[Federal Register: September 19, 2006 (Volume 71, Number 181)]
[Proposed Rules]
[Page 54789-54792]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19se06-10]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AC34
Financial Reporting Requirements for Introducing Brokers
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rules.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend Commission regulations to require
introducing brokers (``IBs'') submitting CFTC financial Forms 1-FR-IB
that are certified by independent public accountants to file such
financial reports electronically with the National Futures Association
(``NFA''). The proposed amendments also would require that certified
Financial and Operational Combined Uniform Single Reports (``FOCUS''
Reports), submitted by IBs registered with the Securities and Exchange
Commission (``SEC'') as securities brokers or dealers (``B/Ds'') in
lieu of Form 1-FR-IB, be filed either electronically or in paper form
in accordance with the rules of the NFA. The CFTC also is proposing to
amend Commission regulations to require that with respect to any such
electronic filing, a paper copy including the original signed
certification be maintained by the IB in its records for a period of
five years in accordance with Commission Regulation 1.31.
DATES: Comments must be received on or before October 19, 2006.
ADDRESSES: You may submit comments, identified by 3038-AC34, by any of
the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: secretary@cftc.gov. Include ``Proposed Amendments
to Rules 1.10 and 1.31'' in the subject line of the message.
Fax: (202) 418-5521.
Mail: Send to Eileen Donovan, Acting Secretary of the
Commission, Commodity Futures Trading Commission, 1155 21st Street,
NW., Washington, DC 20581.
Courier: Same as Mail above.
All comments received will be posted without change to http://www.cftc.gov
, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and
Chief Accountant, at (202) 418-5430 or Jennifer C.P. Bauer, Special
Counsel, at (202) 418-5472, Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail:
tsmith@cftc.gov) or (jbauer@cftc.gov).
SUPPLEMENTARY INFORMATION:
I. Background
Section 4f(b) of the Commodity Exchange Act (``Act'') authorizes
the Commission to adopt regulations imposing minimum financial
requirements on IBs.\1\ Commission Regulation 1.10(a)(2)(ii)(A) \2\
requires each person filing an application for registration as an IB to
file a financial Form 1-FR-IB \3\ certified by an independent public
accountant concurrently with the application. IBs that also are
registered with the SEC as a B/D may file a FOCUS Report in lieu of a
Form 1-FR-IB. The application for registration, and the certified Form
1-FR-IB or FOCUS Report, must be filed with the National Futures
Association (``NFA'') in paper form.\4\
---------------------------------------------------------------------------
\1\ 7 U.S.C. 6f(b).
\2\ The regulations of the Commission cited in this release may
be found at 17 CFR Ch. I (2006).
\3\ The Form 1-FR-IB is a financial report that includes a
statement of financial condition, a statement of income or loss, a
statement of minimum net capital, and appropriate footnote
disclosures.
\4\ NFA is a registered futures association under Section 17 of
the Commodity Exchange Act, 7 U.S.C. 21, and has been delegated
responsibility for processing the Commission's registration
function. NFA also is a self-regulatory organization, as defined in
Regulation 1.3(ee).
---------------------------------------------------------------------------
Regulation 1.10(b)(2)(ii)(A) requires each registered IB to
annually file a certified Form 1-FR-IB as of the close of the IB's
fiscal year with NFA. IBs that are registered with the SEC as B/Ds may
file an annual FOCUS Report with NFA in lieu of the Form 1-FR-IB.
Regulation 1.10(b)(2)(iii) requires that certified Forms 1-FR-IB, or
FOCUS Reports, must be filed in paper form with NFA and may not be
filed electronically. Regulation 1.10(d)(4) requires that
[[Page 54790]]
Forms 1-FR-IB, or FOCUS reports filed in lieu thereof, be accompanied
by an oath or affirmation from specified persons that the information
in the filing is true and correct.
The Commission previously has approved rules submitted by NFA that
require IBs to submit uncertified Forms 1-FR-IB, or FOCUS Reports,
electronically using the NFA EasyFile electronic filing system.\5\ NFA
implemented electronic filing of the uncertified Form 1-FR for IBs
beginning in 2002 by providing them with the WinJammer software
utilized by other self-regulatory organizations and the Commission for
the Forms 1-FR and FOCUS Reports filed electronically by futures
commission merchants (``FCMs''). The EasyFile system was developed by
NFA as a Web-based alternative to WinJammer using the same security
procedure available under NFA's On-line Registration System, or ORS.\6\
---------------------------------------------------------------------------
\5\ By letter dated June 1, 2004, NFA submitted to the
Commission for its review and approval, pursuant to Section 17(j) of
the Act (7 U.S.C. 21(j)), amendments to Section 5 of NFA Financial
Requirements, regarding IB financial requirements, which amendments
were approved by the Commission on an expedited basis and were
effective June 30, 2004.
\6\ The firm's security manager can establish users and assign
them abilities to enter data and/or submit the report in the NFA
EasyFile system. This ``Security Manager'' procedure is part of
NFA's existing electronic system for registration processing.
---------------------------------------------------------------------------
Based partly on the successful implementation of EasyFile for
uncertified filings on Form 1-FR-IB, NFA petitioned the Commission for
rule amendments in 2005 to enable NFA to implement mandatory electronic
filing of commodity pool certified annual reports using the same Web-
based structure as the EasyFile system, which amendments were adopted
by the Commission and became effective in March 2006.\7\ As a result of
these amendments and NFA's rules, currently all certified commodity
pool annual reports must be received by NFA in electronic files in
Portable Document Format (``.pdf format'').
---------------------------------------------------------------------------
\7\ 71 FR 8939 (Feb. 22, 2006).
---------------------------------------------------------------------------
NFA's current petition to amend Commission regulations would permit
NFA to expand the EasyFile electronic 1-FR-IB submissions of IBs to
include the mandatory filing of certified Form 1-FR-IBs through an
electronic file in the same .pdf format. However, NFA has not requested
the amendment of regulations to require mandatory electronic filing of
certified FOCUS Reports from IBs that are SEC registered B/Ds as NFA
currently does not have the systems capability through WinJammer to
accept .pdf files. However, as NFA has indicated that it will develop a
mechanism to receive certified FOCUS Reports from IBs electronically in
the future, the amendments proposed herein provide that such reports
are required to be submitted in accordance with NFA rules, either
electronically in .pdf format or in paper form.
NFA's electronic filing system for certified financial statements
from IBs would require the IB to submit a PDF file version of the
entire certified statement, including the financial information,
footnotes, auditors' statement, and any necessary reconciliation of the
IB's certified financial statement and most recent unaudited 1-FR.
Because the IB would have already entered the detailed figures from the
unaudited Form 1-FR-IB into the system, the IB would not have to enter
the figures from the certified statement unless that statement includes
a reconciliation. If it does not include a reconciliation, the system
would carry over the figures from the uncertified statement for NFA
staff's use in analyzing the certified statement. When the IB submits
the electronic filing, NFA's system prompts the submitter to read and
to indicate agreement to an electronic oath or affirmation. The
submitter will have already securely accessed NFA's system through the
input of a personal identification number (PIN). This oath or
affirmation is made with respect to the PDF file of the annual report
and any information entered into the system from the certified
statement, and is patterned after NFA's existing EasyFile system for
IBs' unaudited financial reports. The IB's Security Manager can
establish users and assign them abilities to enter data and/or submit
the report and data in the NFA electronic filing system. However, only
persons duly authorized to bind the IB in accordance with Rule
1.10(d)(4) may submit the data by entering a PIN and making the
required oath or affirmation. The IB is responsible for ensuring that
only persons who are duly authorized to bind the IB, in accordance with
Rule 1.10(d)(4), are granted the ability to submit the IB's financial
information to the NFA. The electronic version of the oath or
affirmation will appear in dialog boxes when reports or data are
submitted, and completion of the submission will require an affirmative
acceptance of the oath or affirmation by a user who has accessed the
system with a secure PIN number and has been granted permission to
submit the IB's financial information.
II. Proposed Amendments
Regulation 1.10(b)(2)(iii) requires that a Form 1-FR certified by
an independent public accountant which is filed by an FCM, IB or
applicant for registration as an FCM or IB, must be filed in paper form
and may not be filed electronically. The Commission is proposing to
amend Regulation 1.10(b)(2)(iii) to provide that a certified Form 1-FR
required from an IB, or applicant for IB registration, must be filed
electronically with NFA through compliance with NFA's electronic filing
procedures, and that a paper copy with the original, manually signed
certification must be maintained by the IB in accordance with
Regulation 1.31. The Commission is also proposing to amend Regulation
1.10(d)(4)(2)(ii), by revising the second sentence and redesignating
the revised sentence as Regulation 1.10(d)(4)(2)(iii). As proposed,
Regulation 1.10(d)(4)(2)(iii) would confirm that in the case of a Form
1-FR-IB filed via electronic transmission in accordance with NFA
procedures approved by the Commission, such transmission must be
accompanied by the personal identification number assigned under NFA
procedures to the authorized signer, and such personal identification
number will constitute and become a substitute for the manual signature
of the authorized signer for the purpose of making the required oath or
affirmation. In addition, the Commission is proposing to amend
Regulation 1.10(h), to provide that an IB that is permitted to file a
copy of its certified FOCUS Report in lieu of Form 1-FR, file such
report either in paper form, or through compliance with NFA's
electronic filing procedures, according to the rules of NFA. The
proposed amendment to Regulation 1.10(h) also will require that a paper
copy with the original, manually signed certification be maintained by
the IB in accordance with Regulation 1.31 for any IB FOCUS Report
electronically filed with NFA. Lastly, the Commission is proposing to
amend Regulation 1.31(d) to provide that paper copies of electronically
filed certified Forms 1-FR or FOCUS Reports must be retained by the IB
in hard copy with the original manually signed certification. The
Commission hereby requests comment on the foregoing amendments proposed
to implement electronic filing of certified annual reports on Form 1-
FR-IB with NFA, and to permit electronic filing by IBs of certified
FOCUS reports as NFA may in the future require.
[[Page 54791]]
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies, in proposing regulations, consider the impact
of those regulations on small businesses. The Commission previously has
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.\8\ The proposed rule amendments will not
place any additional burdens upon introducing brokers that are small
businesses since all such parties are already subject to the financial
reporting requirements under Regulation 1.10 and already comply with
the electronic filing of uncertified reports through NFA's electronic
filing system. Accordingly, the Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C. 605(b) that the action proposed
to be taken herein will not have a significant economic impact on a
substantial number of small entities. However, the Commission invites
the public to comment on this finding.
---------------------------------------------------------------------------
\8\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \9\ imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The proposed rule amendments do not
require a new collection of information on the part of any entities
subject to the proposed rule amendments. The amendments being proposed
would, if promulgated in final form, alter the method of collection of
some of the information required for certain introducing brokers under
Regulation 1.10.
---------------------------------------------------------------------------
\9\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
Collection Of Information. (Regulations and Forms Pertaining to the
Financial Integrity of the Marketplace, OMB Control Number 3038-0024.)
Although the amendments, if promulgated in final form, would alter the
method of collection of some of the information required in the above-
referenced collection, the estimated burden associated with the
collection is not expected to increase or decrease as a result. All
such affected entities already must comply with and use NFA's
electronic filing system, and the amendment would simply substitute
electronic submission for the mailing of a paper filing. The paper
filing would thereafter be required to be retained, but the retention
of one certified financial report per year is not expected to increase
the estimated recordkeeping burden under the collection. Accordingly,
for purposes of the PRA, the Commission certifies that the proposed
rule amendments, if promulgated in final form, would not impact the
total annual reporting or recordkeeping burden associated with the
above-referenced collection of information, which has been approved
previously by OMB. Pursuant to the PRA, the Commission has submitted a
copy of this section to the Office of Management and Budget (``OMB'')
for its review.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street, NW.,
Washington, DC 20581 (202) 418-5160. The Commission considers comments
by the public on this proposed collection of information in--
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use; Evaluating the accuracy of the Commission's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used; Enhancing the quality, utility,
and clarity of the information to be collected; and
Minimizing the burden of the collection of information on those who
are to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses.
Organizations and individuals desiring to submit comments on the
information collection should contact the Office of Information and
Regulatory Affairs, Office of Management and Budget, Room 10235, New
Executive Office Building, Washington, DC 20503, Attn: Desk Officer of
the Commodity Futures Commission. OMB is required to make a decision
concerning the collection of information contained in these proposed
Regulations between 30 and 60 days after publication of this document
in the Federal Register. Therefore, a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to
comment to the Commission on the proposed Regulations.
C. Cost-Benefit Analysis
Section 15(a) of the Act, as amended by Section 119 of the CFMA,
requires the Commission to consider the costs and benefits of its
action before issuing a new Regulation under the Act. By its terms,
Section 15(a) as amended does not require the Commission to quantify
the costs and benefits of a new Regulation or to determine whether the
benefits of the Regulation outweigh its costs. Rather, Section 15(a)
simply requires the Commission to ``consider the costs and benefits''
of its action.
Section 15(a) of the Act 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 proposed amendments to Regulation 1.10 and 1.31 would require
IBs to electronically file certified Form 1-FR with NFA and would
required IBs which file FOCUS Reports in lieu of Form 1-FR to file in
paper form or electronically in accordance with the instruction of NFA,
with any electronically filed certified reports required to be
maintained by the IB in hard copy paper form with the original manually
signed certification.
The Commission is considering the costs and benefits of this
proposed regulation in light of the specific provisions of Section
15(a) of the Act, as follows:
1. Protection of market participants and the public. The proposed
amendment should not affect the protection of market participants and
the public as it provides an alternate method of delivery of
information contained in certified annual reports of IBs but does not
substantively alter the character of such information available to the
Commission and NFA.
2. Efficiency and competition. The Commission anticipates that the
proposed amendment will benefit efficiency by permitting NFA to
streamline its process for receiving certified financial reports from
IBs. The proposed amendment is considered by
[[Page 54792]]
the Commission as benefiting efficiency and not impacting competition.
3. Financial integrity of futures markets and price discovery. The
proposed amendment should have no effect, from the standpoint of
imposing costs or creating benefits, on the financial integrity of
futures markets or the price discovery function of such markets.
4. Sound risk management practices. The proposed amendment should
have no effect, from the standpoint of imposing costs or creating
benefits, on sound risk management practices.
5. Other public interest considerations. The Commission believes
that the proposed regulation requiring electronic filing for the
submission by IBs of certified Forms 1-FR, and the requirement that IBs
filing certified FOCUS Reports comply with NFA instructions as to
filing in paper form or electronically, is beneficial in that it should
streamline the timeliness of delivery and electronic accessibility of
such reports, and permit NFA to retain such reports in a more
streamlined and accessible manner.
After considering these factors, the Commission has determined to
propose the amendments discussed above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit any data that they may have quantifying the
costs and benefits of the proposal with their comment letters.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
Accordingly, 17 CFR part 1 is proposed to be amended as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 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[dash]1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,
114 Stat. 2763 (2000).
2. Section 1.10 is proposed to be amended by:
a. Revising paragraph (b)(2)(iii);
b. Revising paragraph (d)(4)(ii);
c. Adding paragraph (d)(4)(iii); and
d. Revising paragraph (h), to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(b) * * *
(2) * * *
(iii) A Form 1-FR required to be certified by an independent public
accountant in accordance with Sec. 1.16 which is filed by a futures
commission merchant or applicant for registration as a futures
commission merchant must be filed in paper form and may not be filed
electronically. A Form 1-FR required to be certified by an independent
public accountant in accordance with Sec. 1.16 which is filed by an
introducing broker or applicant for registration as an introducing
broker must be filed electronically in accordance with NFA's electronic
filing procedures, and a paper copy of such filing with the original
manually signed certification must be maintained by such introducing
broker or applicant in accordance with Sec. 1.31.
* * * * *
(d) * * *
(4) * * *
(ii) If the registrant or applicant is registered with the
Securities and Exchange Commission as a securities broker or dealer,
the representative authorized under Sec. 240.17a-5 of this title to
file for the securities broker or dealer its Financial and Operational
Combined Uniform Single Report under the Securities Exchange Act of
1934, Part II, Part IIA, or Part II CSE.
(iii) In the case of a Form 1-FR filed via electronic transmission
in accordance with procedures established or approved by the
Commission, such transmission must be accompanied by the Personal
Identification Number assigned under such procedures to the authorized
signer, and such Personal Identification Number will constitute and
become a substitute for the manual signature of the authorized signer
for the purpose of making the oath or affirmation referred to in this
paragraph.
* * * * *
(h) Filing option available to a futures commission merchant or an
introducing broker that is also a securities broker or dealer. Any
applicant or registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer may comply with
the requirements of this section by filing (in accordance with
paragraphs (a), (b), (c), and (j) of this section) a copy of its
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE
(FOCUS Report), in lieu of Form 1-FR; Provided, however, That all
information which is required to be furnished on and submitted with
Form 1-FR is provided with such FOCUS Report; and Provided, further,
That a certified FOCUS Report filed by an introducing broker or
applicant for registration as an introducing broker in lieu of a
certified Form 1-FR-IB must be filed according to NFA rules, either in
paper form or electronically in accordance with NFA electronic filing
procedures, and if filed electronically, a paper copy of such filing
with the original manually signed certification must be maintained by
such introducing broker or applicant in accordance with Sec. 1.31.
* * * * *
3. Section 1.31 is proposed to be amended by revising paragraph (d)
to read as follows:
Sec. 1.31 Books and records; keeping and inspection.
* * * * *
(d) Trading cards, documents on which trade information is
originally recorded in writing, written orders required to be kept
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d), and paper copies
of electronically filed certified Forms 1-FR and FOCUS Reports with the
original manually signed certification must be retained in hard-copy
for the required time period.
* * * * *
Issued in Washington, DC, on September 13, 2006 by the
Commission.
Eileen Donovan,
Acting Secretary of the Commission.
[FR Doc. 06-7739 Filed 9-18-06; 8:45 am]
BILLING CODE 6351-01-P