[Federal Register Volume 75, Number 175 (Friday, September 10, 2010)]
[Rules and Regulations]
[Pages 55410-55452]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21729]



[[Page 55409]]

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Part II





Commodity Futures Trading Commission





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17 CFR Parts 1, 3, 4, et al.



Regulation of Off-Exchange Retail Foreign Exchange Transactions and 
Intermediaries; Final Rule

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

[[Page 55410]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166

RIN 3038-AC61


Regulation of Off-Exchange Retail Foreign Exchange Transactions 
and Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting a comprehensive regulatory scheme to implement 
the provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Wall Street Reform Act'') \1\ and the CFTC 
Reauthorization Act of 2008 (``CRA'') \2\ with respect to off-exchange 
transactions in foreign currency with members of the retail public 
(i.e., ``retail forex transactions''). The new regulations and 
amendments to existing regulations published today establish 
requirements for, among other things, registration, disclosure, 
recordkeeping, financial reporting, minimum capital, and other 
operational standards.
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203 (2010).
    \2\ Food, Conservation, and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1651, 2189-2204 (2008).

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DATES: Effective Date: October 18, 2010.

FOR FURTHER INFORMATION CONTACT: For information regarding financial 
and related reporting requirements, contact: Thomas Smith, Chief 
Accountant and Deputy Director, Division of Clearing and Intermediary 
Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone 
number: 202-418-5495; facsimile number: 202-418-5547; and electronic 
mail: <a href="/cdn-cgi/l/email-protection#f682859b9f829eb695908295d8919980"><span class="__cf_email__" data-cfemail="b4c0c7d9ddc0dcf4d7d2c0d79ad3dbc2">[email protected]</span></a>. Jennifer Bauer, Special Counsel, Division of 
Clearing and Intermediary Oversight, Division of Clearing and 
Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. 
Telephone number: 202-418-5472; facsimile number: 202-418-5547; and 
electronic mail: <a href="/cdn-cgi/l/email-protection#1d777f7c68786f5d7e7b697e337a726b"><span class="__cf_email__" data-cfemail="1278707367776052717466713c757d64">[email protected]</span></a>.
    For all other information contact: William Penner, Deputy Director, 
Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., 
Washington, DC 20581. Telephone number: 202-418-5450; facsimile number: 
202-418-5547; and electronic mail: <a href="/cdn-cgi/l/email-protection#295e594c47474c5b694a4f5d4a074e465f"><span class="__cf_email__" data-cfemail="bdcacdd8d3d3d8cffddedbc9de93dad2cb">[email protected]</span></a>. Christopher 
Cummings, Special Counsel, Division of Clearing and Intermediary 
Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone 
number (202) 418-5450; facsimile number: 202-418-5547; and electronic 
mail: <a href="/cdn-cgi/l/email-protection#6506061008080c0b021625060311064b020a13"><span class="__cf_email__" data-cfemail="9dfefee8f0f0f4f3faeeddfefbe9feb3faf2eb">[email protected]</span></a>. Peter Sanchez, Special Counsel, Division of 
Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, 
DC 20581. Telephone number (202) 418-5450; facsimile number: 202-418-
5547; and electronic mail: <a href="/cdn-cgi/l/email-protection#a4d4d7c5cac7ccc1dee4c7c2d0c78ac3cbd2"><span class="__cf_email__" data-cfemail="94e4e7f5faf7fcf1eed4f7f2e0f7baf3fbe2">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background

    On January 20, 2010, the Commission published in the Federal 
Register proposed new regulations and amendments to existing 
regulations in response to the CRA (the ``Proposing Release'').\3\ The 
Proposing Release set forth in detail the historical background of the 
regulation of retail forex transactions, and the events, legislative 
and otherwise, that led up to the enactment of the CRA.\4\ The 
Commission explained that its proposed regulations were drawn up with 
the aim of applying the same principles that have guided the regulation 
of on-exchange instruments, while taking into account the real 
differences between the trading of futures contracts on designated 
contract markets (``DCMs'') that are cleared through Commission-
registered derivatives clearing organizations (``DCOs'') on the one 
hand, and off-exchange transactions between forex firms and retail 
customers on the other hand.\5\
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    \3\ Regulation of Off-Exchange Retail Foreign Exchange 
Transactions and Intermediaries, 75 FR 3282 (Jan. 20, 2010).
    \4\ See 75 FR 3282, 3283-3285.
    \5\ See 75 FR 3282, 3285.
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    The proposed rule changes were of two general sorts. The first 
group included amendments to existing regulations to accommodate 
regulation of retail forex transactions and the new registration 
categories created under the CRA. The second group comprised a new part 
5 of the Commission's regulations, encompassing, to the extent 
practicable, the regulations pertaining specifically to persons 
engaging in retail forex transactions. For example, many of the 
operational or registration requirements in part 1 or part 3, 
respectively, of the Commission's regulations referring to futures 
commission merchants (``FCMs'') would, as a result of the CRA, now 
apply also to retail foreign exchange dealers (``RFEDs''). Some of the 
disclosure, reporting and recordkeeping requirements in part 4 had to 
be modified to apply to operators of pooled investment vehicles and 
advisors that engage in retail forex transactions, as called for under 
the CRA. Other parts of the Commission's regulations required their own 
adaptations in order to extend customer protection, privacy and 
procedural requirements to retail forex transactions.
    The Commission also noted in its Proposing Release that in addition 
to the regulations expressly called for by the CRA, it was proposing 
certain additional requirements prompted both by the essential 
differences between on-exchange transactions and retail forex 
transactions, and by the history of fraudulent practices in the retail 
forex market.\6\ The proposed regulatory changes were discussed, 
section by section.\7\
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    \6\ See 75 FR 3282, 3286.
    \7\ See 75 FR 3282, 3286-3293.
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    Following the publication of the Proposing Release, the Wall Street 
Reform Act was enacted which, in relevant part, requires that specified 
Federal regulatory agencies, including the CFTC, promulgate rules 
regarding retail forex transactions. Consistent with the CRA, the Wall 
Street Reform Act directs that such rules prescribe appropriate 
requirements with respect to disclosure, recordkeeping, capital and 
margin, reporting, business conduct, and such other standards or 
requirements as the Federal regulatory agencies determine to be 
necessary.\8\
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    \8\ See Wall Street Reform Act, Sec. 742.
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    Thus, pursuant to the broad authority granted by the Wall Street 
Reform Act and the CRA, the Commission is implementing requirements 
for, among other things: Registration, disclosure, recordkeeping, 
financial reporting, minimum capital, and other operational standards, 
based on existing CFTC regulations for commodity interest transactions 
and commodity interest intermediaries, and on existing National Futures 
Association (``NFA'') rules with respect to retail forex transactions 
offered by NFA's members. With certain exceptions, the Commission is 
adopting the rule changes delineated in the Proposing Release as 
proposed.
    Except for certain otherwise-regulated financial intermediaries 
excluded by the CRA from the Commission's jurisdiction, persons 
offering to be or acting as counterparties to retail forex 
transactions, but not primarily or substantially engaged in the 
exchange-traded futures business, are required to register with the 
CFTC as RFEDs. Registered FCMs that are ``primarily or substantially'' 
(as defined in the new regulations) engaged in the activities set forth 
in the definition in the Commodity

[[Page 55411]]

Exchange Act (the ``Act'') of an FCM \9\ are permitted to engage in 
retail forex transactions without also registering as RFEDs. Also, the 
$20 million minimum net capital standard established in the CRA for 
registering as an RFED or offering retail forex transactions as an FCM 
is incorporated in the new regulations.
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    \9\ 7 U.S.C. 1a(20) (2006).
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    The new regulations also require certain entities other than RFEDs 
and FCMs that intermediate retail forex transactions to register with 
the Commission as introducing brokers (``IBs''), commodity trading 
advisors (``CTAs''), commodity pool operators (``CPOs'') or associated 
persons (``APs'') of such entities, as appropriate, and to be subject 
to the Act and regulations applicable to that registrant category.
    Finally, pursuant to the authority conferred by the CRA,\10\ and to 
address cases where the Commission's jurisdiction has been challenged, 
the Commission is adopting the proposed regulatory provisions 
applicable to certain leveraged, off-exchange retail forex transactions 
commonly known as ``Zelener contracts.'' \11\
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    \10\ See 7 U.S.C. 2(c)(2)(C)(iv).
    \11\ See 75 FR 3282, 3284-3285.
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II. The Comments on the Proposing Release

    The Commission received in excess of 9,100 comments \12\ from a 
range of commenters, including individuals who trade forex, 
intermediaries, registered FCMs currently serving as counterparties in 
retail forex transactions, trade associations or coalitions of industry 
participants, one committee of a county lawyers' association, a 
registered futures association, and numerous law firms representing 
institutional clients. Many commenters offered specific recommendations 
for clarification or modification of particular rules; other commenters 
objected generally to particular proposed rules. Overall, the bulk of 
the comments concerned four of the proposed rules:
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    \12\ The Comment letters referred to in this release are 
available through the Commission's Web site: http://www.cftc.gov/LawRegulation/PublicComments/10-001.html.
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    <bullet> Proposed Regulation 5.9, which would impose a 10 to 1 
leverage limitation on retail forex transactions. (``Security Deposit 
Proposal'' or ``Leverage Proposal'')
    <bullet> Proposed Regulation 5.18(h), which would require each IB 
that solicits or accepts off-exchange retail forex orders to enter into 
a guarantee agreement with the FCM or RFED to which the IB introduces 
the forex transactions. (``Guaranteed IB Proposal'')
    <bullet> Proposed Regulation 5.18(j), which would require all 
retail forex counterparties to calculate, on a quarterly basis, the 
percentage of non-discretionary accounts that were profitable, to 
include the results of this calculation for the preceding four quarters 
in required disclosures to customers, and to maintain and make 
available upon request records reflecting such calculations for five 
years. (``Disclosure Proposal'')
    <bullet> Proposed Regulation 5.7, which would establish a minimum 
capital requirement for FCMs and RFEDs (``Capital Proposal'')

The comments regarding these proposed rules and the Commission's 
response are discussed immediately below. The Commission's response to 
comments concerning other aspects of the proposed rules follows later.

    Given the volume of comments received, the Commission cannot 
respond to each and every comment or objection. However, the Commission 
has carefully reviewed and considered each letter and, in the sections 
that follow, has endeavored to address both the primary themes running 
throughout multiple letters and significant points raised by individual 
commenters.
    Security Deposit Proposal. In general terms, proposed Regulation 
5.9 would have required FCMs and RFEDs engaging in retail forex 
transactions to collect from each retail forex customer a minimum 
security deposit equal to 10 percent of the notional value of each 
retail forex transaction. This proposal is often referred to in the 
comment letters as a 10% or 10:1 leverage requirement (i.e., for every 
$10 of notional value, $1 is required as a security deposit).
    The Commission received a significant number of comment letters 
regarding the Security Deposit Proposal with a substantial majority of 
the commenters objecting to the proposed level of 10%. Many of the 
letters submitted with regard to this issue appeared to be submitted by 
individual traders, were identical or nearly identical, and objected 
generally to the proposal. Within the large group of comments by such 
traders, whether in ``form'' letter objections or otherwise, the most 
common objections were that the leverage proposal would drive business 
off-shore, would lead to the loss of jobs in the U.S., was 
unnecessarily restrictive and would inhibit small traders' ability to 
trade profitably, or that the percentage required as a security deposit 
was arbitrary, capricious and anti-competitive.
    Other commenters noted that by increasing the security deposit 
level, retail forex customers are exposed to greater levels of market 
and credit risk. Many of these commenters believe that the 
amplification that is provided by increased leverage is necessary for 
clients to earn a profit from their positions. Still other commenters 
urged that NFA's current levels be retained and asserted that the 
Commission had already approved these levels by allowing NFA's proposed 
rule regarding leverage to become effective.
    Finally, one commenter encouraged the Commission to (1) recognize 
the different market risks and volatility posed by different 
currencies, (2) adopt requirements reflective of those differences just 
as contract markets do in establishing their margin levels, and (3) 
endorse or adopt some mechanism to allow for periodic review and 
adjustment of the requirements if necessary.
    The Commission's proposed leverage restriction was conservative and 
was proposed in an effort to provide maximum customer protection. The 
Commission does not, however, believe it was arbitrary or contrary to 
previously approved NFA rules.\13\ Moreover, the Commission does not 
believe that most retail foreign exchange customers select a 
counterparty based solely on the maximum allowable leverage, otherwise 
these investors would have already migrated to foreign markets, some of 
which have no limitation on leverage. Nevertheless, after considering 
the concerns expressed and arguments made in the comments, the 
Commission has determined to adopt a revised security deposit 
requirement for FCMs engaging in retail forex transactions and for 
RFEDs.
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    \13\ As noted above, several commenters maintained that the 
proposed Regulation 5.9 was inconsistent with security deposit 
levels set by NFA and approved by the Commission. In February 2009, 
NFA proposed and the Commission approved amendments to Section 12 of 
NFA's Financial Requirements. (See Letter from Thomas W. Sexton to 
David A. Stawick, dated February 23, 2009, regarding Forex Security 
Deposits--Proposed Amendments to NFA Financial Requirements Section 
12 and Interpretive Notice Regarding Forex Transactions, available 
on NFA's website at nfa.futures.org.) NFA's amendments left in place 
requirements of a 1% security deposit for major currencies and a 4% 
deposit for all other currencies, but eliminated an exemption from 
these requirements for well-capitalized firms. As NFA noted in its 
proposed amendments, exempted firms had offered leverage of 200:1, 
400:1 and even 700:1. NFA's February 2009 amendments effectively 
reduced the amount of leverage available to retail forex customers. 
The Commission approved the amendments, in accordance with the 
standards set in Section 17(j) of the Act.
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    In developing the revised Regulation 5.9, the Commission once again

[[Page 55412]]

reviewed futures exchange margin levels, NFA's current security deposit 
requirements, and comparable requirements found in other jurisdictions. 
Final Regulation 5.9 permits the registered futures association 
(``RFA'') of which the FCM or RFED is a member to determine specific 
security deposit levels within parameters set forth by the Commission 
in the regulation.\14\ The Commission has provided minimum security 
deposit amounts of 2 percent of the notional value for major currency 
pairs and 5 percent of the notional value for all other retail forex 
transactions. The Commission will periodically review the parameters it 
has set in light of market conditions and adjust them as necessary. 
Similarly, each RFA (i.e., NFA) will be required to designate which 
currencies are ``major currencies,'' and must review, no less 
frequently than annually, major currency designations and security 
deposit requirements, and must adjust the designations and requirements 
as necessary in light of changes in the volatility of currencies and 
other economic and market factors. It is the Commission's view that 
revised Regulation 5.9 will provide a mechanism for setting security 
deposit levels that is both anchored in, and adaptable to, market 
conditions.
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    \14\ NFA is currently the only futures association registered 
with the Commission.
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    Disclosure of Profitable vs. Non-Profitable Accounts. As proposed, 
Regulation 5.5(e) required that the risk disclosure statement provided 
to every retail forex customer include disclosure of the number of non-
discretionary accounts maintained by the FCM or RFED that were 
profitable and those that were not, during the four most recent 
calendar quarters. Commenters called the provision anti-competitive and 
doubted that measurement of profitable accounts could be done in a way 
that would permit comparison. Proposed Regulation 5.18(i) required that 
each retail forex counterparty prepare and maintain on a quarterly 
basis a calculation of the percentage of non-discretionary retail forex 
accounts open for any period of time during the quarter that earned a 
profit, and the percentage of such accounts that experienced a loss.
    Some commenters asserted that the Commission did not provide 
adequate guidance or a standard methodology for calculating ``winners'' 
and ``losers.'' Commenters stated that the proposal was ambiguous and 
that the reported percentages may not be comparable across the 
industry. In addition, commenters thought that there was too much 
subjectivity in determining ``winners'' and ``losers'' and that, 
therefore, the resulting disclosure would not be helpful for customers. 
Other commenters stated that by requiring retail forex firms to 
disclose the percentage of profitable accounts quarterly, the 
Commission would be unfairly singling out retail forex dealers, as this 
information is not required on the futures side or for broker-dealers.
    As noted in the Proposing Release, there are significant 
differences between trading futures contracts on an exchange and 
entering into off-exchange transactions between forex firms and retail 
customers.\15\ The Commission believes that as a result of the inherent 
conflicts embedded in the operations of the retail over-the-counter 
forex industry, such disclosure is necessary. To illustrate potential 
conflicts of interests in the off-exchange retail forex industry, the 
Commission in its Proposing Release pointed out that the retail forex 
counterparty: (i) Is the counterparty to the customer, which sets up a 
``zero-sum game'' between the customer and the retail forex dealer; 
(ii) provides quotes to their customers, which may not be the best 
quote at the time and may not even be a competitive quote; and (iii) 
enters into a principal-to-principal transaction with the non-
discretionary retail forex accountholder. At each stage of the 
transaction, the retail forex counterparty has an inherent conflict 
with its non-discretionary retail forex accountholders. By contrast, in 
exchange-traded futures markets, accountholders do not encounter the 
same level of conflicts that retail forex customers face, and, 
therefore, a requirement to disclose the percentage of non-
discretionary retail accounts that were profitable and not profitable 
is appropriate in retail forex markets, while it may not be elsewhere. 
As a result of the industry structure and operational conflicts, the 
Commission believes that this disclosure is necessary to protect the 
non-discretionary retail forex accountholder.
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    \15\ See 75 FR 3282, 3285.
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    So while the Commission continues to believe in the value and 
effectiveness of such disclosures, it is adopting Regulation 5.5(e) and 
Regulation 5.18(i) with certain amendments, in order to address 
concerns regarding the implementation of the rule. As proposed, the 
calculation for determining whether a retail forex account was 
profitable or not during a quarter would be net of fees, commissions, 
any other expenses, trading results, customer funds deposited, and 
customer funds withdrawn. The regulation as adopted provides further 
guidance in response to commenters' concerns. The final rule clarifies 
that a retail forex account will be considered either ``profitable'' or 
``not profitable,'' with ``not profitable'' including accounts that 
break-even.
    The Commission is also clarifying the required time periods for 
which the required calculations in Regulation 5.5(e)(1) and 5.5(e)(2) 
must be made and records maintained and made available. Regulation 
5.5(e)(1) requires that information regarding profitable and not 
profitable accounts for the four most recent quarters be included in 
disclosure documents; Regulation 5.5(e)(2) requires that similar 
quarterly information be maintained for five years and provided to 
requesting customers or potential customers. As to the 5.5(e)(1) 
information, once these regulations are effective, FCMs and RFEDs must 
provide the required information for the past four quarters. FCMs and 
RFEDs also must update this information going forward on a quarterly 
basis and disclose the most current four quarters in disclosure 
documents provided to potential customers.
    Regulation 5.5(e)(2) requires an RFED or FCM to provide to a 
customer or potential customer the same account information as set out 
in Regulation 5.5(e)(1) for the most recent five-year period during 
which the RFED or FCM maintained non-discretionary retail forex 
customer accounts, but only at the request of the customer or potential 
customer. The Commission intends that this requirement to keep and make 
available five years worth of profitable and non-profitable account 
information be prospective; following the adoption of these rules, FCMs 
and RFEDs are required to keep and maintain such data going forward on 
a quarterly basis until such time as they have amassed five years worth 
of information, at which point they will have to keep and make 
available the information for the five most recent years. Furthermore, 
prior to amassing five years of performance information, an FCM or RFED 
is obligated to provide, upon request by a customer or prospective 
customer, the historical quarterly performance information for as many 
quarters as the FCM or RFED has available.
    In addition, to provide clarity regarding the type of accounts that 
must be used in making the calculation of profitable and unprofitable 
accounts, FCMs and RFEDS must use those retail forex accounts, as 
defined in Regulation 5.1(i), that are non-discretionary accounts; 
Provided, that the retail forex account is not a proprietary account, 
as

[[Page 55413]]

defined in Regulation 5.18(i)(3). The Commission believes that 
excluding proprietary accounts will help minimize the possibility of 
skewed results stemming from differing methods of calculation. The 
Commission is also requiring that the data be calculated on a calendar 
year basis for all counterparties.
    Guarantee Requirement for IBs Who Introduce Retail Forex Business. 
The Commission proposed in Regulation 5.18(h) to require that any 
person within the definition of an IB under Regulation 5.1(f)(1) (or 
applicant for registration as such, or successor to the business of 
such) enter into a guarantee agreement with an FCM or an RFED. The IB 
would be permitted to enter such an agreement with only one FCM or 
RFED. The rationale behind this requirement was to make FCMs and RFEDs 
exercise care with regard to entities with which they do business by 
making them jointly and severally liable for all obligations of the IB 
under the Act and Commission Regulations with respect to the 
solicitation of retail forex transactions. This would, in turn, 
discourage them from associating with IBs without regard to the sales 
practices employed by those IBs.
    Commenters called the banning of independent IBs in the retail 
forex business harsh and said it could lead to less customer choice and 
poorer service. Others said that requiring a guarantee agreement was 
anticompetitive and unnecessary, as most enforcement activity concerns 
unregistered industry participants, and that guarantee agreements have 
been a substitute for minimum capital for as long as the IB 
registration category has existed.
    After considering the comments, the Commission has determined to 
permit IBs who register in order to transact retail forex business 
(like IBs who register to transact futures and commodity options 
business), to choose between entering into a guarantee agreement with 
an FCM or RFED, and maintaining the existing IB minimum net capital 
requirement. Accordingly, IBs, whether they register to do retail forex 
business, futures business, or both, must comply with the provisions in 
the Commission's regulations that apply to IBs; Provided, that any IB 
that operates pursuant to a guarantee agreement meeting the 
requirements of Regulation 1.10(j) need not meet the minimum net 
capital requirements set forth in Regulations 1.10, 1.12 and 1.17.
    Net Capital Requirements for FCMs and RFEDs. As proposed, 
Regulation 5.7 implements the $20 million minimum net capital 
requirement for FCMs engaging in retail forex transactions and for 
RFEDs (as set forth in the CRA), and to the extent that the FCM's or 
RFED's total retail forex obligation to its customers exceeds $10 
million, the regulation requires an additional five percent of that 
excess. Several comments urged the Commission to revise proposed 
Regulation 5.7 to include an exemption from the additional net capital 
requirement when the FCM or RFED uses ``straight-through processing.'' 
\16\ Referring to the costs imposed by additional capital requirements, 
the commenters argued that such costs, in addition to the limits 
imposed by several of the other proposed regulatory requirements, would 
cause much of the retail forex business to be transferred to offshore 
jurisdictions without (or with substantially reduced) regulatory 
protections.\17\
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    \16\ NFA's Financial Requirement Section 11 currently contains 
such an exemption from an additional capital requirement for member 
firms using straight-through-processing for all customer 
transactions.
    \17\ This argument is diminished by the recent enactment of the 
Wall Street Reform Act, which clearly indicates the intent of 
Congress that retail forex transactions in the United States either 
be comprehensively regulated or be prohibited outright. See Wall 
Street Reform Act, Sec. 742.
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    The Commission considered but did not adopt NFA's straight-through 
processing exemption in its proposal, specifically because the proposed 
additional capital requirement was intended to provide a capital 
requirement that directly relates to the size of a firm's liability to 
retail forex customers. Some firms offering retail forex transactions 
have liabilities to their retail customers exceeding $10 million. 
Straight-through processing, although mitigating market exposure for a 
firm, does not reduce in any way the total liability to retail forex 
customers who are direct counterparties to the firm and therefore 
exposed to the credit risk of such firm. Therefore, the Commission is 
adopting the capital provisions in Section 5.7 as originally proposed.
    Separately, a comment letter was received significantly after the 
comment period was closed objecting to the net capital charges 
applicable to retail foreign currency options set forth in proposed 
Regulation 5.7(b)(2)(v)(B). The Commission has determined to adopt that 
provision as proposed, and to clarify that for both FCMs and RFEDs 
unlisted retail forex options are subject to the existing net capital 
charges that are applicable to an FCM for any other unlisted foreign 
currency option that is entered into with any eligible contract 
participant (which treatment is also consistent with the treatment of 
all unlisted options, including foreign currency options, for 
securities broker-dealers).
    Requirement To Appoint a Chief Compliance Officer. Proposed 
Regulation 5.18(j) calls for each retail forex counterparty (defined to 
include a retail foreign exchange dealer, an FCM or an affiliated 
person of an FCM) to designate a Chief Compliance Officer. In proposing 
this requirement, the Commission sought to promote customer protection 
by focusing responsibility for an entity's regulatory compliance. This 
requirement was criticized on the basis that potential personal 
liability for a Chief Compliance Office would discourage individuals 
from assuming that position, and because no comparable requirement 
exists for firms engaging in on-exchange transactions.
    The Commission continues to believe that, given the history of 
fraudulent and improper behavior in the retail forex business, 
requiring a Chief Compliance Officer is a reasonable way to ensure that 
retail forex counterparties observe the highest professional standards 
and take their compliance obligations seriously. Accordingly, this 
requirement is retained in final Regulation 5.18.
    Prohibition of Guarantees Against Customer Loss. Proposed 
Regulation 5.16 would prohibit, among other things, the making of 
guarantees against loss to retail foreign exchange customers by FCMs, 
RFEDs and IBs. One currently registered FCM commented that firms should 
be allowed to guarantee that clients will not lose more than their 
account balance because technology allows for automatic liquidation of 
positions if the account balance falls below margin requirements.
    The Commission notes that not all retail forex counterparties have 
comparable capabilities to deal with events such as extremely volatile 
markets. Moreover, proposed regulation 5.16 is based on Commission 
Regulation 1.56, which prohibits FCMs and IBs engaged in futures and 
commodity option transactions from making similar guarantees. At the 
time the Commission proposed Regulation 1.56, it specifically noted 
that the use of limited-risk and guarantee-against-loss agreements had 
``often been associated with patterns of allegedly unlawful conduct by 
FCMs or other registrants or with the financial instability of such 
persons.'' \18\ The Commission does not view these dual concerns--
rooted in consumer protection and the financial stability of firms--as 
any less compelling today and

[[Page 55414]]

has determined to issue the regulation as proposed.
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    \18\ See 46 Fed. Reg. 62841 (Dec. 29, 1981).
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    Specific Authorization for Trades. Two commenters expressed a 
concern regarding proposed Regulation 5.17, which requires RFEDs, FCMs, 
IBs, and their APs to have specific authorization by the customer 
before effecting a retail forex transaction. The concerns centered on 
the use of automated systems that generate orders based on the trader's 
specifications. According to the commenters, both IBs and forex 
counterparties may run such software on their servers for traders.
    Neither commenter provided a great deal of detail regarding the 
mechanics of such automated trading programs, and the Commission cannot 
offer its view of any particular program. However, the Commission 
believes that if such programs are nothing more than automated order 
entry platforms, and all relevant trading parameters are set and 
controlled by the customer--including, for example, the designation of 
the currency pair to be traded, the amount of currency to be bought or 
sold, the price at which orders should be placed, and the amount of 
money to be committed to trading--then trades generated by such 
programs would originate from the customer and no additional 
authorization would be required. However, Commission staff will monitor 
the use of such programs. Any features that would appear to constitute 
discretion, strategy or advice on the behalf of the sponsoring entity 
would require a different analysis and, in addition to potentially 
triggering application of Regulation 5.17, may have additional 
registration implications.
    Requirement To Close Out Offsetting Positions. One commenter 
objected to the Commission's proposed amendment to Regulation 1.46, 
which would require RFEDs and FCMs engaging in off-exchange retail 
forex transactions to close out offsetting long and short positions in 
a retail forex customer's account, regardless of whether a customer 
instructs otherwise. Citing the prevalence of spread trades in futures 
trading, the commenter maintained that there is no economic distinction 
between commodity futures and forex transactions with respect to 
offsetting long and short positions.
    The Commission continues to believe that maintaining open long and 
short positions in a retail forex customer's account removes the 
opportunity for the customer to profit on the transaction, increases 
the fees paid by the customer, and invites abuse. Nothing submitted by 
any commenter has demonstrated otherwise. Moreover, spread trades 
executed on-exchange typically involve the purchase of one futures 
delivery month against the sale of another futures delivery month of 
the same commodity, or the purchase of one delivery month of one 
commodity against the sale of that same delivery month of a different 
commodity. Because retail forex contracts are not listed by delivery 
month, spread trades of this sort are not possible in retail forex 
accounts, and open long and short contracts in the same currency pair 
are truly offsetting. Accordingly, the Commission has determined to 
adopt Regulation 1.46 as proposed.
    Re-quoting. Two comments were received regarding Regulation 
5.18(f), which would, among other things, prohibit retail forex 
counterparties from providing a customer a new bid (or asked) price 
that is higher (or lower) than a previous price without providing a new 
asked (or bid) price that is higher (or lower) as well. One commenter 
maintained that the proposed rule would not take into account that in 
the forex market, spreads can increase dramatically, which might cause 
the new bid price to be higher and the new ask price to be lower.
    While a fast-moving market may affect the spread, the Commission's 
proposed rule is intended to apply to those situations where a customer 
is quoted one bid/asked price, and rather than fill the order, the FCM 
or RFED provides a second quote. In this situation, the Commission 
believes that if the forex dealer re-quotes the price, then at a 
minimum, the spread should remain the same.
    A second commenter suggested that the Commission clarify that all 
``re-quote'' practices are required to be objective and evenhanded and 
that a counterparty that re-quotes a price must do so regardless of the 
direction the market moves. Further, the commenter suggested that the 
Commission require counterparties to disclose to customers how orders 
that reach the platform at a price no longer available are handled.
    The Commission believes the intent of proposed Regulation 5.18 is 
clear. It requires that, when re-quoting prices, forex counterparties 
are obligated to do so in a symmetrical fashion, so that the re-quoted 
prices do not represent an increase in the spread from the initially 
quoted prices, regardless of the direction the market moves. As to the 
objectiveness of the re-quote, the Commission believes that the 
requirement that both bid and asked prices be re-quoted symmetrically 
will encourage objectivity. Moreover, proposed Regulations 5.18(b)(3) 
and 5.18(b)(iv) require, respectively, that forex counterparties 
establish and enforce internal rules, procedures and controls to 
``[f]airly and objectively establish settlement prices for retail forex 
transactions'' and to maintain records reflecting ``any method or 
algorithm used to determine the bid or asked price for any retail forex 
transaction or the prices at which the customer orders are executed * * 
*.'' The Commission believes that this should provide adequate 
incentive for firms to deal fairly and objectively with their customers 
with regard to re-quoting.
    Finally, as to the suggested disclosure, as proposed, Regulation 
5.5 would require FCMs, RFEDs and IBs engaged in retail forex 
transactions to distribute to retail forex customers a written 
disclosure statement containing, among other things, the following 
statement:

    Your ability to close your transactions or offset positions is 
limited to what your dealer will offer to you, as there is no other 
market for these transactions. Your dealer may offer any prices it 
wishes, and it may offer prices derived from outside sources or not 
in its discretion. Your dealer may establish its prices by offering 
spreads from third party prices, but it is under no obligation to do 
so or to continue to do so. Your dealer may offer different prices 
to different customers at any point in time on its own terms. The 
terms of your account agreement alone govern the obligations your 
dealer has to you to offer prices and offer offset or liquidating 
transactions in your account and make any payments to you. The 
prices offered by your dealer may or may not reflect prices 
available elsewhere at any exchange, interbank, or other market for 
foreign currency.

    While the proposed disclosure language does not require a statement 
regarding how re-quoted prices are handled, it does inform the customer 
that it is within the discretion of the forex dealer to set prices 
(provided they otherwise comply with the requirements of Regulation 
5.18). For this reason, and those cited above, the Commission has 
determined to issue Regulation 5.18(f) as proposed.
    CFTC Authority To Regulate Zelener Contracts. One commenter, a law 
firm, argued that the CRA did not grant the Commission the authority to 
regulate, other than for fraud, FCMs that are primarily or 
substantially engaged in trading futures contracts on registered 
exchanges to the extent they also offer off-exchange Zelener, or 
``futures look-alike'' forex, contracts.\19\ To the extent legislative 
history suggests that similarly situated RFEDs and FCMs should be 
subject to the same regulations, the

[[Page 55415]]

commenter maintains that this language is restricted to requirements 
relating to the financial soundness of the forex dealer and nothing 
else.
---------------------------------------------------------------------------

    \19\ See 7 U.S.C. 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) regarding 
the scope of the Commission's authority to write rules with regard 
to leveraged or margined foreign currency contracts offered to non-
ECPs.
---------------------------------------------------------------------------

    The CRA contains several provisions that touch on the scope of the 
Commission's jurisdiction over retail off-exchange foreign currency 
contracts, whether futures or look-alike, leveraged contracts. Retail 
off-exchange forex futures and options transactions are subject to 
numerous provisions of the Act including sections 4(b), 4b, 4c(b), 4o, 
6(c) and 6(d), 6c, 6d, 8(a), 13(a), 13(b), if they are offered or 
entered into by an FCM, an RFED, or an affiliate of an FCM that is not 
one of the otherwise regulated entities specified in the Act.\20\ The 
same provisions apply to look-alike forex transactions.\21\ The CRA 
clearly gives the Commission full rulemaking authority over the 
agreements, contracts or transactions in retail forex where 
``reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of [the] Act.'' \22\ On the other hand, 
however, while the CRA explicitly grants the Commission rulemaking 
authority over off-exchange retail futures and options transactions 
where such transactions are offered or entered into by FCMs, their 
affiliates or RFEDs,\23\ its rulemaking authority with regard to look-
alike transactions does not explicitly include FCMs. Thus, the 
commenter concludes that language in Sections 2(c)(2)(C)(ii) and 
2(c)(2)(C)(iii) limits the Commission's authority in this area where 
FCMs are concerned.
---------------------------------------------------------------------------

    \20\ See 7 U.S.C. 2(c)(2)(B)(iii).
    \21\ See 7 U.S.C. 2(c)(2)(C)(ii)(I).
    \22\ See 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v); 
2(c)(2)(C)(ii)(III); 2(c)(2)(C)(iii)(III).
    \23\ See 7 U.S.C. 2(c)(2)(B)(v).
---------------------------------------------------------------------------

    The Commission disagrees. Section 8a(5) of the Act gives the 
Commission the broadest possible authority to ``make and promulgate 
such rules and regulations as, in the judgment of the Commission, are 
reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of this Act[.]'' \24\ Under this 
authority, the Commission has promulgated rules covering the full scope 
of FCM activities generally. Furthermore, the recent Wall Street Reform 
and Consumer Protection Act of 2010 specifically defines FCMs as any 
``individual, association, partnership, corporation, or trust * * * 
that * * * is * * * acting as a counterparty in any agreement, contract 
or transaction described in Section 2(c)(2)(C)(i)'' of the Act,\25\ 
making it clear that the offering of ``look-alike'' transactions falls 
within the scope of regulated FCM activity. Accordingly, the Commission 
sees no deficiencies in its authority to fully regulate FCMs engaged in 
``look-alike'' forex contracts.\26\
---------------------------------------------------------------------------

    \24\ See 7 U.S.C. 12a(5) (2006).
    \25\ See Wall Street Reform Act, Sec. 721(a)(13).
    \26\ The Commission also disagrees with the argument that CRA 
Conference Report language is inapposite. The Conference Report 
states that ``[t]o the extent their risk profiles are similar, the 
managers intend for FCMs and RFEDs to be regulated substantially 
equivalently in terms of their off-exchange retail foreign currency 
business. The managers do not intend for the Commission to provide 
either FCMs or RFEDs with a more favorable regulatory environment 
over the other or to create two significantly different regulatory 
regimes for similar business models--to the extent the financial 
risks posed by such operations are similar.'' See H.R. Rep. No. 110-
627 at 980 (Conf. Rep.) (emphasis added).
---------------------------------------------------------------------------

    Definition of Retail Forex Transactions. One commenter pointed out 
that the definition of ``retail forex transactions'' found in proposed 
Regulation 5.1(m) refers to ``any account, agreement, contract or 
transaction'' described in Section 2(c)(2)(B) or 2(c)(2)(C) of the Act 
and notes that the use of the word ``account'' in this context is 
confusing.
    Broad language in Section 2(c)(2)(B)(i) of the Act provides the 
Commission with jurisdiction over ``an agreement, contract or 
transaction in foreign currency'' that is a contract of sale of a 
commodity for future delivery (or an option on such a contract) or an 
option (other than one traded on a securities exchange). Elsewhere in 
Section 2(c), the statute states that certain of its provisions apply 
to ``agreements, contracts or transactions * * * and accounts or pooled 
investment vehicles * * *.'' \27\ In order to accurately reflect the 
full scope of authority granted it under the Act, the Commission 
included the word ``accounts'' within the definition of ``retail forex 
transactions.'' The Commission does not view this as in any way 
inconsistent with language in Section 2(c), as amended by the CRA, and 
has determined to adopt the regulation as proposed.
---------------------------------------------------------------------------

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

    Anticompetitiveness. In addition to similar comments specifically 
referencing proposed Regulation 5.9 (security deposits) and 5.18(h) 
(guaranteed IBs)--which are addressed above--the Commission received 
numerous comments arguing that various other sections of the proposed 
rules were ``anticompetitive'' insofar as there is no comparable 
requirement relative to those engaged in futures transactions on 
designated contract markets. As the Commission pointed out in its 
Proposing Release, it has, whenever possible, drawn upon the principles 
that have guided it in the regulation of on-exchange instruments. 
However, the Commission also noted that there are essential differences 
between the trading futures contracts on designated contract markets 
that are cleared through designated clearing organizations, on the one 
hand, and off-exchange transactions between forex firms and retail 
customers, on the other.\28\
---------------------------------------------------------------------------

    \28\ 75 FR 3282, 3285-86.
---------------------------------------------------------------------------

    Given the principal-to-principal nature of retail forex 
transactions and the inherent conflicts of interest in the relationship 
between the retail customer and the dealer/counterparty, the lack of 
transparency in the pricing and execution of such transactions, and the 
volume of fraud the Commission has seen arising from such transactions, 
the Commission has determined to promulgate some regulations that are 
unique to, and tailored to, retail forex transactions. By way of 
example, the Commission's proposed regulations included requirements 
that forex registrants maintain records of customer complaints; that 
counterparties disclose, with the Risk Disclosure Statement, the 
percentage of profitable nondiscretionary forex customer accounts; and 
that forex counterparties designate a chief compliance officer to be 
responsible for development and implementation of customer protection 
policies and procedures. To the extent the final rules published today 
do not track precisely with rules applicable to on-exchange futures 
trading, the Commission believes that the differences reflect 
meaningful differences in the market structure of retail forex 
transactions and that the rules issued today are no more restrictive or 
burdensome than necessary to address these differences.
    Scope of Commission's Authority and Application of Other Rules. 
Several commenters lodged criticisms or made observations that go to 
the scope of the Commission's authority, as provided in the Act and 
CRA, or otherwise. For example, several commenters maintained that the 
Commission should require segregation of customer funds by 
counterparties in order to provide some protection in the event of a 
counterparty insolvency. The Commission's segregation requirements with 
regard to futures flow from Section 4d of the Act \29\ which, generally 
speaking, requires that customer property for trading commodity 
contracts be kept apart, or segregated, from the FCM's own funds. 
However, as noted in the

[[Page 55416]]

Commission's proposing release,\30\ a segregated funds regime cannot be 
replicated in the context of off-exchange retail forex trading. Unlike 
segregation of customer funds deposited for futures trading, under the 
relevant provisions of the Bankruptcy Code,\31\ such amounts held in 
connection with retail forex trading would not receive any preferential 
treatment to unsecured creditors in bankruptcy.
---------------------------------------------------------------------------

    \29\ 7 U.S.C. 6(c) (2006).
    \30\ 75 FR 3281, 3287 and 3290 (Jan. 20, 2010).
    \31\ 11 U.S.C. 761, et seq.
---------------------------------------------------------------------------

    Similarly, some commenters took issue with the definitions of 
certain intermediaries and the capital requirements, found in the 
Proposing Release. Here again, the Commission is bound by statutory 
language that defines the scope of its authority.\32\ While the 
Commission appreciates the concerns expressed by these commenters and 
the time they have taken to express them, it can do no more than its 
statutory authority permits.
---------------------------------------------------------------------------

    \32\ See, for example, Section 2(c)(2)(B)(iv)(I) of the Act, 7 
U.S.C. 2(c)(2)(B)(iv)(I), which provides the Commission with the 
authority to register and promulgate rules regarding specifically 
defined persons or entities. See also Section 2(c)(2)(B)(ii) of the 
Act which explicitly provides for a $20 million minimum capital 
requirement.
---------------------------------------------------------------------------

III. Related Matters

A. Regulatory Flexibility Act

    FCMs and CPOs: The Regulatory Flexibility Act (``RFA'') \33\ 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses.\34\ The Commission has already 
established certain definitions of ``small entities'' to be used in 
evaluating the impact of its rules on such small entities in accordance 
with the RFA.\35\ In that statement, the Commission concluded that 
neither FCMs nor registered CPOs should be considered to be small 
entities for purposes of the RFA. With respect to FCMs, the 
Commission's determination was based in part upon their obligation to 
meet the capital requirement established by the Commission and the 
purposes of protecting financial integrity.\36\
---------------------------------------------------------------------------

    \33\ 5 U.S.C. 601, et seq.
    \34\ By its terms, the RFA does not apply to ``individuals.'' 
See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons 
must be individuals, (see Commission Regulation 1.3(aa) and proposed 
Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does 
not apply to APs and no analysis of the economic impact of this rule 
proposal on such persons is required.
    \35\ 47 FR 18618 (April 30, 1982).
    \36\ Id. at 18619.
---------------------------------------------------------------------------

    As for CPOs, the Commission determined that registered CPOs are not 
small entities based upon its existing regulatory standard for 
exempting certain small CPOs from the requirement to register under the 
Act.\37\ (A CPO need not register with the Commission if the gross 
capital contributions for all pools under its management do not exceed 
$400,000 and there are not more than fifteen participants in any one of 
those pools.\38\)
---------------------------------------------------------------------------

    \37\ Id. at 18619-20.
    \38\ 17 CFR 4.13(a)(2) (2009).
---------------------------------------------------------------------------

    Thus, with respect to FCMs and registered CPOs, the Commission 
believes that these final rules will not have a significant economic 
impact on a substantial number of small entities.
    CTAs: The Commission has previously decided to evaluate, within the 
context of a particular rule proposal, whether all or some CTAs should 
be considered to be small entities, and if so, to then analyze the 
economic impact on them of any such rule.\39\ CTAs wishing to advise 
retail forex customers may include both currently registered CTAs and 
previously unregistered persons who now will be required to register. 
As to the first group, there should be no significant new economic 
impact. As to the second group, registration will require the 
submission of application forms, fingerprinting of principals, and 
payment of registration fees. To the extent that CTAs can be considered 
to be small entities, the Commission does not consider either the 
proposed registration fee or the proposed fingerprinting requirement 
for newly registered CTAs to have significant economic impact.\40\
---------------------------------------------------------------------------

    \39\ 47 FR 18618, 18620.
    \40\ 48 FR 35248, 35276 (August 3, 1983)
---------------------------------------------------------------------------

    IBs: In 1983, the Commission proposed that for purposes of the RFA 
and future rulemakings, it would not consider introducing brokers to be 
``small entities'' for essentially the same reasons that FCMs had 
previously been determined not to be small entities.\41\ This was 
based, in part, on the fact that IBs, like FCMs, are required to 
maintain a specified level of adjusted net capital. In the Proposing 
Release, retail forex IBs would not have been subject to a capital 
requirement; rather, they would have had to operate pursuant to a 
guarantee agreement. Under the final rules, retail forex IBs will be 
treated no differently than futures IBs. Accordingly, and in keeping 
with past Commission determinations, the Commission believes that the 
final rules with respect to IBs will not have a significant impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \41\ 48 FR 14933, 14955 (Apr. 6, 1983). See also 47 FR 18618, 
18619.
---------------------------------------------------------------------------

    RFEDs: RFEDs are a new category of registrant. The Commission does 
not believe that there are regulatory alternatives to those being 
proposed which would be consistent with the statutory mandate to 
provide protection to the public against irresponsible or fraudulent 
business practices. In the Proposing Release, the Commission proposed 
that RFEDs not be considered to be ``small entities'' for essentially 
the same reasons that FCMs have previously been determined not to be 
small entities.\42\ As with FCMs, a requirement to maintain a specified 
level of adjusted net capital would be imposed upon RFEDs to ensure 
that they maintain sufficient capital resources to guarantee their 
financial accountability and to promote responsible and reliable 
business operations. Moreover, the Commission has sought to fashion its 
proposed regulatory program for RFEDs in a manner which is responsive 
to the function, purposes, and size of the entity being regulated 
consistent with the objective of the RFA. In particular, the minimum 
capital requirement required by the CRA effectuates the Congressional 
purpose that RFEDs maintain sufficient reserve of capital to remain 
economically viable. For the reasons stated above, the Commission will 
not define RFEDs as small entities for RFA purposes.
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (``PRA'') \43\ an agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless it displays a currently valid 
control number. The Commission's final rules regarding retail forex 
transactions result in information collection requirements within the 
meaning of the PRA. The Commission submitted the proposing release 
along with supporting documentation to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 
CFR 1320.11. The Commission requested that OMB approve, and with 
respect to the collections required under the new part 5 of the 
Commission's regulations, assign a new control number for, the 
collections of information required by the proposing release. The 
information collection burdens created by the Commission's proposed 
rules, which were discussed in detail in the proposing release, are 
identical to the collective information collection burdens of the final 
rules.
---------------------------------------------------------------------------

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

    The Commission invited the public and other Federal agencies to 
comment on any aspect of the information

[[Page 55417]]

collection requirements discussed above. The Commission received no 
comment on its burden estimates or on any other aspect of the 
information collection requirements contained in its proposing release. 
The affected collections are as follows:
    <bullet> Existing Collection 3038-0024 (part 1 of the Commission's 
regulations);
    <bullet> Existing Collection 3038-0023 (part 3 of the Commission's 
regulations);
    <bullet> Existing Collection 3038-0005 (part 4 of the Commission's 
regulations);
    <bullet> Existing Collection 3038-0055 (part 160 of the 
Commission's regulations); and
    <bullet> New Collection 3038-0062 (part 5 of the Commission's 
regulations).

C. Cost-Benefit Analysis

    Section 15(a) of the Act \44\ requires the Commission to consider 
the costs and benefits of its action before issuing new regulations 
under the Act. By its terms, section 15(a) does not require the 
Commission to quantify the costs and benefits of a new regulation or to 
determine whether the benefits of the regulation outweigh its costs. 
Rather, section 15(a) simply requires the Commission to ``consider the 
costs and benefits'' of its action.
---------------------------------------------------------------------------

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

    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern, 
enumerated below. Accordingly, the Commission could, in its discretion, 
give greater weight to any one of the five enumerated areas and could, 
in its discretion, determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    As discussed in more detail above, these amendments are intended to 
create a comprehensive scheme to implement the requirements of the CRA, 
and to put in place requirements including registration, disclosure, 
recordkeeping, financial reporting, minimum capital and other 
operational standards. This is to be achieved through both amendments 
to existing regulations and the creation of a new, free-standing part 
to the Commission's regulations. The Commission is considering the 
costs and benefits of the amendments in light of the specific 
provisions of section 15(a) as follows:
    1. Protection of market participants and the public. The amendments 
should enhance considerably the protection of market participants and 
the public because they require, for the first time, the registration 
of several categories of market participants and require adherence to 
operational standards that have not previously applied. The benefits 
that inhere in the imposition of these requirements to a sector of the 
off-exchange market that has been largely unregulated to this point, 
and which is geared towards the retail public, are manifest.
    2. Efficiency and competition. In its Conference Report, Congress 
indicated that the Commission should avoid creating two different 
regulatory regimes for similar business models with respect to FCMs or 
RFEDs engaging in off-exchange retail forex transactions.\45\ 
Accordingly, the Commission has endeavored to ensure that these 
entities be treated in comparable fashion relative to one another. 
Moreover, the Commission has endeavored, wherever possible, to propose 
regulations in part 5 that are analogous to regulations imposed upon 
intermediaries engaged in on-exchange transactions. Accordingly, the 
Commission believes that it has provided an even handed regulatory 
scheme that will be familiar to industry participants.
---------------------------------------------------------------------------

    \45\ As noted in the Conference Report that accompanied the CRA, 
``To the extent their risk profiles are similar, the managers intend 
for FCMs and RFEDs to be regulated substantially equivalently in 
terms of their off-exchange retail foreign currency business.'' H.R. 
Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference Report 
is available via the Internet on the CFTC's Web site.
---------------------------------------------------------------------------

    3. Financial integrity of futures markets and price discovery. The 
amendments concern retail, off-exchange markets. These markets serve 
primarily as a vehicle for members of the retail public to engage in 
speculative transactions. Accordingly, the Commission does not perceive 
a significant intersection between the operations of these markets and 
the financial integrity or price discovery functions of the markets 
generally.
    4. Sound risk management practices. The amendments include 
requirements regarding capital, financial reporting, risk assessment 
recordkeeping, and risk assessment reporting that are comparable to 
those required of entities engaged in on-exchange trading. The 
Commission believes that the benefits of these risk management 
requirements--which strive to ensure the financial soundness of firms--
have been borne out on the exchange-traded side and will be of 
significant benefit with regard to its oversight of retail forex 
counterparties.
    5. Other public interest considerations. The retail, off-exchange 
forex market has been largely unregulated until now. The Commission 
believes that the amendments are beneficial in that they will provide 
needed protections for members of the public engaging in these 
transactions. The amendments will also bring much needed oversight to 
the forex counterparties and intermediaries that interact with the 
public.
    After considering these factors, the Commission has determined to 
adopt the proposed rule changes. The Commission did not receive any 
comments relative to its analysis of the cost-benefit provision.

List of Subjects

17 CFR Part 1

    Definitions, Minimum financial and reporting requirements. 
Recordkeeping requirements, Prohibited transactions in commodity 
options, Miscellaneous.

17 CFR Part 3

    Definitions, Customer protection, Licensing, Registration.

17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Exemption from 
registration, Reporting and recordkeeping requirements.

17 CFR Part 5

    Bulk transfers, Commodity pool operators, Commodity trading 
advisors, Consumer protection, Customer's money, securities and 
property, Definitions, Foreign exchange, Minimum financial and 
reporting requirements, Prohibited transactions in retail foreign 
exchange, Recordkeeping requirements, Retail foreign exchange dealers, 
Risk assessment, Special calls, Trading practices.

17 CFR Part 10

    Adjudicatory proceedings, Rules of practice.

17 CFR Part 140

    Authority delgations (Government agencies, Conflict of interests, 
Organization and functions (Government agencies).

17 CFR Part 145

    Confidential business information, Freedom of information.

17 CFR Part 147

    Sunshine Act.

17 CFR Part 160

    Consumer financial information, Definitions, Nonpublic personal 
information, Privacy.

[[Page 55418]]

17 CFR Part 166

    Arbitration, Authorization to trade, Customer protection, 
Definitions, Dispute settlement, Litigation, Reparations.

0
For the reasons presented above, the Commission hereby amends Chapter I 
of Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 
6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 
13a, 13a-1, 16, 16a, 19, 21, 23 and 24.


Sec.  1.1  [Removed and Reserved]

0
2. Section 1.1 is removed and reserved.

0
3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to read 
as follows:


Sec.  1.3  Definitions.

* * * * *
    (nn) Guarantee agreement. This term means an agreement of guaranty 
in the form set forth in part B or C of Form 1-FR, executed by a 
registered futures commission merchant or retail foreign exchange 
dealer, as appropriate, and by an introducing broker or applicant for 
registration as an introducing broker on behalf of an introducing 
broker or applicant for registration as an introducing broker in 
satisfaction of the alternative adjusted net capital requirement set 
forth in Sec.  1.17(a)(1)(iii).
* * * * *
    (yy) Commodity interest. This term means:
    (1) Any contract for the purchase or sale of a commodity for future 
delivery;
    (2) Any contract, agreement or transaction subject to Commission 
regulation under section 4c or 19 of the Act; and
    (3) Any contract, agreement or transaction subject to Commission 
jurisdiction under section 2(c)(2) of the Act.

0
4. Section 1.4 is revised to read as follows:


Sec.  1.4  Use of electronic signatures.

    For purposes of complying with any provision in the Commodity 
Exchange Act or the rules or regulations in this Chapter I that 
requires a document to be signed by a customer of a futures commission 
merchant or introducing broker, a retail forex customer of a retail 
foreign exchange dealer or futures commission merchant, a pool 
participant or a client of a commodity trading advisor, an electronic 
signature executed by the customer, participant or client will be 
sufficient, if the futures commission merchant, retail foreign exchange 
dealer, introducing broker, commodity pool operator or commodity 
trading advisor elects generally to accept electronic signatures; 
Provided, however, That the electronic signature must comply with 
applicable Federal laws and other Commission rules; And, Provided 
further, That the futures commission merchant, retail foreign exchange 
dealer, introducing broker, commodity pool operator or commodity 
trading advisor must adopt and utilize reasonable safeguards regarding 
the use of electronic signatures, including at a minimum safeguards 
employed to prevent alteration of the electronic record with which the 
electronic signature is associated, after such record has been 
electronically signed.

0
5. Section 1.10 is amended by revising paragraph (j) to read as 
follows:


Sec.  1.10  Financial reports of futures commission merchants and 
introducing brokers.

* * * * *
    (j) Requirements for guarantee agreement. (1) A guarantee agreement 
filed pursuant to this section must be signed in a manner sufficient to 
be a binding guarantee under local law by an appropriate person on 
behalf of the futures commission merchant or retail foreign exchange 
dealer and the introducing broker, and each signature must be 
accompanied by evidence that the signatory is authorized to enter the 
agreement on behalf of the futures commission merchant, retail foreign 
exchange dealer, or introducing broker and is such an appropriate 
person. For purposes of this paragraph (j), an appropriate person shall 
be the proprietor, if the firm is a sole proprietorship; a general 
partner, if the firm is a partnership; and either the chief executive 
officer or the chief financial officer, if the firm is a corporation; 
and, if the firm is a limited liability company or limited liability 
partnership, either the chief executive officer, the chief financial 
officer, the manager, the managing member, or those members vested with 
the management authority for the limited liability company or limited 
liability partnership.
    (2) No futures commission merchant or retail foreign exchange 
dealer may enter into a guarantee agreement if:
    (i) It knows or should have known that its adjusted net capital is 
less than the amount set forth in Sec.  1.12(b) of this part or Sec.  
5.6(b) of this chapter, as applicable; or
    (ii) There is filed against the futures commission merchant or 
retail foreign exchange dealer an adjudicatory proceeding brought by or 
before the Commission pursuant to the provisions of sections 6(c), 
6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec.  3.55, 3.56 or 3.60 of 
this chapter.
    (3) A retail foreign exchange dealer may enter into a guarantee 
agreement only with an introducing broker as defined in Sec.  5.1(f)(1) 
of this chapter. A retail foreign exchange dealer may not enter into a 
guarantee agreement with an introducing broker as defined in Sec.  
1.3(mm) of this part.
    (4) A guarantee agreement filed in connection with an application 
for initial registration as an introducing broker in accordance with 
the provisions of Sec.  3.10(a) of this chapter shall become effective 
upon the granting of registration or, if appropriate, a temporary 
license, to the introducing broker. A guarantee agreement filed other 
than in connection with an application for initial registration as an 
introducing broker shall become effective as of the date agreed to by 
the parties.
    (5)(i) If the registration of the introducing broker is suspended, 
revoked, or withdrawn in accordance with the provisions of this 
chapter, the guarantee agreement shall expire as of the date of such 
suspension, revocation or withdrawal.
    (ii) If the registration of the futures commission merchant or 
retail foreign exchange dealer is suspended or revoked, the guarantee 
agreement shall expire 30 days after such suspension or revocation, or 
at such earlier time as may be approved by the Commission, the 
introducing broker, and the introducing broker's designated self-
regulatory organization.
    (6) A guarantee agreement may be terminated at any time during the 
term thereof:
    (i) By mutual written consent of the parties, signed by an 
appropriate person on behalf of each party, with prompt written notice 
thereof, signed by an appropriate person on behalf of each party, to 
the Commission and to the designated self-regulatory organizations of 
the futures commission merchant or retail foreign exchange dealer and 
the introducing broker;
    (ii) For good cause shown, by either party giving written notice of 
its intention to terminate the agreement, signed by an appropriate 
person, to the other party to the agreement, to the Commission, and to 
the designated self-regulatory organizations of the futures

[[Page 55419]]

commission merchant or retail foreign exchange dealer and the 
introducing broker; or
    (iii) By either party giving written notice of its intention to 
terminate the agreement, signed by an appropriate person, at least 30 
days prior to the proposed termination date, to the other party to the 
agreement, to the Commission, and to the designated self-regulatory 
organizations of the futures commission merchant or retail foreign 
exchange dealer and the introducing broker.
    (7) The termination of a guarantee agreement by a futures 
commission merchant, retail foreign exchange dealer or an introducing 
broker, or the expiration of such an agreement, shall not relieve any 
party from any liability or obligation arising from acts or omissions 
which occurred during the term of the agreement.
    (8) An introducing broker may not simultaneously be a party to more 
than one guarantee agreement: Provided, however, That the provisions of 
this paragraph (j)(8) shall not be deemed to preclude an introducing 
broker from entering into a guarantee agreement with another futures 
commission merchant or retail foreign exchange dealer if the 
introducing broker, futures commission merchant or retail foreign 
exchange dealer which is a party to the existing agreement has provided 
notice of termination of the existing agreement in accordance with the 
provisions of paragraph (j)(6) of this section, and the new guarantee 
agreement does not become effective until the day following the date of 
termination of the existing agreement: And, provided further, That the 
provisions of this paragraph (j)(8) shall not be deemed to preclude an 
introducing broker from entering into a guarantee agreement with 
another futures commission merchant or retail foreign exchange dealer 
if the futures commission merchant or retail foreign exchange dealer 
which is a party to the existing agreement ceases to remain registered 
and the existing agreement would therefore expire in accordance with 
the provisions of paragraph (j)(6)(ii) of this section.
    (9)(i)(A) An introducing broker that is a party to a guarantee 
agreement that has been terminated in accordance with the provisions of 
paragraph (j)(6) of this section, or that is due to expire in 
accordance with the provisions of paragraph (j)(5)(ii) of this section, 
must cease doing business as an introducing broker on or before the 
effective date of such termination or expiration unless, on or before 
10 days prior to the effective date of such termination or expiration 
or such other period of time as the Commission or the designated self-
regulatory organization may allow for good cause shown, the introducing 
broker files with its designated self-regulatory organization either a 
new guarantee agreement effective as of the day following the date of 
termination of the existing agreement, or, in the case of a guarantee 
agreement that is due to expire in accordance with the provisions of 
paragraph (j)(4)(ii) of this section, a new guarantee agreement 
effective on or before such expiration, or either:
    (1) A Form 1-FR-IB certified by an independent public accountant in 
accordance with Sec.  1.16 as of a date not more than 45 days prior to 
the date on which the report is filed; or
    (2) A Form 1-FR-IB as of a date not more than 17 business days 
prior to the date on which the report is filed and a Form 1-FR-IB 
certified by an independent public accountant in accordance with Sec.  
1.16 as of a date not more than one year prior to the date on which the 
report is filed: Provided, however, that an introducing broker as 
defined in Sec.  5.1(f)(1) of this chapter that is party to a guarantee 
agreement that has been terminated or that has expired must cease doing 
business as an introducing broker on or before the effective date of 
such termination or expiration unless, on or before 10 days prior to 
the effective date of such termination or expiration or such other 
period of time as the Commission or the designated self-regulatory 
organization may allow for good cause shown, the introducing broker 
files with its designated self-regulatory organization a new guarantee 
agreement effective on or before the termination or expiration date of 
the terminating or expiring guarantee agreement.
    (B) Each person filing a Form 1-FR-IB in accordance with this 
section must include with the financial report a statement describing 
the source of his current assets and representing that his capital has 
been contributed for the purpose of operating his business and will 
continue to be used for such purpose.
    (ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of 
this section or of Sec.  1.17(a), an introducing broker that is a party 
to a guarantee agreement that has been terminated in accordance with 
the provisions of paragraph (j)(6)(ii) of this section shall not be 
deemed to be in violation of the minimum adjusted net capital 
requirement of Sec.  1.17(a)(1)(iii) or (a)(2) for 30 days following 
such termination. Such an introducing broker must cease doing business 
as an introducing broker on or after the effective date of such 
termination, and may not resume doing business as an introducing broker 
unless and until it files a new agreement or either:
    (1) A Form 1-FR-IB certified by an independent public accountant in 
accordance with Sec.  1.16 as of a date not more than 45 days prior to 
the date on which the report is filed; or
    (2) A Form 1-FR-IB as of a date not more than 17 business days 
prior to the date on which the report is filed and a Form 1-FR-IB 
certified by an independent public accountant in accordance with Sec.  
1.16 as of a date not more than one year prior to the date on which the 
report is filed: Provided, however, that an introducing broker as 
defined in Sec.  5.1(f)(1) of this chapter that is party to a guarantee 
agreement that has been terminated must cease doing business as an 
introducing broker from and after the effective date of such 
termination, and may not resume doing business as an introducing broker 
as defined in Sec.  5.1(f)(1) of this chapter unless and until it files 
a new guarantee agreement.
    (B) Each person filing a Form 1-FR-IB in accordance with this 
section must include with the financial report a statement describing 
the source of his current assets and representing that his capital has 
been contributed for the purpose of operating his business and will 
continue to be used for such purpose.
* * * * *
0
6. Section 1.35 is amended by revising paragraphs (a), (a-1) and (b) to 
read as follows:


Sec.  1.35  Records of cash commodity, futures, and option 
transactions.

    (a) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and members of contract markets. Each futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, and member of a contract market shall keep full, complete, and 
systematic records, together with all pertinent data and memoranda, of 
all transactions relating to its business of dealing in commodity 
futures, retail forex transactions, commodity options, and cash 
commodities (including currencies). Each futures commission merchant, 
retail foreign exchange dealer, introducing broker, and member of a 
contract market shall retain the required records, data, and memoranda 
in accordance with the requirements of Sec.  1.31, and produce them for 
inspection and furnish true and correct information and reports as to 
the contents or the meaning thereof, when and as requested by an 
authorized representative of the Commission or the United States

[[Page 55420]]

Department of Justice. Included among such records shall be all orders 
(filled, unfilled, or canceled), trading cards, signature cards, street 
books, journals, ledgers, canceled checks, copies of confirmations, 
copies of statements of purchase and sale, and all other records, data 
and memoranda, which have been prepared in the course of its business 
of dealing in commodity futures, retail forex transactions, commodity 
options, and cash commodities. Among such records each member of a 
contract market must retain and produce for inspection are all 
documents on which trade information is originally recorded, whether or 
not such documents must be prepared pursuant to the rules or 
regulations of either the Commission or the contract market. For 
purposes of this section, such documents are referred to as ``original 
source documents.''
    (a-1) Futures commission merchants, retail foreign exchange 
dealers, introducing brokers, and members of contract markets: 
Recording of customers' and option customers' orders. (1) Each futures 
commission merchant, each retail foreign exchange dealer and each 
introducing broker receiving a customer's, retail forex customer's or 
option customer's order, as applicable, shall immediately upon receipt 
thereof prepare a written record of the order including the account 
identification, except as provided in paragraph (a-1)(5) of this 
section, and order number, and shall record thereon, by timestamp or 
other timing device, the date and time, to the nearest minute, the 
order is received, and in addition, for option customers' orders, the 
time, to the nearest minute, the order is transmitted for execution.
    (2)(i) Each member of a contract market who on the floor of such 
contract market receives a customer's or option customer's order which 
is not in the form of a written record including the account 
identification, order number, and the date and time, to the nearest 
minute, the order was transmitted or received on the floor of such 
contract market, shall immediately upon receipt thereof prepare a 
written record of the order in nonerasable ink, including the account 
identification, except as provided in paragraph (a-1)(5) of this 
section or appendix C to this part, and order number and shall record 
thereon, by timestamp or other timing device, the date and time, to the 
nearest minute, the order is received.
    (ii) Except as provided in paragraph (a-1)(3) of this section:
    (A) Each contract market member who on the floor of such contract 
market receives an order from another member present on the floor which 
is not in the form of a written record shall, immediately upon receipt 
of such order, prepare a written record of the order or obtain from the 
member who placed the order a written record of the order, in non-
erasable ink including the account identification and order number and 
shall record thereon, by time-stamp or other timing device, the date 
and time, to the nearest minute, the order is received; or
    (B) When a contract market member present on the floor places an 
order, which is not in the form of a written record, for his own 
account or an account over which he has control, with another member of 
such contract market for execution:
    (1) The member placing such order immediately upon placement of the 
order shall record the order and time of placement to the nearest 
minute on a sequentially-numbered trading card maintained in accordance 
with the requirements of paragraph (d) of this section;
    (2) The member receiving and executing such order immediately upon 
execution of the order shall record the time of execution to the 
nearest minute on a trading card or other record maintained pursuant to 
the requirements of paragraph (d) of this section; and
    (3) The member receiving and executing the order shall return such 
trading card or other record to the member placing the order. The 
member placing the order then must submit together both of the trading 
cards or other records documenting such trade to contract market 
personnel or the clearing member, in accordance with contract market 
rules adopted pursuant to paragraph (j)(1) of this section.
    (iii) Each contract market may adopt rules, which must be submitted 
to the Commission pursuant to section 5a(a)(12)(A) of the Act and 
Commission Regulation 1.41, that provide alternative requirements to 
those contained in paragraph (a-1)(2)(ii) of this section. Such rules 
shall, at a minimum, require that the contemporaneous written records:
    (A) Contain the terms of the order;
    (B) Include reliable timing data for the initiation and execution 
of the order which would permit complete and effective reconstruction 
of the order placement and execution; and
    (C) Be submitted to contract market personnel or clearing members 
in accordance with contract market rules adopted pursuant to paragraph 
(j)(1) of this section.
    (3)(i) The requirements of paragraph (a-1)(2)(ii) of this section 
will not apply if a contract market maintains in effect rules which 
have been submitted to the Commission pursuant to section 5a(a)(12)(A) 
of the Act and Commission Regulation 1.41, which provide for an 
exemption where:
    (A) A contract market member places with another member of such 
contract market an order that is part of a spread transaction;
    (B) The member placing the order personally executes one or more 
legs of the spread; and
    (C) The member receiving and executing such order immediately upon 
execution of the order records the time of execution to the nearest 
minute on his trading card or other record maintained in accordance 
with the requirements of paragraph (d) of this section.
    (ii) Each contract market shall, as part of its trade practice 
surveillance program, conduct surveillance for compliance with the 
recordkeeping and other requirements under paragraphs (a-1) (2) and (3) 
of this section, and for trading abuses related to the execution of 
orders for members present on the floor of the contract market.
    (4) Each member of a contract market reporting the execution from 
the floor of the contract market of a customer's or option customer's 
order or the order of another member of the contract market received in 
accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this 
section, shall record on a written record of the order, including the 
account identification, except as provided in paragraph (a-1)(5) of 
this section, and order number, by timestamp or other timing device, 
the date and time to the nearest minute such report of execution is 
made. Each member of a contract market shall submit the written records 
of customer orders or orders from other contract market members to 
contract market personnel or to the clearing member responsible for the 
collection of orders prepared pursuant to this paragraph as required by 
contract market rules adopted in accordance with paragraph (j)(1) of 
this section. The execution price and other information reported on the 
order tickets must be written in nonerasable ink.
    (5) Post-execution allocation of bunched orders. Specific customer 
account identifiers for accounts included in bunched orders need not be 
recorded at time of order placement or upon report of execution if the 
requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.
    (i) Eligible account managers. The person placing and directing the 
allocation of an order eligible for post-execution allocation must have 
been granted written investment discretion

[[Page 55421]]

with regard to participating customer accounts. The following persons 
shall qualify as eligible account managers:
    (A) A commodity trading advisor registered with the Commission 
pursuant to the Act or excluded or exempt from registration under the 
Act or the Commission's rules, except for entities exempt under Sec.  
4.14(a)(3) or Sec.  4.14(a)(6) of this chapter;
    (B) An investment adviser registered with the Securities and 
Exchange Commission pursuant to the Investment Advisers Act of 1940 or 
with a state pursuant to applicable state law or excluded or exempt 
from registration under such Act or applicable state law or rule;
    (C) A bank, insurance company, trust company, or savings and loan 
association subject to federal or state regulation; or
    (D) A foreign adviser that exercises discretionary trading 
authority solely over the accounts of non-U.S. persons, as defined in 
Sec.  4.7(a)(1)(iv) of this chapter.
    (ii) Information. Eligible account managers shall make the 
following information available to customers upon request:
    (A) The general nature of the allocation methodology the account 
manager will use;
    (B) Whether accounts in which the account manager may have any 
interest may be included with customer accounts in bunched orders 
eligible for post-execution allocation; and
    (C) Summary or composite data sufficient for that customer to 
compare its results with those of other comparable customers and, if 
applicable, any account in which the account manager has an interest.
    (iii) Allocation. Orders eligible for post-execution allocation 
must be allocated by an eligible account manager in accordance with the 
following:
    (A) Allocations must be made as soon as practicable after the 
entire transaction is executed, but in any event account managers must 
provide allocation information to futures commission merchants no later 
than a time sufficiently before the end of the day the order is 
executed to ensure that clearing records identify the ultimate customer 
for each trade.
    (B) Allocations must be fair and equitable. No account or group of 
accounts may receive consistently favorable or unfavorable treatment.
    (C) The allocation methodology must be sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
    (iv) Records. (A) Eligible account managers shall keep and must 
make available upon request of any representative of the Commission, 
the United States Department of Justice, or other appropriate 
regulatory agency, the information specified in paragraph (a-1)(5)(ii) 
of this section.
    (B) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, records 
sufficient to demonstrate that all allocations meet the standards of 
paragraph (a-1)(5)(iii) of this section and to permit the 
reconstruction of the handling of the order from the time of placement 
by the account manager to the allocation to individual accounts.
    (C) Futures commission merchants that execute orders or that carry 
accounts eligible for post-execution allocation, and members of 
contract markets that execute such orders, must maintain records that, 
as applicable, identify each order subject to post-execution allocation 
and the accounts to which contracts executed for such order are 
allocated.
    (D) In addition to any other remedies that may be available under 
the Act or otherwise, if the Commission has reason to believe that an 
account manager has failed to provide information requested pursuant to 
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the 
Commission may inform in writing any designated contract market or 
derivatives transaction execution facility and that designated contract 
market or derivatives transaction execution facility shall prohibit the 
account manager from submitting orders for execution except for 
liquidation of open positions and no futures commission merchants shall 
accept orders for execution on any designated contract market or 
derivatives transaction execution facility from the account manager 
except for liquidation of open positions.
    (E) Any account manager that believes he or she is or may be 
adversely affected or aggrieved by action taken by the Commission under 
paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity 
for a prompt hearing in accordance with the provisions of Sec.  
21.03(g) of this chapter.
* * * * *
    (b) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and clearing members of contract markets. Each 
futures commission merchant, each retail foreign exchange dealer, and 
each clearing member of a contract market and, for purposes of 
paragraph (b)(3) of this section, each introducing broker, shall, as a 
minimum requirement, prepare regularly and promptly, and keep 
systematically and in permanent form, the following:
    (1) A financial ledger record which will show separately for each 
customer or retail forex customer or option customer all charges 
against and credits to such customer's or retail forex customer's or 
option customer's account, including but not limited to customer or 
retail forex customer funds deposited, withdrawn, or transferred, and 
charges or credits resulting from losses or gains on closed 
transactions;
    (2) A record of transactions which will show separately for each 
account (including proprietary accounts):
    (i) All commodity futures transactions executed for such account, 
including the date, price, quantity, market, commodity and future;
    (ii) All retail forex transactions executed for such account, 
including the date, price, quantity, and currency; and
    (iii) All commodity option transactions executed for such account, 
including the date, whether the transaction involved a put or call, 
expiration date, quantity, underlying contract for future delivery or 
underlying physical, strike price, and details of the purchase price of 
the option, including premium, mark-up, commission and fees; and
    (3) A record or journal which will separately show for each 
business day complete details of:
    (i) All commodity futures transactions executed on that day, 
including the date, price, quantity, market, commodity, future and the 
person for whom such transaction was made;
    (ii) All retail forex transactions executed on that day for such 
account, including the date, price, quantity, currency and the person 
for whom such transaction was made; and
    (iii) All commodity option transactions executed on that day, 
including the date, whether the transaction involved a put or call, the 
expiration date, quantity, underlying contract for future delivery, or 
underlying physical, strike price, details of the purchase price of the 
option, including premium, mark-up, commission and fees and the person 
for whom the transaction was made; and
    (iv) In the case of an introducing broker, the record or journal 
required by this paragraph (b)(3) shall also include the futures 
commission merchant or

[[Page 55422]]

retail foreign exchange dealer carrying the account for which each 
commodity futures, retail forex and commodity option transaction was 
executed on that day. Provided, however, that where reproductions on 
microfilm, microfiche or optical disk are substituted for hard copy in 
accordance with the provisions of Sec.  1.31(b) of this part, the 
requirements of paragraphs (b)(1) and (b)(2) of this section will be 
considered met if the person required to keep such records is ready at 
all times to provide, and immediately provides in the same city as that 
in which such person's commodity retail forex or commodity option books 
and records are maintained, at the expense of such person, reproduced 
copies which show the records as specified in paragraphs (b)(1) and 
(b)(2) of this section, on request of any representatives of the 
Commission or the U.S. Department of Justice.
* * * * *
0
7. Section 1.36 is amended by revising paragraph (a) to read as 
follows:


Sec.  1.36  Record of securities and property received from customers 
and option customers.

    (a) Each futures commission merchant and each retail foreign 
exchange dealer shall maintain, as provided in Sec.  1.31, a record of 
all securities and property received from customers, retail forex 
customers or option customers in lieu of money to margin, purchase, 
guarantee, or secure the commodity, retail forex or commodity option 
transactions of such customers, retail forex customers or option 
customers. Such record shall show separately for each customer, retail 
forex customer or option customer: A description of the securities or 
property received; the name and address of such customer, retail forex 
customer or option customer; the dates when the securities or property 
were received; the identity of the depositories or other places where 
such securities or property are segregated or held; the dates of 
deposits and withdrawals from such depositories; and the dates of 
return of such securities or property to such customer, retail forex 
customer or option customer, or other disposition thereof, together 
with the facts and circumstances of such other disposition. In the 
event any futures commission merchant deposits with the clearing 
organization of a contract market, directly or with a bank or trust 
company acting as custodian for such clearing organization, securities 
and/or property which belong to a particular customer or option 
customer, such futures commission merchant shall obtain written 
acknowledgment from such clearing organization that it was informed 
that such securities or property belong to customers or option 
customers of the futures commission merchant making the deposit. Such 
acknowledgment shall be retained as provided in Sec.  1.31.
* * * * *

0
8. Section 1.37 is amended by revising paragraph (a)(1) to read as 
follows:


Sec.  1.37  Customer's or option customer's name, address, and 
occupation recorded; record of guarantor or controller of account.

    (a)(1) Each futures commission merchant, retail foreign exchange 
dealer, introducing broker, and member of a contract market shall keep 
a record in permanent form which shall show for each commodity futures, 
retail forex or option account carried or introduced by it the true 
name and address of the person for whom such account is carried or 
introduced and the principal occupation or business of such person as 
well as the name of any other person guaranteeing such account or 
exercising any trading control with respect to such account. For each 
such commodity option account, the records kept by such futures 
commission merchant, introducing broker, and member of a contract 
market must also show the name of the person who has solicited and is 
responsible for each option customer's account or assign account 
numbers in such a manner to identify that person.
* * * * *

0
9. Section 1.40 is revised to read as follows:


Sec.  1.40  Crop, market information letters, reports; copies required.

    Each futures commission merchant, each retail foreign exchange 
dealer, each introducing broker and each member of a contract market 
shall, upon request, furnish or cause to be furnished to the Commission 
a true copy of any letter, circular, telegram, or report published or 
given general circulation by such futures commission merchant, retail 
foreign exchange dealer, introducing broker or member which concerns 
crop or market information or conditions that affect or tend to affect 
the price of any commodity or exchange rate, and the true source of or 
authority for the information contained therein.

0
10. Section 1.46 is amended by revising paragraphs (a) and (b) to read 
as follows:


Sec.  1.46  Application and closing out of offsetting long and short 
positions.

    (a) Application of purchases and sales. (1) Except with respect to 
purchases or sales which are for omnibus accounts, or where the 
customer or account controller has instructed otherwise, any futures 
commission merchant who, on or subject to the rules of a designated 
contract market or registered derivatives transaction execution 
facility:
    (i) Purchases any commodity for future delivery for the account of 
any customer when the account of such customer at the time of such 
purchase has a short position in the same future of the same commodity 
on the same market;
    (ii) Sells any commodity for future delivery for the account of any 
customer when the account of such customer at the time of such sale has 
a long position in the same future of the same commodity on the same 
market;
    (iii) Purchases a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
purchase has a short put or call option position with the same 
underlying futures contract or same underlying physical, strike price, 
expiration date and contract market as that purchased; or
    (iv) Sells a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
sale has a long put or call option position with the same underlying 
futures contract or same underlying physical, strike price, expiration 
date and contract market as that sold--shall on the same day apply such 
purchase or sale against such previously held short or long futures or 
option position, as the case may be, and shall, for futures 
transactions, promptly furnish such customer a statement showing the 
financial result of the transactions involved and, if applicable, that 
the account was introduced to the futures commission merchant by an 
introducing broker and the names of the futures commission merchant and 
introducing broker.
    (2) Any futures commission merchant or retail foreign exchange 
dealer who:
    (i) Engages in a retail forex transaction involving the purchase of 
any currency for the account of any retail forex customer when the 
account of such retail forex customer at the time of such purchase has 
an open retail forex transaction for the sale of the same currency;
    (ii) Engages in a retail forex transaction involving the sale of 
any currency for the account of any retail forex customer when the 
account of such retail forex customer at the time of such sale has an 
open retail forex transaction for the purchase of the same currency;

[[Page 55423]]

    (iii) Purchases a put or call option involving foreign currency for 
the account of any option customer when the account of such option 
customer at the time of such purchase has a short put or call option 
position with the same underlying currency, strike price, and 
expiration date as that purchased; or
    (iv) Sells a put or call option involving foreign currency for the 
account of any option customer when the account of such option customer 
at the time of such sale has a long put or call option position with 
the same underlying currency, strike price, and expiration date as that 
sold--shall immediately apply such purchase or sale against such 
previously held opposite transaction, and shall promptly furnish such 
retail forex customer a statement showing the financial result of the 
transactions involved and, if applicable, that the account was 
introduced to the futures commission merchant or retail foreign 
exchange dealer by an introducing broker and the names of the futures 
commission merchant or retail foreign exchange dealer, and the 
introducing broker.
    (b) Close-out against oldest open position. In all instances 
wherein the short or long futures, retail forex transaction or option 
position in such customer's, retail forex customer's or option 
customer's account immediately prior to such offsetting purchase or 
sale is greater than the quantity purchased or sold, the futures 
commission merchant or retail foreign exchange dealer shall apply such 
offsetting purchase or sale to the oldest portion of the previously 
held short or long position: Provided, That upon specific instructions 
from the customer or option customer the offsetting transaction shall 
be applied as specified by the customer or option customer without 
regard to the date of acquisition of the previously held position; and 
Provided, further, that a futures commission merchant or retail foreign 
exchange dealer, if permitted by the rules of a registered futures 
association, may offset, at the customer's request, retail forex 
transactions of the same size, even if the customer holds other 
transactions of a different size, but in each case must offset the 
transaction against the oldest transaction of the same size. Such 
instructions may also be accepted from any person who, by power of 
attorney or otherwise, actually directs trading in the customer's, 
retail forex customer's or option customer's account unless the person 
directing the trading is the futures commission merchant or retail 
foreign exchange dealer (including any partner thereof), or is an 
officer, employee, or agent of the futures commission merchant or 
retail foreign exchange dealer. With respect to every such offsetting 
transaction that, in accordance with such specific instructions, is not 
applied to the oldest portion of the previously held position, the 
futures commission merchant or retail foreign exchange dealer shall 
clearly show on the statement issued to the customer, retail forex 
customer or option customer in connection with the transaction, that 
because of the specific instructions given by or on behalf of the 
customer, retail forex customer or option customer the transaction was 
not applied in the usual manner, i.e., against the oldest portion of 
the previously held position. However, no such showing need be made if 
the futures commission merchant or retail foreign exchange dealer has 
received such specific instructions in writing from the customer, 
retail forex customer or option customer for whom such account is 
carried.
* * * * *

0
11. Section 1.52 is amended by:
0
a. Revising paragraphs (a), and (c) introductory text, (c)(1), and 
(c)(2);
0
b. Revising paragraphs (g)(3) and (g)(4); and
0
c. Revising paragraphs (h), (j), and (k) to read as follows:


Sec.  1.52  Self-regulatory organization adoption and surveillance of 
minimum financial requirements.

    (a) Each self-regulatory organization must adopt, and submit for 
Commission approval, rules prescribing minimum financial and related 
reporting requirements for all its members who are registered futures 
commission merchants or registered retail foreign exchange dealers. 
Each self-regulatory organization other than a contract market must 
adopt, and submit for Commission approval, rules prescribing minimum 
financial and related reporting requirements for all its members who 
are registered introducing brokers. Each contract market which elects 
to have a category of membership for introducing brokers must adopt, 
and submit for Commission approval, rules prescribing minimum financial 
and related reporting requirements for all its members who are 
registered introducing brokers. Each self-regulatory organization shall 
submit for Commission approval any modification or other amendments to 
such rules. Such requirements must be the same as, or more stringent 
than, those contained in Sec. Sec.  1.10 and 1.17, for futures 
commission merchants and introducing brokers, and Sec.  5.7 of this 
chapter for retail foreign exchange dealers. The definition of adjusted 
net capital must be the same as that prescribed in Sec.  1.17(c) for 
futures commission merchants and introducing brokers, and Sec.  
5.7(b)(2) of this chapter for futures commission merchants offering or 
engaging in retail forex transactions and for retail foreign exchange 
dealers: Provided, however, A designated self-regulatory organization 
may permit its member registrants which are registered with the 
Securities and Exchange Commission as securities brokers or dealers to 
file (in accordance with Sec.  1.10(h)) a copy of their Financial and 
Operational Combined Uniform Single Report under the Securities 
Exchange Act of 1934, Part II, Part IIA, or Part II CSE, in lieu of 
Form 1-FR: And, provided further, A designated self-regulatory 
organization may permit its member introducing brokers to file a Form 
1-FR-IB in lieu of a Form 1-FR-FCM.
* * * * *
    (c) Any two or more self-regulatory organizations may file with the 
Commission a plan for delegating to a designated self-regulatory 
organization, for any registered futures commission merchant, any 
registered retail foreign exchange dealer, or any registered 
introducing broker which is a member of more than one such self-
regulatory organization, the responsibility of:
    (1) Monitoring and auditing for compliance with the minimum 
financial and related reporting requirements adopted by such self-
regulatory organizations in accordance with paragraph (a) of this 
section; and
    (2) Receiving the financial reports necessitated by such minimum 
financial and related reporting requirements.
* * * * *
    (g) * * *
    (3) Reduces multiple monitoring and auditing for compliance with 
the minimum financial rules of the self-regulatory organizations 
submitting the plan for any futures commission merchant, retail foreign 
exchange dealer, or introducing broker which is a member of more than 
one self-regulatory organization;
    (4) Reduces multiple reporting of the financial information 
necessitated by such minimum financial and related reporting 
requirements by any futures commission merchant, retail foreign 
exchange dealer, or introducing broker which is a member of more than 
one self-regulatory organization;
* * * * *
    (h) After the Commission has approved a plan or part of one under 
Sec.  1.52(g), a self-regulatory organization relieved of 
responsibility must notify

[[Page 55424]]

each of its members which is subject to such a plan:
    (1) Of the limited nature of its responsibility for such a member's 
compliance with its minimum financial and related reporting 
requirements; and
    (2) Of the identity of the designated self-regulatory organization 
which has been delegated responsibility for such a member.
* * * * *
    (j) Whenever a registered futures commission merchant, a registered 
retail foreign exchange dealer, or a registered introducing broker 
holding membership in a self-regulatory organization ceases to be a 
member in good standing of that self-regulatory organization, such 
self-regulatory organization must, on the same day that event takes 
place, give telegraphic notice of that event to the principal office of 
the Commission in Washington, DC, and send a copy of that notification 
to such futures commission merchant, retail foreign exchange dealer, or 
such introducing broker.
    (k) Nothing in this section shall preclude the Commission from 
examining any futures commission merchant, retail foreign exchange 
dealer, or introducing broker for compliance with the minimum financial 
and related reporting requirements to which such futures commission 
merchant, retail foreign exchange dealer, or introducing broker is 
subject.
* * * * *

PART 3--REGISTRATION

0
12. The authority citation for part 3 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21 
and 23.


0
13. Section 3.1 is amended by revising paragraph (c) to read as 
follows:


Sec.  3.1  Definitions.

* * * * *
    (c) Sponsor. Sponsor means the futures commission merchant, retail 
foreign exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant which makes 
the certification required by Sec.  3.12 of this part for the 
registration of an associated person of such sponsor.
* * * * *

0
14. Section 3.4 is amended by revising paragraph (a) to read as 
follows:


Sec.  3.4  Registration in one capacity not included in registration in 
any other capacity.

    (a) Except as may be otherwise provided in the Act or in any rule, 
regulation, or order of the Commission, each futures commission 
merchant, retail foreign exchange dealer, floor broker, floor trader, 
associated person, commodity trading advisor, commodity pool operator, 
introducing broker, and leverage transaction merchant must register as 
such under the Act. Registration in one capacity under the Act shall 
not include registration in any other capacity: Provided, however, That 
a registered floor broker need not also register as a floor trader in 
order to engage in activity as a floor trader.
* * * * *

0
15. Section 3.10 is amended by:
0
a. Revising the heading;
0
b. Revising paragraph (a)(1);
0
c. Revising paragraph (b); and
0
d. Revising paragraph (d) to read as follows:


Sec.  3.10  Registration of futures commission merchants, retail 
foreign exchange dealers, introducing brokers, commodity trading 
advisors, commodity pool operators and leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in 
paragraph (a)(3) of this section, application for registration as a 
futures commission merchant, retail foreign exchange dealers, 
introducing broker, commodity trading advisor, commodity pool operator 
or leverage transaction merchant must be on Form 7-R, completed and 
filed with the National Futures Association in accordance with the 
instructions thereto.
    (ii) Applicants for registration as a futures commission merchant, 
retail foreign exchange dealer or introducing broker must accompany 
their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in 
accordance with the provisions of Sec.  1.10 of this chapter: Provided, 
however, That an applicant for registration as a futures commission 
merchant or introducing broker which is registered with the Securities 
and Exchange Commission as a securities broker or dealer may accompany 
its Form 7-R with a copy of its Financial and Operational Combined 
Uniform Single Report under the Securities Exchange Act of 1934, Part 
II or Part II A, in accordance with the provisions of Sec.  1.10(h) of 
this chapter.
* * * * *
    (b) Duration of registration. (1) A person registered as a futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, commodity trading advisor, commodity pool operator or leverage 
transaction merchant in accordance with paragraph (a) of this section 
will continue to be so registered until the effective date of any 
revocation or withdrawal of such registration. Such person will be 
prohibited from engaging in activities requiring registration under the 
Act or from representing himself to be a registrant under the Act or 
the representative or agent of any registrant during the pendency of 
any suspension of such registration.
    (2) A person registered as an introducing broker who was a party to 
a guarantee agreement with a futures commission merchant or retail 
foreign exchange dealer in accordance with Sec.  1.10(j) of this 
chapter will have its registration cease thirty days after the 
termination of such guarantee agreement unless the procedures set forth 
in Sec.  1.10(j)(8) of this chapter are followed.
* * * * *
    (d) On a date to be established by the National Futures 
Association, and in accordance with procedures established by the 
National Futures Association, each registrant as a futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator or leverage transaction 
merchant shall, on an annual basis, review and update registration 
information maintained with the National Futures Association. The 
failure to complete the review and update within thirty days following 
the date established by the National Futures Association shall be 
deemed to be a request for withdrawal from registration, which shall be 
processed in accordance with the provisions of Sec.  3.33(f).
* * * * *

0
16. Section 3.12 is amended by
0
a. Revising the heading;
0
b. Revising paragraph (a);
0
c. Revising paragraph (f)(1)(iii)(E);
0
d. Revising paragraph (f)(4);
0
e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and
0
f. Removing paragraph (j). The revisions read as follows:


Sec.  3.12  Registration of associated persons of futures commission 
merchants, retail foreign exchange dealers, introducing brokers, 
commodity trading advisors, commodity pool operators and leverage 
transaction merchants.

    (a) Registration required. It shall be unlawful for any person to 
be associated with a futures commission merchant, retail foreign 
exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant as an 
associated person unless that person shall have registered under the 
Act as an associated person of that sponsoring futures commission 
merchant, retail foreign exchange dealer, introducing

[[Page 55425]]

broker, commodity trading advisor, commodity pool operator or leverage 
transaction merchant in accordance with the procedures in paragraphs 
(c), (d), (f), or (i), of this section or is exempt from such 
registration pursuant to paragraph (h) of this section.
* * * * *
    (f) * * *
    (1) * * *
    (iii) * * *
    (E) Associated person's supervision of any person or persons 
engaged in any of the foregoing solicitations or acceptances, with 
respect to any customers common to it and any other futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator, or leverage transaction 
merchant with which the associated person is associated.
* * * * *
    (4) If a person is associated with a futures commission merchant, 
with a retail foreign exchange dealer, or with an introducing broker 
and he directs customers seeking a managed account to use the services 
of a commodity trading advisor(s) approved by the futures commission 
merchant, retail foreign exchange dealer or introducing broker and all 
such customers' accounts solicited or accepted by the associated person 
are carried by the futures commission merchant, retail foreign exchange 
dealer or introduced by the introducing broker with which the 
associated person is associated, such a person shall be deemed to be 
associated solely with the futures commission merchant, retail foreign 
exchange dealer or introducing broker and may not also register as an 
associated person of the commodity trading advisor(s).
* * * * *
    (h) * * *
    (1) * * *
    (i) Registered under the Act as a futures commission merchant, 
retail foreign exchange dealer, floor broker, or as an introducing 
broker;
* * * * *
    (iii) The chief operating officer, general partner or other person 
in the supervisory chain-of-command, provided the futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator, or leverage transaction 
merchant engages in commodity interest related activity for customers 
as no more than ten percent of its total revenue on an annual basis, 
the firm is not subject to a pending proceeding brought by the 
Commission or a self-regulatory organization alleging fraud or failure 
to supervise, and has not been found in such a proceeding to have 
committed fraud or failed to supervise, as required by the Act, the 
rules promulgated thereunder or the rules of a self-regulatory 
organization, the person for whom exemption is sought and the person 
designated in accordance with paragraphs (h)(1)(iii)(C) or 
(h)(1)(iii)(D) of this section are listed as principals of the firm, 
the fitness examination conducted by the National Futures Association 
with respect to these persons discloses no derogatory information that 
would disqualify any of such persons as a principal or as an associated 
person, and the firm files with the National Futures Association 
corporate or partnership resolutions stating that:
    (A) Such supervisory person is not authorized to:
    (1) Solicit or accept customers', retail forex customers', or 
leverage customers' orders,
    (2) Solicit a client's or prospective client's discretionary 
account,
    (3) Solicit funds, securities or property for a participation in a 
commodity pool, or
    (4) Exercise any line supervisory authority over those persons so 
engaged;
    (B) Such supervisory person has no authority with respect to 
hiring, firing or other personnel matters involving persons engaged in 
activities subject to regulation under the Act;
    (C) Another person (or persons) designated therein, who is 
registered as an associated person(s) or who has applied for 
registration as an associated person(s) and is not subject to a pending 
proceeding brought by the Commission or a self-regulatory organization 
alleging fraud or failure to supervise, and has not been found in such 
a proceeding to have committed fraud or failed to supervise, as 
required by the Act, the rules promulgated thereunder or the rules of a 
self-regulatory organization, holds and exercises full and final 
supervisory authority, including authority to hire and fire personnel, 
over the customer commodity interest related activities of the firm; 
and
    (D) If the person (or persons) so designated in accordance with 
paragraph (h)(1)(iii)(C) of this section ceases to have the authority 
referred to therein, the firm will notify the National Futures 
Association within twenty days of such occurrence by means of a 
subsequent resolution which resolution must also include the name of 
another associated person (or persons) who has been vested with full 
supervisory authority, including authority to hire and fire personnel, 
over the customer commodity interest related activities of the firm in 
the event that all of those previously designated in accordance with 
paragraph (h)(1)(iii)(C) of this section have been relieved of such 
authority. Subsequent changes in supervisory authority shall be 
reported in the same manner; or
* * * * *

0
17. Section 3.21 is amended by:
0
a. Revising paragraph (b)(3); and
0
b. Revising paragraphs (c) introductory text, (c)(1) through (3), and 
(c)(4)(i) to read as follows:


Sec.  3.21  Exemption from fingerprinting requirement in certain cases.

* * * * *
    (b) * * *
    (3) With respect to the fingerprints of a principal. An officer, if 
the futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator, introducing broker, 
or leverage transaction merchant with which the principal will be 
affiliated is a corporation, a general partner, if a partnership, or 
the sole proprietor, if a sole proprietorship.
    (c) Outside directors. Any futures commission merchant, retail 
foreign exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant that has a 
principal who is a director but is not also an officer or employee of 
the firm may, in lieu of submitting a fingerprint card in accordance 
with the provisions of Sec. Sec.  3.10(a)(2) and 3.31(a)(2), file a 
``Notice Pursuant to Rule 3.21(c)'' with the National Futures 
Association. Such notice shall state, if true, that such outside 
director:
    (1) Is not engaged in:
    (i) The solicitation or acceptance of customers' orders or retail 
forex customers' orders,
    (ii) The solicitation of funds, securities or property for a 
participation in a commodity pool,
    (iii) The solicitation of a client's or prospective client's 
discretionary account,
    (iv) The solicitation or acceptance of leverage customers' orders 
for leverage transactions;
    (2) Does not regularly have access to the keeping, handling or 
processing of:
    (i) Commodity interest transactions;
    (ii) Customer funds, retail forex customer funds, leverage customer 
funds, foreign futures or foreign options secured amount, or adjusted 
net capital; or
    (3) Does not have direct supervisory responsibility over persons 
engaged in the activities referred to in paragraphs (c)(1) and (c)(2) 
of this section; and

[[Page 55426]]

    (4) * * *
    (i) The name of the futures commission merchant, retail foreign 
exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator, leverage transaction merchant, or applicant 
for registration in any of these capacities of which the person is an 
outside director;
* * * * *
    18. Section 3.30 is amended by revising paragraph (a) to read as 
follows:


Sec.  3.30  Current address for purpose of delivery of communications 
from the Commission or the National Futures Association.

    (a) The address of each registrant, applicant for registration and 
principal, as submitted on the application for registration (Form 7-R 
or Form 8-R) or as submitted on the biographical supplement (Form 8-R) 
shall be deemed to be the address for delivery to the registrant, 
applicant or principal for any communications from the Commission or 
the National Futures Association, including any summons, complaint, 
reparation claim, order, subpoena, special call, request for 
information, notice, and other written documents or correspondence, 
unless the registrant, applicant or principal specifies another address 
for this purpose: Provided, That the Commission or the National Futures 
Association may address any correspondence relating to a biographical 
supplement submitted for or on behalf of a principal to the futures 
commission merchant, retail foreign exchange dealer, commodity trading 
advisor, commodity pool operator, introducing broker, or leverage 
transaction merchant with which the principal is affiliated and may 
address any correspondence relating to the registration of an 
associated person to the futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant with which the 
associated person or the applicant for registration is or will be 
associated as an associated person.
* * * * *

0
19. Section 3.31 is amended by revising paragraphs (a)(1), (b), (c), 
and (d) to read as follows:


Sec.  3.31  Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission 
merchant, retail foreign exchange dealer, commodity trading advisor, 
commodity pool operator, introducing broker, or leverage transaction 
merchant shall, in accordance with the instructions thereto, promptly 
correct any deficiency or inaccuracy in Form 7-R or Form 8-R which no 
longer renders accurate and current the information contained therein. 
Each such correction shall be made on Form 3-R and shall be prepared 
and filed in accordance with the instructions thereto. Provided, 
however, that where a registrant is reporting a change in the form of 
organization from or to a sole proprietorship, the registrant must file 
a Form 7-W regarding the pre-existing organization and a Form 7-R 
regarding the newly formed organization.
* * * * *
    (b) Each applicant or registrant as a floor broker, floor trader or 
associated person, and each principal of a futures commission merchant, 
retail foreign exchange dealer, commodity trading advisor, commodity 
pool operator, introducing broker, or leverage transaction merchant 
must, in accordance with the instructions thereto, promptly correct any 
deficiency or inaccuracy in the Form 8-R or supplemental statement 
thereto which renders no longer accurate and current the information 
contained in the Form 8-R or supplemental statement. Each such 
correction must be made on Form 3-R and must be prepared and filed in 
accordance with the instructions thereto.
    (c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf 
of any person for the purpose of permitting that person to be an 
associated person of a futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator, 
introducing broker, or a leverage transaction merchant, that futures 
commission merchant, retail foreign exchange dealer, commodity trading 
advisor, commodity pool operator, introducing broker or leverage 
transaction merchant must, within thirty days after the occurrence of 
either of the following, file a notice thereof with the National 
Futures Association indicating:
    (i) The failure of that person to become associated with the 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator, introducing broker, or 
leverage transaction merchant, and the reasons therefor; or
    (ii) The termination of the association of the associated person 
with the futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator, introducing broker, 
or leverage transaction merchant, and the reasons therefor.
    (2) Each person registered as, or applying for registration as, a 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator, introducing broker or 
leverage transaction merchant must, within thirty days after the 
termination of the affiliation of a principal with the registrant or 
applicant, file a notice thereof with the National Futures Association.
    (3) Any notice required by paragraph (c) of this section must be 
filed on Form 8-T or on a Uniform Termination Notice for Securities 
Industry Registration.
    (d) Each contract market or derivatives transaction execution 
facility that has granted trading privileges to a person who is 
registered, has received a temporary license, or has applied for 
registration as a floor broker or floor trader, must notify the 
National Futures Association within sixty days after such person has 
ceased having trading privileges on such contract market or derivatives 
transaction execution facility.
* * * * *

0
20. Section 3.33 is amended by revising paragraphs (a) introductory 
text, (b) introductory text, (b)(6), and (e) to read as follows:


Sec.  3.33  Withdrawal from registration.

    (a) A futures commission merchant, retail foreign exchange dealer, 
introducing broker, commodity trading advisor, commodity pool operator, 
leverage transaction merchant, floor broker or floor trader may request 
that its registration be withdrawn in accordance with the requirements 
of this section if:
* * * * *
    (b) A request for withdrawal from registration as a futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, commodity trading advisor, commodity pool operator, or leverage 
transaction merchant must be made on Form 7-W, and a request for 
withdrawal from registration as a floor broker or floor trader must be 
made on Form 8-W, completed and filed with National Futures Association 
in accordance with the instructions thereto. The request for withdrawal 
must be made by a person duly authorized by the registrant and must 
specify:
* * * * *
    (6) If a basis for withdrawal from registration under paragraph 
(a)(1) of this section is that the registrant has ceased engaging in 
activities requiring

[[Page 55427]]

registration, then, with respect to each capacity for which the 
registrant has ceased such activities:
    (i) That all customer, retail forex customer or option customer 
agreements, if any, have been terminated;
    (ii) That all customer, retail forex customer or option customer 
positions, if any, have been transferred on behalf of customers or 
option customers or closed;
    (iii) That all customer, retail forex customer or option customer 
cash balances, securities, or other property, if any, have been 
transferred on behalf of customers, retail forex customers or option 
customers or returned, and that there are no obligations to customers, 
retail forex customers or option customers outstanding;
    (iv) In the case of a commodity pool operator, that all interests 
in, and assets of, any commodity pool have been redeemed, distributed, 
or transferred, on behalf of the participants therein, and that there 
are no obligations to such participants outstanding;
    (v) In the case of a leverage transaction merchant:
    (A) Either that all leverage customer agreements, if any, and all 
leverage contracts have been terminated, and that all leverage customer 
cash balances, securities or other property, if any, have been 
returned, or
    (B) Alternatively, that pursuant to Commission approval, the 
leverage contract obligations of the leverage transaction merchant have 
been assumed by another leverage transaction merchant and all leverage 
customer cash balances, securities or other property, if any, have been 
transferred to such leverage transaction merchant on behalf of leverage 
customers or returned, and that there are no obligations to leverage 
customers outstanding;
    (vi) The nature and extent of any pending customer, retail forex 
customer, option customer, leverage customer, or commodity pool 
participant claims against the registrant, and, to the best of the 
registrant's knowledge and belief, the nature and extent of any 
anticipated or threatened customer, option customer, leverage customer, 
or commodity pool participant claims against the registrant; and
    (vii) In the case of a futures commission merchant or a retail 
foreign exchange dealer which is a party to a guarantee agreement, that 
all such agreements have been or will be terminated in accordance with 
the provisions of Sec.  1.10(j) of this chapter not more than thirty 
days after the filing of the request for withdrawal from registration.
* * * * *
    (e) A request for withdrawal from registration as a futures 
commission merchant, retail foreign exchange dealer, introducing 
broker, commodity trading advisor, commodity pool operator, leverage 
transaction merchant on Form 7-W, and a request for withdrawal from 
registration as a floor broker or floor trader on Form 8-W, must be 
filed with the National Futures Association and a copy of such request 
must be sent by the National Futures Association within three business 
days of the receipt of such withdrawal request to the Commodity Futures 
Trading Commission, Division of Clearing and Intermediary Oversight, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In 
addition, any floor broker or floor trader requesting withdrawal from 
registration must file a copy of his Form 8-W with each contract market 
that has granted him trading privileges. Within three business days of 
any determination by the National Futures Association under Sec.  
3.10(d) to treat the failure by a registrant to file an annual Form 7-R 
as a request for withdrawal, the National Futures Association shall 
send the Commission notice of that determination.
* * * * *
0
21. Section 3.44 is amended by revising paragraphs (a)(1) through (5) 
to read as follows:


Sec.  3.44  Temporary licensing of applicants for guaranteed 
introducing broker registration.

    (a) * * *
    (1) A properly completed guarantee agreement (Form 1-FR part B) 
from a futures commission merchant or retail foreign exchange dealer 
which is eligible to enter into such an agreement pursuant to Sec.  
1.10(j)(2) of this chapter;
    (2) A Form 7-R properly completed in accordance with the 
instructions thereto;
    (3) A Form 8-R for the applicant, if a sole proprietor, and each 
principal (including each branch office manager) thereof, properly 
completed in accordance with the instructions thereto, all of whom 
would be eligible for a temporary license if they had applied as 
associated persons.
    (4) A certification executed by a person duly authorized by the 
futures commission merchant or retail foreign exchange dealer that has 
executed the guarantee agreement required by paragraph (a)(1) of this 
section, stating that:
    (i) The futures commission merchant or retail foreign exchange 
dealer has verified the information on the Forms 8-R filed pursuant to 
paragraph (a)(3) of this section which relate to education and 
employment history of the applicant's principals (including each branch 
office manager) thereof during the preceding three years; and
    (ii) To the best of the futures commission merchant's or retail 
foreign exchange dealer's knowledge, information, and belief, all of 
the publicly available information supplied by the applicant and its 
principals and each branch office manager of the applicant on the Form 
7-R and Forms 8-R, as appropriate, is accurate and complete; and
    (5) The fingerprints of the applicant, if a sole proprietor, and of 
each principal (including each branch office manager) thereof on 
fingerprint cards provided by the National Futures Association for that 
purpose: Provided, that a principal who has a current Form 8-R on file 
with the National Futures Association or the Commission is not required 
to submit a fingerprint card.
* * * * *
0
22. Section 3.45 is amended by revising paragraph (b) to read as 
follows:


Sec.  3.45  Restrictions upon activities.

* * * * *
    (b) An applicant for registration as an introducing broker who has 
received a temporary license may be guaranteed by a futures commission 
merchant or retail foreign exchange dealer other than the futures 
commission merchant or retail foreign exchange dealer which provided 
the initial guarantee agreement described in Sec.  3.44(a)(1) of this 
subpart: Provided, That, at least 10 days prior to the effective date 
of the termination of the existing guarantee agreement in accordance 
with the provisions of Sec.  1.10 (j)(5) of this chapter, or such other 
period of time as the National Futures Association may allow for good 
cause shown, the applicant files with the National Futures 
Association--
    (1) Written notice of such termination and
    (2) A new guarantee agreement with another futures commission 
merchant or retail foreign exchange dealer effective the day following 
the last effective date of the existing guarantee agreement.

0
23. Section 3.50 is amended by revising paragraph (b)(2) to read as 
follows:


Sec.  3.50  Service.

* * * * *
    (b) * * *
    (2) Any futures commission merchant or retail foreign exchange 
dealer which

[[Page 55428]]

has entered into a guarantee agreement in accordance with Sec.  1.10(j) 
of this chapter, if the applicant or registrant is registered as or 
applying for registration as an introducing broker.
* * * * *

0
24. Section 3.60 is amended by revising paragraph (b)(2)(i)(B) to read 
as follows:


Sec.  3.60  Procedure to deny, condition, suspend, revoke or place 
restrictions upon registration pursuant to sections 8a(2), 8a(3) and 
8a(4) of the Act.

* * * * *
    (b) * * *
    (2)(i) * * *
    (B) In the case of a sponsor which is a futures commission 
merchant, a retail foreign exchange dealer or a leverage transaction 
merchant, the sponsor is not subject to the reporting requirements of 
Sec.  1.12(b), Sec.  5.6(b) or Sec.  31.7(b) of this chapter, 
respectively; and
* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
25. The authority citation for part 4 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and 
23.


0
26. Section 4.7 is amended by:
0
a. Revising paragraph (a)(1)(v)(B); and
0
b. Revising paragraph (a)(2)(i) to read as follows:


Sec.  4.7  Exemption from certain part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons 
and for commodity trading advisors with respect to advising qualified 
eligible persons.

* * * * *
    (a) * * *
    (1) * * *
    (v) * * *
    (B) Has had on deposit with a futures commission merchant, for its 
own account at any time during the six-month period preceding either 
the date of sale to that person of a pool participation in the exempt 
pool or the date that the person opens an exempt account with the 
commodity trading advisor, at least $200,000 in exchange-specified 
initial margin and option premiums, together with required minimum 
security deposit for retail forex transactions (as defined in Sec.  
5.1(m) of this chapter) for commodity interest transactions; or
* * * * *
    (2) * * *
    (i)(A) A futures commission merchant registered pursuant to section 
4d of the Act, or a principal thereof;
    (B) A retail foreign exchange dealer registered pursuant to section 
2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;
* * * * *

0
27. Section 4.12 is amended by revising paragraph (b)(1)(i)(C) to read 
as follows:


Sec.  4.12  Exemption from provisions of part 4.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (C) Will not enter into commodity interest transactions for which 
the aggregate initial margin and premiums, and required minimum 
security deposit for retail forex transactions (as defined in Sec.  
5.1(m) of this chapter) exceed 10 percent of the fair market value of 
the pool's assets, after taking into account unrealized profits and 
unrealized losses on any such contracts it has entered into; Provided, 
however, That in the case of an option that is in-the-money at the time 
of purchase, the in-the-money amount as defined in Sec.  190.01(x) of 
this chapter may be excluded in computing such 10 percent; and
* * * * *

0
28. Section 4.13 is amended by:
0
a. Revising paragraph (a)(3)(ii)(A): and
0
b. Revising paragraph (a)(3)(ii)(B)(1) to read as follows:


Sec.  4.13  Exemption from registration as a commodity pool operator.

* * * * *
    (a) * * *
    (3) * * *
    (ii) * * *
    (A) The aggregate initial margin, premiums, and required minimum 
security deposit for retail forex transactions (as defined in Sec.  
5.1(m) of this chapter) required to establish such positions, 
determined at the time the most recent position was established, will 
not exceed 5 percent of the liquidation value of the pool's portfolio, 
after taking into account unrealized profits and unrealized losses on 
any such positions it has entered into; Provided, That in the case of 
an option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Sec.  190.01(x) of this chapter may be 
excluded in computing such 5 percent; or
    (B) * * *
    (1) The term ``notional value'' shall be calculated for each such 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units (taking into account any multiplier 
specified in the contract), by the current market price per unit, and 
for each such option position by multiplying the number of contracts by 
the size of the contract, adjusted by its delta, in contract units 
(taking into account any multiplier specified in the contract), by the 
strike price per unit, and for each such retail forex transaction, by 
calculating the value in U.S. Dollars of such transaction, at the time 
the transaction was established, excluding for this purpose the value 
in U.S. Dollars of offsetting long and short transactions, if any; and
* * * * *

0
29. Section 4.14 is amended by revising paragraph (a)(7) to read as 
follows:


Sec.  4.14  Exemption from registration as a commodity trading advisor.

* * * * *
    (a) * * *
    (7)(i) It is registered under the Act as a leverage transaction 
merchant and the person's trading advice is solely in connection with 
its business as a leverage transaction merchant;
    (ii) It is registered under the Act as a retail foreign exchange 
dealer and the person's trading advice is solely in connection with its 
business as a retail foreign exchange dealer.
* * * * *

0
30. Section 4.23 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Revising paragraph (a)(7); and
0
c. Revising paragraph (b)(1) and (2) to read as follows:


Sec.  4.23  Recordkeeping.

* * * * *
    (a) Concerning the commodity pool: (1) An itemized daily record of 
each commodity interest transaction of the pool, showing the 
transaction date, quantity, commodity interest, and, as applicable, 
price or premium, delivery month or expiration date, whether a put or a 
call, strike price, underlying contract for future delivery or 
underlying physical, the futures commission merchant and/or retail 
foreign exchange dealer carrying the account and the introducing 
broker, if any, whether the commodity interest was purchased, sold 
(including, in the case of a retail forex transaction, offset), 
exercised, expired (including, in the case of a retail forex 
transaction, whether it was rolled forward), and the gain or loss 
realized.
* * * * *
    (7) Copies of each confirmation of a commodity interest transaction 
of the pool, each purchase and sale statement and each monthly 
statement for the pool received from a futures commission

[[Page 55429]]

merchant or retail foreign exchange dealer.
* * * * *
    (b) Concerning the commodity pool operator: (1) An itemized daily 
record of each commodity interest transaction of the commodity pool 
operator and each principal thereof, showing the transaction date, 
quantity, commodity interest, and, as applicable, price or premium, 
delivery month or expiration date, whether a put or a call, strike 
price, underlying contract for future delivery or underlying physical, 
the futures commission merchant or retail foreign exchange dealer 
carrying the account and the introducing broker, if any whether the 
commodity interest was purchased, sold, exercised, or expired, and the 
gain or loss realized.
    (2) Each confirmation of a commodity interest transaction, each 
purchase and sale statement and each monthly statement furnished by a 
futures commission merchant or retail foreign exchange dealer to:
    (i) The commodity pool operator relating to a personal account of 
the pool operator; and
    (ii) Each principal of the pool operator relating to a personal 
account of such principal.
* * * * *

0
31. Section 4.24 is amended by:
0
a. Revising paragraph (b)(1) introductory text and the first three 
sentences of the Risk Disclosure Statement in paragraph (b)(1);
0
b. Adding paragraph (b)(4);
0
c. Revising paragraph (e)(6);
0
d. Revising paragraph (g);
0
e. Revising paragraphs (h)(2) and (h)(4)(iii);
0
f. Revising paragraph (i)(2)(ii);
0
g. Redesignating paragraph (i)(2)(xii) as paragraph (i)(2)(xiii) and 
adding new paragraph (i)(2)(xii);
0
g. Revising paragraphs (j)(1)(vi) and (j)(3); and
0
h. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and 
(l)(2)(i).
    The addition and revisions read as follows:


Sec.  4.24  General disclosures required.

* * * * *
    (b) Risk Disclosure Statement. (1) The following Risk Disclosure 
Statement must be prominently displayed immediately following any 
disclosures required to appear on the cover page of the Disclosure 
Document as provided by the Commission, by any applicable federal or 
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions.

RISK DISCLOSURE STATEMENT
    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION 
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD 
BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE 
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET 
ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN 
THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR 
ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. * * *
* * * * *
    (4) If the pool may engage in retail Forex transactions, the Risk 
Disclosure Statement must further state:
    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN 
OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN 
THE INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE 
FOREIGN CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS 
USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION 
CONTRACTS. IF THE POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT 
COUNTERPARTY BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED 
OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE 
TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF 
CHAPTER 7 OF THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE 
POOL MAY BE A GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH 
THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE 
AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY 
KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF 
PRIORITY AND OTHER GENERAL CREDITORS.
* * * * *
    (e) * * *
    (6) If known, the futures commission merchant and/or retail foreign 
exchange dealer through which the pool will execute its trades, and, if 
applicable, the introducing broker through which the pool will 
introduce its trades to the futures commission merchant and/or retail 
foreign exchange dealer.
* * * * *
    (g) Principal risk factors. A discussion of the principal risk 
factors of participation in the offered pool. This discussion must 
include, without limitation, risks relating to volatility, leverage, 
liquidity, counterparty creditworthiness, as applicable to the types of 
trading programs to be followed, trading structures to be employed and 
investment activity (including retail forex transactions) expected to 
be engaged in by the offered pool.
    (h) * * *
    (2) A description of the trading and investment programs and 
policies that will be followed by the offered pool, including the 
method chosen by the pool operator concerning how futures commission 
merchants and/or retail foreign exchange dealers carrying the pool's 
accounts shall treat offsetting positions pursuant to Sec.  1.46 of 
this chapter, if the method is other than to close out all offsetting 
positions or to close out offsetting positions on other than a first-
in, first-out basis, and any material restrictions or limitations on 
trading required by the pool's organizational documents or otherwise. 
This description must include, if applicable, an explanation of the 
systems used to select commodity trading advisors, investee pools and 
types of investment activity to which pool assets will be committed;
* * * * *
    (4) * * *
    (iii) If assets deposited by the pool as margin or as security 
deposit generate income, to whom that income will be paid.
    (i) * * *
    (2) * * *
    (ii) Brokerage fees and commissions, including interest income paid 
to futures commission merchants, and any fees incurred to maintain an 
open position in retail forex transactions;
* * * * *
    (xii) Any costs or fees included in the spread between bid and 
asked prices for retail forex transactions; and
* * * * *
    (j) * * *
    (1) * * *
    (vi) Any other person providing services to the pool or soliciting 
participants for the pool, or acting as a counterparty to the pool's 
retail forex transactions (as defined in Sec.  5.1(m) of this chapter).
* * * * *
    (3) Included in the description of such conflicts must be any 
arrangement

[[Page 55430]]

whereby a person may benefit, directly or indirectly, from the 
maintenance of the pool's account with the futures commission merchant 
and/or retail foreign exchange dealer, or from the introduction of the 
pool's account to a futures commission merchant and/or retail foreign 
exchange dealer by an introducing broker (such as payment for order 
flow or soft dollar arrangements) or from an investment of pool assets 
in investee pools or funds or other investments.
* * * * *
    (l) * * *
    (1) * * *
    (iii) The pool's futures commission merchants and/or retail foreign 
exchange dealers and its introducing brokers, if any.
    (2) With respect to a futures commission merchant and/or retail 
foreign exchange dealer or an introducing broker, an action will be 
considered material if:
    (i) The action would be required to be disclosed in the notes to 
the futures commission merchant's, retail foreign exchange dealer's or 
introducing broker's financial statements prepared pursuant to 
generally accepted accounting principles;
* * * * *

0
32. Section 4.25 is amended by revising paragraph (c)(3)(ii) to read as 
follows:


Sec.  4.25  Performance disclosures.

* * * * *
    (c) * * *
    (3) * * *
    (ii) If a major commodity trading advisor has not previously traded 
accounts, the pool operator must prominently display the following 
statement:
    (name of the major commodity trading advisor), A COMMODITY TRADING 
ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of 
the pool's funds available for commodity interest trading allocated to 
that trading advisor) PERCENT OF THE POOL'S COMMODITY INTEREST TRADING 
HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.
* * * * *

Subpart C--Commodity Trading Advisors

0
33. Section 4.30 is revised to read as follows:


Sec.  4.30  Prohibited activities.

    No commodity trading advisor may solicit, accept or receive from an 
existing or prospective client funds, securities or other property in 
the trading advisor's name (or extend credit in lieu thereof) to 
purchase, margin, guarantee or secure any commodity interest of the 
client; Provided, however, That this section shall not apply to a 
future commission merchant that is registered as such under the Act or 
to a leverage transaction merchant that is registered as a commodity 
trading advisor under the Act or to a retail foreign exchange dealer 
that is registered as such under the Act.


0
34. Section 4.33 is amended by:
0
a. Revising paragraph (a)(6); and
0
b. Revising paragraphs (b)(1) and (2) to read as follows:


Sec.  4.33  Recordkeeping.

* * * * *
    (a) * * *
    (6) Copies of each confirmation of a commodity interest 
transaction, each purchase and sale statement and each monthly 
statement received from a futures commission merchant or a retail 
foreign exchange dealer.
* * * * *
    (b) * * *
    (1) An itemized daily record of each commodity interest transaction 
of the commodity trading advisor, showing the transaction date, 
quantity, commodity interest, and, as applicable, price or premium, 
delivery month or expiration date, whether a put or a call, strike 
price, underlying contract for future delivery or underlying physical, 
the futures commission merchant and/or retail foreign exchange dealer 
carrying the account and the introducing broker, if any, whether the 
commodity interest was purchased, sold (including, in the case of a 
retail forex transaction, offset), exercised, expired (including, in 
the case of a retail forex transaction, whether it was rolled forward), 
and the gain or loss realized.
    (2) Each confirmation of a commodity interest transaction, each 
purchase and sale statement and each monthly statement furnished by a 
futures commission merchant or retail foreign exchange dealer to:
    (i) The commodity trading advisor relating to a personal account of 
the trading advisor; and
    (ii) Each principal of the trading advisor relating to a personal 
account of such principal.
* * * * *

0
35. Section 4.34 is amended by:
0
a. Revising paragraph (b);
0
b. Revising paragraph (e)(2);
0
c. Revising paragraphs (g) and (h);
0
d. Revising paragraph (i)(2);
0
e. Revising paragraphs (j)(1) and (j)(3);
0
f. Revising paragraphs (k)(1)(ii), (k)(1)(iii), (k)(2) introductory 
text, and (k)(2)(i) to read as follows:


Sec.  4.34  General disclosures required.

* * * * *
    (b) Risk Disclosure Statement. (1) The following Risk Disclosure 
Statement must be prominently displayed immediately following any 
disclosures required to appear on the cover page of the Disclosure 
Document as provided by the Commission, by any applicable federal or 
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions:

RISK DISCLOSURE STATEMENT
    THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. 
YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS 
SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING 
WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU 
SHOULD BE AWARE OF THE FOLLOWING:
    IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF 
THE PREMIUM AND OF ALL TRANSACTION COSTS.
    IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A 
COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU 
MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY 
DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO 
ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR 
POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A 
SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN 
ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED 
FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A 
LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.
    UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR 
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN 
THE MARKET MAKES A ``LIMIT MOVE.''
    THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, 
SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY 
LIMIT YOUR LOSSES

[[Page 55431]]

TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE 
TO EXECUTE SUCH ORDERS.
    A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG'' 
OR ``SHORT'' POSITION.
    THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY 
INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF 
LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
    IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO 
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE 
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE 
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR 
ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page 
number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR 
ACCOUNT BY THE COMMODITY TRADING ADVISOR.
    THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER 
SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD 
THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY 
INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE 
PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page 
number).
    (2)(i) If the commodity trading advisor may trade foreign futures 
or options contracts pursuant to the offered trading program, the Risk 
Disclosure Statement must further state the following:
    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY 
ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON 
MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY 
LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH 
OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES 
REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE 
RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES 
JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE 
YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR 
CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO 
TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR 
LOCAL AND OTHER RELEVANT JURISDICTIONS.
    (ii) If the commodity trading advisor may engage in retail forex 
transactions pursuant to the offered trading program, the Risk 
Disclosure Statement must further state the following:
    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY 
ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT 
CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A 
COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME 
PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED 
FUTURES AND OPTION CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND 
YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON 
TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A 
COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF 
THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL 
CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER 
GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY 
CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM 
ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER 
GENERAL CREDITORS.
    FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN 
THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR 
RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.
    (3) If the commodity trading advisor is not also a registered 
futures commission merchant or a registered retail foreign exchange 
dealer, the trading advisor must make the additional following 
statement in the Risk Disclosure Statement, to be included as the last 
paragraph thereof:
    THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING 
FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY 
INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM 
DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE 
DEALER, AS APPLICABLE.
* * * * *
    (e) * * *
    (2) The futures commission merchant and/or retail foreign exchange 
dealer with which the commodity trading advisor will require the client 
to maintain its account or, if the client is free to choose the futures 
commission merchant or retail foreign exchange dealer with which it 
will maintain its account, the trading advisor must make a statement to 
that effect; and
* * * * *
    (g) Principal risk factors. A discussion of the principal risk 
factors of this trading program. This discussion must include, without 
limitation, risks due to volatility, leverage, liquidity, and 
counterparty creditworthiness, as applicable to the trading program and 
the types of transactions and investment activity expected to be 
engaged in pursuant to such program (including retail forex 
transactions, if any).
    (h) Trading program. A description of the trading program, which 
must include the method chosen by the commodity trading advisor 
concerning how futures commission merchants and/or retail foreign 
exchange dealers carrying accounts it manages shall treat offsetting 
positions pursuant to Sec.  1.46 of this chapter, if the method is 
other than to close out all offsetting positions or to close out 
offsetting positions on other than a first-in, first-out basis, and the 
types of commodity interests and other interests the commodity trading 
advisor intends to trade, with a description of any restrictions or 
limitations on such trading established by the trading advisor or 
otherwise.
    (i) * * *
    (2) Where any fee is determined by reference to a base amount 
including, but not limited to, ``net assets,'' ``gross profits,'' ``net 
profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading 
advisor must explain how such base amount will be calculated. Where any 
fee is based on the difference between bid and asked prices on retail 
forex transactions (as defined in Sec.  5.1(m) of this chapter), the 
trading advisor must explain how such fee will be calculated;
* * * * *
    (j) Conflicts of interest. (1) A full description of any actual or 
potential conflicts of interest regarding any aspect of the trading 
program on the part of:

[[Page 55432]]

    (i) The commodity trading advisor;
    (ii) Any futures commission merchant and/or retail foreign exchange 
dealer with which the client will be required to maintain its commodity 
interest account;
    (iii) Any introducing broker through which the client will be 
required to introduce its account to a futures commission merchant and/
or retail foreign exchange dealer; and
    (iv) Any principal of the foregoing.
* * * * *
    (3) Included in the description of any such conflict must be any 
arrangement whereby the trading advisor or any principal thereof may 
benefit, directly or indirectly, from the maintenance of the client's 
commodity interest account with a futures commission merchant and/or 
retail foreign exchange dealer, or the introduction of such account 
through an introducing broker (such as payment for order flow or soft 
dollar arrangements).
    (k) * * *
    (1) * * *
    (ii) Any futures commission merchant or retail foreign exchange 
dealer with which the client will be required to maintain its commodity 
interest account; and
    (iii) Any introducing broker through which the client will be 
required to introduce its account to the futures commission merchant 
and/or retail foreign exchange dealer.
    (2) With respect to a futures commission merchant, retail foreign 
exchange dealer or introducing broker, an action will be considered 
material if:
    (i) The action would be required to be disclosed in the notes to 
the futures commission merchant's, retail foreign exchange dealer's or 
introducing broker's financial statements prepared pursuant to 
generally accepted accounting principles;
* * * * *

0
36. Part 5 is added to read as follows:

PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

Sec.
5.1 Definitions.
5.2 Prohibited transactions.
5.3 Registration of persons engaged in retail forex transactions.
5.4 Applicability of part 4 of this chapter to commodity pool 
operators and commodity trading advisors.
5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign 
exchange dealers. futures commission merchants and introducing 
brokers regarding retail forex transactions.
5.6 Maintenance of minimum financial requirements by retail foreign 
exchange dealers and futures commission merchants offering or 
engaging in retail forex transactions.
5.7 Minimum financial requirements for retail foreign exchange 
dealers and futures commission merchants offering or engaging in 
retail forex transactions.
5.8 Aggregate retail forex assets.
5.9 Security deposits for retail forex transactions.
5.10 Risk assessment recordkeeping requirements for retail foreign 
exchange dealers.
5.11 Risk assessment reporting requirements for retail foreign 
exchange dealers.
5.12 Financial reports of retail foreign exchange dealers.
5.13 Reporting to customers of retail foreign exchange dealers and 
futures commission merchants; monthly and confirmation statements.
5.14 Records to be kept by retail foreign exchange dealers and 
futures commission merchants.
5.15 Unlawful representations.
5.16 Prohibition of guarantees against loss.
5.17 Authorization to trade.
5.18 Trading and operational standards.
5.19 Pending legal proceedings.
5.20 Special calls for account and transaction information.
5.21 Supervision.
5.22 Registered futures association membership.
5.23 Notice of bulk transfers and bulk liquidations.
5.24 Applicability of other parts of this chapter.
5.25 Applicability of the Act.

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 
21, 23.


Sec.  5.1  Definitions.

    (a) Affiliated person of a futures commission merchant means a 
person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;
    (b) Aggregate retail forex assets means an amount of liquid assets 
held in accordance with Sec.  5.8 of this part;
    (c) Associated person of an affiliated person of a futures 
commission merchant means any natural person associated with an 
affiliated person of a futures commission merchant as a partner, 
officer or employee (or any natural person occupying a similar status 
or performing similar functions), in any capacity which involves:
    (1) The solicitation or acceptance of retail forex customers' 
orders (other than in a clerical capacity); or
    (2) The supervision of any person or persons so engaged;
    (d)(1) Commodity pool operator, for purposes of this part, means 
any person who operates or solicits funds, securities, or property for 
a pooled investment vehicle that is not an eligible contract 
participant as defined in section 1a(12) of the Act, and that engages 
in retail forex transactions;
    (2) Associated person of a commodity pool operator, for purposes of 
this part, means any natural person associated with a commodity pool 
operator as defined in paragraph (d)(1) of this section as a partner, 
officer, employee, consultant or agent (or any natural person occupying 
a similar status or performing similar functions), in any capacity 
which involves:
    (i) The solicitation of funds, securities, or property for a 
participation in a pooled investment vehicle; or
    (ii) The supervision of any person or persons so engaged;
    (e)(1) Commodity trading advisor, for purposes of this part, means 
any person who exercises discretionary trading authority or obtains 
written authorization to exercise discretionary trading authority over 
any account for or on behalf of any person that is not an eligible 
contract participant as defined in section 1a(12) of the Act, in 
connection with retail forex transactions;
    (2) Associated person of a commodity trading advisor, for purposes 
of this part, means any natural person associated with a commodity 
trading advisor as defined in paragraph (e)(1) of this section as a 
partner, officer, employee, consultant or agent (or any natural person 
occupying a similar status or performing similar functions), in any 
capacity which involves:
    (i) The solicitation of a client's or prospective client's 
discretionary account; or
    (ii) The supervision of any person or persons so engaged;
    (f)(1) Introducing broker, for purposes of this part, means any 
person who solicits or accepts orders from a customer that is not an 
eligible contract participant as defined in section 1a(12) of the Act, 
in connection with retail forex transactions;
    (2) Associated person of an introducing broker, for purposes of 
this part, means any natural person associated with an introducing 
broker as defined in paragraph (g)(1) of this section as a partner, 
officer, employee, or agent (or any natural person occupying a similar 
status or performing similar functions), in any capacity which 
involves:
    (i) The solicitation or acceptance of retail forex customers' 
orders (other than in a clerical capacity); or
    (ii) The supervision of any person or persons so engaged;
    (g) Primarily or substantially means, when used to describe the 
extent of a futures commission merchant's engagement in the activities 
described in section 1a(20) of the Act, that:

[[Page 55433]]

    (1) Such activities account for more than fifty percent of the 
futures commission merchant's gross revenues, computed in accordance 
with generally accepted accounting principles, on an annual basis;
    (2) The futures commission merchant receives gross revenues, 
computed in accordance with generally accepted accounting principles, 
from such activities in excess of $500,000 in any twelve month period; 
or
    (3) The futures commission merchant is a clearing member of a 
registered derivatives clearing organization.
    (h)(1) Retail foreign exchange dealer means any person that is, or 
that offers to be, the counterparty to a retail forex transaction, 
except for a person described in sub-paragraph (aa), (bb), (cc)(AA), 
(dd), (ee) or (ff) of section 2(c)(2)(B)(i)(II) of the Act;
    (2) Associated person of a retail foreign exchange dealer means any 
natural person associated with a retail foreign exchange dealer as 
defined in paragraph (i)(1) of this section as a partner, officer or 
employee (or any natural person occupying a similar status or 
performing similar functions), in any capacity which involves:
    (i) The solicitation or acceptance of retail forex customers' 
orders (other than in a clerical capacity); or
    (ii) The supervision of any person or persons so engaged;
    (i) Retail forex account means the account of a person who is not 
an eligible contract participant as defined in section 1a(12) of the 
Act, established with a retail foreign exchange dealer or a futures 
commission merchant, in which account retail forex transactions 
(including options on contracts for the purchase or sale of foreign 
currency) with such retail foreign exchange dealer or futures 
commission merchant as counterparty are undertaken, or which account is 
established in order to enter into such transactions.
    (j) Retail forex account agreement means the contractual agreement 
between a futures commission merchant or retail foreign exchange dealer 
and any person who is not an eligible contract participant as defined 
in section 1a(12) of the Act, which agreement contains the terms 
governing the person's retail forex account with such futures 
commission merchant or retail foreign exchange dealer.
    (k) Retail forex customer means a person, other than an eligible 
contract participant as defined in section 1a(12) of the Act, acting on 
its own behalf and trading in any account, agreement, contract or 
transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
    (l) Retail forex obligation means the net credit balance at a 
retail foreign exchange dealer or futures commission merchant that 
would be obtained by combining all money, securities and property 
deposited by a retail forex customer into a retail forex account or 
accounts, adjusted for the realized and unrealized net profit or loss, 
if any, accruing on the open trades, contracts or transactions in the 
retail forex account or accounts, without including any retail forex 
customers' accounts that contain negative net liquidating balances.
    (m) Retail forex transaction means any account, agreement, contract 
or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the 
Act. A retail forex transaction does not include an account, agreement, 
contract or transaction in foreign currency that is a contract of sale 
of a commodity for future delivery (or an option thereon) that is 
executed, traded on or otherwise subject to the rules of a contract 
market designated pursuant to section 5(a) of the Act or a derivatives 
transaction execution facility registered pursuant to section 5a(c) of 
the Act.


Sec.  5.2  Prohibited transactions.

    (a) Scope. The provisions of this section shall be applicable to 
any retail forex transaction.
    (b) Fraudulent conduct prohibited. It shall be unlawful for any 
person, by use of the mails or by any means or instrumentality of 
interstate commerce, directly or indirectly, in or in connection with 
any retail forex transaction:
    (1) To cheat or defraud or attempt to cheat or defraud any person;
    (2) Willfully to make or cause to be made to any person any false 
report or statement or cause to be entered for any person any false 
record; or
    (3) Willfully to deceive or attempt to deceive any person by any 
means whatsoever.
    (c) Acting as counterparty and exercising discretion prohibited. 
(1) No person who acts as the counterparty for any retail forex 
transaction may do so for an account for which the person or any 
affiliate of the person is authorized (by contract, power of attorney 
or otherwise) to cause transactions to be effected without the client's 
specific authorization.
    (2) For purposes of this paragraph (c), an ``affiliate'' of a 
person means a person controlling, controlled by or under common 
control with, the first person.


Sec.  5.3  Registration of persons engaged in retail forex 
transactions.

    (a) Subject to paragraph (b) of this section, each of the following 
is subject to the registration provisions under the Act and to part 3 
of this chapter:
    (1)(i) Any affiliated person of a futures commission merchant, as 
defined in Sec.  5.1(a) of this part, which affiliated person:
    (A) Solicits or accepts orders from any person that is not an 
eligible contract participant in connection with any retail forex 
transaction; or
    (B) Accepts money, securities, or property (or extends credit in 
lieu thereof) in connection with such solicitation or acceptance of 
orders in order to engage in any retail forex transaction, is required 
to register as a retail foreign exchange dealer; and
    (ii) Any associated person of an affiliated person of a futures 
commission merchant, as defined in Sec.  5.1(c) of this part, is 
required to register as an associated person of an affiliated person of 
a futures commission merchant.
    (2)(i) Any commodity pool operator, as defined in Sec.  5.1(d)(1) 
of this part, is required to register as a commodity pool operator;
    (ii) Any associated person of a commodity pool operator, as defined 
in Sec.  5.1(d)(2) of this part, is required to register as an 
associated person of a commodity pool operator;
    (3)(i) Any commodity trading advisor, as defined in Sec.  5.1(e)(1) 
of this part, is required to register as a commodity trading advisor;
    (ii) Any associated person of a commodity trading advisor, as 
defined in Sec.  5.1(e)(2) of this part, is required to register as an 
associated person of a commodity trading advisor;
    (4)(i) Any person registered as a futures commission merchant:
    (A) That is not primarily or substantially engaged in the business 
activities described in section 1a(20) of the Act;
    (B) That solicits or accepts orders from any person that is not an 
eligible contract participant in connection with any retail forex 
transaction; and
    (C) That accepts money, securities, or property (or extends credit 
in lieu thereof) in connection with such solicitation or acceptance of 
orders in order to engage in retail forex transactions, is required to 
register as a retail foreign exchange dealer;
    (ii) Any associated person of a futures commission merchant 
described in paragraph (a)(4)(i) of this section is required to 
register as an associated person of a futures commission merchant;
    (5)(i) Any introducing broker, as defined in Sec.  5.1(f)(1) of 
this part, is required to register as an introducing broker;

[[Page 55434]]

    (ii) Any associated person of an introducing broker, as defined in 
Sec.  5.1(f)(2) of this part, is required to register as an associated 
person of an introducing broker;
    (6)(i) Any retail foreign exchange dealer, as defined in Sec.  
5.1(h)(1) of this part is required to register as a retail foreign 
exchange dealer;
    (ii) Any associated person of a retail foreign exchange dealer, as 
defined in Sec.  5.1(h)(2) of this part, is required to register as an 
associated person of a retail foreign exchange dealer;
    (b) Any person described in paragraph (a) of this section that is 
already registered in the required capacity specified in paragraph (a) 
is not required under this section to register twice in the same 
capacity; Provided, however, that a person already registered as an 
associated person of one class of registrant may also be required to 
register as an associated person of another class of registrant in 
order to comply with this section.


Sec.  5.4  Applicability of part 4 of this chapter to commodity pool 
operators and commodity trading advisors.

    Part 4 of this chapter applies to any person required pursuant to 
the provisions of this part 5 to register as a commodity pool operator 
or as a commodity trading advisor. Failure by any such person to comply 
with the requirements of part 4 will constitute a violation of this 
section and the relevant section of part 4.


Sec.  5.5  Distribution of ``Risk Disclosure Statement'' by retail 
foreign exchange dealers, futures commission merchants and introducing 
brokers regarding retail forex transactions.

    (a) Except as provided in Sec.  5.23 of this part, no retail 
foreign exchange dealer, futures commission merchant, or in the case of 
an introduced account no introducing broker, may open an account that 
will engage in retail forex transactions for a retail forex customer, 
unless the retail foreign exchange dealer, futures commission merchant 
or introducing broker first:
    (1)(i) In the case of a retail foreign exchange dealer or a person 
required to register as an introducing broker solely by reason of this 
part, furnishes the retail forex customer with a separate written 
disclosure statement containing only the language set forth in 
paragraph (b) of this section and the disclosure required by paragraph 
(e) of this section;
    (ii) In the case of a futures commission merchant or a person 
required to register as an introducing broker because it engages in the 
activities described in Sec.  1.3(mm) of this chapter, furnishes the 
retail forex customer with a separate written disclosure statement 
containing only the language set forth in paragraph (b) of this section 
and the disclosure required by paragraph (e) of this section; Provided, 
however, that the disclosure statement may be attached to other 
documents as the initial page(s) of such documents and as the only 
material on such page(s); and
    (2) Receives from the retail forex customer an acknowledgment 
signed and dated by the retail forex customer that he received and 
understood the disclosure statement.
    (b) The language set forth in the written disclosure statement 
required by paragraph (a) of this section shall be as follows:

RISK DISCLOSURE STATEMENT

    OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED 
TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A 
FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR 
COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED 
HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH 
TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT.
    YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS 
BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
    (1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER 
IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE 
YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM 
THE REGISTRATION STATUS OF YOUR COUNTERPARTY.
    The off-exchange foreign currency trading you are entering into is 
not conducted on an interbank market, nor is it conducted on a futures 
exchange subject to regulation as a designated contract market by the 
Commodity Futures Trading Commission. The foreign currency trades you 
transact are trades with the futures commission merchant or retail 
foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER 
IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when 
you lose money trading, your dealer is making money on such trades, in 
addition to any fees, commissions, or spreads the dealer may charge.
    (2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY 
TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR 
ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE 
GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.
    Any trading platform that you may use to enter off-exchange foreign 
currency transactions is only connected to your futures commission 
merchant or retail foreign exchange dealer. You are accessing that 
trading platform only to transact with your dealer. You are not trading 
with any other entities or customers of the dealer by accessing such 
platform. The availability and operation of any such platform, 
including the consequences of the unavailability of the trading 
platform for any reason, is governed only by the terms of your account 
agreement with the dealer.
    (3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.
    All of your rights associated with your retail forex trading, 
including the manner and denomination of any payments made to you, are 
governed by the contract terms established in your account agreement 
with the futures commission merchant or retail foreign exchange dealer. 
Funds deposited by you with a futures commission merchant or retail 
foreign exchange dealer for trading off-exchange foreign currency 
transactions are not subject to the customer funds protections provided 
to customers trading on a contract market that is designated by the 
Commodity Futures Trading Commission. Your dealer may commingle your 
funds with its own operating funds or use them for other purposes. In 
the event your dealer becomes bankrupt, any funds the dealer is holding 
for you in addition to any amounts owed to you resulting from trading, 
whether or not any assets are maintained in separate deposit accounts 
by the dealer, may be treated as an unsecured creditor's claim.
    (4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY 
TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR 
MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.
    Your ability to close your transactions or offset positions is 
limited to what your dealer will offer to you, as there is no other 
market for these transactions. Your dealer may offer any prices it 
wishes, and it may offer prices derived

[[Page 55435]]

from outside sources or not in its discretion. Your dealer may 
establish its prices by offering spreads from third party prices, but 
it is under no obligation to do so or to continue to do so. Your dealer 
may offer different prices to different customers at any point in time 
on its own terms. The terms of your account agreement alone govern the 
obligations your dealer has to you to offer prices and offer offset or 
liquidating transactions in your account and make any payments to you. 
The prices offered by your dealer may or may not reflect prices 
available elsewhere at any exchange, interbank, or other market for 
foreign currency.
    (5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS
    The futures commission merchant or retail foreign exchange dealer 
may compensate introducing brokers for introducing your account in ways 
which are not disclosed to you. Such paid solicitors are not required 
to have, and may not have, any special expertise in trading, and may 
have conflicts of interest based on the method by which they are 
compensated. Solicitors working on behalf of futures commission 
merchants and retail foreign exchange dealers are required to register. 
You should confirm that they are, in fact registered. You should 
thoroughly investigate the manner in which all such solicitors are 
compensated and be very cautious in granting any person or entity 
authority to trade on your behalf. You should always consider obtaining 
dated written confirmation of any information you are relying on from 
your dealer or a solicitor in making any trading or account decisions.
    FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY 
DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR 
CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS 
MAY INDICATE POTENTIAL SALES FRAUD.
    THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND 
OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS 
WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
    I hereby acknowledge that I have received and understood this risk 
disclosure statement.

-----------------------------------------------------------------------

Date
-----------------------------------------------------------------------

Signature of Customer

    (c) The acknowledgment required by paragraph (a) of this section 
must be retained by the retail foreign exchange dealer, futures 
commission merchant or introducing broker in accordance with Sec.  1.31 
of this chapter.
    (d) This section does not relieve a retail foreign exchange dealer, 
futures commission merchant or introducing broker from any other 
disclosure obligation it may have under applicable law.
    (e)(1) Immediately following the language set forth in paragraph 
(b) of this section, the statement required by paragraph (a) of this 
section shall include, for each of the most recent four calendar 
quarters during which the counterparty maintained retail forex customer 
accounts:
    (i) The total number of non discretionary retail forex customer 
accounts maintained by the retail foreign exchange dealer or futures 
commission merchant;
    (ii) The percentage of such accounts that were profitable during 
the quarter; and
    (iii) The percentage of such accounts that were not profitable 
during the quarter.
    (2) Identification of retail forex customer accounts for the 
purpose of this disclosure and the calculation in determining whether 
each such account was profitable or not profitable must be made in 
accordance with Sec.  5.18(i) of this part. Such statement of 
profitable trades shall include the following legend: PAST PERFORMANCE 
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each retail foreign 
exchange dealer or futures commission merchant shall provide, upon 
request, to any retail forex customer or prospective retail forex 
customer the total number of non discretionary retail forex accounts 
maintained by such foreign exchange dealer or futures commission 
merchant, the percentage of such accounts that were profitable and the 
percentage of such accounts that were not profitable, calculated in 
accordance with Sec.  5.18(i) of this part, for each calendar quarter 
during the most recent five year period during which such retail 
foreign exchange dealer or futures commission merchant maintained non 
discretionary retail forex customer accounts.


Sec.  5.6  Maintenance of minimum financial requirements by retail 
foreign exchange dealers and futures commission merchants offering or 
engaging in retail forex transactions.

    (a) Each futures commission merchant offering or engaging in retail 
forex transactions or who files an application for registration as a 
futures commission merchant that will offer or engage in retail forex 
transactions and each person registered as a retail foreign exchange 
dealer or who files an application for registration as a retail foreign 
exchange dealer, who knows or should have known that its adjusted net 
capital at any time is less than the minimum required by Sec.  5.7 of 
this part or by the capital rule of a registered futures association of 
which it is a member, must:
    (1) Give telephonic notice, to be confirmed in writing by facsimile 
notice, that the applicant's or registrant's adjusted net capital is 
less than that required by Sec.  5.7 of this part. The notice must be 
given immediately after the applicant or registrant knows or should 
know that its adjusted net capital is less than that required by any of 
the aforesaid rules to which the applicant or registrant is subject; 
and
    (2) Provide together with such notice documentation in such form as 
necessary to adequately reflect the applicant's or registrant's capital 
condition as of any date such person's adjusted net capital is less 
than the minimum required. The applicant or registrant must provide 
similar documentation for other days as the Commission may request.
    (b) Each applicant or registrant, who knows or should have known 
that its adjusted net capital at any time is less than the greatest of:
    (1) $22,000,000;
    (2) 110 percent of the amount required by Sec.  5.7(a)(1)(i)(B) of 
this part; or
    (3) 110 percent of the amount of adjusted net capital required by a 
registered futures association of which the futures commission merchant 
or retail foreign exchange dealer is a member, must file written notice 
to that effect within 24 hours of such event.
    (c) If an applicant or registrant at any time fails to make or keep 
current the books and records required by these regulations, such 
applicant or registrant must, on the same day such event occurs, 
provide facsimile notice of such fact, specifying the books and records 
which have not been made or which are not current, and within 48 hours 
after giving such notice file a written report stating what steps have 
been and are being taken to correct the situation.
    (d) Whenever any applicant or registrant discovers or is notified 
by an independent public accountant, pursuant to Sec.  1.16(e)(2) of 
this chapter, of the existence of any material inadequacy, as specified 
in Sec.  1.16(d)(2) of this chapter, such applicant or registrant must 
give facsimile notice of such material inadequacy within 24

[[Page 55436]]

hours, and within 48 hours after giving such notice file a written 
report stating what steps have been and are being taken to correct the 
material inadequacy.
    (e) Whenever any self-regulatory organization learns that a member 
registrant has failed to file a notice or written report as required by 
Sec.  5.6 of this part, that self-regulatory organization must 
immediately report this failure by telephone, confirmed in writing 
immediately by facsimile notice, as provided in paragraph (h) of this 
section.
    (f) A retail foreign exchange dealer or a futures commission 
merchant offering or engaging in retail forex transactions shall 
provide written notice of a substantial reduction in capital as 
compared to that last reported in a financial report filed with the 
Commission pursuant to Sec.  5.12 of this part. This notice shall be 
provided as follows:
    (1) If any event or series of events, including any withdrawal, 
advance, loan or loss cause, on a net basis, a reduction in net capital 
of 20 percent or more, notice must be provided within two business days 
of the event or series of events causing the reduction; and
    (2) If the equity capital of the retail foreign exchange dealer or 
futures commission merchant offering or engaging in retail forex 
transactions or the equity capital of a subsidiary or affiliate of the 
retail foreign exchange dealer or futures commission merchant offering 
or engaging in retail forex transactions consolidated pursuant to Sec.  
1.17(f) of this chapter would be withdrawn by action of a stockholder 
or a partner or a limited liability company member or by redemption or 
repurchase of shares of stock by any of the consolidated entities or 
through the payment of dividends or any similar distribution, or an 
unsecured advance or loan would be made to a stockholder, partner, sole 
proprietor, limited liability company member, employee or affiliate, 
such that the withdrawal, advance or loan would cause, on a net basis, 
a reduction in excess adjusted net capital of 30 percent or more, 
notice must be provided at least two business days prior to the 
withdrawal, advance or loan that would cause the reduction: Provided, 
however, That the provisions of paragraphs (f)(1) and (f)(2) of this 
section do not apply to any retail foreign exchange transaction in the 
ordinary course of business between a retail foreign exchange dealer 
and any affiliate where the retail foreign exchange dealer makes 
payment to or on behalf of such affiliate for such transaction and then 
receives payment from such affiliate for such transaction within two 
business days from the date of the transaction.
    (3) Upon receipt of such notice from a futures commission merchant 
offering or engaging in retail forex transactions or a retail foreign 
exchange dealer, the Director of the Division of Clearing and 
Intermediary Oversight or the Director's designee may require that the 
futures commission merchant offering or engaging in retail forex 
transactions or retail foreign exchange dealer provide or cause a 
Material Affiliated Person (as that term is defined in Sec.  5.10(a)(2) 
of this part) to provide, within three business days from the date of 
the request or such shorter period as the Director or designee may 
specify, such other information as the Director or designee determines 
to be necessary based upon market conditions, reports provided by the 
retail foreign exchange dealer or futures commission merchant offering 
or engaging in retail forex transactions, or other available 
information.
    (g) Whenever a person registered as a futures commission merchant 
offering or engaging in retail forex transactions or a retail foreign 
exchange dealer knows or should know that the total amount of its 
retail forex obligation exceeds the amount of the aggregate retail 
forex assets the registrant maintains in accordance with the provisions 
of Sec.  5.8 of this chapter, the registrant must report such 
deficiency immediately by telephone notice, confirmed immediately in 
writing by facsimile notice.
    (h) Every notice and written report required to be given or filed 
with the Commission by this section by an applicant must be filed with 
the regional office of the Commission with jurisdiction over the state 
in which the applicant's principal place of business is located, and 
with the National Futures Association. Every notice and written report 
required to be given or filed with the Commission by this section by a 
registrant or self-regulatory organization must be filed with the 
regional office of the Commission with jurisdiction over the state in 
which the registrant's principal place of business is located, and with 
the registrant's designated self-regulatory organization. In addition, 
every notice and written report required to be given by this section 
must also be filed with the Chief Accountant of the Division of 
Clearing and Intermediary Oversight at the Commission's principal 
office in Washington, DC.
    (i) In lieu of filing paper copies with the Commission, all filings 
or other notices prepared by a futures commission merchant or retail 
foreign exchange dealer pursuant to this section may be submitted to 
the Commission in electronic form using a form of user authentication 
assigned in accordance with procedures established by or approved by 
the Commission, and otherwise in accordance with instructions issued by 
or approved by the Commission, if the futures commission merchant, 
retail foreign exchange dealer or a designated self-regulatory 
organization has provided the Commission with the means necessary to 
read and to process the information contained in such report. Any such 
electronic submission must clearly indicate the registrant or applicant 
on whose behalf such filing is made and the use of such user 
authentication in submitting such filing will constitute and become a 
substitute for the manual signature of the authorized signer.


Sec.  5.7  Minimum financial requirements for retail foreign exchange 
dealers and futures commission merchants offering or engaging in retail 
forex transactions.

    (a)(1)(i) Each futures commission merchant offering or engaging in 
retail forex transactions and each retail foreign exchange dealer must 
maintain adjusted net capital equal to or in excess of the greatest of:
    (A) $20,000,000;
    (B) $20,000,000 plus five percent of the futures commission 
merchant's or retail foreign exchange dealer's total retail forex 
obligation in excess of $10,000,000;
    (C) any amount required under Sec.  1.17 of this chapter, as 
applicable; or
    (D) the amount of adjusted net capital required by a registered 
futures association of which the futures commission merchant or retail 
foreign exchange dealer is a member.
    (ii) Section 1.17 of this chapter shall apply to retail foreign 
exchange dealers as if such retail foreign exchange dealers were 
futures commission merchants, or as applicable, applicants or 
registrants, as stated in Sec.  1.17 for the purpose of determining the 
adjusted net capital under this section. For the purpose of applying 
this section, ``applicant'' or ``registrant'' shall include retail 
foreign exchange dealers and futures commission merchants offering or 
engaging in retail forex transactions and applicants therefore.
    (2) No person applying for registration as a retail foreign 
exchange dealer or a futures commission merchant that will engage in 
retail forex transactions shall be so registered unless such person 
affirmatively demonstrates to the satisfaction of a registered futures 
association that it complies with the financial requirements of this 
section.

[[Page 55437]]

    (3) Each registrant must be in compliance with this section at all 
times and must be able to demonstrate such compliance to the 
satisfaction of the Commission or the registrant's designated self-
regulatory organization.
    (4) A registrant who is not in compliance with this section, or is 
unable to demonstrate such compliance as required by paragraph (a)(3) 
of this section, shall, as directed by and under the supervision of the 
Commission or the registrant's designated self-regulatory organization, 
either liquidate or transfer all retail forex accounts (including the 
novation of retail forex contracts) and refund or transfer all funds 
associated with such retail forex accounts and immediately cease 
offering or engaging in retail forex transactions until such time as 
the firm is able to demonstrate to the Commission or the registrant's 
designated self-regulatory organization such compliance: Provided, 
however, That if such registrant immediately demonstrates to the 
satisfaction of the Commission or the registrant's designated self-
regulatory organization the ability to achieve compliance, the 
Commission or the registrant's designated self-regulatory organization 
may in its discretion allow such registrant up to a maximum of 10 
business days, or such additional time as determined by the Commission, 
in which to achieve compliance without having to liquidate positions or 
transfer accounts and cease doing business as required above. Nothing 
in this paragraph (a)(4) shall be construed as preventing the 
Commission or the registrant's designated self-regulatory organization 
from taking action against a registrant for non-compliance with any of 
the provisions of this section.
    (b) For the purposes of this section:
    (1) Where the applicant or registrant has an asset or liability 
which is defined in Securities Exchange Act Rule 15c3-1 (Sec.  
240.15c3-1 of this title) the inclusion or exclusion of all or part of 
such asset or liability for the computation of adjusted net capital 
shall be in accordance with Sec.  240.15c3-1 of this title, unless 
specifically stated otherwise in this section or in Sec.  1.17 of this 
chapter.
    (2) The adjusted net capital of an applicant or registrant for the 
purpose of this section shall be determined by the application of Sec.  
1.17 pursuant to paragraph (a)(1)(ii) of this section, with the 
following additions:
    (i) All positions in retail forex accounts and other financial 
positions and instruments of the applicant or registrant must be marked 
to market and adjusted daily by referencing to current market prices or 
rates of exchange.
    (ii) Current assets must exclude any retail forex account which 
liquidates to a deficit or contains a debit ledger balance only and is 
not secured in accordance with Sec.  1.17(c)(3).
    (iii) Current assets must exclude any unsecured receivable accrued 
from any over-the-counter transaction in foreign currency, options on 
foreign currency or options on contracts for the purchase or sale of 
foreign currency, or arising from the deposit of collateral or 
compensating balances with respect to such transactions, unless such 
unsecured receivable is from a person who is an eligible contract 
participant that also is:
    (A) A bank or trust company regulated by a United States banking 
regulator;
    (B) A broker-dealer registered with the Securities and Exchange 
Commission and a member of the Financial Industry Regulatory Authority;
    (C) A futures commission merchant registered with the Commission 
and a member of the National Futures Association;
    (D) A retail foreign exchange dealer registered with the Commission 
and a member of the National Futures Association;
    (E) An entity regulated as a foreign equivalent of any of the 
persons listed in paragraphs (b)(2)(iii)(A) through (D) of this 
section, if such person is regulated in a money center country as 
defined in Sec.  1.49 of this chapter and recognized by the futures 
commission merchant's or retail foreign exchange dealer's designated 
self-regulatory organization as a foreign equivalent;
    (F) Any other entity approved by the futures commission merchant's 
or retail foreign exchange dealer's designated self-regulatory 
organization.
    (iv) The value attributed to any retail forex transaction that is 
an option shall be the difference between the option's exercise value 
or striking value and the market value of the underlying. In the case 
of a call, if the market value of the underlying is less than the 
exercise value or striking value of such call, it shall be given no 
value; and, in the case of a put, if the market value of the underlying 
is more than the exercise value or striking value of the put, it shall 
be given no value.
    (v)(A) In computing adjusted net capital, the capital deductions 
set forth in Sec.  1.17(c)(5)(ii) of this chapter shall apply to retail 
forex transactions other than options. The capital deductions which 
apply are six percent for net positions in Euros, British pounds, 
Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net 
positions in all other foreign currencies, Provided, however, That 
there shall be no capital deductions for retail forex transactions 
covered (as defined in Sec.  1.17(j) of this chapter) by the applicant 
or registrant by open futures contracts to the extent such futures 
contracts are not otherwise designated as cover for any other net 
capital purposes. For purposes of this paragraph (b)(2)(v)(A), such 
retail forex transactions shall be treated as if they were inventory 
and cover were therefore applicable. A retail foreign exchange dealer 
or futures commission merchant may not use an affiliate (unless 
approved by the firm's designated self-regulatory organization) or any 
person that is considered unregulated under the rules of the firm's 
designated self-regulatory organization to cover its currency positions 
for purposes of this section.
    (B) In computing adjusted net capital, the capital deductions set 
forth in Sec.  1.17(c)(5)(vi) of this chapter shall apply to all retail 
forex transactions that are options.
    (C) For the purpose of applying capital deductions on open 
proprietary futures positions under Sec.  1.17(c)(5)(x) of this 
chapter, net or individual positions in retail forex transactions shall 
not constitute cover under Sec.  1.17(j) for the purpose of applying 
such charges.
    (c) An applicant or registrant must prepare, and keep current, 
ledgers or other similar records which show or summarize, with 
appropriate references to supporting documents, each transaction 
affecting the applicant's or registrant's asset, liability, income, 
expense and capital accounts, and in which (except as otherwise 
permitted in writing by the Commission) all the applicant's or 
registrant's asset, liability and capital accounts are classified into 
the account classification subdivisions specified on Form 1-FR-FCM. 
Each applicant or registrant shall prepare and keep current such 
records.
    (d) An applicant or registrant must make and keep as a record in 
accordance with Sec.  5.14 of this part formal computations of its 
adjusted net capital and of its minimum financial requirements pursuant 
to this section as of the close of business each month and on other 
such dates called for by the Commission, the National Futures 
Association, or another self-regulatory organization of which the firm 
is a member. Such computations must be completed and made available for 
inspection by any representative of the Commission, the National 
Futures Association, a self-regulatory organization of which the firm 
is a member, or the United States Department of Justice commencing the

[[Page 55438]]

first month-end after the date the application for registration is 
filed.


Sec.  5.8  Aggregate retail forex assets.

    (a) Each retail foreign exchange dealer and futures commission 
merchant offering or engaging in retail forex transactions shall 
calculate its total retail forex obligation and shall at all times hold 
assets solely of the type permissible under Sec.  1.25 of this chapter 
equal to or in excess of the total retail forex obligation at one or 
more qualifying institutions in the United States or money center 
countries as defined in Sec.  1.49 of this chapter.
    (b) For assets held in the United States, a qualifying institution 
is:
    (1) A bank or trust company regulated by a United States banking 
regulator;
    (2) A broker-dealer registered with the Securities and Exchange 
Commission and a member of the Financial Industry Regulatory Authority; 
or
    (3) A futures commission merchant registered with the Commission 
and a member of the National Futures Association.
    (c) For assets held in a money center country, a qualifying 
institution is:
    (1) A bank or trust company regulated in a money center country, 
Provided that the bank or trust company has regulatory capital in 
excess of $1 billion;
    (2) An entity regulated in a money center country as an equivalent 
of a broker-dealer or futures commission merchant as determined by the 
retail foreign exchange dealer's or futures commission merchant's 
designated self-regulatory organization, Provided that the entity 
maintains regulatory capital in excess of $100 million; or
    (3) A futures commission merchant registered with the Commission 
and a member of the National Futures Association.
    (d) Assets held in a money center country are not eligible to meet 
the requirements of paragraph (a) of this section unless the retail 
foreign exchange dealer or futures commission merchant has entered into 
an agreement that is acceptable to the firm's designated self-
regulatory organization and that authorizes the qualifying institution 
to provide account information to the Commission and the firm's 
designated self-regulatory organization.
    (e) In computing its adjusted net capital pursuant to Sec.  5.7 of 
this part, a retail foreign exchange dealer or futures commission 
merchant may not include aggregate retail forex assets as current 
assets or otherwise record any property received from retail forex 
customers as an asset without recording a corresponding liability to 
the retail forex customers.


Sec.  5.9  Security deposits for retail forex transactions.

    (a) Each futures commission merchant engaging, or offering to 
engage, in retail forex transactions and each retail foreign exchange 
dealer must collect from each retail forex customer a minimum security 
deposit for each retail forex transaction equal to the applicable 
percentage as set by the registered futures association of which they 
are a member; Provided, that the registered futures association's 
security deposit requirement cannot be less than:
    (1) 2% of the notional value of the retail forex transaction for 
major currency pairs and 5% of the notional value of the retail forex 
transaction for all other currency pairs;
    (2) For short options, 2% for major currency pairs and 5% for all 
other currency pairs of the notional value of the retail forex 
transaction, plus the premium received by the retail forex customer; or
    (3) For long options, the full premium charged and received by the 
futures commission merchant or retail foreign exchange dealer from the 
retail forex customer.
    (b) Security deposits must be made in the form of cash or other 
financial instruments that comply with the requirements specified in 
Sec.  1.25 of this chapter.
    (c) A futures commission merchant or retail foreign exchange dealer 
is required to collect additional security deposits from a retail forex 
customer, or liquidate the retail forex customer's positions, if the 
amount of the retail forex customer's security deposits maintained with 
the futures commission merchant or retail foreign exchange dealer are 
not sufficient to meet the requirements of this section.
    (d) A major currency pair security deposit percentage is only 
applicable when both sides of a retail over-the-counter foreign 
exchange transaction involve major currencies.
    (e) Any registered futures association whose members serve as 
counterparties to retail forex transaction shall designate which 
currencies are ``major currencies'', and shall review, no less 
frequently than annually, major currency designations and security 
deposit requirements, and shall adjust the designations and 
requirements as necessary.


Sec.  5.10  Risk assessment recordkeeping requirements for retail 
foreign exchange dealers.

    (a) Requirement to maintain and preserve information. (1) Each 
retail foreign exchange dealer registered with the Commission pursuant 
to section 2(c)(2)(B)(i)(II)(gg) of the Act shall prepare, maintain and 
preserve the following information:
    (i) An organizational chart which includes the retail foreign 
exchange dealer and each of its affiliated persons. Included in the 
organizational chart shall be a designation of which affiliated persons 
are ``Material Affiliated Persons'' as that term is used in paragraph 
(a)(2) of this section, which Material Affiliated Persons file routine 
financial or risk exposure reports with the Securities and Exchange 
Commission, a federal banking agency, an insurance commissioner or 
other similar official or agency of a state, or a foreign regulatory 
authority, and which Material Affiliated Persons are dealers in 
financial instruments with off-balance sheet risk and, if a Material 
Affiliated Person is such a dealer, whether it is also an end-user of 
such instruments;
    (ii) Written policies, procedures, or systems concerning the retail 
foreign exchange dealer's:
    (A) Method(s) for monitoring and controlling financial and 
operational risks to it resulting from the activities of any of its 
affiliated persons;
    (B) Financing and capital adequacy, including information regarding 
sources of funding, together with a narrative discussion by management 
of the liquidity of the material assets of the retail foreign exchange 
dealer, the structure of debt capital, and sources of alternative 
funding;
    (C) Establishing and maintaining internal controls with respect to 
market risk, credit risk, and other risks created by the retail foreign 
exchange dealer's trading activities, including systems and policies 
for supervising, monitoring, reporting and reviewing trading activities 
in forex transactions, securities, futures contracts, commodity 
options, forward contracts and financial instruments; policies for 
hedging or managing risks created by trading activities or supervising 
accounts carried for affiliates, including a description of the types 
of reviews conducted to monitor positions; and policies relating to 
restrictions or limitations on trading activities: Provided, however, 
that if the retail foreign exchange dealer has no such written 
policies, procedures or systems, it must so state in writing;
    (iii) Fiscal year-end consolidated and consolidating balance sheets 
for the highest level Material Affiliated Person within the retail 
foreign exchange dealer's organizational structure, which shall include 
the retail foreign exchange dealer and its other Material Affiliated

[[Page 55439]]

Persons, prepared in accordance with generally accepted accounting 
principles, which consolidated balance sheets shall be audited by an 
independent certified public accountant if an annual audit is performed 
in the ordinary course of business, but which otherwise may be 
unaudited, and which shall include appropriate explanatory notes. The 
consolidating balance sheets may be those prepared by the retail 
foreign exchange dealer's highest level Material Affiliated Person as 
part of its internal financial reporting process. Any additional 
information required to be filed under Sec.  5.11(a)(2)(iii) of this 
part shall also be maintained and preserved; and
    (iv) Fiscal year-end consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the retail foreign exchange dealer's 
organizational structure, which shall include the retail foreign 
exchange dealer and its other Material Affiliated Persons, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary 
course of business, but which otherwise may be unaudited, and which 
shall include appropriate explanatory notes. The consolidating 
statements may be those prepared by the retail foreign exchange 
dealer's highest level Material Affiliated Person as part of its 
internal financial reporting process. Any additional information 
required to be filed under Sec.  5.11(a)(2)(iii) shall also be 
maintained and preserved.
    (2) The determination of whether an affiliated person of a retail 
foreign exchange dealer is a Material Affiliated Person shall involve 
consideration of all aspects of the activities of, and the relationship 
between, both entities, including without limitation, the following 
factors:
    (i) The legal relationship between the retail foreign exchange 
dealer and the affiliated person;
    (ii) The overall financing requirements of the retail foreign 
exchange dealer and the affiliated person, and the degree, if any, to 
which the retail foreign exchange dealer and the affiliated person are 
financially dependent on each other;
    (iii) The degree to which the retail foreign exchange dealer and 
the affiliated person directly or indirectly engage in over-the-counter 
transactions with each other;
    (iv) The degree, if any, to which the retail foreign exchange 
dealer or its customers rely on the affiliated person for operational 
support or services in connection with the retail foreign exchange 
dealer's business;
    (v) The level of market, credit or other risk present in the 
activities of the affiliated person; and
    (vi) The extent to which the affiliated person has the authority or 
the ability to cause a withdrawal of capital from the retail foreign 
exchange dealer.
    (3) For purposes of this section and Sec.  5.11 of this part, the 
term Material Affiliated Person does not include a natural person.
    (4) The information, reports and records required by this section 
shall be maintained and preserved, and made readily available for 
inspection, in accordance with the provisions of Sec.  1.31 of this 
chapter.
    (b) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic regulators. A retail 
foreign exchange dealer shall be deemed to be in compliance with the 
recordkeeping requirements of paragraphs (a)(1)(i), (iii) and (iv) of 
this section with respect to a Material Affiliated Person if:
    (1) The Material Affiliated Person is required to maintain and 
preserve information pursuant to Sec.  240.17h-1T of this title, or 
such other risk assessment regulations as the Securities and Exchange 
Commission may adopt, and the retail foreign exchange dealer maintains 
and makes available for inspection by the Commission in accordance with 
the provisions of this section copies of the records and reports 
maintained and filed on Form 17-H (or such other forms or reports as 
may be required) by the Material Affiliated Person with the Securities 
and Exchange Commission pursuant to Sec. Sec.  240.17h-1T and 240.17h-
2T of this title, or such other risk assessment regulations as the 
Securities and Exchange Commission may adopt;
    (2) In the case of a Material Affiliated Person (including a 
foreign banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the retail foreign 
exchange dealer or such Material Affiliated Person maintains and makes 
available for inspection by the Commission in accordance with the 
provisions of this section copies of all reports submitted by such 
Material Associated Person to the Federal banking agency pursuant to 
section 5211 of the Revised Statutes, section 9 of the Federal Reserve 
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) 
of the Home Owners' Loan Act, or section 5 of the Bank Holding Company 
Act of 1956; or
    (3) In the case of a Material Affiliated Person that is subject to 
the supervision of an insurance commissioner or other similar official 
or agency of a state, the retail foreign exchange dealer or such 
Material Affiliated Person maintains and makes available for inspection 
by the Commission in accordance with the provisions of this section 
copies of the annual statements with schedules and exhibits prepared by 
the Material Affiliated Person on forms prescribed by the National 
Association of Insurance Commissioners or by a state insurance 
commissioner.
    (c)(1) Special provisions with respect to Material Affiliated 
Persons subject to the supervision of a Foreign Regulatory Authority. A 
retail foreign exchange dealer shall be deemed to be in compliance with 
the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of 
this section with respect to a Material Affiliated Person if such 
retail foreign exchange dealer maintains and makes available, or causes 
such Material Affiliated Person to make available, for inspection by 
the Commission in accordance with the provisions of this section copies 
of any financial or risk exposure reports filed by such Material 
Affiliated Person with a foreign futures authority or other foreign 
regulatory authority, provided that:
    (i) The retail foreign exchange dealer agrees to use its best 
efforts to obtain from the Material Affiliated Person and to cause the 
Material Affiliated Person to provide, directly or through its foreign 
futures authority or other foreign regulatory authority, any 
supplemental information the Commission may request and there is no 
statute or other bar in the foreign jurisdiction that would preclude 
the retail foreign exchange dealer, the Material Affiliated Person, the 
foreign futures authority or other foreign regulatory authority from 
providing such information to the Commission; or
    (ii) The foreign futures authority or other foreign regulatory 
authority with whom the Material Affiliated Person files such reports 
has entered into an information-sharing agreement with the Commission 
which is in effect as of the retail foreign exchange dealer's fiscal 
year-end and which will allow the Commission to obtain the type of 
information required herein.
    (2) The retail foreign exchange dealer shall maintain a copy of the 
original report and a copy translated into the English language. For 
the purposes of this section, the term ``Foreign Futures

[[Page 55440]]

Authority'' shall have the meaning set forth in section 1a(10) of the 
Act.
    (d) Exemptions. The Commission may exempt any retail foreign 
exchange dealer from any provision of this section if it finds that the 
exemption is not contrary to the public interest and the purposes of 
the provisions from which the exemption is sought. The Commission may 
grant the exemption subject to such terms and conditions as it may find 
appropriate.
    (e) Location of records. A retail foreign exchange dealer required 
to maintain records concerning Material Affiliated Persons pursuant to 
this section may maintain those records either at the principal office 
of the Material Affiliated Person or at a records storage facility, 
provided that, except as set forth in paragraph (c) of this section, 
the records are located within the boundaries of the United States and 
the records are kept and available for inspection in accordance with 
Sec.  1.31 of this chapter. If such records are maintained at a place 
other than the retail foreign exchange dealer's principal place of 
business, the Material Affiliated Person or other entity maintaining 
the records shall file with the Commission a written undertaking, in a 
form acceptable to the Commission, signed by a duly authorized person, 
to the effect that the records will be treated as if the retail foreign 
exchange dealer were maintaining the records pursuant to this section 
and that the entity maintaining the records will permit examination of 
such records at any time, or from time to time during business hours, 
by representatives or designees of the Commission and promptly furnish 
the Commission representative or its designee true, correct, complete 
and current hard copy of all or any part of such records. The election 
to maintain records at the principal place of business of the Material 
Affiliated Person or at a records storage facility pursuant to the 
provisions of this paragraph shall not relieve the retail foreign 
exchange dealer required to maintain and preserve such records from any 
of its responsibilities under this section or Sec.  5.11 of this part.
    (f) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a retail foreign 
exchange dealer concerning a Material Affiliated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (g) Implementation schedule. Each retail foreign exchange dealer 
who is subject to the requirements of this section shall maintain and 
preserve the information required by paragraphs (a)(1)(i) and (ii) of 
this section commencing 60 calendar days after registration becomes 
effective and the information required by paragraphs (a)(1)(iii) and 
(iv) of this section commencing 105 calendar days following the first 
fiscal year-end occurring after registration becomes effective.


Sec.  5.11  Risk assessment reporting requirements for retail foreign 
exchange dealers.

    (a) Reporting requirements with respect to information required to 
be maintained by Sec.  5.10 of this part. (1) Each retail foreign 
exchange dealer registered with the Commission pursuant to Section 
2(c)(2)(B)(i)(II)(gg) of the Act shall file the following with the 
regional office of the Commission with which it files periodic 
financial reports within 60 calendar days after the effective date of 
such registration:
    (i) A copy of the organizational chart maintained by the retail 
foreign exchange dealer pursuant to Sec.  5.10(a)(l)(i) of this part. 
Where there is a material change in information provided, an updated 
organizational chart shall be filed within sixty calendar days after 
the end of the fiscal quarter in which the change has occurred; and
    (ii) Copies of the financial, operational, and risk management 
policies, procedures and systems maintained by the retail foreign 
exchange dealer pursuant to Sec.  5.10(a)(l)(ii) of this part. If the 
retail foreign exchange dealer has no such written policies, procedures 
or systems, it must file a statement so indicating. Where there is a 
material change in information provided, such change shall be reported 
within sixty calendar days after the end of the fiscal quarter in which 
the change has occurred.
    (2) Each retail foreign exchange dealer registered with the 
Commission pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act shall 
file the following with the regional office with which it files 
periodic financial reports within 105 calendar days after the end of 
each fiscal year or, if a filing is made pursuant to a written notice 
issued under paragraph (a)(2)(iii) of this section, within the time 
period specified in the written notice:
    (i) Fiscal year-end consolidated and consolidating balance sheets 
for the highest level Material Affiliated Person within the retail 
foreign exchange dealer's organizational structure, which shall include 
the retail foreign exchange dealer and its other Material Affiliated 
Persons, prepared in accordance with generally accepted accounting 
principles, which consolidated balance sheets shall be audited by an 
independent certified public accountant if an annual audit is performed 
in the ordinary course of business, but which otherwise may be 
unaudited, and which consolidated balance sheets shall include 
appropriate explanatory notes. The consolidating balance sheets may be 
those prepared by the retail foreign exchange dealer's highest level 
Material Affiliated Person as part of its internal financial reporting 
process;
    (ii) Fiscal year-end annual consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the retail foreign exchange dealer's 
organizational structure, which shall include the retail foreign 
exchange dealer and its other Material Affiliated Persons, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary 
course of business, but which otherwise may be unaudited, and which 
consolidated statements shall include appropriate explanatory notes. 
The consolidating statements may be those prepared by the retail 
foreign exchange dealer's highest level Material Affiliated Person as 
part of its internal financial reporting process; and
    (iii) Upon receiving written notice from any representative of the 
Commission and within the time period specified in the written notice, 
such additional information which the Commission determines is 
necessary for a complete understanding of a particular affiliate's 
financial impact on the retail foreign exchange dealer's organizational 
structure.
    (3) For the purposes of this section, the term Material Affiliated 
Person shall have the meaning used in Sec.  5.10 of this part.
    (4) The reports required to be filed pursuant to paragraphs (a)(1) 
and (2) of this section shall be considered filed when received by the 
regional office of the Commission with whom the retail foreign exchange 
dealer files financial reports pursuant to Sec.  5.12 of this part.
    (b) Exemptions. The Commission may exempt any retail foreign 
exchange dealer from any provision of this section if it finds that the 
exemption is not contrary to the public interest and the purposes of 
the provisions from which the exemption is sought. The Commission may 
grant the exemption subject to such terms and conditions as it may find 
appropriate.
    (c) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic

[[Page 55441]]

regulators. (1) In the case of a Material Affiliated Person that is 
required to maintain and preserve information pursuant to Sec.  
240.17h-1T of this title, or such other risk assessment regulations as 
the Securities and Exchange Commission may adopt, the retail foreign 
exchange dealer shall be deemed to be in compliance with the reporting 
requirements of paragraph (a)(2) of this section with respect to such 
Material Affiliated Person if the retail foreign exchange dealer 
maintains and makes available for inspection by the Commission in 
accordance with the provisions of this section copies of the records 
and reports maintained and filed on Form 17-H (or such other forms or 
reports as may be required) by the Material Affiliated Person with the 
Securities and Exchange Commission pursuant to Sec. Sec.  240.17h-1T 
and 240.17h-2T of this title, or such other risk assessment regulations 
as the Securities and Exchange Commission may adopt;
    (2) In the case of a Material Affiliated Person (including a 
foreign banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the retail foreign 
exchange dealer shall be deemed to be in compliance with the reporting 
requirements of paragraph (a)(2) of this section with respect to such 
Material Affiliated Person if the retail foreign exchange dealer or 
such Material Affiliated Person maintains in accordance with Sec.  5.10 
of this part copies of all reports filed by the Material Affiliated 
Person with the Federal banking agency pursuant to section 5211 of the 
Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of 
the Federal Deposit Insurance Act, section 10(b) of the Home Owners' 
Loan Act, or section 5 of the Bank Holding Company Act of 1956.
    (3) In the case of a retail foreign exchange dealer that has a 
Material Affiliated Person that is subject to the supervision of an 
insurance commissioner or other similar official or agency of a state, 
such retail foreign exchange dealer shall be deemed to be in compliance 
with the reporting requirements of paragraph (a)(2) of this section 
with respect to the Material Affiliated Person if:
    (i) With respect to a Material Affiliated Person organized as a 
mutual insurance company or a non-public stock company, the retail 
foreign exchange dealer or such Material Affiliated Person maintains in 
accordance with Sec.  5.14 of this part copies of the annual statements 
with schedules and exhibits prepared by the Material Affiliated Person 
on forms prescribed by the National Association of Insurance 
Commissioners or by a state insurance commissioner; and
    (ii) With respect to a Material Affiliated Person organized as a 
public stock company, the retail foreign exchange dealer or such 
Material Affiliated Person maintains, in addition to the annual 
statements with schedules and exhibits required to be maintained 
pursuant to Sec.  1.14 of this chapter, copies of the filings made by 
the Material Affiliated Person pursuant to sections 13 or 15 of the 
Securities Exchange Act of 1934 and the Investment Company Act of 1940.
    (4) No retail foreign exchange dealer shall be required to furnish 
to the Commission any examination report of any Federal banking agency 
or any supervisory recommendations or analyses contained therein with 
respect to a Material Affiliated Person that is subject to the 
regulation of a Federal banking agency. All information received by the 
Commission pursuant to this section concerning a Material Affiliated 
Person that is subject to examination by or the reporting requirements 
of a Federal banking agency shall be deemed confidential for the 
purposes of section 8 of the Act.
    (5) The furnishing of any information or documents by a retail 
foreign exchange dealer pursuant to this section shall not constitute 
an admission for any purpose that a Material Affiliated Person is 
otherwise subject to the Act.
    (d) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of a Foreign Regulatory Authority. A retail 
foreign exchange dealer shall be deemed to be in compliance with the 
reporting requirements of paragraph (a)(2) of this section with respect 
to a Material Affiliated Person if such retail foreign exchange dealer 
furnishes, or causes such Material Affiliated Person to make available, 
in accordance with the provisions of this section, copies of any 
financial or risk exposure reports filed by such Material Affiliated 
Person with a foreign futures authority or other foreign regulatory 
authority, provided that:
    (1) The retail foreign exchange dealer agrees to use its best 
efforts to obtain from the Material Affiliated Person and to cause the 
Material Affiliated Person to provide, directly or through its foreign 
futures authority or other foreign regulatory authority, any 
supplemental information the Commission may request and there is no 
statute or other bar in the foreign jurisdiction that would preclude 
the retail foreign exchange dealer, the Material Affiliated Person, the 
foreign futures authority or other foreign regulatory authority from 
providing such information to the Commission; or
    (2) The foreign futures authority or other foreign regulatory 
authority with whom the Material Affiliated Person files such reports 
has entered into an information sharing agreement with the Commission 
which is in effect as of the retail foreign exchange dealer's fiscal 
year-end and which will allow the Commission to obtain the type of 
information required herein. The retail foreign exchange dealer shall 
file a copy of the original report and a copy translated into the 
English language. For the purposes of this section, the term ``Foreign 
Futures Authority'' shall have the meaning set forth in section 1a(10) 
of the Act.
    (e) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a retail foreign 
exchange dealer concerning a Material Associated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (f) Implementation schedule. Each retail foreign exchange dealer 
who is subject to the requirements of this section shall file the 
information required by paragraph (a)(1) of this section within 60 
calendar days after registration is granted, and the information 
required by paragraph (a)(2) of this section within 105 calendar days 
after registration is granted.


Sec.  5.12  Financial reports of retail foreign exchange dealers.

    (a)(1) Each person who files an application for registration as a 
retail foreign exchange dealer with the National Futures Association 
shall submit, concurrently with the filing of such application, either:
    (i) A Form 1-FR-FCM certified by an independent public accountant 
as of a date not more than 45 days prior to the date on which such 
report is filed; or
    (ii) A Form 1-FR-FCM as of a date not more than 17 business days 
prior to the date on which such report is filed and a Form 1-FR-FCM 
certified by an independent public accountant as of a date not more 
than one year prior to the date on which such report is filed.
    (2) Each such person must include with such financial report a 
statement describing the source of his current assets and representing 
that his capital has been contributed for the purpose of operating his 
business and will continue to be used for such purpose.
    (3) The provisions of paragraph (a)(1) of this section do not apply 
to any person succeeding to and continuing the

[[Page 55442]]

business of another retail foreign exchange dealer.
    (b)(1) Each person registered as a retail foreign exchange dealer 
must file a Form 1-FR-FCM as of the close of business each month. Each 
Form 1-FR must be filed no later than 17 business days after the date 
for which the report is made.
    (2) In addition to the monthly financial reports required by 
paragraph (b)(1) of this section, each person registered as a retail 
foreign exchange dealer must file a Form 1-FR-FCM as of the close of 
its fiscal year, which must be certified by an independent public 
accountant and must be filed no later than 90 days after the close of 
the retail foreign exchange dealer's fiscal year.
    (3) A Form 1-FR-FCM required to be certified by an independent 
public accountant which is filed by a retail foreign exchange dealer 
must be filed in paper form and may not be filed electronically with 
the Commission. A Form 1-FR-FCM required to be certified by an 
independent public accountant which is filed by an applicant for 
registration as a retail foreign exchange dealer with the National 
Futures Association must be filed electronically in accordance with 
electronic filing procedures established by the National Futures 
Association, however a paper copy of any such filing with the original 
manually signed certification must be maintained by the applicant for 
registration as a retail foreign exchange dealer in accordance with 
Sec.  1.31.
    (c) Each Form 1-FR-FCM required by the provisions of paragraphs 
(a)(1) and (b)(2) of this section to be certified by an independent 
public accountant must be certified in accordance with Sec.  1.16 of 
this chapter, and must be accompanied by the accountant's report on 
material inadequacies in accordance with the provisions of Sec.  
1.16(c)(5) of this chapter. In all other respects, the independent 
public accountant shall act in accordance with the provisions of Sec.  
1.16 (except paragraph (f)) of this chapter: Provided, however, that 
the term ``Sec.  5.7'' shall be substituted for the term ``Sec.  
1.17,'' and the term ``retail foreign exchange dealer'' shall be 
substituted for the term ``futures commission merchant.''
    (d) Upon receiving written notice from any representative of the 
Commission, National Futures Association, or any self-regulatory 
organization of which the firm is a member, a retail foreign exchange 
dealer or applicant for such registration, must, monthly or at such 
times as specified, furnish the Commission, National Futures 
Association, or self-regulatory organization a Form 1-FR-FCM or such 
other financial information requested in the written notice. Each such 
Form 1-FR-FCM or such other information must be furnished within the 
time period specified in the written notice, and in accordance with the 
provisions of paragraph (i) of this section.
    (e)(1) Each Form 1-FR-FCM filed pursuant to this Sec.  5.12 which 
is not required to be certified by an independent public accountant 
must be completed in accordance with the instructions to the form and 
contain:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) A statement of income (loss) for the period between the date 
of the most recent statement of financial condition filed with the 
Commission and the date for which the report is made;
    (iii) A statement of changes in ownership equity for the period 
between the date of the most recent statement of financial condition 
filed with the Commission and the date for which the report is made;
    (iv) A statement of changes in liabilities subordinated to claims 
of general creditors for the period between the date of the most recent 
statement of financial condition filed with the Commission and the date 
for which the report is made;
    (v) A statement of the computation of the minimum capital 
requirements pursuant to Sec.  5.7 of this part as of the date for 
which the report is made; and
    (vi) In addition to the information expressly required, such 
further material information as may be necessary to make the required 
statements and schedules not misleading.
    (2) Each Form 1-FR-FCM filed pursuant to this Sec.  5.12 which is 
required to be certified by an independent public accountant must be 
completed in accordance with the instructions to the form and contain:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) Statements of income (loss), cash flows, changes in ownership 
equity, and changes in liabilities subordinated to claims of general 
creditors, for the period between the date of the most recent certified 
statement of financial condition filed with the Commission and the date 
for which the report is made: Provided, That for an applicant filing 
pursuant to paragraph (a) of this section the period must be the year 
ending as of the date of the statement of financial condition;
    (iii) A statement of the computation of the minimum capital 
requirements pursuant to Sec.  5.7 of this part as of the date for 
which the report is made;
    (iv) Appropriate footnote disclosures;
    (v) A reconciliation, including appropriate explanations, of the 
statement of the computation of the minimum capital requirements 
pursuant to Sec.  5.7 of this part, in the certified Form 1-FR-FCM with 
the applicant's or registrant's corresponding uncertified most recent 
Form 1-FR-FCM filing when material differences exist or, if no material 
differences exist, a statement so indicating; and
    (vi) In addition to the information expressly required, such 
further material information as may be necessary to make the required 
statements not misleading.
    (3) The statements required by paragraphs (e)(2)(i) and (ii) of 
this section may be presented in accordance with generally accepted 
accounting principles in the certified reports filed as of the close of 
the registrant's fiscal year pursuant to paragraph (b)(2) of this 
section or accompanying the application for registration pursuant to 
paragraph (a)(1) of this section, rather than in the format 
specifically prescribed by these regulations: Provided, the statement 
of financial condition is presented in a format as consistent as 
possible with the Form 1-FR-FCM and a reconciliation is provided 
reconciling such statement of financial condition to the statement of 
the computation of the minimum capital requirements pursuant to Sec.  
5.7 of this part. Such reconciliation must be certified by an 
independent public accountant in accordance with Sec.  1.16 of this 
chapter.
    (4) Attached to each Form 1-FR-FCM filed pursuant to this section 
must be an oath or affirmation that to the best knowledge and belief of 
the individual making such oath or affirmation the information 
contained in the Form 1-FR-FCM is true and correct. The individual 
making such oath or affirmation must be: If the registrant or applicant 
is a sole proprietorship, the proprietor; if a partnership, any general 
partner; if a corporation, the chief executive officer or chief 
financial officer; and, if a limited liability company or limited 
liability partnership, the chief executive officer, the chief financial 
officer, the manager, the managing member, or those members vested with 
the management authority for the limited liability company or limited 
liability partnership.
    (f) Election of fiscal year. (1) An applicant wishing to establish 
a fiscal year other than the calendar year may do so by notifying the 
National Futures Association of its election of such fiscal year, in 
writing, concurrently with the filing of the Form 1-FR-FCM pursuant

[[Page 55443]]

to paragraph (a)(1) of this section, but in no event may such fiscal 
year end more than one year from the date of the Form 1-FR-FCM filed 
pursuant to paragraph (a)(1) of this section. An applicant that does 
not so notify the National Futures Association will be deemed to have 
elected the calendar year as its fiscal year.
    (2)(i) A registrant must continue to use its elected fiscal year, 
calendar or otherwise, unless a change in such fiscal year has been 
approved pursuant to this paragraph (f)(2).
    (ii) A registrant may file with its designated self-regulatory 
organization an application to change its fiscal year, a copy of which 
the registrant must file with the Commission. The application shall be 
approved or denied in writing by the registrant's designated self-
regulatory organization. The registrant must file immediately with the 
Commission a copy of any notice it receives from its designated self-
regulatory organization to approve or deny the registrant's application 
to change its fiscal year. A written notice of approval shall become 
effective upon the filing by the registrant of a copy with the 
Commission, and a written notice of denial shall be effective as of the 
date of the notice.
    (g) In the event a retail foreign exchange dealer or applicant for 
registration as a retail foreign exchange dealer finds that it cannot 
file its Form 1-FR-FCM for any period within the time specified in 
paragraph (b)(1) or (2) of this section without substantial undue 
hardship, it may request approval for an extension of time by filing an 
application for an extension of time with, in the case of a registrant, 
its designated self-regulatory organization, or, in the case of an 
applicant, the National Futures Association. The registrant or 
applicant also must file a copy of its application for an extension of 
time with the Commission. The application shall be approved or denied 
in writing by the National Futures Association or designated self-
regulatory organization, as applicable. The registrant or applicant 
must file immediately with the Commission a copy of any notice it 
receives approving or denying the request for extension of time. A 
written notice of approval shall become effective upon the filing by 
the registrant or applicant of a copy with the Commission, and a 
written notice of denial shall be effective as of the date of the 
notice.
    (h) Public availability of reports. (1) Forms 1-FR-FCM filed 
pursuant to this section will be treated as exempt from mandatory 
public disclosure for purposes of the Freedom of Information Act and 
the Government in the Sunshine Act and parts 145 and 147 of this 
chapter, except for the information described in paragraph (i)(2) of 
this section.
    (2) The following information in Forms 1-FR-FCM will be publicly 
available:
    (i) The amount of the applicant's or registrant's adjusted net 
capital; the amount of its minimum net capital requirement under Sec.  
5.7 of this chapter; the amount of its adjusted net capital in excess 
of its minimum net capital requirement; and the amount of the retail 
forex obligation owed to its retail forex customers; and
    (ii) The Statement of Financial Condition and the opinion of the 
independent public accountant in the certified annual financial reports 
of retail foreign exchange dealers.
    (3) All information that is exempt from mandatory public disclosure 
under paragraph (h)(1) of this section will, however, be available for 
official use by any official or employee of the United States or any 
State, by the National Futures Association or any other self-regulatory 
organization of which the person filing such report is a member, and by 
any other person to whom the Commission believes disclosure of such 
information is in the public interest. Nothing in this paragraph (h) 
will limit the authority of any self-regulatory organization to request 
or receive any information relative to its members' financial 
condition.
    (i)(1) In the case of an applicant, all filings or other notices 
provided for in this section will be considered filed when received by 
the regional office of the Commission with jurisdiction over the state 
in which the applicant's principal place of business is located and by 
the National Futures Association. In the case of a registrant, all 
filings or other notices provided for in this section will be 
considered filed when received by the regional office of the Commission 
with jurisdiction over the state in which the registrant's principal 
place of business is located and by the registrant's designated self-
regulatory organization. Any copy that under paragraph (f)(2) or (g) of 
this section is required to be filed with the Commission shall be filed 
with the regional office of the Commission with jurisdiction over the 
state in which the registrant's principal place of business is located.
    (2) All filings or other notices filed pursuant to this section 
which need not be certified in accordance with Sec.  1.16 may be 
submitted to the Commission in electronic form using a a form of user 
authentication assigned in accordance with procedures established by or 
approved by the Commission, and otherwise in accordance with 
instructions issued by or approved by the Commission, if the retail 
foreign exchange dealer or a designated self-regulatory organization 
has provided the Commission with the means necessary to read and to 
process the information contained in such report. Any such electronic 
submission must clearly indicate the registrant or applicant on whose 
behalf such filing is made and the use of such user authentication in 
submitting such filing will constitute and become a substitute for the 
manual signature of the authorized signer. In the case of a Form 1-FR 
filed via electronic transmission in accordance with procedures 
established by or approved by the Commission, such transmission must be 
accompanied by the user authentication assigned to the authorized 
signer under such procedures, and the use of such user authentication 
will constitute and become a substitute for the manual signature of the 
authorized signer for the purpose of making the oath or affirmation 
referred to in paragraph (e)(4) of this section.


Sec.  5.13  Reporting to customers of retail foreign exchange dealers 
and futures commission merchants; monthly and confirmation statements.

    (a) Monthly statements. Each retail foreign exchange dealer or 
futures commission merchant must promptly furnish in writing to each 
retail forex customer, as of the close of the last business day of each 
month or as of any regular monthly date selected, except for accounts 
in which there are neither open positions at the end of the statement 
period nor any changes to the account balance since the prior statement 
period, but in any event not less frequently than once every three 
months, a statement which clearly shows:
    (1) For each retail forex customer:
    (i) The open retail forex transactions with prices at which 
acquired;
    (ii) The net unrealized profits or losses in all open retail forex 
transactions marked to the market; and
    (iii) Any money, securities or other property carried with the 
retail foreign exchange dealer or futures commission merchant; and
    (iv) A detailed accounting of all financial charges and credits to 
such retail forex accounts during the monthly reporting period, 
including money, securities or property received from or disbursed to 
such customer and realized profits and losses; and

[[Page 55444]]

    (2) For each retail forex customer engaging in forex options 
transactions:
    (i) All forex options purchased, sold, exercised, or expired during 
the monthly reporting period, identified by underlying retail forex 
transaction or underlying currency, strike price, transaction date, and 
expiration date;
    (ii) The open forex option positions carried for such customer as 
of the end of the monthly reporting period, identified by underlying 
retail forex transaction or underlying currency, strike price, 
transaction date, and expiration date;
    (iii) All open forex option positions marked to the market and the 
amount each position is in the money, if any;
    (iv) Any money, securities or other property carried with the 
retail foreign exchange dealer or futures commission merchant; and
    (v) A detailed accounting of all financial charges and credits to 
such retail forex account(s) during the monthly reporting period, 
including money, securities and property received from or disbursed to 
such customer, premiums charged and received, and realized profits and 
losses.
    (b) Confirmation statement. Each retail foreign exchange dealer or 
futures commission merchant must, not later than the next business day 
after any retail forex or forex option transaction, furnish:
    (1) To each retail forex customer, a written confirmation of each 
retail forex transaction caused to be executed by it for the customer, 
including offsetting transactions executed during the same business day 
and the rollover of an open retail forex transaction to the next 
business day.
    (2) To each retail forex customer engaging in forex option 
transactions, a written confirmation of each forex option transaction, 
containing at least the following information:
    (i) The retail forex customer's account identification number;
    (ii) A separate listing of the actual amount of the premium, as 
well as each mark-up thereon, if applicable, and all other commissions, 
costs, fees and other charges incurred in connection with the forex 
option transaction;
    (iii) The strike price;
    (iv) The underlying retail forex transaction or underlying 
currency;
    (v) The final exercise date of the forex option purchased or sold; 
and
    (vi) The date the forex option transaction was executed.
    (3) To each retail forex customer engaging in forex option 
transactions, upon the expiration or exercise of any forex option, a 
written confirmation statement thereof, which statement shall include 
the date of such occurrence, a description of the forex option 
involved, and, in the case of exercise, the details of the retail forex 
or physical currency position which resulted therefrom including, if 
applicable, the final trading date of the retail forex transaction 
underlying the option.
    (4) Notwithstanding the provisions of paragraphs (b)(1) through (3) 
of this section, a retail forex transaction or forex option transaction 
that is caused to be executed for a pooled investment vehicle that 
engages in retail forex transactions need be confirmed only to the 
operator of such pooled investment vehicle.
    (c) Controlled accounts. With respect to any account controlled by 
any person other than the retail forex customer or forex option 
customer for whom such account is carried, each retail foreign exchange 
dealer or futures commission merchant shall promptly furnish in writing 
to such other person the information required by paragraphs (a) and (b) 
of this section.
    (d) Recordkeeping. Each retail foreign exchange dealer or futures 
commission merchant shall retain, in accordance with Sec.  1.31 of this 
chapter, a copy of each monthly statement and confirmation required by 
this section.
    (e) Introduced accounts. Each statement provided pursuant to the 
provisions of this section must, if applicable, show that the account 
for which the retail foreign exchange dealer or futures commission 
merchant is providing the statement was introduced by an introducing 
broker and the names of the retail foreign exchange dealer or futures 
commission merchant and introducing broker.
    (f) Electronic transmission of statements. (1) The statements 
required by this section may be furnished to a retail forex customer by 
means of electronic media if the retail forex customer so consents, 
Provided, however, that a retail foreign exchange dealer or futures 
commission merchant must, prior to the transmission of any statement by 
means of electronic media, disclose the electronic medium or source 
through which statements will be delivered, the duration, whether 
indefinite or not, of the period during which consent will be 
effective, any charges for such service, the information that will be 
delivered by such means, and that consent to electronic delivery may be 
revoked at any time, and provided, further, that a retail foreign 
exchange dealer or futures commission merchant must obtain the retail 
forex customer's signed consent acknowledging such disclosure prior to 
the transmission of any statement by means of electronic media.
    (2) Any statement required to be furnished to a person other than a 
retail forex customer in accordance with paragraph (f) of this section 
may be furnished by electronic media.
    (3) A retail foreign exchange dealer or futures commission merchant 
who furnishes statements to a retail forex customer by means of 
electronic media must retain a daily confirmation statement for such 
retail forex customer as of the end of the trading session, reflecting 
all transactions made during that session for the customer, in 
accordance with Sec.  1.31 of this chapter.
    (g) Combination with other statements. Any futures commission 
merchant required to deliver statements to retail forex customers in 
accordance with Sec.  1.33 of this chapter may combine into one monthly 
statement or confirmation statement, as the case may be, the 
information required by this section and the information required by 
Sec.  1.33, provided that retail forex account information is 
separately identified from any other trading or account activity of the 
retail forex customer.


Sec.  5.14  Records to be kept by retail foreign exchange dealers and 
futures commission merchants.

    (a) No person shall be registered as a retail foreign exchange 
dealer under the Act unless, commencing on the date his application for 
such registration is filed, he prepares and keeps current ledgers or 
other similar records which show or summarize, with appropriate 
references to supporting documents, each transaction affecting his 
asset, liability, income, expense and capital accounts, and in which 
(except as otherwise permitted in writing by the Commission) all his 
asset, liability and capital accounts are classified into either the 
account classification subdivisions specified on Form 1-FR-FCM or 
categories that are in accord with generally accepted accounting 
principles as applicable. Each person so registered shall prepare and 
keep current such records.
    (b) Each applicant or registrant must make and keep as a record in 
accordance with Sec.  1.31 of this chapter formal computations of its 
adjusted net capital and of its minimum financial requirements pursuant 
to Sec.  1.17 or Sec.  5.7 of this chapter, or the requirements of the 
designated self-regulatory organization to which it is subject, as 
applicable, as of the close of business each month. Such computations 
must be completed and made available for inspection by any 
representative of the National Futures Association, in the

[[Page 55445]]

case of an applicant, or of the Commission or designated self-
regulatory organization, if any, in the case of a registrant, within 17 
business days after the date for which the computations are made, 
commencing the first month end after the date the application for 
registration is filed.


Sec.  5.15  Unlawful representations.

    It shall be unlawful for any person registered pursuant to the 
requirements of this part to represent or imply in any manner 
whatsoever that such person has been sponsored, recommended or 
approved, or that its abilities or qualifications have been reviewed or 
evaluated, by the Commission, the Federal government or any agency 
thereof.


Sec.  5.16  Prohibition of guarantees against loss.

    (a) No retail foreign exchange dealer, futures commission merchant 
or introducing broker may in any way represent that it will, with 
respect to any retail foreign exchange transaction in any account 
carried by a retail foreign exchange dealer or futures commission 
merchant for or on behalf of any person:
    (1) Guarantee such person against loss;
    (2) Limit the loss of such person; or
    (3) Not call for or attempt to collect security deposits, margin, 
or other deposits as established for retail forex customers.
    (b) No person may in any way represent that a retail foreign 
exchange dealer, futures commission merchant or introducing broker will 
engage in any of the acts or practices described in paragraph (a) of 
this section.
    (c) This section shall not be construed to prevent a retail foreign 
exchange dealer, futures commission merchant or introducing broker from 
assuming or sharing in the losses resulting from an error or 
mishandling of an order.
    (d) This section shall not affect any guarantee entered into prior 
to October 18, 2010, but this section shall apply to any extension, 
modification or renewal thereof entered into after such date.


Sec.  5.17  Authorization to trade.

    No retail foreign exchange dealer, futures commission merchant, 
introducing broker or any of their associated persons may directly or 
indirectly effect a retail forex transaction for the account of any 
customer unless before the transaction the customer, or person 
designated by the customer to control the account specifically 
authorized the retail foreign exchange dealer, futures commission 
merchant, introducing broker or any of their associated persons to 
effect the transaction. A transaction is ``specifically authorized'' if 
the customer or person designated by the customer to control the 
account specifies:
    (a) The precise retail forex transaction to be effected;
    (b) The exact amount of the foreign currency to be purchased or 
sold; and
    (c) In the case of an option, the identity of the foreign currency 
or contract that underlies the option.


Sec.  5.18  Trading and operational standards.

    (a) For purposes of this section:
    (1) The term retail forex counterparty includes, as appropriate:
    (i) A retail foreign exchange dealer as defined in Sec.  5.1 of 
this part;
    (ii) A futures commission merchant as defined in section 1a(20) of 
the Act; and
    (iii) An affiliated person of a futures commission merchant as 
defined in Sec.  5.1 of this part.
    (2) The term related person when used in reference to a retail 
forex counterparty means any general partner, officer, director, owner 
of more than ten percent of the equity interest, associated person or 
employee of the retail forex counterparty, and any relative or spouse 
of any of the foregoing persons, or any relative of such spouse, who 
shares the same home as any of the foregoing persons.
    (b) Prior to engaging in a retail forex transaction, each retail 
forex counterparty shall, at a minimum, establish and enforce internal 
rules, procedures and controls to:
    (1) Ensure, to the extent possible, that each order received from a 
retail forex customer which order is executable at or near the price 
that the retail forex counterparty has quoted to the customer is 
entered for execution before any order in any retail forex transaction 
for any proprietary account, any other account in which a related 
person of the retail forex counterparty has an interest, or any account 
for which such a related person may originate orders without the prior 
specific consent of the account owner (if such related person has 
gained knowledge of the retail forex customer's order prior to the 
transmission of an order for a proprietary account), an account in 
which such a related person has an interest, or an account in which 
such a related person may originate orders without the prior specific 
consent of the account owner; and
    (2) Prevent related persons of forex counterparties from placing 
orders, directly or indirectly, with another person in a manner 
designed to circumvent the provisions of paragraph (b)(1) of this 
section;
    (3) Fairly and objectively establish settlement prices for retail 
forex transactions; and
    (4) Record and maintain essential information regarding customer 
orders and account activity, and to provide such information to 
customers upon request. Such information shall include:
    (i) Transaction records for the customer's account, including:
    (A) The date and time each order is received by the retail forex 
counterparty;
    (B) The price at which each order is placed, or, in the case of an 
option, the premium paid
    (C) If the transaction was entered into by means of a trading 
platform, the price quoted on the trading platform when the order was 
placed, or, in the case of an option, the premium quoted;
    (D) The customer account identification information;
    (E) The currency pair;
    (F) The size of the transaction;
    (G) Whether the order was a buy or sell order;
    (H) The type of order, if the order was not a market order;
    (I) If a trading platform is used, the date and time the order is 
transmitted to the trading platform;
    (J) If a trading platform is used, the date and time the order is 
executed;
    (K) The size and price at which the order is executed, or in the 
case of an option, the amount of the premium paid for each option 
purchased, or the amount credited for each option sold; and
    (L) For options, whether the option is a put or call, the strike 
price, and expiration date.
    (ii) Account records that contain the following information:
    (A) The funds in the account, net of any commissions and fees;
    (B) The net profits and losses on open trades; and
    (C) The funds in the account plus or minus the net profits and 
losses on open trades. (In the case of open option positions, the 
account balance should be adjusted for the net option value);
    (iii) If a trading platform is used, daily logs showing each price 
change on the platform, the time of the change to the nearest second, 
and the trading volume at that time and price; and
    (iv) Any method or algorithm used to determine the bid or asked 
price for any retail forex transaction or the prices at which customer 
orders are executed, including, but not limited to, any markups, fees, 
commissions or other items which affect the profitability or risk of 
loss of a retail forex customer's transaction.
    (c) No retail forex counterparty shall disclose that an order of 
another person

[[Page 55446]]

is being held by the retail forex counterparty, unless such disclosure 
is necessary to the effective execution of such order or is made at the 
request of an authorized representative of the Commission, or a futures 
association registered with the Commission pursuant to section 17 of 
the Act.
    (d) No retail forex counterparty shall knowingly handle the account 
of any related person of another retail forex counterparty unless it:
    (1) Receives written authorization from a person designated by such 
other retail forex counterparty with responsibility for the 
surveillance over such account pursuant to paragraph (b)(2) of this 
section;
    (2) Prepares immediately upon receipt of an order for such account 
a written record of such order, including the account identification 
and order number, and records thereon to the nearest minute, by time-
stamp or other timing device, the date and time the order is received; 
and
    (3) Transmits on a regular basis to such other retail forex 
counterparty copies of all statements for such account and of all 
written records prepared upon the receipt of orders for such account 
pursuant to paragraph (b)(2) of this section.
    (e) No related person of a retail forex counterparty shall have an 
account, directly or indirectly, with another retail forex counterparty 
unless:
    (1) It receives written authorization to maintain such an account 
from a person designated by the retail forex counterparty of which it 
is a related person with responsibility for the surveillance over such 
account pursuant to paragraph (b)(2) of this section; and
    (2) Copies of all statements for such account and of all written 
records prepared by such other retail forex counterparty upon receipt 
of orders for such account pursuant to paragraph (d)(2) of this section 
are transmitted on a regular basis to the retail forex counterparty of 
which it is a related person.
    (f) No retail forex counterparty shall:
    (1) Enter into a retail forex transaction, to be executed pursuant 
to a market or limit order at a price that is not at or near the price 
at which other retail forex customers, during that same time period, 
have executed retail forex transactions with the retail forex 
counterparty; Provided, however, that this paragraph (f)(1) shall not 
prohibit such practice if done in accordance with the rules of a 
registered futures association, and of which such retail foreign 
exchange dealer, futures commission merchant or affiliated person of a 
futures commission merchant is a member;
    (2) Adjust or alter prices for a retail forex transaction after the 
transaction has been confirmed to the retail forex customer; Provided, 
however, that this paragraph (f)(2) shall not prohibit such practice if 
in accordance with the rules of a registered futures association, and 
of which such retail foreign exchange dealer, futures commission 
merchant or affiliated person of a futures commission merchant is a 
member;
    (3)(i) Provide a retail forex customer a new bid price for a retail 
forex transaction that is higher than its previous bid without 
providing a new asked price that is also higher than its previous asked 
price by a similar amount;
    (ii) Provide a retail forex customer a new bid price for a retail 
forex transaction that is lower than its previous bid without providing 
a new asked price that is also lower than its previous asked price by a 
similar amount; or
    (4) Establish a new position for a retail forex customer (except 
one that offsets an existing position for that retail forex customer) 
where the retail forex counterparty holds outstanding orders of other 
retail forex customers for the same currency pair at a comparable 
price.
    (g)(1) Each retail forex counterparty and each CPO, CTA and IB 
subject to this Part 5 shall maintain a record of all communications 
received by such person concerning facts giving rise to possible 
violations of the Act, rules, regulations or orders thereunder, related 
to their retail forex business. The record shall contain the name of 
the complainant, if provided, the date of the communication, the 
agreement, contract or transaction, the substance of the communication, 
and the name of the person who received the communication.
    (2) Each retail forex counterparty and each CPO, CTA and IB subject 
to this Part 5 shall provide to the Division of Enforcement of the 
Commission, electronically, a copy of the record of each communication 
received pursuant to paragraph (g)(1) of this section. Such copy shall 
be provided to the Division of Enforcement of the Commission no later 
than 30 calendar days after the communication is received: Provided, 
however, that in the case of a communication concerning facts giving 
rise to possible fraud under the Act or Commission regulations, such 
copy shall be provided to the Division of Enforcement of the Commission 
within three business days after the communication is received.
    (h) An introducing broker as defined in Sec.  5.1(f)(1) of this 
part, applicant for registration as an introducing broker as defined in 
Sec.  5.1(f)(1) of this part, or person succeeding to and continuing 
the business of another introducing broker as defined in Sec.  
5.1(f)(1) of this part must comply with all provisions applicable to an 
introducing broker under this chapter; Provided, however, that an 
introducing broker operating pursuant to, or an applicant for 
registration as an introducing broker who has filed concurrently with 
its application for registration, a guarantee agreement meeting the 
requirements of Sec.  1.10(j) of this chapter is not subject to the 
minimum capital and related financial reporting requirements of 
Sec. Sec.  1.10, 1.12 and 1.17 of this chapter.
    (i)(1) Each retail forex counterparty shall prepare and maintain on 
a quarterly basis (calendar quarter) a calculation of the percentage of 
nondiscretionary retail forex customer accounts open for any period of 
time during the quarter that were profitable, and the percentage of 
such accounts that were not profitable. In calculating whether a retail 
forex account was profitable or not profitable during the quarter, the 
FCM or RFED must compute the realized and unrealized gains and/or 
losses on all retail forex transactions carried in the retail forex 
account at any time during the quarter, and subtract all fees, 
commissions, and any other charges posted to the retail forex account 
during the quarter, and add any interest income and other income or 
rebates credited to the retail forex account during the quarter. All 
deposits and/or withdrawals of funds made by a retail forex customer 
during the quarter must be excluded from the computation of whether the 
retail forex account was profitable or not profitable during the 
quarter. Computations that result in a zero or negative number shall be 
considered a retail forex account that was not profitable. Computations 
that result in a positive number shall be considered a retail forex 
account that was profitable. RFEDs and FCMs shall maintain such 
calculations along with data supporting such calculations for five 
years in accordance with Sec.  1.31.
    (2) In calculating its percentages of nondiscretionary retail forex 
customer accounts that were profitable or not profitable, the retail 
forex counterparty may only use those retail forex accounts, as defined 
in Sec.  5.1(i) of this part, that are nondiscretionary accounts; 
provided, that the retail forex account is not a proprietary account, 
as defined in paragraph (i)(3) of this section.
    (3) Proprietary account for this section means a retail forex 
account carried on

[[Page 55447]]

the books of a retail foreign exchange dealer or a futures commission 
merchant for one of the following persons, or of which ten percent or 
more is owned by one of the following persons, or of which an aggregate 
of ten percent or more of which is owned by more than one of the 
following persons:
    (i) Such retail foreign exchange dealer or futures commission 
merchant itself;
    (ii) If the retail foreign exchange dealer or futures commission 
merchant is a partnership, a general partner in such partnership;
    (iii) If the retail foreign exchange dealer or futures commission 
merchant is a limited partnership, a limited or special partner in such 
partnership whose duties include:
    (A) The management of the partnership business or any part thereof,
    (B) The handling of retail forex transactions of such partnership,
    (C) The keeping of records pertaining to retail forex transactions, 
or
    (D) The signing or co-signing of checks or drafts on behalf of such 
partnership;
    (iv) If the retail foreign exchange dealer or futures commission 
merchant is a corporation or association, an officer, director or owner 
of ten percent or more of the capital stock, of such organization;
    (v) An employee of such retail foreign exchange dealer or futures 
commission merchant whose duties include:
    (A) The management of the business of such retail foreign exchange 
dealer or futures commission merchant or any part thereof,
    (B) The handling of retail forex transactions of such retail 
foreign exchange dealer or futures commission merchant,
    (C) The keeping of records pertaining to retail forex transactions 
of such retail foreign exchange dealer or futures commission merchant, 
or
    (D) The signing or co-signing of checks or drafts on behalf of such 
retail foreign exchange dealer or futures commission merchant;
    (vi) A spouse or minor dependent living in the same household of 
any of the foregoing persons;
    (vii) A business affiliate that directly or indirectly controls 
such retail foreign exchange dealer or futures commission merchant; or
    (viii) A business affiliate that, directly or indirectly is 
controlled by or is under common control with, such retail foreign 
exchange dealer or futures commission merchant.
    (j) Each retail forex counterparty shall designate one or more 
principals to serve as a chief compliance officer(s). The chief 
compliance officer(s) shall certify to the Commission and a registered 
national futures association annually that the retail forex 
counterparty has in place processes to establish, maintain, review, 
modify and test policies and procedures reasonably designed to achieve 
compliance with the Act, rules, regulations and orders thereunder. The 
certification shall include a statement that the counterparty has in 
place compliance processes, and that the chief compliance officer(s) 
has apprised the chief executive officer of the compliance efforts to 
date and identify and address significant compliance problems and plans 
to address those problems.


Sec.  5.19  Pending legal proceedings.

    (a) Every retail foreign exchange dealer or futures commission 
merchant and each CPO, CTA or IB subject to this Part 5 shall submit to 
the Commission copies of any dispositive or partially dispositive 
decision for which a notice of appeal has been filed, the notice of 
appeal and such further documents as the Commission may thereafter 
request filed in any material legal proceeding to which the retail 
foreign exchange dealer, futures commission merchant, CPO, CTA or IB is 
a party or to which its property or assets is subject with respect to 
retail forex transactions.
    (b) Every retail foreign exchange dealer or futures commission 
merchant and each CPO, CTA or IB subject to this Part 5 shall submit to 
the Commission copies of any dispositive or partially dispositive 
decision concerning which a notice of appeal has been filed, the notice 
of appeal, and such further documents as the Commission may thereafter 
request filed in any material legal proceeding instituted against any 
person who is a principal of the retail foreign exchange dealer, 
futures commission merchant CPO, CTA or IB (as the term ``principal'' 
is defined in Sec.  3.1(a) of this chapter) arising from conduct in 
such person's capacity as a principal of the retail foreign exchange 
dealer, futures commission merchant, CPO, CTA or IB and alleging 
violations, with regard to retail forex transactions, of:
    (1) The Act or any rule, regulation, or order thereunder; or
    (2) Provisions of state law relating to a duty or obligation owed 
by such a principal.
    (c) All documents required by this section to be submitted to the 
Commission shall be mailed via first-class or submitted by other more 
expeditious means to the Commission's headquarters office in 
Washington, DC, Attention: Director, Division of Enforcement. All 
documents required by this section to be submitted to the Commission as 
to matters pending on October 18, 2010 shall be mailed to the 
Commission within 45 days of that effective date. Thereafter, all 
decisions and notices of appeal required to be submitted by retail 
foreign exchange dealers, futures commission merchants, CPOs, CTAs or 
IBs shall be mailed within 10 days of the filing or receipt by the 
retail foreign exchange dealer or futures commission merchant of the 
relevant notice of appeal. For purposes of paragraph (a) and (b) of 
this section, a ``material legal proceeding'' includes but is not 
limited to actions involving alleged violations of the Commodity 
Exchange Act or the Commission's regulations. However, a legal 
proceeding is not ``material'' for the purposes of this rule if the 
proceeding is not in a federal or state court or if the Commission is a 
party.


Sec.  5.20  Special calls for account and transaction information.

    (a) Preparation and transmission of information upon special call. 
All information required upon special call shall be prepared in such 
form and manner and in accordance with such instructions, and shall be 
transmitted at such time and to such office of the Commission, as may 
be specified in the call.
    (b) Special calls for information on controlled accounts from 
retail foreign exchange dealers, futures commission merchants and 
introducing brokers. Upon call by the Commission, each retail foreign 
exchange dealer, futures commission merchant and introducing broker 
shall file with the Commission the names and addresses of all persons 
who, by power of attorney or otherwise, exercise trading control over 
any customer's account in retail forex transactions.
    (c) Special calls for information on open transactions in accounts 
carried or introduced by retail foreign exchange dealers, futures 
commission merchants, and introducing brokers. Upon special call by the 
Commission for information relating to retail forex transactions held 
or introduced on the dates specified in the call, each retail foreign 
exchange dealer, futures commission merchant, or introducing broker 
shall furnish to the Commission the following information concerning 
accounts of traders owning or controlling such retail forex transaction 
positions, as may be specified in the call:
    (1) The name, address, and telephone number of the person for whom 
each account is carried;
    (2) The principal business or occupation of the person for whom 
each

[[Page 55448]]

account is introduced or carried, as specified in the call;
    (3) The name, address and principal business or occupation of any 
person who controls the trading of each account;
    (4) The name and address of any person having a financial interest 
of ten percent or more in each account;
    (5) The number of open retail forex transaction positions 
introduced or carried in each account, as specified in the call; and
    (6) The total number of retail forex transactions against which 
delivery has been made.
    (d) Delegation of authority to the Director of the Division of 
Clearing and Intermediary Oversight and the Director of the Division of 
Market Oversight. The Commission hereby delegates, until the Commission 
orders otherwise, to the Director of the Division of Clearing and 
Intermediary Oversight and the Director of the Division of Market 
Oversight, or to the respective Director's designees, the authority set 
forth in this section to make special calls for information on 
controlled accounts from retail foreign exchange dealers, futures 
commission merchants and from introducing brokers, and to make special 
calls for information on open contracts in accounts carried or 
introduced by futures commission merchants, introducing brokers, and 
foreign brokers. Either Director may submit to the Commission for its 
consideration any matter that has been delegated pursuant to this 
section. Nothing in this section shall be deemed to prohibit the 
Commission, at its election, from exercising the authority delegated in 
this section to the Directors.


Sec.  5.21  Supervision.

    Each Commission registrant subject to this Part 5, except an 
associated person who has no supervisory duties, must diligently 
supervise the handling by its partners, officers, employees and agents 
(or persons occupying a similar status or performing a similar 
function) of all retail forex accounts carried, operated, advised or 
introduced by the registrant and all other activities of its partners, 
officers, employees and agents (or persons occupying a similar status 
or performing a similar function) relating to its business as a 
Commission registrant.


Sec.  5.22  Registered futures association membership.

    (a) Each person registered as a retail foreign exchange dealer must 
become and remain a member of at least one futures association that is 
registered under section 17 of the Act and that provides for the 
membership therein of such retail foreign exchange dealer.
    (b) Each person required to register as:
    (1) An introducing broker, because the person solicits or accepts 
orders for retail forex transactions;
    (2) A commodity pool operator because the person operates, or 
solicits funds, securities, or property for, a pooled investment 
vehicle that engages in retail forex transactions; or
    (3) A commodity trading advisor because the person exercises 
discretionary trading authority, or obtains written authorization to 
exercise discretionary trading authority over, an account in connection 
with retail forex transactions, must become and remain a member of at 
least one futures association that is registered under section 17 of 
the Act and that provides for the membership therein of such person.


Sec.  5.23  Notice of bulk transfers and bulk liquidations.

    (a) Notice and disclosure to retail forex customers of a bulk 
transfer. (1) A retail foreign exchange dealer, futures commission 
merchant or introducing broker must obtain the written prior and 
specific consent of its retail forex customer to the assignment of any 
position or transfer of any account of the retail forex customer to 
another retail foreign exchange dealer, futures commission merchant or 
introducing broker, unless made at the retail forex customer's request.
    (2) Absent a request of the retail forex customer or the consent 
described in paragraph (a)(1) of this section, assignments of positions 
and transfers of accounts of retail forex customers may be permitted 
under rules of the retail forex dealer's, futures commission 
merchant's, or introducing broker's designated self-regulatory 
organization that establish notice and other requirements with respect 
to the assignment of positions and transfers of accounts of retail 
forex customers. If such rules permit implied consent as a result of 
the failure of the retail forex customer to object after having 
received notice of the proposed assignment or transfer, such rules must 
provide that the notice must include a statement that the retail forex 
customer is not required to accept the proposed assignment or transfer 
and may direct the transferor firm to liquidate the positions of the 
retail forex customer or transfer the account to a firm of the retail 
forex customer's selection.
    (3) For assignments and transfers made under this section, other 
than at the retail forex customer's request, the transferee retail 
foreign exchange dealer, futures commission merchant or introducing 
broker must provide to the retail forex customer the risk disclosure 
statements and forms of acknowledgment required by Part 5 of this 
chapter and receive the required signed acknowledgments within sixty 
days of such assignments or transfers. This requirement shall not 
apply:
    (i) If the transferee retail foreign exchange dealer, futures 
commission merchant or introducing broker has clear written evidence 
that the retail forex customer has received and acknowledged receipt of 
the required disclosure statements; or
    (ii) If the transfer of accounts is made from one introducing 
broker to another introducing broker guaranteed by the same retail 
foreign exchange dealer or futures commission merchant pursuant to a 
guarantee agreement in accordance with the requirements of Sec.  
1.10(j) of this chapter and such retail foreign exchange dealer or 
futures commission merchant maintains the relevant acknowledgments 
required by Part 5 of this chapter.
    (b) Notice to the Commission. Each retail foreign exchange dealer, 
futures commission merchant or introducing broker shall file with the 
Commission prior notice of any transfer of accounts of any retail forex 
customer that is not initiated at the request of the customer, where 
the transfer involves 50 percent or more of the transferor's total 
number of retail forex customer accounts.
    (c) Contents of notice to the Commission. The notice required by 
paragraph (b) of this section shall include:
    (1) The name, principal business address and telephone number of 
the transferor futures retail foreign exchange dealer, futures 
commission merchant or introducing broker;
    (2) The name, principal business address and telephone number of 
each transferee retail foreign exchange dealer, futures commission 
merchant or introducing broker;
    (3) The designated self-regulatory organization for the transferor 
and transferee firms;
    (4) A brief statement as to the reasons for the transfer;
    (5) A copy of any notices to customers regarding the transfers; and
    (6) A statement of the number of accounts to be transferred.
    (d) Notice of the bulk liquidation of retail forex transactions. A 
retail foreign exchange dealer or futures commission merchant may not 
initiate the bulk liquidation of properly margined retail forex 
transactions unless such liquidation complies with the rules and 
procedures of the retail forex dealer's or

[[Page 55449]]

futures commission merchant's designated self-regulatory organization 
and the retail forex dealer or futures commission merchant provides the 
Commission with prior written notice of the liquidation.
    (e) Contents of notice of bulk liquidation. The notice required by 
paragraph (d) of this section shall include:
    (1) The name, principal business address and telephone number of 
the initiating retail foreign exchange dealer or futures commission 
merchant;
    (2) A brief statement of the reasons for the liquidation;
    (3) A copy of any notices to customers regarding the liquidation; 
and
    (4) A statement of the number of accounts to be liquidated.
    (f) Filing of notices. The notice required by paragraph (b) and (d) 
of this section shall be filed five business days prior to the transfer 
or liquidation of the retail forex transaction with the Deputy 
Director, Compliance and Registration Section, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; the 
National Futures Association Attn: Vice President-Compliance; and the 
designated self-regulatory organization for the transferor firm.
    (g) No effect on other obligations. The requirements of this 
section shall not affect the obligations of a retail foreign exchange 
dealer, futures commission merchant or introducing broker under the 
rules of a self-regulatory organization or applicable customer account 
agreement with respect to assignments of positions or transfers of 
accounts or liquidation of positions.
    (h) Corrective notice. If a proposed transfer is not completed in 
accordance with the notice required to be filed by paragraph (b) of 
this section, a corrective notice shall be filed within five business 
days of the date such proposed transfer was to occur explaining why the 
proposed transfer was not completed.


Sec.  5.24  Applicability of other parts of this chapter

    Insofar as it is consistent with the requirements of this part, all 
other provisions of this chapter that apply to a person shall apply to 
such person as though such provisions were expressly set forth in this 
part.


Sec.  5.25  Applicability of the Act.

    Except as otherwise specified in this part and unless the context 
otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k, 
4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall 
apply to retail forex transactions that are subject to the requirements 
of this part as though such provisions were set forth herein and 
included specific references to retail forex transactions and the 
persons defined in Sec.  5.1 of this part.

PART 10--RULES OF PRACTICE

0
37. The authority citation for part 10 continues to read as follows:

    Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7 
U.S.C. 2a(12).

0
38. Section 10.1 is amended by revising paragraph (a) to read as 
follows:


Sec.  10.1  Scope and applicability of rules of practice.

* * * * *
    (a) Denial, suspension, revocation, conditioning, restricting or 
modifying of registration as a futures commission merchant, retail 
foreign exchange dealer, introducing broker, or associated person, 
floor broker, floor trader, commodity pool operator, commodity trading 
advisor or leverage transaction merchant pursuant to sections 6(c), 
8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 U.S.C. 9 and 15, 12a(2), 
12a(3), 12a(4) and 12(a)(11), or denial, suspension, or revocation of 
designation as a contract market pursuant to sections 6(a) and 6(b) of 
the Act, 7 U.S.C. 8;
* * * * *

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0
39. The authority citation for part 140 continues to read as follows:

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

0
40. Section 140.94 is added to read as follows:


Sec.  140.94  Delegation of authority to the Director of the Division 
of Clearing and Intermediary Oversight.

    (a) The Commission hereby delegates, until such time as the 
Commission orders otherwise, the following functions to the Director of 
the Division of Clearing and Intermediary Oversight and to such members 
of the Commission's staff acting under his direction as he may 
designate from time to time:
    (1) All functions reserved to the Commission in Sec.  5.7 of this 
chapter;
    (2) All functions reserved to the Commission in Sec.  5.10 of this 
chapter;
    (3) All functions reserved to the Commission in Sec.  5.11 of this 
chapter;
    (4) All functions reserved to the Commission in Sec.  5.12 of this 
chapter, except for those relating to nonpublic treatment of reports 
set forth in Sec.  5.12(i) of this chapter; and
    (5) All functions reserved to the Commission in Sec.  5.14 of this 
chapter.
    (b) The Director of the Division of Clearing and Intermediary 
Oversight may submit any matter which has been delegated to him under 
paragraph (a) of this section to the Commission for its consideration.
    (c) Nothing in this section may prohibit the Commission, at its 
election, from exercising the authority delegated to the Director of 
the Division of Clearing and Intermediary Oversight under paragraph (a) 
of this section.

PART 145--COMMISSION RECORDS AND INFORMATION

0
41. The authority citation for part 145 continues to read as follows:

    Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80 
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat. 
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389 
(5 U.S.C. 4a(j)); unless otherwise noted.

0
42. Section 145.5 is amended by revising paragraphs (d)(1)(viii) and 
(h) to read as follows:


Sec.  145.5  Disclosure of nonpublic records.

* * * * *
    (d) * * *
    (1) * * *
    (viii) The following reports and statements that are also set forth 
in paragraph (h) of this section, except as specified in 17 CFR 
1.10(g)(2), 17 CFR 31.13(m), or 17 CFR 5.12(h): Forms 1-FR required to 
be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are 
filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR 
required to be filed pursuant to 17 CFR 31.13; the accountant's report 
on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); 
and all reports and statements required to be filed pursuant to 17 CFR 
1.17(c)(6);
* * * * *
    (h) Contained in or related to examinations, operating, or 
condition reports prepared by, on behalf of, or for the use of the 
Commission or any other agency responsible for the regulation or 
supervision of financial institutions, including, but not limited to 
the following reports and statements that are also set forth in 
paragraph (d)(1)(viii) of this section, except as specified in 17 CFR 
1.10(g)(2), 17 CFR 5.12(h) or 17 CFR 31.13(m): Forms 1-FR required to 
be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are 
filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR 
required to be filed pursuant to 17 CFR 31.13; the accountant's report 
on material inadequacies filed in

[[Page 55450]]

accordance with 17 CFR 1.16(c)(5); and all reports and statements 
required to be filed pursuant to 17 CFR 1.17(c)(6); and
* * * * *

PART 147--OPEN COMMISSION MEETINGS

0
43. The authority citation for part 147 continues to read as follows:

    Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C. 
552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C. 
4a(j) (Supp. V, 1975)), unless otherwise noted.

0
44. Section 147.3 is amended by revising paragraphs (b)(4)(i)(H) and 
(b)(8) to read as follows:


Sec.  147.3  General requirement of open meetings; grounds upon which 
meetings may be closed.

* * * * *
    (b) * * *
    (4) * * *
    (i) * * *
    (H) The following reports and statements that are also set forth in 
paragraph (b)(8) of this section, except as specified in 17 CFR 
1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to be 
filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 31.13(m); 
FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR 
1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the 
accountant's report on material inadequacies filed in accordance with 
17 CFR 1.16(c)(5); and all reports and statements required to be filed 
pursuant to 17 CFR 1.17(c)(6);
* * * * *
    (8) Disclose information contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of the Commission or any other agency responsible for the 
regulation or supervision of financial institutions, including, but not 
limited to the following reports and statements that are also set forth 
in paragraph (b)(4)(i)(H) of this section, except as specified in 17 
CFR 1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to 
be filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 
31.12(m); FOCUS reports that are filed in lieu of Forms 1-FR pursuant 
to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 
31.13; the accountant's report on material inadequacies filed in 
accordance with 17 CFR 1.16(c)(5); and all reports and statements 
required to be filed pursuant to 17 CFR 1.17(c)(6);
* * * * *

PART 160--PRIVACY OF CONSUMER FINANCIAL INFORMATION

0
45. The authority citation for part 160 continues to read as follows:

    Authority:  7 U.S.C. 7b-2 and 12a(5); 15 U.S.C. 6801, et seq.

0
46. Section 160.1 is amended by revising paragraph (b) to read as 
follows:


Sec.  160.1  Purpose and scope.

* * * * *
    (b) Scope. This part applies only to nonpublic personal information 
about individuals who obtain financial products or services primarily 
for personal, family, or household purposes from the institutions 
listed below. This part does not apply to information about companies 
or about individuals who obtain financial products or services 
primarily for business, commercial, or agricultural purposes. This part 
applies to all futures commission merchants, retail foreign exchange 
dealers, commodity trading advisors, commodity pool operators and 
introducing brokers that are subject to the jurisdiction of the 
Commission, regardless whether they are required to register with the 
Commission. These entities are hereinafter referred to in this part as 
``you.'' This part does not apply to foreign (non-resident) futures 
commission merchants, retail foreign exchange dealers, commodity 
trading advisors, commodity pool operators and introducing brokers that 
are not registered with the Commission. Nothing in this part modifies, 
limits or supersedes the standards governing individually identifiable 
health information promulgated by the Secretary of Health and Human 
Services under the authority of sections 262 and 264 of the Health 
Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d--
1320d-8.
    47. Section 160.3 is amended by:
0
a. Revising paragraph (a) introductory text and paragraph (a)(2);
0
b. Redesignating paragraphs (k)(2)(i)(B) through (F) as paragraphs 
(k)(2)(i)(C) through (G) and republishing them, and adding new 
paragraph (k)(2)(i)(B);
0
c. Revising paragraphs (n)(1)(i) and (n)(2)(i);
0
d. Revising paragraph (o)(1)(i);
0
e. Revising paragraph (u)(2)(i)(A);
0
f. Redesignating paragraphs (w)(2) through (4) as paragraphs (w)(3) 
through (5) and adding new paragraph (w)(2); and
0
g. Adding new paragraph (x) to read as follows:


Sec.  160.3  Definitions.

* * * * *
    (a) Affiliate of a futures commission merchant, retail foreign 
exchange dealer, commodity trading advisor, commodity pool operator or 
introducing broker means any company that controls, is controlled by, 
or is under common control with a futures commission merchant, retail 
foreign exchange dealer, commodity trading advisor, commodity pool 
operator or introducing broker that is subject to the jurisdiction of 
the Commission. In addition, a futures commission merchant, retail 
foreign exchange dealer, commodity trading advisor, commodity pool 
operator or introducing broker subject to the jurisdiction of the 
Commission will be deemed an affiliate of a company for purposes of 
this part if:
* * * * *
    (2) Rules adopted by the Federal Trade Commission or another 
federal functional regulator under Title V of the GLB Act treat the 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator or introducing broker as an 
affiliate of that company.
* * * * *
    (k) * * *
    (2) * * *
    (i) * * *
    (B) You are a retail foreign exchange dealer with whom a consumer 
has opened an account, or that effects or engages in retail forex 
transactions with or for a consumer, even if you do not hold any assets 
of the consumer;
    (C) You are an introducing broker that solicits or accepts specific 
orders for trades;
    (D) You are a commodity trading advisor with whom a consumer has a 
contract or subscription, either written or oral, regardless of whether 
the advice is standardized, or is based on, or tailored to, the 
commodity interest or cash market positions or other circumstances or 
characteristics of the particular consumer;
    (E) You are a commodity pool operator, and you accept or receive 
from the consumer, funds, securities, or property for the purpose of 
purchasing an interest in a commodity pool;
    (F) You hold securities or other assets as collateral for a loan 
made to the consumer, even if you did not make the loan or do not 
effect any transactions on behalf of the consumer; or
    (G) You regularly effect or engage in commodity interest 
transactions with or for a consumer even if you do not hold any assets 
of the consumer.
* * * * *
    (n)(1) * * *
    (i) Any futures commission merchant, retail foreign exchange 
dealer,

[[Page 55451]]

commodity trading advisor, commodity pool operator or introducing 
broker that is registered with the Commission as such or is otherwise 
subject to the Commission's jurisdiction; and
* * * * *
    (2) * * *
    (i) Any person or entity, other than a futures commission merchant, 
retail foreign exchange dealer, commodity trading advisor, commodity 
pool operator or introducing broker that, with respect to any financial 
activity, is subject to the jurisdiction of the Commission under the 
Act.
* * * * *
    (o)(1) * * *
    (i) Any product or service that a futures commission merchant, 
retail foreign exchange dealer, commodity trading advisor, commodity 
pool operator, or introducing broker could offer that is subject to the 
Commission's jurisdiction; and
* * * * *
    (u) * * *
    (2) * * *
    (i) * * *
    (A) Information a consumer provides to you on an application to 
open a commodity interest trading account, to invest in a commodity 
pool, or to obtain another financial product or service;
* * * * *
    (w) * * *
    (2) Any retail foreign exchange dealer;
* * * * *
    (x) Retail foreign exchange dealer has the same meaning as in Sec.  
5.3(i)(1) of this chapter.
0
48. Section 160.4 is amended by:
0
a. Revising paragraph (c)(2)(ii); and
0
b. Revising paragraph (e)(1)(iv) to read as follows:


Sec.  160.4  Initial privacy notice to consumers required.

* * * * *
    (c) * * *
    (2) * * *
    (ii) Opens a retail forex account, or opens a commodity interest 
account through an introducing broker or with a futures commission 
merchant that clears transactions for its customers through you on a 
fully-disclosed basis;
* * * * *
    (e) * * *
    (1) * * *
    (iv) You have established a customer relationship with a customer 
in a bulk transfer in accordance with Sec.  1.65, if you are a 
transferee futures commission merchant, retail foreign exchange dealer 
or introducing broker.
* * * * *

0
49. Section 160.30 is amended by revising the introductory text to read 
as follows:


Sec.  160.30  Procedures to safeguard customer records and information.

    Every futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator and introducing 
broker subject to the jurisdiction of the Commission must adopt 
policies and procedures that address administrative, technical and 
physical safeguards for the protection of customer records and 
information. These policies and procedures must be reasonably designed 
to:
* * * * *

PART 166--CUSTOMER PROTECTION RULES

0
50. The authority citation for part 166 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7, 
12a and 23, as amended by the Commodity Futures Modernization Act of 
2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

0
51. Section 166.2 is revised to read as follows:


Sec.  166.2  Authorization to trade.

    No futures commission merchant, retail foreign exchange dealer, 
introducing broker or any of their associated persons may directly or 
indirectly effect a transaction in a commodity interest for the account 
of any customer unless before the transaction the customer, or person 
designated by the customer to control the account:
    (a) With respect to any commodity interest as defined in Sec.  
1.3(yy)(1) through (3) of this chapter, specifically authorized the 
futures commission merchant, retail foreign exchange dealer, 
introducing broker or any of their associated persons to effect the 
transaction (a transaction is ``specifically authorized'' if the 
customer or person designated by the customer to control the account 
specifies--
    (1) The precise commodity interest to be purchased or sold; and
    (2) The exact amount of the commodity interest to be purchased or 
sold); or
    (b) With respect to any commodity interest as defined in Sec.  
1.3(yy)(1) or (2) of this chapter, authorized in writing the futures 
commission merchant, introducing broker or any of their associated 
persons to effect transactions in commodity interests for the account 
without the customer's specific authorization; Provided, however, That 
if any such futures commission merchant, introducing broker or any of 
their associated persons is also authorized to effect transactions in 
foreign futures or foreign options without the customer's specific 
authorization, such authorization must be expressly documented.


0
52. Section 166.5 is amended by:
0
a. Removing paragraph (a)(1)(iv), redesignating paragraphs (a)(1)(i) 
through (a)(1)(iii) as paragraphs (a)(1)(i)(A) through (a)(1)(i)(C), 
and adding new paragraph (a)(1)(ii);
0
b. Revising paragraphs (a)(2) and (a)(3);
0
c. Revising paragraphs (c)(5)(i)(A) and (c)(5)(i)(C) to read as 
follows:


Sec.  166.5  Dispute settlement procedures.

    (a) * * * (1) * * *
    (ii) Arises out of any retail forex transaction (as defined in 
Sec.  5.1(m) of this chapter).
    (2) The term customer as used in this section includes an option 
customer (as defined in Sec.  1.3(jj) of this chapter), a retail forex 
customer (as defined in Sec.  5.1(k) of this chapter) and any person 
for or on behalf of whom a member of a designated contract market, or a 
participant transacting on or through such designated contract market, 
effects a transaction on such contract market, except another member of 
or participant in such designated contract market; Provided, however, a 
person who is an ``eligible contract participant'' as defined in 
section 1a(12) of the Act shall not be deemed to be a customer within 
the meaning of this section.
    (3) The term Commission registrant as used in this section means a 
person registered under the Act as a futures commission merchant, 
retail foreign exchange dealer, introducing broker, floor broker, 
commodity pool operator, commodity trading advisor, or associated 
person.
* * * * *
    (c) * * *
    (5) * * *
    (i) * * *
    (A) The designated contract market, if applicable and if available, 
upon which the transaction giving rise to the dispute was executed or 
could have been executed;
* * * * *
    (C) At least one other organization that will provide the customer 
with the opportunity to select the location of the arbitration 
proceeding from among several major cities in diverse geographic 
regions and that will provide the customer with the choice of a panel 
or other decision-maker composed of at least one or more persons, of 
which at least a majority are not members or associated with a member 
of the designated contract market, if applicable, or employee thereof, 
and

[[Page 55452]]

that are not otherwise associated with the designated contract market 
(mixed panel), if applicable: Provided, however, that the list of 
qualified organizations provided by a Commission registrant that is a 
floor broker need not include a registered futures association unless a 
registered futures association has been authorized to act as a 
decision-maker in such matters.
* * * * *

    Issued in Washington, DC, on August 26, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-21729 Filed 9-9-10; 8:45 am]
BILLING CODE 6351-01-P


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