[Federal Register Volume 62, Number 45 (Friday, March 7, 1997)]
[Rules and Regulations]
[Pages 10441-10445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5561]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 31
Financial Reports of Futures Commission Merchants, Introducing
Brokers and Leverage Transaction Merchants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final Rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is amending its Rule 1.10(d)(4), which requires that
each Form 1-FR filed with the Commission contain an oath or affirmation
attesting that, to the best knowledge and belief of the individual
making such oath or affirmation, the information contained therein is
true and correct. The amended rule provides that, for the purposes of
making this attestation when filing a financial report with the
Commission electronically, the use of a personal identification number
(``PIN'') will be deemed to be the equivalent of a manual
signature.1 The Commission also is amending Rule 1.10(c) to
account for the possibility that registrants may choose to file certain
financial reports electronically using a Commission issued PIN rather
than filing such reports in paper form with the regional office of the
Commission nearest the principal place of business of the registrant.
Rule 1.10(c) will permit electronic filing of financial reports that
are not required to be certified by an independent public accountant
provided that the Commission obtains the means to read and process the
electronically transmitted data.2 The Commission also is adding
Rule 1.10(b)(2)(iii) to clarify that certified financial reports may
not be filed electronically.
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\1\ Commission Rule 1.10(h) permits registrants that are also
registered as securities broker-dealers with the Securities and
Exchange Commission to file a copy of their Financial and
Operational Combined Uniform Single Report (``FOCUS'') with the
Commission in lieu of Form 1-FR. The amendments discussed herein are
intended to apply equally to registrants who file Form 1-FR or FOCUS
with the Commission.
\2\ The Commission currently is involved in discussions with the
Chicago Mercantile Exchange (``CME'') to obtain the electronic
filing software co-developed by CME and the Chicago Board of Trade
(``CBT'') and used by CME, CBT and their members.
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In addition, the Commission is amending Rules 1.10(g) and 31.13(m)
to clarify that certain portions of the financial reports will be
deemed public and other portions nonpublic, and to eliminate the
requirement that firms filing financial reports need to separately bind
portions of such reports generally treated as nonpublic in order for
such portions of the reports to be accorded nonpublic treatment.
EFFECTIVE DATE: April 7, 1997.
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Lawrence T. Eckert, Attorney Adviser, Division of Trading
and Markets, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington D.C. 20581. Telephone (202) 418-5450.
SUPPLEMENTARY INFORMATION:
I. Background
On October 25, 1996, the Commission published for comment proposed
amendments to Rule 1.10 (the ``Proposals''),3 which sets forth the
financial reporting requirements for futures commission merchants
(``FCMs'') and independent introducing brokers (``IBIs'').4 Rule
1.10 requires
[[Page 10442]]
generally that FCMs file with the Commission financial reports on Form
1-FR-FCM each quarter and that IBIs file financial reports on Form 1-
FR-IB semiannually.5 The Proposals consisted of several amendments
concerning the electronic filing of such financial reports, as well as
the treatment of the various portions of financial reports as either
public or nonpublic, whether filed electronically or in paper form.
Specifically, the Proposals: (1) provide that for the purposes of
making the attestation under Rule 1.10(d)(4) as to the truth and
correctness of information contained in electronically filed financial
reports, the use of a PIN would be deemed to be the equivalent of a
manual signature; 6 (2) account for the possibility that
registrants may choose to file electronically financial reports which
need not be certified by an independent public accountant; (3) clarify
that certified financial reports may not be filed electronically; (4)
clarify that certain portions of the financial reports will be deemed
public and other portions nonpublic; and (5) eliminate the requirement
that firms filing financial reports bind separately the portions of
such reports generally treated as nonpublic in order for such portions
of the reports to be accorded nonpublic treatment.
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\3\ 61 FR 55235.
\4\ Approximately two-thirds of introducing brokers enter into a
guarantee agreement with an FCM and thus are not required to raise
their own regulatory capital or file financial reports.
\5\ The Commission recently adopted amendments to certain of its
financial reporting requirements for FCMs and IBIs, including time
requirements for filing Form 1-FR. See 62 FR 4633 (Jan. 31, 1997).
\6\ See also, CFTC Interpretative Letter 96-21, [1994-1996
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,633 (Feb. 29,
1996) (no-action letter issued to the CBT concerning the attestation
of financial reports where an FCM is organized as a partnership);
Advisory 12-96, reprinted as CFTC Advisory 96-21 in [1994-1996
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,640 (March 8,
1996) (making relief provided to CBT available to all FCMs, IBIs and
self-regulatory organizations (``SROs'')); Advisory 28-96, [1994-
1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,711 (May 28,
1996) (alerting FCMs, IBs and SROs that to the extent that any SRO
program for electronic filing of financial reports approved by the
Commission does not require a manual signature for purposes of
attestation, the use of a PIN would be deemed to be the equivalent
of a manual signature for purposes of attestation under Commission
Rule 1.10(d)(4)).
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The 30-day public comment period on the Proposals expired on
November 25, 1996. The Commission received one written comment on the
Proposals, submitted by National Futures Association (``NFA''). In
general, NFA noted its strong support for the Commission's Proposals to
allow FCMs and IBIs to file certain financial reports electronically,
but requested that the Commission clarify and revise certain aspects of
the proposed amendments. The Commission has considered carefully the
comments received from NFA. The Commission has determined to adopt the
amendments as proposed with one minor modification. Amended Rule
1.10(c) now clarifies that, while the Commission intends to permit the
electronic filing of noncertified financial reports, it will permit
such electronic filing only after such time as the Commission obtains
the necessary computer software to read and process the electronically
transmitted data. The Commission also has clarified various matters
relevant to the operation of the amended rules in the discussion below.
II. Rule Amendments
A. Electronic Filing Issues
The Commission proposed to amend Rule 1.10(d)(4) such that the use
of a PIN in filing a Form 1-FR pursuant to Rule 1.10 will be deemed to
be the equivalent of a manual signature under the rule. The Commission
did not receive any comments concerning the language of this proposed
amendment and is adopting the provision as proposed. The amended rule,
therefore, makes clear that the transmission of a financial report to
the Commission or an SRO under a PIN constitutes a representation that
the person whose PIN is used in such transmission attests that, to the
best knowledge and belief of that person, the information contained in
the financial report is true, correct and complete.7 The
Commission hopes that this amendment will encourage and facilitate the
process of electronic filing of such reports with the Commission but
notes that, while it encourages the use of the electronic filing
option, the amendments do not mandate electronic filing with the
Commission.8
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\7\ Commission Rule 1.10(c) provides that financial reports must
be filed with the Commission and the firm's designated self-
regulatory organization (``DSRO'').
\8\ The Commission may determine to require electronic filing at
some later period, but believes such a requirement would be
premature at this time. The Commission also encourages the industry
to develop a system of electronic filing of financial reports that
will provide for the development of a uniform database of financial
information with the least burden upon filers, SROs and the
Commission.
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In the Proposals, the Commission noted that it intends to adopt
procedures for issuing PINs to facilitate electronic filing with the
Commission consistent with the procedure currently in use by SROs such
as CBT and the CME.9 In this regard, NFA stated in its comment
letter that it fully supports the use of PINs as described in the
Proposals. However, NFA recommended that, with respect to those firms
that are members of an SRO, the Commission should permit the
registrant's SRO to assign one PIN to be used by the registrant to file
financial reports with both the Commission and the firm's DSRO. Thus,
the Commission could avoid the situation where a registrant would need
to use multiple PINs to file electronically. NFA stated its belief that
such a situation could be a disincentive to filing electronically with
the Commission. The Commission has discussed this issue with CME, which
did not provide a written comment on this issue, but would be affected
along with the other exchanges by adoption of NFA's proposal. CME
stated that, for security reasons, each entity receiving an
electronically filed financial report should assign a unique PIN to
each filer. If a PIN is too widely known, an issue arises as to the
value of the use of the PIN for attestation purposes. Additionally, CME
noted that the software used by FCMs would have to be modified in order
to allow the PIN number currently used with the exchange also to be
used when filing with the Commission. Finally, as NFA's proposed
electronic filing system is evolving, it appears that there may not be
a need for the Commission to have a PIN for firms for which NFA is the
DSRO. NFA is proposing to have the firms for which it is the DSRO file
financial reports directly with NFA. Under this framework, NFA would
then transmit the electronically filed reports to the Commission. In
light of the foregoing, the Commission anticipates that it will issue
unique PINs to FCMs that choose to file their financial reports with
the Commission electronically.
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\9\ 61 FR 55235, at 55236.
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The Commission also proposed to add new Rule 1.10(b)(2)(iii) and to
amend paragraph (c) of Rule 1.10 to provide certain clarifications
regarding the Commission's electronic filing program. New Rule
1.10(b)(2)(iii), as set forth in the Proposals, clarified that firms
may not file electronically their certified financial reports, which
must accompany the application for registration and be submitted as of
each fiscal year-end following registration. The amendment to Rule
1.10(c) clarified that a registrant may file non-certified financial
reports via electronic transmission using a Commission issued PIN in
accordance with instructions issued by the Commission. NFA requested
that the Commission delete the proposed addition of Rule
1.10(b)(2)(iii) as well as the reference in the proposed amendment to
Rule 1.10(c) with respect to ``reports which need not be certified * *
*.'' NFA acknowledged that technology does not yet permit the
electronic filing of a complete certified report, but recommended that
the Commission include any electronic
[[Page 10443]]
filing restrictions in the instructions to the forms to be filed rather
than in Rule 1.10 itself, in order to accommodate future technology.
The Commission believes that references to filing restrictions in the
rules themselves promote clarity. Should the Commission wish to permit
the filing of certified financial reports in order to accommodate new
technology as it becomes available, the Commission could readily amend
Rule 1.10 to account for such change. Accordingly, the Commission is
adopting new Rule 1.10(b)(2)(iii) as proposed. The Commission is,
however, making one minor modification to the proposed amendment to
Rule 1.10(c). As adopted, amended Rule 1.10(c) clarifies that the
Commission's electronic filing program will begin only if the
Commission can obtain the computer software necessary to read and to
process the data contained in the electronically filed reports. The
Commission wishes to avoid a situation in which registrants would be
required to use software to file their financial reports with the
Commission that is different from the software used to file such
reports with their DSRO. As noted above, the Commission currently is
engaged in discussions with CME in an attempt to obtain the computer
software co-developed by CME and CBT and used by CME, CBT and their
members as part of CME's and CBT's electronic filing programs.
The Commission further noted in the Proposals that, at the outset
of its electronic filing program, firms filing non-certified financial
reports electronically must continue to file a paper report with the
appropriate regional office of the Commission. The Commission explained
that, following some experience with electronic transmission of
financial data (the ``Pilot Period''), it may be permissible for firms
to submit non-certified financial reports to the Commission solely via
electronic transmission. In this regard, NFA encouraged the Commission
to keep its Pilot Period with respect to its electronic filing program
brief, stating that firms have little incentive to file with the
Commission electronically if they also are required to file their
reports in paper form. NFA also requested that the Commission clarify
that the Pilot Period is intended for the Commission to gain experience
with the electronic filing program itself and is not meant to serve as
a testing period for each individual firm's use of the system. The
Commission shares NFA's views on these points and anticipates
permitting firms to file their non-certified financial reports solely
via electronic transmission as quickly as practicable, given an
adequate time period in which the Commission can gain experience with
the electronic filing program. At the conclusion of its Pilot Period,
the Commission intends to change its instructions regarding filing to
eliminate the requirement that a firm file a paper copy of its
financial report in addition to filing such report electronically. The
Commission does not anticipate that additional rulemaking would be
necessary to accomplish this.
B. Freedom of Information Act Issues
In the Proposals, the Commission noted that, consistent with
current practice, the Commission intends to respond to a Freedom of
Information Act (``FOIA'') request for a financial report that was
filed with the Commission solely by electronic transmission by printing
a paper copy of the responsive public data and forwarding it to the
requestor. The data which the Commission would print and forward to the
requestor would be the public portions of a Form 1-FR. Commission Rule
1.10(g) provides that these public portions are, for FCMs and IBIs, the
statement of financial condition and the statement of the computation
of the minimum capital requirements, and, in addition, for FCMs only,
the statements concerning segregation of customer funds and the secured
amount for foreign futures and option customers. The proposed
amendments to Rule 1.10(g) would reconfirm the current demarcation as
to which portions of the Form 1-FR are generally treated as public and
nonpublic and eliminate the need for firms to use a separate binding
procedure to receive such treatment for their reports, whether reports
are filed in paper form or electronically. The Commission received no
comments with respect to the proposed amendments to Rule 1.10(g)
10 and is adopting them as proposed.
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\10\ Although there are currently no registered leverage
transaction merchants (``LTMs''), the Commission is also amending
Rule 31.13(m) which currently provides for a separate binding
procedure similar to that set forth in Rule 1.10(g) with respect to
LTMs submitting financial reports on Form 2-FR.
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The Commission has proposed to clarify, in a separate release, its
rules under FOIA and the Government in the Sunshine Act (``GINSA'') in
order to, among other things: (1) reaffirm that certain portions of the
Form 1-FR are generally public and the remainder are nonpublic; and (2)
state that it will no longer process petitions for confidential
treatment of the generally public portions of a Form 1-FR.11 The
amendments to Rule 1.10(g)(1) and(2) 12 are intended to complement
these proposed amendments of the FOIA and GINSA rules and to eliminate
a burden on firms to bind separately certain portions of a Form 1-FR to
assure nonpublic treatment.
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\11\ 61 FR 66949 (Dec. 19, 1996).
\12\ The Commission has removed and reserved paragraph (g)(3)
and revised paragraph (g)(5) of Rule 1.10. 62 FR 4633, 4637 and
n.17, 4640. The amendments discussed herein do not interfere with or
require further amendment of those earlier amendments.
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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 rules discussed herein will affect
FCMs, LTMs and IBIs. The Commission already has established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its rules on such small entities in accordance
with the RFA.13 FCMs and LTMs 14 have been determined not to
be small entities under the RFA.
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\13\ 47 FR 18618-18621 (April 30, 1982).
\14\ See 50 FR 102, 108 n.11 (Jan. 2, 1985).
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With respect to IBIs, the Commission has stated that it is
appropriate to evaluate within the context of a particular rule
proposal whether some or all IBs should be considered to be small
entities and, if so, to analyze the economic impact on such entities at
that time.15 These rule amendments do not require any IBI to
submit financial reports electronically but only govern the attestation
of the completeness and accuracy of such reports so filed. Presumably,
an IBI would choose to file a financial report electronically only if
it were cost-effective to do so. These rule amendments should impose no
additional burden or requirements on an IBI and thus would not have a
significant economic impact on a substantial number of IBIs.
Accordingly, pursuant to Rule 3(a) of the RFA, 5 U.S.C. 605(b), the
Chairperson, on behalf of the Commission, certifies that these
amendments will not have a significant economic impact on a substantial
number of small entities.
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\15\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), Pub. L. 104-13 (May 13,
1995) imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of
[[Page 10444]]
information as defined by the PRA. While these rule amendments have no
burden, the group of rules (3038-0024) of which they are a part has the
following burden:
Average Burden Hours Per Response: 128.
Number of Respondents: 3,988.
Frequency of Response: Quarterly, Monthly or On Occasion.
Copies of the OMB approved information collection package may be
obtained from Desk Officer, CFTC, Office of Management and Budget, Room
10202, NEOB, Washington, DC 20503 (202) 395-7340.
List of Subjects
17 CFR Part 1
Commodity futures; Minimum financial and related reporting
requirements.
17 CFR Part 31
Leverage transactions; Reporting and recordkeeping requirements.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in partic ular, Sections
4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), the Commission
hereby amends parts 1 and 31 of chapter I of title 17 of the Code of
Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
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,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6m, 6o, 6p, 7, 7a, 7b, 8, 9, 12,
12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.
2. Section 1.10 is amended by adding paragraph (b)(2)(iii) and
revising paragraphs (c), (d)(4), (g)(1) and (g)(2) to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(b) * * *
(2) * * *
(iii) A Form 1-FR required to be certified by an independent public
accountant in accordance with Sec. 1.16 which is filed by a futures
commission merchant, an introducing broker or an applicant for
registration in either category, must be filed in paper form and may
not be filed electronically.
* * * * *
(c) Where to file reports. The reports provided for in this section
will be considered filed when received by the regional office of the
Commission nearest the principal place of business of the registrant
(except that a registrant under the jurisdiction of the Commission's
Western Regional Office must file such reports with the Southwestern
Regional Office) and by the designated self regulatory organization, if
any; and reports required to be filed by this section by an applicant
for registration will be considered filed when received by the National
Futures Association and by the regional office of the Commission
nearest the principal place of business of the applicant (except that
an applicant under the jurisdiction of the Commission's Western
Regional Office must file such reports with the Southwestern Regional
Office): Provided, however, That any report filed pursuant to
paragraphs (b)(1), (b)(2) or (b)(4) of this section or Sec. 1.12(a) or
(b) which need not be certified in accordance with Sec. 1.16 may be
submitted to the Commission in electronic form using a Commission-
assigned Personal Identification Number, and otherwise in accordance
with instructions issued by the Commission, if the Commission has
obtained the means necessary to read and to process the information
contained in such report: And, provided further, That information
required of a registrant pursuant to paragraph (b)(4) of this section
need be furnished only to the self-regulatory organization requesting
such information and the Commission, and that information required of
an applicant pursuant to paragraph (b)(4) of this section need be
furnished only to the National Futures Association and the Commission:
And, provided further, That any guarantee agreement entered into
between a futures commission merchant and an introducing broker in
accordance with the provisions of this section need be filed only with
and will be considered filed when received by the National Futures
Association.
(d) * * *
(4) Attached to each Form 1-FR 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 is true and correct. If the applicant or registrant is a
sole proprietorship, then the oath or affirmation must be made by the
proprietor; if a partnership, by a general partner; or if a
corporation, by the chief executive officer or chief financial officer.
In the case of a Form 1-FR filed via electronic transmission in
accordance with procedures established by the Commission, such
transmission must be accompanied by the Commission-assigned Personal
Identification Number of the authorized signer and such Personal
Identification Number 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 this paragraph.
* * * * *
(g) Nonpublic treatment of reports. (1) The following portions of
Forms 1-FR filed pursuant to this section will be public: the statement
of financial condition, the statement of the computation of the minimum
capital requirements, the statements (to be filed by a futures
commission merchant only) of segregation requirements and funds in
segregation for customers trading on U.S. commodity exchanges and for
customers' dealer options accounts, and the statement (to be filed by a
futures commission merchant only) of secured amounts and funds held in
separate accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter. The other financial
statements (including the statement of income (loss)), footnote
disclosures and schedules of Form 1-FR, trade secrets and certain other
commercial or financial information on such other statements and
schedules will be treated as nonpublic for purposes of the Freedom of
Information Act and the Government in the Sunshine Act and parts 145
and 147 of this chapter.
(2) The following portions of copies of the Financial and
Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934, Part II or Part IIA filed pursuant to paragraph
(h) of this section, will be public: The statement of financial
condition, the computations of net capital and the minimum capital
requirements, the statements (to be filed by a futures commission
merchant only) of segregation requirements and funds in segregation for
customers trading on U.S. commodity exchanges and for customers' dealer
options accounts, and the statement (to be filed by a futures
commission merchant only) of secured amounts and funds held in separate
accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter. The other financial
statements (including the statement of income (loss)), footnote
disclosures and schedules of the Financial and Operational Combined
Uniform Single Report under the Securities and Exchange Act of 1934,
Part II or Part IIA, trade secrets and certain other commercial or
financial
[[Page 10445]]
information on such other statements and schedules will be treated as
nonpublic for purposes of the Freedom of Information Act and the
Government in the Sunshine Act and parts 145 and 147 of this chapter.
* * * * *
PART 31--LEVERAGE TRANSACTIONS
3. The authority citation for Part 31 continues to read as follows:
Authority: 7 U.S.C. 12a and 23.
4. Section 31.13 is amended by revising paragraph (m) to read as
follows:
Sec. 31.13 Financial reports of leverage transaction merchants.
* * * * *
(m) The following portions of Form 2-FR filed pursuant to this
section will be public: The statement of financial condition, the
computation of the minimum capital requirements pursuant to Sec. 31.9,
the schedule of coverage requirements and cover provided, and the
schedule of segregation requirements and funds on deposit in
segregation. The other financial statements (including the statement of
income (loss)), footnote disclosures and schedules of Form 2-FR, trade
secrets and certain other commercial or financial information on such
other statements and schedules, will be treated as nonpublic for
purposes of the Freedom of Information Act and the Government in the
Sunshine Act and parts 145 and 147 of this chapter. All information on
such other statements, footnote disclosures and schedules will,
however, be available for official use by any official or employee of
the United States or any State, by any self-regulatory organization of
which the person filing such report is a member, by the National
Futures Association in the case of an applicant, and by any other
person to whom the Commission believes disclosure of such information
is in the public interest. The independent public accountant's opinion
filed pursuant to this section will be deemed to be public information.
* * * * *
Issued in Washington, D.C. on February 27, 1997 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-5561 Filed 3-6-97; 8:45 am]
BILLING CODE 6351-01-P
