Financial Reporting and Debt-Equity Ratio Requirements for Futures Commission Merchants and Introducing Brokers

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 3, 145 and 147

Financial Reporting and Debt-Equity Ratio Requirements for

Futures Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is amending several provisions of its Rule 1.10 which governs financial

reporting requirements for futures commission merchants (FCMs) and

introducing brokers (IBs). The amendments require that financial

reports which need not be certified by an independent public accountant

be filed within 17 business days of the end of the reporting period

(generally the end of a month, a quarter or a six-month period), rather

than within 45 calendar days as previously required. The amendments

provide a phase-in period such that registrants have 30 calendar days

from the end of the reporting period within which to file their

financial reports for reporting periods ending on or between June 30,

1997 and December 31, 1997. Certified financial reports will continue

to be required to be filed within 90 calendar days of the fiscal year

end, rather than 60 days as proposed, except that firms which are also

registered as securities broker-dealers will be required to file their

certified year end reports with the Commission at the same time they

are required to file with the Securities and Exchange Commission (SEC),

which is 60 days after the year end. Further, all registrants will now

be required to file an uncertified financial report with the Commission

for the final quarter (or semiannual period in the case of IBs) of each

fiscal year within 17 business days (or 30 calendar days during the

phase-in period) from the end of the quarter or semiannual period, as

discussed above. Monthly capital computations required under Rule

1.18(b) also will be required to be available for inspection within 17

business days from month end, rather than 10 business days as proposed,

with an initial phase-in period that will allow firms to continue to

prepare the computations within 30 calendar days, as currently

required. In addition, the Commission is deleting the provision which

permits a self-regulatory organization (SRO) to allow its member FCMs

to file financial reports on a semiannual rather than a quarterly

basis. Further, the Commission is amending the debt-equity ratio rule

such that the 30 percent minimum equity requirement would apply to all

of a firm's capital, rather than only to that portion of a firm's

capital necessary to meet the minimum financial requirement.

EFFECTIVE DATE: June 30, 1997.

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

Counsel, Division of Trading and Markets, Commodity Futures Trading

Commission, 1155 21st Street N.W., Washington, DC 20581. Telephone:

(202) 418-5439.

SUPPLEMENTARY INFORMATION:

I. Financial Reporting Requirements for FCMs and IBs

A. Background

On February 26, 1996, the Commission published for comment proposed

amendments to several of its financial reporting requirements for FCMs

and IBs set forth in Commission Rule 1.10 and to the Commission's debt-

equity ratio requirement set forth in Rule 1.17(d) (the

``Proposals'').1 These proposed rule amendments were intended to

conform the Commission's rules with those of the SEC as part of the

Commission's ongoing efforts to harmonize its rules with those of the

SEC to the extent practicable. These amendments are part of a series of

rulemaking proceedings related to the discussions at the Commission's

roundtable on capital issues held in September 1995.2 At that

roundtable, the general consensus among the industry and academic

experts present was that the Commission should conform its rules

concerning the financial reporting cycle and debt-equity ratio

requirements with those of the SEC.

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\1\ 61 FR 7080 (Feb. 26, 1996).

\2\ See 61 FR 19177 (May 1, 1996).

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The Proposals were: (1) To reduce the current time periods (a) for

filing uncertified financial reports from 45 (or 30, for FCMs subject

to monthly reporting under ``early warning'' requirements) calendar

days to 17 business days, (b) for filing certified financial reports

from 90 to 60 calendar days, and (c) for preparing monthly capital

computations from 30 calendar to 10 business days; (2) to delete the

provisions which (a) permit an SRO to allow member FCMs to file

financial reports semiannually rather than quarterly, (b) require a

guaranteed IB (IBG) to file a copy of a guarantee agreement with the

Commission, and (c)

[[Page 4634]]

permit an IB which is also a country elevator to use a compilation

report prepared in accordance with requirements of the U.S. Department

of Agriculture in lieu of Form 1-FR-IB; and (3) to amend the debt-

equity ratio rule to apply the 30 percent minimum equity requirement to

all of a firm's capital.

The 30 day public comment period on the Proposals expired on March

27, 1996. The Commission received 22 written comments on the Proposals,

including 12 from FCMs, three from contract markets, three from trade

associations, three from accounting firms, and one from a bank that has

a subsidiary registered as an independent IB (IBI). In general, most

commenters voiced concerns about the impact of reduced time periods

within which to file financial reports on the business operations of

firms and on the accuracy of the reports prepared. A number of the

commenters proposed alternative filing periods to those contained in

the Proposals. These comments and alternatives are discussed more fully

below.

The Commission has considered carefully the comments received. The

Commission has determined generally to adopt as proposed the amendments

which require those financial reports which need not be certified by an

independent public accountant to be filed within 17 business days of

the end of the reporting period, rather than within 45 calendar days as

currently required. As the Commission realizes that certain firms may

require a period of time to prepare for the change in reporting

deadline, the final rules do not become effective until June 30, 1997

and thereafter are phased in over a six-month period. This phase-in

period provides that for reporting periods ending on or between June

30, 1997 and December 31, 1997, financial reports which are not

required to be certified must be filed within 30 calendar days of the

end of the reporting period.

With respect to those financial reports which must be certified by

an independent public accountant, the Commission has determined, based

upon a review of the comments, not to adopt at this time the provision

of the Proposals that would have reduced from 90 calendar days to 60

calendar days the time period within which registrants must file their

fiscal year end financial reports. Instead, the Commission has

determined to require registrants to file an uncertified financial

report for the final quarter (or semiannual period, in the case of

IBIs) of the fiscal year within 17 business days (or 30 calendar days

for fiscal years ending on or between June 30, 1997 and December 31,

1997) and continue to allow 90 days within which registrants may file

their annual certified reports. If material differences exist between

the capital computation and the segregation and secured amount

schedules contained in the certified report and the uncertified fourth

quarter (or, for IBIs, the second semiannual) report, the certified

report must include a reconciliation with appropriate explanations. If

no such material differences exist, there must be a statement so

indicating. Further, the Commission will require firms that are also

registered with the SEC and thereby required to file certified

financial reports within 60 days of the fiscal year end to file copies

of such reports simultaneously with the Commission.

The Commission also has determined, based upon a review of the

comments and its own reconsideration of the issue, to modify its

proposed amendment to Rule 1.18(b) concerning the completion of monthly

capital computations, such that monthly capital computations will be

required to be completed and available for inspection within 17

business days from month end rather than within 10 business days as

proposed or within 30 calendar days as required currently. In so doing,

the Commission reminds registrants that the Commission interprets Rule

1.17(a)(4) to require FCMs and IBIs to have a system in place to

determine whether they are in capital compliance at all times and to be

able on demand of the Commission or an SRO to prepare a pro forma

calculation subject to the Commission's or SRO's discretion to permit

up to 10 days to complete the same. The Commission will provide,

similar to what is provided for uncertified financial reports discussed

above, a phase-in period during which 30 calendar days will continue to

be allowed for preparation of the monthly computation. Further, the

Commission has determined to adopt its proposal to delete the provision

which permits an SRO to allow its member FCMs to file financial reports

on a semiannual rather than a quarterly basis. Finally, the Commission

has determined to adopt as proposed the amendment to Rule 1.17(d), the

Commission's debt-equity ratio rule, such that the 30 percent minimum

equity requirement will apply to all of a firm's capital rather than

only to that portion of a firm's capital necessary to meet the minimum

financial requirement.

B. Rule Amendments

1. Financial Reporting Cycle

The Commission proposed to amend its financial reporting

requirements for FCMs and IBIs such that interim unaudited financial

reports would be due within 17 business days, rather than the current

45 calendar days, of the ``as of'' date, and the certified financial

report as of the fiscal year end would be due within 60, rather than

90, calendar days of the fiscal year end.3 Sixteen of the

commenters addressed the issues concerning a shortening of the filing

period for uncertified reports while eighteen addressed the issues

concerning a shortening of the filing period for certified reports. Two

commenters addressed all of the proposed changes generally. One

commenter, a bank with an IBI subsidiary, supported all of the

Commission's amendments stating, among other things, that financial

reporting should be accelerated so as to prevent the reporting of stale

data and that conforming Commission regulations with those of the SEC

would ease the regulatory expense and burden of compliance. The

remaining commenters, however, were concerned generally about the

effect that shortening the filing deadlines would have upon firm

resources and the accuracy of financial reports.

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\3\ See proposed amendments to Commission Rules 1.10(b)(1) (i)

and (ii), 61 FR 7080, 7085-86.

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As noted above, participants in the September 1995 roundtable on

capital, including representatives from the industry SROs, urged the

Commission to adopt the rule changes embodied in the Proposals.

a. Uncertified Reports. With respect to uncertified filings, ten

commenters cited an increase in hardship as a result of necessary

workload reallocations and an increase in expense due to the potential

need for hiring additional staff as reasons for not changing the filing

deadline. Four commenters stated that Commission Rule 1.12(g), which

requires notification by an FCM within two business days of a twenty

percent or greater reduction in the firm's net capital compared to that

last reported in a financial report filed with the Commission, provides

adequate timely information of an FCM's financial difficulty.

Additionally, ten commenters, including the three contract markets, two

trade associations and five FCMs, suggested that a 30 calendar day

filing deadline would be more reasonable.

Although the Commission realizes that a shortening of the time

period in

[[Page 4635]]

which to file uncertified financial reports may require a period of

adjustment for some firms, the Commission believes that this additional

burden is warranted when weighed in the balance with the need to obtain

financial information in a timely manner. Indeed, exchange traded

derivatives positions change frequently; hence, the more current

relevant financial information is the more useful it is in

appropriately monitoring financial integrity on an ongoing basis. It

would therefore be anomalous for FCMs to have longer reporting

timeframes than securities broker-dealers. As a change to a 17 business

day filing period will conform the Commission's rules with those of the

SEC in this area, no additional burden should be created for the large

number of firms that are dually registered with the Commission and the

SEC.4

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\4\ As of November 30, 1996, almost one-half of FCMs (115 out of

240) and more than one-third of IBIs (141 out of 376) were dually

registered with the SEC.

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Under these final rules, interim uncertified financial reports will

be due within 17 business days (about 24 calendar days) of the end of

the reporting period. However, in light of the potential adjustment

necessary for some firms to come into full compliance with this rule

change, the rules provide a phase-in period, whereby firms will have 30

calendar days from the end of the reporting period in which to file

their interim reports for reporting periods ending on or between June

30, 1997 and December 31, 1997, the first six months during which the

amendments are effective. Two trade associations commented that should

the Commission and the SEC replace Commission Form 1-FR and the SEC

Financial and Operational Combined Uniform Single (FOCUS) Report with a

single financial reporting form that would be adopted by both agencies,

any greater detail that might be required in such a form might make a

17 business day filing deadline difficult to comply with. In this

regard, the Commission notes that if such a combined form were to

require statements and schedules in addition to those currently

required, the agencies intend to revisit the filing timetables at least

with respect to the additional schedules but would continue to pursue

harmonization of filing deadlines to the extent practicable.5

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\5\ See 61 FR 7080, 7081 n.6.

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Similarly, as proposed, the Commission will require that FCMs

subject to the ``early warning'' requirement 6 of monthly

financial reports, which are now due within 30 calendar days of the

month end, file such reports within 17 business days of the month end.

This requirement is also being phased in so that for months ending on

or between June 30, 1997 and December 31, 1997, the filing requirement

will be 30 calendar days as at present.7 One trade association

commenter objected to this proposed amendment. However, the Commission

believes that FCMs subject to the early warning requirements--that is,

FCMs with adjusted net capital of less than 150 percent of the minimum

requirement--should not have a longer period within which to file

uncertified financial reports than is provided generally.8 This is

because such firms are intended to be subject to increased regulatory

and self-regulatory scrutiny.

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\6\ See 61 FR 7080, 7081-82.

\7\ This amendment is adopted as part of Rule 1.12(b)(4). In the

Proposals, this amendment was proposed as an amendment to Rule

1.12(b)(3) but when the Commission amended Rule 1.12 in May 1996, it

redesignated Rule 1.12(b)(3) as Rule 1.12(b)(4). See 61 FR 7080,

7081 n.8; 61 FR 19177, 19185.

\8\ See 61 FR 7080, 7083.

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The only amendments with respect to filing uncertified financial

reports that are not being phased in concern the uncertified financial

report which a new applicant, or an IBG seeking to become an IBI, can

file if it also submits a certified financial report that is no more

than one year old. An uncertified report accompanying a certified

report which is less than one year old in such circumstances must be

filed within 17 business days of the ``as of'' date, rather than the

current 45 calendar days. See amendments to Rules 1.10 (a)(2)(i)(B),

(a)(2)(ii)(B), (j)(8)(i)(B) and (j)(8)(ii)(B). These are alternative

filings made at the firm's option in lieu of filing only a recent

certified financial report. Thus, the firm has some choice as to the

timing of the uncertified financial statement in this context.

Moreover, this option is likely to be used by a firm already making

regulatory filings which require annual certified financial statements,

such as a securities broker-dealer. None of the commenters specifically

addressed this aspect of the Proposals. The Commission has therefore

determined to adopt the amendments to Rules 1.10 (a)(2)(i)(B),

(a)(2)(ii)(B), (j)(8)(i)(B) and (j)(8)(ii)(B) as proposed.

b. Certified Reports. With respect to the Commission's proposed

rule amendment to shorten the time period for filing annual certified

financial reports, commenters voiced similar concerns to those raised

concerning shortening the time period for filing uncertified interim

reports. Specifically, six commenters stated that firm resources would

have to be shifted to meet new deadlines and small firms would not have

sufficient staff to meet these new demands. Eight commenters, including

the three contract market commenters and two trade associations, noted

that adopting the proposal would cause audit expenses to increase as a

result of a greater demand for accounting services during peak periods

and the need for additional in-house staff. As an alternative to the

Commission's proposal, two contract markets and an FCM suggested that

the Commission could meet its objective of obtaining more timely

financial information by requiring firms to file an unaudited financial

statement within 30 or 45 days of the fiscal year end followed by

filing the certified report within 90 days.9 One of the contract

markets and the FCM suggested that firms provide a reconciliation

between their certified and uncertified reports. Two additional

commenters suggested that if the Proposal is adopted, the Commission

should permit an automatic 30 day extension upon a request which

includes an unaudited fourth quarter financial report and an auditor's

statement that based upon the part of the audit completed to date,

there are no known material inadequacies in the firm's accounting

system or internal controls or failures to comply with the Commission's

minimum capital or segregation requirements.

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\9\ Both the Chicago Mercantile Exchange (CME) and Chicago Board

of Trade (CBT) require the filing of an uncertified financial report

for the fourth quarter in addition to the certified financial report

as of the fiscal year end. More than 40 percent of FCMs are members

of either CME or CBT.

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Based upon the Commission's review of the comments received and

reconsideration of this aspect of the Proposals, the Commission has

determined to leave unchanged the time period within which FCMs and

IBIs must file their annual certified financial reports. Thus, FCMs and

IBIs continue to have 90 calendar days within which to file their

annual certified financial statements, except for those firms already

filing certified financial reports with the SEC within 60 calendar days

because they are securities broker-dealers. Such firms will be

required, pursuant to provisos added to paragraphs (b)(1)(ii) and

(b)(2)(ii)(A) of Rule 1.10, to file copies of such certified reports

with the Commission at the same time the reports are filed with the

SEC. The Commission does not believe this will create any added burden

for such firms since they have been filing certified reports with the

SEC on the

[[Page 4636]]

shorter timeframe. Further, paragraphs (b)(1)(i) and (b)(2)(i) of Rule

1.10 have been amended to make clear that each FCM must file an

uncertified report covering the firm's fourth quarter within 17

business days of the end of the quarter and each IBI must file an

uncertified report covering the firm's second semiannual period within

17 business days of the end of the period, respectively. The Commission

has also redesignated paragraph (d)(2)(vi) of Rule 1.10 as paragraph

(d)(2)(vii) 10 and added a new paragraph (d)(2)(vi) to require

that the year end certified financial report, as suggested by certain

commenters as noted above, contain a reconciliation between that report

and the fourth quarter (or, in the case of IBIs, second semiannual)

uncertified report if material differences exist in the net capital

computation, segregation schedules or secured amount schedules. The

reconciliation must include appropriate explanations. If there are no

material differences between the reports, there must be a statement so

indicating in the certified report. This is consistent with SEC

rules.11 In conformity with the Commission's amendments with

respect to other uncertified filings, Rules 1.10 (b)(1)(i) and

(b)(2)(i) provide a phase-in period such that for quarters (with

respect to FCMs) or semiannual periods (with respect to IBIs) ending on

or between June 30, 1997 and December 31, 1997, firms have 30 calendar

days from the end of the quarter or semiannual period within which to

file their uncertified reports.

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\10\ The redesignated paragraph requires that a certified

financial report include ``[i]n addition to the information

expressly required, such further material information as may be

necessary to make the required statements not misleading.''

\11\ See 17 CFR 240.17a-5(d)(4) (1996).

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2. Monthly Computation

The monthly computation of adjusted net capital and minimum

financial requirement which FCMs and IBIs must prepare in accordance

with Commission Rule 1.18 is currently required to be made available

for inspection within 30 days. The Commission proposed to shorten this

time period to 10 business days since these computations do not involve

the preparation of all of the statements and schedules included in a

Form 1-FR-FCM or a Form 1-FR-IB. The Commission also noted in its

proposal that this shorter time period would conform the requirement

pertaining to monthly capital computations to the SEC's requirement for

filing Part I of the FOCUS Report.

The Commission received fourteen comment letters concerning the

proposed amendment of Rule 1.18. All of these commenters stated that 10

business days is too short a period of time in which to prepare the

monthly computation. Five commenters noted that a formal capital

computation requires the same review and reconciliation process that is

needed to prepare a financial report and, therefore, the time period

for completing such a computation should not be any shorter than that

provided for filing a financial report. Additionally, two contract

markets, two trade associations and an FCM stated that securities

broker-dealers who file Part I of FOCUS are often provided an extension

of time through their respective designated examining authority,12

such that the filing of their monthly capital computations is generally

due within 17 business days from month end. In consideration of these

comments, Rule 1.18(b) as adopted provides that firms must complete and

make available for inspection formal computations of their adjusted net

capital and minimum financial requirements within 17 business days from

month end. As is true with respect to the Commission's other amendments

discussed above, amended Rule 1.18(b) contains a phase-in period, such

that firms continue to have 30 calendar days from month end in which to

complete their monthly computations for all months ending on or before

December 31, 1997.

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\12\ The Commission has confirmed this to be the case.

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The Commission also notes that an FCM or IB must maintain

compliance with the Commission's minimum financial requirements at all

times. Thus, although Rule 1.18(b) provides 17 business days for an FCM

or IBI to complete a formal capital computation, a firm must

nonetheless be able to demonstrate its compliance with the Commission's

minimum capital requirement prior to this deadline if requested by the

Commission.13 The Commission encourages the SROs to use monthly

calculations in their financial monitoring systems and notes that the

CME, CBT and the New York Stock Exchange, Inc. now require clearing

member firms to file as well as to calculate capital monthly.

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\13\ 61 FR 7080, 7081 & n.3.

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3. Other Amendments

The Commission further proposed to delete that portion of Rule

1.52(a) which permits an SRO to allow its member FCMs to file financial

reports semiannually rather than quarterly. In the Proposals, the

Commission stated that it believes this rule amendment is consistent

with the concept that the existing reporting timeframe should be

accelerated so that the financial data reported and used by regulators

for monitoring purposes is reasonably current. Additionally, the

Commission noted that relatively few firms (less than ten percent of

FCMs, approximately 20 in all) are now filing only semiannually, so the

rule amendment would not cause undue hardship for a substantial number

of FCMs. All six of the commenters who addressed this aspect of the

Proposals supported this rule amendment and the Commission is adopting

it as proposed.

The Commission also proposed two other minor amendments to the

financial reporting requirements in Rule 1.10, both of which pertain to

IBs. Currently, an applicant for registration as an IB that intends to

operate pursuant to a guarantee agreement with an FCM must file a copy

of the guarantee agreement with the regional office of the Commission

nearest the principal place of business of the applicant (except that

an applicant under the jurisdiction of the Commission's Western

Regional Office in Los Angeles must file a copy with the Commission's

Southwestern Regional Office in Kansas City).14 This requirement

is in addition to the requirement to file the original of the guarantee

agreement with the registration application submitted to National

Futures Association (NFA). The Commission proposed to amend Rule

1.10(c) to eliminate the requirement that a copy of a guarantee

agreement be filed with a Commission regional office. An IB's status as

an IBG can be readily discerned by Commission staff from contacting

NFA's Information Center or by accessing the registration database. An

IBG has no ongoing financial reporting requirements, so the Commission

believes that no purpose is served by continuing to maintain copies of

guarantee agreements in its regional offices. The Commission further

believes that this amendment to Rule 1.10(c) will ease filing burdens

on IB applicants and record maintenance burdens on the Commission's

staff. The Commission received no comments specifically addressing this

issue and has determined to adopt the amendment to Rule 1.10(c) as

proposed.15

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\14\ The geographic coverage of jurisdiction of the Commission's

regional offices is set forth in 17 CFR 140.2 (1996).

\15\ The Commission has separately proposed further amendment of

Rule 1.10(c) as part of rule amendments concerning electronic filing

of financial reports and attestation requirements related thereto.

61 FR 55235 (Oct. 25, 1996).

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In addition, the Commission proposed to amend the financial

reporting

[[Page 4637]]

requirements to eliminate Rule 1.10(i). Rule 1.10(i) provides that an

IBI or an applicant which is also a country elevator can satisfy its

financial reporting obligation by filing, in lieu of filing a Form 1-

FR-IB, a copy of a compilation report of financial statements of

warehousemen for purposes of Uniform Grain Storage Agreements, prepared

in accordance with requirements of the U.S. Department of Agriculture.

This alternative filing provision was adopted when the Commission first

adopted rules to govern IBs in 1983 16 and has never been

utilized. No comments specifically addressed this issue. The Commission

believes that it is appropriate to delete this provision as a means of

streamlining and simplifying Rule 1.10. References to Rule 1.10(i) in

other Commission rules have likewise been eliminated.17

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\16\ 48 FR 35248, 35263, 35282 (Aug. 3, 1983).

\17\ See deletions of Rules 1.10(g)(3), 145.5(d)(1)(i)(G) and

147.3(b)(4)(i)(A)(7) as well as amendments to Rules 1.10(g)(5),

1.18(a) and (b), and 3.33(c)(1).

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II. Amendments to Debt-Equity Ratio Requirements

Commission Rule 1.17(d) sets forth the debt-equity ratio

requirement, which states that at least 30 percent of an FCM's or IBI's

required debt-equity total must consist of equity capital.18 Thus,

if an FCM's required debt-equity total amount is $1 million, it must

maintain equity capital as defined in the Commission's rules of

$300,000. No matter how much adjusted net capital is actually

maintained by an FCM or IBI, the thirty percent equity requirement

currently applies only to the amount of required debt-equity total.

Accordingly, if an FCM has a $1 million adjusted net capital

requirement and actually maintains $5 million in adjusted net capital

(i.e., it has $4 million in ``excess'' adjusted net capital), the

entire $4 million amount above the minimum requirement could consist of

debt subject to satisfactory subordination agreements in accordance

with Commission Rule 1.17(h).19

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\18\ In addition to certain subordinated debt as described more

fully below, equity capital includes the following:

(1) In the case of a corporation, the sum of its par or stated

value of capital stock, paid in capital in excess of par, retained

earnings, unrealized profit and loss, and other capital accounts;

(2) In the case of a partnership, the sum of its capital

accounts of partners (inclusive of such partners' commodity interest

and securities accounts subject to the provisions of Rule 1.17(e)

concerning restrictions on withdrawals of equity capital), and

unrealized profit and loss; and

(3) In the case of a sole proprietorship, the sum of its capital

accounts and unrealized profit and loss.

``Debt-equity total'' means equity capital as described above

plus the outstanding principal amount of subordinated debt which

does not qualify as equity capital. The ``required debt-equity

total'' means debt-equity total less the amount by which a firm's

adjusted net capital exceeds the minimum required. 17 CFR

1.17(d)(1996).

\19\ 17 CFR 1.17(h) (1996), as amended by 61 FR 19177, 19186-87

(May 1, 1996).

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When the Commission originally proposed what is now Rule 1.17(d) in

1977, the debt-equity ratio requirement was patterned upon the SEC rule

and would have applied to a firm's debt-equity total.20 However,

in response to comments that ``it would be inappropriate to penalize a

firm that maintains capital in the form of satisfactory subordination

agreements, which is in excess of the minimum required by the

regulations,'' the Commission revised its proposal. As adopted in 1978,

Rule 1.17(d) provides that the required debt-equity total to which the

30 percent equity capital requirement applies means a firm's debt-

equity total less its excess adjusted net capital.21

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\20\ 42 FR 27166, 27177 (May 26, 1977).

\21\ 43 FR 39956, 39965, 39976 (Sept. 8, 1978).

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Several of the panelists at the capital roundtable on September 18,

1995 urged the Commission to pursue greater harmonization between CFTC

and SEC financial rules and related reporting requirements and the

debt-equity ratio requirement was one area referred to in this regard.

The Commission also notes that the general international standard is to

apply the debt-equity ratio requirement to all of a firm's

capital.22 The Commission believes that it is important for its

rules to conform to international standards with respect to the quality

of capital.

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\22\ This is the recommendation of Working Party No. 3 of the

Technical Committee of the International Organization of Securities

Commissions (IOSCO). See Report of the Technical Committee of IOSCO,

``Capital Requirements for Multinational Securities Firms,'' XV

Annual Conference of IOSCO, Santiago, Chile 1990.

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Accordingly, in light of these developments and its own

reconsideration of the issue, the Commission determined to propose an

amendment to Rule 1.17(d) to require that the 30 percent debt-equity

ratio requirement apply to an FCM's or IBI's debt-equity total.23

In making this proposal, the Commission noted that a large proportion

of FCMs and IBIs are also securities brokers or dealers and thus

already subject to the SEC rule concerning the debt-equity

ratio.24

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\23\ 61 FR 7080, 7083-84, 7086.

\24\ The Commission also noted that the SEC definition of equity

capital does not include, in the case of a partnership, partners'

securities accounts. See 17 CFR 240.15c3-1(d)(1996).

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The Commission further noted that Rule 1.17(d)(1) provides that

certain subordinated debt may qualify as equity capital if specified

conditions are met, in addition to those which apply to subordinated

debt in general. These additional conditions are: (1) The lender must

be a partner or stockholder of the FCM or IBI; (2) the initial term of

the debt must be at least three years, and there must be a remaining

term of not less than twelve months; 25 (3) the governing

subordination agreement does not contain most of the otherwise

permissible provisions relating to accelerated maturity; (4) the

governing subordination agreement allows no special prepayment of the

debt (i.e., prepayment before one year from the date such subordination

agreement becomes effective); and (5) the debt in question is

maintained as equity capital subject to the provisions on withdrawal of

equity capital contained in Commission Rule 1.17(e). If a firm is

organized as a partnership, however, additional conditions (3) and (4)

need not be met for subordinated debt to qualify as equity capital, if

the partnership agreement provides that the capital contributed

pursuant to a satisfactory subordination agreement as defined in

Commission Rule 1.17(h) shall in all respects be partnership capital

subject to the provisions restricting the withdrawal thereof set forth

in Commission Rule 1.17(e).

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\25\ Subordinated debt entered into today with a maturity date

of December 31, 2000 could, therefore, qualify as equity capital if

all other requirements were met. On January 1, 2000, however, such

subordinated debt would no longer be counted as equity capital

unless an extension of the maturity date had been agreed to by the

parties, since the remaining term of the debt would be less than one

year at that time.

---------------------------------------------------------------------------

Eight commenters addressed this aspect of the Commission's

Proposals and all of them supported the amendment to Rule 1.17(d) to

require application of the 30 percent debt-equity ratio requirement to

a firm's debt-equity total. Based upon these comments and the

Commission's further consideration of this issue, the amendment to Rule

1.17(d) is being adopted as proposed.

The Commission also addressed another issue in connection with the

debt-equity ratio requirement in the Proposals, in response to a letter

submitted by the CME on behalf of the Intermarket Financial

Surveillance Group, an organization composed of representatives of U.S.

commodity and securities organizations. The CME letter, addressed to

the Commission's Division of Trading and Markets and dated October 31,

1995, supported the goal of conforming the rules of the Commission and

the SEC concerning the debt-equity

[[Page 4638]]

ratio requirement. CME also requested in that letter, and in a similar

letter of the same date to the SEC's Division of Market Regulation,

that the financial rules of each agency be amended such that goodwill

net of amortization could be subtracted from the denominator when a

firm calculates its debt-equity ratio.26 Since the SEC had not yet

made such a change in its rule and since the Commission's intention in

making its February 1996 proposal was to conform its rule to that of

the SEC concerning the debt-equity ratio requirement, the Commission

did not propose to incorporate the CME's request in the proposed

amendment to Rule 1.17(d). However, the Commission specifically

requested comment upon the CME's suggestion and whether the Commission

should adopt such a rule amendment in conjunction with or irrespective

of action taken by the SEC. The Commission also noted that its staff

would discuss this matter with staff of the SEC.

---------------------------------------------------------------------------

\26\ CME stated in its letters that it was making this request

because, by definition, goodwill is an intangible asset acquired in

a business combination which represents the excess ``going concern''

value over the fair value of a firm's net assets, it lacks

separability from the firm itself, and its value is often

indefinite, indeterminate and subject to wide fluctuation.

---------------------------------------------------------------------------

In addition to the CME, two other futures exchanges, the CBT and

the New York Mercantile Exchange (NYMEX), and an FCM supported

elimination of goodwill from the debt-equity calculation.27

However, the Securities Industry Association (SIA), the trade

association for securities firms, commented that it is not appropriate

for the Commission to subtract goodwill from the debt-equity

calculation because the number of firms reporting goodwill as an asset

is insignificant and to do so would create disparity with the SEC.

---------------------------------------------------------------------------

\27\ NYMEX stated that such an amendment should only be adopted

in conjunction with a similar amendment to the SEC's rule to assure

consistent treatment.

---------------------------------------------------------------------------

The Commission had noted, when it issued the Proposals, that

information provided by CME based upon studies of several SROs

indicated that the number of firms reporting goodwill as an asset was

quite small.28 The Commission understood that the original

requests concerning goodwill were made primarily in an effort to

accommodate certain large firms dually registered as FCMs and as

securities broker-dealers. Discussions between Commission staff and SEC

staff have revealed that the SEC continues to consider the matter but

an amendment to the SEC's rule in this area is not imminent. Further,

as noted above, the securities industry's trade association has

commented in opposition to the elimination of goodwill from the debt-

equity calculation. Accordingly, the Commission has determined not to

amend Rule 1.17(d) in this regard at this time. The Commission

nonetheless believes that if goodwill is reported as an asset the

better rule is to subtract it from the denominator when a firm

calculates its debt-equity ratio and the Commission intends to continue

to pursue this matter with the SEC.

---------------------------------------------------------------------------

\28\ 61 FR 7080, 7084.

---------------------------------------------------------------------------

III. Ongoing Process

The Commission's adoption of the amendments discussed herein and

its adoption of amendments in May 1996 29 accomplish the

Commission's short term goals arising out of the September 1995

roundtable on capital. Some of the other issues discussed at that

roundtable are necessarily longer term projects that will require

further study, such as whether the second prong of the current minimum

financial requirement, based upon four percent of the sum of segregated

customer funds and the secured amount, should be amended in an effort

to make an FCM's minimum adjusted net capital requirement reflect more

closely the risks to an FCM caused by carrying open positions. The

Commission intends to continue its consultation with industry

representatives and other interested parties concerning the minimum

financial and related reporting requirements.

---------------------------------------------------------------------------

\29\ These amendments covered (1) early warning reporting, (2)

required minimum dollar amount of capital, (3) prepayment of

subordinated debt, (4) gross collection of exchange-set margin for

omnibus accounts, and (5) the capital charge on receivables from

foreign brokers. 61 FR 19177.

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IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,

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

those rules on small businesses. The rule amendments adopted herein

would affect FCMs and IBIs. The Commission has previously determined

that, based upon the fiduciary nature of FCM/customer relationships, as

well as the requirement that FCMs meet minimum financial requirements,

FCMs should be excluded from the definition of small entity.30

---------------------------------------------------------------------------

\30\ See 47 FR 18618, 18619 (Apr. 30, 1982).

---------------------------------------------------------------------------

With respect to IBs, the Commission has stated that it is

appropriate to evaluate within the context of a particular rule

proposal whether some or all IBs should be considered to be small

entities and, if so, to analyze the economic impact on such entities at

that time.31 The amendments to Rules 1.10 and 1.18 relate to the

time within which financial reports must be filed and monthly financial

computations must be prepared. The requirements related to filing

certified financial reports as of the fiscal year end will not be

amended as proposed and the amendments being adopted to other

provisions of the rules are to be phased in over a period of

approximately one year so that firms can make any necessary

adjustments. In addition, the amendment to Rule 1.17(d) for an IBI

conforms the Commission's requirement to that of the SEC. More than

one-third of the IBIs are also subject to the jurisdiction of the SEC

and therefore the amendment to Rule 1.17(d) should have no impact on

the financial operations of these IBIs. Thus, the Chairperson certifies

that these amendments should not have a significant economic impact on

a substantial number of small entities.

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\31\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).

---------------------------------------------------------------------------

B. Paperwork Reduction Act

When publishing final rules, the Paperwork Reduction Act of 1995

(Pub. L. 104-13 (May 13, 1995)) imposes certain requirements on federal

agencies (including the Commission) in connection with their conducting

or sponsoring any collection of information as defined by the Paperwork

Reduction Act. In compliance with the Act, this final rule informs the

public of:

(1) The reasons the information is planned to be and/or has been

collected; (2) the way such information is planned to be and/or has

been used to further the proper performance of the functions of the

agency; (3) an estimate, to the extent practicable, of the average

burden of the collection (together with a request that the public

direct to the agency any comments concerning the accuracy of this

burden estimate and any suggestions for reducing this burden); (4)

whether responses to the collection of information are voluntary,

required to obtain or retain a benefit, or mandatory; (5) the nature

and extent of confidentiality to be provided, if any; and (6) the

fact that 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 OMB control number.

On February 26, 1996, the Commission published proposed rules

dealing with this matter stating that the information collection burden

would be unchanged if the rules were adopted as proposed. However,

because the Commission has determined, in response to comments on the

Proposals, to leave unchanged the filing requirement for the certified

financial report due as of the fiscal year end and

[[Page 4639]]

to explicitly require an uncertified financial report as of the last

quarter, the paperwork burden under Rule 1.10 will increase.

The Commission has submitted this rule and its associated

information collection requirements to the Office of Management and

Budget. The burden associated with this entire collection (3038-0024),

including this final rule, is as follows:

Average burden hours per response: 18.00.

Number of Respondents: 1,662.00.

Frequency of response: 19.00.

The burden associated with this specific final rule is as follows:

Average burden hours per response: 4.00.

Number of Respondents: 500.00.

Frequency of response: 9.00.

Persons wishing to comment on the information required by this

final rule should contact the Desk Officer, CFTC, Office of Management

and Budget, Room 10202, NEOB, Washington, DC 20503, (202) 395-7340.

Copies of the information collection submission to OMB are available

from the CFTC Clearance Officer, 1155 21st Street N.W., Washington, DC

20581, (202) 418-5160.

List of Subjects

17 CFR Part 1

Commodity futures, Minimum financial requirements.

17 CFR Part 3

Commodity futures, Reporting and recordkeeping requirements.

17 CFR Part 145

Freedom of information, Exceptions.

17 CFR Part 147

Sunshine Act, Exceptions.

In consideration of the foregoing and pursuant to the authority

contained in the Commodity Exchange Act and, in particular, Sections

4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), 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,

6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,

12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

2. Section 1.10 is amended by revising paragraphs (a)(2)(i)(A) and

(B), (a)(2)(ii)(A) and (B), (a)(3)(i), (a)(3)(ii)(A), (b)(1),

(b)(2)(i), (b)(2)(ii)(A), (c) and (d)(2)(v), by redesignating paragraph

(d)(2)(vi) as paragraph (d)(2)(vii) and by adding a new paragraph

(d)(2)(vi), by revising paragraphs (d)(3), (f) heading, and (f)(1), by

removing and reserving paragraph (g)(3), by revising paragraph (g)(5),

by removing and reserving paragraph (i), and by revising paragraphs

(j)(8)(i)(B) and (j)(8)(ii)(B) to read as follows:

Sec. 1.10 Financial reports of futures commission merchants and

introducing brokers.

(a) * * *

(2) * * *

(i) * * *

(A) A Form 1-FR-FCM certified by an independent public accountant

in accordance with Sec. 1.16 as of a date not more than 45 days prior

to the date on which such report is filed; or

(B) A Form 1-FR-FCM as of a date not more than 17 business days

prior to the date on which such report is filed and a Form 1-FR-FCM

certified by an independent public accountant in accordance with

Sec. 1.16 as of a date not more than 1 year prior to the date on which

such report is filed.

* * * * *

(ii) * * *

(A) A Form 1-FR-IB certified by an independent public accountant in

accordance with Sec. 1.16 as of a date not more than 45 days prior to

the date on which such report is filed; or

(B) A Form 1-FR-IB as of a date not more than 17 business days

prior to the date on which such report is filed and a Form 1-FR-IB

certified by an independent public accountant in accordance with

Sec. 1.16 as of a date not more than 1 year prior to the date on which

such report is filed; or

* * * * *

(3)(i) The provisions of paragraph (a)(2) of this section do not

apply to any person succeeding to and continuing the business of

another futures commission merchant. Each such person who files an

application for registration as a futures commission merchant and who

is not so registered in that capacity at the time of such filing must

file a Form 1-FR-FCM as of the first month end following the date on

which his registration is approved. Such report must be filed with the

National Futures Association, the Commission and the designated self-

regulatory organization, if any, not more than 17 business days after

the date for which the report is made.

(ii) * * *

(A) Each such person who succeeds to and continues the business of

an introducing broker which was not operating pursuant to a guarantee

agreement, or which was operating pursuant to a guarantee agreement and

was also a securities broker or dealer at the time of succession, who

files an application for registration as an introducing broker, and who

is not so registered in that capacity at the time of such filing, must

file with the National Futures Association either a guarantee agreement

with his application for registration or a Form 1-FR-IB as of the first

month end following the date on which his registration is approved.

Such Form 1-FR-IB must be filed not more than 17 business days after

the date for which the report is made.

* * * * *

(b) Filing of financial reports. (1)(i) Except as provided in

paragraphs (b)(3) and (h) of this section, each person registered as a

futures commission merchant must file a Form 1-FR-FCM for each fiscal

quarter of each fiscal year, including the final fiscal quarter of each

fiscal year, unless the futures commission merchant elects, pursuant to

paragraph (e)(2) of this section, to file a Form 1-FR-FCM for each

calendar quarter of each calendar year, including the final calendar

quarter of each calendar year. Each Form 1-FR-FCM must be filed no

later than 17 business days after the date for which the report is

made: Provided, however, That for each fiscal or calendar quarter

ending between June 30, 1997 and December 31, 1997, inclusive, each

Form 1-FR-FCM must be filed no later than 30 calendar days after the

date for which the report is made.

(ii) In addition to the financial reports required by paragraph

(b)(1)(i) of this section, each person registered as a futures

commission merchant must file a Form 1-FR-FCM as of the close of its

fiscal year (even if it files quarterly reports as of each calendar

quarter) which must be certified by an independent public accountant in

accordance with Sec. 1.16 no later than 90 days after the close of each

futures commission merchant's fiscal year: Provided, however, that a

registrant which is registered with the Securities and Exchange

Commission as a securities broker or dealer must file this report not

later than the time permitted for filing an annual audit report under

Sec. 240.17a-5(d)(5) of this title.

(2)(i) Except as provided in paragraphs (b)(3) and (h) of this

section, and except for an introducing broker operating pursuant to a

guarantee agreement which is not also a securities broker or dealer,

each person registered as an introducing broker must file a Form 1-FR-

IB semiannually as of the

[[Page 4640]]

middle and the close of each fiscal year unless the introducing broker

elects pursuant to paragraph (e)(2) of this section to file a Form 1-

FR-IB semiannually as of the middle and the close of each calendar

year. Each Form 1-FR-IB must be filed no later than 17 business days

after the date for which the report is made: Provided, however, That

for each reporting period ending between June 30, 1997 and December 31,

1997, inclusive, each Form 1-FR-IB must be filed no later than 30

calendar days after the date for which the report is made.

(ii) (A) In addition to the financial reports required by paragraph

(b)(2)(i) of this section, each person registered as an introducing

broker must file a Form 1-FR-IB as of the close of its fiscal year

(even if it files semiannual reports on a calendar year basis) which

must be certified by an independent public accountant in accordance

with Sec. 1.16 no later than 90 days after the close of each

introducing broker's fiscal year: Provided, however, that a registrant

which is registered with the Securities and Exchange Commission as a

securities broker or dealer must file this report not later than the

time permitted for filing an annual audit report under Sec. 240.17a-

5(d)(5) of this title.

* * * * *

(c) Where to file reports. The reports provided for in this section

will be considered filed when received by the regional office of the

Commission nearest the principal place of business of the registrant

(except that a registrant under the jurisdiction of the Commission's

Western Regional Office must file such reports with the South-western

Regional Office) and by the designated self-regulatory organization, if

any; and reports required to be filed by this section by an applicant

for registration will be considered filed when received by the National

Futures Association and by the regional office of the Commission

nearest the principal place of business of the applicant (except that

an applicant under the jurisdiction of the Commission's Western

Regional Office must file such reports with the South western Regional

Office): Provided, however, That information required of a registrant

pursuant to paragraph (b)(4) of this section need be furnished only to

the self-regulatory organization requesting such information and the

Commission, and that information required of an applicant pursuant to

paragraph (b)(4) of this section need be furnished only to the National

Futures Association and the Commission: And, provided further, That any

guarantee agreement entered into between a futures commission merchant

and an introducing broker in accordance with the provisions of this

section need be filed only with and will be considered filed when

received by the National Futures Association.

(d) * * *

(2) * * *

(v) Appropriate footnote disclosures;

(vi) A reconciliation, including appropriate explanations, of the

statement of the computation of the minimum capital requirements

pursuant to Sec. 1.17 and, for a futures commission merchant only, the

statements of segregation requirements and funds in segregation for

customers trading on U.S. commodity exchanges and for customers' dealer

option accounts, and the statement of secured amounts and funds held in

separate accounts for foreign futures and foreign options customers in

accordance with Sec. 30.7 of this chapter, in the certified Form 1-FR

with the applicant's or registrant's corresponding uncertified most

recent Form 1-FR filing when material differences exist or, if no

material differences exist, a statement so indicating; and

* * * * *

(3) The statements required by paragraphs (d)(2)(i) and (d)(2)(ii)

of this section may be presented in accordance with generally accepted

accounting principles in the certified reports filed as of the close of

the registrant's fiscal year pursuant to paragraphs (b)(1)(ii) or

(b)(2)(ii) of this section or accompanying the application for

registration pursuant to paragraph (a)(2) of this section, rather than

in the format specifically prescribed by these regulations: Provided,

the statement of financial condition is presented in a format as

consistent as possible with the Form 1-FR and a reconciliation is

provided reconciling such statement of financial condition to the

statement of the computation of the minimum capital requirements

pursuant to Sec. 1.17. Such reconciliation must be certified by an

independent public accountant in accordance with Sec. 1.16.

* * * * *

(f) Extension of time for filing uncertified reports. (1) In the

event a registrant finds that it cannot file its report for any period

within the time specified in paragraphs (b)(1)(i), (b)(2)(i) or (b)(4)

of this section or Sec. 1.12(b) without substantial undue hardship, it

may file with the principal office of the Commission in Washington,

D.C., an application for an extension of time to a specified date which

may not be more than 90 days after the date as of which the financial

statements were to have been filed. The application must state the

reasons for the requested extension and must contain an agreement to

file the report on or before the specified date. The application must

be received by the Commission before the time specified in paragraphs

(b)(1)(i), (b)(2)(i) or (b)(4) of this section or Sec. 1.12(b) for

filing the report. Notice of such application must be given to the

designated self-regulatory organization, if any, concurrently with the

filing of such application with the Commission. Within ten calendar

days after receipt of the application for an extension of time, the

Commission shall: (i) Notify the registrant of the grant or denial of

the requested extension; or (ii) indicate to the registrant that

additional time is required to analyze the request, in which case the

amount of time needed will be specified. (See Sec. 1.16(f) for

extension of the time for filing certified financial statements.)

* * * * *

(g) * * *

(3) [Reserved]

* * * * *

(5) The independent accountant's opinion and a guarantee agreement

filed pursuant to this section will be deemed public information.

* * * * *

(i) [Reserved]

(j) * * *

(8) * * *

(i) * * *

(B) 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

Sec. 1.16 as of a date not more than one year prior to the date on

which the report is filed.

* * * * *

(ii) * * *

(B) 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

Sec. 1.16 as of a date not more than one year prior to the date on

which the report is filed.

* * * * *

3. Section 1.12 is amended by revising paragraph (b)(4) to read as

follows:

Sec. 1.12 Maintenance of minimum financial requirements by futures

commission merchants and introducing brokers.

* * * * *

(b) * * *

(4) For securities brokers or dealers, the amount of net capital

specified in Rule 17a-11(b) of the Securities and Exchange Commission

(17 CFR

[[Page 4641]]

240.17a-11(b)), must file written notice to that effect as set forth in

paragraph (g) of this section within five (5) business days of such

event. Such applicant or registrant must also file a Form 1-FR-FCM (or,

if such applicant or registrant is registered with the Securities and

Exchange Commission as a securities broker or dealer, it may file, in

accordance with Sec. 1.10(h), a copy of its Financial and Operational

Combined Uniform Single Report under the Securities Exchange Act of

1934, Part II, in lieu of Form 1-FR-FCM) or such other financial

statement designated by the National Futures Association, in the case

of an applicant, or by the Commission or the designated self-regulatory

organization, if any, in the case of a registrant, as of the close of

business for the month during which such event takes place and as of

the close of business for each month thereafter until three (3)

successive months have elapsed during which the applicant's or

registrant's adjusted net capital is at all times equal to or in excess

of the minimums set forth in this paragraph (b) which are applicable to

such applicant or registrant. Each financial statement required by this

paragraph (b) must be filed within 17 business days after the end of

the month for which such report is being made: Provided, however, That

for each month ending between June 30, 1997 and December 31, 1997,

inclusive, for which a financial statement is required by this

paragraph (b), such financial statement must be filed within 30

calendar days after the end of the month for which such report is being

made.

* * * * *

4. Section 1.17 is amended by revising the introductory text of

paragraph (d) and by removing paragraph (d)(3) to read as follows:

Sec. 1.17 Minimum financial requirements for futures commission

merchants and introducing brokers.

* * * * *

(d) Each applicant or registrant shall have equity capital

(inclusive of satisfactory subordination agreements which qualify under

this paragraph (d) as equity capital) of not less than 30 percent of

the debt-equity total, provided, an applicant or registrant may be

exempted from the provisions of this paragraph (d) for a period not to

exceed 90 days or for such longer period which the Commission may, upon

application of the applicant or registrant, grant in the public

interest or for the protection of investors. For the purposes of this

paragraph (d):

* * * * *

5. Section 1.18 is amended by revising paragraphs (a) and (b) to

read as follows:

Sec. 1.18 Records for and relating to financial reporting and monthly

computation by futures commission merchants and introducing brokers.

(a) No person shall be registered as a futures commission merchant

or as an introducing broker under the Act unless, commencing on the

date his application for such registration is filed, he prepares and

keeps current ledgers or other similar records which show or summarize,

with appropriate references to supporting documents, each transaction

affecting his asset, liability, income, expense and capital accounts,

and in which (except as otherwise permitted in writing by the

Commission) all his asset, liability and capital accounts are

classified into either the account classification subdivisions

specified on Form 1-FR-FCM or Form 1-FR-IB, respectively, or, if such

person is registered with the Securities and Exchange Commission as a

securities broker or dealer and he files (in accordance with

Sec. 1.10(h)) a copy of his Financial and Operational Combined Uniform

Single Report under the Securities Exchange Act of 1934, Part II or

Part IIA, in lieu of Form 1-FR-FCM or Form 1-FR-IB, the account

classification subdivisions specified on such Report, or categories

that are in accord with generally accepted accounting principles. Each

person so registered shall prepare and keep current such records.

(b) Each applicant or registrant must make and keep as a record in

accordance with Sec. 1.31 formal computations of its adjusted net

capital and of its minimum financial requirements pursuant to Sec. 1.17

or the requirements of the designated self-regulatory organization to

which it is subject as of the close of business each month. An

applicant or registrant which is also registered as a securities broker

or dealer with the Securities and Exchange Commission may meet the

computation requirements of this paragraph (b) by completing the

Statement of Financial and Operational Combined Uniform Single Report

under the Securities Exchange Act of 1934, Part II or Part IIA. Such

computations must be completed and made available for inspection by any

representative of the National Futures Association, in the case of an

applicant, or of the Commission or designated self-regulatory

organization, if any, in the case of a registrant, within 17 business

days after the date for which the computations are made, commencing the

first month end after the date the application for registration is

filed: Provided, however, That for each month ending between June 30,

1997 and December 31, 1997, inclusive, such computations must be

completed and made available for inspection within 30 calendar days

after the date for which the computations are made.

* * * * *

6. Section 1.52 is amended by revising paragraph (a) to read as

follows:

Sec. 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. 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 Secs. 1.10

and 1.17 and the definition of adjusted net capital must be the same as

that prescribed in Sec. 1.17(c): 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 Sec. 1.10(h)) a copy of

their Financial and Operational Combined Uniform Single Report under

the Securities Exchange Act of 1934, Part II or Part IIA, 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.

* * * * *

PART 3--REGISTRATION

7. The authority citation for Part 3 is revised to read as follows:

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 4, 4a, 6, 6a, 6b,

6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6o, 6p, 8, 9, 9a, 12, 12a, 13b,

13c, 16a, 18, 19, 21, 23.

[[Page 4642]]

Subpart A--Registration

8. Section 3.33 is amended by revising paragraph (c)(1) to read as

follows:

Sec. 3.33 Withdrawal from registration.

* * * * *

(c)(1) Where a futures commission merchant or an introducing broker

which is not operating pursuant to a guarantee agreement is requesting

withdrawal from registration in that capacity and the basis for

withdrawal under paragraph (a)(1) of this section is that it has ceased

engaging in activities requiring registration, the request for

withdrawal must be accompanied by a Form 1-FR-FCM or a Form 1-FR-IB,

respectively, which contains the information specified in

Sec. 1.10(d)(1) of this chapter as of a date not more than 30 days

prior to the date of the withdrawal request: Provided, however, That if

such registrant is also registered with the Securities and Exchange

Commission as a securities broker or dealer, it may file a copy of its

Financial and Operational Combined Uniform Single Report under the

Securities Exchange Act of 1934, Part II or Part IIA (in accordance

with Sec. 1.10(h) of this chapter), in lieu of Form 1-FR-FCM or Form 1-

FR-IB. Any financial report submitted pursuant to this paragraph (c)(1)

must contain the information specified in Sec. 1.10(d)(1) of this

chapter as of a date not more than 30 days prior to the date of the

withdrawal request.

* * * * *

PART 145--COMMISSION RECORDS AND INFORMATION

9. The authority citation for Part 145 continues to read as

follows:

Authority: Pub. L. 89-554, 80 Stat. 383, Pub. L. 90-23, 81 Stat.

54, Pub. L. 93-502, 88 Stat. 1561-1564 (5 U.S.C. 552); Sec. 101(a),

Pub. L. 93-463, 88 Stat. 1389 (5 U.S.C. 4a(j)); Pub. L. 99-570,

unless otherwise noted.

Sec. 145.5 [Amended]

10. Section 145.5 is amended by removing and reserving paragraph

(d)(1)(i)(G).

PART 147--OPEN COMMISSION MEETINGS

11. The authority citation for Part 147 continues to read as

follows:

Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

552b); Sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

4a(j) (Supp. V 1975)), unless otherwise noted.

Sec. 147.3 [Amended]

12. Section 147.3 is amended by removing and reserving paragraph

(b)(4)(i)(A)(7).

Issued in Washington, D.C. on January 21, 1997 by the

Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97-2251 Filed 1-30-97; 8:45 am]

BILLING CODE 6351-01-P