Source: https://www.federalregister.gov/documents/2002/04/19/02-9296/registration-of-intermediaries
Timestamp: 2017-10-22 05:17:15
Document Index: 771274327

Matched Legal Cases: ['art 3', 'art 3', 'art 180', 'art 3', '§\u20093', '§\u20093']

A Proposed Rule by the Commodity Futures Trading Commission on 04/19/2002
Comments on the proposed new rule and amendments must be received by May 20, 2002.
19358-19365 (8 pages)
https://www.federalregister.gov/d/02-9296 https://www.federalregister.gov/d/02-9296
The Commodity Futures Trading Commission (the “Commission” or “CFTC”) is proposing amendments to Part 3 of its rules, which governs registration of intermediaries in the futures industry. These amendments are necessary to facilitate the change from the current paper-based registration system to online registration. It is expected that the online registration system will provide applicants with a more streamlined process for registering, resulting in less redundancy and quicker processing of applications by the National Futures Association. The proposed amendments would permit a floor broker that receives a temporary license to act in the capacity of a fully registered floor broker, and an applicant for registration as an associated person to be granted a temporary license upon filing the Form 8-R and a sponsor's certification, but prior to submission of fingerprints. Several other amendments are technical in nature to accommodate the transfer from a paper-based to an electronic Start Printed Page 19359system and to recognize derivatives transaction execution facilities.
Comments on the proposed rule should be sent to Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581. Comments may be sent by facsimile transmission to (202) 418-5528, or by e-mail to secretary@cftc.gov. Reference should be made to “Registration.”
The Commission has previously delegated the authority to process applications for registration of intermediaries and floor traders under the Commodity Exchange Act (the “Act”)[1] to the National Futures Association (“NFA”).[2] NFA has submitted to the Commission, for its approval, pursuant to Section 17(j) of the Act, amendments to NFA registration rules that would require applicants seeking registration under the Act as futures commission merchants (“FCMs”), introducing brokers (“IBs”), commodity pool operators (“CPOs”), commodity trading advisors (“CTAs”), leverage transaction merchants (“LTMs”), associated persons (“APs”), floor brokers (“FBs”), and floor traders (“FT”) to file applications electronically through an online registration system.[3]
As part of the new online registration system, applicants that have a current active status, either as a registrant or as a listed principal, and who seek to add an additional registration category would be required to file a “short path” version of the form required for a new applicant.[6] This “short path” form would require the applicant to supply only necessary information that is not already in the registration database. For example, if an entity registered as an IB applies to become registered also as a CTA, the entity would complete the “short path” Form 7-R, which requires the applicant to select the appropriate categories for which it would be registered and to indicate the category in which it intends to vote on NFA membership matters. Likewise, natural persons currently registered as APs, FBs, FTs, or listed as branch managers or principals that seek to add an additional category would complete a “short path” Form 8-R.
The Form 7-R would no longer require an applicant to list principals that are natural persons because when a Form 8-R is filed indicating a principal category, the system will require the appropriate information, including information regarding the sponsor firm. Currently, under Commission Rule 3.10(a)(2)(i),[7] each Form 7-R must be accompanied with a Form 8-R and fingerprints for each natural person who is a principal of the applicant. The rule does not apply to a principal that has a current Form 8-R on file. However, because the necessary information about the firm for whom a natural person is a principal is gathered through the Form 8-R, if a natural person with a current active status seeks to add a principal category or to become a principal of another firm, then it would be necessary for a “short path” Form 8-R to be filed.[8] Accordingly, the Commission is proposing to amend Rule 3.10(a)(2)(i) to reflect this change.
Currently, a person who is unconditionally registered as an AP may become associated as an AP with another sponsor if the new sponsor files a Form 3-R with NFA. The Form 3-R must contain a certification signed by each sponsor acknowledging that each sponsor, in addition to being responsible for supervising the AP, is jointly and severally liable for the conduct of the AP. As noted above, under the new online registration system, APs with a current status seeking to add another sponsor would file a “short path” Form 8-R, which, similar to the current paper Form 3-R, would require the submission of only that information not already in the database required for adding the applicable sponsor. Accordingly, the Commission is amending Rule 3.12 to reflect the fact that the sponsor must file a Form 8-R instead of the Form 3-R.
Maintaining the requirement that all of the sponsors of the AP sign and file the acknowledgment mandated under the current rule in an electronic environment would require sending the filing via traditional delivery or via a complicated and costly electronic signature system, both resulting in a delay in adding the sponsor. Additionally, the Commission believes it is unnecessary to require the signed acknowledgment where the rule makes clear that a sponsor is responsible for supervising its APs and is liable for Start Printed Page 19360their conduct.[9] Accordingly, the Commission is removing the requirement that a signed certification be submitted to add an additional sponsor. Instead, the NFA, upon receipt of the Form 8-R for an AP seeking to add a sponsor, shall notify the existing sponsors of the AP of the application. The amended rule would continue to hold each sponsor responsible for the supervision of the AP and make each sponsor jointly and severally liable for the conduct of the AP with respect to customers common to that sponsor and another sponsor.[10] Requiring a signed acknowledgement of this fact would present an added burden for registrants that the Commission does not believe is necessary.
NFA's proposed Registration Rule 207(a) would permit a person whose application for registration as an AP is pending, or who is temporarily licensed as an AP, to apply to become registered as an AP of another sponsor. Pursuant to proposed Registration Rule 207(b), the AP would become registered as an AP of the new sponsor only if he or she is already registered as an AP with another sponsor. The Commission believes that NFA's proposed Registration Rule 207 is consistent with the proposed amendments to Commission Rule 3.12(f).
Notwithstanding the above, under the proposed amendments, where a registrant is ceasing to be or is becoming a sole proprietorship, the registrant would have to file a Form 7-W, withdrawing the registration of the pre-existing organization, and file a Form 7-R regarding the new organization. A change to or from a sole proprietorship to another form of business entity, such as a corporation, is not a mere change in the form of organization. There is a fundamental difference between a natural person and a corporation. A corporation undertaking business that was being conducted by a sole proprietor is not a continuation of an existing organization, but is the creation of a completely new and separate legal entity, thus requiring the filing of a Form 7-W regarding the pre-existing organization and a Form 7-R on behalf of the new organization.
Pursuant to Commission Rule 3.40, an applicant for registration as an AP, FB, or FT, may be granted a temporary license upon the filing of a completed Form 8-R, the applicant's fingerprints, and, (a) if the applicant is applying for registration as an AP, the required sponsor's certification, or (b) if the applicant is applying for registration as an FB or FT, the required proof of having been granted trading privileges by a contract market. Under the online registration system, there would be a delay between the filing of the Form 8-R, which will occur instantaneously via the Internet, and the filing of the applicant's fingerprints, which must still be physically provided on a fingerprint card. Accordingly, the Commission is proposing to amend Rule 3.40 to provide that NFA may grant a temporary license to an applicant for registration as an AP upon filing of the completed Form 8-R and the sponsor's certification, but before the applicant's fingerprints are filed. The fingerprints must be filed with NFA within 20 days. This will not result in any change of the policies that NFA uses in determining to grant a temporary license to an AP.
FBs and FTs will have to continue to file the current documents required under the rule, including fingerprints, to receive a temporary license. Temporary licenses for FBs and FTs will not be granted online because, to be eligible for a temporary license, FB and FT applicants must have been granted trading privileges on a contract market or DTF. It has been the experience of the Commission and NFA that FB and FT applicants, especially new applicants, almost never receive trading privileges before applying for registration. In fact, the applicant's fingerprint cards and registration fees are almost always received before an exchange grants them trading privileges. Moreover, if NFA were to grant an FB or FT applicant a temporary license and later withdraw it, such action could have larger financial implications for the individual than would be the case for an AP applicant. For example, an FB or FT applicant must make sizeable investments to obtain trading privileges on the floor of an exchange.
Currently, an applicant for registration as an FB who is granted a temporary license, and has not been registered as an FB during the preceding 60 days, is only permitted to act as an FT. The Commission does not believe that this difference is required. The fitness standards for becoming registered as an FB or an FT are the same. Likewise, the fitness standards for becoming temporarily licensed as an FB or an FT should be the same. When the Start Printed Page 19361Commission adopted rules that limited FBs granted temporary licenses to acting as FTs, it noted that, after gaining further experience in the area, it might revisit the issue.[11] In the nine years since applicants for registration as FBs have been permitted to receive a temporary license, the Commission and NFA have found that it is very rare that a temporary license granted to an applicant for registration as an FB has had to be terminated as a result of the ensuing fitness check. This is attributable to the fact that, in order to be granted a temporary license as an FB, an applicant must have been granted trading privileges by a contract market and a contract market conducts its own fitness check before granting a person trading privileges. Generally, information that would prevent an applicant from becoming registered with the Commission as an FB would also prevent the person from obtaining trading privileges on a contract market. Accordingly, the Commission is proposing to permit an applicant for registration as an FB who has been granted a temporary license to act in the capacity of an FB for the duration of the temporary license.
Currently, pursuant to Commission Rule 3.11(c)(1), an FB or FT, whose registration has terminated within the preceding sixty days, and who has been granted trading privileges at a new contract market that has filed with NFA the certification required under Rule 3.40(c), regarding the applicant, will be granted a temporary license to act as an FB or FT upon mailing a Form 8-R, a fingerprint card, and if applicable, a supplemental sponsor certification. These are the same submissions necessary to be granted a temporary license under Commission Rule 3.40. However, pursuant to Rule 3.11(c)(1), once the applicant has mailed the Form 8-R and the fingerprint card to NFA the applicant's temporary license will be granted, as opposed to the requirement under Rule 3.40 that the documents be filed with NFA. However, the applicant must have been granted trading privileges by a new contract market and the contract market must have made the required certification before the applicant could be granted the temporary license. The Commission does not believe that it is necessary to maintain both rules for granting temporary licenses to FBs and FTs when the practical result under either rule is the same. Accordingly, the Commission is proposing to remove Rule 3.11(c)(1). All temporary licenses for FBs and FTs will be granted pursuant to Rule 3.40.
The Commission is also proposing to remove Rule 3.11(c)(2). Currently, pursuant to Commission Rule 3.11(c)(2), any FB or FT who continuously maintains trading privileges at a contract market may change their registration category from an FB to an FT or vice versa upon mailing to NFA a completed Form 3-R indicating an intention to change categories. As noted above, under NFA's proposed online registration system, applicants for adding additional registration categories will file a “short path” Form 8-R. Additionally, under Commission Rule 3.11(a), an applicant for registration as an FB or FT is not required to file a fingerprint card if the applicant has a current Form 8-R on file with NFA.[12] Accordingly, removing Rule 3.11(c)(2) should not negatively affect those already registered as FBs or FTs seeking to switch registration categories.
Similar to the granting of a temporary license as a new applicant for AP registration, as discussed above, the Commission is also proposing to amend Rule 3.12(d) to permit the granting of a special temporary license to an AP whose registration terminated within the preceding 60 days upon the filing of a completed Form 8-R, but prior to the applicant's fingerprints being filed with NFA. The fingerprints must be filed with NFA within 20 days.
Currently, pursuant to Commission Rule 3.33(c)(1), when an FCM or an independent IB is requesting withdrawal from registration because it has ceased engaging in activities that require registration, their request for withdrawal must be accompanied by Form 1-FR-FCM or 1-FR-IB [13] completed within a month of the date of the request for withdrawal. Pursuant to NFA Financial Requirement Section 1(b), each FCM for which NFA is the designated self-regulatory organization must file a Form 1-FR-FCM for each month end. Accordingly, for such FCMs, a Form 1-FR-FCM for the previous month will have already been filed. Additionally, an IB is not permitted to hold customer funds. Therefore, requiring an IB seeking withdrawal to file Form 1-FR-IB in every instance is unnecessary. Moreover, if there was a reason for the Commission to be concerned about the financial state of a particular IB requesting withdrawal, the Commission may, pursuant to Rule 3.33(f)(4), require that the IB provide the appropriate financial statements, including a Form 1-FR-IB, before it is permitted to withdraw its registration. Accordingly, the Commission is proposing to remove Rule 3.33(c)(1).
Commission Rules 3.12(c)(1), 3.12(d)(3) (sponsor certifications regarding an applicant for AP registration), 3.33(b) (Form 7-W for a firm's withdrawal of registration), 3.44(a)(4) (FCM certification regarding a temporary license for an IB) require that only certain persons may sign the pertinent documents on behalf of the registrant.[14] Under the proposed online registration system, where the pertinent documents will be filed electronically, it would be difficult, if not impossible, to ensure that only one of the enumerated persons was actually submitting the document.
NFA, in its proposed Registration Rule 802, provides that the electronic filing of required documents constitutes, among other things, the applicant's, registrant's, or sponsor's certification that the person who electronically files the document is authorized by the entity to make the required certifications, representations, requests, acknowledgements, authorizations, and agreements contained therein. Moreover, proposed NFA Registration Rule 801(b) provides that any registration filing made on behalf of a registrant or applicant by a person authorized by the applicant or registrant shall be deemed to be a filing of such registrant or applicant.[15]
Therefore, the entity filing the pertinent certification or form under Commission Rules 3.12(c)(1), 3.33(b), 3.44(a)(4) should be held accountable for any representations in the applicable document. Accordingly, the Commission is proposing to amend these rules to make clear that a person duly authorized by the registrant or Start Printed Page 19362sponsor must file the relevant certification or form.
The Commission is also proposing to make certain technical amendments. For example, the Commission is proposing to amend Rules 3.11 and 3.31 so as to reference both contract markets and derivatives transaction execution facilities. Additionally, the Commission is proposing to remove references in Part 3 to Part 180, which has been removed and reserved.
The Regulatory Flexibility Act (“RFA”)[16] requires that agencies, in proposing rules, consider the impact of those rules on small businesses. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its rules on such entities in accordance with the RFA.[17] The Commission has previously determined that FCMs, registered CPOs, and LTMs are not small entities for the purpose of the RFA.[18] Therefore, the requirements of the RFA do not apply to those entities. With respect to the remaining entities, the proposed rule amendments will not place any additional burdens upon such parties since all registrants are already subject to the registration filing requirements of the Act and Part 3 of the Commission's regulations. To the contrary, the proposed amendments will help to streamline and simplify the current registration procedures. Accordingly, the Chairman, on behalf of the Commission, certifies pursuant to Section 3(a) of the RFA [19] that the proposed rules will not have a significant economic impact on a substantial number of small entities. However, the Commission invites the public to comment on this finding.
The Paperwork Reduction Act of 1995 (“PRA”) [20] imposes certain requirements on federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as defined by the PRA. The proposed rule amendments do not require a new collection of information on the part of any entities subject to the proposed rule amendments. Accordingly, for purposes of the PRA, the Commission certifies that these proposed rule amendments, if promulgated in final form, would not impose any new reporting or recordkeeping requirements. The Commission has submitted hard copies of how the screens will appear in the electronic registration system to OMB.
The proposed amendments are intended to facilitate a streamlined registration process that would result in less redundancy and quicker processing of applications. The Commission is considering the costs and benefits of these rules in light of the specific provisions of Section 15(a) of the Act:
While the proposed amendments are expected to lessen the burden imposed upon applicants in the registration process, they do not reduce the fitness standards for becoming registered with the Commission. Accordingly, they should have no effect on the Commission's ability to protect market participants and the public.
The proposed amendments are expected to benefit efficiency and competition by more quickly facilitating entry into the industry and by enabling information to be collected and made available in a more timely manner.
The proposed amendments should have no effect, from the standpoint of imposing costs or creating benefits, on the financial integrity or price discovery function of the futures and options markets.
The proposal should have no effect on the risk management practices of the futures and options industry.
The proposed amendments, in facilitating the change to an online registration system, are expected to result in a registration system that is easier to use and more efficient in its processing of registration applications. Additionally, the system should permit more information about registrants to be readily accessible by the public more quickly.
(c) The National Futures Association shall notify the registrant, or the sponsor in the case of an applicant for registration as an associated person, and each designated contract market or registered derivatives trading execution facility that has granted the applicant Start Printed Page 19363trading privileges in the case of an applicant for registration as a floor broker or floor trader, if registration has been granted under the Act.
4. Section 3.11 is revised by amending paragraphs (a)(2), (a)(3), and (b), and by removing paragraphs (c) and (d) to read as follows:
(b) Duration of registration. A person registered as a floor broker or floor trader in accordance with paragraphs (a) or (c) of this section, and whose registration has neither been revoked nor withdrawn, will continue to be so registered unless such person's trading privileges on all contract markets or derivatives transaction execution facilities have ceased: Provided, That if a floor broker or floor trader whose trading privileges on all contract markets or derivatives transaction execution facilities have ceased for reasons unrelated to any Commission action or any contract market or derivatives transaction execution facility disciplinary proceeding and whose registration is not revoked, suspended or withdrawn is granted trading privileges as a floor broker or floor trader, respectively, by any contract market or derivatives transaction execution facility where he held such privileges within the preceding sixty days, such registration as a floor broker or floor trader, respectively, shall be deemed to continue and no new Form 8-R or Form 3-R need be filed solely on the basis of the resumption of trading privileges. A floor broker or floor trader is 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 or of all such trading privileges. In accordance with § 3.31(d), each contract market or derivatives transaction execution facility that has granted trading privileges to a person who is registered, or has applied for registration, as a floor broker or floor trader, must notify the National Futures Association within sixty days after such person's trading privileges on such contract market or derivatives transaction execution facility have ceased.
d. By revising paragraph (f), the revisions and addition to read as follows:
(1) No person registered as an associated person in accordance with this paragraph (c) unless a person duly authorized by the sponsor certifies that:
(4) When the Commission or the National Futures Association determines that an applicant for registration as an associated person is not unfit for such registration, it will notify the sponsor that has made the certifications required by paragraph (c)(1) of this section that the applicant's registration as an associated person is granted contingent upon the sponsor hiring or otherwise employing the applicant as such within thirty days.
(2) Any temporary license granted pursuant to paragraph (d)(1) of this section shall be terminated immediately Start Printed Page 19364upon notice to the sponsor of the person granted the temporary license that, within 20 days following the date the temporary license was issued, the National Futures Association has not received the applicant's fingerprints.
6. Section 3.31 is amended as follows:
d. By revising paragraph (a)(3); and
e. By amending paragraph (d) by adding “or derivatives transaction execution facility” after each instance of “contract market”; the revisions and addition to read as follows:
a. By amending the introductory text of paragraph (b) by removing “the sole proprietor if the registrant is a sole proprietorship, by a general partner if a partnership, or by the president or chief executive officer if a corporation,” and adding in its place “a person duly authorized by the registrant”;
c. By redesignating paragraphs (b)(4) through (b)(7) as (b)(3) through (b)(6);
e. By redesignating paragraph (c)(2) as paragraph (c);
f. By removing and reserving paragraph (d); and
(ii) The sponsor's certification required by § 3.12(c): Provided, however, that the fingerprints of the applicant on a fingerprint card provided by the National Futures Association for that purpose must be filed with the National Futures Association within 20 days following the date the temporary license is issued; and, provided further, that failure to file the fingerprints within this period will result in the Start Printed Page 19365termination of the temporary license immediately upon notice to the applicant's sponsor that the National Futures Association has not received the applicant's fingerprints.
(6) Immediately upon failure to comply with an order to pay a civil monetary penalty, restitution, or disgorgement within the time permitted under Sections 6(e), 6b, or 6c(d) of the Act;
(8) Immediately upon failure to comply with an award in an arbitration proceeding conducted pursuant to the rules of a designated contract market, registered derivatives transaction execution facility, or registered futures association within the time specified in Section 10(g) of the National Futures Association's Code of Arbitration or the comparable time period specified in the rules of a contract market, registered derivatives transaction execution facility, or other appropriate arbitration forum.
Issued in Washington, DC on April 12, 2002, by the Commission.
6. Currently, such applicants are required to file a Form 3-R (which is akin to the new “short path” form) or Form 8-R, depending upon their current status and the additional category requested.
7. Commission rules referred to herein may be found at 17 CFR Chap. I (2001).
8. Fingerprints will still not be required.
9. Existing Commission rules also make clear the sponsor's responsibility and liability to supervise its APs. See, e.g., Rule 166.3.
10. NFA Registration Rule 207, as amended, holds sponsors to the same standards.
11. 58 FR 19575, 19583 (Apr. 15, 1993).
12. NFA proposed Registration Rule 205(b) similarly provides that an applicant for FB or FT registration need not file a fingerprint card or pay the registration fee if the applicant has a current Form 8-R on file.
13. The Forms 1-FR-FCM and 1-FR-IB are statements of the financial condition of an FC or IB respectively, used, in part, to ensure compliance with applicable Commission minimum financial requirements.
14. For example, Rule 3.12(c)(1) requires that the sponsor's certification be signed by an officer if the sponsor is a corporation, a general partner, if a partnership, or the sole proprietor, if a sole proprietorship.
15. Under the proposed NFA rules, FBs and FTs may not authorize any other person to file a Form 8-R on their behalf. Additionally, persons for whom a sponsor has filed a Form 8-R must verify the information themselves and may not authorize any other person to do so on their behalf.
18. Id. at 18619-20 (discussing FCMs and CPOs); 54 FR 19556, 19557 (May 8, 1989) (discussing LTMs).
[FR Doc. 02-9296 Filed 4-18-02; 8:45 am]