[Federal Register Volume 64, Number 234 (Tuesday, December 7, 1999)]
[Proposed Rules]
[Pages 68304-68307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31687]
[[Page 68304]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AB48
Exemption From Registration as a Commodity Trading Advisor
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission proposes to amend its
rules to create an exemption from registration requirements for
commodity trading advisors that provide advice by means of media such
as newsletters, Internet web sites, and non-customized computer
software.
DATES: Comments must be received by February 7, 2000.
ADDRESSES: Comments on the proposed rule may be sent to Jean A. Webb,
Secretary of the Commission, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.
In addition, comments may be sent by facsimile transmission to
facsimile number (202) 418-5521, or by electronic mail to
secretary@cftc.gov. Reference should be made to ``Exemption from
Registration as a Commodity Trading Advisor.''
FOR FURTHER INFORMATION CONTACT: Martin White, Attorney, (202) 418-
5120, electronic mail: mwhite@cftc.gov, Office of General Counsel,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, N.W., Washington, D.C. 20581; or Michael J. Garawski, (202)
418-5120, electronic mail: mgarawski@cftc.gov, Office of General
Counsel, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, N.W., Washington, D.C. 20581.
SUPPLEMENTARY INFORMATION:
I. Background
The Commission proposes to exempt certain commodity trading
advisors (``CTAs'') from Section 4m(1) of the Commodity Exchange Act
(``CEA'' or ``Act''), 7 U.S.C. 6m(1) (1994), which requires CTAs to
register with the Commission. The precise scope of the exemption is
described below. Generally speaking, the exemption is intended to apply
to CTAs that provide commodity trading advice by means of media such as
newsletters, Internet web sites, and non-customized computer
software.\1\ For purposes of convenience, these CTAs will be referred
to as ``Section 4.14(a)(9) CTAs.'' \2\
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\1\ In this notice, the term ``commodity trading advice'' refers
to advice with respect to trading in a ``commodity interest,'' as
defined in Commission Rule 3.1(f), 17 CFR 3.1(f).
\2\ ``Section 4.14(a)(9)'' is a shorthand reference to Section
4.14(a)(9) of the Commission's Rules, 17 CFR 4.14(a)(9), at which
the proposed exemption would be codified, if promulgated.
A person that provides commodity trading advice by means of
newsletters, Internet web sites, or similar means falls within the
statutory definition of ``commodity trading advisor'' unless the
person is a ``publisher or producer of.. print or electronic data of
general and regular dissemination'' and the furnishing of commodity
trading advice is ``solely incidental to the conduct of their
business or profession.'' See Sections 1a(5) (B) and (C) of the Act,
7 U.S.C. 1a(5) (B) and (C) (1994); In re R&W Technical Services,
Ltd., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
27,582 (CFTC Mar. 16, 1999); In re Armstrong, [1992-1994 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 25,657 (CFTC Feb. 8, 1993).
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Over the last several years, the Commission has been involved in
several litigated cases that address whether CTAs that provide advice
through newsletters, Internet web sites, or similar means can be
required to register under Section 4m(1) of the CEA. In two of those
cases, Taucher v. Born, 53 F. Supp. 2d 464 (D.D.C. 1999) (appeal
pending), and Commodity Trend Service v. CFTC, No. 97 C 2362 (N.D. Ill.
Sept. 28, 1999), federal district courts held that the Section 4m(1)
registration requirement constitutes an unconstitutional prior
restraint in violation of the First Amendment as applied to the
plaintiffs.\3\ In both cases, the plaintiffs provided only standardized
commodity trading advice through a variety of media, including Internet
web sites, computer software, voice recordings accessible by telephone,
e-mails, facsimiles, and periodicals. Moreover, the plaintiffs in these
cases did not have discretionary control over their clients' accounts,
did not provide advice tailored to the financial situation of any
specific client, and had no personal contact with their clients. All of
the information provided to each client was identical.
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\3\ Both district courts relied on Lowe v. SEC. 472 U.S. 181
(1985), in which the Supreme Court held that the Investment Advisers
Act of 1940, which regulates investment advisers in the securities
industry, should be interpreted to apply only to persons who provide
personalized advice. The district courts relied primarily on the
concurring opinion in Lowe, which rested on constitutional grounds.
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The Commission has not itself determined that applying Section
4m(1) to Section 4.14(a)(9) CTAs violates the Constitution or that the
district court decisions in Taucher and CTS represent a complete and
accurate statement of the constitutional limits of Congress's power
with respect to the regulation of Section 4.14(a)(9) CTAs. The
Commission has nevertheless determined that it may be appropriate to
exempt Section 4.14(a)(9) CTAs from registration for the following
reasons:
1. Taucher and CTS have created legal uncertainty as to whether
Section 4.14(a)(9) CTAs may be required to register with the
Commission. Absent a Supreme Court decision on the issue, continued
litigation is unlikely to eliminate this uncertainty for a considerable
period of time. Moreover, litigation of First Amendment issues has
required the expenditure of considerable resources by the Commission
and, in some instances, has complicated the investigation and
prosecution of fraud by CTAs.
2. Whatever the courts may determine to be the precise
constitutional limits of Congressional authority in this area, the
Commission believes that minimizing impact on speech, other than
deceptive or misleading speech, is a relevant policy consideration in
determining the Commission's regulatory approach toward CTAs whose
relationship with their clients is limited to communications through
media such as newsletters, Internet web sites, and non-customized
computer software.
II. The Proposed Rule
The proposed rule would add a new subsection to Commission Rule
4.14 to create an additional exemption from registration for certain
CTAs. The new exemption is expressed in negative terms: the rule
exempts CTAs that are not engaged in the types of advisory activities
specified in the new subsection. A CTA would have to meet all of the
specified conditions to qualify for the proposed exemption. The general
intent of the proposed rule is to retain the registration requirement
for CTAs whose advisory activities may be licensed even under the
constitutional standards implicit in the district court decisions in
Taucher and Commodity Trend Service.
Proposed Subsection 4.14(a)(9)(i) provides that, to qualify for the
exemption, a CTA may not direct client accounts. As defined by
Commission Rule 4.10(f), ``[d]irect, as used in the context of trading
commodity interest accounts, refers to agreements whereby a person is
authorized to cause transactions to be effected for a client's
commodity interest account without the client's specific
authorization.'' Such authority creates a business relationship between
the CTA and the client that clearly goes beyond speech. Registration of
CTAs that direct client accounts thus raises no First Amendment issue.
Proposed Subsection 4.14(a)(9)(ii) provides that a CTA qualifies
for the exemption only if it does not provide
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commodity interest trading advice based on, or tailored to, the
commodity interest or cash market positions or other circumstances or
characteristics of particular clients. A CTA that provides this kind of
advice carries out a function comparable to that of a traditional
professional. See Lowe v. SEC, 472 U.S. 181, 232-33 (1985) (White, J.,
concurring). This provision is intended to preserve the registration
requirement for CTAs whose knowledge of their clients is limited to
information concerning a particular commodity interest account or
particular commodity interest trading activity, as well as to CTAs who
base their advice on a broader range of information about the client.
Moreover, so long as the CTA's advice was based on or tailored to such
information, the CTA would have to register even if it gave the same
advice to groups of similarly situated clients.
Proposed Subsection 4.14(a)(9)(iii) provides that a CTA qualifies
for the exemption only if it does not provide commodity interest
trading advice through personally interactive communications with
individual clients, such as face-to-face conversations; telephone
conversations; or electronic mail exchanges between individuals. The
use of such means of communications implies that the advisor is giving
advice in the context of a relationship with the client that is more
personal than the remote and standardized relationship between the
publisher of a newsletter or non-custom software and its readers or
users.
It is the intent of the Commission that a CTA that manages a
client's trading under some type of informal arrangement should be
required to register even if the CTA is not authorized to cause
transactions to be effected without the client's specific
authorization, and therefore does not ``direct'' the client's accounts.
The Commission, however, has not proposed that an explicit condition to
this effect be included in the proposed exemption rule. The Commission
believes that, in practice, a CTA that manages a client's trading, but
does not ``direct'' the client's account, would almost certainly fail
to meet the conditions set forth in the proposed subsections
4.14(a)(9)(ii) and 4.14(a)(9)(iii). As a result, the Commission does
not believe that a separate subsection dealing with CTAs that manage
their clients' trading under informal arrangements is necessary. The
Commission invites comments on whether this belief is accurate and on
whether a subsection dealing explicitly with CTAs that manage their
clients' trading under informal arrangements should be added to the
proposed exemption.
Under the proposed rule, any CTA that meets all of the conditions
of proposed Subsection 4.14(a)(9) would not be required to register
with the Commission as a requirement for doing business as a CTA. Such
a CTA, unless it chose to register voluntarily, also would be exempt
from the various regulatory requirements set forth in the CEA and the
Commission's rules that, by their terms, apply only to registrants or
persons required to be registered. For example, an exempt CTA would not
be subject to the recordkeeping and production requirements of Section
4n(3)(A) of the CEA and Commission Rule 4.33, the ethics training
requirement of Section 4p(b) of the CEA, or liability for reparations
under Section 14 of the CEA.
An exempt CTA would still be subject to those provisions of the CEA
andthe Commission's rules that, by their terms, apply to CTAs without
regard to registration. These include Section 4o of the CEA, which
prohibits fraud by CTAs; Commission Rule 4.30, which, broadly speaking,
prohibits CTAs from handling clients' funds; Commission Rule 4.41(a),
which prohibits deceptive advertising by CTAs; and Commission Rule
4.41(b), which requires representations concerning simulated or
hypothetical performance results by CTAs to be accompanied by
disclosures describing the limitations of such results as an indicator
of actual performance. Exempt CTAs also would be subject to those
provisions of the CEA that apply to any person, including, for example,
Section 4b of the CEA, which prohibits certain forms of fraud.
Similarly, the proposed exemption would not alter the duty of a Section
4.14(a)(9) CTA to register with the Commission in a capacity other than
as a CTA, if the CTA, in addition to its advisory activities, engages
in other business activities that require such registration.
Should the Commission proceed to adopt a final rule, an exempt CTA
that wanted to register or retain its current registration, for
example, to enhance the confidence of clients or potential clients,
would be entitled to register voluntarily.
III. Examples
In order to convey the intent of the proposed exemption, the
following examples illustrate how the proposed rule would operate in
specific situations:\4\
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\4\ In all of the following examples, the CTA remains subject to
requirements of the Act or the Commission's regulations that apply
to all CTAs without regard to registration, such as Section 4o of
the Act and Commission Rule 4.41(a) and (b), as well as to
provisions that apply to any person, such as Section 4b of the Act,
to the extent that the CTA's actions fall within the activities
proscribed by those provisions.
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A. A CTA provides commodity trading advice only through
newsletters, books, and periodicals. The advice includes specific
recommendations, such as recommendations to buy or sell specific
futures contracts should a particular price level be reached.
Recipients of publications all receive the same advice. The CTA does
not have powers of attorney from any of his clients to trade accounts.
Under proposed Rule 4.14(a)(9), this CTA would be exempt from the
Section 4m registration requirement.
B. A CTA provides specific commodity trading advice through e-
mails, facsimiles, and an Internet web site. The advice is based on a
computerized trading system, which also is available for purchase and
use on a personal computer. Such advice is provided on a daily basis
and is reactive to the latest market activity. The advice consists only
of an instruction to buy or sell a futures contract and where, if at
all, to place a stop order. The CTA's clients all receive the same
advice. The CTA does not have powers of attorney from any of his
clients to trade accounts, although many clients follow the CTA's
advice exactly. Under proposed Rule 4.14(a)(9), this CTA would be
exempt from the Section 4m registration requirement.
C. A CTA sells a computerized trading system like the system
described in example B. The CTA does not have powers of attorney from
any of its clients to trade accounts. In telephone conversations with
clients, the CTA discusses technical questions concerning the software,
such as how to install the application and computer memory
requirements. Such advice is not ``trading'' advice within the meaning
of proposed Rule 4.14(a)(9)(iii). Under proposed Rule 4.14(a)(9), this
CTA would be exempt from the Section 4m registration requirement.
D. A CTA provides commodity trading advice through a weekly print
periodical and invites readers to contact him by telephone with further
questions. Each week, several readers of the publication call the CTA
to inquire about the CTA's confidence in his published recommendations.
The CTA does not have a power of attorney to trade any of his
subscribers' accounts. The CTA responds to readers' questions
personally on the telephone but does so with no knowledge of the
reader's
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investment portfolio, tolerance for risk, investment goals or other
personal characteristics. Under proposed Rule 4.14(a)(9)(iii), this CTA
would not be exempt from the Section 4m registration requirement,
because it provides commodity trading advice through interactive
communications with individual clients.
E. A CTA has a computerized trading system like the system
described in example B. The CTA meets with his clients individually and
face-to-face, and gives all of them identical trading advice that is
based on what the computer system advises. The CTA does not have a
power of attorney to trade any of his clients' accounts. Under proposed
Rule 4.14(a)(9)(iii), this CTA would not be exempt from the Section 4m
registration requirement, because he provides commodity trading advice
through interactive communications with individual clients.
F. A CTA advises his clients only through facsimile messages and
does not discuss his advice with them. The CTA does not have a power of
attorney to trade any of his clients' accounts. Before advising any
client, the CTA first gathers current knowledge about the client's
current futures holdings and net cash available for futures
investments. The CTA's advice is different for different clients,
depending on their profile. However, the CTA sends similar advice to
groups of clients with similar profiles. Under proposed Rule
4.14(a)(9)(ii), this CTA would not be exempt from the Section 4m
registration requirement, because he provides commodity trading advice
based on, or tailored to, the commodity interest or cash market
positions or other circumstances or characteristics of particular
clients.
IV. Request for Comments
The Commission specifically encourages members of the public to
submit comments on the following issues, in addition to all other
issues relevant to the proposed rule:
1. Should the rule include a provision explicitly stating that the
proposed exemption does not apply to CTAs that manage their clients'
commodity interest trading under informal arrangements? If so, what
language should be used to characterize such CTAs for purposes of the
exemption?
2. Should CTAs falling within the scope of the proposed exemption
be subject to any regulatory requirements beyond the requirements, such
as Section 4o of the CEA and Commission Rule 4.41, that apply to other
exempt CTAs? If so, what should those requirements be? For example,
should Section 4.14(a)(9) CTAs still be subject to recordkeeping
requirements?
3. Are there any categories of CTAs that are not included within
the scope of the proposed exemption but should be?
4. Are there any categories of CTAs that are included within the
scope of the proposed exemption but should not be?
V. Statutory Authority
Pursuant to Sections 4(c)(1) and 8a(5) of the CEA, 7 U.S.C. 6(c)
and 12a(5), the Commission has statutory authority to promulgate the
proposed rule. The proposed rulemaking would revise the authority
citation for Part 4 to include 7 U.S.C. 6(c).
VI. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small business. 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.\5\ With respect to CTAs, the Commission has
stated that it would evaluate within the context of a particular rule
proposal whether all or some affected CTAs would be considered to be
small entities and, if so, the economic impact on them of any rule.
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\5\ 47 FR 18618-21 (Apr. 30, 1982).
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The proposed exemption would reduce or remove existing economic
burdens. Moreover, the registration requirements that would be affected
by the proposed rule involve only minimal economic burdens, except in
the case of the limited number of CTAs who may fail to qualify for
registration under Section 8a of the CEA because of disciplinary or
other disqualifying factors. Therefore, the Chairman of the Commission
hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed rule
will not have a significant economic impact on a substantial number of
small entities. Such a certification is consistent with the regulatory
flexibility analysis conducted by the Commission in a previous
rulemaking exempting certain persons from the CTA registration
requirement.\6\ Nonetheless, the Commission specifically requests
comment on the impact this proposed rule may have on small entities.
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\6\ See 52 FR 41983 n.57 (Nov. 2, 1987).
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B. Paperwork Reduction Act
Proposed Rule 4.14(a)(9) affects information collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Commission has submitted a copy of this section to
the Office of Management and Budget (OMB) for its review.
1. Collection of Information: Rules Relating to the Operations and
Activities of Commodity Pool Operators and Commodity Trading Advisors
and to Monthly Reporting by Futures Commission Merchants, OMB Control
Number 3038-0005.
The expected effect of the proposed rule will be to reduce the
burden previously approved by OMB for this collection of information by
18,200 hours because it will exempt certain commodity trading advisors
from the registration requirement in Section 4m(1) of the Commodity
Exchange Act and associated recordkeeping requirements. Specifically
the burden associated with Commission Rule 4.33 is expected to be
reduced by 18,200 hours:
Estimated number of respondents (after proposed exemption): 2,000.
Annual responses by each respondent: 1.
Total annual responses: 2000.
Estimated average hours per response: 26.
Annual reporting burden: 52,000 hours.
This annual reporting burden of 52,000 hours represents a reduction of
18,200 hours as a result of the proposed new rule. (The estimated
burden figure of 52,000 hours for Rule 4.33 is higher than the Rule
4.33 burden figure previously reported to the Office of Management and
Budget. The Commission, however, believes that the previously reported
figure may be based on an incorrect figure for the number of CTAs.)
2. Collection of Information: Rules, Regulations and Forms for
Domestic and Foreign Futures and Options Relating to Registration with
the Commission, OMB Control Number 3038-0023.
The expected effect of the proposed rule will be to reduce the
burden previously approved by OMB for this collection of information by
311 hours because it will exempt certain commodity trading advisors
from the registration requirement in Section 4m(1) of the Commodity
Exchange Act and associated reporting and recordkeeping requirements.
Specifically:
The burden associated with Commission Rule 3.10(a), Form 7-R, as
applied to CTAs is expected to be reduced by 72 hours:
Estimated number of respondents (after proposed exemption): 350.
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Annual responses by each respondent: 1.
Total annual responses: 350.
Estimated average hours per response: .40.
Annual reporting burden: 140 hours.
This annual reporting burden of 140 hours represents a reduction of 72
hours as a result of the proposed new rule.
The burden associated with Commission Rule 3.10(a), Form 8-R, is
expected to be reduced by 99 hours:
Estimated number of respondents (after proposed exemption): 2800.
Annual responses by each respondent: 1.
Total annual responses: 2800.
Estimated average hours per response: .33.
Annual reporting burden: 924 hours.
This annual reporting burden of 924 hours represents a reduction of 99
hours as a result of the proposed new rule.
The burden associated with Commission Rule 3.10(d) is expected to
be reduced by 140 hours:
Estimated number of respondents (after proposed exemption): 3100.
Annual responses by each respondent: 1.
Total annual responses: 3100.
Estimated average hours per response: .20.
Annual reporting burden: 620 hours.
This annual reporting burden of 620 hours represents a reduction of 140
hours as a result of the proposed new rule.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Commodity Futures Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in--
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of
the burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated electronic, mechanical, or other technological collection
techniques or other forms of information technology; e.g., permitting
electronic submission of responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW,
Washington DC 20581, (202) 418-5160.
List of Subjects in 17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 4 as follows:
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
1. The authority citation for part 4 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6b, 6c, 6l, 6m, 6n, 6o, 12a and
23.
2. Section 4.14 is amended by adding paragraph (a)(9) to read as
follows:
Sec. 4.14 Exemption from registration as a commodity trading advisor.
(a) * * *
(9) It does not engage in any of the following activities:
(i) Direct client accounts;
(ii) Provide commodity interest trading advice based on, or
tailored to, the commodity interest or cash market positions or other
circumstances or characteristics of particular clients; or
(iii) Provide commodity interest trading advice through interactive
communications with individual clients, such as face-to-face or
telephone conversations or electronic mail exchanges between
individuals.
* * * * *
Dated: December 2, 1999.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-31687 Filed 12-6-99; 8:45 am]
BILLING CODE 6351-01-P
