Ethics Training for Registrants

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

Ethics Training for Registrants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: On July 22, 1994, the Commodity Futures Trading Commission

(Commission) proposed amendments to Rule 3.34, which governs ethics

training for Commission registrants. The Commission has published a

release announcing the adoption of those rule amendments in the Federal

Register on December 13, 1995. The Commission also is proposing to

amend Rule 3.34 to require that persons who seek to provide ethics

training must present satisfactory evidence that they meet a

proficiency testing requirement established by a registered futures

association and possess a minimum of three years of relevant

experience. The Commission is also proposing to amend Rule 3.34 to

eliminate the provision permitting state-accredited entities to provide

ethics training without being subject to the requirements pertaining to

other providers under the rule.

DATES: Comments must be received by January 16, 1996.

ADDRESSES: Comments should be sent to the Office of the Secretariat,

Commodity Futures Trading Commission, 1155 21st Street NW., Washington,

DC 20581 and should refer to ``Ethics Training for Registrants.''

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

Counsel or Myra R. Silberstein, Attorney-Advisor, Division of Trading

and Markets, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone

(202) 418-5450.

SUPPLEMENTARY INFORMATION:

I. Background

Section 210 of the Futures Trading Practices Act of 1992 added a

new paragraph (b) to Section 4p of the Commodity Exchange Act (Act) to

mandate ethics training for persons required to be registered under the

Act.\1\ On April 6, 1993, the Commission adopted Rule 3.34 to implement

this Congressional mandate.\2\ In September, 1993, the Commission

issued a Federal Register release to clarify the procedures to be

followed by persons

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seeking to provide ethics training pursuant to Rule 3.34.\3\

\1\This provision of the Act is codified at 7 U.S.C. 6p(b)

(1994) and states that:

The Commission shall issue regulations to require new

registrants, within 6 months after receiving such registration, to

attend a training session, and all other registrants to attend

periodic training sessions, to ensure that registrants understand

their responsibilities to the public under this Act, including

responsibilities to observe just and equitable principles of trade,

any rule or regulation of the Commission, any rule of any

appropriate contract market, registered futures association, or

other self-regulatory organization, or any other applicable Federal

or state law, rule or regulation.

\2\58 FR 19575, 19584-19587, 19593-19594 (Apr. 15, 1993).

\3\58 FR 47890 (Sept. 13, 1993).

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Rule 3.34 requires natural persons registered under the Act to

attend ethics training to ensure that they understand their

responsibilities to the public under the Act. The required training

must address the requirements of the Act and all rules concerning the

treatment and handling of customer orders and business. Issues to be

addressed may include: honesty, fairness and the interests of customers

and the integrity of the markets; effective supervisory systems and

controls; assessment of financial situations and the investment

experience of customers; disclosure of material information; and

avoidance of conflicts of interest. New registrants must attend ethics

training within six months of being granted registration and every

three years thereafter. The initial training must be at least four

hours in duration; subsequent training must be of at least one hour in

duration. Persons registered when Rule 3.34 became effective on April

26, 1993 were granted until April 26, 1996 to attend an initial

training session, of at least two hours in duration, and must

thereafter attend a one-hour session every three years. Ethics trainers

must maintain records of materials used in such training and of

attendees at such training.

In July 1994, the Commission proposed amendments to Rule 3.34 to

improve the operation of its ethics training program and furnish

additional guidance with respect to the activities of ethics training

providers.4 The Commission has published a release announcing the

adoption of those amendments published in the Federal Register on

December 13, 1995. The amendments adopted will, among other things,

require a person seeking to provide ethics training to certify that he

is not subject to a statutory disqualification from registration under

the Act,5 barred from service on self-regulatory organization

(SRO) governing boards or committees,6 or subject to a pending

proceeding concerning possible violations of the Act or rules or orders

promulgated thereunder.

\4\59 FR 37446 (July 22, 1994).

\5\7 U.S.C. 12a (2) and (3)(1994). The Act specifies several

grounds for disqualification from registration including, among

others, a prior revocation of registration, felony conviction, and

an injunction relating to futures or securities activities.

\6\No person may serve on SRO governing boards or committees

who, among other things, has been found within the prior three years

to have committed a ``disciplinary offense'' or entered into a

settlement agreement with respect to a charge involving a

``disciplinary offense,'' is currently suspended from trading on any

contract market, is suspended or expelled from membership in any

SRO, or is currently subject to an agreement with the Commission or

an SRO not to apply for registration or membership. A ``disciplinary

offense'' for these purposes means any violation of the Act or the

rules promulgated thereunder or SRO rules other than those relating

to: (1) decorum or attire; (2) financial requirements; or (3)

reporting or recordkeeping, unless resulting in fines aggregating

more than $5,000 in a calendar year, provided such SRO rule

violations did not involve fraud, deceit or conversion, or result in

a suspension or expulsion. 17 CFR 1.63 (1995).

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II. Proposed Amendments

A. Proficiency Testing and Minimum Experience Requirements

The Commission is now proposing further amendments to Rule 3.34 to

require any person seeking to provide ethics training to furnish

satisfactory evidence to a registered futures association that he has

met the proficiency testing requirement7 established by a

registered futures association8 pursuant to Section 17(p)(1) of

the Act for the registration of commodity professionals9 and

possesses three years of relevant experience. Currently, the National

Commodity Futures Examination (Series 3 Exam) is the proficiency test

required to be completed by most commodity professionals.10

\7\7 U.S.C. 6p(a)(1994).

\8\Presently, the National Futures Association (NFA) is the only

registered futures association.

\9\Section 17(p)(1) of the Act, 7 U.S.C. 21(p)(1)(1994),

provides, in part, that a registered futures association must

establish training standards and proficiency testing for persons

involved in the solicitation of transactions subject to the Act,

supervisors of such persons, and all persons for whom it has

registration responsibilities.

\10\See NFA Registration Rule 401.

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In commenting on the amendments proposed in July, 1994, NFA

suggested that a proficiency testing requirement be incorporated in

Rule 3.34 to require ethics training providers to satisfy an objective

standard designed to reflect a minimum level of knowledge of the

futures industry and the relevant statutory and regulatory structure.

NFA and another commenter also recommended that to ensure that an

ethics training provider possesses a working knowledge of the futures

industry and is capable of teaching relevant rules and regulations,

ethics training providers should be required to have at least three

years of industry or teaching experience.

The Commission agrees that requiring persons who seek to provide

ethics training to provide proof of satisfactory completion of a

proficiency testing requirement applicable to registrants and of

possession of three years of relevant industry or pedagogical

experience provides an objective, readily administered measure for

determining knowledge of relevant matters and should not be unduly

burdensome. The Commission believes that it would be inconsistent with

the Congressional mandate for ethics training and contrary to the

public interest for a person to teach others about their

responsibilities under applicable laws and rules if such a person is

not able to demonstrate at least the same minimum acceptable level of

proficiency as is required of those he intends to educate. Further,

such requirements would be consistent with the approach followed by the

Commission to date in evaluating applications from potential offerors

of ethics training. In proposing Rule 3.34, the Commission noted its

belief that ``pedagogical expertise and knowledge of futures are

factors that should be taken into consideration in evaluating potential

offerors of ethics training.''11 Consequently, in reviewing

applications filed under Rule 3.34 for authorization to provide ethics

training, the Commission has endeavored to assure that such providers

demonstrate pedagogical experience and knowledge of the futures

markets. Should these proposed amendments be adopted, the Commission

anticipates that NFA will promulgate rules establishing specific

proficiency standards for ethics training providers.

\11\58 FR 19575, 19586. However, initially the Commission

elected not to establish specific requirements with respect to these

matters in Rule 3.34.

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The Commission believes that the proposed requirement of three

years of relevant experience may be satisfied not only by pedagogical

or teaching experience but, also, by relevant industry experience. For

example, such industry experience might be acquired by the practice of

law in the fields of futures or securities or employment as a trader or

risk manager at a brokerage or end-user firm. The Commission welcomes

comments as to the types of experience that should be deemed sufficient

for this purpose.

The Series 3 Exam is the only relevant proficiency test currently

available for ethics training providers, since it is the proficiency

test that is generally applicable to Commission registrants and is

designed to assure a broad working knowledge of the futures industry.

Successful completion of the Series 3 Exam is required of all natural

persons seeking to be registered as a commodity pool operator (CPO),

commodity trading advisor (CTA), futures commission merchant,

introducing broker, leverage transaction merchant or an associated

person (AP)

[[Page 64134]]

of any of the foregoing.12 The Commission recently approved an

alternative proficiency testing requirement under which general

securities representatives whose commodity interest activity will be

limited to managed accounts or commodity pool interests may take the

Futures Managed Funds Examination (Series 31 Exam) in lieu of the

Series 3 Exam. The Commission believes that even if an ethics training

provider wishes to instruct only CPOs, CTAs and their APs, the more

comprehensive based Series 3 Exam is the appropriate proficiency test.

\12\See also the 400 Series of the NFA Registration Rules, which

sets forth the proficiency requirements for industry professionals

and the alternatives to and exemptions from the Series 3 Exam

requirements. Currently, floor traders and floor brokers are not

required to pass the Series 3 Exam in order to become registered.

Most floor traders and floor brokers receive orientation and ethics

training from their respective exchanges.

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B. Applicability of Certification, Proficiency Testing and Experience

Requirements

Currently, Rule 3.34 requires that any provider of ethics training

other than an SRO offering ethics training to its members or employees

or an entity accredited to conduct continuing education programs by a

state professional licensing authority in the fields of law, finance,

accounting or economics must be approved by the Commission for this

purpose. A comment letter addressing the amendments to Rule 3.34

published in the Federal Register on December 13, 1995, suggested that

SROs and state-accredited entities should no longer be exempted from

the general requirement under Rule 3.34 that entities seeking to

provide ethics training submit an application to the Commission

summarizing their ethics training program, as all ethics training

providers should be subject to equivalent standards. The Commission

believes that the business purposes and functions of SROs, the

statutory and regulatory requirements applicable to SROs, and the

Commission's oversight program for assuring compliance by SROs with

their responsibilities under the Act and Commission rules provide

sufficient assurance of the expertise and fitness of SROs as ethics

training providers without the necessity for imposing additional

requirements. Consequently, the Commission's proposals with respect to

proficiency training and pedagogical or industry experience do not

apply to SROs seeking to provide ethics training to their members or

employees. The Commission invites commenters to address the continued

appropriateness of this approach for SROs in light of the proposed

modifications of the requirements with respect to other types of ethics

training providers.

The Commission has determined, however, to propose that state-

accredited entities be required to file with the NFA the certification

required under Rule 3.34(b)(3)(iii) and to comply with the other

relevant provisions of Rule 3.34, including proficiency testing and

experience requirements. In the absence of such compliance and in light

of the potential for significant variations among state-accreditation

regimes, the Commission would have no ready means of assuring that such

providers have a minimum level of relevant knowledge or experience.

The Commission is proposing that the proficiency testing and

minimum experience requirements apply to the provider or sponsor of the

ethics training program, to any instructors or presenters employed by

the provider of such ethics training, and to those persons who prepare

ethics training videotapes or electronic presentations. Existing

providers, instructors and preparers operating pursuant to specific

Commission authorization or otherwise in compliance with Rule 3.34 as

currently in effect would not be subject to these requirements.

However, if an entity whose application to provide ethics training has

previously been granted by the Commission seeks to add a new instructor

or course preparer, such person would be subject to the proficiency

testing and minimum relevant experience standards.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988),

requires that agencies, in proposing rules, consider the impact of

those rules on small businesses. The rule amendments proposed herein

will not affect SROs who wish to provide ethics training but would

affect all others who seek to be included on a list of authorized

ethics training providers, including entities accredited to conduct

continuing education programs by state professional licensing

authorities in the fields of law, finance, accounting or economics. The

impact of this proposal on persons seeking to become providers of

ethics training should be minimal. At this time, a one-time processing

fee for the Series 3 Exam offered by the NFA is seventy-five dollars.

This should not constitute an unduly burdensome entry cost for ethics

training providers; the same cost is incurred by all the attendees at

ethics training as a cost of registration. Requiring a minimum level of

experience also should not adversely impact small businesses as this

requirement does not impose additional financial cost upon such

entities.

Therefore, on behalf of the Commission, the Chairman hereby

certifies, pursuant to 5 U.S.C. 605(b), that the rule amendments

proposed herein will not have a significant economic impact on a

substantial number of small entities. The Commission nonetheless

invites comments from any persons or entities who believe that these

proposed rule amendments will have a significant impact on their

operations.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq.,

imposes certain requirements on federal agencies (including the

Commission) in connection with their conducting or sponsoring any

collection of information as defined by the PRA. In compliance with the

PRA, the Commission has previously submitted the proposed rule and its

associated information collection requirements to the Office of

Management and Budget. While the amendments proposed herein have no

burden, Rule 3.34 is a part of a group of rules which has the following

burden: Rules 3.16, 3.32 and 3.34 (3038-0023, approved June 2, 1993):

Average Burden Hours Per

Response--1.13

Number of Respondents--60,980

Frequency of Response--On Occasion and Triennially

Persons wishing to comment on the information which will be

required by these rules as amended should contact Jeff Hill, Office of

Management and Budget, Room 3228, NEOB, Washington, D.C. 20503, (202)

395-7340. Copies of the information collection submission to OMB are

available from Joe F. Mink, CFTC Clearance Officer, 1155 21st St. N.W.,

Washington, D.C. 20581, (202) 418-5170.

List of Subjects in 17 CFR Part 3

Registration, Ethics Training.

Accordingly, the Commission, pursuant to the authority contained in

the Commodity Exchange Act and, in particular, Sections 1a, 4d, 4e, 4g,

4m, 4p, 8a and 17 thereof (7 U.S.C. 1a, 6d, 6e, 6g, 6m, 6p, 12a and 21

(1994), hereby proposes to amend Part 3 of Chapter I of Title 17 of the

Code of Federal Regulations as follows:

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PART 3--REGISTRATION

1. The authority citation for Part 3 continues to read as follows:

Authority: 7 U.S.C. la, 2, 4, 4a, 6, 6b, 6d, 6e, 6f, 6g, 6h, 6i,

6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21 and 23;

5 U.S.C. 552, 552b.

Sec. 3.34 [Amended]

2. Section 3.34 as amended by a final rule published on December

13, 1995, is proposed to be amended by removing and reserving paragraph

(b)(3)(ii) and revising the introductory text of paragraph (b)(3)(iii)

to read as follows: Sec. 3.34 Mandatory ethics training for

registrants.

* * * * *

(b) * * *

(3) * * *

(ii) [Reserved]

(iii) A person included on a list maintained by a registered

futures association who has presented satisfactory evidence to the

registered futures association that he has taken and passed the

proficiency testing requirements established by a registered futures

association for an ethics training provider, possesses a minimum of

three years of relevant experience, and who certifies that:

* * * * *

Issued in Washington, D.C. on December 7, 1995, by the

Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 95-30359 Filed 12-13-95; 8:45 am]

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