[Federal Register Volume 60, Number 240 (Thursday, December 14, 1995)]
[Proposed Rules]
[Pages 64132-64135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30359]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
Ethics Training for Registrants
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: On July 22, 1994, the Commodity Futures Trading Commission
(Commission) proposed amendments to Rule 3.34, which governs ethics
training for Commission registrants. The Commission has published a
release announcing the adoption of those rule amendments in the Federal
Register on December 13, 1995. The Commission also is proposing to
amend Rule 3.34 to require that persons who seek to provide ethics
training must present satisfactory evidence that they meet a
proficiency testing requirement established by a registered futures
association and possess a minimum of three years of relevant
experience. The Commission is also proposing to amend Rule 3.34 to
eliminate the provision permitting state-accredited entities to provide
ethics training without being subject to the requirements pertaining to
other providers under the rule.
DATES: Comments must be received by January 16, 1996.
ADDRESSES: Comments should be sent to the Office of the Secretariat,
Commodity Futures Trading Commission, 1155 21st Street NW., Washington,
DC 20581 and should refer to ``Ethics Training for Registrants.''
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel or Myra R. Silberstein, Attorney-Advisor, Division of Trading
and Markets, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone
(202) 418-5450.
SUPPLEMENTARY INFORMATION:
I. Background
Section 210 of the Futures Trading Practices Act of 1992 added a
new paragraph (b) to Section 4p of the Commodity Exchange Act (Act) to
mandate ethics training for persons required to be registered under the
Act.\1\ On April 6, 1993, the Commission adopted Rule 3.34 to implement
this Congressional mandate.\2\ In September, 1993, the Commission
issued a Federal Register release to clarify the procedures to be
followed by persons
[[Page 64133]]
seeking to provide ethics training pursuant to Rule 3.34.\3\
\1\This provision of the Act is codified at 7 U.S.C. 6p(b)
(1994) and states that:
The Commission shall issue regulations to require new
registrants, within 6 months after receiving such registration, to
attend a training session, and all other registrants to attend
periodic training sessions, to ensure that registrants understand
their responsibilities to the public under this Act, including
responsibilities to observe just and equitable principles of trade,
any rule or regulation of the Commission, any rule of any
appropriate contract market, registered futures association, or
other self-regulatory organization, or any other applicable Federal
or state law, rule or regulation.
\2\58 FR 19575, 19584-19587, 19593-19594 (Apr. 15, 1993).
\3\58 FR 47890 (Sept. 13, 1993).
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Rule 3.34 requires natural persons registered under the Act to
attend ethics training to ensure that they understand their
responsibilities to the public under the Act. The required training
must address the requirements of the Act and all rules concerning the
treatment and handling of customer orders and business. Issues to be
addressed may include: honesty, fairness and the interests of customers
and the integrity of the markets; effective supervisory systems and
controls; assessment of financial situations and the investment
experience of customers; disclosure of material information; and
avoidance of conflicts of interest. New registrants must attend ethics
training within six months of being granted registration and every
three years thereafter. The initial training must be at least four
hours in duration; subsequent training must be of at least one hour in
duration. Persons registered when Rule 3.34 became effective on April
26, 1993 were granted until April 26, 1996 to attend an initial
training session, of at least two hours in duration, and must
thereafter attend a one-hour session every three years. Ethics trainers
must maintain records of materials used in such training and of
attendees at such training.
In July 1994, the Commission proposed amendments to Rule 3.34 to
improve the operation of its ethics training program and furnish
additional guidance with respect to the activities of ethics training
providers.4 The Commission has published a release announcing the
adoption of those amendments published in the Federal Register on
December 13, 1995. The amendments adopted will, among other things,
require a person seeking to provide ethics training to certify that he
is not subject to a statutory disqualification from registration under
the Act,5 barred from service on self-regulatory organization
(SRO) governing boards or committees,6 or subject to a pending
proceeding concerning possible violations of the Act or rules or orders
promulgated thereunder.
\4\59 FR 37446 (July 22, 1994).
\5\7 U.S.C. 12a (2) and (3)(1994). The Act specifies several
grounds for disqualification from registration including, among
others, a prior revocation of registration, felony conviction, and
an injunction relating to futures or securities activities.
\6\No person may serve on SRO governing boards or committees
who, among other things, has been found within the prior three years
to have committed a ``disciplinary offense'' or entered into a
settlement agreement with respect to a charge involving a
``disciplinary offense,'' is currently suspended from trading on any
contract market, is suspended or expelled from membership in any
SRO, or is currently subject to an agreement with the Commission or
an SRO not to apply for registration or membership. A ``disciplinary
offense'' for these purposes means any violation of the Act or the
rules promulgated thereunder or SRO rules other than those relating
to: (1) decorum or attire; (2) financial requirements; or (3)
reporting or recordkeeping, unless resulting in fines aggregating
more than $5,000 in a calendar year, provided such SRO rule
violations did not involve fraud, deceit or conversion, or result in
a suspension or expulsion. 17 CFR 1.63 (1995).
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II. Proposed Amendments
A. Proficiency Testing and Minimum Experience Requirements
The Commission is now proposing further amendments to Rule 3.34 to
require any person seeking to provide ethics training to furnish
satisfactory evidence to a registered futures association that he has
met the proficiency testing requirement7 established by a
registered futures association8 pursuant to Section 17(p)(1) of
the Act for the registration of commodity professionals9 and
possesses three years of relevant experience. Currently, the National
Commodity Futures Examination (Series 3 Exam) is the proficiency test
required to be completed by most commodity professionals.10
\7\7 U.S.C. 6p(a)(1994).
\8\Presently, the National Futures Association (NFA) is the only
registered futures association.
\9\Section 17(p)(1) of the Act, 7 U.S.C. 21(p)(1)(1994),
provides, in part, that a registered futures association must
establish training standards and proficiency testing for persons
involved in the solicitation of transactions subject to the Act,
supervisors of such persons, and all persons for whom it has
registration responsibilities.
\10\See NFA Registration Rule 401.
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In commenting on the amendments proposed in July, 1994, NFA
suggested that a proficiency testing requirement be incorporated in
Rule 3.34 to require ethics training providers to satisfy an objective
standard designed to reflect a minimum level of knowledge of the
futures industry and the relevant statutory and regulatory structure.
NFA and another commenter also recommended that to ensure that an
ethics training provider possesses a working knowledge of the futures
industry and is capable of teaching relevant rules and regulations,
ethics training providers should be required to have at least three
years of industry or teaching experience.
The Commission agrees that requiring persons who seek to provide
ethics training to provide proof of satisfactory completion of a
proficiency testing requirement applicable to registrants and of
possession of three years of relevant industry or pedagogical
experience provides an objective, readily administered measure for
determining knowledge of relevant matters and should not be unduly
burdensome. The Commission believes that it would be inconsistent with
the Congressional mandate for ethics training and contrary to the
public interest for a person to teach others about their
responsibilities under applicable laws and rules if such a person is
not able to demonstrate at least the same minimum acceptable level of
proficiency as is required of those he intends to educate. Further,
such requirements would be consistent with the approach followed by the
Commission to date in evaluating applications from potential offerors
of ethics training. In proposing Rule 3.34, the Commission noted its
belief that ``pedagogical expertise and knowledge of futures are
factors that should be taken into consideration in evaluating potential
offerors of ethics training.''11 Consequently, in reviewing
applications filed under Rule 3.34 for authorization to provide ethics
training, the Commission has endeavored to assure that such providers
demonstrate pedagogical experience and knowledge of the futures
markets. Should these proposed amendments be adopted, the Commission
anticipates that NFA will promulgate rules establishing specific
proficiency standards for ethics training providers.
\11\58 FR 19575, 19586. However, initially the Commission
elected not to establish specific requirements with respect to these
matters in Rule 3.34.
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The Commission believes that the proposed requirement of three
years of relevant experience may be satisfied not only by pedagogical
or teaching experience but, also, by relevant industry experience. For
example, such industry experience might be acquired by the practice of
law in the fields of futures or securities or employment as a trader or
risk manager at a brokerage or end-user firm. The Commission welcomes
comments as to the types of experience that should be deemed sufficient
for this purpose.
The Series 3 Exam is the only relevant proficiency test currently
available for ethics training providers, since it is the proficiency
test that is generally applicable to Commission registrants and is
designed to assure a broad working knowledge of the futures industry.
Successful completion of the Series 3 Exam is required of all natural
persons seeking to be registered as a commodity pool operator (CPO),
commodity trading advisor (CTA), futures commission merchant,
introducing broker, leverage transaction merchant or an associated
person (AP)
[[Page 64134]]
of any of the foregoing.12 The Commission recently approved an
alternative proficiency testing requirement under which general
securities representatives whose commodity interest activity will be
limited to managed accounts or commodity pool interests may take the
Futures Managed Funds Examination (Series 31 Exam) in lieu of the
Series 3 Exam. The Commission believes that even if an ethics training
provider wishes to instruct only CPOs, CTAs and their APs, the more
comprehensive based Series 3 Exam is the appropriate proficiency test.
\12\See also the 400 Series of the NFA Registration Rules, which
sets forth the proficiency requirements for industry professionals
and the alternatives to and exemptions from the Series 3 Exam
requirements. Currently, floor traders and floor brokers are not
required to pass the Series 3 Exam in order to become registered.
Most floor traders and floor brokers receive orientation and ethics
training from their respective exchanges.
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B. Applicability of Certification, Proficiency Testing and Experience
Requirements
Currently, Rule 3.34 requires that any provider of ethics training
other than an SRO offering ethics training to its members or employees
or an entity accredited to conduct continuing education programs by a
state professional licensing authority in the fields of law, finance,
accounting or economics must be approved by the Commission for this
purpose. A comment letter addressing the amendments to Rule 3.34
published in the Federal Register on December 13, 1995, suggested that
SROs and state-accredited entities should no longer be exempted from
the general requirement under Rule 3.34 that entities seeking to
provide ethics training submit an application to the Commission
summarizing their ethics training program, as all ethics training
providers should be subject to equivalent standards. The Commission
believes that the business purposes and functions of SROs, the
statutory and regulatory requirements applicable to SROs, and the
Commission's oversight program for assuring compliance by SROs with
their responsibilities under the Act and Commission rules provide
sufficient assurance of the expertise and fitness of SROs as ethics
training providers without the necessity for imposing additional
requirements. Consequently, the Commission's proposals with respect to
proficiency training and pedagogical or industry experience do not
apply to SROs seeking to provide ethics training to their members or
employees. The Commission invites commenters to address the continued
appropriateness of this approach for SROs in light of the proposed
modifications of the requirements with respect to other types of ethics
training providers.
The Commission has determined, however, to propose that state-
accredited entities be required to file with the NFA the certification
required under Rule 3.34(b)(3)(iii) and to comply with the other
relevant provisions of Rule 3.34, including proficiency testing and
experience requirements. In the absence of such compliance and in light
of the potential for significant variations among state-accreditation
regimes, the Commission would have no ready means of assuring that such
providers have a minimum level of relevant knowledge or experience.
The Commission is proposing that the proficiency testing and
minimum experience requirements apply to the provider or sponsor of the
ethics training program, to any instructors or presenters employed by
the provider of such ethics training, and to those persons who prepare
ethics training videotapes or electronic presentations. Existing
providers, instructors and preparers operating pursuant to specific
Commission authorization or otherwise in compliance with Rule 3.34 as
currently in effect would not be subject to these requirements.
However, if an entity whose application to provide ethics training has
previously been granted by the Commission seeks to add a new instructor
or course preparer, such person would be subject to the proficiency
testing and minimum relevant experience standards.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rule amendments proposed herein
will not affect SROs who wish to provide ethics training but would
affect all others who seek to be included on a list of authorized
ethics training providers, including entities accredited to conduct
continuing education programs by state professional licensing
authorities in the fields of law, finance, accounting or economics. The
impact of this proposal on persons seeking to become providers of
ethics training should be minimal. At this time, a one-time processing
fee for the Series 3 Exam offered by the NFA is seventy-five dollars.
This should not constitute an unduly burdensome entry cost for ethics
training providers; the same cost is incurred by all the attendees at
ethics training as a cost of registration. Requiring a minimum level of
experience also should not adversely impact small businesses as this
requirement does not impose additional financial cost upon such
entities.
Therefore, on behalf of the Commission, the Chairman hereby
certifies, pursuant to 5 U.S.C. 605(b), that the rule amendments
proposed herein will not have a significant economic impact on a
substantial number of small entities. The Commission nonetheless
invites comments from any persons or entities who believe that these
proposed rule amendments will have a significant impact on their
operations.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the PRA. In compliance with the
PRA, the Commission has previously submitted the proposed rule and its
associated information collection requirements to the Office of
Management and Budget. While the amendments proposed herein have no
burden, Rule 3.34 is a part of a group of rules which has the following
burden: Rules 3.16, 3.32 and 3.34 (3038-0023, approved June 2, 1993):
Average Burden Hours Per
Response--1.13
Number of Respondents--60,980
Frequency of Response--On Occasion and Triennially
Persons wishing to comment on the information which will be
required by these rules as amended should contact Jeff Hill, Office of
Management and Budget, Room 3228, NEOB, Washington, D.C. 20503, (202)
395-7340. Copies of the information collection submission to OMB are
available from Joe F. Mink, CFTC Clearance Officer, 1155 21st St. N.W.,
Washington, D.C. 20581, (202) 418-5170.
List of Subjects in 17 CFR Part 3
Registration, Ethics Training.
Accordingly, the Commission, pursuant to the authority contained in
the Commodity Exchange Act and, in particular, Sections 1a, 4d, 4e, 4g,
4m, 4p, 8a and 17 thereof (7 U.S.C. 1a, 6d, 6e, 6g, 6m, 6p, 12a and 21
(1994), hereby proposes to amend Part 3 of Chapter I of Title 17 of the
Code of Federal Regulations as follows:
[[Page 64135]]
PART 3--REGISTRATION
1. The authority citation for Part 3 continues to read as follows:
Authority: 7 U.S.C. la, 2, 4, 4a, 6, 6b, 6d, 6e, 6f, 6g, 6h, 6i,
6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21 and 23;
5 U.S.C. 552, 552b.
Sec. 3.34 [Amended]
2. Section 3.34 as amended by a final rule published on December
13, 1995, is proposed to be amended by removing and reserving paragraph
(b)(3)(ii) and revising the introductory text of paragraph (b)(3)(iii)
to read as follows: Sec. 3.34 Mandatory ethics training for
registrants.
* * * * *
(b) * * *
(3) * * *
(ii) [Reserved]
(iii) A person included on a list maintained by a registered
futures association who has presented satisfactory evidence to the
registered futures association that he has taken and passed the
proficiency testing requirements established by a registered futures
association for an ethics training provider, possesses a minimum of
three years of relevant experience, and who certifies that:
* * * * *
Issued in Washington, D.C. on December 7, 1995, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 95-30359 Filed 12-13-95; 8:45 am]
BILLING CODE 6351-01-P
