[Federal Register: February 24, 2006 (Volume 71, Number 37)]
[Rules and Regulations]
[Page 9442-9446]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24fe06-7]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AC20
Definition of ``Client'' of a Commodity Trading Advisor
AGENCY: Commodity Futures Trading Commission.
ACTION: Final regulations.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
amending Regulation 1.3(bb) by adding to that regulation a definition
of the term ``client,'' as it relates to commodity trading advisors
(CTAs). This amendment clarifies inconsistencies in the Commission's
regulations concerning the advisees of CTAs, and it reflects the
Commission's longstanding view that its antifraud authority extends to
all CTAs, irrespective of whether they provide advice on a personalized
or nonpersonalized basis. The Commission is also amending Regulation
1.3(bb) by adding the term ``derivatives transaction execution
facility'' to the CTA definition set forth in that regulation.
DATES: Effective Date: March 27, 2006.
FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director,
or R. Stephen Painter Jr., Staff Attorney, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581,
telephone number: (202) 418-5450 or (202) 418-5416, respectively;
facsimile number: (202) 418-5528; and electronic mail: bgold@cftc.gov
or spainter@cftc.gov, respectively.
SUPPLEMENTARY INFORMATION:
I. The Proposal
A. Background
On September 28, 2005, the Commission published for public comment
a proposed amendment to Regulation 1.3(bb) (Proposal).\1\ That
amendment, which the Commission is
[[Page 9443]]
adopting as proposed, defines the term ``client'' of a CTA.
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\1\ 70 FR 56608. This Federal Register release announcing the
Proposal (Proposing Release) may be accessed through the
Commission's Web site: http://www.cftc.gov/files/foia/fedreg05/foi050928a.pdf.
In the Proposing Release, the Commission provided a
detailed explanation of the proposed amendment to Regulation
1.3(bb). Accordingly, the Commission encourages interested persons
to read the Proposing Release for a fuller discussion of the purpose
of the amendment to Regulation 1.3(bb).
The Commission's regulations are found at 17 CFR Ch. I (2005)
and may be accessed at http://www.gpoaccess.gov/ecfr.
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Section 1a(6)(A) of the Commodity Exchange Act (Act or CEA) \2\
defines the term ``commodity trading advisor'' to mean any person who:
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\2\ 7 U.S.C. 1a(6) (2000). The Act may be accessed at http://www.access.gpo.gov/uscode/title7/chapter1_.html
.
(i) For compensation or profit, engages in the business of
advising others, either directly or through publications, writings,
or electronic media, as to the value of or the advisability of
trading in--
(I) any contract of sale of a commodity for future delivery made
or to be made on or subject to the rules of a contract market or
derivatives transaction execution facility;
(II) any commodity option authorized under section 4c; or
(III) any leverage transaction authorized under section 19; or
(ii) for compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning any
of the activities referred to in clause (i).
Under the language of Section 1a(6)(A) of the Act, the term ``commodity
trading advisor'' includes advisors who provide nonpersonalized advice,
such as publishers of advisory newsletters or Web sites, as well as
advisors who provide advice tailored to the needs of particular persons
and advisors who direct other persons' trading pursuant to a power of
attorney or other written authorization.\3\
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\3\ As noted in more detail in the Proposing Release, Section
1a(6)(B) of the Act excludes certain persons from the CTA definition
where, as provided for in Section 1a(6)(C) of the Act, their
furnishing of advice with respect to trading in commodity futures
and options is solely incidental to the conduct of their business or
profession. 70 FR 56608, 56609.
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Regulation 1.3(bb) contains essentially the same definition of the
term ``commodity trading advisor'' as that contained in Section 1a(6)
of the Act. However, neither the Act nor the Commission's regulations
issued thereunder define who the ``others'' are that CTAs advise.
Moreover, neither the Act nor the regulations are consistent when
referring to these advisees. As explained in more detail in the
Proposing Release,\4\ although most of the relevant provisions refer
solely to ``clients,'' a few provisions of the Act and regulations
refer to ``clients and subscribers.''
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\4\ 70 FR 56608, 56609 nn.5-6.
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The definition of the term ``client'' of a CTA being adopted today
clarifies these inconsistencies. Specifically, the amendment to
Regulation 1.3(bb) clarifies that, as used in the provisions of the Act
and the regulations relating to CTAs, the term ``client'' refers to all
advisees of a CTA, including persons who receive advice by subscribing
to a newsletter or other information service. A ``subscriber,'' as used
in these statutory provisions and regulations, is one type of
``client.'' \5\ In this regard, the Commission notes that, as it stated
in the Proposing Release,\6\ the amendment to Regulation 1.3(bb)
clarifies that the antifraud provisions of Section 4o of the Act apply
to all CTAs, and not just to those who provide advice on a personalized
basis.
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\5\ As noted in the Proposing Release, 70 FR 56608, 56609 n.8,
and as discussed in more detail below, the usual presumption that
different terms in a statute have separate meanings is rebutted as
to the terms ``client'' and ``subscriber'' in Section 4l(1) of the
Act. Consequently, the phrase ``clients and subscribers,'' as used
in the Act and in the regulations, does not imply that ``clients''
and ``subscribers'' are two separate classes of advisees.
\6\ Id. at 56609.
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B. New Regulation 1.3(bb)(2)
As proposed and as adopted, new Regulation 1.3(bb)(2) defines the
term ``client,'' as it relates to a CTA, as including:
any person (i) to whom a commodity trading advisor provides advice,
for compensation or profit, either directly or through publications,
writings, or electronic media, as to the value of, or the
advisability of trading in, any contract of sale of a commodity for
future delivery made or to be made on or subject to the rules of a
contract market or derivatives transaction execution facility, any
commodity option authorized under section 4c of the Act, or any
leverage transaction authorized under section 19 of the Act; or (ii)
to whom, for compensation or profit, and as part of a regular
business, the commodity trading advisor issues or promulgates
analyses or reports concerning any of the activities referred to
[above]. The term `client' includes, without limitation, any
subscriber of a commodity trading advisor.
This new definition of ``client'' includes clients to whom a CTA
provides personalized trading advice as well as clients to whom a CTA
provides nonpersonalized trading advice. Such nonpersonalized advice
includes, among other things, standardized advice provided by
newsletters, seminars, tutorials, periodicals, computer software,
Internet websites, voicemail recordings, emails, and facsimiles. The
definition also covers advice provided over a period of time pursuant
to a subscription arrangement or on a one-time basis.
As the Commission noted in the Proposing Release,\7\ because the
definition of the term ``client'' of a CTA includes within its scope
persons to whom the CTA provides advice on either a personalized or
nonpersonalized basis, new Regulation 1.3(bb)(2) makes clear that the
antifraud provisions of Section 4o of the Act apply to all persons who
come within the statutory definition of the term ``commodity trading
advisor,'' and not, for example, just to those who provide personalized
trading advice or who direct their clients' trading--i.e., CTAs who
must register as such with the Commission pursuant to Section 4m(1) of
the Act.\8\
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\7\ Id. at 56609.
\8\ 7 U.S.C. 6m(1).
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C. Comments on the Proposal
The Commission received five comment letters on the Proposal: \9\
One from the Association of the Bar of the City of New York (Bar
Association), one from an attorney who represents certain CTAs that
provide commodity trading advice on a nonpersonalized basis, and three
from CTAs. The Bar Association wrote in support of the Proposal,
agreeing that the Commission should eliminate inconsistencies in the
regulations concerning the advisees of CTAs. It further agreed that the
term ``client'' as used in the Act was not intended to abridge the
Commission's jurisdiction to proceed against fraud by CTAs that provide
advice on a nonpersonalized basis.
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\9\ The comment letters may be accessed through the Commission's
Web site: http://www.cftc.gov/foia/comment05/foi05-005_1.htm.
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The other commenters wrote in opposition to the Proposal, with each
suggesting that the proposed definition of ``client'' of a CTA might
raise issues under the First Amendment of the United States
Constitution.\10\ The Commission disagrees, because the definition of
``client'' does no more than clarify that the manner in which advice is
provided, whether on a personalized or nonpersonalized basis, does not
affect whether a person comes within the CTA definition of Section
1a(6)(A) of the Act. As proposed and as adopted, new Regulation
1.3(bb)(2) does not impose any registration obligation on those CTAs
that are currently eligible to claim the registration exemption of
Regulation 4.14(a)(9).\11\ Consequently, because this
[[Page 9444]]
new regulation does not require CTAs that provide advice on a
nonpersonalized basis to register if they are otherwise eligible to
claim the registration exemption of Regulation 4.14(a)(9), the
Commission believes that the regulation does not implicate the First
Amendment. By defining the term ``client'' of a CTA, the Commission is
merely clarifying its longstanding view that all CTAs, regardless of
whether they provide personalized or nonpersonalized advice, are
subject to the Commission's antifraud authority. The Commission does
not believe that the regulation of false, deceptive, or misleading
speech of CTAs--even of those CTAs that provide advice on a
nonpersonalized basis--runs afoul of the protections of the First
Amendment.\12\
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\10\ The First Amendment prohibits Congress from, among other
things, making any law abridging the freedom of speech. U.S. Const.
amend. I.
\11\ Regulation 4.14(a)(9) provides a registration exemption for
CTAs that do not engage in either of the following activities: (1)
Directing client accounts; or (2) providing commodity trading advice
based on, or tailored to, the commodity interest or cash market
positions or other circumstances or characteristics of particular
clients. The Commission adopted Regulation 4.14(a)(9) in response to
several Federal district court cases holding that the CTA
registration requirement, as applied to certain ``publisher'' CTAs,
constitutes an unconstitutional prior restraint on speech.
Specifically, the Commission adopted Regulation 4.14(a)(9) because
of its belief that ``minimizing impact on speech, other than false,
deceptive or misleading speech, is a relevant policy consideration
in determining the Commission's regulatory approach toward CTAs
whose relationship with their clients is limited to standardized
advice through media such as newsletters, prerecorded telephone
newslines, Internet Web sites, and non-customized computer
software.'' 65 FR 12938, 12939 (March 10, 2000).
\12\ Indeed, the Commission may constitutionally prohibit the
dissemination of commercial speech that is ``false, deceptive, or
misleading.'' Zauderer v. Office of Disciplinary Counsel, 471 U.S.
626, 638 (1985).
One commenter suggested that the proposed definition of
``client'' would violate the First Amendment because it would
clarify that Section 4o of the Act covers fraud in connection with
nonpersonalized advice. According to this commenter, Section 4o of
the Act imposes fiduciary standards and such standards cannot
constitutionally be imposed on providers of impersonal advice. The
premise of this argument was rejected by the Court of Appeals in
Commodity Trend Serv., Inc. v. CFTC (CTS), 233 F.3d 981 (7th Cir.
2000). The court held that Section 4o of the Act ``effectuates the
extant fiduciary duties of personalized advisors * * * but does not
impose fiduciary obligations on impersonal advisors.'' Id. at 990,
see also 233 F.3d at 993-95 (discussing the scope of Section 4o of
the Act as applied to impersonal CTAs and holding the provision
constitutional if properly applied). The Commission agrees with the
analysis of this issue in CTS and finds it to be an adequate
response to the commenter's concern.
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In addition to raising First Amendment concerns, one commenter also
suggested that the Commission lacks authority to adopt the Proposal
because the amendment to Regulation 1.3(bb) would eliminate a
substantive distinction between the terms ``client'' and ``subscriber''
that the United States Supreme Court recognized in Lowe v. SEC.\13\
This commenter further suggested that, because the Act and the
Commission's regulations refer to ``clients'' and ``subscribers,''
Congress must have intended those words to have different meanings.
Consequently, according to the commenter, the Commission does not have
the authority to amend Regulation 1.3(bb) to clarify that a
``subscriber'' is one type of ``client.''
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\13\ 472 U.S. 181 (1985). That case involved a securities
investment adviser and the application of the Investment Advisers
Act (IAA), 15 U.S.C. Sec. 80b-1 et seq., to his conduct.
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Both of these arguments were considered and rejected by the United
States Court of Appeals for the Seventh Circuit in Commodity Trend
Service, Inc. (CTS).\14\ As explained in the Proposing Release,\15\ CTS
deferred to the Commission's interpretation of Section 4o of the Act,
finding that the Commission's position was a reasonable interpretation
of the statutory language and that it appeared to effectuate
Congressional intent. In CTS, the court held that the use of the term
``client'' in Section 4o does not connote only a personalized
relationship. Instead, the term ``client'' ``can refer to * * * those
who receive tailored advice from professionals or those who receive any
kind of service regardless of whether it is personalized.'' \16\
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\14\ CTS, 233 F.3d 981.
\15\ 70 FR 56608, 56609.
\16\ CTS, 233 F.3d at 991.
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According to CTS, the distinction drawn by Lowe between the term
``client'' and the term ``subscriber'' is not necessarily applicable to
the CEA. Looking at the broad exclusion from the IAA for publishers,
the Court in Lowe held that, under the IAA, Congress intended the term
``client'' to refer only to a personalized relationship; investment
advisers providing advice on a nonpersonalized basis are excluded
entirely from the scope of the IAA because they generally fall within
the IAA's broad exclusion for publishers.\17\ The CEA, on the other
hand, does not exclude all publishers from its scope. Rather, the CEA
expressly brings within its scope certain advisors that provide advice
on a nonpersonalized basis--for example, publishers of nonpersonalized
advice may come within the CTA definition, provided that their advice
is not ``solely incidental'' to their publishing business.\18\
According to the court in CTS, if the use of the term ``client'' in
Section 4o were construed as removing from the scope of that section's
antifraud provisions CTAs who provide advice on a nonpersonalized
basis, certain of those CTAs would come within the CTA definition, but
virtually none of the Act's provisions would apply to them.\19\
According to the CTS court, Congress likely did not intend such an
anomalous result.\20\
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\17\ Id. at 988.
\18\ See supra note 3.
\19\ CTS, 233 F.3d at 988-89.
\20\ Id. at 989.
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Nor does the Commission believe that by using the terms ``client''
and ``subscriber,'' Congress intended ``client'' to refer only to CTAs
that provide advice on a personalized basis. As noted by CTS,\21\ and
as explained in the Proposing Release,\22\ the usual presumption that
different terms in a statute have separate meanings is rebutted as to
the terms ``client'' and ``subscriber'' by the language of Section
4l(1) of the Act, which lists ``subscriptions'' as one of the
``arrangements with clients'' entered into by CTAs. This language
implies that, in connection with CTAs, a person who arranges for a
subscription, in other words a ``subscriber,'' is a type of ``client.''
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\21\ Id. at 989-90.
\22\ 70 FR 56608, 56609 n.8.
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In light of the foregoing, the Commission is adopting as proposed
Regulation 1.3(bb)(2).
D. Amended Regulation 1.3(bb)(1)
The Commodity Futures Modernization Act of 2000 (CFMA) amended the
statutory definition of ``commodity trading advisor'' to take account
of the new type of trading facility known as a ``derivatives
transaction execution facility.'' \23\ As noted in the Proposing
Release,\24\ the Commission is adopting a conforming change to the CTA
definition contained in Regulation 1.3(bb)(1).
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\23\ See Commodity Futures Modernization Act of 2000, Pub. L.
106-554, Appendix E, 114 Stat. 2763, Section 123(a)(1)(A). The CFMA
may be accessed through the Commission's Web site: http://www.cftc.gov/files/ogc/ogchr5660.pdf
.
\24\ 70 FR 56608, 56609 n.4.
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II. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \25\ requires that agencies,
in proposing rules, consider the impact of those rules on small
businesses. The Commission has previously established certain
definitions of ``small entities'' to be used by the Commission in
evaluating the impact of its regulations on such entities in accordance
with the RFA.\26\
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\25\ 5 U.S.C. 601 et seq.
\26\ 47 FR 18618 (April 30, 1982).
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With respect to CTAs, the Commission has previously stated that it
would evaluate within the context of a particular proposal whether all
or some affected CTAs would be considered to be small entities and, if
so, the economic impact on them of the proposal.\27\ As explained in
the Proposing Release, the Commission does not believe that Regulation
[[Page 9445]]
1.3(bb)(2) will have a significant impact on affected CTAs. This is
because the only burden imposed by the amendment is the obligation to
comply with the antifraud provisions of Section 4o of the Act. Assuming
arguendo, however, that compliance with Section 4o does constitute a
significant burden, the burden is neither new nor additional, because
new Regulation 1.3(bb)(2) is consistent with the Commission's
longstanding interpretation of Section 4o as applicable to all CTAs.
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\27\ Id. at 18620.
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The Commission did not receive any public comments on its analysis
of the application of the RFA to proposed Regulation 1.3(bb)(2).
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA)\28\ 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. This rulemaking does not require a
new collection of information on the part of any entities subject to
it. Accordingly, for purposes of the PRA, the Commission certified that
the proposed amendment did not impose any new reporting or
recordkeeping requirements.
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\28\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis
Section 15(a) of the Act \29\ 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) 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.
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\29\ 7 U.S.C. 19(a).
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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. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular regulation was 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 evaluated the costs
and benefits of new Regulation 1.3(bb)(2) in light of the specific
considerations identified in Section 15(a) of the Act as follows:
1. Protection of Market Participants and the Public
Because Regulation 1.3(bb)(2) expressly brings all CTAs within the
purview of the antifraud provisions of Section 4o of the Act, the
regulation will enhance the Commission's ability to protect market
participants and the public.
2. Efficiency and Competition
Regulation 1.3(bb)(2) will have no effect, from the standpoint of
imposing costs or creating benefits, on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
Regulation 1.3(bb)(2) will have no effect, from the standpoint of
imposing costs or creating benefits, on the financial integrity or
price discovery function of the commodity futures and option markets.
4. Sound Risk Management Practices
Regulation 1.3(bb)(2) will have no effect, from the standpoint of
imposing costs or creating benefits, on the available range of sound
risk management alternatives.
5. Other Public Interest Considerations
Regulation 1.3(bb)(2) will have no effect, from the standpoint of
imposing costs or creating benefits, on any other public interest
considerations.
Accordingly, after considering these factors, the Commission has
determined to adopt the amendments to Regulation 1.3(bb) set forth
below.
List of Subjects in 17 CFR Part 1
17 CFR Part Brokers, Commodity futures, Consumer protection,
Reporting and recordkeeping requirements.
0
For the reasons presented above, the Commission is amending 17 CFR part
1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
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).
0
2. Section 1.3 is amended by revising paragraph (bb)(1) and adding new
paragraph (bb)(2) as follows:
Sec. 1.3 Definitions.
* * * * *
(bb)(1) Commodity trading advisor. This term means any person who,
for compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic media,
as to the value of or the advisability of trading in any contract of
sale of a commodity for future delivery made or to be made on or
subject to the rules of a contract market or derivatives transaction
execution facility, any commodity option authorized under section 4c of
the Act, or any leverage transaction authorized under section 19 of the
Act, or who, for compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning any of
the foregoing; but such term does not include (i) Any bank or trust
company or any person acting as an employee thereof, (ii) any news
reporter, news columnist, or news editor of the print or electronic
media, or any lawyer, accountant, or teacher, (iii) any floor broker or
futures commission merchant, (iv) the publisher or producer of any
print or electronic data of general and regular dissemination,
including its employees, (v) the named fiduciary, or trustee, of any
defined benefit plan which is subject to the provisions of the Employee
Retirement Income Security Act of 1974, or any fiduciary whose sole
business is to advise that plan, (vi) any contract market or
derivatives transaction execution facility, and (vii) such other
persons not within the intent of this definition as the Commission may
specify by rule, regulation or order: Provided, That the furnishing of
such services by the foregoing persons is solely incidental to the
conduct of their business or profession: Provided further, That the
Commission, by rule or regulation, may include within this definition,
any person advising as to the value of commodities or issuing reports
or analyses concerning commodities, if the Commission determines that
such rule or regulation will effectuate the purposes of this provision.
(2) Client. This term, as it relates to a commodity trading
advisor, means any person (i) to whom a commodity trading advisor
provides advice, for compensation or profit, either directly or through
publications, writings, or electronic media, as to the value of, or the
advisability of trading in, any contract of sale of a commodity for
future delivery made or to be made on or subject to the rules of a
contract
[[Page 9446]]
market or derivatives transaction execution facility, any commodity
option authorized under section 4c of the Act, or any leverage
transaction authorized under section 19 of the Act; or (ii) to whom,
for compensation or profit, and as part of a regular business, the
commodity trading advisor issues or promulgates analyses or reports
concerning any of the activities referred to in paragraph (bb)(2)(i) of
this section. The term ``client'' includes, without limitation, any
subscriber of a commodity trading advisor.
* * * * *
Issued in Washington, DC, on February 21, 2006 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06-1745 Filed 2-23-06; 8:45 am]
BILLING CODE 6351-01-P