 

introducing broker with which the 

associated person is associated, such a 

person shall be deemed to be associated 

solely with the futures commission 

merchant, retail foreign exchange dealer 

or introducing broker and may not also 

register as an associated person of the 

commodity trading advisor(s). 

* * * * * 

(h) * * * 

(1) * * * 

(i) Registered under the Act as a 

futures commission merchant, retail 

foreign exchange dealer, floor broker, or 

as an introducing broker; 

* * * * * 

(iii) The chief operating officer, 

general partner or other person in the 

supervisory chain-of-command, 

provided the futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, commodity 

trading advisor, commodity pool 

operator, or leverage transaction 

merchant engages in commodity interest 

related activity for customers as no more 

than ten percent of its total revenue on 

an annual basis, the firm is not subject 

to a pending proceeding brought by the 

Commission or a self-regulatory 

organization alleging fraud or failure to 

supervise, and has not been found in 

such a proceeding to have committed 

fraud or failed to supervise, as required 

by the Act, the rules promulgated 

thereunder or the rules of a selfregulatory organization, the person for 

whom exemption is sought and the 

person designated in accordance with 

paragraphs (h)(1)(iii)(C) or (h)(1)(iii)(D) 

of this section are listed as principals of 

the firm, the fitness examination 

conducted by the National Futures 

Association with respect to these 

persons discloses no derogatory 

information that would disqualify any 

of such persons as a principal or as an 

associated person, and the firm files 

with the National Futures Association 

corporate or partnership resolutions 

stating that: 

(A) Such supervisory person is not 

authorized to: 

(1) Solicit or accept customers’, retail 

forex customers’, or leverage customers’ 

orders, 

(2) Solicit a client’s or prospective 

client’s discretionary account, 

(3) Solicit funds, securities or 

property for a participation in a 

commodity pool, or 

(4) Exercise any line supervisory 

authority over those persons so engaged; 

(B) Such supervisory person has no 

authority with respect to hiring, firing or 

other personnel matters involving 

persons engaged in activities subject to 

regulation under the Act; 

(C) Another person (or persons) 

designated therein, who is registered as 

an associated person(s) or who has 

applied for registration as an associated 

person(s) and is not subject to a pending 

proceeding brought by the Commission 

or a self-regulatory organization alleging 

fraud or failure to supervise, and has not 

been found in such a proceeding to have 

committed fraud or failed to supervise, 

as required by the Act, the rules 

promulgated thereunder or the rules of 

a self-regulatory organization, holds and 

exercises full and final supervisory 

authority, including authority to hire 

and fire personnel, over the customer 

commodity interest related activities of 

the firm; and 

(D) If the person (or persons) so 

designated in accordance with 

paragraph (h)(1)(iii)(C) of this section 

ceases to have the authority referred to 

therein, the firm will notify the National 

Futures Association within twenty days 

of such occurrence by means of a 

subsequent resolution which resolution 

must also include the name of another 

associated person (or persons) who has 

been vested with full supervisory 

authority, including authority to hire 

and fire personnel, over the customer 

commodity interest related activities of 

the firm in the event that all of those 

previously designated in accordance 

with paragraph (h)(1)(iii)(C) of this 

section have been relieved of such 

authority. Subsequent changes in 

supervisory authority shall be reported 

in the same manner; or 

* * * * * 

■ 17. Section 3.21 is amended by: 

■ a. Revising paragraph (b)(3); and 

■ b. Revising paragraphs (c) 

introductory text, (c)(1) through (3), and 

(c)(4)(i) to read as follows: 

§ 3.21 Exemption from fingerprinting 

requirement in certain cases. 

* * * * * 

(b) * * * 

(3) With respect to the fingerprints of 

a principal. An officer, if the futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator, 

introducing broker, or leverage 

transaction merchant with which the 

principal will be affiliated is a 

corporation, a general partner, if a 

partnership, or the sole proprietor, if a 

sole proprietorship. 

(c) Outside directors. Any futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

commodity trading advisor, commodity 

pool operator or leverage transaction 

merchant that has a principal who is a 

director but is not also an officer or 

employee of the firm may, in lieu of 

submitting a fingerprint card in 

accordance with the provisions of 

§§ 3.10(a)(2) and 3.31(a)(2), file a 

‘‘Notice Pursuant to Rule 3.21(c)’’ with 

the National Futures Association. Such 

notice shall state, if true, that such 

outside director: 

(1) Is not engaged in: 

(i) The solicitation or acceptance of 

customers’ orders or retail forex 

customers’ orders, 

(ii) The solicitation of funds, 

securities or property for a participation 

in a commodity pool, 

(iii) The solicitation of a client’s or 

prospective client’s discretionary 

account, 

(iv) The solicitation or acceptance of 

leverage customers’ orders for leverage 

transactions; 

(2) Does not regularly have access to 

the keeping, handling or processing of: 

(i) Commodity interest transactions; 

(ii) Customer funds, retail forex 

customer funds, leverage customer 

funds, foreign futures or foreign options 

secured amount, or adjusted net capital; 

or 

(3) Does not have direct supervisory 

responsibility over persons engaged in 

the activities referred to in paragraphs 

(c)(1) and (c)(2) of this section; and 

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(4) * * * 

(i) The name of the futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

commodity trading advisor, commodity 

pool operator, leverage transaction 

merchant, or applicant for registration 

in any of these capacities of which the 

person is an outside director; 

* * * * * 

18. Section 3.30 is amended by 

revising paragraph (a) to read as follows: 

§ 3.30 Current address for purpose of 

delivery of communications from the 

Commission or the National Futures 

Association. 

(a) The address of each registrant, 

applicant for registration and principal, 

as submitted on the application for 

registration (Form 7–R or Form 8–R) or 

as submitted on the biographical 

supplement (Form 8–R) shall be deemed 

to be the address for delivery to the 

registrant, applicant or principal for any 

communications from the Commission 

or the National Futures Association, 

including any summons, complaint, 

reparation claim, order, subpoena, 

special call, request for information, 

notice, and other written documents or 

correspondence, unless the registrant, 

applicant or principal specifies another 

address for this purpose: Provided, That 

the Commission or the National Futures 

Association may address any 

correspondence relating to a 

biographical supplement submitted for 

or on behalf of a principal to the futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator, 

introducing broker, or leverage 

transaction merchant with which the 

principal is affiliated and may address 

any correspondence relating to the 

registration of an associated person to 

the futures commission merchant, retail 

foreign exchange dealer, commodity 

trading advisor, commodity pool 

operator, introducing broker, or leverage 

transaction merchant with which the 

associated person or the applicant for 

registration is or will be associated as an 

associated person. 

* * * * * 

■ 19. Section 3.31 is amended by 

revising paragraphs (a)(1), (b), (c), and 

(d) to read as follows: 

§ 3.31 Deficiencies, inaccuracies, and 

changes, to be reported. 

(a)(1) Each applicant or registrant as a 

futures commission merchant, retail 

foreign exchange dealer, commodity 

trading advisor, commodity pool 

operator, introducing broker, or leverage 

transaction merchant shall, in 

accordance with the instructions 

thereto, promptly correct any deficiency 

or inaccuracy in Form 7–R or Form 

8–R which no longer renders accurate 

and current the information contained 

therein. Each such correction shall be 

made on Form 3–R and shall be 

prepared and filed in accordance with 

the instructions thereto. Provided, 

however, that where a registrant is 

reporting a change in the form of 

organization from or to a sole 

proprietorship, the registrant must file a 

Form 7–W regarding the pre-existing 

organization and a Form 7–R regarding 

the newly formed organization. 

* * * * * 

(b) Each applicant or registrant as a 

floor broker, floor trader or associated 

person, and each principal of a futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator, 

introducing broker, or leverage 

transaction merchant must, in 

accordance with the instructions 

thereto, promptly correct any deficiency 

or inaccuracy in the Form 8–R or 

supplemental statement thereto which 

renders no longer accurate and current 

the information contained in the Form 

8–R or supplemental statement. Each 

such correction must be made on Form 

3–R and must be prepared and filed in 

accordance with the instructions 

thereto. 

(c)(1) After the filing of a Form 8–R 

or a Form 3–R by or on behalf of any 

person for the purpose of permitting 

that person to be an associated person 

of a futures commission merchant, retail 

foreign exchange dealer, commodity 

trading advisor, commodity pool 

operator, introducing broker, or a 

leverage transaction merchant, that 

futures commission merchant, retail 

foreign exchange dealer, commodity 

trading advisor, commodity pool 

operator, introducing broker or leverage 

transaction merchant must, within 

thirty days after the occurrence of either 

of the following, file a notice thereof 

with the National Futures Association 

indicating: 

(i) The failure of that person to 

become associated with the futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator, 

introducing broker, or leverage 

transaction merchant, and the reasons 

therefor; or 

(ii) The termination of the association 

of the associated person with the futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator, 

introducing broker, or leverage 

transaction merchant, and the reasons 

therefor. 

(2) Each person registered as, or 

applying for registration as, a futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator, 

introducing broker or leverage 

transaction merchant must, within 

thirty days after the termination of the 

affiliation of a principal with the 

registrant or applicant, file a notice 

thereof with the National Futures 

Association. 

(3) Any notice required by paragraph 

(c) of this section must be filed on Form 

8–T or on a Uniform Termination Notice 

for Securities Industry Registration. 

(d) Each contract market or 

derivatives transaction execution 

facility that has granted trading 

privileges to a person who is registered, 

has received a temporary license, or has 

applied for registration as a floor broker 

or floor trader, must notify the National 

Futures Association within sixty days 

after such person has ceased having 

trading privileges on such contract 

market or derivatives transaction 

execution facility. 

* * * * * 

■ 20. Section 3.33 is amended by 

revising paragraphs (a) introductory 

text, (b) introductory text, (b)(6), and (e) 

to read as follows: 

§ 3.33 Withdrawal from registration. 

(a) A futures commission merchant, 

retail foreign exchange dealer, 

introducing broker, commodity trading 

advisor, commodity pool operator, 

leverage transaction merchant, floor 

broker or floor trader may request that 

its registration be withdrawn in 

accordance with the requirements of 

this section if: 

* * * * * 

(b) A request for withdrawal from 

registration as a futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, commodity 

trading advisor, commodity pool 

operator, or leverage transaction 

merchant must be made on Form 7–W, 

and a request for withdrawal from 

registration as a floor broker or floor 

trader must be made on Form 8–W, 

completed and filed with National 

Futures Association in accordance with 

the instructions thereto. The request for 

withdrawal must be made by a person 

duly authorized by the registrant and 

must specify: 

* * * * * 

(6) If a basis for withdrawal from 

registration under paragraph (a)(1) of 

this section is that the registrant has 

ceased engaging in activities requiring 

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registration, then, with respect to each 

capacity for which the registrant has 

ceased such activities: 

(i) That all customer, retail forex 

customer or option customer 

agreements, if any, have been 

terminated; 

(ii) That all customer, retail forex 

customer or option customer positions, 

if any, have been transferred on behalf 

of customers or option customers or 

closed; 

(iii) That all customer, retail forex 

customer or option customer cash 

balances, securities, or other property, if 

any, have been transferred on behalf of 

customers, retail forex customers or 

option customers or returned, and that 

there are no obligations to customers, 

retail forex customers or option 

customers outstanding; 

(iv) In the case of a commodity pool 

operator, that all interests in, and assets 

of, any commodity pool have been 

redeemed, distributed, or transferred, on 

behalf of the participants therein, and 

that there are no obligations to such 

participants outstanding; 

(v) In the case of a leverage 

transaction merchant: 

(A) Either that all leverage customer 

agreements, if any, and all leverage 

contracts have been terminated, and that 

all leverage customer cash balances, 

securities or other property, if any, have 

been returned, or 

(B) Alternatively, that pursuant to 

Commission approval, the leverage 

contract obligations of the leverage 

transaction merchant have been 

assumed by another leverage transaction 

merchant and all leverage customer cash 

balances, securities or other property, if 

any, have been transferred to such 

leverage transaction merchant on behalf 

of leverage customers or returned, and 

that there are no obligations to leverage 

customers outstanding; 

(vi) The nature and extent of any 

pending customer, retail forex customer, 

option customer, leverage customer, or 

commodity pool participant claims 

against the registrant, and, to the best of 

the registrant’s knowledge and belief, 

the nature and extent of any anticipated 

or threatened customer, option 

customer, leverage customer, or 

commodity pool participant claims 

against the registrant; and 

(vii) In the case of a futures 

commission merchant or a retail foreign 

exchange dealer which is a party to a 

guarantee agreement, that all such 

agreements have been or will be 

terminated in accordance with the 

provisions of § 1.10(j) of this chapter not 

more than thirty days after the filing of 

the request for withdrawal from 

registration. 

* * * * * 

(e) A request for withdrawal from 

registration as a futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, commodity 

trading advisor, commodity pool 

operator, leverage transaction merchant 

on Form 7–W, and a request for 

withdrawal from registration as a floor 

broker or floor trader on Form 8–W, 

must be filed with the National Futures 

Association and a copy of such request 

must be sent by the National Futures 

Association within three business days 

of the receipt of such withdrawal 

request to the Commodity Futures 

Trading Commission, Division of 

Clearing and Intermediary Oversight, 

Three Lafayette Centre, 1155 21st Street, 

NW., Washington, DC 20581. In 

addition, any floor broker or floor trader 

requesting withdrawal from registration 

must file a copy of his Form 8–W with 

each contract market that has granted 

him trading privileges. Within three 

business days of any determination by 

the National Futures Association under 

§ 3.10(d) to treat the failure by a 

registrant to file an annual Form 7–R as 

a request for withdrawal, the National 

Futures Association shall send the 

Commission notice of that 

determination. 

* * * * * 

■ 21. Section 3.44 is amended by 

revising paragraphs (a)(1) through (5) to 

read as follows: 

§ 3.44 Temporary licensing of applicants 

for guaranteed introducing broker 

registration. 

(a) * * * 

(1) A properly completed guarantee 

agreement (Form 1–FR part B) from a 

futures commission merchant or retail 

foreign exchange dealer which is 

eligible to enter into such an agreement 

pursuant to § 1.10(j)(2) of this chapter; 

(2) A Form 7–R properly completed in 

accordance with the instructions 

thereto; 

(3) A Form 8–R for the applicant, if 

a sole proprietor, and each principal 

(including each branch office manager) 

thereof, properly completed in 

accordance with the instructions 

thereto, all of whom would be eligible 

for a temporary license if they had 

applied as associated persons. 

(4) A certification executed by a 

person duly authorized by the futures 

commission merchant or retail foreign 

exchange dealer that has executed the 

guarantee agreement required by 

paragraph (a)(1) of this section, stating 

that: 

(i) The futures commission merchant 

or retail foreign exchange dealer has 

verified the information on the Forms 

8–R filed pursuant to paragraph (a)(3) of 

this section which relate to education 

and employment history of the 

applicant’s principals (including each 

branch office manager) thereof during 

the preceding three years; and 

(ii) To the best of the futures 

commission merchant’s or retail foreign 

exchange dealer’s knowledge, 

information, and belief, all of the 

publicly available information supplied 

by the applicant and its principals and 

each branch office manager of the 

applicant on the Form 7–R and Forms 

8–R, as appropriate, is accurate and 

complete; and 

(5) The fingerprints of the applicant, 

if a sole proprietor, and of each 

principal (including each branch office 

manager) thereof on fingerprint cards 

provided by the National Futures 

Association for that purpose: Provided, 

that a principal who has a current Form 

8–R on file with the National Futures 

Association or the Commission is not 

required to submit a fingerprint card. 

* * * * * 

■ 22. Section 3.45 is amended by 

revising paragraph (b) to read as follows: 

§ 3.45 Restrictions upon activities. 

* * * * * 

(b) An applicant for registration as an 

introducing broker who has received a 

temporary license may be guaranteed by 

a futures commission merchant or retail 

foreign exchange dealer other than the 

futures commission merchant or retail 

foreign exchange dealer which provided 

the initial guarantee agreement 

described in § 3.44(a)(1) of this subpart: 

Provided, That, at least 10 days prior to 

the effective date of the termination of 

the existing guarantee agreement in 

accordance with the provisions of § 1.10 

(j)(5) of this chapter, or such other 

period of time as the National Futures 

Association may allow for good cause 

shown, the applicant files with the 

National Futures Association— 

(1) Written notice of such termination 

and 

(2) A new guarantee agreement with 

another futures commission merchant or 

retail foreign exchange dealer effective 

the day following the last effective date 

of the existing guarantee agreement. 

■ 23. Section 3.50 is amended by 

revising paragraph (b)(2) to read as 

follows: 

§ 3.50 Service. 

* * * * * 

(b) * * * 

(2) Any futures commission merchant 

or retail foreign exchange dealer which 

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has entered into a guarantee agreement 

in accordance with § 1.10(j) of this 

chapter, if the applicant or registrant is 

registered as or applying for registration 

as an introducing broker. 

* * * * * 

■ 24. Section 3.60 is amended by 

revising paragraph (b)(2)(i)(B) to read as 

follows: 

§ 3.60 Procedure to deny, condition, 

suspend, revoke or place restrictions upon 

registration pursuant to sections 8a(2), 

8a(3) and 8a(4) of the Act. 

* * * * * 

(b) * * * 

(2)(i) * * * 

(B) In the case of a sponsor which is 

a futures commission merchant, a retail 

foreign exchange dealer or a leverage 

transaction merchant, the sponsor is not 

subject to the reporting requirements of 

§ 1.12(b), § 5.6(b) or § 31.7(b) of this 

chapter, respectively; and 

* * * * * 

PART 4—COMMODITY POOL 

OPERATORS AND COMMODITY 

TRADING ADVISORS 

■ 25. The authority citation for part 4 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 

6n, 6o, 12a and 23. 

■ 26. Section 4.7 is amended by: 

■ a. Revising paragraph (a)(1)(v)(B); and 

■ b. Revising paragraph (a)(2)(i) to read 

as follows: 

§ 4.7 Exemption from certain part 4 

requirements for commodity pool operators 

with respect to offerings to qualified eligible 

persons and for commodity trading 

advisors with respect to advising qualified 

eligible persons. 

* * * * * 

(a) * * * 

(1) * * * 

(v) * * * 

(B) Has had on deposit with a futures 

commission merchant, for its own 

account at any time during the sixmonth period preceding either the date 

of sale to that person of a pool 

participation in the exempt pool or the 

date that the person opens an exempt 

account with the commodity trading 

advisor, at least $200,000 in exchangespecified initial margin and option 

premiums, together with required 

minimum security deposit for retail 

forex transactions (as defined in § 5.1(m) 

of this chapter) for commodity interest 

transactions; or 

* * * * * 

(2) * * * 

(i)(A) A futures commission merchant 

registered pursuant to section 4d of the 

Act, or a principal thereof; 

(B) A retail foreign exchange dealer 

registered pursuant to section 

2(c)(2)(B)(i)(II)(gg) of the Act, or a 

principal thereof; 

* * * * * 

■ 27. Section 4.12 is amended by 

revising paragraph (b)(1)(i)(C) to read as 

follows: 

§ 4.12 Exemption from provisions of part 

4. 

* * * * * 

(b) * * * 

(1) * * * 

(i) * * * 

(C) Will not enter into commodity 

interest transactions for which the 

aggregate initial margin and premiums, 

and required minimum security deposit 

for retail forex transactions (as defined 

in § 5.1(m) of this chapter) exceed 10 

percent of the fair market value of the 

pool’s assets, after taking into account 

unrealized profits and unrealized losses 

on any such contracts it has entered 

into; Provided, however, That in the 

case of an option that is in-the-money at 

the time of purchase, the in-the-money 

amount as defined in § 190.01(x) of this 

chapter may be excluded in computing 

such 10 percent; and 

* * * * * 

■ 28. Section 4.13 is amended by: 

■ a. Revising paragraph (a)(3)(ii)(A): and 

■ b. Revising paragraph (a)(3)(ii)(B)(1) to 

read as follows: 

§ 4.13 Exemption from registration as a 

commodity pool operator. 

* * * * * 

(a) * * * 

(3) * * * 

(ii) * * * 

(A) The aggregate initial margin, 

premiums, and required minimum 

security deposit for retail forex 

transactions (as defined in § 5.1(m) of 

this chapter) required to establish such 

positions, determined at the time the 

most recent position was established, 

will not exceed 5 percent of the 

liquidation value of the pool’s portfolio, 

after taking into account unrealized 

profits and unrealized losses on any 

such positions it has entered into; 

Provided, That in the case of an option 

that is in-the-money at the time of 

purchase, the in-the-money amount as 

defined in § 190.01(x) of this chapter 

may be excluded in computing such 5 

percent; or 

(B) * * * 

(1) The term ‘‘notional value’’ shall be 

calculated for each such futures position 

by multiplying the number of contracts 

by the size of the contract, in contract 

units (taking into account any multiplier 

specified in the contract), by the current 

market price per unit, and for each such 

option position by multiplying the 

number of contracts by the size of the 

contract, adjusted by its delta, in 

contract units (taking into account any 

multiplier specified in the contract), by 

the strike price per unit, and for each 

such retail forex transaction, by 

calculating the value in U.S. Dollars of 

such transaction, at the time the 

transaction was established, excluding 

for this purpose the value in U.S. 

Dollars of offsetting long and short 

transactions, if any; and 

* * * * * 

■ 29. Section 4.14 is amended by 

revising paragraph (a)(7) to read as 

follows: 

§ 4.14 Exemption from registration as a 

commodity trading advisor. 

* * * * * 

(a) * * * 

(7)(i) It is registered under the Act as 

a leverage transaction merchant and the 

person’s trading advice is solely in 

connection with its business as a 

leverage transaction merchant; 

(ii) It is registered under the Act as a 

retail foreign exchange dealer and the 

person’s trading advice is solely in 

connection with its business as a retail 

foreign exchange dealer. 

* * * * * 

■ 30. Section 4.23 is amended by: 

■ a. Revising paragraph (a)(1); 

■ b. Revising paragraph (a)(7); and 

■ c. Revising paragraph (b)(1) and (2) to 

read as follows: 

§ 4.23 Recordkeeping. 

* * * * * 

(a) Concerning the commodity pool: 

(1) An itemized daily record of each 

commodity interest transaction of the 

pool, showing the transaction date, 

quantity, commodity interest, and, as 

applicable, price or premium, delivery 

month or expiration date, whether a put 

or a call, strike price, underlying 

contract for future delivery or 

underlying physical, the futures 

commission merchant and/or retail 

foreign exchange dealer carrying the 

account and the introducing broker, if 

any, whether the commodity interest 

was purchased, sold (including, in the 

case of a retail forex transaction, offset), 

exercised, expired (including, in the 

case of a retail forex transaction, 

whether it was rolled forward), and the 

gain or loss realized. 

* * * * * 

(7) Copies of each confirmation of a 

commodity interest transaction of the 

pool, each purchase and sale statement 

and each monthly statement for the pool 

received from a futures commission 

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merchant or retail foreign exchange 

dealer. 

* * * * * 

(b) Concerning the commodity pool 

operator: (1) An itemized daily record of 

each commodity interest transaction of 

the commodity pool operator and each 

principal thereof, showing the 

transaction date, quantity, commodity 

interest, and, as applicable, price or 

premium, delivery month or expiration 

date, whether a put or a call, strike 

price, underlying contract for future 

delivery or underlying physical, the 

futures commission merchant or retail 

foreign exchange dealer carrying the 

account and the introducing broker, if 

any whether the commodity interest 

was purchased, sold, exercised, or 

expired, and the gain or loss realized. 

(2) Each confirmation of a commodity 

interest transaction, each purchase and 

sale statement and each monthly 

statement furnished by a futures 

commission merchant or retail foreign 

exchange dealer to: 

(i) The commodity pool operator 

relating to a personal account of the 

pool operator; and 

(ii) Each principal of the pool operator 

relating to a personal account of such 

principal. 

* * * * * 

■ 31. Section 4.24 is amended by: 

■ a. Revising paragraph (b)(1) 

introductory text and the first three 

sentences of the Risk Disclosure 

Statement in paragraph (b)(1); 

■ b. Adding paragraph (b)(4); 

■ c. Revising paragraph (e)(6); 

■ d. Revising paragraph (g); 

■ e. Revising paragraphs (h)(2) and 

(h)(4)(iii); 

■ f. Revising paragraph (i)(2)(ii); 

■ g. Redesignating paragraph (i)(2)(xii) 

as paragraph (i)(2)(xiii) and adding new 

paragraph (i)(2)(xii); 

■ g. Revising paragraphs (j)(1)(vi) and 

(j)(3); and 

■ h. Revising paragraphs (l)(1)(iii), (l)(2) 

introductory text and (l)(2)(i). 

The addition and revisions read as 

follows: 

§ 4.24 General disclosures required. 

* * * * * 

(b) Risk Disclosure Statement. (1) The 

following Risk Disclosure Statement 

must be prominently displayed 

immediately following any disclosures 

required to appear on the cover page of 

the Disclosure Document as provided by 

the Commission, by any applicable 

federal or state securities laws and 

regulations or by any applicable laws of 

non-United States jurisdictions. 

RISK DISCLOSURE STATEMENT 

YOU SHOULD CAREFULLY 

CONSIDER WHETHER YOUR 

FINANCIAL CONDITION PERMITS 

YOU TO PARTICIPATE IN A 

COMMODITY POOL. IN SO DOING, 

YOU SHOULD BE AWARE THAT 

COMMODITY INTEREST TRADING 

CAN QUICKLY LEAD TO LARGE 

LOSSES AS WELL AS GAINS. SUCH 

TRADING LOSSES CAN SHARPLY 

REDUCE THE NET ASSET VALUE OF 

THE POOL AND CONSEQUENTLY THE 

VALUE OF YOUR INTEREST IN THE 

POOL. IN ADDITION, RESTRICTIONS 

ON REDEMPTIONS MAY AFFECT 

YOUR ABILITY TO WITHDRAW YOUR 

PARTICIPATION IN THE POOL. * * * 

* * * * * 

(4) If the pool may engage in retail 

Forex transactions, the Risk Disclosure 

Statement must further state: 

YOU SHOULD ALSO BE AWARE 

THAT THIS COMMODITY POOL MAY 

ENGAGE IN OFF-EXCHANGE FOREIGN 

CURRENCY TRADING. SUCH 

TRADING IS NOT CONDUCTED IN 

THE INTERBANK MARKET. THE 

FUNDS THAT THE POOL USES FOR 

OFF-EXCHANGE FOREIGN CURRENCY 

TRADING WILL NOT RECEIVE THE 

SAME PROTECTIONS AS FUNDS 

USED TO MARGIN OR GUARANTEE 

EXCHANGE-TRADED FUTURES AND 

OPTION CONTRACTS. IF THE POOL 

DEPOSITS SUCH FUNDS WITH A 

COUNTERPARTY AND THAT 

COUNTERPARTY BECOMES 

INSOLVENT, THE POOL’S CLAIM FOR 

AMOUNTS DEPOSITED OR PROFITS 

EARNED ON TRANSACTIONS WITH 

THE COUNTERPARTY MAY NOT BE 

TREATED AS A COMMODITY 

CUSTOMER CLAIM FOR PURPOSES 

OF SUBCHAPTER IV OF CHAPTER 7 

OF THE BANKRUPTCY CODE AND 

THE REGULATIONS THEREUNDER. 

THE POOL MAY BE A GENERAL 

CREDITOR AND ITS CLAIM MAY BE 

PAID, ALONG WITH THE CLAIMS OF 

OTHER GENERAL CREDITORS, FROM 

ANY MONIES STILL AVAILABLE 

AFTER PRIORITY CLAIMS ARE PAID. 

EVEN POOL FUNDS THAT THE 

COUNTERPARTY KEEPS SEPARATE 

FROM ITS OWN FUNDS MAY NOT BE 

SAFE FROM THE CLAIMS OF 

PRIORITY AND OTHER GENERAL 

CREDITORS. 

* * * * * 

(e) * * * 

(6) If known, the futures commission 

merchant and/or retail foreign exchange 

dealer through which the pool will 

execute its trades, and, if applicable, the 

introducing broker through which the 

pool will introduce its trades to the 

futures commission merchant and/or 

retail foreign exchange dealer. 

* * * * * 

(g) Principal risk factors. A discussion 

of the principal risk factors of 

participation in the offered pool. This 

discussion must include, without 

limitation, risks relating to volatility, 

leverage, liquidity, counterparty 

creditworthiness, as applicable to the 

types of trading programs to be 

followed, trading structures to be 

employed and investment activity 

(including retail forex transactions) 

expected to be engaged in by the offered 

pool. 

(h) * * * 

(2) A description of the trading and 

investment programs and policies that 

will be followed by the offered pool, 

including the method chosen by the 

pool operator concerning how futures 

commission merchants and/or retail 

foreign exchange dealers carrying the 

pool’s accounts shall treat offsetting 

positions pursuant to § 1.46 of this 

chapter, if the method is other than to 

close out all offsetting positions or to 

close out offsetting positions on other 

than a first-in, first-out basis, and any 

material restrictions or limitations on 

trading required by the pool’s 

organizational documents or otherwise. 

This description must include, if 

applicable, an explanation of the 

systems used to select commodity 

trading advisors, investee pools and 

types of investment activity to which 

pool assets will be committed; 

* * * * * 

(4) * * * 

(iii) If assets deposited by the pool as 

margin or as security deposit generate 

income, to whom that income will be 

paid. 

(i) * * * 

(2) * * * 

(ii) Brokerage fees and commissions, 

including interest income paid to 

futures commission merchants, and any 

fees incurred to maintain an open 

position in retail forex transactions; 

* * * * * 

(xii) Any costs or fees included in the 

spread between bid and asked prices for 

retail forex transactions; and 

* * * * * 

(j) * * * 

(1) * * * 

(vi) Any other person providing 

services to the pool or soliciting 

participants for the pool, or acting as a 

counterparty to the pool’s retail forex 

transactions (as defined in § 5.1(m) of 

this chapter). 

* * * * * 

(3) Included in the description of such 

conflicts must be any arrangement 

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whereby a person may benefit, directly 

or indirectly, from the maintenance of 

the pool’s account with the futures 

commission merchant and/or retail 

foreign exchange dealer, or from the 

introduction of the pool’s account to a 

futures commission merchant and/or 

retail foreign exchange dealer by an 

introducing broker (such as payment for 

order flow or soft dollar arrangements) 

or from an investment of pool assets in 

investee pools or funds or other 

investments. 

* * * * * 

(l) * * * 

(1) * * * 

(iii) The pool’s futures commission 

merchants and/or retail foreign 

exchange dealers and its introducing 

brokers, if any. 

(2) With respect to a futures 

commission merchant and/or retail 

foreign exchange dealer or an 

introducing broker, an action will be 

considered material if: 

(i) The action would be required to be 

disclosed in the notes to the futures 

commission merchant’s, retail foreign 

exchange dealer’s or introducing 

broker’s financial statements prepared 

pursuant to generally accepted 

accounting principles; 

* * * * * 

■ 32. Section 4.25 is amended by 

revising paragraph (c)(3)(ii) to read as 

follows: 

§ 4.25 Performance disclosures. 

* * * * * 

(c) * * * 

(3) * * * 

(ii) If a major commodity trading 

advisor has not previously traded 

accounts, the pool operator must 

prominently display the following 

statement: 

(name of the major commodity trading 

advisor), A COMMODITY TRADING 

ADVISOR THAT HAS 

DISCRETIONARY TRADING 

AUTHORITY OVER (percentage of the 

pool’s funds available for commodity 

interest trading allocated to that trading 

advisor) PERCENT OF THE POOL’S 

COMMODITY INTEREST TRADING 

HAS NOT PREVIOUSLY DIRECTED 

ANY ACCOUNTS. 

* * * * * 

Subpart C—Commodity Trading 

Advisors 

■ 33. Section 4.30 is revised to read as 

follows: 

§ 4.30 Prohibited activities. 

No commodity trading advisor may 

solicit, accept or receive from an 

existing or prospective client funds, 

securities or other property in the 

trading advisor’s name (or extend credit 

in lieu thereof) to purchase, margin, 

guarantee or secure any commodity 

interest of the client; Provided, however, 

That this section shall not apply to a 

future commission merchant that is 

registered as such under the Act or to a 

leverage transaction merchant that is 

registered as a commodity trading 

advisor under the Act or to a retail 

foreign exchange dealer that is 

registered as such under the Act. 

■ 34. Section 4.33 is amended by: 

■ a. Revising paragraph (a)(6); and 

■ b. Revising paragraphs (b)(1) and (2) to 

read as follows: 

§ 4.33 Recordkeeping. 

* * * * * 

(a) * * * 

(6) Copies of each confirmation of a 

commodity interest transaction, each 

purchase and sale statement and each 

monthly statement received from a 

futures commission merchant or a retail 

foreign exchange dealer. 

* * * * * 

(b) * * * 

(1) An itemized daily record of each 

commodity interest transaction of the 

commodity trading advisor, showing the 

transaction date, quantity, commodity 

interest, and, as applicable, price or 

premium, delivery month or expiration 

date, whether a put or a call, strike 

price, underlying contract for future 

delivery or underlying physical, the 

futures commission merchant and/or 

retail foreign exchange dealer carrying 

the account and the introducing broker, 

if any, whether the commodity interest 

was purchased, sold (including, in the 

case of a retail forex transaction, offset), 

exercised, expired (including, in the 

case of a retail forex transaction, 

whether it was rolled forward), and the 

gain or loss realized. 

(2) Each confirmation of a commodity 

interest transaction, each purchase and 

sale statement and each monthly 

statement furnished by a futures 

commission merchant or retail foreign 

exchange dealer to: 

(i) The commodity trading advisor 

relating to a personal account of the 

trading advisor; and 

(ii) Each principal of the trading 

advisor relating to a personal account of 

such principal. 

* * * * * 

■ 35. Section 4.34 is amended by: 

■ a. Revising paragraph (b); 

■ b. Revising paragraph (e)(2); 

■ c. Revising paragraphs (g) and (h); 

■ d. Revising paragraph (i)(2); 

■ e. Revising paragraphs (j)(1) and (j)(3); 

■ f. Revising paragraphs (k)(1)(ii), 

(k)(1)(iii), (k)(2) introductory text, and 

(k)(2)(i) to read as follows: 

§ 4.34 General disclosures required. 

* * * * * 

(b) Risk Disclosure Statement. (1) The 

following Risk Disclosure Statement 

must be prominently displayed 

immediately following any disclosures 

required to appear on the cover page of 

the Disclosure Document as provided by 

the Commission, by any applicable 

federal or state securities laws and 

regulations or by any applicable laws of 

non-United States jurisdictions: 

RISK DISCLOSURE STATEMENT 

THE RISK OF LOSS IN TRADING 

COMMODITY INTERESTS CAN BE 

SUBSTANTIAL. YOU SHOULD 

THEREFORE CAREFULLY CONSIDER 

WHETHER SUCH TRADING IS 

SUITABLE FOR YOU IN LIGHT OF 

YOUR FINANCIAL CONDITION. IN 

CONSIDERING WHETHER TO TRADE 

OR TO AUTHORIZE SOMEONE ELSE 

TO TRADE FOR YOU, YOU SHOULD 

BE AWARE OF THE FOLLOWING: 

IF YOU PURCHASE A COMMODITY 

OPTION YOU MAY SUSTAIN A 

TOTAL LOSS OF THE PREMIUM AND 

OF ALL TRANSACTION COSTS. 

IF YOU PURCHASE OR SELL A 

COMMODITY FUTURES CONTRACT 

OR SELL A COMMODITY OPTION OR 

ENGAGE IN OFF-EXCHANGE FOREIGN 

CURRENCY TRADING YOU MAY 

SUSTAIN A TOTAL LOSS OF THE 

INITIAL MARGIN FUNDS OR 

SECURITY DEPOSIT AND ANY 

ADDITIONAL FUNDS THAT YOU 

DEPOSIT WITH YOUR BROKER TO 

ESTABLISH OR MAINTAIN YOUR 

POSITION. IF THE MARKET MOVES 

AGAINST YOUR POSITION, YOU MAY 

BE CALLED UPON BY YOUR BROKER 

TO DEPOSIT A SUBSTANTIAL 

AMOUNT OF ADDITIONAL MARGIN 

FUNDS, ON SHORT NOTICE, IN 

ORDER TO MAINTAIN YOUR 

POSITION. IF YOU DO NOT PROVIDE 

THE REQUESTED FUNDS WITHIN THE 

PRESCRIBED TIME, YOUR POSITION 

MAY BE LIQUIDATED AT A LOSS, 

AND YOU WILL BE LIABLE FOR ANY 

RESULTING DEFICIT IN YOUR 

ACCOUNT. 

UNDER CERTAIN MARKET 

CONDITIONS, YOU MAY FIND IT 

DIFFICULT OR IMPOSSIBLE TO 

LIQUIDATE A POSITION. THIS CAN 

OCCUR, FOR EXAMPLE, WHEN THE 

MARKET MAKES A ‘‘LIMIT MOVE.’’ 

THE PLACEMENT OF CONTINGENT 

ORDERS BY YOU OR YOUR TRADING 

ADVISOR, SUCH AS A ‘‘STOP-LOSS’’ 

OR ‘‘STOP-LIMIT’’ ORDER, WILL NOT 

NECESSARILY LIMIT YOUR LOSSES 

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TO THE INTENDED AMOUNTS, SINCE 

MARKET CONDITIONS MAY MAKE IT 

IMPOSSIBLE TO EXECUTE SUCH 

ORDERS. 

A ‘‘SPREAD’’ POSITION MAY NOT 

BE LESS RISKY THAN A SIMPLE 

‘‘LONG’’ OR ‘‘SHORT’’ POSITION. 

THE HIGH DEGREE OF LEVERAGE 

THAT IS OFTEN OBTAINABLE IN 

COMMODITY INTEREST TRADING 

CAN WORK AGAINST YOU AS WELL 

AS FOR YOU. THE USE OF LEVERAGE 

CAN LEAD TO LARGE LOSSES AS 

WELL AS GAINS. 

IN SOME CASES, MANAGED 

COMMODITY ACCOUNTS ARE 

SUBJECT TO SUBSTANTIAL 

CHARGES FOR MANAGEMENT AND 

ADVISORY FEES. IT MAY BE 

NECESSARY FOR THOSE ACCOUNTS 

THAT ARE SUBJECT TO THESE 

CHARGES TO MAKE SUBSTANTIAL 

TRADING PROFITS TO AVOID 

DEPLETION OR EXHAUSTION OF 

THEIR ASSETS. THIS DISCLOSURE 

DOCUMENT CONTAINS, AT PAGE 

(insert page number), A COMPLETE 

DESCRIPTION OF EACH FEE TO BE 

CHARGED TO YOUR ACCOUNT BY 

THE COMMODITY TRADING 

ADVISOR. 

THIS BRIEF STATEMENT CANNOT 

DISCLOSE ALL THE RISKS AND 

OTHER SIGNIFICANT ASPECTS OF 

THE COMMODITY INTEREST 

MARKETS. YOU SHOULD THEREFORE 

CAREFULLY STUDY THIS 

DISCLOSURE DOCUMENT AND 

COMMODITY INTEREST TRADING 

BEFORE YOU TRADE, INCLUDING 

THE DESCRIPTION OF THE 

PRINCIPAL RISK FACTORS OF THIS 

INVESTMENT, AT PAGE (insert page 

number). 

(2)(i) If the commodity trading advisor 

may trade foreign futures or options 

contracts pursuant to the offered trading 

program, the Risk Disclosure Statement 

must further state the following: 

YOU SHOULD ALSO BE AWARE 

THAT THIS COMMODITY TRADING 

ADVISOR MAY ENGAGE IN TRADING 

FOREIGN FUTURES OR OPTIONS 

CONTRACTS. TRANSACTIONS ON 

MARKETS LOCATED OUTSIDE THE 

UNITED STATES, INCLUDING 

MARKETS FORMALLY LINKED TO A 

UNITED STATES MARKET MAY BE 

SUBJECT TO REGULATIONS WHICH 

OFFER DIFFERENT OR DIMINISHED 

PROTECTION. FURTHER, UNITED 

STATES REGULATORY AUTHORITIES 

MAY BE UNABLE TO COMPEL THE 

ENFORCEMENT OF THE RULES OF 

REGULATORY AUTHORITIES OR 

MARKETS IN NON-UNITED STATES 

JURISDICTIONS WHERE YOUR 

TRANSACTIONS MAY BE EFFECTED. 

BEFORE YOU TRADE YOU SHOULD 

INQUIRE ABOUT ANY RULES 

RELEVANT TO YOUR PARTICULAR 

CONTEMPLATED TRANSACTIONS 

AND ASK THE FIRM WITH WHICH 

YOU INTEND TO TRADE FOR 

DETAILS ABOUT THE TYPES OF 

REDRESS AVAILABLE IN BOTH YOUR 

LOCAL AND OTHER RELEVANT 

JURISDICTIONS. 

(ii) If the commodity trading advisor 

may engage in retail forex transactions 

pursuant to the offered trading program, 

the Risk Disclosure Statement must 

further state the following: 

YOU SHOULD ALSO BE AWARE 

THAT THIS COMMODITY TRADING 

ADVISOR MAY ENGAGE IN OFFEXCHANGE FOREIGN CURRENCY 

TRADING. SUCH TRADING IS NOT 

CONDUCTED IN THE INTERBANK 

MARKET. THE FUNDS DEPOSITED 

WITH A COUNTERPARTY FOR SUCH 

TRANSACTIONS WILL NOT RECEIVE 

THE SAME PROTECTIONS AS FUNDS 

USED TO MARGIN OR GUARANTEE 

EXCHANGE-TRADED FUTURES AND 

OPTION CONTRACTS. IF THE 

COUNTERPARTY BECOMES 

INSOLVENT AND YOU HAVE A 

CLAIM FOR AMOUNTS DEPOSITED 

OR PROFITS EARNED ON 

TRANSACTIONS WITH THE 

COUNTERPARTY, YOUR CLAIM MAY 

NOT BE TREATED AS A COMMODITY 

CUSTOMER CLAIM FOR PURPOSES 

OF SUBCHAPTER IV OF CHAPTER 7 

OF THE BANKRUPTCY CODE AND 

REGULATIONS THEREUNDER. YOU 

MAY BE A GENERAL CREDITOR AND 

YOUR CLAIM MAY BE PAID, ALONG 

WITH THE CLAIMS OF OTHER 

GENERAL CREDITORS, FROM ANY 

MONIES STILL AVAILABLE AFTER 

PRIORITY CLAIMS ARE PAID. EVEN 

FUNDS THAT THE COUNTERPARTY 

KEEPS SEPARATE FROM ITS OWN 

FUNDS MAY NOT BE SAFE FROM 

THE CLAIMS OF PRIORITY AND 

OTHER GENERAL CREDITORS. 

FURTHER, YOU SHOULD 

CAREFULLY REVIEW THE 

INFORMATION CONTAINED IN THE 

RISK DISCLOSURE STATEMENT OF 

THE FUTURES COMMISSION 

MERCHANT OR RETAIL FOREIGN 

EXCHANGE DEALER THAT YOU 

SELECT TO CARRY YOUR ACCOUNT. 

(3) If the commodity trading advisor 

is not also a registered futures 

commission merchant or a registered 

retail foreign exchange dealer, the 

trading advisor must make the 

additional following statement in the 

Risk Disclosure Statement, to be 

included as the last paragraph thereof: 

THIS COMMODITY TRADING 

ADVISOR IS PROHIBITED BY LAW 

FROM ACCEPTING FUNDS IN THE 

TRADING ADVISOR’S NAME FROM A 

CLIENT FOR TRADING COMMODITY 

INTERESTS. YOU MUST PLACE ALL 

FUNDS FOR TRADING IN THIS 

TRADING PROGRAM DIRECTLY WITH 

A FUTURES COMMISSION 

MERCHANT OR RETAIL FOREIGN 

EXCHANGE DEALER, AS 

APPLICABLE. 

* * * * * 

(e) * * * 

(2) The futures commission merchant 

and/or retail foreign exchange dealer 

with which the commodity trading 

advisor will require the client to 

maintain its account or, if the client is 

free to choose the futures commission 

merchant or retail foreign exchange 

dealer with which it will maintain its 

account, the trading advisor must make 

a statement to that effect; and 

* * * * * 

(g) Principal risk factors. A discussion 

of the principal risk factors of this 

trading program. This discussion must 

include, without limitation, risks due to 

volatility, leverage, liquidity, and 

counterparty creditworthiness, as 

applicable to the trading program and 

the types of transactions and investment 

activity expected to be engaged in 

pursuant to such program (including 

retail forex transactions, if any). 

(h) Trading program. A description of 

the trading program, which must 

include the method chosen by the 

commodity trading advisor concerning 

how futures commission merchants 

and/or retail foreign exchange dealers 

carrying accounts it manages shall treat 

offsetting positions pursuant to § 1.46 of 

this chapter, if the method is other than 

to close out all offsetting positions or to 

close out offsetting positions on other 

than a first-in, first-out basis, and the 

types of commodity interests and other 

interests the commodity trading advisor 

intends to trade, with a description of 

any restrictions or limitations on such 

trading established by the trading 

advisor or otherwise. 

(i) * * * 

(2) Where any fee is determined by 

reference to a base amount including, 

but not limited to, ‘‘net assets,’’ ‘‘gross 

profits,’’ ‘‘net profits,’’ ‘‘net gains,’’ ‘‘pips’’ 

or ‘‘bid-asked spread,’’ the trading 

advisor must explain how such base 

amount will be calculated. Where any 

fee is based on the difference between 

bid and asked prices on retail forex 

transactions (as defined in § 5.1(m) of 

this chapter), the trading advisor must 

explain how such fee will be calculated; 

* * * * * 

(j) Conflicts of interest. (1) A full 

description of any actual or potential 

conflicts of interest regarding any aspect 

of the trading program on the part of: 

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55432 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

(i) The commodity trading advisor; 

(ii) Any futures commission merchant 

and/or retail foreign exchange dealer 

with which the client will be required 

to maintain its commodity interest 

account; 

(iii) Any introducing broker through 

which the client will be required to 

introduce its account to a futures 

commission merchant and/or retail 

foreign exchange dealer; and 

(iv) Any principal of the foregoing. 

* * * * * 

(3) Included in the description of any 

such conflict must be any arrangement 

whereby the trading advisor or any 

principal thereof may benefit, directly 

or indirectly, from the maintenance of 

the client’s commodity interest account 

with a futures commission merchant 

and/or retail foreign exchange dealer, or 

the introduction of such account 

through an introducing broker (such as 

payment for order flow or soft dollar 

arrangements). 

(k) * * * 

(1) * * * 

(ii) Any futures commission merchant 

or retail foreign exchange dealer with 

which the client will be required to 

maintain its commodity interest 

account; and 

(iii) Any introducing broker through 

which the client will be required to 

introduce its account to the futures 

commission merchant and/or retail 

foreign exchange dealer. 

(2) With respect to a futures 

commission merchant, retail foreign 

exchange dealer or introducing broker, 

an action will be considered material if: 

(i) The action would be required to be 

disclosed in the notes to the futures 

commission merchant’s, retail foreign 

exchange dealer’s or introducing 

broker’s financial statements prepared 

pursuant to generally accepted 

accounting principles; 

* * * * * 

■ 36. Part 5 is added to read as follows: 

PART 5—OFF-EXCHANGE FOREIGN 

CURRENCY TRANSACTIONS 

Sec. 

5.1 Definitions. 

5.2 Prohibited transactions. 

5.3 Registration of persons engaged in retail 

forex transactions. 

5.4 Applicability of part 4 of this chapter to 

commodity pool operators and 

commodity trading advisors. 

5.5 Distribution of ‘‘Risk Disclosure 

Statement’’ by retail foreign exchange 

dealers. futures commission merchants 

and introducing brokers regarding retail 

forex transactions. 

5.6 Maintenance of minimum financial 

requirements by retail foreign exchange 

dealers and futures commission 

merchants offering or engaging in retail 

forex transactions. 

5.7 Minimum financial requirements for 

retail foreign exchange dealers and 

futures commission merchants offering 

or engaging in retail forex transactions. 

5.8 Aggregate retail forex assets. 

5.9 Security deposits for retail forex 

transactions. 

5.10 Risk assessment recordkeeping 

requirements for retail foreign exchange 

dealers. 

5.11 Risk assessment reporting 

requirements for retail foreign exchange 

dealers. 

5.12 Financial reports of retail foreign 

exchange dealers. 

5.13 Reporting to customers of retail foreign 

exchange dealers and futures 

commission merchants; monthly and 

confirmation statements. 

5.14 Records to be kept by retail foreign 

exchange dealers and futures 

commission merchants. 

5.15 Unlawful representations. 

5.16 Prohibition of guarantees against loss. 

5.17 Authorization to trade. 

5.18 Trading and operational standards. 

5.19 Pending legal proceedings. 

5.20 Special calls for account and 

transaction information. 

5.21 Supervision. 

5.22 Registered futures association 

membership. 

5.23 Notice of bulk transfers and bulk 

liquidations. 

5.24 Applicability of other parts of this 

chapter. 

5.25 Applicability of the Act. 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 

6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 

12, 12a, 13b, 13c, 16a, 18, 19, 21, 23. 

§ 5.1 Definitions. 

(a) Affiliated person of a futures 

commission merchant means a person 

described in section 

2(c)(2)(B)(i)(II)(cc)(BB) of the Act; 

(b) Aggregate retail forex assets means 

an amount of liquid assets held in 

accordance with § 5.8 of this part; 

(c) Associated person of an affiliated 

person of a futures commission 

merchant means any natural person 

associated with an affiliated person of a 

futures commission merchant as a 

partner, officer or employee (or any 

natural person occupying a similar 

status or performing similar functions), 

in any capacity which involves: 

(1) The solicitation or acceptance of 

retail forex customers’ orders (other 

than in a clerical capacity); or 

(2) The supervision of any person or 

persons so engaged; 

(d)(1) Commodity pool operator, for 

purposes of this part, means any person 

who operates or solicits funds, 

securities, or property for a pooled 

investment vehicle that is not an eligible 

contract participant as defined in 

section 1a(12) of the Act, and that 

engages in retail forex transactions; 

(2) Associated person of a commodity 

pool operator, for purposes of this part, 

means any natural person associated 

with a commodity pool operator as 

defined in paragraph (d)(1) of this 

section as a partner, officer, employee, 

consultant or agent (or any natural 

person occupying a similar status or 

performing similar functions), in any 

capacity which involves: 

(i) The solicitation of funds, 

securities, or property for a participation 

in a pooled investment vehicle; or 

(ii) The supervision of any person or 

persons so engaged; 

(e)(1) Commodity trading advisor, for 

purposes of this part, means any person 

who exercises discretionary trading 

authority or obtains written 

authorization to exercise discretionary 

trading authority over any account for or 

on behalf of any person that is not an 

eligible contract participant as defined 

in section 1a(12) of the Act, in 

connection with retail forex 

transactions; 

(2) Associated person of a commodity 

trading advisor, for purposes of this 

part, means any natural person 

associated with a commodity trading 

advisor as defined in paragraph (e)(1) of 

this section as a partner, officer, 

employee, consultant or agent (or any 

natural person occupying a similar 

status or performing similar functions), 

in any capacity which involves: 

(i) The solicitation of a client’s or 

prospective client’s discretionary 

account; or 

(ii) The supervision of any person or 

persons so engaged; 

(f)(1) Introducing broker, for purposes 

of this part, means any person who 

solicits or accepts orders from a 

customer that is not an eligible contract 

participant as defined in section 1a(12) 

of the Act, in connection with retail 

forex transactions; 

(2) Associated person of an 

introducing broker, for purposes of this 

part, means any natural person 

associated with an introducing broker as 

defined in paragraph (g)(1) of this 

section as a partner, officer, employee, 

or agent (or any natural person 

occupying a similar status or performing 

similar functions), in any capacity 

which involves: 

(i) The solicitation or acceptance of 

retail forex customers’ orders (other 

than in a clerical capacity); or 

(ii) The supervision of any person or 

persons so engaged; 

(g) Primarily or substantially means, 

when used to describe the extent of a 

futures commission merchant’s 

engagement in the activities described 

in section 1a(20) of the Act, that: 

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(1) Such activities account for more 

than fifty percent of the futures 

commission merchant’s gross revenues, 

computed in accordance with generally 

accepted accounting principles, on an 

annual basis; 

(2) The futures commission merchant 

receives gross revenues, computed in 

accordance with generally accepted 

accounting principles, from such 

activities in excess of $500,000 in any 

twelve month period; or 

(3) The futures commission merchant 

is a clearing member of a registered 

derivatives clearing organization. 

(h)(1) Retail foreign exchange dealer 

means any person that is, or that offers 

to be, the counterparty to a retail forex 

transaction, except for a person 

described in sub-paragraph (aa), (bb), 

(cc)(AA), (dd), (ee) or (ff) of section 

2(c)(2)(B)(i)(II) of the Act; 

(2) Associated person of a retail 

foreign exchange dealer means any 

natural person associated with a retail 

foreign exchange dealer as defined in 

paragraph (i)(1) of this section as a 

partner, officer or employee (or any 

natural person occupying a similar 

status or performing similar functions), 

in any capacity which involves: 

(i) The solicitation or acceptance of 

retail forex customers’ orders (other 

than in a clerical capacity); or 

(ii) The supervision of any person or 

persons so engaged; 

(i) Retail forex account means the 

account of a person who is not an 

eligible contract participant as defined 

in section 1a(12) of the Act, established 

with a retail foreign exchange dealer or 

a futures commission merchant, in 

which account retail forex transactions 

(including options on contracts for the 

purchase or sale of foreign currency) 

with such retail foreign exchange dealer 

or futures commission merchant as 

counterparty are undertaken, or which 

account is established in order to enter 

into such transactions. 

(j) Retail forex account agreement 

means the contractual agreement 

between a futures commission merchant 

or retail foreign exchange dealer and 

any person who is not an eligible 

contract participant as defined in 

section 1a(12) of the Act, which 

agreement contains the terms governing 

the person’s retail forex account with 

such futures commission merchant or 

retail foreign exchange dealer. 

(k) Retail forex customer means a 

person, other than an eligible contract 

participant as defined in section 1a(12) 

of the Act, acting on its own behalf and 

trading in any account, agreement, 

contract or transaction described in 

section 2(c)(2)(B) or 2(c)(2)(C) of the Act. 

(l) Retail forex obligation means the 

net credit balance at a retail foreign 

exchange dealer or futures commission 

merchant that would be obtained by 

combining all money, securities and 

property deposited by a retail forex 

customer into a retail forex account or 

accounts, adjusted for the realized and 

unrealized net profit or loss, if any, 

accruing on the open trades, contracts or 

transactions in the retail forex account 

or accounts, without including any 

retail forex customers’ accounts that 

contain negative net liquidating 

balances. 

(m) Retail forex transaction means 

any account, agreement, contract or 

transaction described in section 

2(c)(2)(B) or 2(c)(2)(C) of the Act. A 

retail forex transaction does not include 

an account, agreement, contract or 

transaction in foreign currency that is a 

contract of sale of a commodity for 

future delivery (or an option thereon) 

that is executed, traded on or otherwise 

subject to the rules of a contract market 

designated pursuant to section 5(a) of 

the Act or a derivatives transaction 

execution facility registered pursuant to 

section 5a(c) of the Act. 

§ 5.2 Prohibited transactions. 

(a) Scope. The provisions of this 

section shall be applicable to any retail 

forex transaction. 

(b) Fraudulent conduct prohibited. It 

shall be unlawful for any person, by use 

of the mails or by any means or 

instrumentality of interstate commerce, 

directly or indirectly, in or in 

connection with any retail forex 

transaction: 

(1) To cheat or defraud or attempt to 

cheat or defraud any person; 

(2) Willfully to make or cause to be 

made to any person any false report or 

statement or cause to be entered for any 

person any false record; or 

(3) Willfully to deceive or attempt to 

deceive any person by any means 

whatsoever. 

(c) Acting as counterparty and 

exercising discretion prohibited. (1) No 

person who acts as the counterparty for 

any retail forex transaction may do so 

for an account for which the person or 

any affiliate of the person is authorized 

(by contract, power of attorney or 

otherwise) to cause transactions to be 

effected without the client’s specific 

authorization. 

(2) For purposes of this paragraph (c), 

an ‘‘affiliate’’ of a person means a person 

controlling, controlled by or under 

common control with, the first person. 

§ 5.3 Registration of persons engaged in 

retail forex transactions. 

(a) Subject to paragraph (b) of this 

section, each of the following is subject 

to the registration provisions under the 

Act and to part 3 of this chapter: 

(1)(i) Any affiliated person of a futures 

commission merchant, as defined in 

§ 5.1(a) of this part, which affiliated 

person: 

(A) Solicits or accepts orders from any 

person that is not an eligible contract 

participant in connection with any retail 

forex transaction; or 

(B) Accepts money, securities, or 

property (or extends credit in lieu 

thereof) in connection with such 

solicitation or acceptance of orders in 

order to engage in any retail forex 

transaction, is required to register as a 

retail foreign exchange dealer; and 

(ii) Any associated person of an 

affiliated person of a futures 

commission merchant, as defined in 

§ 5.1(c) of this part, is required to 

register as an associated person of an 

affiliated person of a futures 

commission merchant. 

(2)(i) Any commodity pool operator, 

as defined in § 5.1(d)(1) of this part, is 

required to register as a commodity pool 

operator; 

(ii) Any associated person of a 

commodity pool operator, as defined in 

§ 5.1(d)(2) of this part, is required to 

register as an associated person of a 

commodity pool operator; 

(3)(i) Any commodity trading advisor, 

as defined in § 5.1(e)(1) of this part, is 

required to register as a commodity 

trading advisor; 

(ii) Any associated person of a 

commodity trading advisor, as defined 

in § 5.1(e)(2) of this part, is required to 

register as an associated person of a 

commodity trading advisor; 

(4)(i) Any person registered as a 

futures commission merchant: 

(A) That is not primarily or 

substantially engaged in the business 

activities described in section 1a(20) of 

the Act; 

(B) That solicits or accepts orders 

from any person that is not an eligible 

contract participant in connection with 

any retail forex transaction; and 

(C) That accepts money, securities, or 

property (or extends credit in lieu 

thereof) in connection with such 

solicitation or acceptance of orders in 

order to engage in retail forex 

transactions, is required to register as a 

retail foreign exchange dealer; 

(ii) Any associated person of a futures 

commission merchant described in 

paragraph (a)(4)(i) of this section is 

required to register as an associated 

person of a futures commission 

merchant; 

(5)(i) Any introducing broker, as 

defined in § 5.1(f)(1) of this part, is 

required to register as an introducing 

broker; 

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55434 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

(ii) Any associated person of an 

introducing broker, as defined in 

§ 5.1(f)(2) of this part, is required to 

register as an associated person of an 

introducing broker; 

(6)(i) Any retail foreign exchange 

dealer, as defined in § 5.1(h)(1) of this 

part is required to register as a retail 

foreign exchange dealer; 

(ii) Any associated person of a retail 

foreign exchange dealer, as defined in 

§ 5.1(h)(2) of this part, is required to 

register as an associated person of a 

retail foreign exchange dealer; 

(b) Any person described in paragraph 

(a) of this section that is already 

registered in the required capacity 

specified in paragraph (a) is not 

required under this section to register 

twice in the same capacity; Provided, 

however, that a person already 

registered as an associated person of one 

class of registrant may also be required 

to register as an associated person of 

another class of registrant in order to 

comply with this section. 

§ 5.4 Applicability of part 4 of this chapter 

to commodity pool operators and 

commodity trading advisors. 

Part 4 of this chapter applies to any 

person required pursuant to the 

provisions of this part 5 to register as a 

commodity pool operator or as a 

commodity trading advisor. Failure by 

any such person to comply with the 

requirements of part 4 will constitute a 

violation of this section and the relevant 

section of part 4. 

§ 5.5 Distribution of ‘‘Risk Disclosure 

Statement’’ by retail foreign exchange 

dealers, futures commission merchants and 

introducing brokers regarding retail forex 

transactions. 

(a) Except as provided in § 5.23 of this 

part, no retail foreign exchange dealer, 

futures commission merchant, or in the 

case of an introduced account no 

introducing broker, may open an 

account that will engage in retail forex 

transactions for a retail forex customer, 

unless the retail foreign exchange 

dealer, futures commission merchant or 

introducing broker first: 

(1)(i) In the case of a retail foreign 

exchange dealer or a person required to 

register as an introducing broker solely 

by reason of this part, furnishes the 

retail forex customer with a separate 

written disclosure statement containing 

only the language set forth in paragraph 

(b) of this section and the disclosure 

required by paragraph (e) of this section; 

(ii) In the case of a futures 

commission merchant or a person 

required to register as an introducing 

broker because it engages in the 

activities described in § 1.3(mm) of this 

chapter, furnishes the retail forex 

customer with a separate written 

disclosure statement containing only the 

language set forth in paragraph (b) of 

this section and the disclosure required 

by paragraph (e) of this section; 

Provided, however, that the disclosure 

statement may be attached to other 

documents as the initial page(s) of such 

documents and as the only material on 

such page(s); and 

(2) Receives from the retail forex 

customer an acknowledgment signed 

and dated by the retail forex customer 

that he received and understood the 

disclosure statement. 

(b) The language set forth in the 

written disclosure statement required by 

paragraph (a) of this section shall be as 

follows: 

RISK DISCLOSURE STATEMENT 

OFF-EXCHANGE FOREIGN 

CURRENCY TRANSACTIONS 

INVOLVE THE LEVERAGED TRADING 

OF CONTRACTS DENOMINATED IN 

FOREIGN CURRENCY CONDUCTED 

WITH A FUTURES COMMISSION 

MERCHANT OR A RETAIL FOREIGN 

EXCHANGE DEALER AS YOUR 

COUNTERPARTY. BECAUSE OF THE 

LEVERAGE AND THE OTHER RISKS 

DISCLOSED HERE, YOU CAN RAPIDLY 

LOSE ALL OF THE FUNDS YOU 

DEPOSIT FOR SUCH TRADING AND 

YOU MAY LOSE MORE THAN YOU 

DEPOSIT. 

YOU SHOULD BE AWARE OF AND 

CAREFULLY CONSIDER THE 

FOLLOWING POINTS BEFORE 

DETERMINING WHETHER SUCH 

TRADING IS APPROPRIATE FOR YOU. 

(1) TRADING IS NOT ON A 

REGULATED MARKET OR 

EXCHANGE—YOUR DEALER IS YOUR 

TRADING PARTNER WHICH IS A 

DIRECT CONFLICT OF INTEREST. 

BEFORE YOU ENGAGE IN ANY 

RETAIL FOREIGN EXCHANGE 

TRADING, YOU SHOULD CONFIRM 

THE REGISTRATION STATUS OF 

YOUR COUNTERPARTY. 

The off-exchange foreign currency 

trading you are entering into is not 

conducted on an interbank market, nor 

is it conducted on a futures exchange 

subject to regulation as a designated 

contract market by the Commodity 

Futures Trading Commission. The 

foreign currency trades you transact are 

trades with the futures commission 

merchant or retail foreign exchange 

dealer as your counterparty. WHEN 

YOU SELL, THE DEALER IS THE 

BUYER. WHEN YOU BUY, THE 

DEALER IS THE SELLER. As a result, 

when you lose money trading, your 

dealer is making money on such trades, 

in addition to any fees, commissions, or 

spreads the dealer may charge. 

(2) AN ELECTRONIC TRADING 

PLATFORM FOR RETAIL FOREIGN 

CURRENCY TRANSACTIONS IS NOT 

AN EXCHANGE. IT IS AN 

ELECTRONIC CONNECTION FOR 

ACCESSING YOUR DEALER. THE 

TERMS OF AVAILABILITY OF SUCH A 

PLATFORM ARE GOVERNED ONLY 

BY YOUR CONTRACT WITH YOUR 

DEALER. 

Any trading platform that you may 

use to enter off-exchange foreign 

currency transactions is only connected 

to your futures commission merchant or 

retail foreign exchange dealer. You are 

accessing that trading platform only to 

transact with your dealer. You are not 

trading with any other entities or 

customers of the dealer by accessing 

such platform. The availability and 

operation of any such platform, 

including the consequences of the 

unavailability of the trading platform for 

any reason, is governed only by the 

terms of your account agreement with 

the dealer. 

(3) YOUR DEPOSITS WITH THE 

DEALER HAVE NO REGULATORY 

PROTECTIONS. 

All of your rights associated with your 

retail forex trading, including the 

manner and denomination of any 

payments made to you, are governed by 

the contract terms established in your 

account agreement with the futures 

commission merchant or retail foreign 

exchange dealer. Funds deposited by 

you with a futures commission 

merchant or retail foreign exchange 

dealer for trading off-exchange foreign 

currency transactions are not subject to 

the customer funds protections 

provided to customers trading on a 

contract market that is designated by the 

Commodity Futures Trading 

Commission. Your dealer may 

commingle your funds with its own 

operating funds or use them for other 

purposes. In the event your dealer 

becomes bankrupt, any funds the dealer 

is holding for you in addition to any 

amounts owed to you resulting from 

trading, whether or not any assets are 

maintained in separate deposit accounts 

by the dealer, may be treated as an 

unsecured creditor’s claim. 

(4) YOU ARE LIMITED TO YOUR 

DEALER TO OFFSET OR LIQUIDATE 

ANY TRADING POSITIONS SINCE THE 

TRANSACTIONS ARE NOT MADE ON 

AN EXCHANGE OR MARKET, AND 

YOUR DEALER MAY SET ITS OWN 

PRICES. 

Your ability to close your transactions 

or offset positions is limited to what 

your dealer will offer to you, as there is 

no other market for these transactions. 

Your dealer may offer any prices it 

wishes, and it may offer prices derived 

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from outside sources or not in its 

discretion. Your dealer may establish its 

prices by offering spreads from third 

party prices, but it is under no 

obligation to do so or to continue to do 

so. Your dealer may offer different 

prices to different customers at any 

point in time on its own terms. The 

terms of your account agreement alone 

govern the obligations your dealer has to 

you to offer prices and offer offset or 

liquidating transactions in your account 

and make any payments to you. The 

prices offered by your dealer may or 

may not reflect prices available 

elsewhere at any exchange, interbank, or 

other market for foreign currency. 

(5) PAID SOLICITORS MAY HAVE 

UNDISCLOSED CONFLICTS 

The futures commission merchant or 

retail foreign exchange dealer may 

compensate introducing brokers for 

introducing your account in ways which 

are not disclosed to you. Such paid 

solicitors are not required to have, and 

may not have, any special expertise in 

trading, and may have conflicts of 

interest based on the method by which 

they are compensated. Solicitors 

working on behalf of futures 

commission merchants and retail 

foreign exchange dealers are required to 

register. You should confirm that they 

are, in fact registered. You should 

thoroughly investigate the manner in 

which all such solicitors are 

compensated and be very cautious in 

granting any person or entity authority 

to trade on your behalf. You should 

always consider obtaining dated written 

confirmation of any information you are 

relying on from your dealer or a solicitor 

in making any trading or account 

decisions. 

FINALLY, YOU SHOULD 

THOROUGHLY INVESTIGATE ANY 

STATEMENTS BY ANY DEALERS OR 

SALES REPRESENTATIVES WHICH 

MINIMIZE THE IMPORTANCE OF, OR 

CONTRADICT, ANY OF THE TERMS 

OF THIS RISK DISCLOSURE. SUCH 

STATEMENTS MAY INDICATE 

POTENTIAL SALES FRAUD. 

THIS BRIEF STATEMENT CANNOT, 

OF COURSE, DISCLOSE ALL THE 

RISKS AND OTHER ASPECTS OF 

TRADING OFF-EXCHANGE FOREIGN 

CURRENCY TRANSACTIONS WITH A 

FUTURES COMMISSION MERCHANT 

OR RETAIL FOREIGN EXCHANGE 

DEALER. 

I hereby acknowledge that I have 

received and understood this risk 

disclosure statement. 

lllllllllllllllllllll

Date 

lllllllllllllllllllll

Signature of Customer 

(c) The acknowledgment required by 

paragraph (a) of this section must be 

retained by the retail foreign exchange 

dealer, futures commission merchant or 

introducing broker in accordance with 

§ 1.31 of this chapter. 

(d) This section does not relieve a 

retail foreign exchange dealer, futures 

commission merchant or introducing 

broker from any other disclosure 

obligation it may have under applicable 

law. 

(e)(1) Immediately following the 

language set forth in paragraph (b) of 

this section, the statement required by 

paragraph (a) of this section shall 

include, for each of the most recent four 

calendar quarters during which the 

counterparty maintained retail forex 

customer accounts: 

(i) The total number of non 

discretionary retail forex customer 

accounts maintained by the retail 

foreign exchange dealer or futures 

commission merchant; 

(ii) The percentage of such accounts 

that were profitable during the quarter; 

and 

(iii) The percentage of such accounts 

that were not profitable during the 

quarter. 

(2) Identification of retail forex 

customer accounts for the purpose of 

this disclosure and the calculation in 

determining whether each such account 

was profitable or not profitable must be 

made in accordance with § 5.18(i) of this 

part. Such statement of profitable trades 

shall include the following legend: 

PAST PERFORMANCE IS NOT 

NECESSARILY INDICATIVE OF 

FUTURE RESULTS. Each retail foreign 

exchange dealer or futures commission 

merchant shall provide, upon request, to 

any retail forex customer or prospective 

retail forex customer the total number of 

non discretionary retail forex accounts 

maintained by such foreign exchange 

dealer or futures commission merchant, 

the percentage of such accounts that 

were profitable and the percentage of 

such accounts that were not profitable, 

calculated in accordance with § 5.18(i) 

of this part, for each calendar quarter 

during the most recent five year period 

during which such retail foreign 

exchange dealer or futures commission 

merchant maintained non discretionary 

retail forex customer accounts. 

§ 5.6 Maintenance of minimum financial 

requirements by retail foreign exchange 

dealers and futures commission merchants 

offering or engaging in retail forex 

transactions. 

(a) Each futures commission merchant 

offering or engaging in retail forex 

transactions or who files an application 

for registration as a futures commission 

merchant that will offer or engage in 

retail forex transactions and each person 

registered as a retail foreign exchange 

dealer or who files an application for 

registration as a retail foreign exchange 

dealer, who knows or should have 

known that its adjusted net capital at 

any time is less than the minimum 

required by § 5.7 of this part or by the 

capital rule of a registered futures 

association of which it is a member, 

must: 

(1) Give telephonic notice, to be 

confirmed in writing by facsimile 

notice, that the applicant’s or 

registrant’s adjusted net capital is less 

than that required by § 5.7 of this part. 

The notice must be given immediately 

after the applicant or registrant knows 

or should know that its adjusted net 

capital is less than that required by any 

of the aforesaid rules to which the 

applicant or registrant is subject; and 

(2) Provide together with such notice 

documentation in such form as 

necessary to adequately reflect the 

applicant’s or registrant’s capital 

condition as of any date such person’s 

adjusted net capital is less than the 

minimum required. The applicant or 

registrant must provide similar 

documentation for other days as the 

Commission may request. 

(b) Each applicant or registrant, who 

knows or should have known that its 

adjusted net capital at any time is less 

than the greatest of: 

(1) $22,000,000; 

(2) 110 percent of the amount 

required by § 5.7(a)(1)(i)(B) of this part; 

or 

(3) 110 percent of the amount of 

adjusted net capital required by a 

registered futures association of which 

the futures commission merchant or 

retail foreign exchange dealer is a 

member, must file written notice to that 

effect within 24 hours of such event. 

(c) If an applicant or registrant at any 

time fails to make or keep current the 

books and records required by these 

regulations, such applicant or registrant 

must, on the same day such event 

occurs, provide facsimile notice of such 

fact, specifying the books and records 

which have not been made or which are 

not current, and within 48 hours after 

giving such notice file a written report 

stating what steps have been and are 

being taken to correct the situation. 

(d) Whenever any applicant or 

registrant discovers or is notified by an 

independent public accountant, 

pursuant to § 1.16(e)(2) of this chapter, 

of the existence of any material 

inadequacy, as specified in § 1.16(d)(2) 

of this chapter, such applicant or 

registrant must give facsimile notice of 

such material inadequacy within 24 

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55436 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

hours, and within 48 hours after giving 

such notice file a written report stating 

what steps have been and are being 

taken to correct the material 

inadequacy. 

(e) Whenever any self-regulatory 

organization learns that a member 

registrant has failed to file a notice or 

written report as required by § 5.6 of 

this part, that self-regulatory 

organization must immediately report 

this failure by telephone, confirmed in 

writing immediately by facsimile notice, 

as provided in paragraph (h) of this 

section. 

(f) A retail foreign exchange dealer or 

a futures commission merchant offering 

or engaging in retail forex transactions 

shall provide written notice of a 

substantial reduction in capital as 

compared to that last reported in a 

financial report filed with the 

Commission pursuant to § 5.12 of this 

part. This notice shall be provided as 

follows: 

(1) If any event or series of events, 

including any withdrawal, advance, 

loan or loss cause, on a net basis, a 

reduction in net capital of 20 percent or 

more, notice must be provided within 

two business days of the event or series 

of events causing the reduction; and 

(2) If the equity capital of the retail 

foreign exchange dealer or futures 

commission merchant offering or 

engaging in retail forex transactions or 

the equity capital of a subsidiary or 

affiliate of the retail foreign exchange 

dealer or futures commission merchant 

offering or engaging in retail forex 

transactions consolidated pursuant to 

§ 1.17(f) of this chapter would be 

withdrawn by action of a stockholder or 

a partner or a limited liability company 

member or by redemption or repurchase 

of shares of stock by any of the 

consolidated entities or through the 

payment of dividends or any similar 

distribution, or an unsecured advance or 

loan would be made to a stockholder, 

partner, sole proprietor, limited liability 

company member, employee or affiliate, 

such that the withdrawal, advance or 

loan would cause, on a net basis, a 

reduction in excess adjusted net capital 

of 30 percent or more, notice must be 

provided at least two business days 

prior to the withdrawal, advance or loan 

that would cause the reduction: 

Provided, however, That the provisions 

of paragraphs (f)(1) and (f)(2) of this 

section do not apply to any retail foreign 

exchange transaction in the ordinary 

course of business between a retail 

foreign exchange dealer and any affiliate 

where the retail foreign exchange dealer 

makes payment to or on behalf of such 

affiliate for such transaction and then 

receives payment from such affiliate for 

such transaction within two business 

days from the date of the transaction. 

(3) Upon receipt of such notice from 

a futures commission merchant offering 

or engaging in retail forex transactions 

or a retail foreign exchange dealer, the 

Director of the Division of Clearing and 

Intermediary Oversight or the Director’s 

designee may require that the futures 

commission merchant offering or 

engaging in retail forex transactions or 

retail foreign exchange dealer provide or 

cause a Material Affiliated Person (as 

that term is defined in § 5.10(a)(2) of 

this part) to provide, within three 

business days from the date of the 

request or such shorter period as the 

Director or designee may specify, such 

other information as the Director or 

designee determines to be necessary 

based upon market conditions, reports 

provided by the retail foreign exchange 

dealer or futures commission merchant 

offering or engaging in retail forex 

transactions, or other available 

information. 

(g) Whenever a person registered as a 

futures commission merchant offering 

or engaging in retail forex transactions 

or a retail foreign exchange dealer 

knows or should know that the total 

amount of its retail forex obligation 

exceeds the amount of the aggregate 

retail forex assets the registrant 

maintains in accordance with the 

provisions of § 5.8 of this chapter, the 

registrant must report such deficiency 

immediately by telephone notice, 

confirmed immediately in writing by 

facsimile notice. 

(h) Every notice and written report 

required to be given or filed with the 

Commission by this section by an 

applicant must be filed with the 

regional office of the Commission with 

jurisdiction over the state in which the 

applicant’s principal place of business 

is located, and with the National 

Futures Association. Every notice and 

written report required to be given or 

filed with the Commission by this 

section by a registrant or self-regulatory 

organization must be filed with the 

regional office of the Commission with 

jurisdiction over the state in which the 

registrant’s principal place of business 

is located, and with the registrant’s 

designated self-regulatory organization. 

In addition, every notice and written 

report required to be given by this 

section must also be filed with the Chief 

Accountant of the Division of Clearing 

and Intermediary Oversight at the 

Commission’s principal office in 

Washington, DC. 

(i) In lieu of filing paper copies with 

the Commission, all filings or other 

notices prepared by a futures 

commission merchant or retail foreign 

exchange dealer pursuant to this section 

may be submitted to the Commission in 

electronic form using a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission, if the futures 

commission merchant, retail foreign 

exchange dealer or a designated selfregulatory organization has provided the 

Commission with the means necessary 

to read and to process the information 

contained in such report. Any such 

electronic submission must clearly 

indicate the registrant or applicant on 

whose behalf such filing is made and 

the use of such user authentication in 

submitting such filing will constitute 

and become a substitute for the manual 

signature of the authorized signer. 

§ 5.7 Minimum financial requirements for 

retail foreign exchange dealers and futures 

commission merchants offering or 

engaging in retail forex transactions. 

(a)(1)(i) Each futures commission 

merchant offering or engaging in retail 

forex transactions and each retail 

foreign exchange dealer must maintain 

adjusted net capital equal to or in excess 

of the greatest of: 

(A) $20,000,000; 

(B) $20,000,000 plus five percent of 

the futures commission merchant’s or 

retail foreign exchange dealer’s total 

retail forex obligation in excess of 

$10,000,000; 

(C) any amount required under § 1.17 

of this chapter, as applicable; or 

(D) the amount of adjusted net capital 

required by a registered futures 

association of which the futures 

commission merchant or retail foreign 

exchange dealer is a member. 

(ii) Section 1.17 of this chapter shall 

apply to retail foreign exchange dealers 

as if such retail foreign exchange dealers 

were futures commission merchants, or 

as applicable, applicants or registrants, 

as stated in § 1.17 for the purpose of 

determining the adjusted net capital 

under this section. For the purpose of 

applying this section, ‘‘applicant’’ or 

‘‘registrant’’ shall include retail foreign 

exchange dealers and futures 

commission merchants offering or 

engaging in retail forex transactions and 

applicants therefore. 

(2) No person applying for registration 

as a retail foreign exchange dealer or a 

futures commission merchant that will 

engage in retail forex transactions shall 

be so registered unless such person 

affirmatively demonstrates to the 

satisfaction of a registered futures 

association that it complies with the 

financial requirements of this section. 

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(3) Each registrant must be in 

compliance with this section at all times 

and must be able to demonstrate such 

compliance to the satisfaction of the 

Commission or the registrant’s 

designated self-regulatory organization. 

(4) A registrant who is not in 

compliance with this section, or is 

unable to demonstrate such compliance 

as required by paragraph (a)(3) of this 

section, shall, as directed by and under 

the supervision of the Commission or 

the registrant’s designated selfregulatory organization, either liquidate 

or transfer all retail forex accounts 

(including the novation of retail forex 

contracts) and refund or transfer all 

funds associated with such retail forex 

accounts and immediately cease offering 

or engaging in retail forex transactions 

until such time as the firm is able to 

demonstrate to the Commission or the 

registrant’s designated self-regulatory 

organization such compliance: 

Provided, however, That if such 

registrant immediately demonstrates to 

the satisfaction of the Commission or 

the registrant’s designated selfregulatory organization the ability to 

achieve compliance, the Commission or 

the registrant’s designated selfregulatory organization may in its 

discretion allow such registrant up to a 

maximum of 10 business days, or such 

additional time as determined by the 

Commission, in which to achieve 

compliance without having to liquidate 

positions or transfer accounts and cease 

doing business as required above. 

Nothing in this paragraph (a)(4) shall be 

construed as preventing the 

Commission or the registrant’s 

designated self-regulatory organization 

from taking action against a registrant 

for non-compliance with any of the 

provisions of this section. 

(b) For the purposes of this section: 

(1) Where the applicant or registrant 

has an asset or liability which is defined 

in Securities Exchange Act Rule 15c3– 

1 (§ 240.15c3–1 of this title) the 

inclusion or exclusion of all or part of 

such asset or liability for the 

computation of adjusted net capital 

shall be in accordance with § 240.15c3– 

1 of this title, unless specifically stated 

otherwise in this section or in § 1.17 of 

this chapter. 

(2) The adjusted net capital of an 

applicant or registrant for the purpose of 

this section shall be determined by the 

application of § 1.17 pursuant to 

paragraph (a)(1)(ii) of this section, with 

the following additions: 

(i) All positions in retail forex 

accounts and other financial positions 

and instruments of the applicant or 

registrant must be marked to market and 

adjusted daily by referencing to current 

market prices or rates of exchange. 

(ii) Current assets must exclude any 

retail forex account which liquidates to 

a deficit or contains a debit ledger 

balance only and is not secured in 

accordance with § 1.17(c)(3). 

(iii) Current assets must exclude any 

unsecured receivable accrued from any 

over-the-counter transaction in foreign 

currency, options on foreign currency or 

options on contracts for the purchase or 

sale of foreign currency, or arising from 

the deposit of collateral or 

compensating balances with respect to 

such transactions, unless such 

unsecured receivable is from a person 

who is an eligible contract participant 

that also is: 

(A) A bank or trust company regulated 

by a United States banking regulator; 

(B) A broker-dealer registered with the 

Securities and Exchange Commission 

and a member of the Financial Industry 

Regulatory Authority; 

(C) A futures commission merchant 

registered with the Commission and a 

member of the National Futures 

Association; 

(D) A retail foreign exchange dealer 

registered with the Commission and a 

member of the National Futures 

Association; 

(E) An entity regulated as a foreign 

equivalent of any of the persons listed 

in paragraphs (b)(2)(iii)(A) through (D) 

of this section, if such person is 

regulated in a money center country as 

defined in § 1.49 of this chapter and 

recognized by the futures commission 

merchant’s or retail foreign exchange 

dealer’s designated self-regulatory 

organization as a foreign equivalent; 

(F) Any other entity approved by the 

futures commission merchant’s or retail 

foreign exchange dealer’s designated 

self-regulatory organization. 

(iv) The value attributed to any retail 

forex transaction that is an option shall 

be the difference between the option’s 

exercise value or striking value and the 

market value of the underlying. In the 

case of a call, if the market value of the 

underlying is less than the exercise 

value or striking value of such call, it 

shall be given no value; and, in the case 

of a put, if the market value of the 

underlying is more than the exercise 

value or striking value of the put, it 

shall be given no value. 

(v)(A) In computing adjusted net 

capital, the capital deductions set forth 

in § 1.17(c)(5)(ii) of this chapter shall 

apply to retail forex transactions other 

than options. The capital deductions 

which apply are six percent for net 

positions in Euros, British pounds, 

Canadian dollars, Japanese yen, or 

Swiss francs and 20 percent for net 

positions in all other foreign currencies, 

Provided, however, That there shall be 

no capital deductions for retail forex 

transactions covered (as defined in 

§ 1.17(j) of this chapter) by the applicant 

or registrant by open futures contracts to 

the extent such futures contracts are not 

otherwise designated as cover for any 

other net capital purposes. For purposes 

of this paragraph (b)(2)(v)(A), such retail 

forex transactions shall be treated as if 

they were inventory and cover were 

therefore applicable. A retail foreign 

exchange dealer or futures commission 

merchant may not use an affiliate 

(unless approved by the firm’s 

designated self-regulatory organization) 

or any person that is considered 

unregulated under the rules of the firm’s 

designated self-regulatory organization 

to cover its currency positions for 

purposes of this section. 

(B) In computing adjusted net capital, 

the capital deductions set forth in 

§ 1.17(c)(5)(vi) of this chapter shall 

apply to all retail forex transactions that 

are options. 

(C) For the purpose of applying 

capital deductions on open proprietary 

futures positions under § 1.17(c)(5)(x) of 

this chapter, net or individual positions 

in retail forex transactions shall not 

constitute cover under § 1.17(j) for the 

purpose of applying such charges. 

(c) An applicant or registrant must 

prepare, and keep current, ledgers or 

other similar records which show or 

summarize, with appropriate references 

to supporting documents, each 

transaction affecting the applicant’s or 

registrant’s asset, liability, income, 

expense and capital accounts, and in 

which (except as otherwise permitted in 

writing by the Commission) all the 

applicant’s or registrant’s asset, liability 

and capital accounts are classified into 

the account classification subdivisions 

specified on Form 1–FR–FCM. Each 

applicant or registrant shall prepare and 

keep current such records. 

(d) An applicant or registrant must 

make and keep as a record in 

accordance with § 5.14 of this part 

formal computations of its adjusted net 

capital and of its minimum financial 

requirements pursuant to this section as 

of the close of business each month and 

on other such dates called for by the 

Commission, the National Futures 

Association, or another self-regulatory 

organization of which the firm is a 

member. Such computations must be 

completed and made available for 

inspection by any representative of the 

Commission, the National Futures 

Association, a self-regulatory 

organization of which the firm is a 

member, or the United States 

Department of Justice commencing the 

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55438 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

first month-end after the date the 

application for registration is filed. 

§ 5.8 Aggregate retail forex assets. 

(a) Each retail foreign exchange dealer 

and futures commission merchant 

offering or engaging in retail forex 

transactions shall calculate its total 

retail forex obligation and shall at all 

times hold assets solely of the type 

permissible under § 1.25 of this chapter 

equal to or in excess of the total retail 

forex obligation at one or more 

qualifying institutions in the United 

States or money center countries as 

defined in § 1.49 of this chapter. 

(b) For assets held in the United 

States, a qualifying institution is: 

(1) A bank or trust company regulated 

by a United States banking regulator; 

(2) A broker-dealer registered with the 

Securities and Exchange Commission 

and a member of the Financial Industry 

Regulatory Authority; or 

(3) A futures commission merchant 

registered with the Commission and a 

member of the National Futures 

Association. 

(c) For assets held in a money center 

country, a qualifying institution is: 

(1) A bank or trust company regulated 

in a money center country, Provided 

that the bank or trust company has 

regulatory capital in excess of $1 billion; 

(2) An entity regulated in a money 

center country as an equivalent of a 

broker-dealer or futures commission 

merchant as determined by the retail 

foreign exchange dealer’s or futures 

commission merchant’s designated selfregulatory organization, Provided that 

the entity maintains regulatory capital 

in excess of $100 million; or 

(3) A futures commission merchant 

registered with the Commission and a 

member of the National Futures 

Association. 

(d) Assets held in a money center 

country are not eligible to meet the 

requirements of paragraph (a) of this 

section unless the retail foreign 

exchange dealer or futures commission 

merchant has entered into an agreement 

that is acceptable to the firm’s 

designated self-regulatory organization 

and that authorizes the qualifying 

institution to provide account 

information to the Commission and the 

firm’s designated self-regulatory 

organization. 

(e) In computing its adjusted net 

capital pursuant to § 5.7 of this part, a 

retail foreign exchange dealer or futures 

commission merchant may not include 

aggregate retail forex assets as current 

assets or otherwise record any property 

received from retail forex customers as 

an asset without recording a 

corresponding liability to the retail forex 

customers. 

§ 5.9 Security deposits for retail forex 

transactions. 

(a) Each futures commission merchant 

engaging, or offering to engage, in retail 

forex transactions and each retail 

foreign exchange dealer must collect 

from each retail forex customer a 

minimum security deposit for each 

retail forex transaction equal to the 

applicable percentage as set by the 

registered futures association of which 

they are a member; Provided, that the 

registered futures association’s security 

deposit requirement cannot be less than: 

(1) 2% of the notional value of the 

retail forex transaction for major 

currency pairs and 5% of the notional 

value of the retail forex transaction for 

all other currency pairs; 

(2) For short options, 2% for major 

currency pairs and 5% for all other 

currency pairs of the notional value of 

the retail forex transaction, plus the 

premium received by the retail forex 

customer; or 

(3) For long options, the full premium 

charged and received by the futures 

commission merchant or retail foreign 

exchange dealer from the retail forex 

customer. 

(b) Security deposits must be made in 

the form of cash or other financial 

instruments that comply with the 

requirements specified in § 1.25 of this 

chapter. 

(c) A futures commission merchant or 

retail foreign exchange dealer is 

required to collect additional security 

deposits from a retail forex customer, or 

liquidate the retail forex customer’s 

positions, if the amount of the retail 

forex customer’s security deposits 

maintained with the futures commission 

merchant or retail foreign exchange 

dealer are not sufficient to meet the 

requirements of this section. 

(d) A major currency pair security 

deposit percentage is only applicable 

when both sides of a retail over-thecounter foreign exchange transaction 

involve major currencies. 

(e) Any registered futures association 

whose members serve as counterparties 

to retail forex transaction shall designate 

which currencies are ‘‘major currencies’’, 

and shall review, no less frequently than 

annually, major currency designations 

and security deposit requirements, and 

shall adjust the designations and 

requirements as necessary. 

§ 5.10 Risk assessment recordkeeping 

requirements for retail foreign exchange 

dealers. 

(a) Requirement to maintain and 

preserve information. (1) Each retail 

foreign exchange dealer registered with 

the Commission pursuant to section 

2(c)(2)(B)(i)(II)(gg) of the Act shall 

prepare, maintain and preserve the 

following information: 

(i) An organizational chart which 

includes the retail foreign exchange 

dealer and each of its affiliated persons. 

Included in the organizational chart 

shall be a designation of which affiliated 

persons are ‘‘Material Affiliated Persons’’ 

as that term is used in paragraph (a)(2) 

of this section, which Material Affiliated 

Persons file routine financial or risk 

exposure reports with the Securities and 

Exchange Commission, a federal 

banking agency, an insurance 

commissioner or other similar official or 

agency of a state, or a foreign regulatory 

authority, and which Material Affiliated 

Persons are dealers in financial 

instruments with off-balance sheet risk 

and, if a Material Affiliated Person is 

such a dealer, whether it is also an enduser of such instruments; 

(ii) Written policies, procedures, or 

systems concerning the retail foreign 

exchange dealer’s: 

(A) Method(s) for monitoring and 

controlling financial and operational 

risks to it resulting from the activities of 

any of its affiliated persons; 

(B) Financing and capital adequacy, 

including information regarding sources 

of funding, together with a narrative 

discussion by management of the 

liquidity of the material assets of the 

retail foreign exchange dealer, the 

structure of debt capital, and sources of 

alternative funding; 

(C) Establishing and maintaining 

internal controls with respect to market 

risk, credit risk, and other risks created 

by the retail foreign exchange dealer’s 

trading activities, including systems and 

policies for supervising, monitoring, 

reporting and reviewing trading 

activities in forex transactions, 

securities, futures contracts, commodity 

options, forward contracts and financial 

instruments; policies for hedging or 

managing risks created by trading 

activities or supervising accounts 

carried for affiliates, including a 

description of the types of reviews 

conducted to monitor positions; and 

policies relating to restrictions or 

limitations on trading activities: 

Provided, however, that if the retail 

foreign exchange dealer has no such 

written policies, procedures or systems, 

it must so state in writing; 

(iii) Fiscal year-end consolidated and 

consolidating balance sheets for the 

highest level Material Affiliated Person 

within the retail foreign exchange 

dealer’s organizational structure, which 

shall include the retail foreign exchange 

dealer and its other Material Affiliated 

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Persons, prepared in accordance with 

generally accepted accounting 

principles, which consolidated balance 

sheets shall be audited by an 

independent certified public accountant 

if an annual audit is performed in the 

ordinary course of business, but which 

otherwise may be unaudited, and which 

shall include appropriate explanatory 

notes. The consolidating balance sheets 

may be those prepared by the retail 

foreign exchange dealer’s highest level 

Material Affiliated Person as part of its 

internal financial reporting process. Any 

additional information required to be 

filed under § 5.11(a)(2)(iii) of this part 

shall also be maintained and preserved; 

and 

(iv) Fiscal year-end consolidated and 

consolidating income statements and 

consolidated cash flow statements for 

the highest level Material Affiliated 

Person within the retail foreign 

exchange dealer’s organizational 

structure, which shall include the retail 

foreign exchange dealer and its other 

Material Affiliated Persons, prepared in 

accordance with generally accepted 

accounting principles, which 

consolidated statements shall be audited 

by an independent certified public 

accountant if an annual audit is 

performed in the ordinary course of 

business, but which otherwise may be 

unaudited, and which shall include 

appropriate explanatory notes. The 

consolidating statements may be those 

prepared by the retail foreign exchange 

dealer’s highest level Material Affiliated 

Person as part of its internal financial 

reporting process. Any additional 

information required to be filed under 

§ 5.11(a)(2)(iii) shall also be maintained 

and preserved. 

(2) The determination of whether an 

affiliated person of a retail foreign 

exchange dealer is a Material Affiliated 

Person shall involve consideration of all 

aspects of the activities of, and the 

relationship between, both entities, 

including without limitation, the 

following factors: 

(i) The legal relationship between the 

retail foreign exchange dealer and the 

affiliated person; 

(ii) The overall financing 

requirements of the retail foreign 

exchange dealer and the affiliated 

person, and the degree, if any, to which 

the retail foreign exchange dealer and 

the affiliated person are financially 

dependent on each other; 

(iii) The degree to which the retail 

foreign exchange dealer and the 

affiliated person directly or indirectly 

engage in over-the-counter transactions 

with each other; 

(iv) The degree, if any, to which the 

retail foreign exchange dealer or its 

customers rely on the affiliated person 

for operational support or services in 

connection with the retail foreign 

exchange dealer’s business; 

(v) The level of market, credit or other 

risk present in the activities of the 

affiliated person; and 

(vi) The extent to which the affiliated 

person has the authority or the ability to 

cause a withdrawal of capital from the 

retail foreign exchange dealer. 

(3) For purposes of this section and 

§ 5.11 of this part, the term Material 

Affiliated Person does not include a 

natural person. 

(4) The information, reports and 

records required by this section shall be 

maintained and preserved, and made 

readily available for inspection, in 

accordance with the provisions of § 1.31 

of this chapter. 

(b) Special provisions with respect to 

Material Affiliated Persons subject to 

the supervision of certain domestic 

regulators. A retail foreign exchange 

dealer shall be deemed to be in 

compliance with the recordkeeping 

requirements of paragraphs (a)(1)(i), (iii) 

and (iv) of this section with respect to 

a Material Affiliated Person if: 

(1) The Material Affiliated Person is 

required to maintain and preserve 

information pursuant to § 240.17h–1T of 

this title, or such other risk assessment 

regulations as the Securities and 

Exchange Commission may adopt, and 

the retail foreign exchange dealer 

maintains and makes available for 

inspection by the Commission in 

accordance with the provisions of this 

section copies of the records and reports 

maintained and filed on Form 17–H (or 

such other forms or reports as may be 

required) by the Material Affiliated 

Person with the Securities and 

Exchange Commission pursuant to 

§§ 240.17h–1T and 240.17h–2T of this 

title, or such other risk assessment 

regulations as the Securities and 

Exchange Commission may adopt; 

(2) In the case of a Material Affiliated 

Person (including a foreign banking 

organization) that is subject to 

examination by, or the reporting 

requirements of, a Federal banking 

agency, the retail foreign exchange 

dealer or such Material Affiliated Person 

maintains and makes available for 

inspection by the Commission in 

accordance with the provisions of this 

section copies of all reports submitted 

by such Material Associated Person to 

the Federal banking agency pursuant to 

section 5211 of the Revised Statutes, 

section 9 of the Federal Reserve Act, 

section 7(a) of the Federal Deposit 

Insurance Act, section 10(b) of the 

Home Owners’ Loan Act, or section 5 of 

the Bank Holding Company Act of 1956; 

or 

(3) In the case of a Material Affiliated 

Person that is subject to the supervision 

of an insurance commissioner or other 

similar official or agency of a state, the 

retail foreign exchange dealer or such 

Material Affiliated Person maintains 

and makes available for inspection by 

the Commission in accordance with the 

provisions of this section copies of the 

annual statements with schedules and 

exhibits prepared by the Material 

Affiliated Person on forms prescribed by 

the National Association of Insurance 

Commissioners or by a state insurance 

commissioner. 

(c)(1) Special provisions with respect 

to Material Affiliated Persons subject to 

the supervision of a Foreign Regulatory 

Authority. A retail foreign exchange 

dealer shall be deemed to be in 

compliance with the recordkeeping 

requirements of paragraphs (a)(1)(iii) 

and (iv) of this section with respect to 

a Material Affiliated Person if such 

retail foreign exchange dealer maintains 

and makes available, or causes such 

Material Affiliated Person to make 

available, for inspection by the 

Commission in accordance with the 

provisions of this section copies of any 

financial or risk exposure reports filed 

by such Material Affiliated Person with 

a foreign futures authority or other 

foreign regulatory authority, provided 

that: 

(i) The retail foreign exchange dealer 

agrees to use its best efforts to obtain 

from the Material Affiliated Person and 

to cause the Material Affiliated Person 

to provide, directly or through its 

foreign futures authority or other foreign 

regulatory authority, any supplemental 

information the Commission may 

request and there is no statute or other 

bar in the foreign jurisdiction that 

would preclude the retail foreign 

exchange dealer, the Material Affiliated 

Person, the foreign futures authority or 

other foreign regulatory authority from 

providing such information to the 

Commission; or 

(ii) The foreign futures authority or 

other foreign regulatory authority with 

whom the Material Affiliated Person 

files such reports has entered into an 

information-sharing agreement with the 

Commission which is in effect as of the 

retail foreign exchange dealer’s fiscal 

year-end and which will allow the 

Commission to obtain the type of 

information required herein. 

(2) The retail foreign exchange dealer 

shall maintain a copy of the original 

report and a copy translated into the 

English language. For the purposes of 

this section, the term ‘‘Foreign Futures 

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Authority’’ shall have the meaning set 

forth in section 1a(10) of the Act. 

(d) Exemptions. The Commission may 

exempt any retail foreign exchange 

dealer from any provision of this section 

if it finds that the exemption is not 

contrary to the public interest and the 

purposes of the provisions from which 

the exemption is sought. The 

Commission may grant the exemption 

subject to such terms and conditions as 

it may find appropriate. 

(e) Location of records. A retail 

foreign exchange dealer required to 

maintain records concerning Material 

Affiliated Persons pursuant to this 

section may maintain those records 

either at the principal office of the 

Material Affiliated Person or at a records 

storage facility, provided that, except as 

set forth in paragraph (c) of this section, 

the records are located within the 

boundaries of the United States and the 

records are kept and available for 

inspection in accordance with § 1.31 of 

this chapter. If such records are 

maintained at a place other than the 

retail foreign exchange dealer’s 

principal place of business, the Material 

Affiliated Person or other entity 

maintaining the records shall file with 

the Commission a written undertaking, 

in a form acceptable to the Commission, 

signed by a duly authorized person, to 

the effect that the records will be treated 

as if the retail foreign exchange dealer 

were maintaining the records pursuant 

to this section and that the entity 

maintaining the records will permit 

examination of such records at any time, 

or from time to time during business 

hours, by representatives or designees of 

the Commission and promptly furnish 

the Commission representative or its 

designee true, correct, complete and 

current hard copy of all or any part of 

such records. The election to maintain 

records at the principal place of 

business of the Material Affiliated 

Person or at a records storage facility 

pursuant to the provisions of this 

paragraph shall not relieve the retail 

foreign exchange dealer required to 

maintain and preserve such records 

from any of its responsibilities under 

this section or § 5.11 of this part. 

(f) Confidentiality. All information 

obtained by the Commission pursuant to 

the provisions of this section from a 

retail foreign exchange dealer 

concerning a Material Affiliated Person 

shall be deemed confidential 

information for the purposes of section 

8 of the Act. 

(g) Implementation schedule. Each 

retail foreign exchange dealer who is 

subject to the requirements of this 

section shall maintain and preserve the 

information required by paragraphs 

(a)(1)(i) and (ii) of this section 

commencing 60 calendar days after 

registration becomes effective and the 

information required by paragraphs 

(a)(1)(iii) and (iv) of this section 

commencing 105 calendar days 

following the first fiscal year-end 

occurring after registration becomes 

effective. 

§ 5.11 Risk assessment reporting 

requirements for retail foreign exchange 

dealers. 

(a) Reporting requirements with 

respect to information required to be 

maintained by § 5.10 of this part. (1) 

Each retail foreign exchange dealer 

registered with the Commission 

pursuant to Section 2(c)(2)(B)(i)(II)(gg) 

of the Act shall file the following with 

the regional office of the Commission 

with which it files periodic financial 

reports within 60 calendar days after the 

effective date of such registration: 

(i) A copy of the organizational chart 

maintained by the retail foreign 

exchange dealer pursuant to 

§ 5.10(a)(l)(i) of this part. Where there is 

a material change in information 

provided, an updated organizational 

chart shall be filed within sixty calendar 

days after the end of the fiscal quarter 

in which the change has occurred; and 

(ii) Copies of the financial, 

operational, and risk management 

policies, procedures and systems 

maintained by the retail foreign 

exchange dealer pursuant to 

§ 5.10(a)(l)(ii) of this part. If the retail 

foreign exchange dealer has no such 

written policies, procedures or systems, 

it must file a statement so indicating. 

Where there is a material change in 

information provided, such change shall 

be reported within sixty calendar days 

after the end of the fiscal quarter in 

which the change has occurred. 

(2) Each retail foreign exchange dealer 

registered with the Commission 

pursuant to section 2(c)(2)(B)(i)(II)(gg) of 

the Act shall file the following with the 

regional office with which it files 

periodic financial reports within 105 

calendar days after the end of each fiscal 

year or, if a filing is made pursuant to 

a written notice issued under paragraph 

(a)(2)(iii) of this section, within the time 

period specified in the written notice: 

(i) Fiscal year-end consolidated and 

consolidating balance sheets for the 

highest level Material Affiliated Person 

within the retail foreign exchange 

dealer’s organizational structure, which 

shall include the retail foreign exchange 

dealer and its other Material Affiliated 

Persons, prepared in accordance with 

generally accepted accounting 

principles, which consolidated balance 

sheets shall be audited by an 

independent certified public accountant 

if an annual audit is performed in the 

ordinary course of business, but which 

otherwise may be unaudited, and which 

consolidated balance sheets shall 

include appropriate explanatory notes. 

The consolidating balance sheets may 

be those prepared by the retail foreign 

exchange dealer’s highest level Material 

Affiliated Person as part of its internal 

financial reporting process; 

(ii) Fiscal year-end annual 

consolidated and consolidating income 

statements and consolidated cash flow 

statements for the highest level Material 

Affiliated Person within the retail 

foreign exchange dealer’s organizational 

structure, which shall include the retail 

foreign exchange dealer and its other 

Material Affiliated Persons, prepared in 

accordance with generally accepted 

accounting principles, which 

consolidated statements shall be audited 

by an independent certified public 

accountant if an annual audit is 

performed in the ordinary course of 

business, but which otherwise may be 

unaudited, and which consolidated 

statements shall include appropriate 

explanatory notes. The consolidating 

statements may be those prepared by the 

retail foreign exchange dealer’s highest 

level Material Affiliated Person as part 

of its internal financial reporting 

process; and 

(iii) Upon receiving written notice 

from any representative of the 

Commission and within the time period 

specified in the written notice, such 

additional information which the 

Commission determines is necessary for 

a complete understanding of a particular 

affiliate’s financial impact on the retail 

foreign exchange dealer’s organizational 

structure. 

(3) For the purposes of this section, 

the term Material Affiliated Person shall 

have the meaning used in § 5.10 of this 

part. 

(4) The reports required to be filed 

pursuant to paragraphs (a)(1) and (2) of 

this section shall be considered filed 

when received by the regional office of 

the Commission with whom the retail 

foreign exchange dealer files financial 

reports pursuant to § 5.12 of this part. 

(b) Exemptions. The Commission may 

exempt any retail foreign exchange 

dealer from any provision of this section 

if it finds that the exemption is not 

contrary to the public interest and the 

purposes of the provisions from which 

the exemption is sought. The 

Commission may grant the exemption 

subject to such terms and conditions as 

it may find appropriate. 

(c) Special provisions with respect to 

Material Affiliated Persons subject to 

the supervision of certain domestic 

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regulators. (1) In the case of a Material 

Affiliated Person that is required to 

maintain and preserve information 

pursuant to § 240.17h–1T of this title, or 

such other risk assessment regulations 

as the Securities and Exchange 

Commission may adopt, the retail 

foreign exchange dealer shall be deemed 

to be in compliance with the reporting 

requirements of paragraph (a)(2) of this 

section with respect to such Material 

Affiliated Person if the retail foreign 

exchange dealer maintains and makes 

available for inspection by the 

Commission in accordance with the 

provisions of this section copies of the 

records and reports maintained and 

filed on Form 17–H (or such other forms 

or reports as may be required) by the 

Material Affiliated Person with the 

Securities and Exchange Commission 

pursuant to §§ 240.17h–1T and 

240.17h–2T of this title, or such other 

risk assessment regulations as the 

Securities and Exchange Commission 

may adopt; 

(2) In the case of a Material Affiliated 

Person (including a foreign banking 

organization) that is subject to 

examination by, or the reporting 

requirements of, a Federal banking 

agency, the retail foreign exchange 

dealer shall be deemed to be in 

compliance with the reporting 

requirements of paragraph (a)(2) of this 

section with respect to such Material 

Affiliated Person if the retail foreign 

exchange dealer or such Material 

Affiliated Person maintains in 

accordance with § 5.10 of this part 

copies of all reports filed by the Material 

Affiliated Person with the Federal 

banking agency pursuant to section 

5211 of the Revised Statutes, section 9 

of the Federal Reserve Act, section 7(a) 

of the Federal Deposit Insurance Act, 

section 10(b) of the Home Owners’ Loan 

Act, or section 5 of the Bank Holding 

Company Act of 1956. 

(3) In the case of a retail foreign 

exchange dealer that has a Material 

Affiliated Person that is subject to the 

supervision of an insurance 

commissioner or other similar official or 

agency of a state, such retail foreign 

exchange dealer shall be deemed to be 

in compliance with the reporting 

requirements of paragraph (a)(2) of this 

section with respect to the Material 

Affiliated Person if: 

(i) With respect to a Material 

Affiliated Person organized as a mutual 

insurance company or a non-public 

stock company, the retail foreign 

exchange dealer or such Material 

Affiliated Person maintains in 

accordance with § 5.14 of this part 

copies of the annual statements with 

schedules and exhibits prepared by the 

Material Affiliated Person on forms 

prescribed by the National Association 

of Insurance Commissioners or by a 

state insurance commissioner; and 

(ii) With respect to a Material 

Affiliated Person organized as a public 

stock company, the retail foreign 

exchange dealer or such Material 

Affiliated Person maintains, in addition 

to the annual statements with schedules 

and exhibits required to be maintained 

pursuant to § 1.14 of this chapter, copies 

of the filings made by the Material 

Affiliated Person pursuant to sections 

13 or 15 of the Securities Exchange Act 

of 1934 and the Investment Company 

Act of 1940. 

(4) No retail foreign exchange dealer 

shall be required to furnish to the 

Commission any examination report of 

any Federal banking agency or any 

supervisory recommendations or 

analyses contained therein with respect 

to a Material Affiliated Person that is 

subject to the regulation of a Federal 

banking agency. All information 

received by the Commission pursuant to 

this section concerning a Material 

Affiliated Person that is subject to 

examination by or the reporting 

requirements of a Federal banking 

agency shall be deemed confidential for 

the purposes of section 8 of the Act. 

(5) The furnishing of any information 

or documents by a retail foreign 

exchange dealer pursuant to this section 

shall not constitute an admission for 

any purpose that a Material Affiliated 

Person is otherwise subject to the Act. 

(d) Special provisions with respect to 

Material Affiliated Persons subject to 

the supervision of a Foreign Regulatory 

Authority. A retail foreign exchange 

dealer shall be deemed to be in 

compliance with the reporting 

requirements of paragraph (a)(2) of this 

section with respect to a Material 

Affiliated Person if such retail foreign 

exchange dealer furnishes, or causes 

such Material Affiliated Person to make 

available, in accordance with the 

provisions of this section, copies of any 

financial or risk exposure reports filed 

by such Material Affiliated Person with 

a foreign futures authority or other 

foreign regulatory authority, provided 

that: 

(1) The retail foreign exchange dealer 

agrees to use its best efforts to obtain 

from the Material Affiliated Person and 

to cause the Material Affiliated Person 

to provide, directly or through its 

foreign futures authority or other foreign 

regulatory authority, any supplemental 

information the Commission may 

request and there is no statute or other 

bar in the foreign jurisdiction that 

would preclude the retail foreign 

exchange dealer, the Material Affiliated 

Person, the foreign futures authority or 

other foreign regulatory authority from 

providing such information to the 

Commission; or 

(2) The foreign futures authority or 

other foreign regulatory authority with 

whom the Material Affiliated Person 

files such reports has entered into an 

information sharing agreement with the 

Commission which is in effect as of the 

retail foreign exchange dealer’s fiscal 

year-end and which will allow the 

Commission to obtain the type of 

information required herein. The retail 

foreign exchange dealer shall file a copy 

of the original report and a copy 

translated into the English language. For 

the purposes of this section, the term 

‘‘Foreign Futures Authority’’ shall have 

the meaning set forth in section 1a(10) 

of the Act. 

(e) Confidentiality. All information 

obtained by the Commission pursuant to 

the provisions of this section from a 

retail foreign exchange dealer 

concerning a Material Associated Person 

shall be deemed confidential 

information for the purposes of section 

8 of the Act. 

(f) Implementation schedule. Each 

retail foreign exchange dealer who is 

subject to the requirements of this 

section shall file the information 

required by paragraph (a)(1) of this 

section within 60 calendar days after 

registration is granted, and the 

information required by paragraph (a)(2) 

of this section within 105 calendar days 

after registration is granted. 

§ 5.12 Financial reports of retail foreign 

exchange dealers. 

(a)(1) Each person who files an 

application for registration as a retail 

foreign exchange dealer with the 

National Futures Association shall 

submit, concurrently with the filing of 

such application, either: 

(i) A Form 1–FR–FCM certified by an 

independent public accountant as of a 

date not more than 45 days prior to the 

date on which such report is filed; or 

(ii) A Form 1–FR–FCM as of a date 

not more than 17 business days prior to 

the date on which such report is filed 

and a Form 1–FR–FCM certified by an 

independent public accountant as of a 

date not more than one year prior to the 

date on which such report is filed. 

(2) Each such person must include 

with such financial report a statement 

describing the source of his current 

assets and representing that his capital 

has been contributed for the purpose of 

operating his business and will continue 

to be used for such purpose. 

(3) The provisions of paragraph (a)(1) 

of this section do not apply to any 

person succeeding to and continuing the 

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business of another retail foreign 

exchange dealer. 

(b)(1) Each person registered as a 

retail foreign exchange dealer must file 

a Form 1–FR–FCM as of the close of 

business each month. Each Form 1–FR 

must be filed no later than 17 business 

days after the date for which the report 

is made. 

(2) In addition to the monthly 

financial reports required by paragraph 

(b)(1) of this section, each person 

registered as a retail foreign exchange 

dealer must file a Form 1–FR–FCM as of 

the close of its fiscal year, which must 

be certified by an independent public 

accountant and must be filed no later 

than 90 days after the close of the retail 

foreign exchange dealer’s fiscal year. 

(3) A Form 1–FR–FCM required to be 

certified by an independent public 

accountant which is filed by a retail 

foreign exchange dealer must be filed in 

paper form and may not be filed 

electronically with the Commission. A 

Form 1–FR–FCM required to be certified 

by an independent public accountant 

which is filed by an applicant for 

registration as a retail foreign exchange 

dealer with the National Futures 

Association must be filed electronically 

in accordance with electronic filing 

procedures established by the National 

Futures Association, however a paper 

copy of any such filing with the original 

manually signed certification must be 

maintained by the applicant for 

registration as a retail foreign exchange 

dealer in accordance with § 1.31. 

(c) Each Form 1–FR–FCM required by 

the provisions of paragraphs (a)(1) and 

(b)(2) of this section to be certified by 

an independent public accountant must 

be certified in accordance with § 1.16 of 

this chapter, and must be accompanied 

by the accountant’s report on material 

inadequacies in accordance with the 

provisions of § 1.16(c)(5) of this chapter. 

In all other respects, the independent 

public accountant shall act in 

accordance with the provisions of § 1.16 

(except paragraph (f)) of this chapter: 

Provided, however, that the term ‘‘§ 5.7’’ 

shall be substituted for the term ‘‘§ 1.17,’’ 

and the term ‘‘retail foreign exchange 

dealer’’ shall be substituted for the term 

‘‘futures commission merchant.’’ 

(d) Upon receiving written notice 

from any representative of the 

Commission, National Futures 

Association, or any self-regulatory 

organization of which the firm is a 

member, a retail foreign exchange dealer 

or applicant for such registration, must, 

monthly or at such times as specified, 

furnish the Commission, National 

Futures Association, or self-regulatory 

organization a Form 1–FR–FCM or such 

other financial information requested in 

the written notice. Each such Form 

1–FR–FCM or such other information 

must be furnished within the time 

period specified in the written notice, 

and in accordance with the provisions 

of paragraph (i) of this section. 

(e)(1) Each Form 1–FR–FCM filed 

pursuant to this § 5.12 which is not 

required to be certified by an 

independent public accountant must be 

completed in accordance with the 

instructions to the form and contain: 

(i) A statement of financial condition 

as of the date for which the report is 

made; 

(ii) A statement of income (loss) for 

the period between the date of the most 

recent statement of financial condition 

filed with the Commission and the date 

for which the report is made; 

(iii) A statement of changes in 

ownership equity for the period 

between the date of the most recent 

statement of financial condition filed 

with the Commission and the date for 

which the report is made; 

(iv) A statement of changes in 

liabilities subordinated to claims of 

general creditors for the period between 

the date of the most recent statement of 

financial condition filed with the 

Commission and the date for which the 

report is made; 

(v) A statement of the computation of 

the minimum capital requirements 

pursuant to § 5.7 of this part as of the 

date for which the report is made; and 

(vi) In addition to the information 

expressly required, such further 

material information as may be 

necessary to make the required 

statements and schedules not 

misleading. 

(2) Each Form 1–FR–FCM filed 

pursuant to this § 5.12 which is required 

to be certified by an independent public 

accountant must be completed in 

accordance with the instructions to the 

form and contain: 

(i) A statement of financial condition 

as of the date for which the report is 

made; 

(ii) Statements of income (loss), cash 

flows, changes in ownership equity, and 

changes in liabilities subordinated to 

claims of general creditors, for the 

period between the date of the most 

recent certified statement of financial 

condition filed with the Commission 

and the date for which the report is 

made: Provided, That for an applicant 

filing pursuant to paragraph (a) of this 

section the period must be the year 

ending as of the date of the statement of 

financial condition; 

(iii) A statement of the computation of 

the minimum capital requirements 

pursuant to § 5.7 of this part as of the 

date for which the report is made; 

(iv) Appropriate footnote disclosures; 

(v) A reconciliation, including 

appropriate explanations, of the 

statement of the computation of the 

minimum capital requirements pursuant 

to § 5.7 of this part, in the certified Form 

1–FR–FCM with the applicant’s or 

registrant’s corresponding uncertified 

most recent Form 1–FR–FCM filing 

when material differences exist or, if no 

material differences exist, a statement so 

indicating; and 

(vi) In addition to the information 

expressly required, such further 

material information as may be 

necessary to make the required 

statements not misleading. 

(3) The statements required by 

paragraphs (e)(2)(i) and (ii) of this 

section may be presented in accordance 

with generally accepted accounting 

principles in the certified reports filed 

as of the close of the registrant’s fiscal 

year pursuant to paragraph (b)(2) of this 

section or accompanying the application 

for registration pursuant to paragraph 

(a)(1) of this section, rather than in the 

format specifically prescribed by these 

regulations: Provided, the statement of 

financial condition is presented in a 

format as consistent as possible with the 

Form 1–FR–FCM and a reconciliation is 

provided reconciling such statement of 

financial condition to the statement of 

the computation of the minimum capital 

requirements pursuant to § 5.7 of this 

part. Such reconciliation must be 

certified by an independent public 

accountant in accordance with § 1.16 of 

this chapter. 

(4) Attached to each Form 1–FR–FCM 

filed pursuant to this section must be an 

oath or affirmation that to the best 

knowledge and belief of the individual 

making such oath or affirmation the 

information contained in the Form 

1–FR–FCM is true and correct. The 

individual making such oath or 

affirmation must be: If the registrant or 

applicant is a sole proprietorship, the 

proprietor; if a partnership, any general 

partner; if a corporation, the chief 

executive officer or chief financial 

officer; and, if a limited liability 

company or limited liability 

partnership, the chief executive officer, 

the chief financial officer, the manager, 

the managing member, or those 

members vested with the management 

authority for the limited liability 

company or limited liability 

partnership. 

(f) Election of fiscal year. (1) An 

applicant wishing to establish a fiscal 

year other than the calendar year may 

do so by notifying the National Futures 

Association of its election of such fiscal 

year, in writing, concurrently with the 

filing of the Form 1–FR–FCM pursuant 

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to paragraph (a)(1) of this section, but in 

no event may such fiscal year end more 

than one year from the date of the Form 

1–FR–FCM filed pursuant to paragraph 

(a)(1) of this section. An applicant that 

does not so notify the National Futures 

Association will be deemed to have 

elected the calendar year as its fiscal 

year. 

(2)(i) A registrant must continue to 

use its elected fiscal year, calendar or 

otherwise, unless a change in such fiscal 

year has been approved pursuant to this 

paragraph (f)(2). 

(ii) A registrant may file with its 

designated self-regulatory organization 

an application to change its fiscal year, 

a copy of which the registrant must file 

with the Commission. The application 

shall be approved or denied in writing 

by the registrant’s designated selfregulatory organization. The registrant 

must file immediately with the 

Commission a copy of any notice it 

receives from its designated selfregulatory organization to approve or 

deny the registrant’s application to 

change its fiscal year. A written notice 

of approval shall become effective upon 

the filing by the registrant of a copy 

with the Commission, and a written 

notice of denial shall be effective as of 

the date of the notice. 

(g) In the event a retail foreign 

exchange dealer or applicant for 

registration as a retail foreign exchange 

dealer finds that it cannot file its Form 

1–FR–FCM for any period within the 

time specified in paragraph (b)(1) or (2) 

of this section without substantial 

undue hardship, it may request 

approval for an extension of time by 

filing an application for an extension of 

time with, in the case of a registrant, its 

designated self-regulatory organization, 

or, in the case of an applicant, the 

National Futures Association. The 

registrant or applicant also must file a 

copy of its application for an extension 

of time with the Commission. The 

application shall be approved or denied 

in writing by the National Futures 

Association or designated selfregulatory organization, as applicable. 

The registrant or applicant must file 

immediately with the Commission a 

copy of any notice it receives approving 

or denying the request for extension of 

time. A written notice of approval shall 

become effective upon the filing by the 

registrant or applicant of a copy with 

the Commission, and a written notice of 

denial shall be effective as of the date 

of the notice. 

(h) Public availability of reports. (1) 

Forms 1–FR–FCM filed pursuant to this 

section will be treated as exempt from 

mandatory public disclosure for 

purposes of the Freedom of Information 

Act and the Government in the 

Sunshine Act and parts 145 and 147 of 

this chapter, except for the information 

described in paragraph (i)(2) of this 

section. 

(2) The following information in 

Forms 1–FR–FCM will be publicly 

available: 

(i) The amount of the applicant’s or 

registrant’s adjusted net capital; the 

amount of its minimum net capital 

requirement under § 5.7 of this chapter; 

the amount of its adjusted net capital in 

excess of its minimum net capital 

requirement; and the amount of the 

retail forex obligation owed to its retail 

forex customers; and 

(ii) The Statement of Financial 

Condition and the opinion of the 

independent public accountant in the 

certified annual financial reports of 

retail foreign exchange dealers. 

(3) All information that is exempt 

from mandatory public disclosure under 

paragraph (h)(1) of this section will, 

however, be available for official use by 

any official or employee of the United 

States or any State, by the National 

Futures Association or any other selfregulatory organization of which the 

person filing such report is a member, 

and by any other person to whom the 

Commission believes disclosure of such 

information is in the public interest. 

Nothing in this paragraph (h) will limit 

the authority of any self-regulatory 

organization to request or receive any 

information relative to its members’ 

financial condition. 

(i)(1) In the case of an applicant, all 

filings or other notices provided for in 

this section will be considered filed 

when received by the regional office of 

the Commission with jurisdiction over 

the state in which the applicant’s 

principal place of business is located 

and by the National Futures 

Association. In the case of a registrant, 

all filings or other notices provided for 

in this section will be considered filed 

when received by the regional office of 

the Commission with jurisdiction over 

the state in which the registrant’s 

principal place of business is located 

and by the registrant’s designated selfregulatory organization. Any copy that 

under paragraph (f)(2) or (g) of this 

section is required to be filed with the 

Commission shall be filed with the 

regional office of the Commission with 

jurisdiction over the state in which the 

registrant’s principal place of business 

is located. 

(2) All filings or other notices filed 

pursuant to this section which need not 

be certified in accordance with § 1.16 

may be submitted to the Commission in 

electronic form using a a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission, if the retail foreign 

exchange dealer or a designated selfregulatory organization has provided the 

Commission with the means necessary 

to read and to process the information 

contained in such report. Any such 

electronic submission must clearly 

indicate the registrant or applicant on 

whose behalf such filing is made and 

the use of such user authentication in 

submitting such filing will constitute 

and become a substitute for the manual 

signature of the authorized signer. In the 

case of a Form 1–FR filed via electronic 

transmission in accordance with 

procedures established by or approved 

by the Commission, such transmission 

must be accompanied by the user 

authentication assigned to the 

authorized signer under such 

procedures, and the use of such user 

authentication will constitute and 

become a substitute for the manual 

signature of the authorized signer for the 

purpose of making the oath or 

affirmation referred to in paragraph 

(e)(4) of this section. 

§ 5.13 Reporting to customers of retail 

foreign exchange dealers and futures 

commission merchants; monthly and 

confirmation statements. 

(a) Monthly statements. Each retail 

foreign exchange dealer or futures 

commission merchant must promptly 

furnish in writing to each retail forex 

customer, as of the close of the last 

business day of each month or as of any 

regular monthly date selected, except 

for accounts in which there are neither 

open positions at the end of the 

statement period nor any changes to the 

account balance since the prior 

statement period, but in any event not 

less frequently than once every three 

months, a statement which clearly 

shows: 

(1) For each retail forex customer: 

(i) The open retail forex transactions 

with prices at which acquired; 

(ii) The net unrealized profits or 

losses in all open retail forex 

transactions marked to the market; and 

(iii) Any money, securities or other 

property carried with the retail foreign 

exchange dealer or futures commission 

merchant; and 

(iv) A detailed accounting of all 

financial charges and credits to such 

retail forex accounts during the monthly 

reporting period, including money, 

securities or property received from or 

disbursed to such customer and realized 

profits and losses; and 

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(2) For each retail forex customer 

engaging in forex options transactions: 

(i) All forex options purchased, sold, 

exercised, or expired during the 

monthly reporting period, identified by 

underlying retail forex transaction or 

underlying currency, strike price, 

transaction date, and expiration date; 

(ii) The open forex option positions 

carried for such customer as of the end 

of the monthly reporting period, 

identified by underlying retail forex 

transaction or underlying currency, 

strike price, transaction date, and 

expiration date; 

(iii) All open forex option positions 

marked to the market and the amount 

each position is in the money, if any; 

(iv) Any money, securities or other 

property carried with the retail foreign 

exchange dealer or futures commission 

merchant; and 

(v) A detailed accounting of all 

financial charges and credits to such 

retail forex account(s) during the 

monthly reporting period, including 

money, securities and property received 

from or disbursed to such customer, 

premiums charged and received, and 

realized profits and losses. 

(b) Confirmation statement. Each 

retail foreign exchange dealer or futures 

commission merchant must, not later 

than the next business day after any 

retail forex or forex option transaction, 

furnish: 

(1) To each retail forex customer, a 

written confirmation of each retail forex 

transaction caused to be executed by it 

for the customer, including offsetting 

transactions executed during the same 

business day and the rollover of an open 

retail forex transaction to the next 

business day. 

(2) To each retail forex customer 

engaging in forex option transactions, a 

written confirmation of each forex 

option transaction, containing at least 

the following information: 

(i) The retail forex customer’s account 

identification number; 

(ii) A separate listing of the actual 

amount of the premium, as well as each 

mark-up thereon, if applicable, and all 

other commissions, costs, fees and other 

charges incurred in connection with the 

forex option transaction; 

(iii) The strike price; 

(iv) The underlying retail forex 

transaction or underlying currency; 

(v) The final exercise date of the forex 

option purchased or sold; and 

(vi) The date the forex option 

transaction was executed. 

(3) To each retail forex customer 

engaging in forex option transactions, 

upon the expiration or exercise of any 

forex option, a written confirmation 

statement thereof, which statement shall 

include the date of such occurrence, a 

description of the forex option involved, 

and, in the case of exercise, the details 

of the retail forex or physical currency 

position which resulted therefrom 

including, if applicable, the final trading 

date of the retail forex transaction 

underlying the option. 

(4) Notwithstanding the provisions of 

paragraphs (b)(1) through (3) of this 

section, a retail forex transaction or 

forex option transaction that is caused 

to be executed for a pooled investment 

vehicle that engages in retail forex 

transactions need be confirmed only to 

the operator of such pooled investment 

vehicle. 

(c) Controlled accounts. With respect 

to any account controlled by any person 

other than the retail forex customer or 

forex option customer for whom such 

account is carried, each retail foreign 

exchange dealer or futures commission 

merchant shall promptly furnish in 

writing to such other person the 

information required by paragraphs (a) 

and (b) of this section. 

(d) Recordkeeping. Each retail foreign 

exchange dealer or futures commission 

merchant shall retain, in accordance 

with § 1.31 of this chapter, a copy of 

each monthly statement and 

confirmation required by this section. 

(e) Introduced accounts. Each 

statement provided pursuant to the 

provisions of this section must, if 

applicable, show that the account for 

which the retail foreign exchange dealer 

or futures commission merchant is 

providing the statement was introduced 

by an introducing broker and the names 

of the retail foreign exchange dealer or 

futures commission merchant and 

introducing broker. 

(f) Electronic transmission of 

statements. (1) The statements required 

by this section may be furnished to a 

retail forex customer by means of 

electronic media if the retail forex 

customer so consents, Provided, 

however, that a retail foreign exchange 

dealer or futures commission merchant 

must, prior to the transmission of any 

statement by means of electronic media, 

disclose the electronic medium or 

source through which statements will be 

delivered, the duration, whether 

indefinite or not, of the period during 

which consent will be effective, any 

charges for such service, the information 

that will be delivered by such means, 

and that consent to electronic delivery 

may be revoked at any time, and 

provided, further, that a retail foreign 

exchange dealer or futures commission 

merchant must obtain the retail forex 

customer’s signed consent 

acknowledging such disclosure prior to 

the transmission of any statement by 

means of electronic media. 

(2) Any statement required to be 

furnished to a person other than a retail 

forex customer in accordance with 

paragraph (f) of this section may be 

furnished by electronic media. 

(3) A retail foreign exchange dealer or 

futures commission merchant who 

furnishes statements to a retail forex 

customer by means of electronic media 

must retain a daily confirmation 

statement for such retail forex customer 

as of the end of the trading session, 

reflecting all transactions made during 

that session for the customer, in 

accordance with § 1.31 of this chapter. 

(g) Combination with other 

statements. Any futures commission 

merchant required to deliver statements 

to retail forex customers in accordance 

with § 1.33 of this chapter may combine 

into one monthly statement or 

confirmation statement, as the case may 

be, the information required by this 

section and the information required by 

§ 1.33, provided that retail forex account 

information is separately identified from 

any other trading or account activity of 

the retail forex customer. 

§ 5.14 Records to be kept by retail foreign 

exchange dealers and futures commission 

merchants. 

(a) No person shall be registered as a 

retail foreign exchange dealer under the 

Act unless, commencing on the date his 

application for such registration is filed, 

he prepares and keeps current ledgers or 

other similar records which show or 

summarize, with appropriate references 

to supporting documents, each 

transaction affecting his asset, liability, 

income, expense and capital accounts, 

and in which (except as otherwise 

permitted in writing by the 

Commission) all his asset, liability and 

capital accounts are classified into 

either the account classification 

subdivisions specified on Form 1–FR– 

FCM or categories that are in accord 

with generally accepted accounting 

principles as applicable. Each person so 

registered shall prepare and keep 

current such records. 

(b) Each applicant or registrant must 

make and keep as a record in 

accordance with § 1.31 of this chapter 

formal computations of its adjusted net 

capital and of its minimum financial 

requirements pursuant to § 1.17 or § 5.7 

of this chapter, or the requirements of 

the designated self-regulatory 

organization to which it is subject, as 

applicable, as of the close of business 

each month. Such computations must 

be completed and made available for 

inspection by any representative of the 

National Futures Association, in the 

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case of an applicant, or of the 

Commission or designated selfregulatory organization, if any, in the 

case of a registrant, within 17 business 

days after the date for which the 

computations are made, commencing 

the first month end after the date the 

application for registration is filed. 

§ 5.15 Unlawful representations. 

It shall be unlawful for any person 

registered pursuant to the requirements 

of this part to represent or imply in any 

manner whatsoever that such person 

has been sponsored, recommended or 

approved, or that its abilities or 

qualifications have been reviewed or 

evaluated, by the Commission, the 

Federal government or any agency 

thereof. 

§ 5.16 Prohibition of guarantees against 

loss. 

(a) No retail foreign exchange dealer, 

futures commission merchant or 

introducing broker may in any way 

represent that it will, with respect to 

any retail foreign exchange transaction 

in any account carried by a retail foreign 

exchange dealer or futures commission 

merchant for or on behalf of any person: 

(1) Guarantee such person against 

loss; 

(2) Limit the loss of such person; or 

(3) Not call for or attempt to collect 

security deposits, margin, or other 

deposits as established for retail forex 

customers. 

(b) No person may in any way 

represent that a retail foreign exchange 

dealer, futures commission merchant or 

introducing broker will engage in any of 

the acts or practices described in 

paragraph (a) of this section. 

(c) This section shall not be construed 

to prevent a retail foreign exchange 

dealer, futures commission merchant or 

introducing broker from assuming or 

sharing in the losses resulting from an 

error or mishandling of an order. 

(d) This section shall not affect any 

guarantee entered into prior to October 

18, 2010, but this section shall apply to 

any extension, modification or renewal 

thereof entered into after such date. 

§ 5.17 Authorization to trade. 

No retail foreign exchange dealer, 

futures commission merchant, 

introducing broker or any of their 

associated persons may directly or 

indirectly effect a retail forex 

transaction for the account of any 

customer unless before the transaction 

the customer, or person designated by 

the customer to control the account 

specifically authorized the retail foreign 

exchange dealer, futures commission 

merchant, introducing broker or any of 

their associated persons to effect the 

transaction. A transaction is 

‘‘specifically authorized’’ if the customer 

or person designated by the customer to 

control the account specifies: 

(a) The precise retail forex transaction 

to be effected; 

(b) The exact amount of the foreign 

currency to be purchased or sold; and 

(c) In the case of an option, the 

identity of the foreign currency or 

contract that underlies the option. 

§ 5.18 Trading and operational standards. 

(a) For purposes of this section: 

(1) The term retail forex counterparty 

includes, as appropriate: 

(i) A retail foreign exchange dealer as 

defined in § 5.1 of this part; 

(ii) A futures commission merchant as 

defined in section 1a(20) of the Act; and 

(iii) An affiliated person of a futures 

commission merchant as defined in 

§ 5.1 of this part. 

(2) The term related person when 

used in reference to a retail forex 

counterparty means any general partner, 

officer, director, owner of more than ten 

percent of the equity interest, associated 

person or employee of the retail forex 

counterparty, and any relative or spouse 

of any of the foregoing persons, or any 

relative of such spouse, who shares the 

same home as any of the foregoing 

persons. 

(b) Prior to engaging in a retail forex 

transaction, each retail forex 

counterparty shall, at a minimum, 

establish and enforce internal rules, 

procedures and controls to: 

(1) Ensure, to the extent possible, that 

each order received from a retail forex 

customer which order is executable at or 

near the price that the retail forex 

counterparty has quoted to the customer 

is entered for execution before any order 

in any retail forex transaction for any 

proprietary account, any other account 

in which a related person of the retail 

forex counterparty has an interest, or 

any account for which such a related 

person may originate orders without the 

prior specific consent of the account 

owner (if such related person has gained 

knowledge of the retail forex customer’s 

order prior to the transmission of an 

order for a proprietary account), an 

account in which such a related person 

has an interest, or an account in which 

such a related person may originate 

orders without the prior specific 

consent of the account owner; and 

(2) Prevent related persons of forex 

counterparties from placing orders, 

directly or indirectly, with another 

person in a manner designed to 

circumvent the provisions of paragraph 

(b)(1) of this section; 

(3) Fairly and objectively establish 

settlement prices for retail forex 

transactions; and 

(4) Record and maintain essential 

information regarding customer orders 

and account activity, and to provide 

such information to customers upon 

request. Such information shall include: 

(i) Transaction records for the 

customer’s account, including: 

(A) The date and time each order is 

received by the retail forex 

counterparty; 

(B) The price at which each order is 

placed, or, in the case of an option, the 

premium paid 

(C) If the transaction was entered into 

by means of a trading platform, the price 

quoted on the trading platform when the 

order was placed, or, in the case of an 

option, the premium quoted; 

(D) The customer account 

identification information; 

(E) The currency pair; 

(F) The size of the transaction; 

(G) Whether the order was a buy or 

sell order; 

(H) The type of order, if the order was 

not a market order; 

(I) If a trading platform is used, the 

date and time the order is transmitted to 

the trading platform; 

(J) If a trading platform is used, the 

date and time the order is executed; 

(K) The size and price at which the 

order is executed, or in the case of an 

option, the amount of the premium paid 

for each option purchased, or the 

amount credited for each option sold; 

and 

(L) For options, whether the option is 

a put or call, the strike price, and 

expiration date. 

(ii) Account records that contain the 

following information: 

(A) The funds in the account, net of 

any commissions and fees; 

(B) The net profits and losses on open 

trades; and 

(C) The funds in the account plus or 

minus the net profits and losses on open 

trades. (In the case of open option 

positions, the account balance should be 

adjusted for the net option value); 

(iii) If a trading platform is used, daily 

logs showing each price change on the 

platform, the time of the change to the 

nearest second, and the trading volume 

at that time and price; and 

(iv) Any method or algorithm used to 

determine the bid or asked price for any 

retail forex transaction or the prices at 

which customer orders are executed, 

including, but not limited to, any 

markups, fees, commissions or other 

items which affect the profitability or 

risk of loss of a retail forex customer’s 

transaction. 

(c) No retail forex counterparty shall 

disclose that an order of another person 

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is being held by the retail forex 

counterparty, unless such disclosure is 

necessary to the effective execution of 

such order or is made at the request of 

an authorized representative of the 

Commission, or a futures association 

registered with the Commission 

pursuant to section 17 of the Act. 

(d) No retail forex counterparty shall 

knowingly handle the account of any 

related person of another retail forex 

counterparty unless it: 

(1) Receives written authorization 

from a person designated by such other 

retail forex counterparty with 

responsibility for the surveillance over 

such account pursuant to paragraph 

(b)(2) of this section; 

(2) Prepares immediately upon receipt 

of an order for such account a written 

record of such order, including the 

account identification and order 

number, and records thereon to the 

nearest minute, by time-stamp or other 

timing device, the date and time the 

order is received; and 

(3) Transmits on a regular basis to 

such other retail forex counterparty 

copies of all statements for such account 

and of all written records prepared upon 

the receipt of orders for such account 

pursuant to paragraph (b)(2) of this 

section. 

(e) No related person of a retail forex 

counterparty shall have an account, 

directly or indirectly, with another retail 

forex counterparty unless: 

(1) It receives written authorization to 

maintain such an account from a person 

designated by the retail forex 

counterparty of which it is a related 

person with responsibility for the 

surveillance over such account pursuant 

to paragraph (b)(2) of this section; and 

(2) Copies of all statements for such 

account and of all written records 

prepared by such other retail forex 

counterparty upon receipt of orders for 

such account pursuant to paragraph 

(d)(2) of this section are transmitted on 

a regular basis to the retail forex 

counterparty of which it is a related 

person. 

(f) No retail forex counterparty shall: 

(1) Enter into a retail forex 

transaction, to be executed pursuant to 

a market or limit order at a price that is 

not at or near the price at which other 

retail forex customers, during that same 

time period, have executed retail forex 

transactions with the retail forex 

counterparty; Provided, however, that 

this paragraph (f)(1) shall not prohibit 

such practice if done in accordance with 

the rules of a registered futures 

association, and of which such retail 

foreign exchange dealer, futures 

commission merchant or affiliated 

person of a futures commission 

merchant is a member; 

(2) Adjust or alter prices for a retail 

forex transaction after the transaction 

has been confirmed to the retail forex 

customer; Provided, however, that this 

paragraph (f)(2) shall not prohibit such 

practice if in accordance with the rules 

of a registered futures association, and 

of which such retail foreign exchange 

dealer, futures commission merchant or 

affiliated person of a futures 

commission merchant is a member; 

(3)(i) Provide a retail forex customer 

a new bid price for a retail forex 

transaction that is higher than its 

previous bid without providing a new 

asked price that is also higher than its 

previous asked price by a similar 

amount; 

(ii) Provide a retail forex customer a 

new bid price for a retail forex 

transaction that is lower than its 

previous bid without providing a new 

asked price that is also lower than its 

previous asked price by a similar 

amount; or 

(4) Establish a new position for a 

retail forex customer (except one that 

offsets an existing position for that retail 

forex customer) where the retail forex 

counterparty holds outstanding orders 

of other retail forex customers for the 

same currency pair at a comparable 

price. 

(g)(1) Each retail forex counterparty 

and each CPO, CTA and IB subject to 

this Part 5 shall maintain a record of all 

communications received by such 

person concerning facts giving rise to 

possible violations of the Act, rules, 

regulations or orders thereunder, related 

to their retail forex business. The record 

shall contain the name of the 

complainant, if provided, the date of the 

communication, the agreement, contract 

or transaction, the substance of the 

communication, and the name of the 

person who received the 

communication. 

(2) Each retail forex counterparty and 

each CPO, CTA and IB subject to this 

Part 5 shall provide to the Division of 

Enforcement of the Commission, 

electronically, a copy of the record of 

each communication received pursuant 

to paragraph (g)(1) of this section. Such 

copy shall be provided to the Division 

of Enforcement of the Commission no 

later than 30 calendar days after the 

communication is received: Provided, 

however, that in the case of a 

communication concerning facts giving 

rise to possible fraud under the Act or 

Commission regulations, such copy 

shall be provided to the Division of 

Enforcement of the Commission within 

three business days after the 

communication is received. 

(h) An introducing broker as defined 

in § 5.1(f)(1) of this part, applicant for 

registration as an introducing broker as 

defined in § 5.1(f)(1) of this part, or 

person succeeding to and continuing the 

business of another introducing broker 

as defined in § 5.1(f)(1) of this part must 

comply with all provisions applicable to 

an introducing broker under this 

chapter; Provided, however, that an 

introducing broker operating pursuant 

to, or an applicant for registration as an 

introducing broker who has filed 

concurrently with its application for 

registration, a guarantee agreement 

meeting the requirements of § 1.10(j) of 

this chapter is not subject to the 

minimum capital and related financial 

reporting requirements of §§ 1.10, 1.12 

and 1.17 of this chapter. 

(i)(1) Each retail forex counterparty 

shall prepare and maintain on a 

quarterly basis (calendar quarter) a 

calculation of the percentage of 

nondiscretionary retail forex customer 

accounts open for any period of time 

during the quarter that were profitable, 

and the percentage of such accounts that 

were not profitable. In calculating 

whether a retail forex account was 

profitable or not profitable during the 

quarter, the FCM or RFED must 

compute the realized and unrealized 

gains and/or losses on all retail forex 

transactions carried in the retail forex 

account at any time during the quarter, 

and subtract all fees, commissions, and 

any other charges posted to the retail 

forex account during the quarter, and 

add any interest income and other 

income or rebates credited to the retail 

forex account during the quarter. All 

deposits and/or withdrawals of funds 

made by a retail forex customer during 

the quarter must be excluded from the 

computation of whether the retail forex 

account was profitable or not profitable 

during the quarter. Computations that 

result in a zero or negative number shall 

be considered a retail forex account that 

was not profitable. Computations that 

result in a positive number shall be 

considered a retail forex account that 

was profitable. RFEDs and FCMs shall 

maintain such calculations along with 

data supporting such calculations for 

five years in accordance with § 1.31. 

(2) In calculating its percentages of 

nondiscretionary retail forex customer 

accounts that were profitable or not 

profitable, the retail forex counterparty 

may only use those retail forex 

accounts, as defined in § 5.1(i) of this 

part, that are nondiscretionary accounts; 

provided, that the retail forex account is 

not a proprietary account, as defined in 

paragraph (i)(3) of this section. 

(3) Proprietary account for this section 

means a retail forex account carried on 

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the books of a retail foreign exchange 

dealer or a futures commission 

merchant for one of the following 

persons, or of which ten percent or more 

is owned by one of the following 

persons, or of which an aggregate of ten 

percent or more of which is owned by 

more than one of the following persons: 

(i) Such retail foreign exchange dealer 

or futures commission merchant itself; 

(ii) If the retail foreign exchange 

dealer or futures commission merchant 

is a partnership, a general partner in 

such partnership; 

(iii) If the retail foreign exchange 

dealer or futures commission merchant 

is a limited partnership, a limited or 

special partner in such partnership 

whose duties include: 

(A) The management of the 

partnership business or any part thereof, 

(B) The handling of retail forex 

transactions of such partnership, 

(C) The keeping of records pertaining 

to retail forex transactions, or 

(D) The signing or co-signing of 

checks or drafts on behalf of such 

partnership; 

(iv) If the retail foreign exchange 

dealer or futures commission merchant 

is a corporation or association, an 

officer, director or owner of ten percent 

or more of the capital stock, of such 

organization; 

(v) An employee of such retail foreign 

exchange dealer or futures commission 

merchant whose duties include: 

(A) The management of the business 

of such retail foreign exchange dealer or 

futures commission merchant or any 

part thereof, 

(B) The handling of retail forex 

transactions of such retail foreign 

exchange dealer or futures commission 

merchant, 

(C) The keeping of records pertaining 

to retail forex transactions of such retail 

foreign exchange dealer or futures 

commission merchant, or 

(D) The signing or co-signing of 

checks or drafts on behalf of such retail 

foreign exchange dealer or futures 

commission merchant; 

(vi) A spouse or minor dependent 

living in the same household of any of 

the foregoing persons; 

(vii) A business affiliate that directly 

or indirectly controls such retail foreign 

exchange dealer or futures commission 

merchant; or 

(viii) A business affiliate that, directly 

or indirectly is controlled by or is under 

common control with, such retail 

foreign exchange dealer or futures 

commission merchant. 

(j) Each retail forex counterparty shall 

designate one or more principals to 

serve as a chief compliance officer(s). 

The chief compliance officer(s) shall 

certify to the Commission and a 

registered national futures association 

annually that the retail forex 

counterparty has in place processes to 

establish, maintain, review, modify and 

test policies and procedures reasonably 

designed to achieve compliance with 

the Act, rules, regulations and orders 

thereunder. The certification shall 

include a statement that the 

counterparty has in place compliance 

processes, and that the chief compliance 

officer(s) has apprised the chief 

executive officer of the compliance 

efforts to date and identify and address 

significant compliance problems and 

plans to address those problems. 

§ 5.19 Pending legal proceedings. 

(a) Every retail foreign exchange 

dealer or futures commission merchant 

and each CPO, CTA or IB subject to this 

Part 5 shall submit to the Commission 

copies of any dispositive or partially 

dispositive decision for which a notice 

of appeal has been filed, the notice of 

appeal and such further documents as 

the Commission may thereafter request 

filed in any material legal proceeding to 

which the retail foreign exchange 

dealer, futures commission merchant, 

CPO, CTA or IB is a party or to which 

its property or assets is subject with 

respect to retail forex transactions. 

(b) Every retail foreign exchange 

dealer or futures commission merchant 

and each CPO, CTA or IB subject to this 

Part 5 shall submit to the Commission 

copies of any dispositive or partially 

dispositive decision concerning which a 

notice of appeal has been filed, the 

notice of appeal, and such further 

documents as the Commission may 

thereafter request filed in any material 

legal proceeding instituted against any 

person who is a principal of the retail 

foreign exchange dealer, futures 

commission merchant CPO, CTA or IB 

(as the term ‘‘principal’’ is defined in 

§ 3.1(a) of this chapter) arising from 

conduct in such person’s capacity as a 

principal of the retail foreign exchange 

dealer, futures commission merchant, 

CPO, CTA or IB and alleging violations, 

with regard to retail forex transactions, 

of: 

(1) The Act or any rule, regulation, or 

order thereunder; or 

(2) Provisions of state law relating to 

a duty or obligation owed by such a 

principal. 

(c) All documents required by this 

section to be submitted to the 

Commission shall be mailed via firstclass or submitted by other more 

expeditious means to the Commission’s 

headquarters office in Washington, DC, 

Attention: Director, Division of 

Enforcement. All documents required 

by this section to be submitted to the 

Commission as to matters pending on 

October 18, 2010 shall be mailed to the 

Commission within 45 days of that 

effective date. Thereafter, all decisions 

and notices of appeal required to be 

submitted by retail foreign exchange 

dealers, futures commission merchants, 

CPOs, CTAs or IBs shall be mailed 

within 10 days of the filing or receipt by 

the retail foreign exchange dealer or 

futures commission merchant of the 

relevant notice of appeal. For purposes 

of paragraph (a) and (b) of this section, 

a ‘‘material legal proceeding’’ includes 

but is not limited to actions involving 

alleged violations of the Commodity 

Exchange Act or the Commission’s 

regulations. However, a legal proceeding 

is not ‘‘material’’ for the purposes of this 

rule if the proceeding is not in a federal 

or state court or if the Commission is a 

party. 

§ 5.20 Special calls for account and 

transaction information. 

(a) Preparation and transmission of 

information upon special call. All 

information required upon special call 

shall be prepared in such form and 

manner and in accordance with such 

instructions, and shall be transmitted at 

such time and to such office of the 

Commission, as may be specified in the 

call. 

(b) Special calls for information on 

controlled accounts from retail foreign 

exchange dealers, futures commission 

merchants and introducing brokers. 

Upon call by the Commission, each 

retail foreign exchange dealer, futures 

commission merchant and introducing 

broker shall file with the Commission 

the names and addresses of all persons 

who, by power of attorney or otherwise, 

exercise trading control over any 

customer’s account in retail forex 

transactions. 

(c) Special calls for information on 

open transactions in accounts carried or 

introduced by retail foreign exchange 

dealers, futures commission merchants, 

and introducing brokers. Upon special 

call by the Commission for information 

relating to retail forex transactions held 

or introduced on the dates specified in 

the call, each retail foreign exchange 

dealer, futures commission merchant, or 

introducing broker shall furnish to the 

Commission the following information 

concerning accounts of traders owning 

or controlling such retail forex 

transaction positions, as may be 

specified in the call: 

(1) The name, address, and telephone 

number of the person for whom each 

account is carried; 

(2) The principal business or 

occupation of the person for whom each 

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account is introduced or carried, as 

specified in the call; 

(3) The name, address and principal 

business or occupation of any person 

who controls the trading of each 

account; 

(4) The name and address of any 

person having a financial interest of ten 

percent or more in each account; 

(5) The number of open retail forex 

transaction positions introduced or 

carried in each account, as specified in 

the call; and 

(6) The total number of retail forex 

transactions against which delivery has 

been made. 

(d) Delegation of authority to the 

Director of the Division of Clearing and 

Intermediary Oversight and the Director 

of the Division of Market Oversight. The 

Commission hereby delegates, until the 

Commission orders otherwise, to the 

Director of the Division of Clearing and 

Intermediary Oversight and the Director 

of the Division of Market Oversight, or 

to the respective Director’s designees, 

the authority set forth in this section to 

make special calls for information on 

controlled accounts from retail foreign 

exchange dealers, futures commission 

merchants and from introducing 

brokers, and to make special calls for 

information on open contracts in 

accounts carried or introduced by 

futures commission merchants, 

introducing brokers, and foreign 

brokers. Either Director may submit to 

the Commission for its consideration 

any matter that has been delegated 

pursuant to this section. Nothing in this 

section shall be deemed to prohibit the 

Commission, at its election, from 

exercising the authority delegated in 

this section to the Directors. 

§ 5.21 Supervision. 

Each Commission registrant subject to 

this Part 5, except an associated person 

who has no supervisory duties, must 

diligently supervise the handling by its 

partners, officers, employees and agents 

(or persons occupying a similar status or 

performing a similar function) of all 

retail forex accounts carried, operated, 

advised or introduced by the registrant 

and all other 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. 

§ 5.22 Registered futures association 

membership. 

(a) Each person registered as a retail 

foreign exchange dealer must become 

and remain a member of at least one 

futures association that is registered 

under section 17 of the Act and that 

provides for the membership therein of 

such retail foreign exchange dealer. 

(b) Each person required to register as: 

(1) An introducing broker, because the 

person solicits or accepts orders for 

retail forex transactions; 

(2) A commodity pool operator 

because the person operates, or solicits 

funds, securities, or property for, a 

pooled investment vehicle that engages 

in retail forex transactions; or 

(3) A commodity trading advisor 

because the person exercises 

discretionary trading authority, or 

obtains written authorization to exercise 

discretionary trading authority over, an 

account in connection with retail forex 

transactions, must become and remain a 

member of at least one futures 

association that is registered under 

section 17 of the Act and that provides 

for the membership therein of such 

person. 

§ 5.23 Notice of bulk transfers and bulk 

liquidations. 

(a) Notice and disclosure to retail 

forex customers of a bulk transfer. (1) A 

retail foreign exchange dealer, futures 

commission merchant or introducing 

broker must obtain the written prior and 

specific consent of its retail forex 

customer to the assignment of any 

position or transfer of any account of the 

retail forex customer to another retail 

foreign exchange dealer, futures 

commission merchant or introducing 

broker, unless made at the retail forex 

customer’s request. 

(2) Absent a request of the retail forex 

customer or the consent described in 

paragraph (a)(1) of this section, 

assignments of positions and transfers of 

accounts of retail forex customers may 

be permitted under rules of the retail 

forex dealer’s, futures commission 

merchant’s, or introducing broker’s 

designated self-regulatory organization 

that establish notice and other 

requirements with respect to the 

assignment of positions and transfers of 

accounts of retail forex customers. If 

such rules permit implied consent as a 

result of the failure of the retail forex 

customer to object after having received 

notice of the proposed assignment or 

transfer, such rules must provide that 

the notice must include a statement that 

the retail forex customer is not required 

to accept the proposed assignment or 

transfer and may direct the transferor 

firm to liquidate the positions of the 

retail forex customer or transfer the 

account to a firm of the retail forex 

customer’s selection. 

(3) For assignments and transfers 

made under this section, other than at 

the retail forex customer’s request, the 

transferee retail foreign exchange dealer, 

futures commission merchant or 

introducing broker must provide to the 

retail forex customer the risk disclosure 

statements and forms of 

acknowledgment required by Part 5 of 

this chapter and receive the required 

signed acknowledgments within sixty 

days of such assignments or transfers. 

This requirement shall not apply: 

(i) If the transferee retail foreign 

exchange dealer, futures commission 

merchant or introducing broker has 

clear written evidence that the retail 

forex customer has received and 

acknowledged receipt of the required 

disclosure statements; or 

(ii) If the transfer of accounts is made 

from one introducing broker to another 

introducing broker guaranteed by the 

same retail foreign exchange dealer or 

futures commission merchant pursuant 

to a guarantee agreement in accordance 

with the requirements of § 1.10(j) of this 

chapter and such retail foreign exchange 

dealer or futures commission merchant 

maintains the relevant 

acknowledgments required by Part 5 of 

this chapter. 

(b) Notice to the Commission. Each 

retail foreign exchange dealer, futures 

commission merchant or introducing 

broker shall file with the Commission 

prior notice of any transfer of accounts 

of any retail forex customer that is not 

initiated at the request of the customer, 

where the transfer involves 50 percent 

or more of the transferor’s total number 

of retail forex customer accounts. 

(c) Contents of notice to the 

Commission. The notice required by 

paragraph (b) of this section shall 

include: 

(1) The name, principal business 

address and telephone number of the 

transferor futures retail foreign exchange 

dealer, futures commission merchant or 

introducing broker; 

(2) The name, principal business 

address and telephone number of each 

transferee retail foreign exchange dealer, 

futures commission merchant or 

introducing broker; 

(3) The designated self-regulatory 

organization for the transferor and 

transferee firms; 

(4) A brief statement as to the reasons 

for the transfer; 

(5) A copy of any notices to customers 

regarding the transfers; and 

(6) A statement of the number of 

accounts to be transferred. 

(d) Notice of the bulk liquidation of 

retail forex transactions. A retail foreign 

exchange dealer or futures commission 

merchant may not initiate the bulk 

liquidation of properly margined retail 

forex transactions unless such 

liquidation complies with the rules and 

procedures of the retail forex dealer’s or 

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futures commission merchant’s 

designated self-regulatory organization 

and the retail forex dealer or futures 

commission merchant provides the 

Commission with prior written notice of 

the liquidation. 

(e) Contents of notice of bulk 

liquidation. The notice required by 

paragraph (d) of this section shall 

include: 

(1) The name, principal business 

address and telephone number of the 

initiating retail foreign exchange dealer 

or futures commission merchant; 

(2) A brief statement of the reasons for 

the liquidation; 

(3) A copy of any notices to customers 

regarding the liquidation; and 

(4) A statement of the number of 

accounts to be liquidated. 

(f) Filing of notices. The notice 

required by paragraph (b) and (d) of this 

section shall be filed five business days 

prior to the transfer or liquidation of the 

retail forex transaction with the Deputy 

Director, Compliance and Registration 

Section, Division of Clearing and 

Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street, NW., 

Washington, DC 20581; the National 

Futures Association Attn: Vice 

President-Compliance; and the 

designated self-regulatory organization 

for the transferor firm. 

(g) No effect on other obligations. The 

requirements of this section shall not 

affect the obligations of a retail foreign 

exchange dealer, futures commission 

merchant or introducing broker under 

the rules of a self-regulatory 

organization or applicable customer 

account agreement with respect to 

assignments of positions or transfers of 

accounts or liquidation of positions. 

(h) Corrective notice. If a proposed 

transfer is not completed in accordance 

with the notice required to be filed by 

paragraph (b) of this section, a 

corrective notice shall be filed within 

five business days of the date such 

proposed transfer was to occur 

explaining why the proposed transfer 

was not completed. 

§ 5.24 Applicability of other parts of this 

chapter 

Insofar as it is consistent with the 

requirements of this part, all other 

provisions of this chapter that apply to 

a person shall apply to such person as 

though such provisions were expressly 

set forth in this part. 

§ 5.25 Applicability of the Act. 

Except as otherwise specified in this 

part and unless the context otherwise 

requires, the provisions of Sections 4b, 

4c(b), 4f, 4g, 4k, 4m, 4n, 4o, 6(c)–(e), 6b, 

6c, 8(a)–(e), 8a and 12(f) of the Act shall 

apply to retail forex transactions that are 

subject to the requirements of this part 

as though such provisions were set forth 

herein and included specific references 

to retail forex transactions and the 

persons defined in § 5.1 of this part. 

PART 10—RULES OF PRACTICE 

■ 37. The authority citation for part 10 

continues to read as follows: 

Authority: Pub. L. 93–463, sec. 101(a)(11), 

88 Stat. 1391; 7 U.S.C. 2a(12). 

■ 38. Section 10.1 is amended by 

revising paragraph (a) to read as follows: 

§ 10.1 Scope and applicability of rules of 

practice. 

* * * * * 

(a) Denial, suspension, revocation, 

conditioning, restricting or modifying of 

registration as a futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, or associated 

person, floor broker, floor trader, 

commodity pool operator, commodity 

trading advisor or leverage transaction 

merchant pursuant to sections 6(c), 

8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 

7 U.S.C. 9 and 15, 12a(2), 12a(3), 12a(4) 

and 12(a)(11), or denial, suspension, or 

revocation of designation as a contract 

market pursuant to sections 6(a) and 

6(b) of the Act, 7 U.S.C. 8; 

* * * * * 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

■ 39. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 12a. 

■ 40. Section 140.94 is added to read as 

follows: 

§ 140.94 Delegation of authority to the 

Director of the Division of Clearing and 

Intermediary Oversight. 

(a) The Commission hereby delegates, 

until such time as the Commission 

orders otherwise, the following 

functions to the Director of the Division 

of Clearing and Intermediary Oversight 

and to such members of the 

Commission’s staff acting under his 

direction as he may designate from time 

to time: 

(1) All functions reserved to the 

Commission in § 5.7 of this chapter; 

(2) All functions reserved to the 

Commission in § 5.10 of this chapter; 

(3) All functions reserved to the 

Commission in § 5.11 of this chapter; 

(4) All functions reserved to the 

Commission in § 5.12 of this chapter, 

except for those relating to nonpublic 

treatment of reports set forth in § 5.12(i) 

of this chapter; and 

(5) All functions reserved to the 

Commission in § 5.14 of this chapter. 

(b) The Director of the Division of 

Clearing and Intermediary Oversight 

may submit any matter which has been 

delegated to him under paragraph (a) of 

this section to the Commission for its 

consideration. 

(c) Nothing in this section may 

prohibit the Commission, at its election, 

from exercising the authority delegated 

to the Director of the Division of 

Clearing and Intermediary Oversight 

under paragraph (a) of this section. 

PART 145—COMMISSION RECORDS 

AND INFORMATION 

■ 41. The authority citation for part 145 

continues to read as follows: 

Authority: Pub. L. 99–570, 100 Stat. 3207; 

Pub. L. 89–554, 80 Stat. 383; Pub. L. 90–23, 

81 Stat. 54; Pub. L. 98–502, 88 Stat. 1561– 

1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93– 

463, 88 Stat. 1389 (5 U.S.C. 4a(j)); unless 

otherwise noted. 

■ 42. Section 145.5 is amended by 

revising paragraphs (d)(1)(viii) and (h) 

to read as follows: 

§ 145.5 Disclosure of nonpublic records. 

* * * * * 

(d) * * * 

(1) * * * 

(viii) The following reports and 

statements that are also set forth in 

paragraph (h) of this section, except as 

specified in 17 CFR 1.10(g)(2), 17 CFR 

31.13(m), or 17 CFR 5.12(h): Forms 

1–FR required to be filed pursuant to 17 

CFR 1.10 or 17 CFR 5.12; FOCUS 

reports that are filed in lieu of Forms 

1–FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); 

* * * * * 

(h) Contained in or related to 

examinations, operating, or condition 

reports prepared by, on behalf of, or for 

the use of the Commission or any other 

agency responsible for the regulation or 

supervision of financial institutions, 

including, but not limited to the 

following reports and statements that 

are also set forth in paragraph (d)(1)(viii) 

of this section, except as specified in 17 

CFR 1.10(g)(2), 17 CFR 5.12(h) or 17 

CFR 31.13(m): Forms 

1–FR required to be filed pursuant to 17 

CFR 1.10 or 17 CFR 5.12; FOCUS 

reports that are filed in lieu of Forms 1– 

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

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accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); and 

* * * * * 

PART 147—OPEN COMMISSION 

MEETINGS 

■ 43. The authority citation for part 147 

continues to read as follows: 

Authority: Sec. 3(a), Pub. L. 94–409, 90 

Stat. 1241 (5 U.S.C. 552b); sec. 101(a)(11), 

Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j) 

(Supp. V, 1975)), unless otherwise noted. 

■ 44. Section 147.3 is amended by 

revising paragraphs (b)(4)(i)(H) and 

(b)(8) to read as follows: 

§ 147.3 General requirement of open 

meetings; grounds upon which meetings 

may be closed. 

* * * * * 

(b) * * * 

(4) * * * 

(i) * * * 

(H) The following reports and 

statements that are also set forth in 

paragraph (b)(8) of this section, except 

as specified in 17 CFR 1.10(g)(2), 17 

CFR 5.12, or 17 CFR 31.13(m): Forms 1– 

FR required to be filed pursuant to 17 

CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 

31.13(m); FOCUS reports that are filed 

in lieu of Forms 1–FR pursuant to 17 

CFR 1.10(h); Forms 2–FR required to be 

filed pursuant to 17 CFR 31.13; the 

accountant’s report on material 

inadequacies filed in accordance with 

17 CFR 1.16(c)(5); and all reports and 

statements required to be filed pursuant 

to 17 CFR 1.17(c)(6); 

* * * * * 

(8) Disclose information contained in 

or related to examination, operating, or 

condition reports prepared by, on behalf 

of, or for the use of the Commission or 

any other agency responsible for the 

regulation or supervision of financial 

institutions, including, but not limited 

to the following reports and statements 

that are also set forth in paragraph 

(b)(4)(i)(H) of this section, except as 

specified in 17 CFR 1.10(g)(2), 17 CFR 

5.12, or 17 CFR 31.13(m): Forms 1–FR 

required to be filed pursuant to 17 CFR 

1.10, 17 CFR 5.12(h)(2), or 17 CFR 

31.12(m); FOCUS reports that are filed 

in lieu of Forms 1–FR pursuant to 17 

CFR 1.10(h); Forms 2–FR required to be 

filed pursuant to 17 CFR 31.13; the 

accountant’s report on material 

inadequacies filed in accordance with 

17 CFR 1.16(c)(5); and all reports and 

statements required to be filed pursuant 

to 17 CFR 1.17(c)(6); 

* * * * * 

PART 160—PRIVACY OF CONSUMER 

FINANCIAL INFORMATION 

■ 45. The authority citation for part 160 

continues to read as follows: 

Authority: 7 U.S.C. 7b–2 and 12a(5); 15 

U.S.C. 6801, et seq. 

■ 46. Section 160.1 is amended by 

revising paragraph (b) to read as follows: 

§ 160.1 Purpose and scope. 

* * * * * 

(b) Scope. This part applies only to 

nonpublic personal information about 

individuals who obtain financial 

products or services primarily for 

personal, family, or household purposes 

from the institutions listed below. This 

part does not apply to information about 

companies or about individuals who 

obtain financial products or services 

primarily for business, commercial, or 

agricultural purposes. This part applies 

to all futures commission merchants, 

retail foreign exchange dealers, 

commodity trading advisors, commodity 

pool operators and introducing brokers 

that are subject to the jurisdiction of the 

Commission, regardless whether they 

are required to register with the 

Commission. These entities are 

hereinafter referred to in this part as 

‘‘you.’’ This part does not apply to 

foreign (non-resident) futures 

commission merchants, retail foreign 

exchange dealers, commodity trading 

advisors, commodity pool operators and 

introducing brokers that are not 

registered with the Commission. 

Nothing in this part modifies, limits or 

supersedes the standards governing 

individually identifiable health 

information promulgated by the 

Secretary of Health and Human Services 

under the authority of sections 262 and 

264 of the Health Insurance Portability 

and Accountability Act of 1996, 42 

U.S.C. 1320d—1320d–8. 

47. Section 160.3 is amended by: 

■ a. Revising paragraph (a) introductory 

text and paragraph (a)(2); 

■ b. Redesignating paragraphs 

(k)(2)(i)(B) through (F) as paragraphs 

(k)(2)(i)(C) through (G) and republishing 

them, and adding new paragraph 

(k)(2)(i)(B); 

■ c. Revising paragraphs (n)(1)(i) and 

(n)(2)(i); 

■ d. Revising paragraph (o)(1)(i); 

■ e. Revising paragraph (u)(2)(i)(A); 

■ f. Redesignating paragraphs (w)(2) 

through (4) as paragraphs (w)(3) through 

(5) and adding new paragraph (w)(2); 

and 

■ g. Adding new paragraph (x) to read 

as follows: 

§ 160.3 Definitions. 

* * * * * 

(a) Affiliate of a futures commission 

merchant, retail foreign exchange 

dealer, commodity trading advisor, 

commodity pool operator or introducing 

broker means any company that 

controls, is controlled by, or is under 

common control with a futures 

commission merchant, retail foreign 

exchange dealer, commodity trading 

advisor, commodity pool operator or 

introducing broker that is subject to the 

jurisdiction of the Commission. In 

addition, a futures commission 

merchant, retail foreign exchange 

dealer, commodity trading advisor, 

commodity pool operator or introducing 

broker subject to the jurisdiction of the 

Commission will be deemed an affiliate 

of a company for purposes of this part 

if: 

* * * * * 

(2) Rules adopted by the Federal 

Trade Commission or another federal 

functional regulator under Title V of the 

GLB Act treat the futures commission 

merchant, retail foreign exchange 

dealer, commodity trading advisor, 

commodity pool operator or introducing 

broker as an affiliate of that company. 

* * * * * 

(k) * * * 

(2) * * * 

(i) * * * 

(B) You are a retail foreign exchange 

dealer with whom a consumer has 

opened an account, or that effects or 

engages in retail forex transactions with 

or for a consumer, even if you do not 

hold any assets of the consumer; 

(C) You are an introducing broker that 

solicits or accepts specific orders for 

trades; 

(D) You are a commodity trading 

advisor with whom a consumer has a 

contract or subscription, either written 

or oral, regardless of whether the advice 

is standardized, or is based on, or 

tailored to, the commodity interest or 

cash market positions or other 

circumstances or characteristics of the 

particular consumer; 

(E) You are a commodity pool 

operator, and you accept or receive from 

the consumer, funds, securities, or 

property for the purpose of purchasing 

an interest in a commodity pool; 

(F) You hold securities or other assets 

as collateral for a loan made to the 

consumer, even if you did not make the 

loan or do not effect any transactions on 

behalf of the consumer; or 

(G) You regularly effect or engage in 

commodity interest transactions with or 

for a consumer even if you do not hold 

any assets of the consumer. 

* * * * * 

(n)(1) * * * 

(i) Any futures commission merchant, 

retail foreign exchange dealer, 

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commodity trading advisor, commodity 

pool operator or introducing broker that 

is registered with the Commission as 

such or is otherwise subject to the 

Commission’s jurisdiction; and 

* * * * * 

(2) * * * 

(i) Any person or entity, other than a 

futures commission merchant, retail 

foreign exchange dealer, commodity 

trading advisor, commodity pool 

operator or introducing broker that, with 

respect to any financial activity, is 

subject to the jurisdiction of the 

Commission under the Act. 

* * * * * 

(o)(1) * * * 

(i) Any product or service that a 

futures commission merchant, retail 

foreign exchange dealer, commodity 

trading advisor, commodity pool 

operator, or introducing broker could 

offer that is subject to the Commission’s 

jurisdiction; and 

* * * * * 

(u) * * * 

(2) * * * 

(i) * * * 

(A) Information a consumer provides 

to you on an application to open a 

commodity interest trading account, to 

invest in a commodity pool, or to obtain 

another financial product or service; 

* * * * * 

(w) * * * 

(2) Any retail foreign exchange dealer; 

* * * * * 

(x) Retail foreign exchange dealer has 

the same meaning as in § 5.3(i)(1) of this 

chapter. 

■ 48. Section 160.4 is amended by: 

■ a. Revising paragraph (c)(2)(ii); and 

■ b. Revising paragraph (e)(1)(iv) to read 

as follows: 

§ 160.4 Initial privacy notice to consumers 

required. 

* * * * * 

(c) * * * 

(2) * * * 

(ii) Opens a retail forex account, or 

opens a commodity interest account 

through an introducing broker or with a 

futures commission merchant that clears 

transactions for its customers through 

you on a fully-disclosed basis; 

* * * * * 

(e) * * * 

(1) * * * 

(iv) You have established a customer 

relationship with a customer in a bulk 

transfer in accordance with § 1.65, if 

you are a transferee futures commission 

merchant, retail foreign exchange dealer 

or introducing broker. 

* * * * * 

■ 49. Section 160.30 is amended by 

revising the introductory text to read as 

follows: 

§ 160.30 Procedures to safeguard 

customer records and information. 

Every futures commission merchant, 

retail foreign exchange dealer, 

commodity trading advisor, commodity 

pool operator and introducing broker 

subject to the jurisdiction of the 

Commission must adopt policies and 

procedures that address administrative, 

technical and physical safeguards for 

the protection of customer records and 

information. These policies and 

procedures must be reasonably designed 

to: 

* * * * * 

PART 166—CUSTOMER PROTECTION 

RULES 

■ 50. The authority citation for part 166 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 

6h, 6k, 6l, 6o, 7, 12a and 23, as amended by 

the Commodity Futures Modernization Act of 

2000, Appendix E of Pub. L. 106–554, 114 

Stat. 2763 (2000). 

■ 51. Section 166.2 is revised to read as 

follows: 

§ 166.2 Authorization to trade. 

No futures commission merchant, 

retail foreign exchange dealer, 

introducing broker or any of their 

associated persons may directly or 

indirectly effect a transaction in a 

commodity interest for the account of 

any customer unless before the 

transaction the customer, or person 

designated by the customer to control 

the account: 

(a) With respect to any commodity 

interest as defined in § 1.3(yy)(1) 

through (3) of this chapter, specifically 

authorized the futures commission 

merchant, retail foreign exchange 

dealer, introducing broker or any of 

their associated persons to effect the 

transaction (a transaction is ‘‘specifically 

authorized’’ if the customer or person 

designated by the customer to control 

the account specifies— 

(1) The precise commodity interest to 

be purchased or sold; and 

(2) The exact amount of the 

commodity interest to be purchased or 

sold); or 

(b) With respect to any commodity 

interest as defined in § 1.3(yy)(1) or (2) 

of this chapter, authorized in writing the 

futures commission merchant, 

introducing broker or any of their 

associated persons to effect transactions 

in commodity interests for the account 

without the customer’s specific 

authorization; Provided, however, That 

if any such futures commission 

merchant, introducing broker or any of 

their associated persons is also 

authorized to effect transactions in 

foreign futures or foreign options 

without the customer’s specific 

authorization, such authorization must 

be expressly documented. 

■ 52. Section 166.5 is amended by: 

■ a. Removing paragraph (a)(1)(iv), 

redesignating paragraphs (a)(1)(i) 

through (a)(1)(iii) as paragraphs 

(a)(1)(i)(A) through (a)(1)(i)(C), and 

adding new paragraph (a)(1)(ii); 

■ b. Revising paragraphs (a)(2) and 

(a)(3); 

■ c. Revising paragraphs (c)(5)(i)(A) and 

(c)(5)(i)(C) to read as follows: 

§ 166.5 Dispute settlement procedures. 

(a) * * * (1) * * * 

(ii) Arises out of any retail forex 

transaction (as defined in § 5.1(m) of 

this chapter). 

(2) The term customer as used in this 

section includes an option customer (as 

defined in § 1.3(jj) of this chapter), a 

retail forex customer (as defined in 

§ 5.1(k) of this chapter) and any person 

for or on behalf of whom a member of 

a designated contract market, or a 

participant transacting on or through 

such designated contract market, effects 

a transaction on such contract market, 

except another member of or participant 

in such designated contract market; 

Provided, however, a person who is an 

‘‘eligible contract participant’’ as defined 

in section 1a(12) of the Act shall not be 

deemed to be a customer within the 

meaning of this section. 

(3) The term Commission registrant as 

used in this section means a person 

registered under the Act as a futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

floor broker, commodity pool operator, 

commodity trading advisor, or 

associated person. 

* * * * * 

(c) * * * 

(5) * * * 

(i) * * * 

(A) The designated contract market, if 

applicable and if available, upon which 

the transaction giving rise to the dispute 

was executed or could have been 

executed; 

* * * * * 

(C) At least one other organization 

that will provide the customer with the 

opportunity to select the location of the 

arbitration proceeding from among 

several major cities in diverse 

geographic regions and that will provide 

the customer with the choice of a panel 

or other decision-maker composed of at 

least one or more persons, of which at 

least a majority are not members or 

associated with a member of the 

designated contract market, if 

applicable, or employee thereof, and 

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55452 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Rules and Regulations 

that are not otherwise associated with 

the designated contract market (mixed 

panel), if applicable: Provided, however, 

that the list of qualified organizations 

provided by a Commission registrant 

that is a floor broker need not include 

a registered futures association unless a 

registered futures association has been 

authorized to act as a decision-maker in 

such matters. 

* * * * * 

Issued in Washington, DC, on August 26, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–21729 Filed 9–9–10; 8:45 am] 

BILLING CODE 6351–01–P 

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