[Federal Register Volume 60, Number 240 (Thursday, December 14, 1995)]
[Proposed Rules]
[Pages 64132-64135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30359]



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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3


Ethics Training for Registrants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: On July 22, 1994, the Commodity Futures Trading Commission 
(Commission) proposed amendments to Rule 3.34, which governs ethics 
training for Commission registrants. The Commission has published a 
release announcing the adoption of those rule amendments in the Federal 
Register on December 13, 1995. The Commission also is proposing to 
amend Rule 3.34 to require that persons who seek to provide ethics 
training must present satisfactory evidence that they meet a 
proficiency testing requirement established by a registered futures 
association and possess a minimum of three years of relevant 
experience. The Commission is also proposing to amend Rule 3.34 to 
eliminate the provision permitting state-accredited entities to provide 
ethics training without being subject to the requirements pertaining to 
other providers under the rule.

DATES: Comments must be received by January 16, 1996.

ADDRESSES: Comments should be sent to the Office of the Secretariat, 
Commodity Futures Trading Commission, 1155 21st Street NW., Washington, 
DC 20581 and should refer to ``Ethics Training for Registrants.''

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief 
Counsel or Myra R. Silberstein, Attorney-Advisor, Division of Trading 
and Markets, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone 
(202) 418-5450.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 210 of the Futures Trading Practices Act of 1992 added a 
new paragraph (b) to Section 4p of the Commodity Exchange Act (Act) to 
mandate ethics training for persons required to be registered under the 
Act.\1\ On April 6, 1993, the Commission adopted Rule 3.34 to implement 
this Congressional mandate.\2\ In September, 1993, the Commission 
issued a Federal Register release to clarify the procedures to be 
followed by persons 

[[Page 64133]]
seeking to provide ethics training pursuant to Rule 3.34.\3\

    \1\This provision of the Act is codified at 7 U.S.C. 6p(b) 
(1994) and states that:
    The Commission shall issue regulations to require new 
registrants, within 6 months after receiving such registration, to 
attend a training session, and all other registrants to attend 
periodic training sessions, to ensure that registrants understand 
their responsibilities to the public under this Act, including 
responsibilities to observe just and equitable principles of trade, 
any rule or regulation of the Commission, any rule of any 
appropriate contract market, registered futures association, or 
other self-regulatory organization, or any other applicable Federal 
or state law, rule or regulation.
    \2\58 FR 19575, 19584-19587, 19593-19594 (Apr. 15, 1993).
    \3\58 FR 47890 (Sept. 13, 1993).
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    Rule 3.34 requires natural persons registered under the Act to 
attend ethics training to ensure that they understand their 
responsibilities to the public under the Act. The required training 
must address the requirements of the Act and all rules concerning the 
treatment and handling of customer orders and business. Issues to be 
addressed may include: honesty, fairness and the interests of customers 
and the integrity of the markets; effective supervisory systems and 
controls; assessment of financial situations and the investment 
experience of customers; disclosure of material information; and 
avoidance of conflicts of interest. New registrants must attend ethics 
training within six months of being granted registration and every 
three years thereafter. The initial training must be at least four 
hours in duration; subsequent training must be of at least one hour in 
duration. Persons registered when Rule 3.34 became effective on April 
26, 1993 were granted until April 26, 1996 to attend an initial 
training session, of at least two hours in duration, and must 
thereafter attend a one-hour session every three years. Ethics trainers 
must maintain records of materials used in such training and of 
attendees at such training.
    In July 1994, the Commission proposed amendments to Rule 3.34 to 
improve the operation of its ethics training program and furnish 
additional guidance with respect to the activities of ethics training 
providers.<SUP>4 The Commission has published a release announcing the 
adoption of those amendments published in the Federal Register on 
December 13, 1995. The amendments adopted will, among other things, 
require a person seeking to provide ethics training to certify that he 
is not subject to a statutory disqualification from registration under 
the Act,<SUP>5 barred from service on self-regulatory organization 
(SRO) governing boards or committees,<SUP>6 or subject to a pending 
proceeding concerning possible violations of the Act or rules or orders 
promulgated thereunder.

    \4\59 FR 37446 (July 22, 1994).
    \5\7 U.S.C. 12a (2) and (3)(1994). The Act specifies several 
grounds for disqualification from registration including, among 
others, a prior revocation of registration, felony conviction, and 
an injunction relating to futures or securities activities.
    \6\No person may serve on SRO governing boards or committees 
who, among other things, has been found within the prior three years 
to have committed a ``disciplinary offense'' or entered into a 
settlement agreement with respect to a charge involving a 
``disciplinary offense,'' is currently suspended from trading on any 
contract market, is suspended or expelled from membership in any 
SRO, or is currently subject to an agreement with the Commission or 
an SRO not to apply for registration or membership. A ``disciplinary 
offense'' for these purposes means any violation of the Act or the 
rules promulgated thereunder or SRO rules other than those relating 
to: (1) decorum or attire; (2) financial requirements; or (3) 
reporting or recordkeeping, unless resulting in fines aggregating 
more than $5,000 in a calendar year, provided such SRO rule 
violations did not involve fraud, deceit or conversion, or result in 
a suspension or expulsion. 17 CFR 1.63 (1995).
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II. Proposed Amendments

A. Proficiency Testing and Minimum Experience Requirements

    The Commission is now proposing further amendments to Rule 3.34 to 
require any person seeking to provide ethics training to furnish 
satisfactory evidence to a registered futures association that he has 
met the proficiency testing requirement<SUP>7 established by a 
registered futures association<SUP>8 pursuant to Section 17(p)(1) of 
the Act for the registration of commodity professionals<SUP>9 and 
possesses three years of relevant experience. Currently, the National 
Commodity Futures Examination (Series 3 Exam) is the proficiency test 
required to be completed by most commodity professionals.<SUP>10

    \7\7 U.S.C. 6p(a)(1994).
    \8\Presently, the National Futures Association (NFA) is the only 
registered futures association.
    \9\Section 17(p)(1) of the Act, 7 U.S.C. 21(p)(1)(1994), 
provides, in part, that a registered futures association must 
establish training standards and proficiency testing for persons 
involved in the solicitation of transactions subject to the Act, 
supervisors of such persons, and all persons for whom it has 
registration responsibilities.
    \10\See NFA Registration Rule 401.
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    In commenting on the amendments proposed in July, 1994, NFA 
suggested that a proficiency testing requirement be incorporated in 
Rule 3.34 to require ethics training providers to satisfy an objective 
standard designed to reflect a minimum level of knowledge of the 
futures industry and the relevant statutory and regulatory structure. 
NFA and another commenter also recommended that to ensure that an 
ethics training provider possesses a working knowledge of the futures 
industry and is capable of teaching relevant rules and regulations, 
ethics training providers should be required to have at least three 
years of industry or teaching experience.
    The Commission agrees that requiring persons who seek to provide 
ethics training to provide proof of satisfactory completion of a 
proficiency testing requirement applicable to registrants and of 
possession of three years of relevant industry or pedagogical 
experience provides an objective, readily administered measure for 
determining knowledge of relevant matters and should not be unduly 
burdensome. The Commission believes that it would be inconsistent with 
the Congressional mandate for ethics training and contrary to the 
public interest for a person to teach others about their 
responsibilities under applicable laws and rules if such a person is 
not able to demonstrate at least the same minimum acceptable level of 
proficiency as is required of those he intends to educate. Further, 
such requirements would be consistent with the approach followed by the 
Commission to date in evaluating applications from potential offerors 
of ethics training. In proposing Rule 3.34, the Commission noted its 
belief that ``pedagogical expertise and knowledge of futures are 
factors that should be taken into consideration in evaluating potential 
offerors of ethics training.''<SUP>11 Consequently, in reviewing 
applications filed under Rule 3.34 for authorization to provide ethics 
training, the Commission has endeavored to assure that such providers 
demonstrate pedagogical experience and knowledge of the futures 
markets. Should these proposed amendments be adopted, the Commission 
anticipates that NFA will promulgate rules establishing specific 
proficiency standards for ethics training providers.

    \11\58 FR 19575, 19586. However, initially the Commission 
elected not to establish specific requirements with respect to these 
matters in Rule 3.34.
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    The Commission believes that the proposed requirement of three 
years of relevant experience may be satisfied not only by pedagogical 
or teaching experience but, also, by relevant industry experience. For 
example, such industry experience might be acquired by the practice of 
law in the fields of futures or securities or employment as a trader or 
risk manager at a brokerage or end-user firm. The Commission welcomes 
comments as to the types of experience that should be deemed sufficient 
for this purpose.
    The Series 3 Exam is the only relevant proficiency test currently 
available for ethics training providers, since it is the proficiency 
test that is generally applicable to Commission registrants and is 
designed to assure a broad working knowledge of the futures industry. 
Successful completion of the Series 3 Exam is required of all natural 
persons seeking to be registered as a commodity pool operator (CPO), 
commodity trading advisor (CTA), futures commission merchant, 
introducing broker, leverage transaction merchant or an associated 
person (AP) 

[[Page 64134]]
of any of the foregoing.<SUP>12 The Commission recently approved an 
alternative proficiency testing requirement under which general 
securities representatives whose commodity interest activity will be 
limited to managed accounts or commodity pool interests may take the 
Futures Managed Funds Examination (Series 31 Exam) in lieu of the 
Series 3 Exam. The Commission believes that even if an ethics training 
provider wishes to instruct only CPOs, CTAs and their APs, the more 
comprehensive based Series 3 Exam is the appropriate proficiency test.

    \12\See also the 400 Series of the NFA Registration Rules, which 
sets forth the proficiency requirements for industry professionals 
and the alternatives to and exemptions from the Series 3 Exam 
requirements. Currently, floor traders and floor brokers are not 
required to pass the Series 3 Exam in order to become registered. 
Most floor traders and floor brokers receive orientation and ethics 
training from their respective exchanges.
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B. Applicability of Certification, Proficiency Testing and Experience 
Requirements

    Currently, Rule 3.34 requires that any provider of ethics training 
other than an SRO offering ethics training to its members or employees 
or an entity accredited to conduct continuing education programs by a 
state professional licensing authority in the fields of law, finance, 
accounting or economics must be approved by the Commission for this 
purpose. A comment letter addressing the amendments to Rule 3.34 
published in the Federal Register on December 13, 1995, suggested that 
SROs and state-accredited entities should no longer be exempted from 
the general requirement under Rule 3.34 that entities seeking to 
provide ethics training submit an application to the Commission 
summarizing their ethics training program, as all ethics training 
providers should be subject to equivalent standards. The Commission 
believes that the business purposes and functions of SROs, the 
statutory and regulatory requirements applicable to SROs, and the 
Commission's oversight program for assuring compliance by SROs with 
their responsibilities under the Act and Commission rules provide 
sufficient assurance of the expertise and fitness of SROs as ethics 
training providers without the necessity for imposing additional 
requirements. Consequently, the Commission's proposals with respect to 
proficiency training and pedagogical or industry experience do not 
apply to SROs seeking to provide ethics training to their members or 
employees. The Commission invites commenters to address the continued 
appropriateness of this approach for SROs in light of the proposed 
modifications of the requirements with respect to other types of ethics 
training providers.
    The Commission has determined, however, to propose that state-
accredited entities be required to file with the NFA the certification 
required under Rule 3.34(b)(3)(iii) and to comply with the other 
relevant provisions of Rule 3.34, including proficiency testing and 
experience requirements. In the absence of such compliance and in light 
of the potential for significant variations among state-accreditation 
regimes, the Commission would have no ready means of assuring that such 
providers have a minimum level of relevant knowledge or experience.
    The Commission is proposing that the proficiency testing and 
minimum experience requirements apply to the provider or sponsor of the 
ethics training program, to any instructors or presenters employed by 
the provider of such ethics training, and to those persons who prepare 
ethics training videotapes or electronic presentations. Existing 
providers, instructors and preparers operating pursuant to specific 
Commission authorization or otherwise in compliance with Rule 3.34 as 
currently in effect would not be subject to these requirements. 
However, if an entity whose application to provide ethics training has 
previously been granted by the Commission seeks to add a new instructor 
or course preparer, such person would be subject to the proficiency 
testing and minimum relevant experience standards.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rule amendments proposed herein 
will not affect SROs who wish to provide ethics training but would 
affect all others who seek to be included on a list of authorized 
ethics training providers, including entities accredited to conduct 
continuing education programs by state professional licensing 
authorities in the fields of law, finance, accounting or economics. The 
impact of this proposal on persons seeking to become providers of 
ethics training should be minimal. At this time, a one-time processing 
fee for the Series 3 Exam offered by the NFA is seventy-five dollars. 
This should not constitute an unduly burdensome entry cost for ethics 
training providers; the same cost is incurred by all the attendees at 
ethics training as a cost of registration. Requiring a minimum level of 
experience also should not adversely impact small businesses as this 
requirement does not impose additional financial cost upon such 
entities.
    Therefore, on behalf of the Commission, the Chairman hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the rule amendments 
proposed herein will not have a significant economic impact on a 
substantial number of small entities. The Commission nonetheless 
invites comments from any persons or entities who believe that these 
proposed rule amendments will have a significant impact on their 
operations.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq., 
imposes certain requirements on federal agencies (including the 
Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the PRA. In compliance with the 
PRA, the Commission has previously submitted the proposed rule and its 
associated information collection requirements to the Office of 
Management and Budget. While the amendments proposed herein have no 
burden, Rule 3.34 is a part of a group of rules which has the following 
burden: Rules 3.16, 3.32 and 3.34 (3038-0023, approved June 2, 1993):

Average Burden Hours Per
  Response--1.13
Number of Respondents--60,980
Frequency of Response--On Occasion and Triennially

    Persons wishing to comment on the information which will be 
required by these rules as amended should contact Jeff Hill, Office of 
Management and Budget, Room 3228, NEOB, Washington, D.C. 20503, (202) 
395-7340. Copies of the information collection submission to OMB are 
available from Joe F. Mink, CFTC Clearance Officer, 1155 21st St. N.W., 
Washington, D.C. 20581, (202) 418-5170.

List of Subjects in 17 CFR Part 3

    Registration, Ethics Training.

    Accordingly, the Commission, pursuant to the authority contained in 
the Commodity Exchange Act and, in particular, Sections 1a, 4d, 4e, 4g, 
4m, 4p, 8a and 17 thereof (7 U.S.C. 1a, 6d, 6e, 6g, 6m, 6p, 12a and 21 
(1994), hereby proposes to amend Part 3 of Chapter I of Title 17 of the 
Code of Federal Regulations as follows: 

[[Page 64135]]


PART 3--REGISTRATION

    1. The authority citation for Part 3 continues to read as follows:

    Authority: 7 U.S.C. la, 2, 4, 4a, 6, 6b, 6d, 6e, 6f, 6g, 6h, 6i, 
6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21 and 23; 
5 U.S.C. 552, 552b.


Sec. 3.34  [Amended]

    2. Section 3.34 as amended by a final rule published on December 
13, 1995, is proposed to be amended by removing and reserving paragraph 
(b)(3)(ii) and revising the introductory text of paragraph (b)(3)(iii) 
to read as follows: Sec. 3.34 Mandatory ethics training for 
registrants.
* * * * *
    (b) * * *
    (3) * * *
    (ii) [Reserved]
    (iii) A person included on a list maintained by a registered 
futures association who has presented satisfactory evidence to the 
registered futures association that he has taken and passed the 
proficiency testing requirements established by a registered futures 
association for an ethics training provider, possesses a minimum of 
three years of relevant experience, and who certifies that:
* * * * *
    Issued in Washington, D.C. on December 7, 1995, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 95-30359 Filed 12-13-95; 8:45 am]
BILLING CODE 6351-01-P