E7-12767. Registration of Intermediaries

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) has amended Commission Regulation 3.10 to require certain registered intermediaries, i.e., futures commission merchants (“FCMs”), introducing brokers (“IBs”), commodity pool operators (“CPOs”), commodity trading advisors (“CTAs”) and leverage transaction merchants (“LTMs”), to complete an online annual review of their registration information maintained with the National Futures Association (“NFA”). This amendment is intended to ensure that NFA will have accurate and current information about such registrants. The Commission also has made a technical and conforming amendment to Commission Regulation 3.33(f) in order to remove an unnecessary reference to Regulation 3.10(d).

EFFECTIVE DATE:

August 1, 2007.

FOR FURTHER INFORMATION CONTACT:

Helene D. Schroeder, Special Counsel, Compliance and Registration Section, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, telephone number: [phone]; facsimile number: [phone]; and electronic mail: [e-mail].

SUPPLEMENTARY INFORMATION:

I. Background

Part 3 of the Commission's regulations sets forth the regulations relating to the registration of intermediaries and other futures industry professionals.^[1] The Commission adopted Part 3 pursuant to the authority set forth in Sections 4c, 4d, 4f(a)(1), 4m, 4n(1) and 19 of the Commodity Exchange Act (“Act”).^[2] These statutory provisions require the registration of firms seeking to act as intermediaries for exchange-traded futures and commodity options. Section 4f(a)(1) contains the framework for the registration of FCMs and IBs.^[3] Section 4n(1) governs the registration of CPOs and CTAs.^[4] Sections 4c ^[5] and 19 of the Act,^[6] respectively, grant the Commission plenary authority, including registration authority, over commodity options and leverage transactions.

Commission Regulation 3.10(a) specifies that an application for registration as an FCM, IB, CPO, CTA or LTM must be on a Form 7-R, completed and filed with NFA in accordance with the instructions thereto.^[7] Commission Regulation 3.31(a)(1) requires such intermediaries to correct promptly deficiencies or inaccuracies contained in the person's Form 7-R or any Form 8-R filed on behalf of a principal or an associated person.^[8]

In 2002, NFA altered its registration procedures by shifting from paper-based registration to an online or electronic registration system. Pursuant to these new procedures, NFA requires, with limited exceptions,^[9] that all registration (and membership) forms, including the completed Form 7-R and 3-R, must be filed with NFA electronically through NFA's Online Registration System (“ORS”). Shortly after the new procedures were implemented, the Commission deleted Regulation 3.10(d), pursuant to which intermediary firms would conduct an annual review of a pre-printed copy of the registrant's 7-R.^[10]

II. Proposal

In order to ensure that the registration information it maintains is accurate and up-to-date, NFA developed an online registration update protocol for firms to review and update their registration records. In addition to providing an updated list of persons authorized to enter data in ORS, the protocol would require registrants to provide updated disciplinary, branch office and firm contact information.^[11]

To facilitate NFA's efforts in implementing this new protocol, on April 26, 2007, the Commission published in the Federal Register a proposal to require firms to conduct an annual review of registration information. (“Proposal”).^[12] The Proposal, which included a proposed new paragraph (d) of Regulation 3.10 (“Proposed Amendment”) was designed to ensure that NFA would be in possession of current and accurate information regarding intermediaries.^[13] Specifically, the Proposed Amendment would require that each FCM, IB, CPO, CTA and LTM, in accordance with procedures established by NFA, complete an online annual review of the registration information maintained by NFA. Pursuant to procedures established by NFA, registrants would be required to correct any deficiencies or inaccuracies contained therein.

The Proposed Amendment also would provide that the failure to complete the review and update within 30 days of the date established by NFA for completion would be deemed to be a request for withdrawal from registration. As further provided therein, NFA would be required to process the request in accordance with the existing procedures for withdrawal of registration set forth in Commission Regulation 3.33(f).

The Commission's Proposal also included a technical and conforming amendment to Commission Regulation 3.33(f) in order to remove unnecessary language that referenced Regulation 3.10(d).

III. Comments Regarding the Proposal

The Commission received only one comment letter on its Proposal, and this comment, which was from NFA, expressed full support for the amendment. In light of this fact, and the foregoing, the Commission has determined to adopt the amendments to Regulations 3.10 and 3.33(f) as set forth in the Proposal.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) ^[14] requires that agencies, in proposing regulations, consider the impact of those regulations on small businesses. The amendment to Regulation 3.10 will affect persons that are registered as FCMs, IBs, CPOs, CTAs and LTMs. The Commission has previously established certain definitions of “small entities” to be used by the Commission in evaluating the impact of its regulations on such entities in accordance with the RFA.^[15] The Commission previously determined that registered FCMs, CPOs and LTMs are not small entities for the purpose of the RFA.^[16]

With respect to the remaining persons, CTAs and IBs, the Commission stated in the Proposal that it did not believe that the economic impact of the Proposed Amendment would be significant. First, the information that would be required under the Proposed Amendment already is required to be collected under the existing registration framework, to wit, Regulation 3.31(a)(1). Second, the Proposed Amendment and NFA's new protocol would focus each registrant on the specific areas that must be reviewed and, if needed, updated. Third, the Proposed Amendment would permit review and updating via electronic means in keeping with the current registration procedures. Accordingly, in accordance with Section 3(a) of the RFA,^[17] the Chairman, on behalf of the Commission, certified that the Proposed Amendment would not have a significant economic impact on a substantial number of small entities.

The Commission invited the public to comment regarding its analysis of the application of the RFA to the Proposal. The Commission did not receive any such comments.

B. Cost-Benefit Analysis

Section 15(a) of the Act ^[18] requires the Commission to consider the costs and benefits of its action before issuing a new regulation under the Act. By its terms, Section 15(a) does not require the Commission to quantify the costs and benefits of a new regulation or to determine whether the benefits of the proposed regulation outweigh its costs. Rather, Section 15(a) simply requires the Commission to “consider the costs and benefits” of its action.

Section 15(a) further specifies that costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission, in its discretion, may choose to give greater weight to any one of the five enumerated areas and determine that, notwithstanding its costs, a particular regulation is necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act. The Commission has evaluated the costs and benefits of its Proposal, in particular, new Regulation 3.10(d) in light of the specific considerations identified in Section 15(a) of the Act.

Regulation 3.10(d) concerns the registration of intermediaries, in particular, FCMs, IBs, CPOs, CTAs and LTMs. Specifically, it will require these intermediaries to complete an online annual review of their registration information, including disciplinary information, firm contacts and lists of authorized users. By ensuring that NFA, the self-regulatory organization that oversees the activities of these registrants, will have accurate and current information regarding registrants, Regulation 3.10(d) will maximize the protection of market participants and the public.

Such intermediaries already are under an ongoing obligation to provide updated information to NFA pursuant to Commission Regulation 3.31(a)(1). Regulation 3.10(d) will require these registrants to comply with an online review protocol established by NFA. This protocol will provide a straightforward process for registrants to electronically update their registration information. It will focus and guide registrants on the particular areas that need updating. By facilitating NFA's efforts to adopt this protocol, Regulation 3.10(d) will result in efficiency enhancements for registrants and NFA.

Regulation 3.10(d) also will have no effect on the following three enumerated areas: (1) Efficiency, competitiveness or the financial integrity of futures markets; (2) price discovery; and (3) sound risk management practices.

After considering these factors, the Commission has determined to adopt the amendment to Regulation 3.10 set forth below.

C. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) imposes certain obligations on federal agencies, including the Commission, in connection with their conducting or sponsoring any collection of information as defined by the PRA.^[19] In its Proposal, the Commission noted that the Proposed Amendment would require intermediaries to conduct an annual review of their registration information maintained with NFA and that this information is part of an approved collection of information. The Commission further noted that the Proposed Amendment would not result in any material modifications to this approved collection. Accordingly, for purposes of the PRA, the Commission certified that the Proposed Amendment did not impose any new reporting or recordkeeping requirements.

The Commission did not receive any comments regarding its analysis relative to the PRA.

List of Subjects in 17 CFR Part 3

• Administrative practice and procedure
• Brokers
• Commodity futures
• Reporting and recordkeeping requirements

For the reasons discussed in the preamble, the Commission amends 17 CFR part 3 as follows:

PART 3—REGISTRATION

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

Authority: 5 U.S.C. 522, 522b; 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.

2. Section 3.10 is amended by adding paragraph (d) to read as follows:

§ 3.10

Registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.

* * * * *

(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, 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 § 3.33(f).

3. Section 3.33 is amended by revising paragraph (f) introductory text to read as follows:

§ 3.33

Withdrawal from registration.

* * * * *

(f) A request for withdrawal from registration will become effective on the thirtieth day after receipt of such request by the National Futures Association, or earlier upon written notice from the National Futures Association (with the written concurrence of the Commission) of the granting of such request, unless prior to the effective date:

* * * * *

Issued in Washington, DC, on June 26, 2007, by the Commission.

Eileen Donovan,

Acting Secretary of the Commission.

Footnotes

1.  17 CFR Part 3. The Commission's regulations can be accessed at http://www.access.gpo.gov/​nara/​cfr/​waisidx_​06/​17cfrv1_​06.html.

2.  7 U.S.C. 1 et seq. (2000). The Act can be accessed at http://www.access.gpo.gov/​uscode/​title7/​chapter1_​.html.

3.  7 U.S.C. 6f(a)(1).

4.  7 U.S.C. 6n(1).

5.  7 U.S.C. 6c.

6.  7 U.S.C. 23. Commission Regulation 31.5, 17 CFR 31.5 (2007), was promulgated under this provision and along with Regulation 3.10, 17 CFR 3.10, governs the registration of LTMs.

7.  17 CFR 3.10(a).

8.  17 CFR 3.31(a)(1).

9.  For example, NFA requires that any securities broker or dealer that is registered with the Securities and Exchange Commission that becomes a notice-registered FCM or IB must submit a hardcopy version of its Form 7-R.

10.  See 67 FR 38869 (June 6, 2002).

11.  Under the protocol, a firm could modify the title given for a particular principal of a firm, but it could not identify a new principal, as this would require separate application.

12.  72 FR 20788.

13.  Paragraph (d) of Regulation 3.10 had been reserved.

14.  5 U.S.C. 601 et seq.

15.  47 FR 18618 (Apr. 30, 1982).

16.  47 FR 18618, 18619.

17.  5 U.S.C. 605(b).

18.  7 U.S.C. 19(a).

19.  44 U.S.C. 3501 et seq.