69004 Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations 

1 74 FR 52434 (Oct 13, 2009). The Commission’s 

regulations cited in this rulemaking may be found 

at 17 CFR Ch. 1 (2009). 

2For simplicity, references in this Federal 

Register release to IBs in connection with financial 

reporting and notice requirements are intended to 

refer to IBs that are not operating pursuant to a 

guarantee agreement. 

3For example, Regulation 1.12(a) requires 

immediate telephonic notice, to be confirmed in 

writing by facsimile, when a registrant’s (or 

applicant’s) adjusted net capital falls below that 

required by Regulation 1.17. Other provisions of 

Regulation 1.12 require notification to the 

Commission for certain ‘‘early warning’’ events. 

Regulation 1.12(b), for example, requires 

notification by a registrant or applicant if such 

entity’s adjusted net capital drops below a specified 

threshold. 

10 times a month, and arrives more than 

30 minutes late (including cancelled 

flights) more than 50 percent of the time 

during that month. 

(3) For purposes of this paragraph, the 

Department considers all of a carrier’s 

flights that are operated in a given citypair market whose scheduled departure 

times are within 30 minutes of the most 

frequently occurring scheduled 

departure time to be one single flight. 

(4) The holding out of a chronically 

delayed flight for more than four 

consecutive one-month periods 

represents one form of unrealistic 

scheduling and is an unfair or deceptive 

practice and an unfair method of 

competition within the meaning of 49 

U.S.C. 41712. 

[FR Doc. E9–30615 Filed 12–29–09; 8:45 am] 

BILLING CODE 4910–9X–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 1 

RIN 3038–AB87 

Electronic Filing of Financial Reports 

and Notices 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rules. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is amending certain of its 

regulations in connection with 

electronic filing of financial reports and 

related notices. The amendments 

broaden the language in the 

Commission’s regulations applicable to 

electronic filings of financial reports to 

clarify that, to the extent a futures 

commission merchant (‘‘FCM’’) submits 

a Form 1–FR to the Commission 

electronically, it may do so using any 

user authentication procedures 

established or approved by the 

Commission. The amendments also 

permit registrants to electronically 

submit filings in addition to financial 

reports, including an election to use a 

non-calendar fiscal year, requests for 

extensions of time to file uncertified 

financial reports and ‘‘early warning’’ 

notices required under Commission 

regulations. In connection with the 

filing of financial reports, the 

amendments specify, consistent with 

other requirements and existing 

practice, that a statement of income and 

loss is included as a required part of the 

non-certified 1–FR filings for FCMs and 

introducing brokers (‘‘IBs’’). The 

amendments also require more 

immediate, but less prescriptive, 

documentation regarding a firm’s capital 

condition when a firm falls below its 

required minimum adjusted net capital. 

Finally, the final regulations include 

several other minor amendments to 

correct certain outdated references and 

to make other clarifications to existing 

regulations. 

DATES: Effective Date: January 4, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Thelma Diaz, Associate Director, 

Division of Clearing and Intermediary 

Oversight, 1155 21st Street, NW., 

Washington, DC 20581. Telephone 

number: 202–418–5137; facsimile 

number: 202–418–5547; and electronic 

mail: tdiaz@cftc.gov, or Lawrence T. 

Eckert, Special Counsel, Division of 

Clearing and Intermediary Oversight, 

140 Broadway, New York, New York 

10005. Telephone number (646) 746– 

9704; and electronic mail: 

leckert@cftc.gov. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On October 13, 2009, the Commission 

published for comment in the Federal 

Register proposed amendments to 

Regulations 1.10 and 1.12 (the 

‘‘Proposals’’).1 Commission Regulation 

1.10 sets forth the financial reporting 

requirements for FCMs and IBs 2 and 

Regulation 1.12 requires FCMs, IBs and 

applicants for registration thereof to 

provide notice of a variety of predefined 

events as or before they occur.3

The Proposals consisted of several 

amendments regarding electronic filing 

of financial reports and notices by FCMs 

and IBs as well as amendments to 

certain other financial reporting 

requirements. Specifically, the 

Commission proposed amendments to: 

(1) Broaden language in the 

Commission’s regulations concerning 

authentication procedures applicable to 

electronic filing of financial reports in 

order to enable internet-based filing of 

such reports in anticipation of expected 

changes to ‘‘WinJammerTM,’’ an 

application used by FCMs that file their 

non-certified financial reports 

electronically with the Commission; (2) 

expand the types of filings that FCMs 

and IBs may submit electronically to 

include required ‘‘early warning’’ 

notices and certain other notices and 

filings under Regulations 1.10 and 1.12; 

(3) provide for less prescriptive, but 

more immediate, documentation to be 

filed regarding a firm’s undercapitalized 

condition; (4) expressly include an 

income statement in the required 

periodic unaudited financial reports of 

FCMs and IBs; and (5) make several 

other minor amendments to correct 

certain outdated references and to make 

other clarifications to existing 

regulations. 

The 30-day public comment period on 

the Proposals expired on November 12, 

2009. The Commission received one 

written comment on the Proposals, 

submitted by the National Futures 

Association (‘‘NFA’’). NFA noted its 

agreement and support of the 

Commission’s Proposals and 

commended the Commission for its 

review of its electronic filing 

requirements and proposal of changes to 

reflect technological advances and 

current practices. As discussed below, 

NFA also encouraged the Commission 

to consider certain additional 

amendments to further expand the use 

of electronic filing in certain 

circumstances. NFA did not suggest 

delaying the implementation of the 

Proposals while these additional 

suggestions made by NFA are under 

consideration by the Commission. The 

Commission further notes that certain 

provisions included in the additional 

amendments offered by NFA for 

consideration may require publication 

in the Federal Register for prior notice 

and comment before they may be 

adopted. For the reasons set forth below, 

the Commission has therefore 

determined to adopt the amendments as 

proposed. 

II. Rule Amendments 

A. Electronic Filing Issues 

1. Amendments to Regulation 1.10 

Commission Regulation 1.10(c) 

generally sets forth the provisions 

governing where and how financial 

reports required to be filed by FCMs and 

IBs under Regulation 1.10 must be filed. 

Regulation 1.10(c)(1) indicates with 

whom reports should be filed and 

Regulation 1.10(c)(2) addresses the 

method for submitting such reports. 

Electronic submission of certified 

financial reports currently is addressed 

separately in Regulation 1.10(b)(2)(iii). 


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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations 69005 

4See footnote 3, above. 

5 IBs file notices under Regulation 1.12 with NFA 

pursuant to NFA rules. NFA has indicated that it 

intends to make changes to the EasyFile system 

and/or NFA rules, as may be necessary to facilitate 

the electronic filing by IBs of notices or other 

information permitted to be submitted 

electronically by the Proposal but currently filed 

with NFA in paper form. 

This section provides that FCMs must 

file certified financial reports in paper 

form and IBs must file such reports 

electronically in accordance with 

electronic filing procedures established 

by NFA. 

For clarification and ease of reading, 

the Commission is moving Regulation 

1.10(b)(2)(iii) into a new subparagraph 

of Regulation 1.10(c)(2). Regulation 

1.10(c)(2) is being amended as discussed 

below and divided into 2 new 

subparagraphs: New subparagraph 

(c)(2)(i) addresses electronic filing by 

FCMs with the Commission and new 

subparagraph (c)(2)(ii) addresses 

electronic filings with NFA by IBs and 

by applicants for registration as IBs and 

FCMs. 

Regulation 1.10(c)(2) currently 

provides that non-certified financial 

reports may be submitted to the 

Commission ‘‘in electronic form using a 

Commission assigned Personal 

Identification Number, and otherwise in 

accordance with instructions issued by 

the Commission * * *.’’ The adopted 

amendments to Regulation 1.10(c)(2) 

broaden the language in the regulation 

relating to user authentication by no 

longer limiting user authentication to 

the use of a personal identification 

number (‘‘PIN’’). As described in the 

proposing release, the use of such a PIN 

is no longer consistent with the internetbased enhancements under 

development for Winjammer. The 

revisions to Regulation 1.10(c)(2) also 

permit any filing or other notice 

submitted under the regulation to be 

transmitted electronically, rather than 

limiting such submission to financial 

reports as under the current regulation. 

Such other notices would include, for 

example, an election to use a fiscal year 

other than a calendar year under 

Regulation 1.10(e) and a request for an 

extension of time to file uncertified 

financial reports under Regulation 

1.10(f). Regulation 1.10(d)(4)(iii), which 

deals with electronic filing of Form 

1–FR, is being amended by deleting 

references to the use of a PIN. 

As amended, Regulation 1.10(c)(2)(i) 

provides that all filings or other notices 

or applications prepared by a futures 

commission merchant ‘‘[except with 

respect to the filing of certified financial 

reports which must be filed in paper 

form], and pursuant to [Regulation 1.10] 

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 

instruction issued by or approved by the 

Commission, if the futures commission 

merchant or a designated self-regulatory 

organization has provided the 

Commission with the means necessary 

to read and to process the information 

contained in such report.’’ 

Amended Regulation 1.10(c)(2)(ii) 

provides that ‘‘[except with respect to 

the filing of certified FOCUS reports by 

a registered broker or dealer with the 

SEC], all filings or other notices or 

applications prepared by an introducing 

broker or applicant for registration as an 

introducing broker or futures 

commission merchant * * * must be 

filed electronically in accordance with 

electronic filing procedures established 

by the National Futures Association 

* * *.’’ 

In its comment letter, NFA indicated 

that it would support the Commission 

further broadening the permitted use of 

electronic filing to include FCM 

certified financial statements. The 

current requirement in Regulation 1.10 

for FCM certified financial statements to 

be filed in paper form is due in part to 

the fact that such statements are not 

prepared in a standard format that lends 

itself easily to electronic input. NFA 

suggested that notwithstanding this lack 

of standardization, the Commission 

could consider permitting the 

submission of such statements in 

portable document format (‘‘pdf’’). The 

Commission notes, however, that this 

suggestion requires further review 

because the pdf format is not conducive 

to the application of automated review 

of the data by the Commission. Further 

review would also be beneficial in light 

of continuing developments in 

technology that may at a later date result 

in increased benefits of electronic filing 

of certified financial statements for the 

filers, the Commission and the DSRO 

recipients. The adoption of the 

amendments as proposed will not 

impede such further review, and will 

make available to these same parties 

other recognized enhancements to the 

current requirements for electronic 

filing. 

2. Amendments to Regulation 1.12 

Commission Regulation 1.12 requires 

FCMs, IBs and applicants for 

registration thereof to provide notice of 

a variety of predefined events as or 

before they occur.4 The Commission 

proposed to amend Regulation 1.12(i), 

which sets forth the procedures for 

filing notices under Regulation 1.12, to 

allow FCMs and IBs to submit 

electronically filings otherwise required 

to be submitted in writing via 

facsimile.5 In its comment letter, NFA 

supported this change, but suggested 

that the Commission consider requiring, 

rather than simply permitting, 

registrants to electronically file such 

notices. Although the Commission 

strongly encourages, and believes that 

most registrants will choose to utilize, 

electronic filing as a more efficient and 

expeditious means to file notices, the 

Commission nonetheless appreciates 

that there may be times when a 

registrant would prefer, or is otherwise 

unable, to file electronically. For 

example, a registrant may have a 

regulatory deadline under the 

Commission’s regulations but be unable 

to satisfy such deadline through 

electronic means due to temporary 

technological issues with 

WinJammerTM, NFA’s EasyFile system 

or the registrants’ own systems. 

Moreover, moving from a permissive to 

mandatory filing requirement may 

require publication in the Federal 

Register in order to obtain public 

comment on such a proposal. In light of 

these concerns, the Commission has 

determined to adopt the amendment as 

proposed. 

The amendment adopted adds a new 

subparagraph 1.12(i)(3) to the 

Commission’s regulations which 

provides that ‘‘[e]very notice or report 

required to be provided in writing under 

[Regulation 1.12] may, in lieu of 

facsimile, be filed via electronic 

transmission 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.’’ An electronic 

submission is required to clearly 

indicate the registrant or applicant on 

whose behalf such filing is made and 

the use of such user authentication in 

submitting such filing would constitute 

and become a substitute for the manual 

signature of the authorized signer. 

B. Income Statement Filing Requirement 

Commission Regulation 1.10(d) sets 

forth the content requirements for 

financial reports filed with the 

Commission: The Commission proposed 

to amend Regulation 1.10(d)(1) to 

require ‘‘statements of income (loss)’’ to 

be included as part of FCM and IB noncertified financial report filings. The 

Commission noted that this amendment 

is consistent with Regulation 

1.10(d)(2)(ii), which requires FCMs and 


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69006 Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations 

6Under SEC Regulation 17a–5 and rules of 

applicable self-regulatory organizations, certain 

securities brokers or dealers may include as part of 

their quarterly FOCUS report filings a consolidated 

Statement of Income (Loss) for the relevant quarter 

rather than a Statement of Income (Loss) for the 

month for which the report is being filed (i.e., 

March, June, September or December). Such brokerdealers that also are registered as FCMs would file 

these same reports with the Commission. The 

Commission wishes to make clear that an otherwise 

complete FOCUS report filing made with the 

Commission that includes such a consolidated 

Statement of Income (Loss) will be deemed an 

acceptable filing in accordance with Commission 

Regulation 1.10(h). 

7Specifically, Regulation 1.12(a)(2) requires an 

FCM (or applicant) to file with the Commission: 

(1) A statement of financial condition; (2) a 

statement of the computation of its minimum 

capital requirements; (3) the statements of 

segregation requirements and funds in segregation 

for customers trading on U.S. commodity exchanges 

and for customers’ dealer options accounts; and 

(4) the statement of secured amounts and funds 

held in separate accounts for foreign futures and 

foreign options customers. Regulation 1.12(a)(3) 

requires an IB (or applicant) to file a statement of 

financial condition and a statement of the 

computation of its minimum capital requirements. 

8This amendment is consistent with SEC 

Regulation 17a–11 which requires a broker or dealer 

whose net capital falls below its required minimum 

to give notice of the deficiency that same day, 

specifying the broker or dealer’s net capital 

requirement and its current amount of net capital. 

9Regulation 1.10(b)(4) already provides that 

representatives of the Commission may upon 

written notice require Form 1–FR or other financial 

information at such times as specified by the 

representative. 

IBs to include an income statement as 

part of their certified financial reports, 

and is a practice currently followed by 

most registrants. NFA voiced its support 

of this amendment in its comment letter 

noting its agreement that the income 

statement provides the Commission 

with important information for 

monitoring the financial condition of 

firms. The Commission is adopting the 

amendment as proposed. 

As noted in the Proposals, this 

amendment does not affect the ability of 

a broker-dealer to file with the 

Commission in accordance with 

Regulation 1.10(h) the FOCUS report 

under the Securities and Exchange Act 

of 1934, including the income statement 

currently provided in that report.6

C. Net Capital Undercapitalization 

Documentation 

Regulation 1.12(a) requires a 

registrant or applicant for registration as 

an FCM or IB that knows or should have 

known that its adjusted net capital is 

less than the minimum required by the 

Commission or by its designated selfregulatory organization (‘‘DSRO’’) to 

provide notice of such event 

immediately by telephone and confirm 

such telephonic notice in writing by 

facsimile. Regulations 1.12(a)(2) 

(applicable to FCMs) and 1.12(a)(3) 

(applicable to IBs) further require that, 

within 24 hours thereafter, the registrant 

(or applicant) must file certain specific 

financial records with the Commission.7

The Commission also is amending 

Regulations 1.12(a)(2) and (a)(3) to 

require more immediate, but less 

prescriptive, reporting to the 

Commission when a registrant or 

applicant falls below its minimum net 

capital requirement. NFA supported this 

amendment, stating its agreement with 

the Commission that it is more 

beneficial for the Commission to receive 

prompt information concerning a firm’s 

capital condition than to receive such 

information in a specific prescribed 

format. Under the amended regulation, 

a firm must continue to provide 

immediate telephonic notice, confirmed 

in writing, in the event that its adjusted 

net capital falls below its required 

minimum. Amended Regulation 

1.12(a)(2) requires that together with 

such initial telephonic notice and 

written confirmation, a firm must 

provide ‘‘documentation in such form as 

necessary to adequately reflect the 

firm’s capital condition as of any date 

such person’s adjusted net capital is less 

than the minimum required.’’ 8 The 

Commission envisions that such 

adequate documentation would at a 

minimum specify the firm’s adjusted net 

capital requirement and actual adjusted 

net capital for any date during which 

the firm fell below its regulatory 

requirement. The amended regulation 

also requires a firm to provide similar 

documentation to that initially provided 

for any other days the Commission may 

request.9 By requiring documentation as 

of ‘‘any’’ date that adjusted net capital 

is less than the required minimum, the 

amended regulation makes clear that 

where a firm is undercapitalized on 

more than one day, documentation 

related to all such time must be 

provided. 

Regulation 1.12(a)(3), which provides 

documentation requirements for IBs that 

provide the Commission with notice of 

their undercapitalized condition, has 

been deleted because Regulation 

1.12(a)(2) as amended applies to IBs as 

well as to FCMs. Regulation 1.12(i)(1) 

also is being amended by deleting 

certain language related to the method 

of filing documentation that is no longer 

required to be submitted to the 

Commission in light of the amendments 

to Regulation 1.12(a)(2) discussed 

above. 

D. Miscellaneous Amendments to 

Regulations 

The Commission proposed a number 

of minor amendments to Regulations 

1.10 and 1.12 to correct certain outdated 

references and to otherwise clarify 

existing regulations. NFA noted their 

support of certain of these amendments 

that eliminated requirements that 

provided for duplicative filing with 

NFA and the Commission (enumerated 

as items (1) and (2), below). The 

Commission received no comments on 

the other amendments. The Commission 

is, therefore, adopting each of the 

amendments as proposed and, as 

outlined below: 

(1) Regulation 1.10(c)(1) is amended 

to clarify that FCM and IB applicants for 

registration need file financial reports 

required as part of the application 

process only with NFA and not also 

with a regional office of the 

Commission; 

(2) Regulation 1.12(i)(1) is amended to 

clarify that an applicant for registration 

as an FCM need file any notices 

required under Regulation 1.12 only 

with NFA and not also with the 

Commission. The amended regulation 

makes clear that any notice or report 

filed with NFA will be deemed to be 

filed with, and to be the official record 

of, the Commission; 

(3) The following minor wording 

amendments are being made to 

Regulation 1.10(c)(1) for the purposes of 

consistency with other provisions of the 

regulations and/or general clarification: 

(A) The reference to ‘‘[a] report filed 

by an [IB] pursuant to paragraph (b)(2)(i) 

or (b)(2)(ii)’’ is amended to clarify that 

‘‘a report’’ in this context is meant to 

refer to Form 1–FR; 

(B) The reference to subparagraphs 

(b)(2)(i) and (b)(2)(ii) is being amended 

for simplicity to refer only to paragraph 

(b)(2) in general; and 

(C) The language of paragraph 

1.10(c)(1) is being amended to clarify 

that it is intended to cover not only 

‘‘reports’’ but all reports and other 

‘‘information;’’ 

(4) Regulations 1.10(b)(2)(i) and 

1.10(b)(2)(ii) are being amended to 

delete language referring to an option to 

file financial statements on a calendaryear basis which is no longer contained 

in the Commission’s regulations; 

(5) Regulation 1.10(b)(3), which 

permits an FCM or IB to satisfy the 

Commission’s Form 1–FR filing 

requirements if it satisfies certain 

financial reporting standards and 

reporting requirements of its DSRO, is 

being amended to delete outdated 

language referring to DSRO regulations 

applicable ‘‘after the effective date of 

these regulations by the Commission’’; 

and 

(6) Language within regulation 1.10(h) 

that references ‘‘NFA’’ is amended for 

consistency purposes by spelling out 

‘‘National Futures Association.’’ 


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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations 69007 

10 5 U.S.C. 553(b) and (d). 

11 5 U.S.C. 553–(d). 

12See 48 FR 35248, 35275–78 (Aug. 3, 1983). 

13See Commission Regulations 1.10(b)(2) and 

1.10(h) (requiring IBs to file with the Commission 

Form 1–FR–FCM or, as an alternative in the case 

of a registered broker or dealer with the SEC, the 

FOCUS report). 

14 74 FR at 52438. 

15 Id. 

16 74 FR at 52439. 

III. Related Matters 

A. Administrative Procedure Act 

The Administrative Procedure Act 

(‘‘APA’’) provides that the required 

publication of a substantive rule shall be 

made not less than 30 days before its 

effective date, unless the agency is 

permitted to implement an earlier 

effective date under one of the 

exceptions recognized by the APA.10

The exceptions set forth in the APA are 

as follows: (1) A substantive rule which 

grants or recognizes an exemption or 

relieves a restriction; (2) interpretative 

rules and statements of policy; or (3) as 

otherwise provided by the agency for 

good cause found and published with 

the rule.11

The amendments being made to Rules 

1.10 and 1.12 will ‘‘grant or recognize 

an exemption or relieve a restriction’’ in 

that they generally serve to permit and 

enable registrants to file notices and 

reports electronically that previously 

were required to be filed in paper form. 

In addition, the amendments include a 

number of non-substantive amendments 

to correct certain outdated references 

and to otherwise clarify existing 

regulations. 

With regard to the amendments 

relating to the timing of documentation 

required by firms that become 

undercapitalized, the Commission has a 

clear interest in receiving such 

information immediately and believes, 

therefore, that there is ‘‘good cause’’ to 

make such requirement effective in 

fewer than 30 days. With respect to the 

amendments requiring an income 

statement, the Commission believes that 

there is also ‘‘good cause’’ to make this 

provision effective on January 4, 2010, 

consistent with the other rule 

amendments. It would not be logical for 

the income statement requirement to be 

implemented at a time later than the 

effective date of the remaining rules, as 

the information in the income statement 

is an integral part of a registrant’s 

financial statements. Further, as the SEC 

and several self-regulatory organizations 

already require dual registrants and 

other FCMs to include the income 

statement in their financial statements, 

the income statement is already 

formatted as part of the Form 1–FR 

reports that registrants currently file 

with the Commission, and the data 

required to complete it is generally 

already available from other parts of the 

form. In fact, substantially all FCMs and 

IBs already complete the income 

statement as part of their required 

periodic non-certified financial report 

filings. 

Accordingly, the Commission has 

determined to make these amendments 

effective on January 4, 2010, consistent 

with the anticipated availability of the 

updated WinJammerTM system. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’), 5 U.S.C. 601 et seq., requires 

that agencies, in rulemaking, consider 

the impact of those regulations on small 

businesses. This rulemaking would 

affect FCMs and IBs. The Commission 

has previously determined that, based 

upon the fiduciary nature of FCM/ 

customer relationships, as well as the 

requirement that FCMs meet minimum 

financial requirements, FCMs should be 

excluded from the definition of small 

entity. 

With respect to IBs, the Commission 

stated that it is appropriate to evaluate 

within the context of a particular rule 

proposal whether some or all IBs should 

be considered to be small entities and, 

if so, to analyze the economic impact on 

such entities at that time.12 These 

amendments will not place any 

additional burdens on IBs that are small 

businesses because all such parties, if 

any, already are subject to the financial 

reporting and notice requirements under 

Regulations 1.10 and 1.12 and already 

file financial reports through NFA’s 

electronic filing system. Additionally, 

although the Commission is amending 

its regulations to add a requirement to 

include statements of income and loss 

as part of non-certified financial report 

filings, substantially all IBs already are 

filing this data in practice and, in any 

event, must compute the relevant 

income and loss data (although not 

currently required to be provided in a 

separate income statement) in order to 

complete Commission Form 1–FR or the 

SEC FOCUS report, as applicable, under 

the Commission’s regulations.13 The 

Commission’s Proposals solicited public 

comment on this analysis.14 No 

comments were received. Accordingly, 

pursuant to Section 3(a) of the RFA, 5 

U.S.C. 605(b), the Chairman, on behalf 

of the Commission, certifies that the 

action taken herein will not have a 

significant economic impact on a 

substantial number of small entities. 

C. Paperwork Reduction Act 

This rulemaking provides an 

alternative method of collection for a 

required collection of information under 

Part 1 of the Commission’s rules, but is 

not anticipated to change the burden 

under such collection as the actual 

financial reporting requirements have 

not changed significantly. As required 

by the Paperwork Reduction Act of 1995 

(44 U.S.C. 3507(d)), the Commission 

submitted a copy of this section to the 

Office of Management and Budget 

(‘‘OMB’’) for its review. No comments 

were received in response to the 

Commission’s invitation in its notice of 

proposed rulemaking to comment on 

any change in the potential paperwork 

burden associated with these rule 

amendments.15

D. Cost-Benefit Analysis 

Section 15(a) of the Act, as amended 

by Section 119 of the Commodity 

Futures Modernization Act, requires the 

Commission to consider the costs and 

benefits of its action before issuing a 

new regulation under the Act. By its 

terms, Section 15(a) as amended does 

not require the Commission to quantify 

the costs and benefits of a new 

regulation or to determine whether the 

benefits of the proposed regulation 

outweigh its costs. Rather, Section 15(a) 

simply requires the Commission to 

‘‘consider the costs and benefits’’ of its 

action. 

Section 15(a) further specifies that 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern: Protection of market 

participants and the public; efficiency, 

competitiveness, and financial integrity 

of futures markets; price discovery; 

sound risk management practices; and 

other public interest considerations. The 

Commission, in its discretion, can 

choose to give greater weight to any one 

of the five enumerated areas and 

determine that, notwithstanding its 

costs, a particular regulation is 

necessary or appropriate to protect the 

public interest or to effectuate any of the 

provisions or to accomplish any of the 

purposes of the Act. 

The Commission’s proposal contained 

an analysis of its consideration of these 

costs and benefits and solicited public 

comment thereon.16 No comments were 

received with respect to this analysis. 

Therefore, pursuant to such 

consideration, the Commission has 

decided to adopt these amendments as 

discussed above. 


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69008 Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations 

List of Subjects in 17 CFR Part 1 

Brokers, Commodity futures, 

Reporting and recordkeeping 

requirements. 

■ In consideration of the foregoing and 

pursuant to the authority contained in 

the Commodity Exchange Act and, in 

particular, Sections 4f, 4g and 8a(5) 

thereof, 7 U.S.C. 6f, 6g and 12a(5), the 

Commission hereby amends 17 CFR part 

1 as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

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

16, 16a, 19, 21, 23 and 24, as amended by 

the Commodity Futures Modernization Act of 

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

Stat. 2763 (2000). 

■ 2. Section 1.10 is amended by 

removing paragraph (b)(2)(iii) and 

revising paragraphs (b)(2)(i), 

(b)(2)(ii)(A), (b)(3), (c)(1) and (c)(2), 

(d)(1)(ii), (d)(4)(iii), and (h) as follows: 

§ 1.10 Minimum financial requirements for 

futures commission merchants and 

introducing brokers. 

* * * * * 

(b) * * * 

(2)(i) Except as provided in 

paragraphs (b)(3) and (h) of this section, 

and except for an introducing broker 

operating pursuant to a guarantee 

agreement which is not also a securities 

broker or dealer, each person registered 

as an introducing broker must file a 

Form 1–FR–IB semiannually as of the 

middle and the close of each fiscal year. 

Each Form 1–FR–IB must be filed no 

later than 17 business days after the date 

for which the report is made. 

(ii)(A) In addition to the financial 

reports required by paragraph (b)(2)(i) of 

this section, each person registered as 

an introducing broker must file a Form 

1–FR–IB as of the close of its fiscal year 

which must be certified by an 

independent public accountant in 

accordance with § 1.16 no later than 90 

days after the close of each introducing 

broker’s fiscal year: Provided, however, 

that a registrant which is registered with 

the Securities and Exchange 

Commission as a securities broker or 

dealer must file this report not later than 

the time permitted for filing an annual 

audit report under § 240.17a–5(d)(5) of 

this title. 

* * * * * 

(3) The provisions of paragraphs (b)(1) 

and (b)(2) of this section may be met by 

any person registered as a futures 

commission merchant or as an 

introducing broker who is a member of 

a designated self-regulatory organization 

and conforms to minimum financial 

standards and related reporting 

requirements set by such designated 

self-regulatory organization in its 

bylaws, rules, regulations, or resolutions 

and approved by the Commission 

pursuant to Section 4f(b) of the Act and 

§ 1.52: Provided, however, That each 

such registrant shall promptly file with 

the Commission a true and exact copy 

of each financial report which it files 

with such designated self-regulatory 

organization. 

* * * * * 

(c) Where to file reports. (1) Form 

1–FR filed by an introducing broker 

pursuant to paragraph (b)(2) of this 

section need be filed only with, and will 

be considered filed when received by, 

the National Futures Association. Other 

reports or information 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 designated self-regulatory 

organization, if any; and reports or other 

information required to be filed by this 

section by an applicant for registration 

will be considered filed when received 

by the National Futures Association. 

Any report or information filed with the 

National Futures Association pursuant 

to this paragraph shall be deemed for all 

purposes to be filed with, and to be the 

official record of, the Commission. 

(2)(i) Except as provided in the last 

sentence of this subparagraph, all filings 

or other notices prepared by a futures 

commission merchant 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 or a designated 

self-regulatory organization has 

provided the Commission with the 

means necessary to read and to process 

the information contained in such 

report. A Form 1–FR required to be 

certified by an independent public 

accountant in accordance with § 1.16 

which is filed by a futures commission 

merchant must be filed in paper form 

and may not be filed electronically. 

(ii) Except as provided in paragraph 

(h) of this section, all filings or other 

notices or applications prepared by an 

introducing broker or applicant for 

registration as an introducing broker or 

futures commission merchant pursuant 

to this section must be filed 

electronically in accordance with 

electronic filing procedures established 

by the National Futures Association. In 

the case of a Form 1–FR–IB that is 

required to be certified by an 

independent public accountant in 

accordance with § 1.16, a paper copy of 

any such filing with the original 

manually signed certification must be 

maintained by the introducing broker or 

applicant for registration as an 

introducing broker in accordance with 

§ 1.31. 

* * * * * 

(d)(1) * * * 

(ii) Statements of income (loss) and 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; 

* * * * * 

(4) * * * 

(iii) 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 this paragraph. 

* * * * * 

(h) Filing option available to a futures 

commission merchant or an introducing 

broker that is also a securities broker or 

dealer. Any applicant or registrant 

which is registered with the Securities 

and Exchange Commission as a 

securities broker or dealer may comply 

with the requirements of this section by 

filing (in accordance with paragraphs 

(a), (b), (c), and (j) of this section) a copy 

of its Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE (FOCUS 

Report), in lieu of Form 1–FR; Provided, 

however, That all information which is 

required to be furnished on and 

submitted with Form 1–FR is provided 

with such FOCUS Report; and Provided, 

further, That a certified FOCUS Report 

filed by an introducing broker or 

applicant for registration as an 

introducing broker in lieu of a certified 

Form 1–FR–IB must be filed according 

to National Futures Association rules, 

either in paper form or electronically, in 

accordance with procedures established 


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Federal Register / Vol. 74, No. 249 / Wednesday, December 30, 2009 / Rules and Regulations 69009 

1Rule 206(3)–3T [17 CFR 275.206(3)–3T]. All 

references to Rule 206(3)–3T and the various 

sections thereof in this Release are to 17 CFR 

275.206(3)–3T and its corresponding sections. See 

also Temporary Rule Regarding Principal Trades 

with Certain Advisory Clients, Investment Advisers 

Act Release No. 2653 (Sep. 24, 2007) [72 FR 55022 

(Sep. 28, 2007)] (‘‘2007 Principal Trade Rule 

Release’’). 

2 482 F.3d 481 (D.C. Cir. 2007). In the FPA 

Decision, handed down on March 30, 2007, the 

Court of Appeals for the District of Columbia 

Circuit vacated (subject to a subsequent stay until 

October 1, 2007) Rule 202(a)(11)–1 under the 

Advisers Act. Rule 202(a)(11)–1 provided, among 

other things, that fee-based brokerage accounts were 

not advisory accounts and were thus not subject to 

the Advisers Act. For further discussion of feebased brokerage accounts, see 2007 Principal Trade 

Rule Release, Section I. 

3See 2007 Principal Trade Rule Release at nn.19– 

20 and Section VI.C. 

4As a consequence of the FPA Decision, brokerdealers offering fee-based brokerage accounts 

became subject to the Advisers Act with respect to 

those accounts, and the client relationship became 

fully subject to the Advisers Act. These brokerdealers—to the extent they wanted to continue to 

offer fee-based accounts and met the requirements 

for registration—had to register as investment 

advisers, if they had not done so already, act as 

fiduciaries with respect to those clients, disclose all 

material conflicts of interest, and otherwise fully 

comply with the Advisers Act, including the 

restrictions on principal trading contained in 

Section 206(3) of the Act. See 2007 Principal Trade 

Rule Release, Section I. 

by the National Futures Association, 

and if filed electronically, a paper copy 

of such filing with the original manually 

signed certification must be maintained 

by such introducing broker or applicant 

in accordance with § 1.31. 

* * * * * 

■ 3. Section 1.12 is amended by: 

■ a. Revising paragraphs (a)(2) and 

(i)(1); 

■ b. Removing paragraph (a)(3); and 

■ c. Adding paragraph (i)(3) as follows: 

§ 1.12 Maintenance of minimum financial 

requirements by futures commission 

merchants and introducing brokers. 

(a) * * * 

(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. 

* * * * * 

(i)(1) Every notice and written report 

required to be given or filed by this 

section (except for notices required by 

paragraph (f) of this section) by a futures 

commission merchant or a selfregulatory 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, with the 

principal office of the Commission in 

Washington, DC, with the designated 

self-regulatory organization, if any; and 

with the Securities and Exchange 

Commission, if such registrant is a 

securities broker or dealer. Every notice 

and written report required to be given 

or filed by this section by an applicant 

for registration as a futures commission 

merchant must be filed with the 

National Futures Association (on behalf 

of the Commission), with the designated 

self-regulatory organization, if any, and 

with the Securities and Exchange 

Commission, if such applicant is a 

securities broker or dealer. Any notice 

or report filed with the National Futures 

Association pursuant to this paragraph 

shall be deemed for all purposes to be 

filed with, and to be the official record 

of, the Commission. 

* * * * * 

(3) Every notice or report required to 

be provided in writing to the 

Commission under this section may, in 

lieu of facsimile, be filed via electronic 

transmission 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. 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. 

Issued in Washington, DC, on December 

24, 2009, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. E9–31032 Filed 12–29–09; 8:45 am] 

BILLING CODE P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 275 

[Release No. IA–2965; File No. S7–23–07] 

RIN 3235–AJ96 

Temporary Rule Regarding Principal 

Trades With Certain Advisory Clients 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission is adopting as final Rule 

206(3)–3T under the Investment 

Advisers Act of 1940, the interim final 

temporary rule that establishes an 

alternative means for investment 

advisers who are registered with the 

Commission as broker-dealers to meet 

the requirements of Section 206(3) of 

the Investment Advisers Act when they 

act in a principal capacity in 

transactions with certain of their 

advisory clients. As adopted, the only 

change to the rule is the expiration date. 

Rule 206(3)–3T will sunset on December 

31, 2010. 

DATES: Effective Date: December 30, 

2009. 

FOR FURTHER INFORMATION CONTACT: 

Sarah A. Bessin, Assistant Director, 

Daniel S. Kahl, Branch Chief, or 

Matthew N. Goldin, Senior Counsel, at 

(202) 551–6787 or IArules@sec.gov, 

Office of Investment Adviser 

Regulation, Division of Investment 

Management, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–5041. 

SUPPLEMENTARY INFORMATION: The 

Securities and Exchange Commission is 

adopting as final temporary Rule 

206(3)–3T [17 CFR 275.206(3)–3T] 

under the Investment Advisers Act of 

1940 [15 U.S.C. 80b]. 

I. Background 

On September 24, 2007, we adopted, 

on an interim final basis, Rule 206(3)– 

3T, a temporary rule under the 

Investment Advisers Act of 1940 (the 

‘‘Advisers Act’’) that provides an 

alternative means for investment 

advisers who are registered with us as 

broker-dealers to meet the requirements 

of Section 206(3) of the Advisers Act 

when they act in a principal capacity in 

transactions with certain of their 

advisory clients.1 The purpose of the 

rule was to permit broker-dealers to sell 

to their advisory clients, in the wake of 

Financial Planning Association v. SEC 

(the ‘‘FPA Decision’’),2 certain securities 

held in the proprietary accounts of their 

firms that might not be available on an 

agency basis—or might be available on 

an agency basis only on less attractive 

terms 3—while protecting clients from 

conflicts of interest as a result of such 

transactions.4

The rule vacated in the FPA Decision 

had allowed broker-dealers to offer feebased accounts without complying with 

the Advisers Act, including the 

requirements of Section 206(3). Section 

206(3) makes is unlawful for any 

investment adviser, directly or 

indirectly, ‘‘acting as a principal for his 

own account, knowingly to sell any 

security to or to purchase any security 

from a client * * *, without disclosing 

to such client in writing before the 

completion of such transaction the 


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