e9-24480
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FR Doc E9-24480[Federal Register: October 13, 2009 (Volume 74, Number 196)]
[Proposed Rules]
[Page 52434-52441]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13oc09-14]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AB87
Electronic Filing of Financial Reports and Notices
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend certain of its regulations in
connection with electronic filing of financial reports and other
notices (``Proposal''). The Proposal would broaden the language in the
Commission's regulations applicable to electronic filings of financial
reports to clarify that, to the extent a futures commission merchant
(``FCM'') submits a Form 1-FR to the Commission electronically, it may
do so using any user authentication procedures established or approved
by the Commission. The Proposal also would permit registrants to
electronically submit filings in addition to financial reports,
including an election to use a non-calendar fiscal year, requests for
extensions of time to file uncertified financial reports and ``early
warning'' notices required under Commission regulations. In connection
with the filing of financial reports, the Commission also is proposing
to specify, consistent with other requirements and existing practice,
that a statement of income and loss is included as a required part of
the non-certified 1-FR filings for FCMs and introducing brokers
(``IBs''). The Commission also is proposing to require more immediate,
but less prescriptive, documentation regarding a firm's capital
condition when a firm falls below its required minimum adjusted net
capital. Finally, the Commission is proposing several other minor
amendments to correct certain outdated references and to make other
clarifications to existing regulations.
DATES: Comments must be received on or before November 12, 2009.
ADDRESSES: You may submit comments, identified by RIN 3038-AB87, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov/
search/index.jsp. Follow the instructions for submitting comments.
E-mail: secretary@cftc.gov. Include ``Electronic Filing
Amendments'' in the subject line of the message.
Fax: (202) 418-5521.
Mail: Send to David Stawick, Secretary, Commodity Futures
Trading Commission, 1155 21st Street, NW., Washington, DC 20581.
Courier: Same as Mail above.
All comments received will be posted without change to http://
www.cftc.gov, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Thelma Diaz, Associate Director,
Division of Clearing and Intermediary Oversight, 1155 21st Street, NW.,
Washington, DC 20581. Telephone number: 202-418-5137; facsimile number:
202-418-5547; and electronic mail: tdiaz@cftc.gov, or Lawrence T.
Eckert, Special Counsel, Division of Clearing and Intermediary
Oversight, 140 Broadway, New York, New York 10005. Telephone number
(646) 746-9704; and electronic mail: leckert@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Background
Section 4f(b) of the Commodity Exchange Act, as amended (the
``Act'') authorizes the Commission to impose by regulation minimum
financial and related reporting requirements on futures commission
merchants (``FCMs'') and introducing brokers (``IBs'').\1\ Commission
Regulation 1.10 sets forth the financial reporting requirements for
FCMs and IBs.\2\ This regulation includes a requirement for FCMs and
IBs to file annual financial statements that have been certified by an
independent public accountant in accordance with Regulation 1.16.
Regulation 1.10 also requires generally that FCMs file with the
Commission non-certified Form 1-FR-FCM financial reports each month and
that IBs file non-certified Form 1-FR-IB financial
[[Page 52435]]
reports semiannually.\3\ Commission Regulation 1.12 requires FCMs, IBs
and applicants for registration thereof to provide notice of a variety
of predefined events as or before they occur.\4\
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\1\ The Act is codified at 7 U.S.C. 1 et seq. (2009), and
section 4f(b) of the Act is codified at 7 U.S.C. 6f(b). The
Commission's regulations cited in this proposed rulemaking may be
found at 17 CFR Ch. 1 (2009).
\2\ For simplicity, references in this Federal Register release
to IBs in connection with financial reporting and notice
requirements are intended to refer to IBs that are not operating
pursuant to a guarantee agreement.
\3\ Commission Regulation 1.10(h) permits a registrant that also
is registered as a securities broker-dealer with the Securities and
Exchange Commission (``SEC'') to file a copy of its Financial and
Operational Combined Uniform Single Report (``FOCUS'') with the
Commission in lieu of Form 1-FR.
\4\ For example, Regulation 1.12(a) requires immediate
telephonic notice, to be confirmed in writing by facsimile, when a
registrant's (or applicant's) adjusted net capital falls below that
required by Regulation 1.17. Other provisions of Regulation 1.12
require notification to the Commission for certain ``early warning''
events. Regulation 1.12(b), for example, requires notification by a
registrant or applicant if such entity's adjusted net capital drops
below a specified threshold.
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The Commission amended Regulation 1.10 in 1997 to provide for the
first time the regulatory means for FCMs and IBs to file financial
reports electronically with the Commission.\5\ Regulation 1.10(c)(2)
permits FCMs to file non-certified financial reports with the
Commission via electronic transmission using a Commission-assigned
personal identification number (``PIN''). Regulation 1.10(b)(2)(iii)
requires FCMs to continue to file certified financial reports in paper
form, but requires IBs to file such certified reports electronically in
accordance with procedures adopted by the National Futures Association
(``NFA'').\6\
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\5\ See 62 FR 10441 (March 7, 1997) (a technical amendment to
the final rules is found at 62 FR 33007 (June 18, 1997)). Many firms
were already filing financial reports electronically with their self
regulatory organizations (``SROs'') at this time pursuant to SRO
rules approved by the Commission.
\6\ The Commission approved on an expedited basis, effective
June 30, 2004, NFA rule amendments which require that IBs submit
non-certified Forms 1-FR-IB or FOCUS reports electronically using
NFA's EasyFile electronic filing system. On November 22, 2006, in
response to a petition by NFA, the Commission adopted amendments to
its regulations that effectively provided NFA with the ability to
further expand its electronic financial report filing requirements
applicable to IBs to include mandatory electronic filing of
certified financial reports. 71 FR 54789 (Sep. 19, 2006). Although
submissions by IBs of certified Form 1-FR-IB must be made
electronically, NFA has not yet mandated electronic filing of
certified FOCUS reports by IBs registered as securities brokers or
dealers.
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FCMs that file their non-certified financial reports electronically
with the Commission currently do so through WinJammer,TM a
software application initially developed jointly by the Chicago
Mercantile Exchange (``CME'') and the Chicago Board of Trade (``CBT'').
The WinJammer TM Group \7\ has licensed or otherwise
provided application access to a number of SROs and regulatory
agencies, including the Commission. IBs file financial reports with NFA
through NFA's ``EasyFile'' system, which was developed by NFA as an
internet-based alternative to WinJammer.TM
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\7\ The ``WinJammer TM Group'' consists of the CME,
CBT, and NFA, which joined the group in 2000.
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The WinJammer TM Group currently is working on a new
release of its application that would, among other things, move toward
an internet-based approach to electronic filing of documents. It is
envisioned that security access to the updated WinJammer TM
application will no longer require a PIN, but rather will use a
username/password combination for authentication. The new application
is expected to provide a number of advancements over the current
software, including the ability for FCMs to file notices on a central
server to be maintained by the WinJammer TM Group. The use
of a central server-approach will facilitate greater filing efficiency
by enabling an FCM to make a single electronic filing to the server.
The filing would be available to and would be downloaded by the
software of the Commission, NFA and/or the relevant SRO, as applicable.
The registrant would be responsible to check its WinJammer
TM account for confirmation that the filing had in fact been
received by the intended recipients. Currently, FCMs must make separate
electronic filings with each relevant party.
II. Proposed Rule Amendments
A. Electronic Filing Issues
Commission Regulation 1.10(c) generally sets forth the provisions
governing where and how the financial reports required to be filed by
FCMs and IBs under Regulation 1.10 must be filed. Regulation 1.10(c)(1)
indicates with whom reports should be filed. Regulation 1.10(c)(2)
addresses the method, rather than the location of filing and provides
that certain non-certified financial reports may be submitted to the
Commission via electronic transmission using a Commission-assigned
personal identification number. Electronic submission of certified
financial reports is addressed in Regulation 1.10(b)(2)(iii). This
section provides that FCMs must file certified financial reports in
paper form and IBs must file such reports electronically in accordance
with electronic filing procedures established by NFA.
For clarification and ease of reading, the Proposal would move
Regulation 1.10(b)(2)(iii) into a new subparagraph of Regulation
1.10(c)(2). Regulation 1.10(c)(2) would be amended as discussed below
and divided into 2 new subparagraphs: Subparagraph (c)(2)(i) would
address electronic filing by FCMs with the Commission and subparagraph
(c)(2)(ii) would address electronic filings with NFA by IBs and by
applicants for registration as IBs and FCMs.
Regulation 1.10(c)(2) currently provides that non-certified
financial reports 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 * *
*.'' As discussed above, the anticipated changes to the user
authentication process for WinJammer TM users would no
longer utilize a PIN. Accordingly, the Commission is proposing to
broaden the language in the regulation relating to user authentication.
In addition, the Commission is proposing to permit any filing or other
notice submitted under the regulation to be transmitted electronically,
rather than limiting such submission to financial reports as under the
current regulation. This would enable FCMs to electronically file, for
example, an election to use a fiscal year other than a calendar year
under Regulation 1.10(e) or a request for an extension of time to file
uncertified financial reports under Regulation 1.10(f). As amended,
Regulation 1.10(c)(2)(i) would provide that ``[except with respect to
the filing of certified financial reports which must be filed in paper
form], all filings or other notices or applications prepared by a
futures commission merchant pursuant to [Regulation 1.10] may be
submitted to the Commission in electronic form using a form of user
authentication assigned in accordance with procedures established by or
approved by the Commission, and otherwise in accordance with
instruction issued by or approved by the Commission, if the futures
commission merchant or a designated self-regulatory organization has
provided the Commission with the means necessary to read and to process
the information contained in such report.'' The Commission also would
revise the instructions to Form 1-FR-FCM to reflect this change.
Regulation 1.10(c)(2)(ii) would provide that ``[except with respect to
the filing of certified FOCUS reports by a registered broker or dealer
with the SEC], all filings or other notices or applications prepared by
an introducing broker or applicant for registration as an introducing
broker or futures commission merchant * * * must be
[[Page 52436]]
filed electronically in accordance with electronic filing procedures
established by the National Futures Association * * *.''
Regulation 1.10(d)(4)(iii) provides that with respect to the
electronic submission of a Form 1-FR, the transmission must be
accompanied by the PIN or other user authentication assigned to the
authorized signer under procedures established or approved by the
Commission, and the use of such PIN or other user authentication will
substitute for the manual signature of the authorized signer for the
purposes of making the oath or affirmation required to accompany the
filing of Form 1-FR. In light of the amendments to Regulation 1.10
discussed above related to user authentication procedures, the Proposal
would delete from Regulation 1.10(d)(4)(iii) references to the use of a
PIN.
Commission Regulation 1.12 requires FCMs, IBs and applicants for
registration thereof to provide notice of a variety of predefined
events as or before they occur.\8\ The regulation generally requires
such notices to be provided in writing by facsimile and, in certain
cases, written notice must be preceded by immediate telephonic notice.
Regulation 1.12(i) provides the procedures for filing notices under
Regulation 1.12. In light of the anticipated changes to the WinJammer
TM application, the successful implementation in the past of
the electronic filing of Form 1-FR with the Commission and the
potential benefits in terms of efficiency and paper reduction, the
Commission is proposing to amend Regulation 1.12(i) to allow FCMs and
IBs to submit electronically filings otherwise required to be submitted
in writing via facsimile under Regulation 1.12.\9\ The Proposal would
add new subparagraph 1.12(i)(3) which would provide that ``[e]very
notice or report required to be provided in writing under [Regulation
1.12] may, in lieu of facsimile, be filed via electronic transmission
using a form of user authentication assigned in accordance with
procedures established by or approved by the Commission, and otherwise
in accordance with instructions issued by or approved by the
Commission.'' An electronic submission would be required to clearly
indicate the registrant or applicant on whose behalf such filing is
made and the use of such user authentication in submitting such filing
would constitute and become a substitute for the manual signature of
the authorized signer.
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\8\ See footnote 4, above.
\9\ IBs file notices under Regulation 1.12 with NFA pursuant to
NFA rules. NFA has indicated that it intends to make changes to the
EasyFile system and/or NFA rules, as may be necessary to facilitate
the electronic filing by IBs of notices or other information
permitted to be submitted electronically by the Proposal but
currently filed with NFA in paper form.
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B. Income Statement Filing Requirement
Commission Regulation 1.10(d) sets forth the content requirements
for financial reports filed with the Commission: Regulation 1.10(d)(2)
applies to certified financial reports and Regulation 1.10(d)(1)
applies to non-certified financial reports.
Certified financial reports are required to include, among other
things, ``statements of income (loss)'' pursuant to Regulation
1.10(d)(2)(ii). This requirement is not currently included as part of
Regulation 1.10(d)(1) in connection with the filing of non-certified
financial reports. In practice, however, FCMs and IBs typically include
such statements with all financial report filings made with the
Commission, whether or not such reports are required to be certified.
FCMs that are also registered with the SEC as broker-dealers and that
carry or clear customer accounts already are required to file with
their designated examining authority an income statement as part of
their monthly FOCUS filing.\10\ Other FCMs and IBs, while not
necessarily required to file these statements, must nonetheless compute
the firm's income and loss on a monthly basis (or semiannual basis in
the case of IBs) in order to appropriately complete other relevant
portions of Form 1-FR or FOCUS. Both Form 1-FR and FOCUS already are
formatted to accept the reporting of income and loss data
electronically.
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\10\ Non-clearing broker-dealers file FOCUS, including the
statement of income (loss), on a quarterly basis.
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The income statement is an integral part of the financial report
that the Commission believes should be available for review along with
other relevant financial data filed on an interim basis. Additionally,
requiring the filing of such statements should not add any additional
burden to registrants. In fact, as mentioned, substantially all FCMs
and IBs already include such statements as part of their non-certified
financial reports filed with the Commission. Accordingly, the
Commission is proposing to amend Regulation 1.10(d)(1)(ii) to require
``statements of income (loss)'' to be included as part of FCM and IB
non-certified financial report filings. By requiring that firms file an
income statement with their non-certified financial reports as well as
with their annual certified report, the amended rule would ensure that
Commission staff receive more current information and have the ability
to review this information relating to a firm's financial health more
than once a year. This amendment would not affect the ability of a
broker-dealer to file with the Commission in accordance with Regulation
1.10(h) the FOCUS report under the Securities and Exchange Act of 1934,
including the income statement currently provided in that report.\11\
Further, as is true of such statements filed as part of a certified
financial report, income statements included as part of a non-certified
1-FR or FOCUS filing would be afforded nonpublic treatment pursuant to
Commission Regulation 1.10(g).
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\11\ Under SEC Regulation 17a-5 and rules of applicable self-
regulatory organizations, certain securities brokers or dealers may
include as part of their quarterly FOCUS report filings a
consolidated Statement of Income (Loss) for the relevant quarter
rather than a Statement of Income (Loss) for the month for which the
report is being filed (i.e., March, June, September or December).
Such broker-dealers that also are registered as FCMs would file
these same reports with the Commission. The Commission wishes to
make clear that an otherwise complete FOCUS report filing made with
the Commission that includes such a consolidated Statement of Income
(Loss) would be deemed an acceptable filing in accordance with
Commission Regulation 1.10(h).
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C. Net Capital Undercapitalization Documentation
The Commission is proposing to amend Regulations 1.12(a)(2) and
(a)(3) to require more immediate, but less prescriptive, reporting to
the Commission when a registrant or applicant falls below its minimum
net capital requirement. Regulation 1.12(a) requires a registrant or
applicant for registration as an FCM or IB that knows or should have
known that its adjusted net capital is less than the minimum required
by the Commission or by its designated self-regulatory organization
(``DSRO'') to provide notice of such event immediately by telephone and
confirm such telephonic notice in writing by facsimile. Regulation
1.12(a)(2) further requires that, within 24 hours thereafter, the
registrant (or applicant) must file certain financial records with the
Commission. Specifically, an FCM (or applicant) is required to file:
(1) A statement of financial condition; (2) a statement of the
computation of its minimum capital requirements; (3) the statements of
segregation requirements and funds in segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts;
and (4) the statement of secured amounts
[[Page 52437]]
and funds held in separate accounts for foreign futures and foreign
options customers. Regulation 1.12(a)(3) requires an IB (or applicant)
to file a statement of financial condition and a statement of the
computation of its minimum capital requirements. All statements under
Regulations 1.12(a)(2) and (a)(3) must be prepared as of the date the
registrant's or applicant's adjusted net capital was below its minimum
requirement.
When a firm falls below its minimum adjusted net capital
requirement, the Commission's interest is to understand fully the
circumstances that gave rise to the reduction in capital and to ensure
that there are no imminent concerns regarding the firm's ability to
meet its obligations to the market or customers, or to otherwise
continue normal business operations. The statements required by the
current regulation help provide a picture of a firm's financial
position as of the time such statements are prepared. The regulations,
however, currently allow up to 24 hours from the receipt of original
notice of a net capital deficiency for such documentation to be
provided. In practice, firms that notify the Commission of a fall below
minimum net capital under Regulation 1.12(a) often simultaneously
provide written information to the Commission sufficient to evidence
the firm's then-current capital condition. Such information has not
always taken the specific form prescribed in the regulation, however.
Upon receipt of information from a registrant, Commission staff members
have requested further information as determined appropriate and
necessary in the circumstances. Firms generally have been prompt in
providing such data.
The Commission has found that receiving more immediate information
regarding a firm's capital condition better satisfies the Commission's
interests and typically is of greater benefit than obtaining
documentation in the specific form currently prescribed at the expense
of a time delay. Accordingly, the Commission is proposing to amend
Regulation 1.12(a) consistent with this practice. Under the Proposal, a
firm must continue to provide immediate telephonic notice, confirmed in
writing, in the event that its adjusted net capital falls below its
required minimum. Paragraph 1.12(a)(2) would be amended to require that
together with such initial telephonic notice and written confirmation,
a firm must provide ``documentation in such form as necessary to
adequately reflect the firm's capital condition as of any date such
person's adjusted net capital is less than the minimum required.'' \12\
Thus, a firm would be required to provide documentation regarding its
capital condition at the same time as it provides its notice and
confirmation of a capital deficiency to the Commission. The amended
regulation would, however, provide greater flexibility with respect to
the form such documentation must take, allowing any documentation that
adequately reflects the firm's capital condition. The Commission
envisions that such adequate documentation would at a minimum specify
the firm's adjusted net capital requirement and actual adjusted net
capital for any date during which the firm fell below its regulatory
requirement. By requiring documentation as of ``any'' date that
adjusted net capital is less than the required minimum, the amended
regulation makes clear that where a firm is undercapitalized on more
than one day, documentation related to all such time must be provided.
The amended regulation also would require a firm to provide similar
documentation to that initially provided for any other days the
Commission may request.\13\ Regulation 1.12(a)(3), which provides
supplementary documentation requirements for IBs, would be deleted
because amended Regulation 1.12(a)(2) would subsume this section.
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\12\ This amendment is consistent with SEC Regulation 17a-11
which requires a broker or dealer whose net capital falls below its
required minimum to give notice of the deficiency that same day,
specifying the broker or dealer's net capital requirement and its
current amount of net capital.
\13\ Regulation 1.10(b)(4) already provides that representatives
of the Commission may upon written notice require Form 1-FR or other
financial information at such times as specified by the
representative.
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As a corollary to the amendment to Regulation 1.12(a)(2), the
Commission is proposing to amend Regulation 1.12(i)(1). This section
addresses the process for filing notices under Regulation 1.12 and
currently requires, among other things, that the documentation required
under Regulations 1.12(a)(2) and (a)(3) be filed in accordance with the
provisions of section 1.10(d), which specifies the required content of
financial reports. This requirement is no longer necessary as the
specific financial statements currently referenced in Regulation
1.12(i)(1) would no longer be required under the Proposal. Accordingly,
the Proposal would delete this requirement. Documentation required to
be provided under amended Regulation 1.12(a)(2) would be submitted
either by facsimile or electronically pursuant to amended Regulation
1.12(i)(3).
D. Miscellaneous Amendments to Regulations
The Commission is proposing several minor amendments to Regulations
1.10 and 1.12 to correct certain outdated references and to otherwise
clarify existing regulations. Regulation 1.10(c)(1) states generally
that reports filed by IBs pursuant to paragraph (b)(2)(i) or (b)(2)(ii)
(i.e., the filing provisions for non-certified and certified reports by
registered IBs) are filed only with NFA. Other reports are generally
required to be filed with the relevant regional office of the
Commission and the registrant's SRO, except that an applicant for
registration is required to file reports with the relevant regional
office of the Commission and NFA. The Commission has issued orders
delegating to NFA the processing of application requests by FCMs and
IBs, and in practice almost all financial reports from applicants for
registration as FCMs or IBs are filed with the NFA only.\14\
Accordingly, the Commission is proposing to amend the language of
Regulation 1.10(c)(1) to delete reference to an applicant's need to
file financial reports with a regional office of the Commission.
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\14\ The Commission order delegating to NFA the registration
function for IB applicants is published at 48 FR 35158 (August 3,
1983), and the order delegating the registration function for FCM
applicants is published at 49 FR 39593 (October 9, 1984).
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Similarly, Regulation 1.12(i)(1) currently indicates that an
applicant for registration as an FCM must file any notices required
under Regulation 1.12 with, among others, the regional office of the
Commission that has jurisdiction over the state in which the
applicant's principal place of business is located and with the
Commission's principal office in Washington, DC. The proposed, amended
language in Regulation 1.12(i)(1) would make clear that an applicant
for registration as an FCM would file such notices only with NFA and
that such notices need not be filed with the Commission. The amended
regulation would also make clear that any notice or report filed with
the National Futures Association will be deemed to be filed with, and
to be the official record of, the Commission.
The Commission also is proposing the following minor wording
changes to Regulation 1.10(c)(1) for the purposes of consistency with
other provisions of the regulations and/or general clarification as
follows: (1) The reference to ``[a] report filed by an [IB] pursuant to
paragraph (b)(2)(i) or (b)(2)(ii)'' would be amended to clarify that
``a report'' in this context is meant to refer to Form 1-
[[Page 52438]]
FR; (2) the reference to subparagraphs (b)(2)(i) and (b)(2)(ii) would
be amended for simplicity to refer only to paragraph (b)(2) in general;
and (3) the language of paragraph 1.10(c)(1) would be amended to make
clear that it is intended to cover not only ``reports'' but all reports
and other ``information.'' The Commission, NFA and SROs are permitted
under Regulation 1.10(b)(4) to make a written request of an FCM or IB
for information as they may determine is necessary. The proposed
amendment would clarify that the guidance provided in Regulation
1.10(c)(1) regarding with whom filings should be made would govern the
filing of such requested information.
Regulation 1.10(b)(2)(i) provides generally that an IB must file a
Form 1-FR-IB semiannually as of the middle and close of each fiscal
year ``unless the [IB] elects * * * to file a Form 1-FR-IB semiannually
as of the middle and close of each calendar year.'' Regulation
1.10(b)(2)(ii) generally states further that an IB must file a
certified 1-FR-IB as of the close of its fiscal year ``(even if it
files semiannual reports on a calendar year basis).'' Prior to 1993,
Commission regulations required IBs to file Form 1-FR on a quarterly
rather than a semiannual basis, unless the IB's SRO permitted
semiannual filing. The regulations also allowed IBs to elect to file
reports on a calendar year basis rather than on a fiscal year
basis.\15\ This election was separate from the election to use a fiscal
year other than a calendar year, which is still permitted to be made
under Regulation 1.10(e)(1). The Commission's regulations no longer
provide a separate option to elect to file on a calendar year rather
than a fiscal year basis and, accordingly, the Commission is proposing
to delete the language quoted above referencing such an election.
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\15\ See 48 FR 35248 (Aug. 3, 1983) (adopting registration
requirements and procedures for IBs, among others).
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Regulation 1.10(b)(3) provides generally that an FCM or IB can
satisfy the 1-FR filing requirements applicable to them set forth in
Regulations 1.10(b)(1) and (2), respectively, if the FCM or IB is a
member of a DSRO and satisfies the minimum financial standards and
reporting requirements established by rules of the DSRO which have been
approved ``after the effective date of these regulations by the
Commission * * *.'' The language ``after the effective date of these
regulations'' is no longer relevant and, accordingly, the Commission is
proposing to delete the language.
Finally, for purposes of clarification and consistency with the
Commission's regulations the Commission is proposing to amend language
within regulation 1.10(h) that references ``NFA'' by spelling out
``National Futures Association.''
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing regulations, consider the impact
of those regulations on small businesses. The amendments proposed
herein would affect FCMs and IBs. 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.
With respect to IBs, the Commission 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.\16\ The
Proposal will not place any additional burdens on IBs that are small
businesses because all such parties, if any, already are subject to the
financial reporting and notice requirements under Regulations 1.10 and
1.12 and already file financial reports through NFA's electronic filing
system. Additionally, although the Commission is proposing to add a
requirement to include statements of income and loss as part of non-
certified financial report filings, substantially all IBs already are
filing this data in practice and, in any event, must compute the
relevant income and loss data (although not currently required to be
provided in a separate income statement) in order to complete
Commission Form 1-FR or the SEC FOCUS report, as applicable, under the
Commission's regulations.\17\ Accordingly, pursuant to Section 3(a) of
the RFA, 5 U.S.C. 605(b), the Chairman, on behalf of the Commission,
certifies that these proposed rule amendments will not have a
significant economic impact on a substantial number of small entities.
However, the Commission invites the public to comment on this finding.
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\16\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).
\17\ See Commission Regulations 1.10(b)(2) and 1.10(h)
(requiring IBs to file with the Commission Form 1-FR-FCM or, as an
alternative in the case of a registered broker or dealer with the
SEC, the FOCUS report).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \18\ 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. The Proposal does not require a new
collection of information on the part of any entities subject to the
proposed amendments. The amendments would, if adopted in final form,
provide FCMs and IBs with an alternative method for submitting certain
data. The amendments proposed under Regulation 1.12(a)(2) would provide
FCMs and IBs with a more flexible approach to providing documentation
if a registrant's adjusted net capital fell below its minimum
requirement, but would not require a new collection or affect the
collection burden, as discussed below. Additionally, although the
Commission is proposing to add a requirement to include statements of
income and loss as part of non-certified financial report filings,
substantially all registrants that file financial reports with the
Commission already are filing this data.
---------------------------------------------------------------------------
\18\ 44 U.S.C. 3507(d).
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Collection of Information
(Regulations and Forms Pertaining to the Financial Integrity of the
Marketplace, OMB Control Number 3038-0024). Although the amendments if
promulgated in final form would alter the method of collection of some
of the information required in the above referenced collection, would
provide a simpler approach of documenting compliance with certain
regulatory obligations, and would add a requirement to include an
additional statement as part of non-certified financial report filings,
the estimated burden associated with this collection is not expected to
increase or decrease as a result. The Commission is proposing to add a
requirement for certain registrants to include statements of income and
loss as part of their monthly non-certified financial report filings
with the Commission. Substantially all registrants that file financial
reports with the Commission already are filing this data in practice,
however. Additionally, to the extent a firm did not already file this
report with the Commission monthly, it would, nonetheless, need to have
this information computed and available in order to file other
currently required reports. Filing the information with the Commission
would require nothing more than inputting a few extra data items into a
form already required to be filed. Accordingly, the burden associated
with such a filing already is included in the estimated burden for this
collection. With respect to proposed
[[Page 52439]]
rule amendments that would permit certain entities to file
electronically reports and notices that currently are filed in paper
form, all such affected entities currently must complete these same
reports and notices. The amendments would simply substitute electronic
submission for the mailing of a paper filing. With respect to rule
amendments concerning the documentation required of FCMs and IBs that
fall below their required net capital requirements, these amendments
would provide registrants with more flexibility in choosing the form
documentation will take when providing the Commission with required
information. The Commission believes, however, that the burden
associated with preparing such documentation would be equivalent to
that required under current regulations. Additionally, although the
amendments allow the Commission to request registrants to provide
additional documentation on request, this is simply a clarification of,
rather than a change to, current regulations and practice and would not
affect the collection burden. Accordingly, for purposes of the PRA, the
Commission certifies that the proposed rule amendments, if promulgated
in final form, would not impact the total annual reporting or
recordkeeping burden associated with the above-referenced collection of
information, which has been approved previously by the Office of
Management and Budget (``OMB''). Pursuant to the PRA, the Commission
has submitted a copy of this section to OMB for its review.
The Commission considers comments by the public on this proposed
collection of information in--
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used;
Enhancing the quality, utility, and clarity of the information to
be collected; and
Minimizing the burden of the collection of information on those who
are to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses.
Organizations and individuals desiring to submit comments on the
information collection should contact the Office of Information and
Regulatory Affairs, Office of Management and Budget, Room 10235, New
Executive Office Building, Washington, DC 20503, Attn: Desk Officer of
the Commodity Futures Commission. OMB is required to make a decision
concerning the collection of information contained in these proposed
regulations between 30 and 90 days after publication of this document
in the Federal Register. Therefore, a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to
comment to the Commission on the proposed regulations. Copies of the
information collection submission to OMB are available from the CFTC
Clearance Officer, 1155 21st Street, NW., Washington, DC 20581 or (202)
418-5160.
C. Cost-Benefit Analysis
Section 15(a) of the Act, as amended by Section 119 of the
Commodity Futures Modernization Act, requires the Commission to
consider the costs and benefits of its action before issuing a new
regulation under the Act. By its terms, Section 15(a) as amended does
not require the Commission to quantify the costs and benefits of a new
regulation or to determine whether the benefits of the proposed
regulation outweigh its costs. Rather, Section 15(a) simply requires
the Commission to ``consider the costs and benefits'' of its action.
Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. The Commission, in its discretion, can choose to give
greater weight to any one of the five enumerated areas and determine
that, notwithstanding its costs, a particular regulation is necessary
or appropriate to protect the public interest or to effectuate any of
the provisions or to accomplish any of the purposes of the Act.
The Commission has considered the costs and benefits of this
proposed regulation in light of the specific provisions of Section
15(a) of the Act, as follows:
1. Protection of market participants and the public. The proposed
amendments should not affect the protection of market participants and
the public as they generally provide an alternate method of delivery of
information contained in certain reports and notice filings currently
required or permitted by Commission regulations but do not
substantively alter the character of such information.
2. Efficiency and competition. The Commission anticipates that the
proposed amendments will benefit efficiency by permitting the
Commission and NFA to streamline their processes for receiving
financial reports and various notice filings from FCMs and IBs and
providing greater flexibility to registrants in providing certain
required documentation to the Commission. The proposed amendments are
considered by the Commission as benefiting efficiency and not impacting
competition.
3. Financial integrity of futures markets and price discovery. The
proposed amendments should have no effect, from the standpoint of
imposing costs or creating benefits, on the financial integrity of
futures markets or the price discovery function of such markets.
4. Sound risk management practices. The proposed amendment should
have no effect, from the standpoint of imposing costs or creating
benefits, on sound risk management practices.
5. Other public interest considerations. The Commission believes
that the proposed regulations are beneficial in that they should
encourage improvements to future systems of electronic authorization
and streamline the timeliness of delivery and electronic accessibility
of notices to and by the Commission and NFA as well as allow the
Commission and NFA to retain such reports in a more streamlined manner.
After considering these factors, the Commission has determined to
propose the amendments discussed above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit any data that they may have quantifying the
costs and benefits of the proposal with their comment letters.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
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 17 CFR part 1 as follows:
[[Page 52440]]
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, 5, 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, as amended by the Commodity
Futures Modernization Act of 2000, appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).
2. Section 1.10 is amended by removing paragraph (b)(2)(iii) and
revising paragraphs (b)(2)(i), (b)(2)(ii)(A), (b)(3), (c)(1) and
(c)(2), (d)(1)(ii), (d)(4)(iii), and (h) to read as follows:
Sec. 1.10 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(b) * * *
(2)(i) 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.
Each Form 1-FR-IB must be filed no later than 17 business days after
the date for which the report is made.
(ii)(A) In addition to the financial reports required by paragraph
(b)(2)(i) of this section, each person registered as an introducing
broker must file a Form 1-FR-IB as of the close of its fiscal year
which must be certified by an independent public accountant in
accordance with Sec. 1.16 no later than 90 days after the close of
each introducing broker's fiscal year: Provided, however, that a
registrant which is registered with the Securities and Exchange
Commission as a securities broker or dealer must file this report not
later than the time permitted for filing an annual audit report under
Sec. 240.17a-5(d)(5) of this title.
* * * * *
(3) The provisions of paragraphs (b)(1) and (b)(2) of this section
may be met by any person registered as a futures commission merchant or
as an introducing broker who is a member of a designated self-
regulatory organization and conforms to minimum financial standards and
related reporting requirements set by such designated self-regulatory
organization in its bylaws, rules, regulations, or resolutions and
approved by the Commission pursuant to Section 4f(b) of the Act and
Sec. 1.52: Provided, however, That each such registrant shall promptly
file with the Commission a true and exact copy of each financial report
which it files with such designated self-regulatory organization.
* * * * *
(c) Where to file reports. (1) Form 1-FR filed by an introducing
broker pursuant to paragraph (b)(2) of this section need be filed only
with, and will be considered filed when received by, the National
Futures Association. Other reports or information provided for in this
section will be considered filed when received by the regional office
of the Commission with jurisdiction over the state in which the
registrant's principal place of business is located and by the
designated self-regulatory organization, if any; and reports or other
information required to be filed by this section by an applicant for
registration will be considered filed when received by the National
Futures Association. Any report or information filed with the National
Futures Association pursuant to this paragraph shall be deemed for all
purposes to be filed with, and to be the official record of, the
Commission.
(2)(i) Except as provided in the last sentence of this
subparagraph, all filings or other notices prepared by a futures
commission merchant pursuant to this section may be submitted to the
Commission in electronic form using a form of user authentication
assigned in accordance with procedures established by or approved by
the Commission, and otherwise in accordance with instructions issued by
or approved by the Commission, if the futures commission merchant or a
designated self-regulatory organization has provided the Commission
with the means necessary to read and to process the information
contained in such report. 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 must be filed in paper form and
may not be filed electronically.
(ii) Except as provided in paragraph (h) of this section, all
filings or other notices or applications prepared by an introducing
broker or applicant for registration as an introducing broker or
futures commission merchant pursuant to this section must be filed
electronically in accordance with electronic filing procedures
established by the National Futures Association. In the case of a Form
1-FR-IB that is required to be certified by an independent public
accountant in accordance with Sec. 1.16, a paper copy of any such
filing with the original manually signed certification must be
maintained by the introducing broker or applicant for registration as
an introducing broker in accordance with Sec. 1.31.
* * * * *
(d) * * *
(1) * * *
(ii) Statements of income (loss) and a statement of changes in
ownership equity for the period between the date of the most recent
statement of financial condition filed with the Commission and the date
for which the report is made;
* * * * *
(4) * * *
(iii) In the case of a Form 1-FR filed via electronic transmission
in accordance with procedures established by or approved by the
Commission, such transmission must be accompanied by the user
authentication assigned to the authorized signer under such procedures,
and the use of such user authentication 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.
* * * * *
(h) Filing option available to a futures commission merchant or an
introducing broker that is also a securities broker or dealer. Any
applicant or registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer may comply with
the requirements of this section by filing (in accordance with
paragraphs (a), (b), (c), and (j) of this section) a copy of its
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE
(FOCUS Report), in lieu of Form 1-FR; Provided, however, That all
information which is required to be furnished on and submitted with
Form 1-FR is provided with such FOCUS Report; and Provided, further,
That a certified FOCUS Report filed by an introducing broker or
applicant for registration as an introducing broker in lieu of a
certified Form 1-FR-IB must be filed according to National Futures
Association rules, either in paper form or electronically, in
accordance with procedures established by the National Futures
Association, and if filed electronically, a paper copy of such filing
with the original manually signed certification must be maintained by
such introducing broker or applicant in accordance with Sec. 1.31.
* * * * *
3. Section 1.12 is amended by:
a. Revising paragraphs (a)(2) and (i)(1);
b. Removing paragraph (a)(3); and
[[Page 52441]]
c. Adding paragraph (i)(3).
The revisions and addition read as follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
(a) * * *
(2) Provide together with such notice documentation in such form as
necessary to adequately reflect the applicant's or registrant's capital
condition as of any date such person's adjusted net capital is less
than the minimum required. The applicant or registrant must provide
similar documentation for other days as the Commission may request.
* * * * *
(i)(1) Every notice and written report required to be given or
filed by this section (except for notices required by paragraph (f) of
this section) by a futures commission merchant or a self-regulatory
organization must be filed with the regional office of the Commission
with jurisdiction over the state in which the registrant's principal
place of business is located, with the principal office of the
Commission in Washington, DC, with the designated self-regulatory
organization, if any, and with the Securities and Exchange Commission,
if such registrant is a securities broker or dealer. Every notice and
written report required to be given or filed by this section by an
applicant for registration as a futures commission merchant must be
filed with the National Futures Association (on behalf of the
Commission), with the designated self-regulatory organization, if any,
and with the Securities and Exchange Commission, if such applicant is a
securities broker or dealer. Any notice or report filed with the
National Futures Association pursuant to this paragraph shall be deemed
for all purposes to be filed with, and to be the official record of,
the Commission.
* * * * *
(3) Every notice or report required to be provided in writing to
the Commission under this section may, in lieu of facsimile, be filed
via electronic transmission using a form of user authentication
assigned in accordance with procedures established by or approved by
the Commission, and otherwise in accordance with instructions issued by
or approved by the Commission. Any such electronic submission must
clearly indicate the registrant or applicant on whose behalf such
filing is made and the use of such user authentication in submitting
such filing will constitute and become a substitute for the manual
signature of the authorized signer.
* * * * *
Issued in Washington, DC on October 6, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-24480 Filed 10-9-09; 8:45 am]
Last Updated: October 13, 2009
See Also:
