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[Federal Register: February 20, 1998 (Volume 63, Number 34)]

[Rules and Regulations]

[Page 8566-8571]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr20fe98-5]



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COMMODITY FUTURES TRADING COMMISSION



17 CFR Parts 1, 30, 33, and 190





Distribution of Risk Disclosure Statements by Futures Commission

Merchants and Introducing Brokers



AGENCY: Commodity Futures Trading Commission.



ACTION: Final rules.



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SUMMARY: On September 10, 1997, the Commodity Futures Trading

Commission ("CFTC" or "Commission") published for comment proposed

amendments to its rules concerning the mandatory risk disclosure

obligations of futures commission merchants ("FCMs") and introducing

brokers ("IBs") to their customers (the "Proposal").\1\

Specifically, the Commission proposed to relieve FCMs and IBs from the

requirements to furnish certain defined customers with mandatory risk

disclosure statements and to receive from such customers a signed

acknowledgment of receipt of such statements pursuant to Rule 1.55(a)

(risk disclosure pertaining to domestic futures); Rule 30.6(a) (risk

disclosure pertaining to foreign futures or foreign options); Rule

33.7(a) (risk disclosure pertaining to domestic exchange-traded

commodity options); Rule 1.65(a)(3) (risk disclosure for customers

whose accounts are transferred other than at the customer's request to

another FCM or IB) and Rule 190.10(c) (disclosure pertaining to

treatment in bankruptcy of non-cash property held by an FCM as margin

for commodity interest contracts). The comment period for the Proposal

was sixty days and closed on November 10, 1997.

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    \1\ 62 FR 47612 (September 10, 1997).

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    The Commission has carefully considered the comments received on

the Proposal, and based upon its review of these comments and its

reconsideration of the proposed rule amendments, it is adopting the

Proposal as modified herein.



EFFECTIVE DATE: April 21, 1998.



FOR FURTHER INFORMATION CONTACT:

Thomas E. Joseph, Attorney-Adviser, Division of Trading and Markets,

Commodity Futures Trading Commission, 1155 21st Street, N.W.,

Washington D.C. 20581. Telephone (202) 418-5450.



SUPPLEMENTARY INFORMATION:



I. Background



    CFTC rules require FCMs and IBs to provide customers with

Commission-approved disclosure statements describing the risks of

trading in domestic (and, as applicable, foreign) commodity futures and

options and to receive written acknowledgment of receipt of such

statements prior to opening an account for the customer.\2\ In

addition, Commission Rule 190.10(c) requires an FCM to provide a

customer with a disclosure statement concerning the treatment in

bankruptcy of any non-cash property deposited as margin at the FCM by a

customer before the FCM may accept this property from the customer to

margin, guarantee or secure any commodity interest contract.\3\ As

discussed more fully in the Proposal, the Commission, based upon its

previous efforts to simplify disclosure obligations of Commission

registrants, believed that it was appropriate to provide FCMs and IBs

with relief from certain disclosure and bankruptcy statement

requirements in the context of accounts for specified customers and

thus published for comment proposed amendments to the risk disclosure

and bankruptcy rules.\4\

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    \2\ See Rule 1.55(a) (risk disclosure requirement concerning

trading domestic commodity futures); Rule 30.6(a) (risk disclosure

requirement concerning non-United States commodity futures or

options contracts); and Rule 33.7(a) (risk disclosure requirement

concerning domestic, exchange-traded commodity options).

    \3\ Commission Rule 190.10 does not require an FCM to obtain a

customer's written acknowledgment of receipt of this statement.

    \4\ See 62 FR at 47612-13 (discussing previous Commission

efforts to reduce and streamline disclosure obligations of

registrants).

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    The comment period for the Proposal closed on November 10, 1997,

although the Commission considered comments received after this date.

The Commission received comment letters from: (1) The Chicago Board of

Trade ("CBOT"); (2) the Government Finance Officers Association

("GFOA"); (3) the Chicago Mercantile Exchange ("CME"); (4) the

Futures Industry Association ("FIA"); (5) the National Futures

Association ("NFA"); and (6) the Association of the Bar of the City

of New York, Committee on Futures Regulation ("NYCBar"). Only the

GFOA opposed the Commission's effort to modify its risk disclosure

rules, although the GFOA alternatively requested that the Commission

delete government entities from the list of customers for whom this

relief can be claimed. The remaining five commenters generally

supported the Proposal but suggested certain modifications, as

discussed more fully below. The following discussion focuses



principally on the comments received on the Proposal and the

modifications to the Proposal made in response to these comments.

Additional background information on these final rules is found in the

Federal Register release setting forth the Proposal.\5\

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    \5\ 62 FR 47612 (September 10, 1997).

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II. Discussion



    The rule amendments adopted herein eliminate the requirement that

FCMs and IBs provide specified customers, defined in Rule 1.55(f), with

Commission-mandated risk disclosure statements and obtain from these

customers a written acknowledgment of receipt of the risk disclosure

statement, as required by Rules 1.55(a), 1.65(a)(3), 30.6(a), and

33.7(a), before opening a commodity futures or options account for

these customers. Additionally, the amendments relieve FCMs of the

obligation to furnish these customers with the bankruptcy disclosure

statement required by Rule 190.10(c) before accepting non-cash property

from such customers to margin a commodity interest contract. FCMs or

IBs will remain free to provide customers specified in proposed Rule

1.55(f) with the Commission-approved risk disclosure statement without

obtaining a written acknowledgement of receipt of this statement from

these qualifying customers.\6\

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    \6\ FCMs will also remain free to provide all customers with the

disclosure statement concerning the treatment in bankruptcy of non-

cash property held by an FCM to margin, secure or guarantee a

commodity interest contract.



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[[Page 8567]]



    The categories of customers specified in Rule 1.55(f) for whom an

FCM or IB may claim the relief adopted herein are based substantially

upon the categories of eligible swap participants in part 35 of the

Commission rules \7\ and eligible participants in part 36 of the

Commission rules.\8\ Rule 1.55(f) provides FCMs and IBs with clear,

objective criteria for identifying the customers to whom delivery of

the Commission-approved disclosure statements is not required. In this

regard, the Commission notes that the rule contains no specific

requirement that FCMs and IBs maintain with their books and records any

information in addition to that already required by other Commission

rules in order to identify a particular customer's eligibility for the

relief provided by the proposed amendments.\9\ However, FCMs and IBs

are required to assure that mandated disclosure statements are provided

to customers other than those to whom this relief applies. In order to

substantiate compliance with such disclosure requirements and exercise

meaningful supervision over customer accounts, FCMs and IBs should

maintain and review on a regular basis adequate documentation relevant

to establish the qualifications of the customers for whom the relief

adopted herein will be claimed and to confirm the identities of

customers to whom specified risk disclosures have been made and from

whom acknowledgments have been obtained.\10\

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    \7\ See CFTC Rule 35.1(b)(2). Part 35 of the Commission's rules

exempts certain swap agreements from most provisions of the Act and

Commission rules.

    \8\See CFTC Rule 36.1(c)(2). Part 36 of the Commission's rules

exempts certain contract market transactions from specified

provisions of the Act and Commission regulations thereunder. Parts

35 and 36 of the Commission rules were adopted pursuant to authority

set forth in Section 4(c) of the Act, 7 U.S.C. 6(c). See 58 FR 5587

(January 22, 1993) (adopting Part 35) and 60 FR 51323 (October 2,

1995) (adopting Part 36). Section 4(c)(2) of the Act, 7 U.S.C.

6(c)(2), requires that, among other conditions, any agreement,

contract or transaction exempted from any provision of the Act

pursuant to Section 4(c) of the Act must "be entered into solely

between appropriate persons," who are defined in Section 4(c)(3)

(A) through (J) of the Act, 7 U.S.C. 6(c)(3)(A)-(J). Thus, the lists

of eligible swap participants and eligible participants were, in

turn, modeled closely on the list of appropriate persons provided in

Section 4(c) of the Act.

    \9\ For example, FCMs and IBs would be required to obtain and

maintain the information required by CFTC Rule 1.37 concerning all

customers, including customers listed in Rule 1.55(f).

    \10\ Rule 166.3 requires FCMs and IBs to supervise diligently

the handling of commodity interest accounts.

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    The comments received on the Proposal are summarized below. The

Commission has carefully considered these comments. For the reasons

discussed herein, the Commission is adopting these rule amendments

substantially as proposed, although the Commission is removing

government entities from the list of qualifying customers set forth in

Rule 1.55(f) \11\ and deleting language, which commenters felt was

redundant, from Rule 1.55(f) that had referred to the obligation of any

FCM or IB claiming this relief to "provide such disclosure as is

material in the circumstances."

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    \11\ The Commission's reasons for deleting "government

entities" from the categories of customers for whom the relief

adopted may be claimed is discussed below in the subsection entitled

Government Entities.

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Comment in Opposition to the Proposal



    The GFOA objected to the Proposal and recommended that no change be

made in the Commission's risk disclosure requirements. The GFOA

stressed the difficulty of developing generalized standards to assess

financial sophistication and the likelihood that the proposed rule

amendments will erode customer protections. However, as the Commission

emphasized in the Proposal, its previous efforts to consolidate and

reduce disclosure obligations for registrants have not negatively

affected the public interest. Moreover, the Commission believes that

the stringent criteria set forth in Rule 1.55(f), along with the

continuing disclosure obligations set forth in newly-designated Rule

1.55(g), will allow it to eliminate requirements for standardized risk

disclosures and customer acknowledgments of that disclosure for certain

specified customers without eroding overall customer protection. Thus,

after considering GFOA's objections, the Commission continues to

believe that it would not be contrary to the public interest to adopt

the Proposal, as modified herein, and has decided to adopt these final

rule amendments.



Categories of Customers for Whom Relief May Be Claimed



    All the commenters urged the Commission to reconsider the

categories of parties for whom FCMs and IBs can claim the relief

adopted herein. Most generally, the NYCBar questioned "the creation of

a further group of `sophisticated' customers" in defining the

categories of customers for whom FCMs or IBs can claim the risk

disclosure relief and urged the Commission to adopt an already existing

standard such as that used by the Commission for defining qualified

eligible participants ("QEPs"), qualified eligible clients ("QECs")

or appropriate persons,\12\ or used by the Securities and Exchange

Commission ("SEC") to define accredited investor, qualified

institutional buyer or qualified purchaser.\13\ The NYCBar commented

that creation of a new class of customers will lead to even more

paperwork as FCMs or IBs try "to insure that they receive the

appropriate representations permitting them to invoke the expected

relief." The NYCBar also suggested that the policy reasons behind the

selection of the criteria used to define the customers set forth in

Rule 1.55(f) were not sufficiently explained.

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    \12\ Commission Rule 4.7, 17 CFR 4.7, defines the terms QEP and

QEC. The term "appropriate persons" is defined in Section 4(c) of

the Act.

    \13\ The term "accredited investor" as used in SEC Regulation

D is defined at 17 CFR 230.501. The term "qualified institutional

buyer" is defined at 17 CFR 230.144A. The term "qualified

purchaser" is defined at 15 U.S.C. 80-2(a)(51)(A) and 17 CFR

270.2a51-1. See 62 FR 17512 (April 9, 1997) (adopting, among other

rules, 17 CFR 270.2a51-1).

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    As stated in the Proposal, the categories of customers for whom an

FCM or IB can claim the risk disclosure relief are based substantially

upon the existing definitions of eligible swap participant and eligible

Part 36 participant, which themselves are based upon the definition of

appropriate persons contained in the Act. The Commission explained that

these definitions were "appropriate models for the definitions set

forth in proposed Rule 1.55(f) inasmuch as the Part 35 and 36 rules

exempt parties from providing mandatory risk disclosure statements * *

* in connection with transactions covered by these rules." \14\

Modifications were made to the Part 35 and 36 definitions only to

assure that the Proposal did not cause some commodity pools to be given

risk disclosure statements when then-current Rule 1.55 did not require

any pool to receive such a statement and to prevent applying criteria

from the Part 35 and 36 rules that made little sense in the context of

the Proposal.\15\

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    \14\ 62 FR at 47613.

    \15\ Id.

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    Moreover, as discussed more fully below, the Commission does not

believe that the criteria applicable to securities regulations or to

other commodities transactions are as relevant as the Part 35 and Part

36 standards in identifying which categories of FCM or IB customers do

not require the protections afforded by mandatory risk disclosure. By

contrast, the criteria set forth in the Part 35 and Part 36 rules

provide a reasonable basis for protecting the public interest and

limiting the affected categories of commodity futures or options

customers to those persons



[[Page 8568]]



whose wealth, line of business or other proxies of financial

sophistication render them unlikely to require the protections afforded

by standardized risk disclosure. Therefore, with the exception of

removing government entities, the Commission has adopted in Rule

1.55(f) the categories of customers for whom FCMs and IBs may claim

this relief, as proposed, based upon the reasons explained below.

Government Entities

    As an alternative to its recommendation that the Commission not

adopt the Proposal, the GFOA urged that government entities be removed

from the list of qualifying customers. The GFOA emphasized that the

proposed rule did not distinguish between small, local governmental

organizations and large state treasury operations. In this respect,

GFOA commented that:



    Finance officers in many of the smallest jurisdictions often

have additional responsibilities as far removed from finance as

handling public works projects and supervising public safety

officers. These small jurisdictions often rely on public servants

who may have little expertise with commodities. At a minimum, they

should be able to expect full disclosure regarding the risk of

commodities futures prior to deciding whether or not to open a

commodities futures account and to commit taxpayer funds to such an

investment.



Further, the GFOA commented that "asset-based or, similarly portfolio-

size measurement tests have proved to be ineffective as predictors of

problems. Large entities and investors, both public and private, have

been the victims of misrepresentations and other misconduct just as

small ones have." \16\

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    \16\ In its comment letter, the GFOA noted that it had supported

the inclusion of local governments among the entities deemed

"eligible swap participants" by the Part 35 rules because it

believed that to exclude such entities would have been an

unwarranted federal intrusion into what is properly a state

function--that is, the regulation of allowable investment activity

by a state and its political subdivisions. The GFOA further noted

that, in its comments on the Part 35 rules, it recommended that the

Commission require improved disclosure regarding the types of

contracts being entered into and the risks involved in such

transactions. The GFOA also stated that it had opposed the

Commission's Part 36 professional trading market exemption.

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    The GFOA is a 13,500-member professional association of state and

local government finance officials and other public finance specialists

whose responsibilities include debt, cash and pension fund management

and is in a unique position to comment upon the financial

sophistication and disclosure needs of governmental organizations. The

Commission, based upon the GFOA's comments, believes that government

entities, especially those in smaller jurisdictions, would benefit from

continued receipt of the mandatory risk and bankruptcy disclosure

statements. Moreover, the Commission has taken note, in particular, of

the GFOA's comments that taxpayers deserve the full protection of the

CFTC's risk disclosure regulations. Therefore, after careful

consideration of the GFOA's comments, the Commission has decided to

remove government entities from the list of customers for whom FCMs or

IBs may claim the relief provided herein.

Natural Persons

    The CBOT, CME, FIA and NFA urged the Commission to allow FCMs and

IBs to claim the proposed relief for customers who are natural persons

who meet financial criteria significantly less stringent than the $10

million total asset standard proposed in the rule. The two Chicago

futures exchanges recommended that FCMs and IBs be allowed to claim the

relief for natural persons who are accredited investors as defined in

SEC Regulation D. The FIA urged the Commission to allow FCMs and IBs to

claim the relief for natural persons with a net worth of $1 million

while the NFA suggested that the Commission apply the same standard

used to define a natural person who is a QEP under CFTC Rule 4.7(a).

These commenters generally argued that the standards applied to

regulated exchange-traded futures should be less onerous than those

applied in unregulated markets such as the swaps market. The CBOT, in

particular, believed that it was not realistic to require an individual

to have the same level of assets as a qualifying corporation or to have

asset holdings twice as large as those required for a qualifying

investment company.

    As already mentioned, the total asset test is a proxy for financial

sophistication. Trading futures even on regulated exchanges involves

different risks than investments in securities. Thus, the private

offering safeharbor codified in SEC Regulation D is not necessarily

relevant to determining when a futures customer is not in need of

standardized risk disclosure.\17\ Moreover, the Commission does not

believe that in the context of this relief, it is unreasonable for

natural persons to be required to have asset holdings larger than

entities which are directly involved in the financial industry and are

otherwise regulated since such entities would be less likely than

individuals to require the protections afforded by mandatory risk

disclosure.

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    \17\ This point is also applicable to FIA's suggestion

concerning the net worth criteria for natural persons inasmuch as

the SEC's Regulation D defines an "accredited investor" to include

a natural person with a net worth of $1 million.

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    Perhaps more relevant to the issues raised by the proposal is the

suggestion that FCMs and IBs be able to claim the relief with respect

to natural persons who qualify as QEPs under CFTC Rule 4.7(a). Rule

4.7(a) relieves CPOs from providing eligible clients who invest in

qualifying pools with a Commission required Disclosure Document (which

normally would include a standardized risk disclosure statement),

provided that any offering memorandum must include all disclosures

necessary to make the information contained therein not misleading.

However, a pool participant's potential losses are generally limited to

the amount of his or her investment in the pool, while persons trading

directly in the futures markets (i.e., customers of an FCM or IB) are

exposed potentially to losses beyond amounts deposited as initial

margin and are responsible for any deficits that occur in their

accounts as a result of adverse price movements. Given the potentially

disparate risk exposures assumed by pool investors and customers of IBs

and FCMs, the QEP criteria would not necessarily be a reasonable basis

for defining customers for whom an FCM and IB can claim the relief

adopted herein.\18\

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    \18\ The Commission notes that natural persons, along with other

specified persons, may qualify as a QEC of a CTA under Rule 4.7(b).

QECs are potentially exposed to unlimited liability in connection

with the trading of their commodity futures accounts. Some but not

all QECs will be among the categories of customers listed in Rule

1.55(f). Under CFTC rules in effect prior to the rule amendments

adopted herein, all QECs received a standardized risk disclosure

statement from an FCM or IB before opening a commodity trading

account although AECs would not receive a Disclosure Document from a

CTA who correctly claimed the 4.7(b) relief. Given that QECs have

received the full protections of the CFTC risk disclosure rules

governing FCMs and IBs, the Commission does not believe that the QEC

criteria are appropriate for determining which persons are no longer

in need of the protections afforded by the standardized FCM/IB risk

disclosure statements.

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Requirement That FCMs and IBs Claiming Relief Disclose Material

Information



    FIA and NFA urged the Commission to eliminate from proposed Rule

1.55(f) the statement that FCMs and IBs claiming relief "provide such

disclosure as is material in the circumstances." FIA and NFA commented

that the requirement could be viewed as imposing a higher disclosure

standard on FCMs and IBs claiming relief under the amendments than on

other FCMs and IBs and, in any event, it was



[[Page 8569]]



duplicative of disclosure obligations recognized in then-current Rule

1.55(f) (redesignated Rule 1.55(g) by this final rule).\19\

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    \19\ Newly-designated Rule 1.55(g) provides: "This section

[Rule 1.55] does not relieve a futures commission merchant or

introducing broker from any other disclosure obligation it may have

under applicable law."

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    As the Commission stated in the Proposal, FCMs and IBs currently

have obligations independent of the duty to deliver the standardized

risk disclosure statement to disclose to customers information that

would be material in the circumstances. These rule amendments are not

intended to enlarge the scope of an FCM's or IB's existing duties.

Given that the proposed wording may create confusion concerning the

disclosure obligations for FCMs and IBs which claim this relief, the

Commission has decided to delete the above-cited language from Rule

1.55(f). As the commenters noted, however, FCMs and IBs continue to

have disclosure obligations to customers for whom this relief has been

claimed as recognized in newly-designated Rule 1.55(g).\20\ Moreover,

as the Commission stated when it first adopted Rule 1.55(g), "the

essential purpose of the rule [is] to confirm the existing obligations

of an FCM or IB under the law to disclose material information to its

customers." \21\

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    \20\ The NYCBar also urged the Commission to define "the scope

and duty of such remaining [risk] disclosure obligations." As the

Commission stated in the Proposal, these minimum disclosure

obligations arise under the Act, under state law and under common

law, and may differ in particular circumstances. See 62 FR at 47614-

15. Thus, the scope of an FCM's or IB's disclosure obligations will

be affected by the particular facts surrounding a transaction and by

the Act, by state law and by common law, as interpreted by the

courts or in administrative proceedings. See id. at 47615 n.22.

    \21\ 50 FR 5380, 5381 (February 8, 1985).

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Obligation That FCM or IB Assure That Customers for Whom Relief Is

Claimed Qualify for Such Relief



    FIA argued that FCMs or IBs should be able to claim the proposed

relief and be relieved of any disclosure obligation if a customer's

investment adviser or CTA represents that the client qualifies for

relief and that the adviser or the CTA has made all necessary

disclosure to such client. FIA contended that an institutional client's

primary market relationship is with its investment adviser or CTA and

not the FCM or IB and, thus, a CTA or adviser should have primary

responsibility for disclosure. FIA also urged the Commission to

consider whether CTAs and investment advisers, and not the carrying

FCMs, should be responsible for providing their clients with the

necessary risk and related disclosures in all circumstances, without

regard to the financial status of those clients.

    FCMs and IBs have obligations under Commission Rules 166.3, 1.37

and, as designated herein, 1.55(g) to supervise customer accounts

diligently, to maintain accounts in the name of the ultimate customer,

and to provide customers with adequate disclosure. In addition, the

Commission has stated, and current law has already recognized, that an

FCM's or IB's disclosure obligations vary with the functions and

responsibilities that an FCM or IB undertakes on behalf of a

customer.\22\ This current rulemaking is not intended to shift an FCM's

or IB's existing obligations to other parties, such as a CTA or

investment adviser, and therefore, the Commission has not made any

change in the Proposal in response to this comment.

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    \22\ See 50 FR at 5381-82 ("the extent of the required risk

disclosure [by an FCM or IB] will vary with the precise nature of

the customer relationship and with the degree of customer reliance

on an FCM's or IB's advice").

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Financial and Segregation Interpretation No. 12



    The CBOT, CME, FIA and NFA suggested that the Commission eliminate

the requirement under Financial and Segregation Interpretation No. 12

that FCMs receive a signed, Commission-mandated subordination agreement

from customers before the customer may have segregated funds held in

foreign depositories. The Commission notes that on December 30, 1997,

it published a concept release soliciting public comment on how to

address risks related to holding segregated funds offshore or in

foreign currencies.\23\ Since the subordination agreement has been one

means by which the Commission has addressed these risks,\24\ comments

concerning the need for or effectiveness of the subordination agreement

requirement would best be considered by the Commission in connection

with the December 30, 1997 concept release and not as part of this

rulemaking exercise.\25\

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    \23\ 62 FR 67841 (December 30, 1997).

    \24\ See 53 FR 46911, 46913 (November 21, 1988) (release

adopting Financial and Segregation Interpretation No. 12).

    \25\ Comments concerning the issues addressed in the concept

release, including those related to the subordination agreement

requirement, should be received by the Commission on or before March

2, 1998. See 62 FR 67841.

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Electronic Distribution of Risk Disclosure Statement



    FIA and NFA also urged the Commission to allow FCMs/IBs to

establish customer acknowledgment of receipt of electronically-

distributed risk disclosure statements through means of a unique

customer identifier. Such a change would bring FCM and IB disclosure

rules into line with similar, recently-amended rules for CPOs and CTAs

\26\ and permit FCMs and IBs to deliver the required risk disclosure

statements electronically to all categories of customers.

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    \26\ See 62 FR 39104 (July 22, 1997) (amending Rules 4.21 and

4.31).

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    The Commission did not address the question of a customer's

"electronic" acknowledgment of risk disclosure statements in the

Proposal. Any change in current procedures would clearly affect the

rights of commodity futures customers beyond those persons identified

in Rule 1.55(f), and such customers should be allowed adequate notice

and opportunity to comment on any possible changes to current rules.

However, although the Commission believes that this suggested change is

outside the scope of the current rulemaking, the Commission recognizes

the importance of the issues raised by FIA and NFA and will consider

undertaking a future rulemaking or other action to address these

issues.\27\

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    \27\ CFTC staff is reviewing issues related to the electronic

distribution and acknowledgment of documents and will provide the

Commission with recommendations on how best to address these issues.

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III. Related Matters



A. Regulatory Flexibility Act



    The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601-611,

requires that agencies, in promulgating final rules, consider the

impact of those rules on small businesses. The rules discussed herein

will affect FCMs and IBs. The Commission has already established

certain definitions of "small entities" to be used by the Commission

in evaluating the impact of its rules on such small entities in

accordance with the RFA. FCMs have been determined not to be small

entities under the RFA.

    With respect to IBs, the Commission has stated that it is

appropriate to evaluate within the context of a particular rule 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. These

rule amendments would not require any IB to alter its current method of

doing business. Instead the rule amendments provide IBs with relief

from certain disclosure and recordkeeping requirements with respect to

certain identified customers. Presumably, an IB would only choose to

make use of this relief if it were cost-



[[Page 8570]]



 effective to do so. Further, these rule amendments impose no

additional burden or requirements on IBs and, thus, should not have a

significant economic impact on a substantial number of IBs.



B. Paperwork Reduction Act



    When publishing final rules, the Paperwork Reduction Act of 1995

(Pub. L. 104-13 (May 13, 1995)) imposes certain requirements on federal

agencies (including the Commission) in connection with their conducting

or sponsoring any collection of information as defined by the Paperwork

Reduction Act. There is no burden associated with the rule amendments

to Rule 1.55 or Rule 1.65. While these rule amendments have no burden,

the group of rules (3038-0024) of which these rules are a part has the

following burden:



Average burden hours per response: 128

Number of Respondents: 3,148

Frequency of response: 36



    Three OMB approved collections are affected by the adoption of

these rule amendments. In compliance with the Act, this final rule

informs the public of:



    (1) The reasons the information is planned to be and/or has been

collected; (2) the way such information is planned to be and/or has

been used to further the proper performance of the functions of the

agency; (3) an estimate, to the extent practicable, of the average

burden of the collection (together with a request that the public

direct to the agency any comments concerning the accuracy of this

burden estimate and any suggestions for reducing this burden); (4)

whether responses to the collection of information are voluntary,

required to obtain or retain a benefit or mandatory; (5) the nature

and extent of confidentiality to be provided, if any; and (6) the

fact that 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 OMB control number.



    The Commission previously submitted these rule amendments in

proposed form and its associated information collection requirements to

the Office of Management and Budget. The Office of Management and

Budget approved the associated information collection on January 6,

1998.

    3038-0007--Regulation of Domestic Exchange-Traded Commodity

Options. The burden associated with collection 3038-0007, including

these final rule amendments, is as follows:



Average burden hours per response: 50.57

Number of Respondents: 190,422

Frequency of response: 1,111



    The burden associated with Rule 33.7 is as follows:



Average burden hours per response: 0.08

Number of Respondents: 175

Frequency of response: 115



    3038-0021--Regulations Governing Bankruptcies of Commodity Brokers.

The burden associated with collection 3038-0021, including these final

rule amendments, is as follows:



Average burden hours per response: 0.35

Number of Respondents: 472

Frequency of response: 34



    The burden associated with Rule 190.10(c) is as follows:



Average burden hours per response: 0.05

Number of Respondents: 235

Frequency of response: 8



    3038-0035--Rules Relating to the Offer and Sale of Foreign Futures

and Options. The burden associated with collection 3038-0035, including

these final rule amendments, is as follows:



Average burden hours per response: 15.70

Number of Respondents: 2,832

Frequency of response: 48



    The burden associated with Rule 30.6 is as follows:



Average burden hours per response: 0.60

Number of Respondents: 360

Frequency of response: 4



    Persons wishing to comment on the information which would be

required by these amended rules should contact the Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB, Washington, DC

20503, (202) 395-7340. Copies of the information collection submission

to OMB are available from the CFTC Clearance Officer, 1155 21st Street,

N.W., Washington, DC 20581, (202) 418-5160.



List of Subjects



17 CFR Part 1



    Customer protection, Risk disclosure statements, Commodity futures.



17 CFR Part 30



    Foreign futures and options transactions, Customer protection, Risk

disclosure statements.



17 CFR Part 33



    Domestic exchange-traded commodity options transactions.



17 CFR Part 190



    Bankruptcy.



    In consideration of the foregoing and pursuant to the authority

contained in the Commodity Exchange Act and in particular sections

2(a)(1), 4b, 4c, 4d, 4f, 4g and 8a of the Act, as amended, 7 U.S.C. 2,

6b, 6c, 6f, 6g and 12a, 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,

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, 24.



    2. Section 1.55 is amended by revising paragraph (a)(1), by

removing paragraph (a)(1)(iii), by redesignating paragraph (f) as

paragraph (g), and by adding new paragraph (f) to read as follows:





Sec. 1.55  Distribution of "Risk Disclosure Statement" by futures

commission merchants and introducing brokers.



    (a)(1) Except as provided in Sec. 1.65, no futures commission

merchant, or in the case of an introduced account no introducing

broker, may open a commodity futures account for a customer, other than

for a customer specified in paragraph (f) of this section, unless the

futures commission merchant or introducing broker first:

* * * * *

    (f) A futures commission merchant or, in the case of an introduced

account an introducing broker, may open a commodity futures account for

a customer without furnishing such customer the disclosure statements

or obtaining the acknowledgments required under paragraph (a) of this

section, Sec. 1.65(a)(13), and Sec. 30.6(a), Sec. 33.7(a), and

Sec. 190.10(c) of this chapter, provided that the customer is, at the

time at which the account is opened:

    (1) A bank or trust company;

    (2) A savings association or credit union;

    (3) An insurance company;

    (4) An investment company subject to regulation under the

Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1, et seq.) or a

foreign entity performing a similar role or function subject as such to

foreign regulations, provided that such investment company has total

assets exceeding $5,000,000;

    (5) A pool operated by a commodity pool operator registered under

the Commodity Exchange Act or exempt such registration or by a foreign

person performing a similar function to that of a commodity pool

operator and subject as such to foreign regulation;

    (6) A corporation, partnership, proprietorship, organization,

trust, or other entity:

    (i) which has total assets exceeding $10,000,000; or



[[Page 8571]]



    (ii) which has a net worth of $1,000,000;

    (7) An employee benefit plan subject to the Employee Retirement

Income Security Act of 1974, or a foreign person performing a similar

role or function and subject as such to foreign regulation, with total

assets exceeding $5,000,000 or whose investment decisions are made by a

bank, trust company, insurance company, investment adviser subject to

regulation under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1,

et seq.), or a commodity trading advisor subject to regulation under

the Commodity Exchange Act;



    (8) A broker-dealer subject to regulation under the Securities

Exchange Act of 1934 (15 U.S.C. 78a, et seq.) or a foreign person

performing a similar role or function subject as such to foreign

regulation, acting on its own behalf: provided, however, that if such

broker-dealer is a natural person or proprietorship, the broker-dealer

must also meet the requirements of paragraphs (f)(6) or (f)(10) of this

section;

    (9) A futures commission merchant, floor brokers, or floor traders

subject to regulation under the Commodity Exchange Act or a foreign

person performing a similar role or function subject as such to foreign

regulation; or

    (10) Any natural person with total assets exceeding $10,000,000.

* * * * *

    3. Section 1.65 is amended by redesignating paragraph (a)(3)(ii) as

(a)(3)(iii) and adding new paragraph (a)(3)(ii) to read as follows:





Sec. 1.65  Notice of bulk transfers and disclosure obligations to

customers.



    (a) * * *

    (3) * * *

    (ii) As to customers for which the transferee futures commission

merchant or introducing broker has clear evidence that such customer

was at the time the account was opened by the transferring futures

commission merchant or introducing broker, or is at the time the

account is being transferred, a customer listed in Sec. 1.55(f); or

* * * * *



PART 30--FOREIGN FUTURES OR FOREIGN OPTIONS TRANSACTIONS



    4. The authority citation for part 30 continues to read:



    Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise

noted.



    5. Section 30.6 is amended by revising paragraph (a) to read as

follows:





Sec. 30.6  Disclosure.



    (a) Future commission merchants and introducing brokers. Except as

provided in Sec. 1.65 of this chapter, no futures commission merchant,

or in the case of an introduced account no introducing broker, may open

a foreign futures or option account for a foreign futures or option

customer, other than for a customer specified in Sec. 1.55(f) of this

chapter, unless the futures commission merchant or introducing broker

first furnishes the customer with a separate written disclosure

statement containing only the language set forth in Sec. 1.55(b) of

this chapter or as otherwise approved under Sec. 155(c) of this chapter

(except for nonsubstantive additions such as captions), which has been

acknowledged in accordance with Sec. 1.55 of this chapter: Provided,

however, that the risk disclosure statement may be attached to other

documents as the cover page or the first page of such documents and as

the only material on such page.

* * * * *



PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION

TRANSACTIONS



    6. The authority citation for part 33 continues to read:



    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c,6d, 6e, 6f, 6g, 6h,

6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-

1, 13b, 19, and 21, unless otherwise noted.



    7. Section 33.7 is amended by revising paragraph (a)(1)

introductory text, to read as follows:





Sec. 33.7  Disclosure.



    (a)(1) Except as provided in Sec. 1.65 of this chapter, no futures

commission merchant, or in the case of an introduced account no

introducing broker, may open or cause the opening of a commodity option

account for an option customer, other than for a customer specified in

Sec. 1.55(f) of this chapter, unless the futures commission merchant or

introducing broker first:

* * * * *



PART 190--BANKRUPTCY



    8. The authority citation for Part 190 continues to read:



    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,

and 11 U.S.C. 362, 546, 548, 556 and 761-766, unless otherwise

noted.



    9. Section 190.10 is amended by revising paragraph (c)(1) to read

as follows:





Sec. 190.10  General.



* * * * *

    (c) Disclosure statement for non-cash margin. (1) Except as

provided in Sec. 1.65 of this chapter, no commodity broker (other than

a clearing organization) may accept property other than cash from or

for the account of a customer, other than a customer specified in

Sec. 1.55(f) of this chapter, to margin, guarantee, or secure a

commodity contract unless the commodity broker first furnishes the

customer with the disclosure statement set forth in paragraph (c)(2) of

this section in boldface print in at least 10 point type which may be

provided as either a separate, written document or incorporated into

the customer agreement, or with another statement approved under

Sec. 1.55(c) of this chapter and set forth in appendix A to Sec. 1.55

which the Commission finds satisfies this requirement.

* * * * *

    Issued in Washington, DC on February 13, 1998 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98-4258 Filed 2-19-98; 8:45 am]

BILLING CODE 6351-01-M
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