2010-21726. Performance of Registration Functions by National Futures Association With Respect to Retail Foreign Exchange Dealers and Associated Persons

AGENCY:

Commodity Futures Trading Commission

ACTION:

Notice and order

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is authorizing the National Futures Association (“NFA”), effective September 10, 2010, to process and grant applications for initial registration, renewed registration and withdrawals of retail foreign exchange dealers (“RFEDs”) and their associated persons (“APs”) and to issue temporary licenses to eligible APs; to conduct proceedings to deny, condition, suspend, restrict or revoke the registration of any RFED or AP of an RFED, or an applicant for registration in either category; and to maintain records regarding RFEDs and their APs, and to serve as the official custodian of those Commission records.

DATES:

Effective Date: September 10, 2010.

FOR FURTHER INFORMATION CONTACT:

For information contact: William Penner, Deputy Director, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW, Washington, DC 20581. Telephone number: 202-418-5450; facsimile number: 202-418-5547; and electronic mail: [e-mail]. Christopher Cummings, Special Counsel, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number [phone]; facsimile number: 202-418-5547; and electronic mail: [e-mail].

SUPPLEMENTARY INFORMATION:

I. Authority and Background

In a separate document published elsewhere in today's Federal Register, the Commission is issuing final rules regarding the regulation of off-exchange retail foreign exchange transactions and intermediaries. The final rules follow the publication of proposed rules on January 20, 2010,^[1] and represent a comprehensive regulatory scheme to implement the requirements of the CFTC Reauthorization Act of 2008 (“CRA”) with regard to off-exchange retail forex transactions.^[2] The Commodity Exchange Act (“Act”),^[3] as amended by the CRA, provides that the Commission's jurisdiction extends to off-exchange contracts of sale of a commodity for future delivery (or an option on such a contract) or an option (other than an option executed or traded on a national securities exchange), and to certain off-exchange leveraged or margined contracts in foreign currency that are offered to or entered into with retail customers. Moreover, the CRA provides the Commission with the authority to register persons serving as intermediaries or counterparties to these transactions.

Specifically, the CRA gives the Commission the authority to require the registration of intermediaries who solicit retail customers to participate in off-exchange forex contracts, who pool customer money for the purpose of trading off-exchange currency contracts or who manage customer money for this purpose. In the final rules published today, the Commission has determined that these entities should be registered in the existing categories of introducing broker (“IB”), commodity pool operator (“CPO”), or commodity trading advisor (“CTA”), as appropriate.

The CRA also authorizes the Commission to register entities that serve as counterparties to such transactions, either within the existing category of futures commission merchant (“FCM”) or as an RFED, a new category of registrant. RFEDs are counterparties not engaged primarily or substantially in the offer and sale of exchange-traded futures (as opposed to FCMs, which are).^[4] The CRA provides that RFEDs, their APs, and each of the other categories of registrants discussed above, must be members of a registered futures association such as the National Futures Association (“NFA”) and must register with the Commission subject to such terms as the Commission may prescribe.^[5]

The CFTC has previously authorized NFA to perform the full range of registration functions with regard to FCMs, IBs, CTAs, CPOs and their respective APs, including granting applications for initial registration and renewed registration; enabling withdrawals and issuing temporary licenses to eligible APs; and conducting proceedings to deny, condition, suspend, restrict or revoke the registration of existing registrants or applicants for registration in each category.^[6] By today's order the Commission authorizes NFA to perform these functions with regard to RFEDs and their APs.

As proposed and adopted, Commission Regulations 5.3(a)(4) and (6) require all those who meet the definition of an RFED, and any such associated persons of RFEDs to register with the Commission in accordance with part 3 of the Commission's Regulations. (17 CFR 3.1, et seq.) Commission Regulation 3.2 provides that the registration functions of the Commission are to be performed by the National Futures Association. Upon consideration, the Commission has determined to authorize NFA, effective September 10, 2010, to perform registration functions with regard to RFEDs and their APs as set forth in part 3 of the Commission's Regulations. Moreover, Section 17(o)(2) of the Act provides that the Commission may authorize a registered futures association, such as NFA, to perform Commission registration functions, to deny, condition, suspend, restrict or revoke any registration, subject to Commission review.^[7] The Commission is therefore also authorizing NFA to take such actions with regard to RFED and AP applicants as well as existing registrants in each of these categories.

The Commission further notes that it has, by prior orders, authorized NFA to maintain various Commission registration records, and has certified NFA as the official custodian of such records for the Commission.^[8] The Commission has determined, in accordance with its authority under section 8a(10) of the Act, to authorize NFA to maintain and serve as official custodian of the Commission's registration records with respect to RFEDs and their APs.

In maintaining the Commission's registration records pursuant to this Order, NFA shall be subject to all other requirements and obligations imposed upon it by the Commission in existing or future Orders or regulations. In this regard, NFA shall also implement such additional procedures (or modify existing procedures) as are necessary to ensure the security and integrity of these records as may be acceptable to the Commission; to facilitate prompt access to these records by the Commission and its staff; to facilitate disclosure of public or nonpublic information in those records when permitted by Commission Orders or rules, and to keep logs as required by the Commission concerning disclosures of nonpublic information; and otherwise to safeguard the confidentiality of the records.

II. Conclusion and Order

The Commission has determined, in accordance with the provisions of Sections 2(c)(2)(B), 2(c)(2)(C), and 8a(10) of the Act, to authorize NFA, effective September 10, 2010 to perform the following registration functions:

(1) To process and grant applications for initial registration, renewed registration and withdrawals from registration of retail foreign exchange dealers (“RFEDs”) and their associated persons (“APs”) and to issue temporary licenses to eligible APs;

(2) To conduct proceedings to deny, condition, suspend, restrict or revoke the registration of any RFED or AP of an RFED, or any applicant for registration in either category; and

(3) To maintain records regarding RFEDs and their APs, and to serve as the official custodian of those Commission records.

NFA shall perform these functions in accordance with the standards established by the Act and the regulations promulgated thereunder. NFA shall follow the same procedures with respect to recordkeeping, disclosure and tracking of fitness investigations and adverse action proceedings concerning RFEDs and their APs as it must follow in cases involving FCMs, IBs, CPOs, CTAs, and their respective APs.

These determinations are based upon the Congressional intent expressed in sections 2(c)(2)(B), 2(c)(2)(C), 8a(10) and 17(o) of the Act. This Order does not, however, authorize NFA to accept or act upon requests for exemption from registration, or to render “no-action” or interpretive letters with respect to applicable registration requirements.

Nothing in this Order, or in sections 2(c)(2)(B), 2(c)(2)(C), 8a(10) and 17(o) of the Act, shall affect the Commission's authority to review the performance by NFA of Commission registration functions.^[9]

Issued in Washington, DC, on August 26, 2010.

David A. Stawick,

Secretary of the Commission.

Footnotes

1.  See Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries; Proposed Rule, 75 FR 3282 (Jan. 20, 2010).

2.  Food, Conservation, and Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1651, 2189-2201 (2008).

3.  7 U.S.C. 1, et seq.

4.  Previously, firms serving as counterparties to retail forex typically registered as FCMs, even though they may not have engaged in exchange-traded futures business. Under the CRA, either FCMs or RFEDs can offer to serve as counterparties to retail forex transactions, but the entity must register as an FCM if primarily and substantially engaged in on-exchange trading, or an RFED if not. See, 7 U.S.C. 2(c)(2)(B)(i)(II)(cc) and (gg) and 7 U.S.C. 2(c)(2)(C)(i).

5.  Id.

6.  See 48 FR 15940 (Apr. 13, 1983); 48 FR 35158 (Aug. 3, 1983); 48 FR 51809 (Nov. 14, 1983); 49 FR 8226 (Mar. 5, 1984); 49 FR 39593 (Oct. 9, 1984); and 50 FR 34885 (Aug. 28, 1985).

7.  7 U.S.C. 21(o)(2).

8.  See 49 FR 39593 (Oct. 9, 1984) and 66 FR 43227 (Aug. 17, 2001).

9.  See also section 17(o)(3) of the Act, 7 U.S.C. 21(o)(3).