[Federal Register Volume 61, Number 38 (Monday, February 26, 1996)]
[Proposed Rules]
[Pages 7080-7087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4236]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 3, 145 and 147
Financial Reporting and Debt-Equity Ratio Requirements for
Futures Commission Merchants and Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing to amend several provisions of its Rule 1.10, which
governs financial reporting requirements for futures commission
merchants (FCMs) and introducing brokers (IBs). The proposed rule
[[Page 7081]]
amendments would require that financial reports which need not be
certified by an independent public accountant be filed within 17
business days of the end of the reporting period, which is generally
the end of a month, a quarter or a six-month period. The Commission is
also proposing to require that certified financial reports be filed
within 60 calendar days of the fiscal year end. Currently, the
Commission allows 45 and 90 calendar days for the filing of uncertified
and certified financial reports, respectively. In addition, the
Commission is proposing to delete the provision which permits a self-
regulatory organization to allow its member FCMs file financial reports
on a semiannual rather than a quarterly basis. The Commission is
further proposing to amend the debt-equity ratio rule such that the 30
percent minimum equity requirement would apply to all of a firm's
capital, rather than only to that portion of a firm's capital necessary
to meet the minimum financial requirement. These proposed rule
amendments would conform the Commission's rules to the corresponding
rules of the Securities and Exchange Commission (SEC) and the
Commission's proposals are part of its ongoing efforts to harmonize its
financial rules with those of the SEC to the extent practicable. These
proposals are also part of a series of rulemaking proceedings related
to the discussions at the Commission's roundtable on capital issues
last September. The Commission anticipates that it will next address
harmonization of early warning notices among the Commission, the SEC
and self-regulatory organizations as well as capital charge based upon
five percent of unsecured receivables from foreign brokers.
DATES: Comments on the proposed amendments must be received on or
before March 27, 1996.
ADDRESSES: Comments should be sent to Jean A. Webb, Secretary of the
Commission, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington, D.C. 20581. Please refer to ``Financial Reporting
Cycle/Debt-Equity Ratio Amendments.''
FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, Division of Trading and Markets, Commodity Futures Trading
Commission, at the address listed above. Telephone: (202) 418-5439.
SUPPLEMENTARY INFORMATION:
I. Financial Reporting Requirements for FCMs and IBs
A. Background
The Commission's minimum financial requirements are premised upon
the concept that an FCM or an IB must maintain compliance with these
requirements at all times.\1\ An FCM or IB that is not in compliance
with the minimum financial requirements, or is unable to demonstrate
such compliance, must immediately cease doing business unless it can
immediately demonstrate an ability to achieve compliance, in which case
the Commission or the firm's designated self-regulatory organization
(DSRO) \2\ may, in its discretion, allow the firm up to 10 business
days to achieve compliance without having to cease doing business.\3\
\1\ The statutory authority for the minimum financial
requirements, Section 4f(b) of the Commodity Exchange Act (Act), 7
U.S.C. 6f(b) (1994), provides in pertinent part that:
Notwithstanding any other provisions of this chapter, no person
desiring to register as futures commission merchant or as
introducing broker shall be so registered unless he meets such
minimum financial requirements as the Commission may by regulation
prescribe as necessary to insure his meeting his obligation as a
registrant, and each person so registered shall at all times
continue to meet such prescribed minimum financial requirements * *
*.
\2\ The term ``self-regulatory organization'' (SRO) means a
contract market or a registered futures association (National
Futures Association (NFA) is currently the only registered futures
association). 17 CFR 1.3(ee)(1995). A DSRO is the SRO, where an FCM
or IB is a member of more than one SRO, that is delegated the
responsibility under a plan approved by the Commission to monitor
and audit such FCM or IB for compliance with minimum financial and
related reporting requirements and to receive the financial reports
necessitated by such requirements. 17 CFR 1.3(ff)(1995); see also 17
CFR 1.52(1995).
\3\ See 17 CFR 1.17 (a)(3), (a)(4) and (a)(5) (1995).
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As part of the system of surveillance to assure that FCMs and IBs
are maintaining compliance with their financial requirements, the
Commission has established various reporting and recordkeeping
requirements, and these begin when a firm applies for registration. An
applicant for registration as an FCM must file a financial report
certified by an independent public accountant 4 which shows that
the applicant meets the minimum financial requirement for an FCM.5
An applicant can meet this requirement in either of two ways, by
filing: (1) A certified financial report as of a date not more than 45
days preceding its filing; or (2) an uncertified financial report as of
a date not more than 45 days preceding its filing, accompanied by a
certified financial report as of a date not more than one year
preceding its filing.6 After a firm is granted registration as an
FCM, it generally must file uncertified financial reports on a
quarterly or semiannual basis and a certified financial report as of
its fiscal yearend.7 If an FCM's adjusted net capital is below the
``early warning'' level (i.e., 150 percent of the minimum requirement),
it must file a financial report as of the close of business for the
month during which such event takes place and as of the close of
business for each month thereafter until three successive months have
elapsed during which its adjusted net capital is at all times equal to
or in excess of the early warning level.8
\4\ The Commission's rules relating to qualifications and
reports of accountants are set forth in 17 CFR 1.16 (1995).
\5\ The Commission recently proposed to increase the minimum
required dollar amount of adjusted net capital for an FCM from
$50,000 to $250,000. 60 FR 63995 (Dec. 13, 1995).
\6\ An FCM or applicant therefor generally must file its
financial report on Form 1-FR-FCM. However, the Commission also
provides an FCM or applicant therefor that is also a securities
broker or dealer the option of filing a copy of its Financial and
Operational Combined Uniform Single (FOCUS) Report, Part II, filed
with the SEC in lieu of Form 1-FR-FCM. See Commission Rule 1.10(h),
17 CFR 1.10(h)(1995). The Commission and the SEC are continuing to
pursue efforts to develop a single financial reporting form that
would be adopted by both agencies. If such a form were to require
statements and schedules in addition to those currently required,
the agencies may revisit the filing timetables but would continue to
pursue harmonization to the extent practicable.
\7\ Although Commission Rule 1.10(b)(1)(i) specifies a quarterly
financial reporting requirement for FCMs, Commission Rule 1.52(a)
permits a DSRO to determine the number of financial reports it
receives from member FCMs so long as such reports are required on at
least a semiannual basis. Currently, the New York Mercantile
Exchange, the New York Cotton Exchange and the Kansas City Board of
Trade permit member FCMs to file semiannual financial reports. Less
than ten percent of FCMs (approximately 20 out of 258) file
semiannually. As discussed below, the Commission is proposing to
delete that provision of Rule 1.52(a).
\8\ Commission Rule 1.12(b)(3). The Commission has proposed to
redesignate paragraph (b)(3) of Rule 1.12 as paragraph (b)(4) and to
add a new paragraph (b)(3). 60 FR 63995, 63999. If the Commission
adopts those rule changes proposed last December prior to or
simultaneously with the proposed amendment to Rule 1.12 concerning
the due date for filing monthly financial reports set forth in this
release, the latter amendment would appear in the redesignated Rule
1.12(b)(4).
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Commission rules also provide that the Commission or a DSRO can
request a special financial report upon written notice.9 In
addition to the required financial reports, the Commission requires
FCMs to make and keep as a record, but not file, a monthly computation
of its adjusted net capital
[[Page 7082]]
and its minimum financial requirement.10
\9\ Commission Rule 1.10(b)(4). The Commission would generally
make such a request if a firm were experiencing financial
difficulties. In extraordinary circumstances, such as the October
1987 market break, the Commission has requested all firms to file a
special financial report.
\10\ Commission Rule 1.18. As with other records required to be
kept by the Act or rules thereunder, such record is open to
inspection by any representative of the Commission or the U.S.
Department of Justice. 17 CFR 1.31 (1995).
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An applicant for registration as an IB, in addition to the filing
options available to an FCM applicant with respect to submitting a
certified financial report no more than 45 days old or an uncertified
financial report no more than 45 days old accompanied by a certified
financial report no more than one year old, has the option of
submitting a guarantee agreement entered into with an FCM. Most IBs
choose the guarantee agreement option and when registered are often
referred to as ``guaranteed introducing brokers'' or ``IBGs.'' 11
As such, they have no further financial reporting requirements. The
minority of registered IBs which raise their own capital and are often
referred to as ``independent introducing brokers'' or ``IBIs,'' are
subject to financial reporting and recordkeeping requirements. An IBI
must file an unaudited financial report as of mid-year and a certified
financial report as of the fiscal yearend.12 An IBI is not subject
to that portion of the early warning requirements in Commission Rule
1.12 which mandates that notice and monthly financial reports be filed
when adjusted net capital is less than 150 percent of the minimum
requirement.13 However, like an FCM, an IBI is subject to a
request for a special financial report upon written notice by the
Commission or a DSRO pursuant to Commission Rule 1.10(b)(4) and must
prepare and maintain a monthly adjusted net capital and minimum
financial requirement computation in accordance with Commission Rule
1.18.
\11\ As of November 30, 1995, of the registered IBs, 1,087
operated pursuant to a guarantee agreement with an FCM and 390 were
raising their own capital. An IBG must introduce all accounts to its
guarantor FCM. 17 CFR 1.57(a)(1)(1995).
\12\ An IBI can file its financial reports using Form 1-FR-IB,
which is shorter than Form 1-FR-FCM largely because an IBI, unlike
an FCM, cannot handle customer funds and thus schedules related to
segregation of customer funds are irrelevant to an IBI. For an IBI
that is also a securities broker or dealer, it has the option under
Commission Rule 1.10(h) to file a copy of its FOCUS Report, Part
IIA, filed with the SEC in lieu of Form 1-FR-IB.
\13\ The Commission recently proposed to increase the minimum
required dollar amount of adjusted net capital for an IBI from
$20,000 to $30,000. 60 FR 63995, 63996, 64000.
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The time frame within which registered FCMs and IBIs must submit
interim unaudited financial reports is 45 days after the quarter or
six-month period, and the certified yearend financial report must be
filed within 90 days. FCMs subject to monthly reporting under the early
warning rule must file reports within 30 days, and the monthly adjusted
net capital and minimum financial requirement computations must be
prepared by FCMs and IBIs within 30 days. If a special report is
requested upon written notice by the Commission or a DSRO pursuant to
Commission Rule 1.10(b)(4), such a report must be furnished within the
time period specified in the notice.
B. Proposed Rule Amendments
1. Financial Reporting Cycle
The Commission is proposing to amend its financial reporting
requirements for FCMs and IBIs such that interim unaudited financial
reports would be due within 17 business days, rather than the current
45 calendar days, of the ``as of'' date, and the certified financial
report as of the fiscal yearend would be due within 60, rather than 90,
calendar days of the fiscal yearend. See proposed amendments to
Commission Rules 1.10(b)(1) (i) and (ii). There will be no change in
the requirement that applicants for registration as an FCM or an IB
submitting only a certified financial report file such a report as of a
date not more than 45 days prior to the date on which the report is
filed, since that is a shorter timeframe than the proposed 60-day
period for certified reports of registered firms.14 However, if an
applicant for registration as an FCM or an IB chooses the option of
submitting a certified financial report that is no more than one year
old accompanied by a recent uncertified financial report, the
Commission's proposed amendments to Rules 1.10 (a)(2)(i)(B) and
(a)(2)(ii)(B) would require that the latter have an ``as of'' date not
more than 17 business days, rather the current 45 calendar days, prior
to the date upon which it is filed. Similar treatment would be accorded
to an IBG whose guarantee agreement with an FCM is terminated and who
is seeking to become an IBI under proposed amendments to Commission
Rules 1.10 (j)(8)(i)(B) and (j)(8)(ii)(B).
\14\ The Commission has also determined not to propose an
amendment to the timeframe for filing an uncertified financial
report that must accompany an FCM's or IBI's request to withdraw its
registration where such request is based upon the firm's having
ceased engaging in activities requiring registration. Such a
financial report must have an ``as of'' date not more than 30 days
prior to the date of the withdrawal request. See Commission Rule
3.33(c)(1) which, as discussed below, is proposed to be amended for
another reason.
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Certain unaudited financial reports are filed as of a monthend,
where an FCM is filing financial reports under the early warning
provision and where a firm succeeds to the business of an FCM or IBI
(Rule 1.10 (a)(3)(i) and (a)(3)(ii)(A)). Such reports are now due
within 30 and 45 calendar days, respectively. The Commission is
proposing to amend these rules so that such unaudited financial
reports, like a normal quarterly or semiannual report, would be due
within 17 business days.
The monthly computation of adjusted net capital and minimum
financial requirement which FCMs and IBIs must prepare in accordance
with Commission Rule 1.18 is currently required to be made available
for inspection within 30 days. Since these computations do not involve
the preparation of all of the statements and schedules included in a
Form 1-FR-FCM or a Form 1-FR-IB, the Commission is proposing to shorten
the time period within which FCMs and IBIs must make available for
inspection their monthly computations to 10 business days. The
Commission also notes that this proposed shorter time period would
conform the requirement pertaining to monthly computations to the SEC's
requirement for filing Part I of the FOCUS Report, which is discussed
below.
The Commission is also proposing to delete that portion of Rule
1.52(a) which permits an SRO to allow its member FCMs to file financial
reports semiannually rather than quarterly. The Commission believes
that this rule amendment would be consistent with the concept that
financial reporting should be made more quickly than currently required
so that such data does not become stale when it is reported to
regulators. As noted above, relatively few firms are now filing only
semiannually so the Commission does not believe that this rule
amendment would cause undue hardship for a substantial number of FCMs.
The Commission was prompted to review its rules relating to the
financial reporting cycle to assure that such rules are up-to-date in
light of the speed and complexity of today's markets and available
information technology following the roundtable on capital issues held
on September 18, 1995, during which several matters relating to minimum
financial and related reporting requirements were discussed. Several
participants in the roundtable discussion stated that there should be
greater harmonization of CFTC/SEC requirements in several areas such as
financial reporting cycles.15 The
[[Page 7083]]
proposed rule amendments that would make the CFTC reporting cycle for
registered FCMs and IBIs 17 business days for unaudited financial
reports and 60 calendar days for certified financial reports would
conform Commission Rule 1.10 to the corresponding SEC rules governing
the filing of the FOCUS Report, Part II or Part IIA.16
\15\ The other areas mentioned at the roundtable with respect to
harmonization included debt-equity ratio requirements, which are
discussed more fully below, early warning requirements and risk
assessment data elements. The Commission is expecting to receive
more input from the industry concerning harmonization of CFTC, SEC,
and self-regulatory organization rules relating to early warning
notices following the next meeting of the Intermarket Financial
Surveillance Group (IFSG). IFSG was formed in 1988 to provide a
coordinating body to address financial surveillance issues relevant
to both futures and securities markets and includes representatives
of the principal futures and securities exchanges as well as NFA and
the National Association of Securities Dealers, Inc. The Commission
has outstanding proposals to amend the early warning notice
requirements. 59 FR 66822 (Dec. 28, 1994). As to risk assessment
data elements, the Commission's staff will continue to consult with
staff from the SEC and other financial regulators concerning
appropriate data elements. See also 60 FR 63995, 63998.
\16\ See 17 CFR 240.17a-5 (a)(2)(ii), (a)(2)(iii), and
(d)(5)(1995). As to an applicant for registration as a securities
broker or dealer or an introducing broker, the SEC does not require
submission of a financial report with the registration application.
Instead, an inspection is conducted by a self-regulatory
organization within six months after a firm is registered to
determine whether the firm is operating in conformity with
applicable financial responsibility rules. See 17 CFR 240.15b1-1 and
240.15b2-2 (1995).
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The SEC also requires monthly filing within 10 business days after
the end of each month of Part I of the FOCUS Report by every securities
broker or dealer who clears or carries customer accounts.17
Although the Commission's requirement under Rule 1.18(b) that FCMs and
IBIs prepare and make available for inspection monthly computations of
adjusted net capital and the minimum financial requirement is not
precisely analogous to the SEC requirement for filing a FOCUS Report,
Part I on a monthly basis, the proposed amendment of Commission Rule
1.18 to require preparation of the monthly computations within 10
business days, rather than the current 30 calendar days, is also
intended to promote harmonization between CFTC and SEC rules.
\17\ Part I of the FOCUS Report consists of two pages upon which
a firm reports key financial and operational data in summary form
including items such as subordinated debt, net profit or loss,
ownership equity, partners' capital, non-allowable assets, net
capital and haircuts. The FOCUS Report Part I contains side-by-side
columns for each month of the year to allow visual month-to-month
comparison of key items. Part II or Part IIA of the FOCUS Report
requires several pages of in-depth computations of a firm's
financial condition and minimum requirements.
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There is no specific analogue in the SEC's early warning rule
18 to the requirement under the CFTC's early warning rule for
monthly filings of financial reports referred to above. (As noted in
the preceding paragraph, SEC rules require that all firms which clear
or carry customer accounts file a monthly FOCUS Report, Part I.) Since
the Commission is proposing to require that routine interim financial
reports be submitted within 17 business days of the ``as of'' date, the
Commission believes that financial reports on firms that are required
to report under the early warning provisions and thereby subject to
enhanced scrutiny should not be filed on a longer time cycle. The
Commission is therefore proposing that monthly financial reports
required by Rule 1.12 be submitted within 17 business days of the
monthend, rather than the current 30 calendar days.
\18\ 17 CFR 240.17a-11 (1995).
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The Commission does not believe that these amendments to the
financial reporting cycle should be an undue hardship for FCMs and
IBIs. Many of these firms are dually registered as securities broker-
dealers or introducing brokers and are thus already subject to the SEC
reporting timeframes.19 Beyond the issue of conforming the filing
cycles with the SEC, the Commission also believes that these proposed
rule amendments are appropriate in light of the increasing rapidity and
complexity of today's financial markets. FCMs and IBIs are required to
be in compliance with minimum financial standards on a moment-to-moment
basis and being required to formally demonstrate such compliance on a
quicker schedule than is currently required is appropriate and
achievable given advances in information technology.
\19\ As of November 30, 1995, almost one-half of FCMs
(approximately 120 out of 258) and one-third of IBIs (approximately
141 out of 390) were dually registered with the SEC.
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2. Other Proposed Amendments
The Commission is also proposing two other minor amendments to the
financial reporting requirements in Rule 1.10, both of which pertain to
IBs. Currently, an applicant for registration as an IB that intends to
operate pursuant to a guarantee agreement with an FCM must file a copy
of the guarantee agreement with 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 in Los Angeles must file a copy with the Commission's
Southwestern Regional Office in Kansas City).20 This requirement
is in addition to the requirement to file the original of the guarantee
agreement with the registration application submitted to NFA. The
Commission is proposing to amend Rule 1.10(c) to eliminate the
requirement that a copy of a guarantee agreement be filed with a
Commission regional office. An IB's status as an IBG can be readily
discerned by Commission staff from contacting NFA's Information Center
or by accessing the registration database. An IBG has no ongoing
financial reporting requirements, so the Commission believes that no
purpose is served by continuing to maintain copies of guarantee
agreements. The Commission further believes that this amendment to Rule
1.10(c) will ease filing burdens on IB applicants and record
maintenance burdens on the Commission's staff.
\20\ The geographic coverage of jurisdiction of the Commission's
regional offices is set forth in 17 CFR 140.2 (1995).
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The other proposed amendment to the financial reporting
requirements would eliminate Rule 1.10(i). Rule 1.10(i) provides an IBI
or an applicant which is also a country elevator an alternative to
satisfy its financial reporting obligation by filing, in lieu of filing
a Form 1-FR-IB, a copy of a compilation report of financial statements
of warehousemen for purposes of Uniform Grain Storage Agreements,
prepared in accordance with requirements of the U.S. Department of
Agriculture. This provision was adopted when the Commission first
adopted rules to govern IBs in 1983 21 and has never been
utilized. The Commission believes it is appropriate to delete this
provision as a means of streamlining and simplifying Rule 1.10.
References to Rule 1.10(i) in other Commission rules would likewise be
eliminated.22
\21\ 48 FR 35248, 35263, 35282 (Aug. 3, 1983).
\22\ See proposed deletions of Rules 1.10(g)(3),
145.5(d)(1)(i)(G) and 147.3(b)(4)(i)(A)(7) as well as proposed
amendments to Rules 1.10(g)(5), 1.18 (a) and (b), and 3.33(c)(1).
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II. Proposed Amendments to Debt-Equity Ratio Requirements
A. Proposed Rule Amendments
Commission Rule 1.17(d) sets forth the debt-equity ratio
requirement, which requires that at least 30 percent of an FCM's or
IBI's required debt-equity total must consist of equity capital.23
Thus, if
[[Page 7084]]
an FCM's required debt-equity total amount is $1 million, it must
maintain equity capital as defined in the Commission's rules of
$300,000. No matter how much adjusted net capital is actually
maintained by an FCM or IBI, the thirty percent equity requirement
currently applies only to the amount of required debt-equity total.
Accordingly, if an FCM has a $1 million adjusted net capital
requirement and actually maintains $5 million in adjusted net capital
(i.e., it has $4 million in ``excess'' adjusted net capital), the
entire $4 million amount above the minimum requirement could consist of
debt subject to satisfactory subordination agreements in accordance
with Commission Rule 1.17(h).24
\23\ In addition to certain subordinated debt as described more
fully below, equity capital includes the following:
(1) In the case of a corporation, the sum of its par or stated
value of capital stock, paid in capital in excess of par, retained
earnings, unrealized profit and loss, and other capital accounts;
(2) In the case of a partnership, the sum of its capital
accounts of partners (inclusive of such partners' commodity interest
and securities accounts subject to the provisions of Rule 1.17(e)
concerning restrictions on withdrawals of equity capital), and
unrealized profit and loss; and
(3) In the case of a sole proprietorship, the sum of its capital
accounts and unrealized profit and loss.
``Debt-equity total'' means equity capital as described above
plus the outstanding principal amount of subordinated debt which
does not qualify as equity capital. The ``required debt-equity
total'' means debt-equity total less the amount by which a firm's
adjusted net capital exceeds the minimum required. 17 CFR
1.17(d)(1995).
\24\ 17 CFR 1.17(h) (1995).
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When the Commission originally proposed what is now Rule 1.17(d) in
1977, the debt-equity ratio requirement was patterned upon the SEC rule
and would have applied to a firm's debt-equity total.25 However,
in response to comments that ``it would be inappropriate to penalize a
firm that maintains capital in the form of satisfactory subordination
agreements, which is in excess of the minimum required by regulation,''
the Commission revised its proposal. As adopted, Rule 1.17(d) provides
that the required debt-equity total to which the 30 percent equity
capital requirement applies means a firm's debt-equity total less its
excess adjusted net capital.26
\25\ 42 FR 27166, 27177 (May 26, 1977).
\26\ 43 FR 39956, 39965, 39976 (Sept. 8, 1978).
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Several of the panelists at the capital roundtable on September 18,
1995 urged the Commission to pursue greater harmonization between CFTC
and SEC financial rules and related reporting requirements and the
debt-equity ratio requirement was one area referred to in this regard.
The Commission also notes that the general international standard is to
apply the debt-equity ratio requirement to all of a firm's
capital.27 The Commission believes that it is important for its
rules to conform to international standards with respect to the quality
of capital.
\27\ This is the recommendation of Working Party No. 3 of the
Technical Committee of the International Organization of Securities
Commissions (IOSCO). See Report of the Technical Committee of IOSCO,
``Capital Requirements for Multinational Securities Firms,'' XV
Annual Conference of IOSCO, Santiago, Chile 1990.
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Accordingly, in light of these developments and its own
reconsideration of the issue, the Commission has determined to propose
to amend Rule 1.17(d) to require that the 30 percent debt-equity ratio
requirement apply to an FCM's or IBI's debt-equity total. The
Commission notes that, as referred to above, a large proportion of FCMs
and IBIs are also securities brokers or dealers and thus already
subject to the SEC rule concerning the debt-equity ratio.28 The
Commission further notes that Rule 1.17(d)(1) provides that certain
subordinated debt may qualify as equity capital if specified conditions
are met, in addition to those which apply to subordinated debt in
general. These additional conditions are: (1) The lender must be a
partner or stockholder of the FCM or IBI; (2) the initial term of the
debt must be at least three years, and there must be a remaining term
of not less than twelve months; 29 (3) the governing subordination
agreement does not contain most of the otherwise permissible provisions
relating to accelerated maturity; (4) the governing subordination
agreement allows no special prepayment of the debt (i.e., prepayment
before one year from the date such subordination agreement becomes
effective); and (5) the debt in question is maintained as equity
capital subject to the provisions on withdrawal of equity capital
contained in Commission Rule 1.17(e). If a firm is organized as a
partnership, however, additional conditions (3) and (4) need not be met
for subordinated debt to qualify as equity capital, if the partnership
agreement provides that the capital contributed pursuant to a satis-
factory subordination agreement as defined in Commission Rule 1.17(h)
shall in all respects be partnership capital subject to the provisions
restricting the withdrawal thereof set forth in Commission Rule
1.17(e).
\28\ See n.19 supra. The Commission notes that the SEC
definition of equity capital does not include, in the case of a
partnership, partners' securities accounts. See 17 CFR 240.15c3-
1(d)(1995).
\29\ Subordinated debt entered into today with a maturity date
of January 1, 2000 could, therefore, qualify as equity capital if
all other requirements were met. On January 1, 1999, however, such
subordinated debt would no longer be counted as equity capital
unless an extension of the maturity date had been agreed to by the
parties, since the remaining term of the debt would be less than one
year at that time.
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B. Request for Comment
Following the capital roundtable in September, the Chicago
Mercantile Exchange (CME), on behalf of the IFSG, submitted a letter to
the Commission's Division of Trading and Markets dated October 31, 1995
supporting the goal of conforming the rules of the Commission and the
SEC concerning the debt-equity ratio requirement. CME also requested in
that letter, and in a similar letter of the same date to the SEC's
Division of Market Regulation, that the financial rules of each agency
be amended such that goodwill net of amortization could be subtracted
from the denominator when a firm calculates its debt-equity
ratio.30 Since the SEC has not yet made such a change in its rule
and since the Commission's intention in this proposal is to conform its
rule to that of the SEC concerning the debt-equity ratio requirement,
the Commission is not proposing to incorporate the CME's request in the
proposed amendment to Rule 1.17(d). However, the Commission's staff
will discuss this matter with staff of the SEC. The Commission also
specifically requests comment upon the CME's suggestion, which could be
accommodated by amending Rule 1.17(d)(2) to define debt-equity total as
equity capital as defined in Rule 1.17(d)(1) less goodwill net of
amortization plus total subordinated debt, and whether the Commission
should adopt such a rule amendment in conjunction with or irrespective
of action taken by the SEC. The Commission staff also notes, however,
that information provided by CME based upon studies of several SROs
indicates that the number of firms reporting goodwill as an asset is
quite small.
\30\ CME stated in its letters that it was making this request
because, by definition, goodwill is an intangible asset acquired in
a business combination which represents the excess ``going concern''
value over the fair value of a firm's net assets, it lacks
separability from the firm itself, and its value is often
indefinite, indeterminate and subject to wide fluctuation.
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III. 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 businesses. The rule amendments proposed herein
would affect FCMs and IBIs. The Commission has previously determined
that, based upon the fiduciary nature of FCM/customer relationships, as
well as the requirement that FCMs meet minimum financial requirements,
FCMs should be excluded from the definition of small entity.31
\31\ See 47 FR 18618, 18619 (Apr. 30, 1982.)
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With respect to IBs, 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
[[Page 7085]]
time.32 The proposed amendments to Rules 1.10 and 1.18 relate to
the time within which financial reports must be filed and monthly
financial computations must be prepared, but would not increase the
number of reports or records. Accordingly, these proposed amendments
should impose no additional requirements on an IBI. In addition, the
proposed amendment to Rule 1.17(d) for an IBI would conform the
Commission's requirement to that of the SEC. More than one-third of the
IBIs are also subject to the jurisdiction of the SEC and therefore the
proposed amendment to Rule 1.17(d) should have no impact on the
financial operations of these IBIs. Thus, if adopted, these proposals
would not have a significant economic impact on a substantial number of
IBs. Therefore, pursuant to Section 3(a) of the RFA, 5 U.S.C. 605(b),
the Chairman certifies that these proposed rule amendments will not
have a significant economic impact on a substantial number of small
entities.
\32\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1990, (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. While the amendments
proposed herein have no burden, Rules 1.10, 1.12, 1.17, and 1.18 are
part of a group of rules with the following burden.
The burden associated with the collection required by Rules 1.10,
1.12, 1.17 and 1.18 (3038-0024), including these proposed amendments,
is as follows:
Average Burden Hours Per Response (FCMs)..................... 7.00
Average Burden Hours Per Response (IBs)...................... 5.00
Number of FCM Respondents.................................... 785.00
Number of IB Respondents..................................... 542.00
Frequency of Response........................................ 5.00
Persons wishing to comment on the estimated paperwork burden
associated with these proposed rule amendments should contact Jeff
Hill, Office of Management and Budget, Room 3228, NEOB, Washington, DC
20503, (202) 395-7340. Copies of the information collection submission
to OMB are available from Joe F. Mink, CFTC Clearance Officer, 1155
21st Street, NW., Washington, DC 20581, (202) 418-5170.
List of Subjects
17 CFR Part 1
Commodity futures, minimum financial requirements.
17 CFR Part 3
Commodity futures, reporting and recordkeeping requirements.
17 CFR Part 145
Freedom of information, exceptions.
17 CFR Part 147
Sunshine Act, exceptions.
In consideration of the foregoing and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, Sections
4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), the Commission
hereby proposes to amend 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, 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 revising paragraphs (a)(2)(i) (A) and
(B), (a)(2)(ii) (A) and (B), (a)(3)(i), (a)(3)(ii)(A), (b)(1)(i),
(b)(1)(ii) and (c), by removing and reserving paragraph (g)(3), by
revising paragraph (g)(5), by removing and reserving paragraph (i), and
by revising paragraphs (j)(8)(i)(B) and (j)(8)(ii)(B) to read as
follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
(a) * * *
(2) * * *
(i) * * *
(A) A Form 1-FR-FCM certified by an independent public accountant
in accordance with Sec. 1.16 as of a date not more than 45 days prior
to the date on which such report is filed; or
(B) A Form 1-FR-FCM as of a date not more than 17 business days
prior to the date on which such report is filed and a Form 1-FR-FCM
certified by an independent public accountant in accordance with
Sec. 1.16 as of a date not more than 1 year prior to the date on which
such report is filed.
(ii) * * *
(A) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which such report is filed; or
(B) A Form 1-FR-IB as of a date not more than 17 business days
prior to the date on which such report is filed and a Form 1-FR-IB
certified by an independent public accountant in accordance with
Sec. 1.16 as of a date not more than 1 year prior to the date on which
such report is filed; or
* * * * *
(3)(i) The provisions of paragraph (a)(2) of this section do not
apply to any person succeeding to and continuing the business of
another futures commission merchant. Each such person who files an
application for registration as a futures commission merchant and who
is not so registered in that capacity at the time of such filing must
file a Form 1-FR as of the first monthend following the date on which
his registration is approved. Such report must be filed with the
National Futures Association, the Commission and the designated self-
regulatory organization, if any, not more than 17 business days after
the date for which the report is made.
(ii) * * *
(A) Each such person who succeeds to and continues the business of
an introducing broker which was not operating pursuant to a guarantee
agreement, or which was operating pursuant to a guarantee agreement and
was also a securities broker or dealer at the time of succession, who
files an application for registration as an introducing broker, and who
is not so registered in that capacity at the time of such filing, must
file with the National Futures Association either a guarantee agreement
with his application for registration or a Form 1-FR-IB as of the first
monthend following the date on which his registration is approved. Such
Form 1-FR-IB must be filed not more than 17 business days after the
date for which the report is made.
* * * * *
(b) Filing of financial reports. (1)(i) Except as provided in
paragraphs (b)(3) and (h) of this section, each person registered as a
futures commission merchant must file a Form 1-FR-FCM for each fiscal
quarter of each fiscal year unless the futures commission merchant
elects, pursuant to paragraph (e)(2) of this section, to file a Form 1-
FR-FCM for each calendar quarter of each calendar year. Each Form 1-FR-
FCM must be filed no later than 17 business days after the date for
which the report is made: Provided, however, That any Form 1-FR-FCM
which must be certified by an independent public accountant pursuant to
paragraph (b)(2) of this section must be filed no later than 60 days
after the close of each
[[Page 7086]]
futures commission merchant's fiscal year.
(ii) Except as provided in paragraphs (b)(3) and (h) of this
section, and except for an introducing broker operating pursuant to a
guarantee agreement which is not also a securities broker or dealer,
each person registered as an introducing broker must file a Form 1-FR-
IB semiannually as of the middle and the close of each fiscal year
unless the introducing broker elects pursuant to paragraph (e)(2) of
this section to file a Form 1-FR-IB semiannually as of the middle and
the close of each calendar year. Each Form 1-FR-IB must be filed no
later than 17 business days after the date for which the report is
made: Provided, however, That any Form 1-FR-IB which must be certified
by an independent public accountant pursuant to paragraph (b)(2) of
this section must be filed no later than 60 days after the close of
each introducing broker's fiscal year.
* * * * *
(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 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.
* * * * *
(g) * * *
(3) [Reserved]
* * * * *
(5) The independent accountant's opinion and a guarantee agreement
filed pursuant to this section will be deemed public information.
* * * * *
(i) [Reserved]
(j) * * *
(8) * * *
(i) * * *
(B) A Form 1-FR-IB as of a date not more than 17 business days
prior to the date on which the report is filed and a Form 1-FR-IB
certified by an independent public accountant in accordance with
Sec. 1.16 as of a date not more than one year prior to the date on
which the report is filed.
* * * * *
(ii) * * *
(B) A Form 1-FR-IB as of a date not more than 17 business days
prior to the date on which the report is filed and a Form 1-FR-IB
certified by an independent public accountant in accordance with
Sec. 1.16 as of a date not more than one year prior to the date on
which the report is filed.
* * * * *
3. Section 1.12 is amended by revising paragraph (b)(3) to read as
follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(b) * * *
(3) For securities brokers or dealers, the amount of net capital
specified in Rule 17a-11(b) of the Securities and Exchange Commission
(17 CFR 240.17a-11(b)), must file written notice to that effect as set
forth in paragraph (g) of this section within five (5) business days of
such event. Such applicant or registrant must also file a Form 1-FR-FCM
(or, if such applicant or registrant is registered with the Securities
and Exchange Commission as a securities broker or dealer, it may file,
in accordance with Sec. 1.10(h), a copy of its Financial and
Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934, Part II, in lieu of Form 1-FR-FCM) or such other
financial statement designated by the National Futures Association, in
the case of an applicant, or by the Commission or the designated self-
regulatory organization, if any, in the case of a registrant, as of the
close of business for the month during which such event takes place and
as of the close of business for each month thereafter until three (3)
successive months have elapsed during which the applicant's or
registrant's adjusted net capital is at all times equal to or in the
excess of the minimums set forth in this paragraph (b) which are
applicable to such applicant or registrant. Each financial statement
required by this paragraph (b) must be filed within 17 business days
after the end of the month for which such report is being made.
* * * * *
4. Section 1.17 is amended by revising the introductory text of
paragraph (d) and by removing paragraph (d)(3) to read as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(d) Each applicant or registrant shall have equity capital
(inclusive of satisfactory subordination agreements which qualify under
this paragraph (d) as equity capital) of not less than 30 percent of
the debt-equity total, provided, an applicant or registrant may be
exempted from the provisions of this paragraph (d) for a period not to
exceed 90 days or for such longer period which the Commission may, upon
application of the applicant or registrant, grant in the public
interest or for the protection of investors. For the purposes of this
paragraph (d):
* * * * *
5. Section 1.18 is amended by revising paragraphs (a) and (b) to
read as follows:
Sec. 1.18 Records for and relating to financial reporting and monthly
computation by futures commission merchants and introducing brokers.
(a) No person shall be registered as a futures commission merchant
or as an introducing broker under the Act unless, commencing on the
date his application for such registration is filed, he prepares and
keeps current ledgers or other similar records which show or summarize,
with appropriate references to supporting documents, each transaction
affecting his asset, liability, income, expense and capital accounts,
and in which (except as otherwise permitted in writing by the
Commission) all his asset, liability and capital accounts are
classified into either the account classification subdivisions
specified on Form 1-FR-FCM or Form 1-FR-IB, respectively, or, if such
person is registered with the Securities and Exchange Commission as a
securities broker or dealer and he files (in accordance with
Sec. 1.10(h)) a copy of his Financial and Operational Combined Uniform
Single Report under the Securities Exchange Act of 1934, Part II or
Part IIA, in lieu of Form 1-FR-FCM or Form 1-FR-IB, the account
[[Page 7087]]
classification subdivisions specified on such Report, or categories
that are in accord with generally accepted account ing principles. Each
person so registered shall prepare and keep current such records.
(b) Each applicant or registrant must make and keep as a record in
accordance with Sec. 1.31 formal computations of its adjusted net
capital and of its minimum financial requirements pursuant to Sec. 1.17
or the requirements of the designated self-regulatory organization to
which it is subject as of the close of business each month. An
applicant or registrant which is also registered as a securities broker
or dealer with the Securities and Exchange Commission may meet the
computation requirements of this paragraph (b) by completing the
Statement of Financial and Operational Combined Uniform Single Report
under the Securities Exchange Act of 1934, Part II or Part IIA. Such
computations must be completed and made available for inspection by any
representative of the National Futures Association, in the case of an
applicant, or of the Commission or designated self-regulatory
organization, if any, in the case of a registrant, within 10 business
days after the date for which the computations are made, commencing the
first monthend after the date the application for registration is
filed.
* * * * *
6. Section 1.52 is amended by revising paragraph (a) to read as
follows:
Sec. 1.52 Self-regulatory organization adoption and surveillance of
minimum financial requirements.
(a) Each self-regulatory organization must adopt, and submit for
Commission approval, rules prescribing minimum financial and related
reporting requirements for all its members who are registered futures
commission merchants. Each self-regulatory organization other than a
contract market must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for
all its members who are registered introducing brokers. Each contract
market which elects to have a category of membership for introducing
brokers must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for
all its members who are registered introducing brokers. Each self-
regulatory organization shall submit for Commission approval any
modification or other amendments to such rules. Such requirements must
be the same as, or more stringent than, those contained in Secs. 1.10
and 1.17 of this part and the definition of adjusted net capital must
be the same as that prescribed in Sec. 1.17(c) of this part: Provided,
however, A designated self-regulatory organization may permit its
member registrants which are registered with the Securities and
Exchange Commission as securities brokers or dealers to file (in
accordance with Sec. 1.10(h) of this part) a copy of their Financial
and Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934, Part II or Part IIA, in lieu of Form 1-FR: And,
provided further, A designated self-regulatory organization may permit
its member introducing brokers to file a Form 1-FR-IB in lieu of a Form
1-FR-FCM.
* * * * *
PART 3--REGISTRATION
7. The authority citation for Part 3 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19,
21, 23; 5 U.S.C. 552, 552b.
Subpart A--Registration
8. Section 3.33 is amended by revising paragraph (c)(1) to read as
follows:
Sec. 3.33 Withdrawal from registration.
* * * * *
(c)(1) Where a futures commission merchant or an introducing broker
which is not operating pursuant to a guarantee agreement is requesting
withdrawal from registration in that capacity and the basis for
withdrawal under paragraph (a)(1) of this section is that it has ceased
engaging in activities requiring registration, the request for
withdrawal must be accompanied by a Form 1-FR-FCM or a Form 1-FR-IB,
respectively, which contains the information specified in
Sec. 1.10(d)(1) of this chapter as of a date not more than 30 days
prior to the date of the withdrawal request: Provided, however, That if
such registrant is also registered with the Securities and Exchange
Commission as a securities broker or dealer, it may file a copy of its
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II or Part IIA (in accordance
with Sec. 1.10(h) of this chapter), in lieu of Form 1-FR-FCM or Form 1-
FR-IB. Any financial report submitted pursuant to this paragraph (c)(1)
must contain the information specified in Sec. 1.10(d)(1) of this
chapter as of a date not more than 30 days prior to the date of the
withdrawal request.
* * * * *
PART 145--COMMISSION RECORDS AND INFORMATION
9. The authority citation for Part 145 continues to read as
follows:
Authority: Pub. L. 89-554, 80 Stat. 383, Pub. L. 90-23, 81 Stat.
54, Pub. L. 93-502, 88 Stat. 1561-1564 (5 U.S.C. 552); Sec. 101(a),
Pub. L. 93-463, 88 Stat. 1389 (5 U.S.C. 4a(j)); Pub. L. 99-570,
unless otherwise noted.
Sec. 145.5 [Amended]
10. Section 145.5 is amended by removing and reserving paragraph
(d)(1)(i)(G).
PART 147--OPEN COMMISSION MEETINGS
11. The authority citation for Part 147 continues to read as
follows:
Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.
552b); Sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.
4a(j)(Supp. V 1975)), unless otherwise noted.
Sec. 147.3 [Amended]
12. Section 147.3 is amended by removing and reserving paragraph
(b)(4)(i)(A)(7).
Issued in Washington, D.C. on February 20, 1996 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-4236 Filed 2-23-96; 8:45 am]
BILLING CODE 6351-01-P
