2012-20962
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Federal Register, Volume 77 Issue 167 (Tuesday, August 28, 2012)[Federal Register Volume 77, Number 167 (Tuesday, August 28, 2012)]
[Rules and Regulations]
[Pages 51898-51910]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20962]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 3
RIN 3038-AC96
Registration of Intermediaries
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
adopting regulations to further implement new statutory provisions
enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) regarding registration of
intermediaries. Specifically, the Commission is adopting certain
conforming amendments to the Commission's regulations regarding the
registration of intermediaries, consistent with other Commission
rulemakings issued pursuant to the Dodd-Frank Act, and other non-
substantive, technical amendments to its regulations.
DATES: Effective October 29, 2012.
FOR FURTHER INFORMATION CONTACT: Andrew Chapin, Associate Director,
Division of Swap Dealer and Intermediary Oversight, (202) 418-5465,
achapin@cftc.gov; or Claire Noakes, Attorney Advisor, Division of Swap
Dealer and Intermediary Oversight, (202) 418-5444, cnoakes@cftc.gov;
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\
Title VII of the Dodd-Frank Act amended the Commodity Exchange Act
(CEA) \2\ to establish a comprehensive new regulatory framework to
reduce risk, increase transparency, and promote market integrity within
the financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers (SDs) and
major swap participants (MSPs); (2) imposing clearing and trade
execution requirements on standardized derivative products; (3)
creating rigorous recordkeeping and real-time reporting regimes; and
(4) enhancing the Commission's rulemaking and enforcement authorities
with respect to all registered entities and intermediaries subject to
the Commission's oversight.
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\1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376
(2010). The text of the Dodd-Frank Act may be accessed at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
\2\ 7 U.S.C. 1 et seq.
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As discussed below, the regulations the Commission is adopting
today concern conforming and technical amendments to part 3 governing
the registration of intermediaries. These final regulations are based
in large part on the Commission's proposed regulations regarding part 3
(Proposal).\3\ The conforming amendments largely consist of adding
references, where appropriate, to SDs, MSPs and swap execution
facilities (SEFs). In addition, the adopted regulations contain
modernizing and technical amendments to part 3 in anticipation of an
influx of new registrants. Further, the adopted regulations clarify or
update definitions, outdated cross-references to other regulations, and
other typographical errors.
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\3\ 76 FR 12888, Mar. 9, 2011.
\4\ The comments the Commission received on the Proposal are
currently available on the Commission's Web site.
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II. Comments \4\ and Responses
A. In General
In response to the Proposal, the Commission received four comments
from the Futures Industry Association (FIA), the National Futures
Association (NFA), and two individuals, Chris Barnard and Bill Nolan.
In addition, the Commission also received comments relevant to the
Proposal in a global comment letter submitted by a U.S. investor and a
petition for exemption submitted pursuant to Section 4(c) of the CEA
\5\ by a group of trade industry associations.\6\ The commenters
generally supported the Commission's efforts to update and modernize
part 3 consistent with the regulatory developments set forth in the
Dodd-Frank Act. In consideration of the comments received,\7\ and
unless specifically addressed below in the section-by-section analysis,
the Commission adopts the final regulations as proposed.
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\5\ 7 U.S.C. 6(c).
\6\ The Commission determined that the issues raised in the
global comment letter with respect to addressing the types of
activities that would cause a market participant to be deemed an
introducing broker engaged in swap-related activities were outside
of the scope of the Proposal, and therefore is not addressing them
in this final rule. Likewise, the petition submitted by the trade
industry associations cited the Proposal as an example of amendments
that would likely not be effective in time for a July 16, 2011
compliance deadline. Those concerns were addressed when the
Commission granted related relief and extended the effective and/or
compliance date applicable to many Dodd-Frank requirements. See the
second amended version of the effective date order at 77 FR 41260,
July 13, 2012.
\7\ NFA requested that the Commission specifically list the
chief compliance officer of a registered foreign exchange dealer in
the definition of principal. The Commission addressed this request
in another rulemaking, wherein chief compliance officer is listed as
an example of a principal of a registrant. See 77 FR 20200, Apr. 3,
2012.
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B. Section 3.1--Definitions
Section 3.1 proposed alterations to the scope of persons who, by
reason of their ownership of securities of a registrant, must be listed
as a principal. The Commission proposed to narrow the current category
of persons in Sec. 3.1(a)(2)(i) to only those individuals who are the
owners or are entitled to vote or have the power to sell or direct the
sale of 10 percent or more of the outstanding shares of any class of
equity securities, other than non-voting securities. The Commission
intended to narrow the scope of the provision because the existing
provision was over-inclusive, in that it captured individuals without
the ability to influence a company's actions, such as owners of 10% of
a class of preferred stock. However, upon further reflection, the
Commission is concerned that the Proposal might, in other ways, be
under-inclusive, in that it would fail to capture an owner who might
indirectly have the power--such as through a membership agreement--to
dictate upfront the entity's activities that are subject to regulation
by the Commission. Consequently, in order to strike the right balance
between the over-inclusive existing provision and the under-inclusive
proposed language, the Commission is modifying Sec. 3.1(a)(2)(i) to
include individuals who have the power to exercise a controlling
influence over the entity's activities that are subject to regulation
by the Commission.\8\
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\8\ In comparison, broker-dealers regulated by the Securities
and Exchange Commission are required to disclose on Form BD that is
filed with the Financial Industry Regulatory Authority any person
not otherwise named on Schedule A as a direct owner or Schedule B as
an indirect owner who nonetheless controls the management or
policies of the applicant through agreement or otherwise. See http://www.sec.gov/about/forms/formbd.pdf.
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[[Page 51899]]
C. Section 3.10--Registration of Futures Commission Merchants, Retail
Foreign Exchange Dealers, Introducing Brokers, Commodity Trading
Advisors, Commodity Pool Operators, Swap Dealers, Major Swap
Participants, and Leverage Transaction Merchants. Section 3.11--
Registration of Floor Brokers and Floor Traders. Section 3.12--
Registration of Associated Persons of Futures Commission Merchants,
Retail Foreign Exchange Dealers, Introducing Brokers, Commodity Trading
Advisors, Commodity Pool Operators and Leverage Transaction Merchants
Section 3.10 generally sets forth the registration requirements for
various Commission registrants. Section 3.11 generally sets forth the
registration requirements for floor brokers and floor traders. Section
3.12 generally sets forth the registration requirements for natural
persons associated with a Commission registrant in certain capacities,
referred to as associated persons (APs).
With respect to APs, the Commission proposed to amend Sec. 3.10 to
add a new paragraph (c)(5) to clarify that a person employed by either
an SD or a MSP and acting as its AP is not required to separately
register as an SD or MSP, respectively, solely arising out of the
person's activities as an AP. The Commission sought public comment as
to whether this exemption is necessary to clarify the registration
responsibilities of employees, in light of the current absence of a
registration requirement as an AP of an SD or an MSP, and in light of
the definition requiring persons who engage in certain swap activities
to register as an SD or an MSP.\9\ FIA and Chris Barnard were
supportive of this clarification on the grounds that it provided
regulatory certainty. The Commission is adopting the language in new
paragraph (c)(5) with a change in the language to reflect that it is
not appropriate to consider the AP's activities as an AP of an SD for
the purpose of determining whether the person is an SD.
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\9\ See 77 FR 30596, May 23, 2012.
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With respect to intermediaries, current Sec. 3.10(c)(2) and (3)
provides exemptions from registration as a futures commission merchant
(FCM) for foreign brokers and other foreign intermediaries conducting
activities in commodity interest transactions on designated contract
markets (DCMs) solely on behalf of customers located outside the U.S.
The Commission proposed to amend this section to expand these
registration exemptions to foreign brokers and foreign intermediaries
engaged in commodity interest transactions solely on behalf of non-U.S.
customers executed on a SEF and cleared on a designated clearing
organization through the customer omnibus account maintained with a
registered FCM. FIA supported the Commission's proposal to align
registration exemptions for foreign intermediaries across DCMs and
SEFs. The Commission also sought comment as to whether it should expand
such exemption to swap transactions executed bilaterally, and FIA
supported this suggestion as well. Finally, the Commission sought
comment as to whether any expansion should distinguish between
bilateral swap transactions that occur within the U.S. and those that
occur abroad. The Commission did not receive any comments regarding
such a distinction. Therefore, the Commission is amending Sec.
3.10(c)(2) and (3) to extend the registration exemption to commodity
interest transactions executed bilaterally, on or subject to the rules
of a DCM, or on or subject to the rules of a SEF, that are submitted
for clearing on an omnibus basis through a registered FCM.
As proposed, Sec. 3.11 pertaining to registration of floor brokers
and floor traders contained a series of technical changes, such as
consolidating an exemption found in Sec. 3.4 and removing references
to DTEFs. Subsequently, the Commission has promulgated the further
definition of the term ``swap dealer'' \10\ which, among other things,
excludes certain swaps entered into by registered floor traders from
the SD determination. Specifically, Sec. 1.3(ggg)(6)(iv) states that
``[i]n determining whether a person is a swap dealer, each swap that
the person enters into in its capacity as a floor trader as defined by
section 1a(23) of the Act or on or subject to the rules of a swap
execution facility shall not be considered for the purpose of
determining whether the person is a swap dealer,'' provided that the
person is registered as a floor trader pursuant to Sec. 3.11 and
otherwise satisfies other conditions with respect to its trading,
including certain requirements as if it were an SD.\11\
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\10\ 77 FR 30596, May 23, 2012.
\11\ 17 CFR 1.3(ggg)(6)(iv) (emphasis added). Section 1a(23) of
the CEA restricts floor traders to the offer and sale of contracts
``solely for such person's own account.'' 7 U.S.C. 1a(23).
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Given that legal entities, in addition to natural persons, may seek
to avail themselves of the exclusion set forth above, the Commission
therefore is adding a reference to Form 7-R in Sec. 3.11. Form 7-R, as
the application for registration as an intermediary, is the appropriate
form for NFA to process an entity's application for registration as a
floor trader engaged in swaps activities. Additionally, references to
SEFs are being added throughout Sec. 3.11 as one of the two categories
of facilities for which floor traders in swaps will be granted trading
privileges. Although these additions were omitted in the Proposal, the
Commission believes that insertion of the appropriate reference to the
type of registration form, and the type of facility, that would allow
the NFA to properly process applications for registration of floor
traders engaged in swaps activities are conforming changes to the
registration rule that are necessary to implement the SD definition.
Consequently, the Commission is adopting additional technical
modifications in Sec. 3.21 to address the processing of fingerprints
for principals of a floor trader that is a non-natural person, as well
as in Sec. 3.33 to reflect the use of Form 7-W for a request for
withdrawal from a floor trader that is a non-natural person. The
Commission is also adopting other technical modifications in Sec. Sec.
3.30 and 3.40 to reflect the registration of legal entities as floor
traders,\12\ and in Sec. Sec. 3.2, 3.4, 3.42, 3.56, 3.60 and 3.64 to
add references to SEFs.
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\12\ In Sec. 3.40, the provision for temporary licenses is
limited to individual floor traders because this provision is
applicable only to natural persons (such as APs addressed in Sec.
3.40(a)).
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The Commission proposed to amend Sec. 3.12(h)(1) to provide that a
person is not required to register as an AP in any capacity if such
person is registered in one of the other enumerated categories,
including an SD or MSP. FIA agreed with the Commission that it is
highly improbable that an individual, rather than an entity, would
register as an SD and MSP, but supported the Commission's proposal in
light of the regulatory certainty that it provides. Accordingly, the
Commission is adopting Sec. 3.12(h)(1) as proposed.
D. Section 3.31--Deficiencies, Inaccuracies, and Changes To Be
Reported. Section 3.33--Withdrawal From Registration
Section 3.31 sets forth procedural requirements for a registrant to
update and/or correct information previously provided to the Commission
and the NFA. The NFA is a registered futures association (RFA) to which
the Commission has delegated certain registration functions.\13\
Currently, NFA
[[Page 51900]]
exercises discretion in determining whether changes to the information
originally filed on the registrant's Form 7-R or 8-R,\14\ including its
legal name, form of organization, and list of principals, would require
a registrant to withdraw and re-register or, in the alternative, amend
its Form 7-R or 8-R. The NFA's discretion is subject only to the
requirement to withdraw and re-register set forth in Sec. 3.31(a)(1)
where a registrant is reporting a change in the form of organization
from or to a sole proprietorship, and the safe-harbor from re-
registration set forth in Sec. 3.31(a)(3).
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\13\ Section 17(o)(1) of the CEA, 7 U.S.C. 21(o)(1), provides
that the Commission may require an RFA to perform certain Commission
registration functions, in accordance with the CEA and the rules of
the RFA.
\14\ Form 7-R is the Commission's application for registration
as an intermediary or floor broker that is a non-natural person and
application for NFA membership, while Form 8-R is the Commission's
application for registration as an AP, floor broker, or individual
floor trader, as well as the application for listing as a principal
of a registrant.
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Among other changes set forth in the Proposal, the Commission
proposed: (1) To adopt Sec. 3.31(a)(5) to require re-registration in
the event of a change in name or form of organization and a change in
principal, while preserving the existing safe harbor in Sec.
3.31(a)(3) in the event that there is no change in principal and the
registrant will be liable for its predecessor organization. The
Commission specifically requested comment on whether the additional
transparency under the new provisions of Sec. 3.31 is beneficial and
necessary to fulfill the Commission's mandate to protect customers, and
whether the existing safe harbors from re-registration should be
maintained. In response to the Commission's request, NFA and FIA
opposed the proposed re-registration requirements as unnecessary, while
Bill Nolan supported the proposed re-registration requirements as
necessary to ensure that the existing process is not abused by
registrants to the detriment of customers.
In particular, the NFA challenged the proposed amendments to Sec.
3.31 on the following grounds: (1) It will be more difficult for
members of the public to uncover a ``new'' firm's true disciplinary
information; (2) the change in the legal name or form of a business
organization and the addition of a principal does not necessarily
trigger a regulatory need for re-registration; and (3) the proposed
changes do not adequately address the timing of events sufficient to
require re-registration. FIA similarly opposed the proposed changes on
the grounds that re-registration should not be required for concurrent
changes to the name or form of an organization, or the addition of a
principal because re-registration is not required separately for each
of these occurrences. FIA also stated that, upon implementation of the
Dodd-Frank Act, the prospective mergers of affiliated companies will be
negatively impacted by the proposed requirements.
After carefully considering the foregoing comments, the Commission
has determined not to adopt the amendment in Sec. 3.31(a)(3) and (5)
as proposed.\15\ The Commission intends to promptly consider
alternatives to the Proposal's re-registration requirements \16\ in
order to address customer protection issues raised by the current
rules. In the meantime, a prospective customer will continue to be able
to obtain disciplinary history of any associated organizations by
reviewing the list of principals shared by both the currently and
formerly registered organizations, which is already contained in a
publicly available database maintained by the NFA.
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\15\ In its comment letter, the NFA also suggested a few
technical edits to the language in proposed Sec. 3.31(a)(2) and (4)
to reflect the current filing requirements associated with the
filing of Form 7-R. The Commission agrees with these comments and is
adopting these technical edits in the final rule. Additionally, as a
technical change, the Commission is deleting Sec. 3.31(b)(2)
because it duplicates some of the language in Sec. 3.31(a)(1) with
respect to the obligations of applicants for registration as SDs or
MSPs, and is combining the reference to principals of SDs or MSPs
found in current Sec. 3.31(b)(2) with the reference to principals
of other registrants in current Sec. 3.31(b)(1).
\16\ In comparison, consider that broker-dealers regulated by
the Securities and Exchange Commission are required to provide on
Form BD, which is filed with the Financial Industry Regulatory
Authority, any information about business predecessors, including
the date of succession, name of predecessor, and the registration
number for any predecessor.
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In its comment letter, the NFA also suggested a few technical edits
to the language in proposed Sec. 3.31 to clarify that: (1) It is not
the electronic update reporting a change on a Form 7-R that creates any
deficiency or inaccuracy; and (2) an applicant or registrant no longer
lists its principals who are individuals on its application for
registration, as only holding companies are listed. The Commission
believes that these comments improve upon the proposed language and is
adopting these suggested changes in the final regulation. Finally, as
previously mentioned, the Commission is also adopting additional
technical modifications in Sec. 3.31 to reflect the use of Form 7-R
for floor traders that are non-natural persons.
E. Corrections
In the Proposal, the Commission noted that it would be necessary to
harmonize any distinctions between the Proposal and other rulemakings
as they become final. On January 19, 2012, the Commission published in
the Federal Register a final rulemaking regarding the registration of
SDs and MSPs.\17\ In that final rulemaking, the Commission adopted new
registration requirements for SDs and MSPs that were not contained in
the rule language on which the Proposal was based. In order to
integrate the new rule language from the above final rulemaking with
the proposed language to be finalized in this release, the Commission
is incorporating, where relevant, the amended rule language referencing
SDs and MSPs into this release.\18\
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\17\ 77 FR 2613, Jan. 19, 2012. The Commission subsequently
published a correction regarding certain language set forth in the
January 19, 2012 release. See 77 FR 3590, Jan. 25, 2012.
\18\ See, e.g., Sec. 3.12.
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (Reg Flex Act) requires that
agencies consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact.\19\ A regulatory flexibility analysis or certification is
required for ``any rule for which the agency publishes a general notice
of proposed rulemaking pursuant to'' the notice-and-comment provisions
of the Administrative Procedure Act, 5 U.S.C. 553(b) or any other
law.\20\ The final rules promulgated today amend existing rules in part
3 regarding the registration of intermediaries consistent with other
Commission rulemakings issued pursuant to the Dodd-Frank Act, and also
make other technical, non-substantive amendments to part 3.
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\19\ 5 U.S.C. 601 et seq.
\20\ See 5 U.S.C. 601(2), 603, 604 and 605.
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As set forth in the Proposal,\21\ the final rules shall affect
registered FCMs, IBs, commodity trading advisors, commodity pool
operators, SDs, and MSPs. The Commission has previously determined that
FCMs, commodity pool operators, SDs, and MSPs are not small entities
for purposes of the Reg Flex Act.\22\ The Commission has previously
made a determination with respect to IBs and commodity trading advisors
to evaluate within the context of a
[[Page 51901]]
particular rule proposal whether all or some IBs or commodity trading
advisors should be considered to be small entities and, if so, to
analyze the economic impact on them of any such rule.\23\ The final
rules will also affect floor traders. The Commission has not previously
made a determination regarding floor traders, since currently all
registered floor traders are individuals, and individuals are not
included in the small entity analysis under the Reg Flex Act.
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\21\ The Commission did not receive any comments regarding the
Reg Flex Act and the Proposal.
\22\ See 47 FR 18618, 18619-20, Apr. 30, 1982 (FCMs and
commodity pool operators); 77 FR 30596, 30701 (finding that MSPs are
not small entities and that the number of SDs that are small
entities, if any, is not significant).
\23\ See, with respect to commodity trading advisors, 47 FR
18620, Apr. 30, 1982, and see, with respect to IBs, 48 FR 35276,
Aug. 3, 1983.
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Since there could be some small entities that register as IBs,
commodity trading advisors, or floor traders, the Commission considered
whether this rulemaking would have a significant economic impact on
these registrants. The final rules would clarify the mechanics of
registration by updating cross-references, consolidating exemptions,
and deleting obsolete forms. The Commission does not expect registrants
to incur additional expenses as a result of these clarifications.
Consequently, the Commission finds that there is no significant
economic impact on IBs or commodity trading advisors resulting from
this rulemaking. The final rules also provide clarity to floor traders
regarding existing registration requirements (for example, the
revisions to Sec. 3.11 clarify that an entity that wishes to register
as a floor trader shall do so by filing Form 7-R), rather than imposing
any new registration requirement. Consequently, the Commission finds
that there is no significant economic impact on floor traders resulting
from this rulemaking.
Accordingly, for the reasons stated in the Proposal and the
additional rationale provided above, the Commission believes that the
conforming and other technical amendments in this rulemaking will not
have a significant economic impact on a substantial number of small
entities. Therefore, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the regulations being
published today by this Federal Register release will not have a
significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA), an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.\24\ In the Proposal, the Commission indicated that the proposed
rules would not impose any new recordkeeping or information collection
requirements, or other collections of information that require approval
of the Office of Management and Budget under the PRA. The Commission
invited public comment on the accuracy of its estimate that no
additional information collection requirements or changes to existing
collection requirements would result from the rules proposed herein. In
response, the Commission received no comments.
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\24\ 44 U.S.C. 3501 et seq.
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The currently approved rule collection covering the regulatory
filings discussed in this final rule (3038-0023, which covers Forms 3-
R, 7-R, 8-R and 8-T) has a burden of 78,109 respondents and 7,030
annual hours.\25\ The Commission believes that the number of entities
filing Form 7-R will increase slightly, since that form may now be used
by an entity to register as a floor trader, and the number of persons
filing Form 8-R and 8-T will also increase slightly, when individuals
who are principals of entities that are registered as floor traders use
those forms to list themselves.
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\25\ See currently approved information collection, available at
http://www.reginfo.gov/public/do/PRAICList?ref_nbr=201203-3038-004.
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Therefore, the Commission has determined to revise the burden for
this information collection as follows. The burden associated with the
use of Form 7-R for the registration of entities as floor traders is
estimated to be 60 hours, assuming 60 respondents,\26\ which will
result from: (1) Application for registration by entities as floor
traders and submission of required information on behalf of their
respective principals; (2) initially, no withdrawals from registration
by floor traders and a relatively small decrease in the number of their
respective principals; and (3) initially, no reported corrections.
Burden means the total time, effort, or financial resources expended by
persons to generate, maintain, retain, disclose or provide information
to or for a federal agency.
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\26\ The Commission has previously estimated that approximately
120 entities will register as SDs. See 77 FR 2613, 2622 (January 19,
2012). The Commission believes it is reasonable to estimate that
half as many entities will register as floor traders.
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The respondent burden for this collection is estimated to average 1
hour per response for the Form 7-R; 0.8 hours per response for the Form
8-R; and 0.2 hours per response for the Form 8-T.\27\ These estimates
include the time needed to review instructions; to prepare technology
and systems for the purposes of collecting, validating, and verifying
information, processing and maintaining information, and disclosing and
providing information; to adjust the existing ways to comply with any
previously applicable instructions and requirements; to train personnel
to be able to respond to a collection of information; and to transmit
or otherwise disclose the information.
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\27\ See id. at 2643.
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Form 7-R
Respondents/Affected Entities: 60.
Estimated number of responses: 60.
Estimated total annual burden on respondents: 1 hour.
Frequency of collection: On occasion and annually.
Burden Statement: 60 respondents x 1 hour = 60 Burden Hours.
Form 8-R
Respondents/Affected Entities: 5 principals per each of 60 floor
traders.
Estimated number of responses: 300.
Estimated total annual burden on respondents: 0.8 hours.
Frequency of collection: On occasion.
Burden Statement: 300 respondents x 0.8 hours = 240 Burden Hours.
Form 8-T
Respondents/Affected Entities: 1 principal per each of 10 floor
traders.
Estimated number of responses: 10.
Estimated total annual burden on respondents: 0.2 hours.
Frequency of collection: On occasion.
Burden Statement: 10 respondents x 0.2 hours = 2 Burden Hours.
C. Cost-Benefit Considerations
Section 15(a) of the CEA \28\ requires the Commission to consider
the costs and benefits of its actions before promulgating a regulation
under the CEA or issuing an order. Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
Section 15(a) factors.
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\28\ 7 U.S.C. 19(a).
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The regulations being adopted today conform, modernize, and make
technical amendments to part 3 governing the regulation of
intermediaries. Their purpose is to
[[Page 51902]]
ensure that the Commission's current rules are consistent with other
Commission rulemakings issued pursuant to the Dodd-Frank Act. Before
adopting these regulations, the Commission sought public comment on the
Proposal, including comment on the costs and benefits of the Proposal.
While inviting public comments on its cost-benefit considerations, the
Proposal clarified that the substantive proposed rulemakings with which
this rulemaking is associated have addressed the costs and benefits of
the proposals as required by section 15(a) of the CEA.\29\
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\29\ 76 FR at 12891.
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The Commission received few specific comments concerning the
Proposal's consideration of costs and benefits beyond general comments
that the costs associated with particular rule amendments would
outweigh the benefits. Those it did receive are addressed in the
discussion below. None of the comments received provided a basis to
quantify estimated costs or benefits.
The Commission's baseline for consideration of the costs and
benefits of this rulemaking are the costs and benefits that the public
and market participants would experience in the absence of this
proposed regulatory action. In other words, the proposed baseline is an
alternative situation in which the Commission takes no action to
conform, modernize, and make technical adjustments to its existing
rules as described above in light of the Dodd-Frank Act amendments to
the CEA.
1. Costs and Benefits of the Conforming Amendments--In General
As set forth in the Proposal, the regulations the Commission is
adopting concern conforming and technical amendments to part 3
governing the registration of intermediaries. Although the conforming
amendments do not involve substantive changes to existing regulations,
and hence no significant changes to the costs or benefits of the same,
the final rules do benefit market participants by adding specificity to
the mechanics of registration, which also benefits customers in the
form of increased transparency. For example, the conforming amendments
will add references to SEFs in Sec. 3.42 to clarify that a temporary
license would immediately terminate upon failure to comply with an
award in an arbitration proceeding conducted pursuant to the rules of a
SEF.
2. Costs and Benefits of the Definitions
Current Sec. 3.1(a) sets forth the definition of ``principal,''
and Sec. 3.1(a)(3) carves out from that definition certain persons
that have made capital contributions in the form of subordinated debt
to a registrant, including unaffiliated banks operating in the U.S. and
U.S. branches of foreign banks. The Commission is adopting amendments
to expand the carve-out to accommodate the likelihood that persons with
capital contributions from foreign banks might register as SDs and thus
be included within the definition of principal. This expanded
definitional carve-out makes the foreign bank registration process
consistent with that for domestic banks. This consistency promotes
market efficiency by avoiding additional costs that foreign banks would
otherwise incur to comply with listing and qualification requirements.
No comments were received with respect to any cost or benefit
implications of this definitional amendment, notwithstanding that the
Commission specifically sought comments concerning it.\30\
---------------------------------------------------------------------------
\30\ The Commission requested comments on whether the provision
is warranted to ensure uniform listing of principals by domestic and
foreign-domiciled registrants, and whether the expansion would
ensure that the list of principals remains a meaningful reflection
of the persons who actually exercise control over the registrant's
regulated activities.
---------------------------------------------------------------------------
3. Costs and Benefits of Section 3.10--Registration of Futures
Commission Merchants, Retail Foreign Exchange Dealers, Introducing
Brokers, Commodity Trading Advisors, Commodity Pool Operators, Swap
Dealers, Major Swap Participants, and Leverage Transaction Merchants.
Section 3.11--Registration of Floor Brokers and Floor Traders. Section
3.12--Registration of Associated Persons of Futures Commission
Merchants, Retail Foreign Exchange Dealers, Introducing Brokers,
Commodity Trading Advisors, Commodity Pool Operators and Leverage
Transaction Merchants
Section 3.10 generally sets forth the registration requirements for
various Commission registrants. The Commission has decided to implement
the expansion of the existing exemption in Sec. 3.10(c)(2) and (3),
which will introduce parity between registration obligations of foreign
brokers and foreign intermediaries conducting commodity interest
transactions bilaterally, on DCMs, and on SEFs. The Commission expects
such expansion of the exemption to reduce compliance costs without
affecting customer protection. The Commission has also decided to
implement the proposed new paragraph Sec. 3.10(c)(5), which will
provide regulatory certainty that the activities engaged in solely as
an associated person of an SD would not require such person to register
as an SD. The Commission believes that this amendment is beneficial by
reducing the costs to market participants of approaching the Commission
for clarifications.
Section 3.11 is being amended to reflect the further definition of
the term ``swap dealer'' which, among, other things, excludes certain
swaps entered into by registered floor traders from the SD
determination. Traditionally, natural persons have registered as floor
traders. However, following promulgation of rules further defining the
term ``swap dealer,'' the Commission foresees that firms will register
as floor traders, making the previous rule requiring fingerprinting for
all floor traders impractical without clarification. The new rules
clarify that principals of a firm registering as a floor trader, and
each individual responsible for entry of orders from that floor
trader's own account, will be subject to the fingerprinting
requirement. The Commission believes that this amendment is beneficial
by obviating the need for potentially impacted market participants to
incur costs to approach the Commission for clarifications. The other
amendments extending the scope of Sec. 3.11 to SEFs, while mainly
technical in nature, will improve operational efficiency by allowing
NFA to properly process applications for registration for floor traders
engaged in swap activities.
Section 3.12 generally sets forth the registration requirement for
APs. The Commission is adopting an amendment to Sec. 3.12(h)(1)(i) to
provide that a person is not required to register as an AP in any
capacity if he or she is registered in one of the other enumerated
categories, including an SD or MSP. FIA agreed with the Commission that
it is highly improbable that an individual, rather than an entity,
would register as an SD and MSP, but supported the Commission's
proposal in light of the clarity it provides. As the change clarifies
and extends the exemptions to activities of an SD or MSP, it will not
create additional costs, and will benefit the markets by promoting
efficiency by eliminating the need for multiple registrations by a
single individual.
4. Costs and benefits--DTEF
The rules amendments adopted today delete the term DTEF from
Sec. Sec. 3.2(c), 3.2(c)(2), 3.10(a)(3)(i)(A), 3.10(c)(2)(i),
[[Page 51903]]
3.10(c)(3)(i), 3.10(c)(4)(ii) and (iv), 3.11(a)(2) and (3), 3.11(b),
3.31(d), 3.40(a)(2)(iv), 3.42(a)(6), and 3.46(a)(8). This will
implement the abolishment of DTEF as a market category by the Dodd-
Frank Act.
As this change is mandated by statute, it will not create costs and
benefits relative to the baseline. No comments were received on the
costs and benefits of this aspect of the Proposal.
5. Cost and Benefits of Modernization and Technical Amendments to Part
3--Definitions
Section 3.1(a)(2) defines a principal to include persons who exceed
a threshold for equity ownership. As a technical matter, the Commission
is adopting amendments to harmonize the references to outstanding
classes of securities in Sec. 3.1(a)(2)(i) and (ii) by referring
throughout to ``outstanding shares of any class of equity securities,
other than non-voting securities.'' The primary benefit from these
amended regulations is that they provide specificity for calculations
involving authorized but unissued securities, or debt securities.
Also, the Commission is amending its regulations to move the
concept of indirect owners found in the definition of beneficial
ownership in Sec. 3.1(d) to Sec. 3.1(a)(4) to serve as a backstop to
the requirement to list indirect owners in Sec. 3.1(a)(2). The
Commission received no comments with respect to the costs and benefits
of this amendment. The Commission does not believe that this amendment
will have a material impact on costs and benefits relative to the
baseline.
The rules incorporate revised language further defining the
definition of principal to include any person who has the power to
exercise a controlling influence over an entity's activities that are
subject to regulation by the Commission. As described earlier, the
proposed amendments were designed to reduce the scope of persons who
might potentially be covered by the definition. Under certain
circumstances, the revised Sec. 3.1(a)(2)(i) language referencing
those with power to exercise a controlling influence could potentially
increase the scope of persons covered by the definition. But, given
that this amendment is similar to an existing requirement in Form BD
covering broker-dealers, the Commission believes that any additional
costs will be limited to the subset of firms that are not already
registered with the SEC and within this subset, those firms which have
individuals who are not subject to the existing equity ownership
threshold, or the existing director or officer function threshold, but
nonetheless who possess the power to exercise control. Given the nature
of the control structure being addressed, while it is not feasible for
the Commission to estimate the number of firms likely to be impacted by
this rule, it believes that costs of complying with the rule are likely
to be minimal because information on which owners of an entity exercise
control is generally known to officers of that entity. Furthermore, the
minimal costs are justified by the benefits to the market and market
participants from ensuring that individuals cannot circumvent the
fitness qualifications presently in place for principals by structuring
their holdings into non-voting securities, and then exercising control
through a separate agreement.
6. Costs and Benefits of Section 3.31--Deficiencies, Inaccuracies, and
Changes To Be Reported, and Section 3.33--Withdrawal From Registration
Current Sec. 3.31 sets forth procedural requirements for a
registrant to update and/or correct information previously provided to
the Commission and the NFA. Section 3.33 addresses the procedural
requirements for the withdrawal of registration. The Commission is
adopting amendments to Sec. 3.31(a) to reference the requirement in
amended Sec. 3.33 to withdraw registration upon certain events of
dissolution, and in Sec. 3.31(b), (c) and (d) to make technical
corrections.
The adopted amendments in Sec. 3.31 are technical and are not
expected to involve costs, but will provide greater clarity by
correcting references to outdated forms and by deleting duplicate
instructions. The amendments to Sec. 3.33 clarify the requirement to
withdraw under certain circumstances involving dissolution of a
company, and would improve the predictability of withdrawal
requirements to the benefit of market participants. There were no
comments on the costs and benefits of the proposed withdrawal
requirements under Sec. 3.33.
7. Costs and Benefits of Registration Forms
The Commission is adopting amendments to the regulations addressing
the forms used during the registration process. These changes are
technical in nature--for example, the changes would delete references
to an obsolete form and obsolete cross-references. The Commission does
not believe that increased costs to market participants or the public
will result from these changes. That said, the Commission believes they
do provide a benefit by addressing gaps in the current information
collected through the various forms, particularly those forms cross-
referencing other data.
There were no comments on the costs and benefits of the proposed
technical amendments to the forms.
8. Section 15(a) Factors
Protection of market participants and the public.
The Commission believes that the amendments to Sec. 3.33 will
improve the protection of market participants and the public by
requiring withdrawal of registration in the event of dissolution of a
registrant, thus improving the protection of the public.
Efficiency, competitiveness, and financial integrity.
The amendments to Sec. 3.1 clarify the calculations used to
determine who meets the definition of principal, reducing uncertainty
surrounding compliance by intermediaries. The amendments to the
regulations addressing the forms used during the registration process
will update the description of information collection and make it more
accurate, which improves the overall efficiency of our markets.
Price discovery. The Commission has not identified any
impact to the price discovery process from these rules.
Sound risk management policies. The Commission has not
identified any impact to sound risk management practices from these
rules.
Other public interest considerations. The Commission has
not identified any impact to other public interest considerations from
these rules.
List of Subjects in 17 CFR Part 3
Administrative practice and procedure, Brokers, Commodity futures,
Major swap participants, Reporting and recordkeeping requirements, Swap
dealers.
For the reasons stated in the preamble, the Commission amends 17
CFR part 3 as follows:
PART 3--REGISTRATION
0
1. The authority citation for part 3 is revised to read as follows:
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,
13b, 13c, 16a, 18, 19, 21, 23.
0
2. Amend Sec. 3.1 by revising paragraphs (a) introductory text,
(a)(2), and (a)(3), adding paragraph (a)(4), and removing and reserving
paragraphs (d) and (e). The revisions and addition read as follows:
[[Page 51904]]
Sec. 3.1 Definitions.
(a) Principal. Principal means, with respect to an entity that is
an applicant for registration, a registrant or a person required to be
registered under the Act or the regulations in this part:
* * * * *
(2)(i) Any individual who directly or indirectly, through
agreement, holding company, nominee, trust or otherwise, is either the
owner of ten percent or more of the outstanding shares of any class of
equity securities, other than non-voting securities, is entitled to
vote or has the power to sell or direct the sale of ten percent or more
of the outstanding shares of any class of equity securities, other than
non-voting securities, is entitled to receive ten percent or more of
the profits of the entity, or has the power to exercise a controlling
influence over the entity's activities that are subject to regulation
by the Commission; or
(ii) Any person other than an individual that is the direct owner
of ten percent or more of the outstanding shares of any class of equity
securities, other than non-voting securities; or
(3) Any person that has contributed ten percent or more of the
capital of the entity, provided, however, that if such capital
contribution consists of subordinated debt contributed by either:
(i) An unaffiliated bank insured by the Federal Deposit Insurance
Corporation,
(ii) An unaffiliated ``foreign bank,'' as defined in 12 CFR
211.21(n) that currently operates an ``office of a foreign bank,'' as
defined in 12 CFR 211.21(t), which is licensed under 12 CFR 211.24(a),
(iii) Such unaffiliated office of a foreign bank that is licensed,
or
(iv) An insurance company subject to regulation by any State, such
bank, foreign bank, office of a foreign bank, or insurance company will
not be deemed to be a principal for purposes of this section, provided
such debt is not guaranteed by another party not listed as a principal.
(4) Any individual who, directly or indirectly, creates or uses a
trust, proxy, power of attorney, pooling arrangement or any other
contract, arrangement, or device with the purpose or effect of
divesting such person of direct or indirect ownership of an equity
security of the entity, other than a non-voting security, or preventing
the vesting of such ownership, or of avoiding making a contribution of
ten percent or more of the capital of the entity, as part of a plan or
scheme to evade being deemed a principal of the entity, shall be deemed
to be a principal of the entity.
* * * * *
0
3. Amend Sec. 3.2 by revising the section heading and paragraphs (c)
introductory text and (c)(2) to read as follows:
Sec. 3.2 Registration processing by the National Futures Association;
notification and duration of registration.
* * * * *
(c) The National Futures Association shall notify the registrant,
or the sponsor in the case of an applicant for registration as an
associated person, and each designated contract market and swap
execution facility that has granted the applicant trading privileges in
the case of an applicant for registration as a floor broker or floor
trader, if registration has been granted under the Act.
* * * * *
(2) If an applicant for registration as a floor broker or floor
trader receives a temporary license in accordance with Sec. 3.40, the
National Futures Association shall notify the designated contract
market or swap execution facility that has granted the applicant
trading privileges that only a temporary license has been granted.
* * * * *
0
4. Amend Sec. 3.4 by revising paragraph (a) to read as follows:
Sec. 3.4 Registration in one capacity not included in registration in
any other capacity.
(a) Except as may be otherwise provided in the Act or in any rule,
regulation, or order of the Commission, each futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, floor broker, floor trader of any commodity for future
delivery, commodity trading advisor, commodity pool operator,
introducing broker, leverage transaction merchant, and associated
person (other than an associated person of a swap dealer or major swap
participant) must register as such under the Act. Except as may be
otherwise provided in the Act or in any rule, regulation, or order of
the Commission, registration in one capacity under the Act shall not
include registration in any other capacity.
* * * * *
0
5. Amend Sec. 3.10 by revising paragraphs (a)(3)(i)(A), (c)(2)(i),
(c)(3)(i), (c)(4)(ii), (c)(4)(iii), and (c)(4)(iv) and adding paragraph
(c)(5) to read as follows:
Sec. 3.10 Registration of futures commission merchants, introducing
brokers, commodity trading advisors, commodity pool operators, swap
dealers, major swap participants, and leverage transaction merchants.
(a) * * *
(3) * * *
(i) * * *
(A) The broker or dealer limits its solicitation of orders,
acceptance of orders, or execution of orders, or placing of orders on
behalf of others involving any contracts of sale of any commodity for
future delivery, on or subject to the rules of any contract market, to
security futures products as defined in section 1a(44) of the Act;
* * * * *
(c) * * *
(2)(i) A foreign broker, as defined in Sec. 1.3(xx) of this
chapter, is not required to register as a futures commission merchant
if it submits any commodity interest transactions executed bilaterally,
on or subject to the rules of a designated contract market, or on or
subject to the rules of a swap execution facility, for clearing on an
omnibus basis through a futures commission merchant registered in
accordance with section 4d of the Act.
* * * * *
(3)(i) A person located outside the United States, its territories
or possessions engaged in the activity of: An introducing broker, as
defined in Sec. 1.3(mm) of this chapter; a commodity trading advisor,
as defined in Sec. 1.3(bb) of this chapter; or a commodity pool
operator, as defined in Sec. 1.3(nn) of this chapter, in connection
with any commodity interest transaction executed bilaterally or made on
or subject to the rules of any designated contract market or swap
execution facility only on behalf of persons located outside the United
States, its territories or possessions, is not required to register in
such capacity provided that any such commodity interest transaction is
submitted for clearing through a futures commission merchant registered
in accordance with section 4d of the Act.
* * * * *
(4) * * *
(ii) Such a person introduces, on a fully-disclosed basis in
accordance with Sec. 1.57 of this chapter, any institutional customer,
as defined in Sec. 1.3(g) of this chapter, to a registered futures
commission merchant for the purpose of trading on a designated contract
market;
(iii) Such person's affiliated futures commission merchant has
filed with the National Futures Association (Attn: Vice President,
Compliance) an acknowledgement that the affiliated futures commission
merchant will be jointly and severally liable for any violations of the
Act or the Commission's regulations committed by such person in
connection with those introducing activities, whether or not
[[Page 51905]]
the affiliated futures commission merchant submits for clearing any
trades resulting from those introducing activities; and
(iv) Such person does not solicit any person located in the United
States, its territories or possessions for trading on a designated
contract market, nor does such person handle the customer funds of any
person located in the United States, its territories or possessions for
the purpose of trading on any designated contract market.
* * * * *
(5) In determining whether a person is a swap dealer, the
activities of a registered swap dealer with respect to which such
person is an associated person shall not be considered.
* * * * *
0
6. Revise Sec. 3.11 to read as follows:
Sec. 3.11 Registration of floor brokers and floor traders.
(a) Application for registration. (1) Application for registration
as a floor broker or floor trader must be on Form 8-R, if as an
individual, or Form 7-R, if as a non-natural person, and must be
completed and filed with the National Futures Association in accordance
with the instructions thereto. Each Form 7-R filed in accordance with
this paragraph (a) must be accompanied by a Form 8-R, completed in
accordance with the instructions thereto and executed by each
individual who is a principal of the applicant, and each individual
responsible for entry of orders from that applicant's own account. Each
Form 8-R filed in accordance with this paragraph (a) must be
accompanied by the fingerprints of the applicant on a fingerprint card
provided for that purpose by the National Futures Association, except
that a fingerprint card need not be filed by any applicant who has a
current Form 8-R on file with the Commission or the National Futures
Association.
(2) An applicant for registration as a floor broker or floor trader
will not be registered or issued a temporary license as a floor broker
or floor trader unless the applicant has been granted trading
privileges by a board of trade designated as a contract market or
registered as a swap execution facility by the Commission.
(3) When the Commission or the National Futures Association
determines that an applicant for registration as a floor broker or
floor trader is not disqualified from such registration or temporary
license, the National Futures Association will notify the applicant and
any contract market or swap execution facility that has granted the
applicant trading privileges that the applicant's registration or
temporary license as a floor broker or floor trader is granted.
(b) Duration of registration. A person registered as a floor broker
or floor trader in accordance with paragraph (a) of this section, and
whose registration has neither been revoked nor withdrawn, will
continue to be so registered unless such person's trading privileges on
all contract markets and swap execution facilities have ceased:
provided, that if a floor broker or floor trader whose trading
privileges on all contract markets and swap execution facilities have
ceased for reasons unrelated to any Commission action or any contract
market or swap execution facility disciplinary proceeding and whose
registration is not revoked, suspended or withdrawn is granted trading
privileges as a floor broker or floor trader, respectively, by any
contract market or swap execution facility where such person held such
privileges within the preceding sixty days, such registration as a
floor broker or floor trader, respectively, shall be deemed to continue
and no new Form 7-R, Form 8-R or Form 3-R record of a change to Form 7-
R or Form 8-R need be filed solely on the basis of the resumption of
trading privileges. A floor broker or floor trader is prohibited from
engaging in activities requiring registration under the Act or from
representing such person to be a registrant under the Act or the
representative or agent of any registrant during the pendency of any
suspension of such registration or of all such trading privileges. Each
contract market and swap execution facility that has granted trading
privileges to a person who is registered, or has applied for
registration, as a floor broker or floor trader, must provide notice in
accordance with Sec. 3.31(d) after such person's trading privileges on
such contract market or swap execution facility have ceased.
(c) Exceptions. A registered floor broker need not also register as
a floor trader in order to engage in activity as a floor trader.
0
7. Amend Sec. 3.12 by revising paragraphs (b), (c) introductory text,
(g), (h)(1) introductory text, and (h)(1)(i) and (ii) to read as
follows:
Sec. 3.12 Registration of associated persons of futures commission
merchants, retail foreign exchange dealers, introducing brokers,
commodity trading advisors, commodity pool operators and leverage
transaction merchants.
* * * * *
(b) Duration of registration. A person registered in accordance
with paragraphs (c), (d), (f), or (i) of this section and whose
registration has not been revoked will continue to be so registered
until the revocation or withdrawal of the registration of each of the
registrant's sponsors, or until the cessation of the association of the
registrant with each of the registrant's sponsors. Such person will be
prohibited from engaging in activities requiring registration under the
Act or from representing himself or herself to be a registrant under
the Act or the representative or agent of any registrant during the
pendency of any suspension of his or her registration, or his or her
sponsor's registration. Each of the registrant's sponsors must file a
notice in accordance with Sec. 3.31(c) reporting the termination of
the association of the associated person.
(c) Application for registration. Except as otherwise provided in
paragraphs (d), (f), and (i) of this section, application for
registration as an associated person in any capacity must be on Form 8-
R, completed and filed in accordance with the instructions thereto.
* * * * *
(g) Petitions for exemption. Any person adversely affected by the
operation of this section may file a petition with the Secretary of the
Commission, which petition must set forth with particularity the
reasons why that person believes that an applicant should be exempted
from the requirements of this section and why such an exemption would
not be contrary to the public interest and the purposes of the
provision from which exemption is sought. The petition will be granted
or denied by the Commission on the basis of the papers filed. The
Commission may grant such a petition if it finds that the exemption is
not contrary to the public interest and the purposes of the provision
from which exemption is sought. The petition may be granted subject to
such terms and conditions as the Commission may find appropriate.
(h) Exemption from registration. (1) A person is not required to
register as an associated person in any capacity if that person is:
(i) Registered under the Act as a futures commission merchant,
retail foreign exchange dealer, swap dealer, major swap participant,
floor broker, or as an introducing broker;
(ii) Engaged in the solicitation of funds, securities, or property
for a participation in a commodity pool, or the supervision of any
person or persons so engaged, pursuant to registration
[[Page 51906]]
with the Financial Industry Regulatory Authority as a registered
representative, registered principal, limited representative or limited
principal, and that person does not engage in any other activity
subject to regulation by the Commission;
* * * * *
0
8. Amend Sec. 3.21 by:
0
a. Revising paragraphs (a)(1) and (2);
0
b. Adding paragraph (a)(3); and
0
c. Revising paragraphs (b)(1) through (3), (c) introductory text, and
(c)(4)(i) and (iii).
The revisions and addition read as follows:
Sec. 3.21 Exemption from fingerprinting requirement in certain cases.
(a) * * *
(1) A legible, accurate and complete photocopy of a fingerprint
card that has been submitted to the Federal Bureau of Investigation for
identification and appropriate processing and of each report, record,
and notation made available by the Federal Bureau of Investigation with
respect to that fingerprint card if such identification and processing
has been completed satisfactorily by the Federal Bureau of
Investigation not more than ninety days prior to the filing with the
National Futures Association of the photocopy;
(2) A statement that such person's application for initial
registration in any capacity was granted within the preceding ninety
days, provided that the provisions of this paragraph (a)(2) shall not
be applicable to any person who, by Commission rule, regulation, or
order, was not required to file a fingerprint card in connection with
such application for initial registration; or
(3) A statement that such person has a current Form 8-R on file
with the Commission or the National Futures Association.
(b) * * *
(1) With respect to the fingerprints of an associated person: An
officer, if the sponsor is a corporation; a general partner, if a
partnership; or the sole proprietor, if a sole proprietorship;
(2) With respect to fingerprints of a floor broker or individual
floor trader: The applicant for registration; and with respect to
fingerprints of each individual who is responsible for entry of orders
from the account of a floor trader that is a non-natural person, the
applicant for registration, or
(3) With respect to the fingerprints of a principal: An officer, if
the futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, commodity trading advisor, commodity
pool operator, introducing broker, floor trader that is a non-natural
person, or leverage transaction merchant with which the principal will
be affiliated is a corporation; a general partner, if a partnership; or
the sole proprietor, if a sole proprietorship.
(c) Outside directors. Any futures commission merchant, retail
foreign exchange dealer, swap dealer, major swap participant,
introducing broker, commodity pool operator, commodity trading advisor,
floor trader that is a non-natural person, or leverage transaction
merchant that has a principal who is a director but is not also an
officer or employee of the firm may, in lieu of submitting a
fingerprint card in accordance with the provisions of Sec. 3.10(a)(2),
file a ``Notice Pursuant to Rule 3.21(c)'' with the National Futures
Association. Such notice shall state, if true, that such outside
director:
* * * * *
(4) * * *
(i) The name of the futures commission merchant, retail foreign
exchange dealer, swap dealer, major swap participant, introducing
broker, commodity trading advisor, commodity pool operator, floor
trader that is a non-natural person, leverage transaction merchant, or
applicant for registration in any of these capacities of which the
person is an outside director;
* * * * *
(iii) The internal controls used to ensure that the outside
director for whom exemption under this paragraph (c) is sought does not
have access to the keeping, handling or processing of the items
described in paragraphs (c)(2)(i) and (ii) of this section; and
* * * * *
0
9. Amend Sec. 3.22 by revising paragraph (b) to read as follows:
Sec. 3.22 Supplemental filings.
* * * * *
(b) That the person, or any individual who, based upon his or her
relationship with that person is required to file a Form 8-R in
accordance with the requirements of this part, as applicable, must,
within such period of time as the Commission or the National Futures
Association may specify, complete and file with the Commission or the
National Futures Association a current Form 7-R, or if appropriate, a
Form 8-R, in accordance with the instructions thereto.
* * * * *
0
10. Revise Sec. 3.30 to read as follows:
Sec. 3.30 Current address for purpose of delivery of communications
from the Commission or the National Futures Association.
(a) The address of each registrant, applicant for registration, and
principal, as submitted on the application for registration (Form 7-R
or Form 8-R) or as submitted on the biographical supplement (Form 8-R)
shall be deemed to be the address for delivery to the registrant,
applicant or principal for any communications from the Commission or
the National Futures Association, including any summons, complaint,
reparation claim, order, subpoena, special call, request for
information, notice, and other written documents or correspondence,
unless the registrant, applicant or principal specifies another address
for this purpose: Provided that the Commission or the National Futures
Association may address any correspondence relating to a biographical
supplement submitted for or on behalf of a principal to the futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator,
commodity trading advisor, floor trader that is a non-natural person,
or leverage transaction merchant with which the principal is affiliated
and may address any correspondence relating to an associated person to
the futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity pool
operator, commodity trading advisor, floor trader that is a non-natural
person, or leverage transaction merchant with which the associated
person or the applicant for registration is or will be associated as an
associated person.
(b) Each registrant, while registered and for two years after
termination of registration, and each principal, while affiliated and
for two years after termination of affiliation, must notify in writing
the National Futures Association of any change of the address on the
application for registration, biographical supplement, or other address
filed with the National Futures Association for the purpose of
receiving communications from the Commission or the National Futures
Association. Failure to file a required response to any communication
sent to the latest such address filed with the National Futures
Association that is caused by a failure to notify in writing the
National Futures Association of an address change may result in an
order of default and award of claimed monetary damages or other
appropriate order in any National Futures Association or Commission
[[Page 51907]]
proceeding, including a reparation proceeding brought under part 12 of
this chapter.
0
11. Amend Sec. 3.31 by revising paragraphs (a), (b), (c)(1)
introductory text, (c)(2), and (d) to read as follows:
Sec. 3.31 Deficiencies, inaccuracies, and changes to be reported.
(a)(1) Each applicant or registrant as a futures commission
merchant, retail foreign exchange dealer, swap dealer, major swap
participant, commodity trading advisor, commodity pool operator,
introducing broker, floor trader that is a non-natural person or
leverage transaction merchant shall, in accordance with the
instructions thereto, promptly correct any deficiency or inaccuracy in
Form 7-R or Form 8-R that no longer renders accurate and current the
information contained therein, with the exception of any change that
requires withdrawal from registration under Sec. 3.33. Each such
correction shall be prepared and filed in accordance with the
instructions thereto to create a Form 3-R record of such change.
(2) Where a registrant has changed its form of organization to or
from a sole proprietorship, the registrant must request withdrawal from
registration in accordance with Sec. 3.33.
(3) Where any person becomes a principal of an applicant or
registrant subsequent to the filing of the applicant's or registrant's
current Form 7-R:
(i) If the new principal is not a natural person, the registrant
shall update such Form 7-R to create a Form 3-R record of change.
(ii) If the new principal is a natural person, the registrant shall
file a Form 8-R, completed in accordance with the instructions thereto
and executed by such person who is a principal of the registrant and
who was not listed on the registrant's initial application for
registration or any amendment thereto.
(b) Each applicant or registrant as a floor broker, floor trader or
associated person, and each principal of a futures commission merchant,
retail foreign exchange dealer, swap dealer, major swap participant,
commodity trading advisor, commodity pool operator, introducing broker,
floor trader that is a non-natural person, or leverage transaction
merchant must, in accordance with the instructions thereto, promptly
correct any deficiency or inaccuracy in the Form 8-R or supplemental
statement thereto to create a Form 3-R record of change.
(c)(1) After the filing of a Form 8-R or updating a Form 8-R to
create a Form 3-R record of change by or on behalf of any person for
the purpose of permitting that person to be an associated person of a
futures commission merchant, retail foreign exchange dealer, commodity
trading advisor, commodity pool operator, introducing broker, or a
leverage transaction merchant, that futures commission merchant, retail
foreign exchange dealer, commodity trading advisor, commodity pool
operator, introducing broker or leverage transaction merchant must,
within thirty days after the occurrence of either of the following,
file a notice thereof with the National Futures Association indicating:
* * * * *
(2) Each person registered as, or applying for registration as, a
futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, commodity trading advisor, commodity
pool operator, introducing broker, floor trader that is a non-natural
person, or leverage transaction merchant must, within thirty days after
the termination of the affiliation of a principal with the registrant
or applicant, file a notice thereof with the National Futures
Association.
* * * * *
(d) Each contract market or swap execution facility that has
granted trading privileges to a person who is registered, has received
a temporary license, or has applied for registration as a floor broker
or floor trader, must notify the National Futures Association within
sixty days after such person has ceased having trading privileges on
such contract market or swap execution facility.
* * * * *
0
12. Amend Sec. 3.33 by revising paragraphs (a) introductory text, (b)
introductory text, and (e) to read as follows:
Sec. 3.33 Withdrawal from registration.
(a) A futures commission merchant, retail foreign exchange dealer,
swap dealer, major swap participant, introducing broker, commodity
trading advisor, commodity pool operator, floor trader that is a non-
natural person, or leverage transaction merchant must request that its
registration be withdrawn prior to any voluntary resolution to file
articles (or a certificate) of dissolution (or cancellation), and upon
notice of any involuntary dissolution initiated by a third-party. A
futures commission merchant, retail foreign exchange dealer, swap
dealer, major swap participant, introducing broker, commodity trading
advisor, commodity pool operator, leverage transaction merchant, floor
broker or floor trader may request that its registration be withdrawn
in accordance with the requirements of this section if:
* * * * *
(b) A request for withdrawal from registration as a futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity trading advisor,
commodity pool operator, floor trader that is a non-natural person, or
leverage transaction merchant must be made on Form 7-W, and a request
for withdrawal from registration as a floor broker or individual floor
trader must be made on Form 8-W, completed and filed with the National
Futures Association in accordance with the instructions thereto. The
request for withdrawal must be made by a person duly authorized by the
registrant and must specify:
* * * * *
(e) A request for withdrawal from registration as a futures
commission merchant, retail foreign exchange dealer, swap dealer, major
swap participant, introducing broker, commodity pool operator,
commodity trading advisor, floor trader that is a non-natural person,
or leverage transaction merchant on Form 7-W, and a request for
withdrawal from registration as a floor broker or individual floor
trader on Form 8-W, must be filed with the National Futures Association
and a copy of such request must be sent by the National Futures
Association within three business days of the receipt of such
withdrawal request to the Commodity Futures Trading Commission,
Division of Swap Dealer and Intermediary Oversight, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581. In addition, any
floor broker or individual floor trader requesting withdrawal from
registration must file a copy of his or her Form 8-W with each contract
market or swap execution facility that has granted him or her trading
privileges, and any floor trader that is a non-natural person
requesting withdrawal from registration must file a copy of its Form 7-
W with each contract market or swap execution facility that has granted
it trading privileges. Within three business days of any determination
by the National Futures Association under Sec. 3.10(d) to treat the
failure by a registrant to file an annual Form 7-R as a request for
withdrawal, the National Futures Association shall send the Commission
notice of that determination.
* * * * *
[[Page 51908]]
0
13. Amend Sec. 3.40 by revising paragraph (a)(2) introductory text and
(a)(2)(iv) to read as follows:
Sec. 3.40 Temporary licensing of applicants for associated person,
floor broker or floor trader registration.
(a) * * *
(2) The National Futures Association may grant a temporary license
to any applicant for registration as a floor broker or individual floor
trader upon the contemporaneous filing with the National Futures
Association of:
* * * * *
(iv) Evidence that the applicant has been granted trading
privileges by a contract market or swap execution facility that has
filed with the National Futures Association a certification signed by
its chief operating officer with respect to the review of an
applicant's employment, credit and other history in connection with the
granting of trading privileges.
* * * * *
0
14. Amend Sec. 3.42 by revising paragraphs (a) introductory text,
(a)(2), (a)(6), and (a)(8) to read as follows:
Sec. 3.42 Termination.
(a) A temporary license issued pursuant to Sec. 3.40 shall
terminate:
* * * * *
(2) Immediately upon termination of the association of the
applicant for registration as an associated person with the registrant
which filed the sponsorship certification, or immediately upon loss of
trading privileges by an applicant for registration as a floor broker
or floor trader on all contract markets and swap execution facilities
which filed the certification described in Sec. 3.40;
* * * * *
(6) Immediately upon failure to comply with an award in an
arbitration proceeding conducted pursuant to the rules of a designated
contract market, swap execution facility or registered futures
association within the time specified in section 10(g) of the National
Futures Association's Code of Arbitration or the comparable time period
specified in the rules of a contract market or other appropriate
arbitration forum.
* * * * *
(8) Immediately upon notice to the applicant and the applicant's
sponsor or the contract market or swap execution facility that has
granted the applicant trading privileges that:
(i) The applicant failed to disclose relevant disciplinary history
information on the applicant's Form 8-R; or
(ii) An event has occurred leading to a required disclosure on the
applicant's Form 8-R.
* * * * *
0
15. Amend Sec. 3.44 by revising paragraph (a)(5) to read as follows:
Sec. 3.44 Temporary licensing of applicants for guaranteed
introducing broker registration.
(a) * * *
(5) The fingerprints of the applicant, if a sole proprietor, and of
each principal (including each branch office manager) thereof on
fingerprint cards provided by the National Futures Association for that
purpose.
* * * * *
0
16. Amend Sec. 3.46 by revising paragraphs (a) introductory text,
(a)(6), (a)(8), and (a)(10) to read as follows:
Sec. 3.46 Termination.
(a) A temporary license issued pursuant to Sec. 3.44 shall
terminate:
* * * * *
(6) Immediately upon failure to comply with an order to pay a civil
monetary penalty, restitution, or disgorgement within the time
permitted under section 6(e), 6b, or 6c(d) of the Act;
* * * * *
(8) Immediately upon failure to comply with an award in an
arbitration proceeding conducted pursuant to the rules of a designated
contract market, swap execution facility, or registered futures
association within the time specified in section 10(g) of the National
Futures Association's Code of Arbitration or the comparable time period
specified in the rules of a contract market, swap execution facility,
or other appropriate arbitration forum.
* * * * *
(10) Immediately upon notice to the applicant and the guarantor
futures commission merchant that:
(i) The applicant or any principal (including any branch officer
manager) failed to disclose relevant disciplinary history information
on the applicant's Form 7-R or on a principal's Form 8-R; or
(ii) An event has occurred leading to a required disclosure on the
applicant's Form 7-R or on a principal's Form 8-R.
* * * * *
0
17. Amend Sec. 3.56 by revising paragraph (b)(1)(iv) to read as
follows:
Sec. 3.56 Suspension or modification of registration pursuant to
section 8a(11) of the Act.
* * * * *
(b) * * *
(1) * * *
(iv) The statement accompanying the notice referred to in paragraph
(a)(2) of this section and, in an effort to have his registration
modified rather than suspended, the Supplemental Sponsor Certification
Statement signed by a sponsor, supervising floor broker or, in the case
of a floor trader, a supervising registrant, principal, contract
market, or swap execution facility, as appropriate for the registrant
in accordance with Sec. 3.60(b)(2)(i) and who meets the standards set
forth in Sec. 3.60(b)(2)(i)(A) and (C).
* * * * *
0
18. Amend Sec. 3.60 by revising paragraphs (b)(2)(i) introductory
text, (f)(3), and (l) to read as follows:
Sec. 3.60 Procedure to deny, condition, suspend, revoke or place
restrictions upon registration pursuant to sections 8a(2), 8a(3) and
8a(4) of the Act.
* * * * *
(b) * * *
(2)(i) In the response, if the person is not an associated person,
a floor broker or a floor trader or an applicant for registration in
any of those capacities, the applicant or registrant shall also state
whether he or she intends to show that registration would not pose a
substantial risk to the public despite the existence of the
disqualification set forth in the notice. If the person is an
associated person, a floor broker or a floor trader or an applicant for
registration in any of those capacities, the applicant or registrant
shall also state whether he or she intends to show that full,
conditioned or restricted registration would not pose a substantial
risk to the public despite the existence of the disqualification set
forth in the notice. If the person is an associated person or an
applicant for registration as an associated person and intends to make
such a showing, he or she must also submit a letter signed by an
officer or general partner authorized to bind the sponsor whereby the
sponsor agrees to sign a Supplemental Sponsor Certification Statement
and supervise compliance with any conditions or restrictions that may
be imposed on the applicant or registrant as a result of a statutory
disqualification proceeding under this section; if the person is a
floor broker or a floor trader or an applicant for registration in
either capacity and intends to make such a showing, he or she must, in
the case of a floor broker or applicant for registration as a floor
broker, also submit a letter signed by his employer or if he or she has
no employer by another floor broker or, in the case of a floor trader
or applicant for registration
[[Page 51909]]
as a floor trader, also submit a letter signed by an officer of the
floor trader's clearing member, if such officer is a registrant or a
principal of a registrant, or the chief operating officer of each
contract market or swap execution facility that has granted trading
privileges, whereby the employer or floor broker, appropriate
registrant, principal or chief operating officer (on behalf of the
contract market or swap execution facility) agrees to sign a
Supplemental Sponsor Certification Statement and supervise compliance
with any conditions or restrictions that may be imposed on the
applicant or registrant as a result of a statutory disqualification
proceeding under this section; provided, that, with respect to such
sponsor, supervising employer or floor broker, supervising registrant
or principal:
* * * * *
(f) * * *
(3) If the person is an associated person, a floor broker or a
floor trader or an applicant for registration in any of those
capacities, evidence that the applicant's or registrant's registration
on a conditioned or restricted basis would be subject to supervisory
controls likely both to detect future wrongdoing by the applicant or
registrant and protect the public from any harm arising from future
wrongdoing by the applicant or registrant. Any decision providing for a
conditioned or restricted registration shall take into consideration
the applicant's or registrant's statutory disqualification and the time
period remaining on such statutory disqualification, and shall fix a
time period after which the registrant and his or her sponsor,
supervising employer or floor broker, or supervising registrant,
principal, contract market, or swap execution facility may petition to
lift or modify the conditions or restrictions in accordance with Sec.
3.64.
* * * * *
(l) The failure of any sponsor, supervising employer or floor
broker, or supervising registrant, principal, contract market, or swap
execution facility to fulfill its obligations with respect to
supervision or monitoring of a conditioned or restricted registrant as
agreed to in the Supplemental Sponsor Certification Statement shall be
deemed a violation of this rule under the Act.
0
19. Amend Sec. 3.64 by revising paragraph (a)(2) to read as follows:
Sec. 3.64 Procedure to lift or modify conditions or restrictions.
(a) * * *
(2) In the petition, the registrant and his or her sponsor,
supervising employer or floor broker, or supervising registrant,
principal, contract market, or swap execution facility shall be limited
to a showing, by affidavit, that the conditions or restrictions have
been satisfied pursuant to the order which imposed them. The affidavit
must be sworn to by a person with actual knowledge of the registrant's
activities on behalf of the sponsor, supervising employer or floor
broker, or supervising registrant, principal, contract market or swap
execution facility.
* * * * *
0
20. Amend Sec. 3.75 by revising paragraph (a) to read as follows:
Sec. 3.75 Delegation and reservation of authority.
(a) The Commission hereby delegates, until such time as it orders
otherwise, to the Director of the Division of Swap Dealer and
Intermediary Oversight or his or her designee the authority to grant or
deny requests filed pursuant to Sec. 3.12(g). The Director of the
Division of Swap Dealer and Intermediary Oversight may submit to the
Commission for its consideration any matter which has been delegated to
him pursuant to Sec. 3.12(g). The Commission hereby delegates, until
such time as it orders otherwise, the authority to perform all
functions specified in subparts B through D of this part to the persons
authorized to perform them thereunder.
* * * * *
Issued in Washington, DC, on August 15, 2012, by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
Appendices to Registration of Intermediaries--Commission Voting Summary
and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton and Wetjen voted in the affirmative; Commissioner O'Malia
voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule to amend certain provisions of Part 3
of the Commission's regulations regarding the registration of
intermediaries. The final amendments are necessary to conform
existing regulations to the new requirements in the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
The final rule would amend Part 3 to facilitate the extension of
the existing registration process to apply to new categories of
registrants, such as swap dealers and major swap participants.
Customers will benefit from the increased transparency of the
registration process. The final amendments also modernize existing
provisions that will apply to all Commission registrants.
In addition, the Commission has made technical changes to permit
legal entities (in addition to natural persons) to register as floor
traders. This change was required to implement the exception from
the definition of a swap dealer for floor traders that trade cleared
swaps on swap execution facilities.
Appendix 3--Statement of Commissioner Scott O'Malia
I respectfully dissent with the Commodity Futures Trading
Commission's (``Commission'') final rule to adopt certain conforming
amendments to part 3 of the Commission's regulations regarding the
registration of intermediaries.\1\ I find it disturbing that coming
off of two widely publicized incidents of intermediary fraud and
misappropriation of customer funds (i.e., MF Global Holdings and
Peregrine Financial Group), the Commission is not adopting a rule
that will provide customers with greater transparency of the
professional and disciplinary background of Commission registrants.
While I support most of what is included in this rule, I am unable
to vote in the affirmative because of what has been excluded. The
Commission indicates in the final rule that it will work with the
National Futures Association (``NFA'') to increase transparency, but
does not set forth any details describing how the Commission and NFA
will accomplish that goal.
---------------------------------------------------------------------------
\1\ See 17 CFR Part 3 (Registration).
---------------------------------------------------------------------------
The Commission and NFA should follow the lead of the Securities
and Exchange Commission (``SEC'') and the Financial Industry
Regulatory Authority (``FINRA'') in terms of how professional and
disciplinary background information is disclosed to the potential
customers of SEC-registered broker-dealers. FINRA's
BrokerCheck[supreg] is a tool that provides potential customers with
detailed information regarding the professional backgrounds of
current and former FINRA-registered brokerage firms and brokers, as
well as investment adviser firms and representatives.\2\ Through
BrokerCheck[supreg], these customers can research certain criminal
matters, regulatory actions, civil judicial proceedings, and
financial matters in which the broker-dealer, one of its control
affiliates, or representatives has been involved.
---------------------------------------------------------------------------
\2\ For more information regarding BrokerCheck[supreg], see
http://www.finra.org/Investors/ToolsCalculators/BrokerCheck.
---------------------------------------------------------------------------
Today's futures markets need better technology solutions that
will help futures customers make informed choices about the
Commission-registered intermediaries with which they may wish to do
business. Instead of promising to take action in the future, the
Commission's final rule should do everything it can right now to
protect customer funds. I believe the final rule should enable the
public to receive access to information about current and formerly
registered intermediaries who may seek to attain
[[Page 51910]]
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positions of trust with potential futures customers.
[FR Doc. 2012-20962 Filed 8-27-12; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: August 28, 2012
See Also:
