# Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-21729 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** September 10, 2010 - **Citation:** 75 FR 55410 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166 RIN 3038-AC61 Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries AGENCY: Commodity Futures Trading Commission. ACTION: Final rules. SUMMARY: The Commodity Futures Trading Commission (“Commission” or “CFTC”) is adopting a comprehensive regulatory scheme to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Wall Street Reform Act”) 1 and the CFTC Reauthorization Act of 2008 (“CRA”) 2 with respect to off-exchange transactions in foreign currency with members of the retail public ( i.e., “retail forex transactions”). The new regulations and amendments to existing regulations published today establish requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital, and other operational standards. 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203 (2010). 2 Food, Conservation, and Energy Act of 2008, Public Law 110-246, 122 Stat. 1651, 2189-2204 (2008). DATES: Effective Date: October 18, 2010. FOR FURTHER INFORMATION CONTACT: For information regarding financial and related reporting requirements, contact: Thomas Smith, Chief Accountant and Deputy Director, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number: 202-418-5495; facsimile number: 202-418-5547; and electronic mail: tsmith@cftc.gov . Jennifer Bauer, Special Counsel, Division of Clearing and Intermediary Oversight, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number: 202-418-5472; facsimile number: 202-418-5547; and electronic mail: jbauer@cftc.gov . For all other information contact: William Penner, Deputy Director, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number: 202-418-5450; facsimile number: 202-418-5547; and electronic mail: wpenner@cftc.gov . Christopher Cummings, Special Counsel, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number (202) 418-5450; facsimile number: 202-418-5547; and electronic mail: ccummings@cftc.gov . Peter Sanchez, Special Counsel, Division of Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone number (202) 418-5450; facsimile number: 202-418-5547; and electronic mail: psanchez@cftc.gov. SUPPLEMENTARY INFORMATION: I. Background On January 20, 2010, the Commission published in the Federal Register proposed new regulations and amendments to existing regulations in response to the CRA (the “Proposing Release”). 3 The Proposing Release set forth in detail the historical background of the regulation of retail forex transactions, and the events, legislative and otherwise, that led up to the enactment of the CRA. 4 The Commission explained that its proposed regulations were drawn up with the aim of applying the same principles that have guided the regulation of on-exchange instruments, while taking into account the real differences between the trading of futures contracts on designated contract markets (“DCMs”) that are cleared through Commission-registered derivatives clearing organizations (“DCOs”) on the one hand, and off-exchange transactions between forex firms and retail customers on the other hand. 5 3 Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 FR 3282 (Jan. 20, 2010). 4 See 75 FR 3282, 3283-3285. 5 See 75 FR 3282, 3285. The proposed rule changes were of two general sorts. The first group included amendments to existing regulations to accommodate regulation of retail forex transactions and the new registration categories created under the CRA. The second group comprised a new part 5 of the Commission's regulations, encompassing, to the extent practicable, the regulations pertaining specifically to persons engaging in retail forex transactions. For example, many of the operational or registration requirements in part 1 or part 3, respectively, of the Commission's regulations referring to futures commission merchants (“FCMs”) would, as a result of the CRA, now apply also to retail foreign exchange dealers (“RFEDs”). Some of the disclosure, reporting and recordkeeping requirements in part 4 had to be modified to apply to operators of pooled investment vehicles and advisors that engage in retail forex transactions, as called for under the CRA. Other parts of the Commission's regulations required their own adaptations in order to extend customer protection, privacy and procedural requirements to retail forex transactions. The Commission also noted in its Proposing Release that in addition to the regulations expressly called for by the CRA, it was proposing certain additional requirements prompted both by the essential differences between on-exchange transactions and retail forex transactions, and by the history of fraudulent practices in the retail forex market. 6 The proposed regulatory changes were discussed, section by section. 7 6 See 75 FR 3282, 3286. 7 See 75 FR 3282, 3286-3293. Following the publication of the Proposing Release, the Wall Street Reform Act was enacted which, in relevant part, requires that specified Federal regulatory agencies, including the CFTC, promulgate rules regarding retail forex transactions. Consistent with the CRA, the Wall Street Reform Act directs that such rules prescribe appropriate requirements with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, and such other standards or requirements as the Federal regulatory agencies determine to be necessary. 8 8 See Wall Street Reform Act, Sec. 742. Thus, pursuant to the broad authority granted by the Wall Street Reform Act and the CRA, the Commission is implementing requirements for, among other things: Registration, disclosure, recordkeeping, financial reporting, minimum capital, and other operational standards, based on existing CFTC regulations for commodity interest transactions and commodity interest intermediaries, and on existing National Futures Association (“NFA”) rules with respect to retail forex transactions offered by NFA's members. With certain exceptions, the Commission is adopting the rule changes delineated in the Proposing Release as proposed. Except for certain otherwise-regulated financial intermediaries excluded by the CRA from the Commission's jurisdiction, persons offering to be or acting as counterparties to retail forex transactions, but not primarily or substantially engaged in the exchange-traded futures business, are required to register with the CFTC as RFEDs. Registered FCMs that are “primarily or substantially” (as defined in the new regulations) engaged in the activities set forth in the definition in the Commodity Exchange Act (the “Act”) of an FCM 9 are permitted to engage in retail forex transactions without also registering as RFEDs. Also, the $20 million minimum net capital standard established in the CRA for registering as an RFED or offering retail forex transactions as an FCM is incorporated in the new regulations. 9 7 U.S.C. 1a(20) (2006). The new regulations also require certain entities other than RFEDs and FCMs that intermediate retail forex transactions to register with the Commission as introducing brokers (“IBs”), commodity trading advisors (“CTAs”), commodity pool operators (“CPOs”) or associated persons (“APs”) of such entities, as appropriate, and to be subject to the Act and regulations applicable to that registrant category. Finally, pursuant to the authority conferred by the CRA, 10 and to address cases where the Commission's jurisdiction has been challenged, the Commission is adopting the proposed regulatory provisions applicable to certain leveraged, off-exchange retail forex transactions commonly known as “Zelener contracts.” 11 10 See 7 U.S.C. 2(c)(2)(C)(iv). 11 See 75 FR 3282, 3284-3285. II. The Comments on the Proposing Release The Commission received in excess of 9,100 comments 12 from a range of commenters, including individuals who trade forex, intermediaries, registered FCMs currently serving as counterparties in retail forex transactions, trade associations or coalitions of industry participants, one committee of a county lawyers' association, a registered futures association, and numerous law firms representing institutional clients. Many commenters offered specific recommendations for clarification or modification of particular rules; other commenters objected generally to particular proposed rules. Overall, the bulk of the comments concerned four of the proposed rules: 12 The Comment letters referred to in this release are available through the Commission's Web site: http://www.cftc.gov/LawRegulation/PublicComments/10-001.html . • Proposed Regulation 5.9, which would impose a 10 to 1 leverage limitation on retail forex transactions. (“Security Deposit Proposal” or “Leverage Proposal”) • Proposed Regulation 5.18(h), which would require each IB that solicits or accepts off-exchange retail forex orders to enter into a guarantee agreement with the FCM or RFED to which the IB introduces the forex transactions. (“Guaranteed IB Proposal”) • Proposed Regulation 5.18(j), which would require all retail forex counterparties to calculate, on a quarterly basis, the percentage of non-discretionary accounts that were profitable, to include the results of this calculation for the preceding four quarters in required disclosures to customers, and to maintain and make available upon request records reflecting such calculations for five years. (“Disclosure Proposal”) • Proposed Regulation 5.7, which would establish a minimum capital requirement for FCMs and RFEDs (“Capital Proposal”) The comments regarding these proposed rules and the Commission's response are discussed immediately below. The Commission's response to comments concerning other aspects of the proposed rules follows later. Given the volume of comments received, the Commission cannot respond to each and every comment or objection. However, the Commission has carefully reviewed and considered each letter and, in the sections that follow, has endeavored to address both the primary themes running throughout multiple letters and significant points raised by individual commenters. Security Deposit Proposal. In general terms, proposed Regulation 5.9 would have required FCMs and RFEDs engaging in retail forex transactions to collect from each retail forex customer a minimum security deposit equal to 10 percent of the notional value of each retail forex transaction. This proposal is often referred to in the comment letters as a 10% or 10:1 leverage requirement ( i.e., for every $10 of notional value, $1 is required as a security deposit). The Commission received a significant number of comment letters regarding the Security Deposit Proposal with a substantial majority of the commenters objecting to the proposed level of 10%. Many of the letters submitted with regard to this issue appeared to be submitted by individual traders, were identical or nearly identical, and objected generally to the proposal. Within the large group of comments by such traders, whether in “form” letter objections or otherwise, the most common objections were that the leverage proposal would drive business off-shore, would lead to the loss of jobs in the U.S., was unnecessarily restrictive and would inhibit small traders' ability to trade profitably, or that the percentage required as a security deposit was arbitrary, capricious and anti-competitive. Other commenters noted that by increasing the security deposit level, retail forex customers are exposed to greater levels of market and credit risk. Many of these commenters believe that the amplification that is provided by increased leverage is necessary for clients to earn a profit from their positions. Still other commenters urged that NFA's current levels be retained and asserted that the Commission had already approved these levels by allowing NFA's proposed rule regarding leverage to become effective. Finally, one commenter encouraged the Commission to (1) recognize the different market risks and volatility posed by different currencies, (2) adopt requirements reflective of those differences just as contract markets do in establishing their margin levels, and (3) endorse or adopt some mechanism to allow for periodic review and adjustment of the requirements if necessary. The Commission's proposed leverage restriction was conservative and was proposed in an effort to provide maximum customer protection. The Commission does not, however, believe it was arbitrary or contrary to previously approved NFA rules. 13 Moreover, the Commission does not believe that most retail foreign exchange customers select a counterparty based solely on the maximum allowable leverage, otherwise these investors would have already migrated to foreign markets, some of which have no limitation on leverage. Nevertheless, after considering the concerns expressed and arguments made in the comments, the Commission has determined to adopt a revised security deposit requirement for FCMs engaging in retail forex transactions and for RFEDs. 13 As noted above, several commenters maintained that the proposed Regulation 5.9 was inconsistent with security deposit levels set by NFA and approved by the Commission. In February 2009, NFA proposed and the Commission approved amendments to Section 12 of NFA's Financial Requirements. ( See Letter from Thomas W. Sexton to David A. Stawick, dated February 23, 2009, regarding Forex Security Deposits—Proposed Amendments to NFA Financial Requirements Section 12 and Interpretive Notice Regarding Forex Transactions, available on NFA's website at nfa.futures.org.) NFA's amendments left in place requirements of a 1% security deposit for major currencies and a 4% deposit for all other currencies, but eliminated an exemption from these requirements for well-capitalized firms. As NFA noted in its proposed amendments, exempted firms had offered leverage of 200:1, 400:1 and even 700:1. NFA's February 2009 amendments effectively reduced the amount of leverage available to retail forex customers. The Commission approved the amendments, in accordance with the standards set in Section 17(j) of the Act. In developing the revised Regulation 5.9, the Commission once again reviewed futures exchange margin levels, NFA's current security deposit requirements, and comparable requirements found in other jurisdictions. Final Regulation 5.9 permits the registered futures association (“RFA”) of which the FCM or RFED is a member to determine specific security deposit levels within parameters set forth by the Commission in the regulation. 14 The Commission has provided minimum security deposit amounts of 2 percent of the notional value for major currency pairs and 5 percent of the notional value for all other retail forex transactions. The Commission will periodically review the parameters it has set in light of market conditions and adjust them as necessary. Similarly, each RFA ( i.e., NFA) will be required to designate which currencies are “major currencies,” and must review, no less frequently than annually, major currency designations and security deposit requirements, and must adjust the designations and requirements as necessary in light of changes in the volatility of currencies and other economic and market factors. It is the Commission's view that revised Regulation 5.9 will provide a mechanism for setting security deposit levels that is both anchored in, and adaptable to, market conditions. 14 NFA is currently the only futures association registered with the Commission. Disclosure of Profitable vs. Non-Profitable Accounts . As proposed, Regulation 5.5(e) required that the risk disclosure statement provided to every retail forex customer include disclosure of the number of non-discretionary accounts maintained by the FCM or RFED that were profitable and those that were not, during the four most recent calendar quarters. Commenters called the provision anti-competitive and doubted that measurement of profitable accounts could be done in a way that would permit comparison. Proposed Regulation 5.18(i) required that each retail forex counterparty prepare and maintain on a quarterly basis a calculation of the percentage of non-discretionary retail forex accounts open for any period of time during the quarter that earned a profit, and the percentage of such accounts that experienced a loss. Some commenters asserted that the Commission did not provide adequate guidance or a standard methodology for calculating “winners” and “losers.” Commenters stated that the proposal was ambiguous and that the reported percentages may not be comparable across the industry. In addition, commenters thought that there was too much subjectivity in determining “winners” and “losers” and that, therefore, the resulting disclosure would not be helpful for customers. Other commenters stated that by requiring retail forex firms to disclose the percentage of profitable accounts quarterly, the Commission would be unfairly singling out retail forex dealers, as this information is not required on the futures side or for broker-dealers. As noted in the Proposing Release, there are significant differences between trading futures contracts on an exchange and entering into off-exchange transactions between forex firms and retail customers. 15 The Commission believes that as a result of the inherent conflicts embedded in the operations of the retail over-the-counter forex industry, such disclosure is necessary. To illustrate potential conflicts of interests in the off-exchange retail forex industry, the Commission in its Proposing Release pointed out that the retail forex counterparty: (i) Is the counterparty to the customer, which sets up a “zero-sum game” between the customer and the retail forex dealer; (ii) provides quotes to their customers, which may not be the best quote at the time and may not even be a competitive quote; and (iii) enters into a principal-to-principal transaction with the non-discretionary retail forex accountholder. At each stage of the transaction, the retail forex counterparty has an inherent conflict with its non-discretionary retail forex accountholders. By contrast, in exchange-traded futures markets, accountholders do not encounter the same level of conflicts that retail forex customers face, and, therefore, a requirement to disclose the percentage of non-discretionary retail accounts that were profitable and not profitable is appropriate in retail forex markets, while it may not be elsewhere. As a result of the industry structure and operational conflicts, the Commission believes that this disclosure is necessary to protect the non-discretionary retail forex accountholder. 15 See 75 FR 3282, 3285. So while the Commission continues to believe in the value and effectiveness of such disclosures, it is adopting Regulation 5.5(e) and Regulation 5.18(i) with certain amendments, in order to address concerns regarding the implementation of the rule. As proposed, the calculation for determining whether a retail forex account was profitable or not during a quarter would be net of fees, commissions, any other expenses, trading results, customer funds deposited, and customer funds withdrawn. The regulation as adopted provides further guidance in response to commenters' concerns. The final rule clarifies that a retail forex account will be considered either “profitable” or “not profitable,” with “not profitable” including accounts that break-even. The Commission is also clarifying the required time periods for which the required calculations in Regulation 5.5(e)(1) and 5.5(e)(2) must be made and records maintained and made available. Regulation 5.5(e)(1) requires that information regarding profitable and not profitable accounts for the four most recent quarters be included in disclosure documents; Regulation 5.5(e)(2) requires that similar quarterly information be maintained for five years and provided to requesting customers or potential customers. As to the 5.5(e)(1) information, once these regulations are effective, FCMs and RFEDs must provide the required information for the past four quarters. FCMs and RFEDs also must update this information going forward on a quarterly basis and disclose the most current four quarters in disclosure documents provided to potential customers. Regulation 5.5(e)(2) requires an RFED or FCM to provide to a customer or potential customer the same account information as set out in Regulation 5.5(e)(1) for the most recent five-year period during which the RFED or FCM maintained non-discretionary retail forex customer accounts, but only at the request of the customer or potential customer. The Commission intends that this requirement to keep and make available five years worth of profitable and non-profitable account information be prospective; following the adoption of these rules, FCMs and RFEDs are required to keep and maintain such data going forward on a quarterly basis until such time as they have amassed five years worth of information, at which point they will have to keep and make available the information for the five most recent years. Furthermore, prior to amassing five years of performance information, an FCM or RFED is obligated to provide, upon request by a customer or prospective customer, the historical quarterly performance information for as many quarters as the FCM or RFED has available. In addition, to provide clarity regarding the type of accounts that must be used in making the calculation of profitable and unprofitable accounts, FCMs and RFEDS must use those retail forex accounts, as defined in Regulation 5.1(i), that are non-discretionary accounts; Provided, that the retail forex account is not a proprietary account, as defined in Regulation 5.18(i)(3). The Commission believes that excluding proprietary accounts will help minimize the possibility of skewed results stemming from differing methods of calculation. The Commission is also requiring that the data be calculated on a calendar year basis for all counterparties. Guarantee Requirement for IBs Who Introduce Retail Forex Business. The Commission proposed in Regulation 5.18(h) to require that any person within the definition of an IB under Regulation 5.1(f)(1) (or applicant for registration as such, or successor to the business of such) enter into a guarantee agreement with an FCM or an RFED. The IB would be permitted to enter such an agreement with only one FCM or RFED. The rationale behind this requirement was to make FCMs and RFEDs exercise care with regard to entities with which they do business by making them jointly and severally liable for all obligations of the IB under the Act and Commission Regulations with respect to the solicitation of retail forex transactions. This would, in turn, discourage them from associating with IBs without regard to the sales practices employed by those IBs. Commenters called the banning of independent IBs in the retail forex business harsh and said it could lead to less customer choice and poorer service. Others said that requiring a guarantee agreement was anticompetitive and unnecessary, as most enforcement activity concerns unregistered industry participants, and that guarantee agreements have been a substitute for minimum capital for as long as the IB registration category has existed. After considering the comments, the Commission has determined to permit IBs who register in order to transact retail forex business (like IBs who register to transact futures and commodity options business), to choose between entering into a guarantee agreement with an FCM or RFED, and maintaining the existing IB minimum net capital requirement. Accordingly, IBs, whether they register to do retail forex business, futures business, or both, must comply with the provisions in the Commission's regulations that apply to IBs; Provided, that any IB that operates pursuant to a guarantee agreement meeting the requirements of Regulation 1.10(j) need not meet the minimum net capital requirements set forth in Regulations 1.10, 1.12 and 1.17. Net Capital Requirements for FCMs and RFEDs. As proposed, Regulation 5.7 implements the $20 million minimum net capital requirement for FCMs engaging in retail forex transactions and for RFEDs (as set forth in the CRA), and to the extent that the FCM's or RFED's total retail forex obligation to its customers exceeds $10 million, the regulation requires an additional five percent of that excess. Several comments urged the Commission to revise proposed Regulation 5.7 to include an exemption from the additional net capital requirement when the FCM or RFED uses “straight-through processing.” 16 Referring to the costs imposed by additional capital requirements, the commenters argued that such costs, in addition to the limits imposed by several of the other proposed regulatory requirements, would cause much of the retail forex business to be transferred to offshore jurisdictions without (or with substantially reduced) regulatory protections. 17 16 NFA's Financial Requirement Section 11 currently contains such an exemption from an additional capital requirement for member firms using straight-through-processing for all customer transactions. 17 This argument is diminished by the recent enactment of the Wall Street Reform Act, which clearly indicates the intent of Congress that retail forex transactions in the United States either be comprehensively regulated or be prohibited outright. See Wall Street Reform Act, Sec. 742. The Commission considered but did not adopt NFA's straight-through processing exemption in its proposal, specifically because the proposed additional capital requirement was intended to provide a capital requirement that directly relates to the size of a firm's liability to retail forex customers. Some firms offering retail forex transactions have liabilities to their retail customers exceeding $10 million. Straight-through processing, although mitigating market exposure for a firm, does not reduce in any way the total liability to retail forex customers who are direct counterparties to the firm and therefore exposed to the credit risk of such firm. Therefore, the Commission is adopting the capital provisions in Section 5.7 as originally proposed. Separately, a comment letter was received significantly after the comment period was closed objecting to the net capital charges applicable to retail foreign currency options set forth in proposed Regulation 5.7(b)(2)(v)(B). The Commission has determined to adopt that provision as proposed, and to clarify that for both FCMs and RFEDs unlisted retail forex options are subject to the existing net capital charges that are applicable to an FCM for any other unlisted foreign currency option that is entered into with any eligible contract participant (which treatment is also consistent with the treatment of all unlisted options, including foreign currency options, for securities broker-dealers). Requirement To Appoint a Chief Compliance Officer. Proposed Regulation 5.18(j) calls for each retail forex counterparty (defined to include a retail foreign exchange dealer, an FCM or an affiliated person of an FCM) to designate a Chief Compliance Officer. In proposing this requirement, the Commission sought to promote customer protection by focusing responsibility for an entity's regulatory compliance. This requirement was criticized on the basis that potential personal liability for a Chief Compliance Office would discourage individuals from assuming that position, and because no comparable requirement exists for firms engaging in on-exchange transactions. The Commission continues to believe that, given the history of fraudulent and improper behavior in the retail forex business, requiring a Chief Compliance Officer is a reasonable way to ensure that retail forex counterparties observe the highest professional standards and take their compliance obligations seriously. Accordingly, this requirement is retained in final Regulation 5.18. Prohibition of Guarantees Against Customer Loss. Proposed Regulation 5.16 would prohibit, among other things, the making of guarantees against loss to retail foreign exchange customers by FCMs, RFEDs and IBs. One currently registered FCM commented that firms should be allowed to guarantee that clients will not lose more than their account balance because technology allows for automatic liquidation of positions if the account balance falls below margin requirements. The Commission notes that not all retail forex counterparties have comparable capabilities to deal with events such as extremely volatile markets. Moreover, proposed regulation 5.16 is based on Commission Regulation 1.56, which prohibits FCMs and IBs engaged in futures and commodity option transactions from making similar guarantees. At the time the Commission proposed Regulation 1.56, it specifically noted that the use of limited-risk and guarantee-against-loss agreements had “often been associated with patterns of allegedly unlawful conduct by FCMs or other registrants or with the financial instability of such persons.” 18 The Commission does not view these dual concerns—rooted in consumer protection and the financial stability of firms—as any less compelling today and has determined to issue the regulation as proposed. 18 See 46 Fed. Reg. 62841 (Dec. 29, 1981). Specific Authorization for Trades. Two commenters expressed a concern regarding proposed Regulation 5.17, which requires RFEDs, FCMs, IBs, and their APs to have specific authorization by the customer before effecting a retail forex transaction. The concerns centered on the use of automated systems that generate orders based on the trader's specifications. According to the commenters, both IBs and forex counterparties may run such software on their servers for traders. Neither commenter provided a great deal of detail regarding the mechanics of such automated trading programs, and the Commission cannot offer its view of any particular program. However, the Commission believes that if such programs are nothing more than automated order entry platforms, and all relevant trading parameters are set and controlled by the customer—including, for example, the designation of the currency pair to be traded, the amount of currency to be bought or sold, the price at which orders should be placed, and the amount of money to be committed to trading—then trades generated by such programs would originate from the customer and no additional authorization would be required. However, Commission staff will monitor the use of such programs. Any features that would appear to constitute discretion, strategy or advice on the behalf of the sponsoring entity would require a different analysis and, in addition to potentially triggering application of Regulation 5.17, may have additional registration implications. Requirement To Close Out Offsetting Positions. One commenter objected to the Commission's proposed amendment to Regulation 1.46, which would require RFEDs and FCMs engaging in off-exchange retail forex transactions to close out offsetting long and short positions in a retail forex customer's account, regardless of whether a customer instructs otherwise. Citing the prevalence of spread trades in futures trading, the commenter maintained that there is no economic distinction between commodity futures and forex transactions with respect to offsetting long and short positions. The Commission continues to believe that maintaining open long and short positions in a retail forex customer's account removes the opportunity for the customer to profit on the transaction, increases the fees paid by the customer, and invites abuse. Nothing submitted by any commenter has demonstrated otherwise. Moreover, spread trades executed on-exchange typically involve the purchase of one futures delivery month against the sale of another futures delivery month of the same commodity, or the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity. Because retail forex contracts are not listed by delivery month, spread trades of this sort are not possible in retail forex accounts, and open long and short contracts in the same currency pair are truly offsetting. Accordingly, the Commission has determined to adopt Regulation 1.46 as proposed. Re-quoting. Two comments were received regarding Regulation 5.18(f), which would, among other things, prohibit retail forex counterparties from providing a customer a new bid (or asked) price that is higher (or lower) than a previous price without providing a new asked (or bid) price that is higher (or lower) as well. One commenter maintained that the proposed rule would not take into account that in the forex market, spreads can increase dramatically, which might cause the new bid price to be higher and the new ask price to be lower. While a fast-moving market may affect the spread, the Commission's proposed rule is intended to apply to those situations where a customer is quoted one bid/asked price, and rather than fill the order, the FCM or RFED provides a second quote. In this situation, the Commission believes that if the forex dealer re-quotes the price, then at a minimum, the spread should remain the same. A second commenter suggested that the Commission clarify that all “re-quote” practices are required to be objective and evenhanded and that a counterparty that re-quotes a price must do so regardless of the direction the market moves. Further, the commenter suggested that the Commission require counterparties to disclose to customers how orders that reach the platform at a price no longer available are handled. The Commission believes the intent of proposed Regulation 5.18 is clear. It requires that, when re-quoting prices, forex counterparties are obligated to do so in a symmetrical fashion, so that the re-quoted prices do not represent an increase in the spread from the initially quoted prices, regardless of the direction the market moves. As to the objectiveness of the re-quote, the Commission believes that the requirement that both bid and asked prices be re-quoted symmetrically will encourage objectivity. Moreover, proposed Regulations 5.18(b)(3) and 5.18(b)(iv) require, respectively, that forex counterparties establish and enforce internal rules, procedures and controls to “[f]airly and objectively establish settlement prices for retail forex transactions” and to maintain records reflecting “any method or algorithm used to determine the bid or asked price for any retail forex transaction or the prices at which the customer orders are executed * * *.” The Commission believes that this should provide adequate incentive for firms to deal fairly and objectively with their customers with regard to re-quoting. Finally, as to the suggested disclosure, as proposed, Regulation 5.5 would require FCMs, RFEDs and IBs engaged in retail forex transactions to distribute to retail forex customers a written disclosure statement containing, among other things, the following statement: Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may offer prices derived from outside sources or not in its discretion. Your dealer may establish its prices by offering spreads from third party prices, but it is under no obligation to do so or to continue to do so. Your dealer may offer different prices to different customers at any point in time on its own terms. The terms of your account agreement alone govern the obligations your dealer has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you. The prices offered by your dealer may or may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency. While the proposed disclosure language does not require a statement regarding how re-quoted prices are handled, it does inform the customer that it is within the discretion of the forex dealer to set prices (provided they otherwise comply with the requirements of Regulation 5.18). For this reason, and those cited above, the Commission has determined to issue Regulation 5.18(f) as proposed. CFTC Authority To Regulate Zelener Contracts. One commenter, a law firm, argued that the CRA did not grant the Commission the authority to regulate, other than for fraud, FCMs that are primarily or substantially engaged in trading futures contracts on registered exchanges to the extent they also offer off-exchange Zelener, or “futures look-alike” forex, contracts. 19 To the extent legislative history suggests that similarly situated RFEDs and FCMs should be subject to the same regulations, the commenter maintains that this language is restricted to requirements relating to the financial soundness of the forex dealer and nothing else. 19 See 7 U.S.C. 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) regarding the scope of the Commission's authority to write rules with regard to leveraged or margined foreign currency contracts offered to non-ECPs. The CRA contains several provisions that touch on the scope of the Commission's jurisdiction over retail off-exchange foreign currency contracts, whether futures or look-alike, leveraged contracts. Retail off-exchange forex futures and options transactions are subject to numerous provisions of the Act including sections 4(b), 4b, 4c(b), 4o, 6(c) and 6(d), 6c, 6d, 8(a), 13(a), 13(b), if they are offered or entered into by an FCM, an RFED, or an affiliate of an FCM that is not one of the otherwise regulated entities specified in the Act. 20 The same provisions apply to look-alike forex transactions. 21 The CRA clearly gives the Commission full rulemaking authority over the agreements, contracts or transactions in retail forex where “reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of [the] Act.” 22 On the other hand, however, while the CRA explicitly grants the Commission rulemaking authority over off-exchange retail futures and options transactions where such transactions are offered or entered into by FCMs, their affiliates or RFEDs, 23 its rulemaking authority with regard to look-alike transactions does not explicitly include FCMs. Thus, the commenter concludes that language in Sections 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) limits the Commission's authority in this area where FCMs are concerned. 20 See 7 U.S.C. 2(c)(2)(B)(iii). 21 See 7 U.S.C. 2(c)(2)(C)(ii)(I). 22 See 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v); 2(c)(2)(C)(ii)(III); 2(c)(2)(C)(iii)(III). 23 See 7 U.S.C. 2(c)(2)(B)(v). The Commission disagrees. Section 8a(5) of the Act gives the Commission the broadest possible authority to “make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of this Act[.]” 24 Under this authority, the Commission has promulgated rules covering the full scope of FCM activities generally. Furthermore, the recent Wall Street Reform and Consumer Protection Act of 2010 specifically defines FCMs as any “individual, association, partnership, corporation, or trust * * * that * * * is * * * acting as a counterparty in any agreement, contract or transaction described in Section 2(c)(2)(C)(i)” of the Act, 25 making it clear that the offering of “look-alike” transactions falls within the scope of regulated FCM activity. Accordingly, the Commission sees no deficiencies in its authority to fully regulate FCMs engaged in “look-alike” forex contracts. 26 24 See 7 U.S.C. 12a(5) (2006). 25 See Wall Street Reform Act, Sec. 721(a)(13). 26 The Commission also disagrees with the argument that CRA Conference Report language is inapposite. The Conference Report states that “[t]o the extent their risk profiles are similar, the managers intend for FCMs and RFEDs to be regulated substantially equivalently in terms of their off-exchange retail foreign currency business. The managers do not intend for the Commission to provide either FCMs or RFEDs with a more favorable regulatory environment over the other or to create two significantly different regulatory regimes for similar business models—to the extent the financial risks posed by such operations are similar.” See H.R. Rep. No. 110-627 at 980 (Conf. Rep.) (emphasis added). Definition of Retail Forex Transactions. One commenter pointed out that the definition of “retail forex transactions” found in proposed Regulation 5.1(m) refers to “any account, agreement, contract or transaction” described in Section 2(c)(2)(B) or 2(c)(2)(C) of the Act and notes that the use of the word “account” in this context is confusing. Broad language in Section 2(c)(2)(B)(i) of the Act provides the Commission with jurisdiction over “an agreement, contract or transaction in foreign currency” that is a contract of sale of a commodity for future delivery (or an option on such a contract) or an option (other than one traded on a securities exchange). Elsewhere in Section 2(c), the statute states that certain of its provisions apply to “agreements, contracts or transactions * * * and accounts or pooled investment vehicles * * *.” 27 In order to accurately reflect the full scope of authority granted it under the Act, the Commission included the word “accounts” within the definition of “retail forex transactions.” The Commission does not view this as in any way inconsistent with language in Section 2(c), as amended by the CRA, and has determined to adopt the regulation as proposed. 27 See, for example, 7 U.S.C. 2(c)(2)(B)(iii). Anticompetitiveness. In addition to similar comments specifically referencing proposed Regulation 5.9 (security deposits) and 5.18(h) (guaranteed IBs)—which are addressed above—the Commission received numerous comments arguing that various other sections of the proposed rules were “anticompetitive” insofar as there is no comparable requirement relative to those engaged in futures transactions on designated contract markets. As the Commission pointed out in its Proposing Release, it has, whenever possible, drawn upon the principles that have guided it in the regulation of on-exchange instruments. However, the Commission also noted that there are essential differences between the trading futures contracts on designated contract markets that are cleared through designated clearing organizations, on the one hand, and off-exchange transactions between forex firms and retail customers, on the other. 28 28 75 FR 3282, 3285-86. Given the principal-to-principal nature of retail forex transactions and the inherent conflicts of interest in the relationship between the retail customer and the dealer/counterparty, the lack of transparency in the pricing and execution of such transactions, and the volume of fraud the Commission has seen arising from such transactions, the Commission has determined to promulgate some regulations that are unique to, and tailored to, retail forex transactions. By way of example, the Commission's proposed regulations included requirements that forex registrants maintain records of customer complaints; that counterparties disclose, with the Risk Disclosure Statement, the percentage of profitable nondiscretionary forex customer accounts; and that forex counterparties designate a chief compliance officer to be responsible for development and implementation of customer protection policies and procedures. To the extent the final rules published today do not track precisely with rules applicable to on-exchange futures trading, the Commission believes that the differences reflect meaningful differences in the market structure of retail forex transactions and that the rules issued today are no more restrictive or burdensome than necessary to address these differences. Scope of Commission's Authority and Application of Other Rules. Several commenters lodged criticisms or made observations that go to the scope of the Commission's authority, as provided in the Act and CRA, or otherwise. For example, several commenters maintained that the Commission should require segregation of customer funds by counterparties in order to provide some protection in the event of a counterparty insolvency. The Commission's segregation requirements with regard to futures flow from Section 4d of the Act 29 which, generally speaking, requires that customer property for trading commodity contracts be kept apart, or segregated, from the FCM's own funds. However, as noted in the Commission's proposing release, 30 a segregated funds regime cannot be replicated in the context of off-exchange retail forex trading. Unlike segregation of customer funds deposited for futures trading, under the relevant provisions of the Bankruptcy Code, 31 such amounts held in connection with retail forex trading would not receive any preferential treatment to unsecured creditors in bankruptcy. 29 7 U.S.C. 6(c) (2006). 30 75 FR 3281, 3287 and 3290 (Jan. 20, 2010). 31 11 U.S.C. 761, et seq. Similarly, some commenters took issue with the definitions of certain intermediaries and the capital requirements, found in the Proposing Release. Here again, the Commission is bound by statutory language that defines the scope of its authority. 32 While the Commission appreciates the concerns expressed by these commenters and the time they have taken to express them, it can do no more than its statutory authority permits. 32 See, for example, Section 2(c)(2)(B)(iv)(I) of the Act, 7 U.S.C. 2(c)(2)(B)(iv)(I), which provides the Commission with the authority to register and promulgate rules regarding specifically defined persons or entities. See also Section 2(c)(2)(B)(ii) of the Act which explicitly provides for a $20 million minimum capital requirement. III. Related Matters A. Regulatory Flexibility Act FCMs and CPOs: The Regulatory Flexibility Act (“RFA”) 33 requires that agencies, in proposing rules, consider the impact of those rules on small businesses. 34 The Commission has already established certain definitions of “small entities” to be used in evaluating the impact of its rules on such small entities in accordance with the RFA. 35 In that statement, the Commission concluded that neither FCMs nor registered CPOs should be considered to be small entities for purposes of the RFA. With respect to FCMs, the Commission's determination was based in part upon their obligation to meet the capital requirement established by the Commission and the purposes of protecting financial integrity. 36 33 5 U.S.C. 601, et seq. 34 By its terms, the RFA does not apply to “individuals.” See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons must be individuals, (see Commission Regulation 1.3(aa) and proposed Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does not apply to APs and no analysis of the economic impact of this rule proposal on such persons is required. 35 47 FR 18618 (April 30, 1982). 36 Id. at 18619. As for CPOs, the Commission determined that registered CPOs are not small entities based upon its existing regulatory standard for exempting certain small CPOs from the requirement to register under the Act. 37 (A CPO need not register with the Commission if the gross capital contributions for all pools under its management do not exceed $400,000 and there are not more than fifteen participants in any one of those pools. 38 ) 37 Id. at 18619-20. 38 17 CFR 4.13(a)(2) (2009). Thus, with respect to FCMs and registered CPOs, the Commission believes that these final rules will not have a significant economic impact on a substantial number of small entities. CTAs: The Commission has previously decided to evaluate, within the context of a particular rule proposal, whether all or some CTAs should be considered to be small entities, and if so, to then analyze the economic impact on them of any such rule. 39 CTAs wishing to advise retail forex customers may include both currently registered CTAs and previously unregistered persons who now will be required to register. As to the first group, there should be no significant new economic impact. As to the second group, registration will require the submission of application forms, fingerprinting of principals, and payment of registration fees. To the extent that CTAs can be considered to be small entities, the Commission does not consider either the proposed registration fee or the proposed fingerprinting requirement for newly registered CTAs to have significant economic impact. 40 39 47 FR 18618, 18620. 40 48 FR 35248, 35276 (August 3, 1983) IBs: In 1983, the Commission proposed that for purposes of the RFA and future rulemakings, it would not consider introducing brokers to be “small entities” for essentially the same reasons that FCMs had previously been determined not to be small entities. 41 This was based, in part, on the fact that IBs, like FCMs, are required to maintain a specified level of adjusted net capital. In the Proposing Release, retail forex IBs would not have been subject to a capital requirement; rather, they would have had to operate pursuant to a guarantee agreement. Under the final rules, retail forex IBs will be treated no differently than futures IBs. Accordingly, and in keeping with past Commission determinations, the Commission believes that the final rules with respect to IBs will not have a significant impact on a substantial number of small entities. 41 48 FR 14933, 14955 (Apr. 6, 1983). See also 47 FR 18618, 18619. RFEDs: RFEDs are a new category of registrant. The Commission does not believe that there are regulatory alternatives to those being proposed which would be consistent with the statutory mandate to provide protection to the public against irresponsible or fraudulent business practices. In the Proposing Release, the Commission proposed that RFEDs not be considered to be “small entities” for essentially the same reasons that FCMs have previously been determined not to be small entities. 42 As with FCMs, a requirement to maintain a specified level of adjusted net capital would be imposed upon RFEDs to ensure that they maintain sufficient capital resources to guarantee their financial accountability and to promote responsible and reliable business operations. Moreover, the Commission has sought to fashion its proposed regulatory program for RFEDs in a manner which is responsive to the function, purposes, and size of the entity being regulated consistent with the objective of the RFA. In particular, the minimum capital requirement required by the CRA effectuates the Congressional purpose that RFEDs maintain sufficient reserve of capital to remain economically viable. For the reasons stated above, the Commission will not define RFEDs as small entities for RFA purposes. 42 Id. B. Paperwork Reduction Act Under the Paperwork Reduction Act of 1995 (“PRA”) 43 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. The Commission's final rules regarding retail forex transactions result in information collection requirements within the meaning of the PRA. The Commission submitted the proposing release along with supporting documentation to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The Commission requested that OMB approve, and with respect to the collections required under the new part 5 of the Commission's regulations, assign a new control number for, the collections of information required by the proposing release. The information collection burdens created by the Commission's proposed rules, which were discussed in detail in the proposing release, are identical to the collective information collection burdens of the final rules. 43 44 U.S.C. 3501, et seq. The Commission invited the public and other Federal agencies to comment on any aspect of the information collection requirements discussed above. The Commission received no comment on its burden estimates or on any other aspect of the information collection requirements contained in its proposing release. The affected collections are as follows: • Existing Collection 3038-0024 (part 1 of the Commission's regulations); • Existing Collection 3038-0023 (part 3 of the Commission's regulations); • Existing Collection 3038-0005 (part 4 of the Commission's regulations); • Existing Collection 3038-0055 (part 160 of the Commission's regulations); and • New Collection 3038-0062 (part 5 of the Commission's regulations). C. Cost-Benefit Analysis Section 15(a) of the Act 44 requires the Commission to consider the costs and benefits of its action before issuing new regulations 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 regulation outweigh its costs. Rather, section 15(a) simply requires the Commission to “consider the costs and benefits” of its action. 44 7 U.S.C. 19(a). Section 15(a) further specifies that costs and benefits shall be evaluated in light of five broad areas of market and public concern, enumerated below. 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 rule 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. As discussed in more detail above, these amendments are intended to create a comprehensive scheme to implement the requirements of the CRA, and to put in place requirements including registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards. This is to be achieved through both amendments to existing regulations and the creation of a new, free-standing part to the Commission's regulations. The Commission is considering the costs and benefits of the amendments in light of the specific provisions of section 15(a) as follows: 1. Protection of market participants and the public. The amendments should enhance considerably the protection of market participants and the public because they require, for the first time, the registration of several categories of market participants and require adherence to operational standards that have not previously applied. The benefits that inhere in the imposition of these requirements to a sector of the off-exchange market that has been largely unregulated to this point, and which is geared towards the retail public, are manifest. 2. Efficiency and competition. In its Conference Report, Congress indicated that the Commission should avoid creating two different regulatory regimes for similar business models with respect to FCMs or RFEDs engaging in off-exchange retail forex transactions. 45 Accordingly, the Commission has endeavored to ensure that these entities be treated in comparable fashion relative to one another. Moreover, the Commission has endeavored, wherever possible, to propose regulations in part 5 that are analogous to regulations imposed upon intermediaries engaged in on-exchange transactions. Accordingly, the Commission believes that it has provided an even handed regulatory scheme that will be familiar to industry participants. 45 As noted in the Conference Report that accompanied the CRA, “To the extent their risk profiles are similar, the managers intend for FCMs and RFEDs to be regulated substantially equivalently in terms of their off-exchange retail foreign currency business.” H.R. Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference Report is available via the Internet on the CFTC's Web site. 3. Financial integrity of futures markets and price discovery. The amendments concern retail, off-exchange markets. These markets serve primarily as a vehicle for members of the retail public to engage in speculative transactions. Accordingly, the Commission does not perceive a significant intersection between the operations of these markets and the financial integrity or price discovery functions of the markets generally. 4. Sound risk management practices. The amendments include requirements regarding capital, financial reporting, risk assessment recordkeeping, and risk assessment reporting that are comparable to those required of entities engaged in on-exchange trading. The Commission believes that the benefits of these risk management requirements—which strive to ensure the financial soundness of firms—have been borne out on the exchange-traded side and will be of significant benefit with regard to its oversight of retail forex counterparties. 5. Other public interest considerations. The retail, off-exchange forex market has been largely unregulated until now. The Commission believes that the amendments are beneficial in that they will provide needed protections for members of the public engaging in these transactions. The amendments will also bring much needed oversight to the forex counterparties and intermediaries that interact with the public. After considering these factors, the Commission has determined to adopt the proposed rule changes. The Commission did not receive any comments relative to its analysis of the cost-benefit provision. List of Subjects 17 CFR Part 1 Definitions, Minimum financial and reporting requirements. Recordkeeping requirements, Prohibited transactions in commodity options, Miscellaneous. 17 CFR Part 3 Definitions, Customer protection, Licensing, Registration. 17 CFR Part 4 Advertising, Brokers, Commodity futures, Commodity pool operators, Commodity trading advisors, Consumer protection, Exemption from registration, Reporting and recordkeeping requirements. 17 CFR Part 5 Bulk transfers, Commodity pool operators, Commodity trading advisors, Consumer protection, Customer's money, securities and property, Definitions, Foreign exchange, Minimum financial and reporting requirements, Prohibited transactions in retail foreign exchange, Recordkeeping requirements, Retail foreign exchange dealers, Risk assessment, Special calls, Trading practices. 17 CFR Part 10 Adjudicatory proceedings, Rules of practice. 17 CFR Part 140 Authority delgations (Government agencies, Conflict of interests, Organization and functions (Government agencies). 17 CFR Part 145 Confidential business information, Freedom of information. 17 CFR Part 147 Sunshine Act. 17 CFR Part 160 Consumer financial information, Definitions, Nonpublic personal information, Privacy. 17 CFR Part 166 Arbitration, Authorization to trade, Customer protection, Definitions, Dispute settlement, Litigation, Reparations. For the reasons presented above, the Commission hereby amends Chapter I of Title 17 of the Code of Federal Regulations 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, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6h, 6i, 6j, 6k, 6 l, 6m, 6n, 6 o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24. § 1.1 [Removed and Reserved] 2. Section 1.1 is removed and reserved. 3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to read as follows: § 1.3 Definitions. (nn) Guarantee agreement. This term means an agreement of guaranty in the form set forth in part B or C of Form 1-FR, executed by a registered futures commission merchant or retail foreign exchange dealer, as appropriate, and by an introducing broker or applicant for registration as an introducing broker on behalf of an introducing broker or applicant for registration as an introducing broker in satisfaction of the alternative adjusted net capital requirement set forth in § 1.17(a)(1)(iii). (yy) Commodity interest. This term means: (1) Any contract for the purchase or sale of a commodity for future delivery; (2) Any contract, agreement or transaction subject to Commission regulation under section 4c or 19 of the Act; and (3) Any contract, agreement or transaction subject to Commission jurisdiction under section 2(c)(2) of the Act. 4. Section 1.4 is revised to read as follows: § 1.4 Use of electronic signatures. For purposes of complying with any provision in the Commodity Exchange Act or the rules or regulations in this Chapter I that requires a document to be signed by a customer of a futures commission merchant or introducing broker, a retail forex customer of a retail foreign exchange dealer or futures commission merchant, a pool participant or a client of a commodity trading advisor, an electronic signature executed by the customer, participant or client will be sufficient, if the futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator or commodity trading advisor elects generally to accept electronic signatures; Provided, however, That the electronic signature must comply with applicable Federal laws and other Commission rules; And, Provided further, That the futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator or commodity trading advisor must adopt and utilize reasonable safeguards regarding the use of electronic signatures, including at a minimum safeguards employed to prevent alteration of the electronic record with which the electronic signature is associated, after such record has been electronically signed. 5. Section 1.10 is amended by revising paragraph (j) to read as follows: § 1.10 Financial reports of futures commission merchants and introducing brokers. (j) Requirements for guarantee agreement. (1) A guarantee agreement filed pursuant to this section must be signed in a manner sufficient to be a binding guarantee under local law by an appropriate person on behalf of the futures commission merchant or retail foreign exchange dealer and the introducing broker, and each signature must be accompanied by evidence that the signatory is authorized to enter the agreement on behalf of the futures commission merchant, retail foreign exchange dealer, or introducing broker and is such an appropriate person. For purposes of this paragraph (j), an appropriate person shall be the proprietor, if the firm is a sole proprietorship; a general partner, if the firm is a partnership; and either the chief executive officer or the chief financial officer, if the firm is a corporation; and, if the firm is a limited liability company or limited liability partnership, either the chief executive officer, the chief financial officer, the manager, the managing member, or those members vested with the management authority for the limited liability company or limited liability partnership. (2) No futures commission merchant or retail foreign exchange dealer may enter into a guarantee agreement if: (i) It knows or should have known that its adjusted net capital is less than the amount set forth in § 1.12(b) of this part or § 5.6(b) of this chapter, as applicable; or (ii) There is filed against the futures commission merchant or retail foreign exchange dealer an adjudicatory proceeding brought by or before the Commission pursuant to the provisions of sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or §§ 3.55, 3.56 or 3.60 of this chapter. (3) A retail foreign exchange dealer may enter into a guarantee agreement only with an introducing broker as defined in § 5.1(f)(1) of this chapter. A retail foreign exchange dealer may not enter into a guarantee agreement with an introducing broker as defined in § 1.3(mm) of this part. (4) A guarantee agreement filed in connection with an application for initial registration as an introducing broker in accordance with the provisions of § 3.10(a) of this chapter shall become effective upon the granting of registration or, if appropriate, a temporary license, to the introducing broker. A guarantee agreement filed other than in connection with an application for initial registration as an introducing broker shall become effective as of the date agreed to by the parties. (5)(i) If the registration of the introducing broker is suspended, revoked, or withdrawn in accordance with the provisions of this chapter, the guarantee agreement shall expire as of the date of such suspension, revocation or withdrawal. (ii) If the registration of the futures commission merchant or retail foreign exchange dealer is suspended or revoked, the guarantee agreement shall expire 30 days after such suspension or revocation, or at such earlier time as may be approved by the Commission, the introducing broker, and the introducing broker's designated self-regulatory organization. (6) A guarantee agreement may be terminated at any time during the term thereof: (i) By mutual written consent of the parties, signed by an appropriate person on behalf of each party, with prompt written notice thereof, signed by an appropriate person on behalf of each party, to the Commission and to the designated self-regulatory organizations of the futures commission merchant or retail foreign exchange dealer and the introducing broker; (ii) For good cause shown, by either party giving written notice of its intention to terminate the agreement, signed by an appropriate person, to the other party to the agreement, to the Commission, and to the designated self-regulatory organizations of the futures commission merchant or retail foreign exchange dealer and the introducing broker; or (iii) By either party giving written notice of its intention to terminate the agreement, signed by an appropriate person, at least 30 days prior to the proposed termination date, to the other party to the agreement, to the Commission, and to the designated self-regulatory organizations of the futures commission merchant or retail foreign exchange dealer and the introducing broker. (7) The termination of a guarantee agreement by a futures commission merchant, retail foreign exchange dealer or an introducing broker, or the expiration of such an agreement, shall not relieve any party from any liability or obligation arising from acts or omissions which occurred during the term of the agreement. (8) An introducing broker may not simultaneously be a party to more than one guarantee agreement: Provided, however, That the provisions of this paragraph (j)(8) shall not be deemed to preclude an introducing broker from entering into a guarantee agreement with another futures commission merchant or retail foreign exchange dealer if the introducing broker, futures commission merchant or retail foreign exchange dealer which is a party to the existing agreement has provided notice of termination of the existing agreement in accordance with the provisions of paragraph (j)(6) of this section, and the new guarantee agreement does not become effective until the day following the date of termination of the existing agreement: And, provided further, That the provisions of this paragraph (j)(8) shall not be deemed to preclude an introducing broker from entering into a guarantee agreement with another futures commission merchant or retail foreign exchange dealer if the futures commission merchant or retail foreign exchange dealer which is a party to the existing agreement ceases to remain registered and the existing agreement would therefore expire in accordance with the provisions of paragraph (j)(6)(ii) of this section. (9)(i)(A) An introducing broker that is a party to a guarantee agreement that has been terminated in accordance with the provisions of paragraph (j)(6) of this section, or that is due to expire in accordance with the provisions of paragraph (j)(5)(ii) of this section, must cease doing business as an introducing broker on or before the effective date of such termination or expiration unless, on or before 10 days prior to the effective date of such termination or expiration or such other period of time as the Commission or the designated self-regulatory organization may allow for good cause shown, the introducing broker files with its designated self-regulatory organization either a new guarantee agreement effective as of the day following the date of termination of the existing agreement, or, in the case of a guarantee agreement that is due to expire in accordance with the provisions of paragraph (j)(4)(ii) of this section, a new guarantee agreement effective on or before such expiration, or either: ( 1 ) A Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than 45 days prior to the date on which the report is filed; or ( 2 ) A Form 1-FR-IB as of a date not more than 17 business days prior to the date on which the report is filed and a Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than one year prior to the date on which the report is filed: Provided, however, that an introducing broker as defined in § 5.1(f)(1) of this chapter that is party to a guarantee agreement that has been terminated or that has expired must cease doing business as an introducing broker on or before the effective date of such termination or expiration unless, on or before 10 days prior to the effective date of such termination or expiration or such other period of time as the Commission or the designated self-regulatory organization may allow for good cause shown, the introducing broker files with its designated self-regulatory organization a new guarantee agreement effective on or before the termination or expiration date of the terminating or expiring guarantee agreement. (B) Each person filing a Form 1-FR-IB in accordance with this section must include with the financial report a statement describing the source of his current assets and representing that his capital has been contributed for the purpose of operating his business and will continue to be used for such purpose. (ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of this section or of § 1.17(a), an introducing broker that is a party to a guarantee agreement that has been terminated in accordance with the provisions of paragraph (j)(6)(ii) of this section shall not be deemed to be in violation of the minimum adjusted net capital requirement of § 1.17(a)(1)(iii) or (a)(2) for 30 days following such termination. Such an introducing broker must cease doing business as an introducing broker on or after the effective date of such termination, and may not resume doing business as an introducing broker unless and until it files a new agreement or either: ( 1 ) A Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than 45 days prior to the date on which the report is filed; or ( 2 ) A Form 1-FR-IB as of a date not more than 17 business days prior to the date on which the report is filed and a Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than one year prior to the date on which the report is filed: Provided, however, that an introducing broker as defined in § 5.1(f)(1) of this chapter that is party to a guarantee agreement that has been terminated must cease doing business as an introducing broker from and after the effective date of such termination, and may not resume doing business as an introducing broker as defined in § 5.1(f)(1) of this chapter unless and until it files a new guarantee agreement. (B) Each person filing a Form 1-FR-IB in accordance with this section must include with the financial report a statement describing the source of his current assets and representing that his capital has been contributed for the purpose of operating his business and will continue to be used for such purpose. 6. Section 1.35 is amended by revising paragraphs (a), (a-1) and (b) to read as follows: § 1.35 Records of cash commodity, futures, and option transactions. (a) Futures commission merchants, retail foreign exchange dealers, introducing brokers, and members of contract markets. Each futures commission merchant, retail foreign exchange dealer, introducing broker, and member of a contract market shall keep full, complete, and systematic records, together with all pertinent data and memoranda, of all transactions relating to its business of dealing in commodity futures, retail forex transactions, commodity options, and cash commodities (including currencies). Each futures commission merchant, retail foreign exchange dealer, introducing broker, and member of a contract market shall retain the required records, data, and memoranda in accordance with the requirements of § 1.31, and produce them for inspection and furnish true and correct information and reports as to the contents or the meaning thereof, when and as requested by an authorized representative of the Commission or the United States Department of Justice. Included among such records shall be all orders (filled, unfilled, or canceled), trading cards, signature cards, street books, journals, ledgers, canceled checks, copies of confirmations, copies of statements of purchase and sale, and all other records, data and memoranda, which have been prepared in the course of its business of dealing in commodity futures, retail forex transactions, commodity options, and cash commodities. Among such records each member of a contract market must retain and produce for inspection are all documents on which trade information is originally recorded, whether or not such documents must be prepared pursuant to the rules or regulations of either the Commission or the contract market. For purposes of this section, such documents are referred to as “original source documents.” (a-1) Futures commission merchants, retail foreign exchange dealers, introducing brokers, and members of contract markets: Recording of customers' and option customers' orders. (1) Each futures commission merchant, each retail foreign exchange dealer and each introducing broker receiving a customer's, retail forex customer's or option customer's order, as applicable, shall immediately upon receipt thereof prepare a written record of the order including the account identification, except as provided in paragraph (a-1)(5) of this section, and order number, and shall record thereon, by timestamp or other timing device, the date and time, to the nearest minute, the order is received, and in addition, for option customers' orders, the time, to the nearest minute, the order is transmitted for execution. (2)(i) Each member of a contract market who on the floor of such contract market receives a customer's or option customer's order which is not in the form of a written record including the account identification, order number, and the date and time, to the nearest minute, the order was transmitted or received on the floor of such contract market, shall immediately upon receipt thereof prepare a written record of the order in nonerasable ink, including the account identification, except as provided in paragraph (a-1)(5) of this section or appendix C to this part, and order number and shall record thereon, by timestamp or other timing device, the date and time, to the nearest minute, the order is received. (ii) Except as provided in paragraph (a-1)(3) of this section: (A) Each contract market member who on the floor of such contract market receives an order from another member present on the floor which is not in the form of a written record shall, immediately upon receipt of such order, prepare a written record of the order or obtain from the member who placed the order a written record of the order, in non-erasable ink including the account identification and order number and shall record thereon, by time-stamp or other timing device, the date and time, to the nearest minute, the order is received; or (B) When a contract market member present on the floor places an order, which is not in the form of a written record, for his own account or an account over which he has control, with another member of such contract market for execution: ( 1 ) The member placing such order immediately upon placement of the order shall record the order and time of placement to the nearest minute on a sequentially-numbered trading card maintained in accordance with the requirements of paragraph (d) of this section; ( 2 ) The member receiving and executing such order immediately upon execution of the order shall record the time of execution to the nearest minute on a trading card or other record maintained pursuant to the requirements of paragraph (d) of this section; and ( 3 ) The member receiving and executing the order shall return such trading card or other record to the member placing the order. The member placing the order then must submit together both of the trading cards or other records documenting such trade to contract market personnel or the clearing member, in accordance with contract market rules adopted pursuant to paragraph (j)(1) of this section. (iii) Each contract market may adopt rules, which must be submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act and Commission Regulation 1.41, that provide alternative requirements to those contained in paragraph (a-1)(2)(ii) of this section. Such rules shall, at a minimum, require that the contemporaneous written records: (A) Contain the terms of the order; (B) Include reliable timing data for the initiation and execution of the order which would permit complete and effective reconstruction of the order placement and execution; and (C) Be submitted to contract market personnel or clearing members in accordance with contract market rules adopted pursuant to paragraph (j)(1) of this section. (3)(i) The requirements of paragraph (a-1)(2)(ii) of this section will not apply if a contract market maintains in effect rules which have been submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act and Commission Regulation 1.41, which provide for an exemption where: (A) A contract market member places with another member of such contract market an order that is part of a spread transaction; (B) The member placing the order personally executes one or more legs of the spread; and (C) The member receiving and executing such order immediately upon execution of the order records the time of execution to the nearest minute on his trading card or other record maintained in accordance with the requirements of paragraph (d) of this section. (ii) Each contract market shall, as part of its trade practice surveillance program, conduct surveillance for compliance with the recordkeeping and other requirements under paragraphs (a-1) (2) and (3) of this section, and for trading abuses related to the execution of orders for members present on the floor of the contract market. (4) Each member of a contract market reporting the execution from the floor of the contract market of a customer's or option customer's order or the order of another member of the contract market received in accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this section, shall record on a written record of the order, including the account identification, except as provided in paragraph (a-1)(5) of this section, and order number, by timestamp or other timing device, the date and time to the nearest minute such report of execution is made. Each member of a contract market shall submit the written records of customer orders or orders from other contract market members to contract market personnel or to the clearing member responsible for the collection of orders prepared pursuant to this paragraph as required by contract market rules adopted in accordance with paragraph (j)(1) of this section. The execution price and other information reported on the order tickets must be written in nonerasable ink. (5) Post-execution allocation of bunched orders. Specific customer account identifiers for accounts included in bunched orders need not be recorded at time of order placement or upon report of execution if the requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met. (i) Eligible account managers. The person placing and directing the allocation of an order eligible for post-execution allocation must have been granted written investment discretion with regard to participating customer accounts. The following persons shall qualify as eligible account managers: (A) A commodity trading advisor registered with the Commission pursuant to the Act or excluded or exempt from registration under the Act or the Commission's rules, except for entities exempt under § 4.14(a)(3) or § 4.14(a)(6) of this chapter; (B) An investment adviser registered with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 or with a state pursuant to applicable state law or excluded or exempt from registration under such Act or applicable state law or rule; (C) A bank, insurance company, trust company, or savings and loan association subject to federal or state regulation; or (D) A foreign adviser that exercises discretionary trading authority solely over the accounts of non-U.S. persons, as defined in § 4.7(a)(1)(iv) of this chapter. (ii) Information. Eligible account managers shall make the following information available to customers upon request: (A) The general nature of the allocation methodology the account manager will use; (B) Whether accounts in which the account manager may have any interest may be included with customer accounts in bunched orders eligible for post-execution allocation; and (C) Summary or composite data sufficient for that customer to compare its results with those of other comparable customers and, if applicable, any account in which the account manager has an interest. (iii) Allocation. Orders eligible for post-execution allocation must be allocated by an eligible account manager in accordance with the following: (A) Allocations must be made as soon as practicable after the entire transaction is executed, but in any event account managers must provide allocation information to futures commission merchants no later than a time sufficiently before the end of the day the order is executed to ensure that clearing records identify the ultimate customer for each trade. (B) Allocations must be fair and equitable. No account or group of accounts may receive consistently favorable or unfavorable treatment. (C) The allocation methodology must be sufficiently objective and specific to permit independent verification of the fairness of the allocations using that methodology by appropriate regulatory and self-regulatory authorities and by outside auditors. (iv) Records. (A) Eligible account managers shall keep and must make available upon request of any representative of the Commission, the United States Department of Justice, or other appropriate regulatory agency, the information specified in paragraph (a-1)(5)(ii) of this section. (B) Eligible account managers shall keep and must make available upon request of any representative of the Commission, the United States Department of Justice, or other appropriate regulatory agency, records sufficient to demonstrate that all allocations meet the standards of paragraph (a-1)(5)(iii) of this section and to permit the reconstruction of the handling of the order from the time of placement by the account manager to the allocation to individual accounts. (C) Futures commission merchants that execute orders or that carry accounts eligible for post-execution allocation, and members of contract markets that execute such orders, must maintain records that, as applicable, identify each order subject to post-execution allocation and the accounts to which contracts executed for such order are allocated. (D) In addition to any other remedies that may be available under the Act or otherwise, if the Commission has reason to believe that an account manager has failed to provide information requested pursuant to paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the Commission may inform in writing any designated contract market or derivatives transaction execution facility and that designated contract market or derivatives transaction execution facility shall prohibit the account manager from submitting orders for execution except for liquidation of open positions and no futures commission merchants shall accept orders for execution on any designated contract market or derivatives transaction execution facility from the account manager except for liquidation of open positions. (E) Any account manager that believes he or she is or may be adversely affected or aggrieved by action taken by the Commission under paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity for a prompt hearing in accordance with the provisions of § 21.03(g) of this chapter. (b) Futures commission merchants, retail foreign exchange dealers, introducing brokers, and clearing members of contract markets. Each futures commission merchant, each retail foreign exchange dealer, and each clearing member of a contract market and, for purposes of paragraph (b)(3) of this section, each introducing broker, shall, as a minimum requirement, prepare regularly and promptly, and keep systematically and in permanent form, the following: (1) A financial ledger record which will show separately for each customer or retail forex customer or option customer all charges against and credits to such customer's or retail forex customer's or option customer's account, including but not limited to customer or retail forex customer funds deposited, withdrawn, or transferred, and charges or credits resulting from losses or gains on closed transactions; (2) A record of transactions which will show separately for each account (including proprietary accounts): (i) All commodity futures transactions executed for such account, including the date, price, quantity, market, commodity and future; (ii) All retail forex transactions executed for such account, including the date, price, quantity, and currency; and (iii) All commodity option transactions executed for such account, including the date, whether the transaction involved a put or call, expiration date, quantity, underlying contract for future delivery or underlying physical, strike price, and details of the purchase price of the option, including premium, mark-up, commission and fees; and (3) A record or journal which will separately show for each business day complete details of: (i) All commodity futures transactions executed on that day, including the date, price, quantity, market, commodity, future and the person for whom such transaction was made; (ii) All retail forex transactions executed on that day for such account, including the date, price, quantity, currency and the person for whom such transaction was made; and (iii) All commodity option transactions executed on that day, including the date, whether the transaction involved a put or call, the expiration date, quantity, underlying contract for future delivery, or underlying physical, strike price, details of the purchase price of the option, including premium, mark-up, commission and fees and the person for whom the transaction was made; and (iv) In the case of an introducing broker, the record or journal required by this paragraph (b)(3) shall also include the futures commission merchant or retail foreign exchange dealer carrying the account for which each commodity futures, retail forex and commodity option transaction was executed on that day. Provided, however, that where reproductions on microfilm, microfiche or optical disk are substituted for hard copy in accordance with the provisions of § 1.31(b) of this part, the requirements of paragraphs (b)(1) and (b)(2) of this section will be considered met if the person required to keep such records is ready at all times to provide, and immediately provides in the same city as that in which such person's commodity retail forex or commodity option books and records are maintained, at the expense of such person, reproduced copies which show the records as specified in paragraphs (b)(1) and (b)(2) of this section, on request of any representatives of the Commission or the U.S. Department of Justice. 7. Section 1.36 is amended by revising paragraph (a) to read as follows: § 1.36 Record of securities and property received from customers and option customers. (a) Each futures commission merchant and each retail foreign exchange dealer shall maintain, as provided in § 1.31, a record of all securities and property received from customers, retail forex customers or option customers in lieu of money to margin, purchase, guarantee, or secure the commodity, retail forex or commodity option transactions of such customers, retail forex customers or option customers. Such record shall show separately for each customer, retail forex customer or option customer: A description of the securities or property received; the name and address of such customer, retail forex customer or option customer; the dates when the securities or property were received; the identity of the depositories or other places where such securities or property are segregated or held; the dates of deposits and withdrawals from such depositories; and the dates of return of such securities or property to such customer, retail forex customer or option customer, or other disposition thereof, together with the facts and circumstances of such other disposition. In the event any futures commission merchant deposits with the clearing organization of a contract market, directly or with a bank or trust company acting as custodian for such clearing organization, securities and/or property which belong to a particular customer or option customer, such futures commission merchant shall obtain written acknowledgment from such clearing organization that it was informed that such securities or property belong to customers or option customers of the futures commission merchant making the deposit. Such acknowledgment shall be retained as provided in § 1.31. 8. Section 1.37 is amended by revising paragraph (a)(1) to read as follows: § 1.37 Customer's or option customer's name, address, and occupation recorded; record of guarantor or controller of account. (a)(1) Each futures commission merchant, retail foreign exchange dealer, introducing broker, and member of a contract market shall keep a record in permanent form which shall show for each commodity futures, retail forex or option account carried or introduced by it the true name and address of the person for whom such account is carried or introduced and the principal occupation or business of such person as well as the name of any other person guaranteeing such account or exercising any trading control with respect to such account. For each such commodity option account, the records kept by such futures commission merchant, introducing broker, and member of a contract market must also show the name of the person who has solicited and is responsible for each option customer's account or assign account numbers in such a manner to identify that person. 9. Section 1.40 is revised to read as follows: § 1.40 Crop, market information letters, reports; copies required. Each futures commission merchant, each retail foreign exchange dealer, each introducing broker and each member of a contract market shall, upon request, furnish or cause to be furnished to the Commission a true copy of any letter, circular, telegram, or report published or given general circulation by such futures commission merchant, retail foreign exchange dealer, introducing broker or member which concerns crop or market information or conditions that affect or tend to affect the price of any commodity or exchange rate, and the true source of or authority for the information contained therein. 10. Section 1.46 is amended by revising paragraphs (a) and (b) to read as follows: § 1.46 Application and closing out of offsetting long and short positions. (a) Application of purchases and sales. (1) Except with respect to purchases or sales which are for omnibus accounts, or where the customer or account controller has instructed otherwise, any futures commission merchant who, on or subject to the rules of a designated contract market or registered derivatives transaction execution facility: (i) Purchases any commodity for future delivery for the account of any customer when the account of such customer at the time of such purchase has a short position in the same future of the same commodity on the same market; (ii) Sells any commodity for future delivery for the account of any customer when the account of such customer at the time of such sale has a long position in the same future of the same commodity on the same market; (iii) Purchases a put or call option for the account of any option customer when the account of such option customer at the time of such purchase has a short put or call option position with the same underlying futures contract or same underlying physical, strike price, expiration date and contract market as that purchased; or (iv) Sells a put or call option for the account of any option customer when the account of such option customer at the time of such sale has a long put or call option position with the same underlying futures contract or same underlying physical, strike price, expiration date and contract market as that sold—shall on the same day apply such purchase or sale against such previously held short or long futures or option position, as the case may be, and shall, for futures transactions, promptly furnish such customer a statement showing the financial result of the transactions involved and, if applicable, that the account was introduced to the futures commission merchant by an introducing broker and the names of the futures commission merchant and introducing broker. (2) Any futures commission merchant or retail foreign exchange dealer who: (i) Engages in a retail forex transaction involving the purchase of any currency for the account of any retail forex customer when the account of such retail forex customer at the time of such purchase has an open retail forex transaction for the sale of the same currency; (ii) Engages in a retail forex transaction involving the sale of any currency for the account of any retail forex customer when the account of such retail forex customer at the time of such sale has an open retail forex transaction for the purchase of the same currency; (iii) Purchases a put or call option involving foreign currency for the account of any option customer when the account of such option customer at the time of such purchase has a short put or call option position with the same underlying currency, strike price, and expiration date as that purchased; or (iv) Sells a put or call option involving foreign currency for the account of any option customer when the account of such option customer at the time of such sale has a long put or call option position with the same underlying currency, strike price, and expiration date as that sold—shall immediately apply such purchase or sale against such previously held opposite transaction, and shall promptly furnish such retail forex customer a statement showing the financial result of the transactions involved and, if applicable, that the account was introduced to the futures commission merchant or retail foreign exchange dealer by an introducing broker and the names of the futures commission merchant or retail foreign exchange dealer, and the introducing broker. (b) Close-out against oldest open position. In all instances wherein the short or long futures, retail forex transaction or option position in such customer's, retail forex customer's or option customer's account immediately prior to such offsetting purchase or sale is greater than the quantity purchased or sold, the futures commission merchant or retail foreign exchange dealer shall apply such offsetting purchase or sale to the oldest portion of the previously held short or long position: Provided, That upon specific instructions from the customer or option customer the offsetting transaction shall be applied as specified by the customer or option customer without regard to the date of acquisition of the previously held position; and Provided, further, that a futures commission merchant or retail foreign exchange dealer, if permitted by the rules of a registered futures association, may offset, at the customer's request, retail forex transactions of the same size, even if the customer holds other transactions of a different size, but in each case must offset the transaction against the oldest transaction of the same size. Such instructions may also be accepted from any person who, by power of attorney or otherwise, actually directs trading in the customer's, retail forex customer's or option customer's account unless the person directing the trading is the futures commission merchant or retail foreign exchange dealer (including any partner thereof), or is an officer, employee, or agent of the futures commission merchant or retail foreign exchange dealer. With respect to every such offsetting transaction that, in accordance with such specific instructions, is not applied to the oldest portion of the previously held position, the futures commission merchant or retail foreign exchange dealer shall clearly show on the statement issued to the customer, retail forex customer or option customer in connection with the transaction, that because of the specific instructions given by or on behalf of the customer, retail forex customer or option customer the transaction was not applied in the usual manner, i.e., against the oldest portion of the previously held position. However, no such showing need be made if the futures commission merchant or retail foreign exchange dealer has received such specific instructions in writing from the customer, retail forex customer or option customer for whom such account is carried. 11. Section 1.52 is amended by: a. Revising paragraphs (a), and (c) introductory text, (c)(1), and (c)(2); b. Revising paragraphs (g)(3) and (g)(4); and c. Revising paragraphs (h), (j), and (k) to read as follows: § 1.52 Self-regulatory organization adoption and surveillance of minimum financial requirements. (a) Each self-regulatory organization must adopt, and submit for Commission approval, rules prescribing minimum financial and related reporting requirements for all its members who are registered futures commission merchants or registered retail foreign exchange dealers. Each self-regulatory organization other than a contract market must adopt, and submit for Commission approval, rules prescribing minimum financial and related reporting requirements for all its members who are registered introducing brokers. Each contract market which elects to have a category of membership for introducing brokers must adopt, and submit for Commission approval, rules prescribing minimum financial and related reporting requirements for all its members who are registered introducing brokers. Each self-regulatory organization shall submit for Commission approval any modification or other amendments to such rules. Such requirements must be the same as, or more stringent than, those contained in §§ 1.10 and 1.17, for futures commission merchants and introducing brokers, and § 5.7 of this chapter for retail foreign exchange dealers. The definition of adjusted net capital must be the same as that prescribed in § 1.17(c) for futures commission merchants and introducing brokers, and § 5.7(b)(2) of this chapter for futures commission merchants offering or engaging in retail forex transactions and for retail foreign exchange dealers: Provided, however, A designated self-regulatory organization may permit its member registrants which are registered with the Securities and Exchange Commission as securities brokers or dealers to file (in accordance with § 1.10(h)) a copy of their 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: And, provided further, A designated self-regulatory organization may permit its member introducing brokers to file a Form 1-FR-IB in lieu of a Form 1-FR-FCM. (c) Any two or more self-regulatory organizations may file with the Commission a plan for delegating to a designated self-regulatory organization, for any registered futures commission merchant, any registered retail foreign exchange dealer, or any registered introducing broker which is a member of more than one such self-regulatory organization, the responsibility of: (1) Monitoring and auditing for compliance with the minimum financial and related reporting requirements adopted by such self-regulatory organizations in accordance with paragraph (a) of this section; and (2) Receiving the financial reports necessitated by such minimum financial and related reporting requirements. (g) * * * (3) Reduces multiple monitoring and auditing for compliance with the minimum financial rules of the self-regulatory organizations submitting the plan for any futures commission merchant, retail foreign exchange dealer, or introducing broker which is a member of more than one self-regulatory organization; (4) Reduces multiple reporting of the financial information necessitated by such minimum financial and related reporting requirements by any futures commission merchant, retail foreign exchange dealer, or introducing broker which is a member of more than one self-regulatory organization; (h) After the Commission has approved a plan or part of one under § 1.52(g), a self-regulatory organization relieved of responsibility must notify each of its members which is subject to such a plan: (1) Of the limited nature of its responsibility for such a member's compliance with its minimum financial and related reporting requirements; and (2) Of the identity of the designated self-regulatory organization which has been delegated responsibility for such a member. (j) Whenever a registered futures commission merchant, a registered retail foreign exchange dealer, or a registered introducing broker holding membership in a self-regulatory organization ceases to be a member in good standing of that self-regulatory organization, such self-regulatory organization must, on the same day that event takes place, give telegraphic notice of that event to the principal office of the Commission in Washington, DC, and send a copy of that notification to such futures commission merchant, retail foreign exchange dealer, or such introducing broker. (k) Nothing in this section shall preclude the Commission from examining any futures commission merchant, retail foreign exchange dealer, or introducing broker for compliance with the minimum financial and related reporting requirements to which such futures commission merchant, retail foreign exchange dealer, or introducing broker is subject. PART 3—REGISTRATION 12. The authority citation for part 3 continues to read as follows: Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21 and 23. 13. Section 3.1 is amended by revising paragraph (c) to read as follows: § 3.1 Definitions. (c) Sponsor. Sponsor means the futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant which makes the certification required by § 3.12 of this part for the registration of an associated person of such sponsor. 14. Section 3.4 is amended by revising paragraph (a) to read as follows: § 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, floor broker, floor trader, associated person, commodity trading advisor, commodity pool operator, introducing broker, and leverage transaction merchant must register as such under the Act. Registration in one capacity under the Act shall not include registration in any other capacity: Provided, however, That a registered floor broker need not also register as a floor trader in order to engage in activity as a floor trader. 15. Section 3.10 is amended by: a. Revising the heading; b. Revising paragraph (a)(1); c. Revising paragraph (b); and d. Revising paragraph (d) to read as follows: § 3.10 Registration of futures commission merchants, retail foreign exchange dealers, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants. (a) Application for registration. (1)(i) Except as provided in paragraph (a)(3) of this section, application for registration as a futures commission merchant, retail foreign exchange dealers, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant must be on Form 7-R, completed and filed with the National Futures Association in accordance with the instructions thereto. (ii) Applicants for registration as a futures commission merchant, retail foreign exchange dealer or introducing broker must accompany their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in accordance with the provisions of § 1.10 of this chapter: Provided, however, That an applicant for registration as a futures commission merchant or introducing broker which is registered with the Securities and Exchange Commission as a securities broker or dealer may accompany its Form 7-R with a copy of its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II or Part II A, in accordance with the provisions of § 1.10(h) of this chapter. (b) Duration of registration. (1) A person registered as a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant in accordance with paragraph (a) of this section will continue to be so registered until the effective date of any revocation or withdrawal of such registration. Such person will be prohibited from engaging in activities requiring registration under the Act or from representing himself to be a registrant under the Act or the representative or agent of any registrant during the pendency of any suspension of such registration. (2) A person registered as an introducing broker who was a party to a guarantee agreement with a futures commission merchant or retail foreign exchange dealer in accordance with § 1.10(j) of this chapter will have its registration cease thirty days after the termination of such guarantee agreement unless the procedures set forth in § 1.10(j)(8) of this chapter are followed. (d) On a date to be established by the National Futures Association, and in accordance with procedures established by the National Futures Association, each registrant as a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant shall, on an annual basis, review and update registration information maintained with the National Futures Association. The failure to complete the review and update within thirty days following the date established by the National Futures Association shall be deemed to be a request for withdrawal from registration, which shall be processed in accordance with the provisions of § 3.33(f). 16. Section 3.12 is amended by a. Revising the heading; b. Revising paragraph (a); c. Revising paragraph (f)(1)(iii)(E); d. Revising paragraph (f)(4); e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and f. Removing paragraph (j). The revisions read as follows: § 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. (a) Registration required. It shall be unlawful for any person to be associated with a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant as an associated person unless that person shall have registered under the Act as an associated person of that sponsoring futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant in accordance with the procedures in paragraphs (c), (d), (f), or (i), of this section or is exempt from such registration pursuant to paragraph (h) of this section. (f) * * * (1) * * * (iii) * * * (E) Associated person's supervision of any person or persons engaged in any of the foregoing solicitations or acceptances, with respect to any customers common to it and any other futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator, or leverage transaction merchant with which the associated person is associated. (4) If a person is associated with a futures commission merchant, with a retail foreign exchange dealer, or with an introducing broker and he directs customers seeking a managed account to use the services of a commodity trading advisor(s) approved by the futures commission merchant, retail foreign exchange dealer or introducing broker and all such customers' accounts solicited or accepted by the associated person are carried by the futures commission merchant, retail foreign exchange dealer or introduced by the introducing broker with which the associated person is associated, such a person shall be deemed to be associated solely with the futures commission merchant, retail foreign exchange dealer or introducing broker and may not also register as an associated person of the commodity trading advisor(s). (h) * * * (1) * * * (i) Registered under the Act as a futures commission merchant, retail foreign exchange dealer, floor broker, or as an introducing broker; (iii) The chief operating officer, general partner or other person in the supervisory chain-of-command, provided the futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator, or leverage transaction merchant engages in commodity interest related activity for customers as no more than ten percent of its total revenue on an annual basis, the firm is not subject to a pending proceeding brought by the Commission or a self-regulatory organization alleging fraud or failure to supervise, and has not been found in such a proceeding to have committed fraud or failed to supervise, as required by the Act, the rules promulgated thereunder or the rules of a self-regulatory organization, the person for whom exemption is sought and the person designated in accordance with paragraphs (h)(1)(iii)(C) or (h)(1)(iii)(D) of this section are listed as principals of the firm, the fitness examination conducted by the National Futures Association with respect to these persons discloses no derogatory information that would disqualify any of such persons as a principal or as an associated person, and the firm files with the National Futures Association corporate or partnership resolutions stating that: (A) Such supervisory person is not authorized to: ( 1 ) Solicit or accept customers', retail forex customers', or leverage customers' orders, ( 2 ) Solicit a client's or prospective client's discretionary account, ( 3 ) Solicit funds, securities or property for a participation in a commodity pool, or ( 4 ) Exercise any line supervisory authority over those persons so engaged; (B) Such supervisory person has no authority with respect to hiring, firing or other personnel matters involving persons engaged in activities subject to regulation under the Act; (C) Another person (or persons) designated therein, who is registered as an associated person(s) or who has applied for registration as an associated person(s) and is not subject to a pending proceeding brought by the Commission or a self-regulatory organization alleging fraud or failure to supervise, and has not been found in such a proceeding to have committed fraud or failed to supervise, as required by the Act, the rules promulgated thereunder or the rules of a self-regulatory organization, holds and exercises full and final supervisory authority, including authority to hire and fire personnel, over the customer commodity interest related activities of the firm; and (D) If the person (or persons) so designated in accordance with paragraph (h)(1)(iii)(C) of this section ceases to have the authority referred to therein, the firm will notify the National Futures Association within twenty days of such occurrence by means of a subsequent resolution which resolution must also include the name of another associated person (or persons) who has been vested with full supervisory authority, including authority to hire and fire personnel, over the customer commodity interest related activities of the firm in the event that all of those previously designated in accordance with paragraph (h)(1)(iii)(C) of this section have been relieved of such authority. Subsequent changes in supervisory authority shall be reported in the same manner; or 17. Section 3.21 is amended by: a. Revising paragraph (b)(3); and b. Revising paragraphs (c) introductory text, (c)(1) through (3), and (c)(4)(i) to read as follows: § 3.21 Exemption from fingerprinting requirement in certain cases. (b) * * * (3) With respect to the fingerprints of a principal. An officer, if the futures commission merchant, retail foreign exchange dealer, commodity trading advisor, commodity pool operator, introducing broker, 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, introducing broker, commodity trading advisor, commodity pool operator 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 §§ 3.10(a)(2) and 3.31(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: (1) Is not engaged in: (i) The solicitation or acceptance of customers' orders or retail forex customers' orders, (ii) The solicitation of funds, securities or property for a participation in a commodity pool, (iii) The solicitation of a client's or prospective client's discretionary account, (iv) The solicitation or acceptance of leverage customers' orders for leverage transactions; (2) Does not regularly have access to the keeping, handling or processing of: (i) Commodity interest transactions; (ii) Customer funds, retail forex customer funds, leverage customer funds, foreign futures or foreign options secured amount, or adjusted net capital; or (3) Does not have direct supervisory responsibility over persons engaged in the activities referred to in paragraphs (c)(1) and (c)(2) of this section; and (4) * * * (i) The name of the futures commission merchant, retail foreign exchange dealer, introducing broker, commodity trading advisor, commodity pool operator, leverage transaction merchant, or applicant for registration in any of these capacities of which the person is an outside director; 18. Section 3.30 is amended by revising paragraph (a) to read as follows: § 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, commodity trading advisor, commodity pool operator, introducing broker, or leverage transaction merchant with which the principal is affiliated and may address any correspondence relating to the registration of an associated person to the futures commission merchant, retail foreign exchange dealer, commodity trading advisor, commodity pool operator, introducing broker, or leverage transaction merchant with which the associated person or the applicant for registration is or will be associated as an associated person. 19. Section 3.31 is amended by revising paragraphs (a)(1), (b), (c), and (d) to read as follows: § 3.31 Deficiencies, inaccuracies, and changes, to be reported. (a)(1) Each applicant or registrant as a futures commission merchant, retail foreign exchange dealer, commodity trading advisor, commodity pool operator, introducing broker, 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 which no longer renders accurate and current the information contained therein. Each such correction shall be made on Form 3-R and shall be prepared and filed in accordance with the instructions thereto. Provided, however, that where a registrant is reporting a change in the form of organization from or to a sole proprietorship, the registrant must file a Form 7-W regarding the pre-existing organization and a Form 7-R regarding the newly formed organization. (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, commodity trading advisor, commodity pool operator, introducing broker, 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 which renders no longer accurate and current the information contained in the Form 8-R or supplemental statement. Each such correction must be made on Form 3-R and must be prepared and filed in accordance [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-21729. Public record. Not legal advice.