[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR1.16]

[Page 35-40]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
 
PART 1_GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of Contents
 
Sec.  1.16  Qualifications and reports of accountants.

    (a) Definitions--(1) Accountant's report. The term ``accountant's 
report,'' when used in regard to financial statements and schedules, 
means a document in which an independent licensed or certified public 
accountant indicates the scope of the audit (or examination) which he 
has made and sets forth his opinion regarding the financial statements 
and schedules taken as a whole or an assertion to the fact that an 
overall opinion cannot be expressed. When an overall opinion cannot be 
expressed, the reasons therefore must be stated.
    (2) Audit or examination. The terms ``audit'' and ``examination,'' 
when used in regard to financial statements and schedules, mean an 
examination of the statements and schedules by an accountant in 
accordance with generally accepted auditing standards for the purposes 
of expressing an opinion thereon.
    (3) Certified. The term ``certified,'' when used in regard to 
financial statements and schedules, means audited and reported upon with 
an opinion expressed by an independent certified public accountant or 
independent licensed public accountant.
    (4) Customer. The term ``customer'' means customer (as defined in 
Sec.  1.3(k)) and option customer (as defined in Sec.  1.3(jj) of this 
part and in Sec.  32.1(c) of this chapter) and includes a foreign 
futures and foreign options customer (as defined in Sec.  30.1(c) of 
this chapter).
    (b) Qualifications of accountants. (1) The Commission will recognize 
any person as a certified public accountant who is duly registered and 
in good standing as such under the laws of the place of his residence or 
principal office. The Commission will recognize any person as a licensed 
public accountant who was duly licensed on or before December 31, 1970, 
and is in good standing as such under the laws of the place of his 
residence or principal office.
    (2) The Commission will not recognize any certified public 
accountant or licensed public accountant as independent who is not in 
fact independent. For example, an accountant will not be considered 
independent with respect to any applicant or registrant or any parent, 
subsidiary, or other affiliate of such applicant or registrant (i) in

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which, during the period of his professional engagement to examine the 
financial statements and schedules being reported on or at the date of 
his report, he or his firm or a member thereof had, or was committed to 
acquire, any direct financial interest or any material indirect 
financial interest, or (ii) with which, during the period of his 
professional engagement to examine the financial statements and 
schedules being reported on, at the date of his report or during the 
period covered by the financial statements, he or his firm or a member 
thereof was connected as a promoter, underwriter, voting trustee, 
director, officer, or employee, except that a firm will be deemed 
independent with respect to an applicant or registrant and its 
affiliates if a former employee or officer of such applicant or 
registrant or any such affiliate is employed by the firm and such 
individual has completely disassociated himself from the applicant or 
registrant and its affiliates and does not participate in auditing 
financial statements and schedules of the applicant or registrant or its 
affiliates covering any period of his employment by the applicant or 
registrant or its affiliates. An accountant will not be considered 
independent if he or his firm or a member thereof performs manual or 
automated bookkeeping services or assumes responsibility for maintenance 
of the accounting records, including accounting classification 
decisions, of such applicant or registrant or any of its affiliates. For 
the purposes of this Sec.  1.16(b), the term ``member'' means all 
partners in the firm and all professional employees participating in the 
audit or located in the office of the firm participating in a 
significant portion of the audit.
    (3) In determining whether an accountant may in fact not be 
independent with respect to a particular applicant or registrant, the 
Commission will give appropriate consideration to all relevant 
circumstances, including evidence bearing on all relationships between 
the accountant and that applicant or registrant or any affiliate 
thereof, and will not confine itself to the relationship existing in 
connection with the filing of reports with the Commission.
    (c) Accountant's reports--(1) Technical requirements. The 
accountant's report (i) must be dated, (ii) must be signed manually, 
(iii) must indicate the city and State where issued and (iv) must 
identify without detailed enumeration the financial statements covered 
by the report.
    (2) Representations as to the audit. The accountant's report (i) 
must state whether the audit was made in accordance with generally 
accepted auditing standards, and (ii) must designate any auditing 
procedures deemed necessary by the accountant under the circumstances of 
the particular case which have been omitted and the reasons for their 
omission. However, nothing in this paragraph (c)(2) shall be construed 
to imply authority for the omission of any procedure which independent 
accountants would ordinarily employ in the course of an audit made for 
the purposes of expressing the opinion required by paragraph (c)(3) of 
this section.
    (3) Opinion to be expressed. The accountant's report must state 
clearly: (i) The opinion of the accountant with respect to the financial 
statements and schedules covered by the report and the accounting 
principles and practices reflected therein and (ii) the opinion of the 
accountant as to the consistency of the application of the accounting 
principles, or as to any changes in such principles which have material 
effect on the financial statements and schedules.
    (4) Exceptions. Any matters to which the accountant takes exception 
must be clearly identified, such exceptions specifically and clearly 
stated, and to the extent practicable, the effect of each exception on 
related financial statements and schedules given.
    (5) Accountant's report on material inadequacies. A registrant must 
file concurrently with the annual audit report a supplemental report by 
the accountant describing any material inadequacies found to exist or 
found to have existed since the date of the previous audit. An applicant 
must file concurrently with the audit report a supplemental report by 
the accountant describing any material inadequacies found to exist as of 
the date of the

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Form 1-FR being filed: Provided, however, That if such applicant is 
registered with the Securities and Exchange Commission as a securities 
broker or dealer, and it files (in accordance with Sec.  1.10(h)) a copy 
of its Financial and Operational Combined Uniform Single Report under 
the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE, 
in lieu of Form 1-FR, the accountant's supplemental report must be made 
as of the date of such report. The supplemental report must indicate any 
corrective action taken or proposed by the applicant or registrant in 
regard thereto. If the audit did not disclose any material inadequacies, 
the supplemental report must so state.
    (d) Audit objectives. (1) The audit must be made in accordance with 
generally accepted auditing standards and must include a review and 
appropriate tests of the accounting system, the internal accounting 
control, and the procedures for safeguarding customer and firm assets in 
accordance with the provisions of the Act and the regulations 
thereunder, since the prior examination date. The audit must include all 
procedures necessary under the circumstances to enable the independent 
licensed or certified public accountant to express an opinion on the 
financial statements and schedules. The scope of the audit and review of 
the accounting system, the internal controls, and procedures for 
safeguarding customer and firm assets must be sufficient to provide 
reasonable assurance that any material inadequacies existing at the date 
of the examination in (i) the accounting system, (ii) the internal 
accounting controls, and (iii) the procedures for safeguarding customer 
and firm assets (including, in the case of a futures commission 
merchant, the segregation requirements of section 4d(a)(2) of the Act 
and these regulations and the secured amount requirements of the Act and 
these regulations) will be discovered. Additionally, as specified 
objectives the audit must include reviews of the practices and 
procedures followed by the registrant in making (A) periodic 
computations of the minimum financial requirements pursuant to Sec.  
1.17 and (B) in the case of a futures commission merchant, daily 
computations of the segregation requirements of section 4d(a)(2) of the 
Act and these regulations and the secured amount requirements of the Act 
and these regulations.
    (2) A material inadequacy in the accounting system, the internal 
accounting controls, the procedures for safeguarding customer and firm 
assets, and the practices and procedures referred to in paragraph (d)(1) 
of this section which is to be reported in accordance with paragraph 
(e)(2) of this section includes any conditions which contributed 
substantially to or, if appropriate corrective action is not taken, 
could reasonably be expected to:
    (i) Inhibit an applicant or registrant from promptly completing 
transactions or promptly discharging his responsibilities to customers 
or other creditors;
    (ii) Result in material financial loss;
    (iii) Result in material misstatement of the applicant's or 
registrant's financial statements and schedules; or
    (iv) Result in violations of the Commission's segregation or secured 
amount (in the case of a futures commission merchant), recordkeeping or 
financial reporting requirements to the extent that could reasonably be 
expected to result in the conditions described in paragraph (d)(2) (i), 
(ii), or (iii) of this section.
    (e) Extent and timing of audit procedures. (1) The extent and timing 
of audit procedures are matters for the independent public accountant to 
determine on the basis of his review and evaluation of existing internal 
controls and other audit procedures performed in accordance with 
generally accepted auditing standards and the audit objectives set forth 
in paragraph (d) of this section. In determining the extent of testing, 
consideration must be given to the materiality of an area and to the 
possible effect on the financial statements and schedules of a material 
misstatement in a related account.
    (2) If during the course of an audit or interim work, the 
independent public accountant determines that any material inadequacies 
exist in the accounting system, in the internal accounting control, in 
the procedures for safeguarding customer or firm assets, or as otherwise 
defined in paragraph (d) of

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this section, he must call such inadequacies to the attention of the 
applicant or registrant, which has the responsibility to give notice to 
the National Futures Association and, if an applicant, or the Commission 
and the designated self-regulatory organization, if any, if a 
registrant, in accordance with paragraphs (d) and (g) of Sec.  1.12: 
Provided, however, That if the applicant or registrant is an introducing 
broker or applicant for registration as an introducing broker, it also 
has the responsibility to give notice to the National Futures 
Association, the designated self-regulatory organization, if any, and 
every futures commission merchant carrying or intending to carry 
customer accounts for the introducing broker or applicant for 
registration as an introducing broker. The applicant or registrant must 
also furnish the accountant with a copy of said notice within three (3) 
business days. If the accountant fails to receive such notice from the 
applicant or registrant within three (3) business days, or if he 
disagrees with the statements contained in the notice of the applicant 
or registrant, the accountant must inform the National Futures 
Association, in the case of an applicant, or the Commission and the 
designated self-regulatory organization, if any, in the case of a 
registrant, by reporting the material inadequacy and, in the case of an 
applicant or registrant which is an introducing broker or applicant for 
registration as in introducing broker, the accountant must also inform 
the National Futures Association, the designated self-regulatory 
organization, if any, and every futures commission merchant carrying or 
intending to carry customer accounts for the introducing an introducing 
broker, within three (3) business days thereafter. Such report from the 
accountant must, if the applicant or registrant failed to file a notice, 
describe the material inadequacies found to exist. If the applicant or 
registrant filed a notice, the accountant must file a report detailing 
the aspects, if any, of the applicant's or registrant's notice with 
which the accountant does not agree.
    (f)(1) Extension of time for filing audited reports. In the event a 
registered futures commission merchant or a registered introducing 
broker finds that it cannot file, without substantial undue hardship, 
its certified financial statements and schedules for any year within the 
time specified in Sec.  1.10 (b)(1)(ii) or Sec.  1.10 (b)(2)(ii) of this 
part, as applicable, such registrants may request approval for an 
extension of time, as follows:
    (i) Futures commission merchant registrants. (A) A futures 
commission merchant may file with its designated self-regulatory 
organization an application for an extension of time, a copy of which 
the registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self-regulatory 
organization. The registrant must file immediately with the Commission a 
copy of any notice it receives from the designated self-regulatory 
organization to approve or deny the registrant's request for extension 
of time. A written notice of approval shall become effective upon the 
filing by the registrant of a copy with the Commission, and a written 
notice of denial shall be effective as of the date of the notice.
    (B) A futures commission merchant that is registered with the 
Securities and Exchange Commission as a securities broker or dealer may 
file with its designated self-regulatory organization a copy of any 
application that the registrant has filed with its designated examining 
authority, pursuant to Sec.  240.17-a5(l)(1)of this title, for an 
extension of time to file audited annual financial statements. The 
registrant must also file immediately with the designated self-
regulatory organization and the Commission copies of any notice it 
receives from its designated examining authority to approve or deny the 
requested extension of time. Upon receipt by the designated self-
regulatory organization and the Commission of copies of any such notice 
of approval, the requested extension of time referenced in the notice 
shall be deemed approved under this paragraph (f)(1)(i).
    (C) Any copy that under this paragraph (f)(1)(i) is required to be 
filed with the Commission shall be filed with the regional office of the 
Commission with jurisdiction over the state in which the registrant's 
principal place of business is located.

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    (ii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application for extension 
of time, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with the 
National Futures Association copies of any application that the 
registrant has filed with its designated examining authority, pursuant 
to Sec.  240.17-a5(l)(1) of this title, for an extension of time to file 
audited annual financial statements. The registrant must also file 
immediately with the National Futures Association copies of any notice 
it receives from its designated examining authority to approve or deny 
the requested extension of time. Upon the receipt by the National 
Futures Association of a copy of any such notice of approval, the 
requested extension of time referenced in the notice shall be deemed 
approved under this paragraph (f)(1)(ii).
    (2) Exemption requests. On the written request of any designated 
self-regulatory organization or registrant, or on its own motion, the 
Commission may grant an extension of time or an exemption from any of 
the certified financial reporting requirements of this chapter either 
unconditionally or on specified terms and conditions.
    (g) Replacement of accountant. (1) In the event (i) the independent 
public accountant who was previously engaged as the principal accountant 
to audit an applicant's or registrant's financial statements resigns (or 
indicates he declines to stand for re-election after the completion of 
the current audit) or is dismissed as the applicant's or registrant's 
principal accountant, (ii) another independent accountant is engaged as 
principal accountant, or (iii) an independent accountant on whom the 
principal accountant expresses reliance in his report regarding a 
subsidiary resigns (or formally indicates he declines to stand for re-
election after completion of the current audit) or is dismissed or 
another independent public accountant is engaged to audit that 
subsidiary, an applicant shall file written notice of such occurrence 
with the National Futures Association, and a registrant shall file 
written notice of such occurrence with the Commission at its principal 
office in Washington, DC, and with the designated self-regulatory 
organization, if any, not more than 15 business days after such 
occurrence.
    (2) Such notice must state (i) the date of such resignation (or 
declination to stand for re-election, dismissal or engagement) and (ii) 
whether, in connection with the audit of the two most recent fiscal 
years and any subsequent interim period preceding such resignation, 
dismissal or engagement, there were any disagreements with the former 
accountant on any matter of accounting principles or practices, 
financial statements disclosure, auditing scope or procedures, or 
compliance with the applicable rules of the Commission, which, if not 
resolved to the satisfaction of the former accountant, would have caused 
him to make reference in connection with his report to the subject 
matter of the disagreements (if so, describe such disagreements). The 
disagreements required to be reported in this paragraph (g)(2) include 
both those resolved to the former accountant's satisfaction and those 
not resolved to the former accountant's satisfaction. Disagreements 
contemplated by this paragraph (g)(2) are those which occur at the 
decision-making level, i.e., between personnel of the applicant or 
registrant responsible for presentation of its financial statements and 
schedules and personnel of the accounting firm responsible for rendering 
its report. The notice must also state whether the accountant's report 
on the financial statements and schedules for any of the past two years 
contained an adverse opinion or a disclaimer of opinion or was qualified 
as to uncertainties, audit scope, or accounting principles (if so, 
describe the nature of each such adverse opinion, disclaimer of opinion, 
or qualification). An applicant must also request the former accountant 
to furnish the applicant with a letter addressed to the National Futures 
Association, and a registrant must also request the former accountant to 
furnish the registrant with a letter addressed to the Commission, 
stating whether he agrees with

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the statements contained in the notice of the applicant or registrant 
and, if not, stating the respects in which he does not agree. Each copy 
of the notice and accountant's letter must be manually signed by the 
sole proprietor or a general partner or a duly authorized corporate 
officer of the applicant or registrant, as appropriate, and by the 
accountant.
    (3) If (i) within the 24 months prior to the date of the most recent 
audited financial statement, a notice has been filed pursuant to 
paragraph (g)(1) of this section reporting a change of accountants, (ii) 
included in such filing there is a reported disagreement on any matters 
of accounting principles or practices, financial statements disclosure, 
auditing scope, or noncompliance with the applicable rules of the 
Commission, (iii) during the fiscal year in which the change in 
accountants took place or during the subsequent fiscal year, there have 
been any transactions or events similar to those which involved a 
reported disagreement, and (iv) such transactions or events are material 
and were accounted for or disclosed in a manner different from that 
which the former accountant apparently would have concluded was 
required, the existence and nature of the disagreements and also the 
effect on the financial statements must be stated in a written notice to 
the National Futures Association, in the case of an applicant, or to the 
Commission at its principal office in Washington, DC, and the designated 
self-regulatory organization, if any, in the case of a registrant, if 
the method which the former accountant apparently would have concluded 
was required had been followed. These disclosures need not be made if 
the method asserted by the former accountant ceases to be generally 
accepted because of authoritative standards or interpretations 
subsequently issued. The notice required by this paragraph (g)(3) must 
be filed by the applicant or registrant concurrently with the financial 
statements and schedules to which it pertains.
    (h) Exemption for introducing broker or applicant therefor. The 
provisions of this section do not apply to an introducing broker which 
is operating pursuant to a guarantee agreement, nor do such provisions 
apply to an applicant for registration as an introducing broker who 
files concurrently with such application a guarantee agreement, provided 
such introducing broker or applicant therefor is not also a securities 
broker or dealer.

(Approved by the Office of Management and Budget under control numbers 
3038-0007, 3038-0024)

[43 FR 39970, Sept. 8, 1978, as amended at 46 FR 54516, Nov. 3, 1981; 46 
FR 63035, Dec. 30, 1981; 48 FR 35284, Aug. 3, 1983; 49 FR 39526, Oct. 9, 
1984; 52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17, 1988; 69 FR 41426, 
July 9, 2004; 69 FR 49798, Aug. 12, 2004; 71 FR 5593, Feb. 2, 2006]