Adverse Registration Actions by National Futures Association With Respect to Floor Brokers, Floor Traders, and Applicants for Registration in Either Category

COMMODITY FUTURES TRADING COMMISSION

Adverse Registration Actions by National Futures Association With

Respect to Floor Brokers, Floor Traders, and Applicants for

Registration in Either Category

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and Order.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is

authorizing National Futures Association (NFA) to deny, condition,

suspend, modify, restrict or revoke the registration of any floor

broker (FB), floor trader (FT), or an applicant for registration in

either category. The Commission has previously authorized NFA to

perform various functions with respect to processing registration

records of FBs, FTs and applicants therefor, including, among other

things, granting such registrations where appropriate and serving as

the official custodian of those Commission records. This Order does not

authorize NFA to accept or act upon requests for exemption or to render

``no-action'' opinions with respect to applicable registration

requirements. This Order generally will conform NFA's authority

regarding the FB and FT registration categories to the authority

delegated by the Commission to NFA concerning the other categories of

registration under the Commodity Exchange Act (Act).1

\1\7 U.S.C. 1 et seq. (1988 & Supp. IV 1992).

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EFFECTIVE DATE: August 1, 1994.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief

Counsel, or Robert P. Shiner, Assistant Director, Division of Trading

and Markets, Commodity Futures Trading Commission, 2033 K Street NW.,

Washington, DC 20581. Telephone: (202) 254-8955 or 254-3688,

respectively.

SUPPLEMENTARY INFORMATION:

Introduction

The Commission has previously issued Orders authorizing NFA to

perform registration processing functions with respect to FBs and FTs.

These functions have included: (1) processing and, where appropriate,

granting applications for registration under the Act; (2) issuing and

terminating, where appropriate, temporary licenses; (3) processing the

triennial review of registration information, periodic updates,

terminations of trading privileges and requests for withdrawal from

registration; and (4) establishing and maintaining systems of records

regarding FBs and FTs and serving as the official custodian of those

Commission records.2 However, the Commission has not previously

authorized NFA to take adverse actions against FBs, FTs or persons

applying for registration in either category, or to accept or act upon

requests for exemption or to render ``no-action'' opinions with respect

to applicable registration requirements.3 By the Order below

issued on this date, the Commission is authorizing NFA to assume the

performance of additional registration functions on behalf of the

Commission, specifically, to deny, condition, suspend, modify, restrict

or revoke the registration of any FB, FT or applicant for registration

in either category.4 However, the Commission will continue to

handle any matter that has already been referred to it by NFA.

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\2\51 FR 25929 (July 7, 1986); 51 FR 34490 (September 29, 1986);

58 FR 19657 (April 15, 1993).

\3\When the Commission issued its most recent delegation Order,

it noted that:

Certain commenters on the Commission's proposed rules concerning

FT registration suggested that authority to take adverse action

against FTs and FBs should be delegated to NFA. The Commission will

take the matter under advisement and may consider authorizing NFA to

perform such functions at a subsequent date when it has more

experience with the FT registration process. 58 FR 19657, 19658

(footnote omitted).

\4\See Sections 8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7

U.S.C. 12a(2), 12a(3), 12a(4) and 12a(11) (1988 & Supp. IV 1992).

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The Commission's order also provides that, until the Commission

orders otherwise, with respect to an application for registration as an

FB or an FT that NFA previously would have forwarded to the Commission

for review of disciplinary history, if NFA determines that registration

should be granted in such a case, either with or without conditions,

NFA shall transmit the file to the Commission and stay the granting of

registration until the Commission has had an opportunity to object to

such granting of registration.\5\

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\5\See 58 FR 19657, 19659. The same treatment will apply in the

case of a registered FB or FT with new disciplinary history where

NFA determines to maintain registration, either with or without

restrictions. NFA need not, however, forward to the Commission any

matter related to an FB, FT or applicant for registration in either

category where the only ``yes'' answer to a disciplinary history

question relates to a single arrest where there was no subsequent

conviction, guilty plea or plea of nolo contendere, or a single

misdemeanor conviction based on conduct unrelated to financial

market activity that predates the application for registration by at

least five years, provided such matter is disclosed on the

registration application or any update thereto. If a person

willfully makes any materially false or misleading statement or

omits to state any material fact in his registration application or

any update thereto, that is a separate ground for statutory

disqualification from registration. Sections 8a(2)(G) and 8a(3)(G)

of the Act, 7 U.S.C. 12a(2)(G) and 12a(3)(G) (1988 & Supp. IV 1992).

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Further, this Order does not authorize NFA to accept or act upon

requests for exemption or to render ``no-action'' opinions with respect

to applicable registration requirements. This Order will conform NFA's

authority concerning the FB and FT registration categories to the

authority delegated by the Commission to NFA concerning the other

categories of registration under the Act, except with respect to the

temporary requirement for forwarding certain matters to the Commission

referred to above.\6\

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\6\The Commission has previously authorized NFA to perform

registration processing functions, and to take adverse registration

actions, with respect to futures commission merchants, introducing

brokers, commodity pool operators, commodity trading advisors,

leverage transactions merchants and associated persons of such

entities, as well as applicants for registration in any of the

aforementioned categories. See 48 FR 15940 (April 13, 1983); 48 FR

35158 (August 3, 1983); 48 FR 51809 (November 14, 1983); 49 FR 8226

(March 5, 1984); 49 FR 39593 (October 9, 1984); 50 FR 34885 (August

28, 1985); 54 FR 19594 (May 8, 1989); and 54 FR 41133 (October 5,

1989). In performing Commission registration functions, NFA is

required to monitor compliance with the conditions and restrictions

imposed on conditioned and restricted registrants.

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The Commission further notes that in enacting Section 227 of the

Futures Trading Practices Act of 1992, Congress added Section 8a(11) to

the Act, 7 U.S.C. 12a(11) (Supp. IV 1992), which provided rulemaking

authority for the Commission to suspend the registration of any person

charged with a felony if the Commission determines that continued

registration of the person may pose a threat to the public interest or

may threaten to impair public confidence in any market regulated by the

Commission. The Commission adopted Rule 3.56 to implement this

authority at the same time that it adopted rules to govern registration

of FTs. 58 FR 19575, 19587-19588, 19595-19596 (April 15, 1993). The

Commission expects that NFA will promptly notify the Commission when

NFA becomes aware that any registrant has been charged with a felony.

United States of America Before the Commodity Futures Trading

Commission Order Authorizing the Performance of Registration Processing

Functions

I. Authority and Background

Section 8a(10) of the Act (7 U.S.C. 12a(10) (1988 and Supp. IV

1992)) provides that the Commission may authorize any person to perform

any portion of the registration functions under the Act,

notwithstanding any other provision of law, in accordance with rules

adopted by such person and submitted to the Commission for approval or,

if applicable, for review pursuant to Section 17(j) of the Act and

subject to the provisions of the Act applicable to registrations

granted by the Commission. Section 17(o)(2) of the Act provides that

the Commission may authorize NFA, in performing Commission registration

functions, to deny, condition, suspend, restrict or revoke any

registration, subject to Commission review.7

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\7\7 U.S.C. 21(o)(2) (1988).

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NFA submitted under cover of a letter dated March 8, 1994

amendments to its bylaws and rules to govern adverse actions against

FTs, FBs and applicants for registration in either category. These

amendments reflect actions taken by NFA's Board at meetings on May 20,

1993 and February 24, 1994. NFA's rule amendments establish procedures

for conducting adverse registration proceedings with respect to the FB

and FT registration categories that closely track the Commission's Part

3 rules in this regard. NFA's amended rules further provide that NFA's

Membership Committee will conduct adverse proceedings regarding FB and

FT registrations and applicants for registration in either category and

that a Subcommittee conducting such a proceeding will consist of at

least three persons, the majority of whom are members of the Membership

Committee and the remainder of whom are FBs or FTs drawn from a list

approved by NFA's Board. By letter dated June 17, 1994, NFA has

indicated that, in composing such designated Subcommittees, it will

utilize its best efforts to avoid having as Subcommittee members FBs

and FTs who have trading privileges at the same exchange as the subject

of the proceeding.8

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\8\Letter from Michael J. Crowley, Associate General Counsel,

NFA, to Lawrence B. Patent, Associate Chief Counsel, Division of

Trading and Markets.

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NFA has indicated that in carrying out the function of taking

adverse registration action involving the FB and FT registration

categories, it will be bound by restrictions in Commission rules

regarding who may act as a supervisor. Therefore, if NFA determines to

condition or restrict the registration of an FB or an FT, someone

eligible to do so under Commission rules must sign a Supplemental

Sponsor Certification Statement (SSCS) for the FB or FT and supervise

compliance with any conditions or restrictions that may be imposed. In

the case of an FB, the SSCS must be signed by his employer or, if he

has no employer, by another floor broker;9 if an FT is involved,

the SSCS must be signed by an officer of the floor trader's clearing

member, if such officer is a registrant or a principal of a registrant,

or the chief operating officer on behalf of each contract market that

has granted trading privileges.10

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\9\If the FB has no employer and another FB signs the SSCS, the

Commission has required that the FB subject to conditions or

restrictions receive customer orders only from the person who signed

the SSCS or agents of that person. See In the Matter of John V.

Piccolo, CFTC Docket No. SD-93-8 (July 20, 1993).

\1\0Such a supervising employer or FB, supervising registrant or

principal may not be subject to a pending adjudicatory proceeding

under the Act or barred from service on self-regulatory organization

governing boards or committees based on disciplinary history in

accordance with Commission Rule 1.63, 17 CFR 1.63 (1993). See

Commission Rule 3.60(b)(2)(i), 17 CFR Sec. 3.60(b)(2)(i) (1993); NFA

letter dated June 17, 1994.

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Upon consideration, the Commission has determined to authorize NFA,

effective August 1, 1994, to deny, condition, suspend, modify, restrict

or revoke the registration of any FB, FT or an applicant for

registration in either category in accordance with the standards

established by the Act and rules promulgated thereunder.11

However, the Commission will continue to handle any matter that has

already been referred to it by NFA. The Commission is also authorizing

NFA to perform records custodianship functions with respect to such

adverse registration actions.12 The Commission has separately

approved on this date amendments to NFA Bylaws 305 and 708 and NFA

Registration Rules 101, 201, 203, 501, 502, and 504-510 to authorize

implementation of these grants of authority.

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\1\1In conjunction with this authorization to take adverse

action, the Commission is also directing that, until the Commission

orders otherwise, with respect to the file of an FB, an FT or an

applicant for registration in either category that NFA previously

would have forwarded to the Commission for review of disciplinary

history, if NFA determines that registration should be maintained or

granted in such a case, either with or without restrictions or

conditions, NFA shall transmit the file to the Commission and stay

the maintenance or granting of registration until the Commission has

had an opportunity to object to such maintenance or granting of

registration. NFA need not, however, forward to the Commission any

matter related to an FB, FT or applicant for registration in either

category where the only ``yes'' answer to a disciplinary history

question relates to a single arrest where there was no subsequent

conviction, guilty plea or plea of nolo contendere, or a single

misdemeanor conviction based on conduct unrelated to financial

market activity that predates the application for registration by at

least five years, provided such matter is disclosed on the

registration application or any update thereto. See note 5, supra.

\1\2In this connection, in a separate notice published elsewhere

today in the Federal Register, the Commission is publishing a Notice

under the Privacy Act of 1974 of modified descriptions of systems of

records to incorporate records applicable to adverse registration

actions against FBs, FTs or applicants for registration in either

category.

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By prior orders, the Commission has authorized NFA to maintain

various other Commission registration records and certified NFA as the

official custodian of such records for this agency.13 The

Commission has now determined, in accordance with its authority under

Section 8a(10) of the Act, to authorize NFA to maintain and serve as

official custodian of the Commission's registration records with

respect to adverse actions against FBs, FTs, and applicants for

registration in either category from this time forward. This

determination is based upon NFA's representations regarding the

implementation of rules and procedures for maintaining and safeguarding

all such records, as well as the need to facilitate NFA's assumption of

responsibility for taking adverse registration action against FBs, FTs,

and applicants for registration in either category.

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\1\349 FR 39593; 50 FR 34885; 51 FR 25929; 54 FR 19594; 54 FR

41133; 58 FR 19657.

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In maintaining the Commission's registration records pursuant to

this Order, NFA shall be subject to all other requirements and

obligations imposed upon it by the Commission in existing or future

Orders or regulations.14 In this regard, NFA shall also implement

such additional procedures (or modify existing procedures) as are

necessary and acceptable to the Commission to ensure the security and

integrity of the FB, FT or applicant records in NFA's custody; to

facilitate prompt access to those records by the Commission and its

staff, particularly as described in other Commission Orders or rules;

to facilitate disclosure of public or nonpublic information in those

records when permitted by Commission Orders or rules and to keep logs

as required by the Commission concerning disclosure of nonpublic

information; and otherwise to safeguard the confidentiality of the

records.

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\1\4See, e.g., 49 FR 39593, 39595-97; 50 FR 34885, 34887.

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II. Conclusion and Order

The Commission has determined, in accordance with the provisions of

Section 8a(10) of the Act, to authorize NFA, effective August 1, 1994,

to perform the following registration functions:

(1) To deny, condition, suspend, modify, restrict or revoke

registration under the Commodity Exchange Act as a floor broker, floor

trader or applicant for registration in either category;

(2) To establish and maintain a system of records regarding such

adverse actions involving floor brokers, floor traders and applicants

for registration in either category, and to serve as the official

custodian of those Commission records.

NFA shall perform these functions in accordance with the standards

established by the Act and the regulations promulgated thereunder.

These determinations are based upon the Congressional intent

expressed in Sections 8a(10) and 17(o) of the Act that the Commission

be allowed to authorize NFA to perform any portion of the Commission's

registration responsibilities under the Act for purposes of carrying

out these responsibilities in the most efficient and cost-effective

manner, and NFA's representations concerning standards and procedures

to be followed in administering these functions.

This Order does not, however, authorize NFA to accept or act upon

requests for exemption from registration or to render ``no-action''

opinions or interpretations with respect to applicable registration

requirements.

Nothing in this Order or in Sections 8a(10) or 17 of the Act shall

affect the Commission's authority to review the granting of a

registration application by NFA in the performance of Commission

registration functions, or to review any adverse registration action

taken by NFA. See also Sections 17(o)(3) and (4) of the Act, 7 U.S.C.

21(o)(3) and (4) (1988 and Supp. IV 1992), and 17 CFR Part 171.

Issued in Washington, D.C. on July 26, 1994 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 94-15630 Filed 7-29-94; 8:45 am]

BILLING CODE 6351-01-P