Financial Reports of Futures Commission Merchants, Introducing Brokers and Leverage Transaction Merchants

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 31

Financial Reports of Futures Commission Merchants, Introducing

Brokers and Leverage Transaction Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

``Commission'') is amending its Rule 1.10(d)(4), which requires that

each Form 1-FR filed with the Commission contain an oath or affirmation

attesting that, to the best knowledge and belief of the individual

making such oath or affirmation, the information contained therein is

true and correct. The amended rule provides that, for the purposes of

making this attestation when filing a financial report with the

Commission electronically, the use of a personal identification number

(``PIN'') will be deemed to be the equivalent of a manual

signature.1 The Commission also is amending Rule 1.10(c) to

account for the possibility that registrants may choose to file certain

financial reports electronically using a Commission issued PIN rather

than filing such reports in paper form with the regional office of the

Commission nearest the principal place of business of the registrant.

Rule 1.10(c) will permit electronic filing of financial reports that

are not required to be certified by an independent public accountant

provided that the Commission obtains the means to read and process the

electronically transmitted data.2 The Commission also is adding

Rule 1.10(b)(2)(iii) to clarify that certified financial reports may

not be filed electronically.

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\1\ Commission Rule 1.10(h) permits registrants that are also

registered as securities broker-dealers with the Securities and

Exchange Commission to file a copy of their Financial and

Operational Combined Uniform Single Report (``FOCUS'') with the

Commission in lieu of Form 1-FR. The amendments discussed herein are

intended to apply equally to registrants who file Form 1-FR or FOCUS

with the Commission.

\2\ The Commission currently is involved in discussions with the

Chicago Mercantile Exchange (``CME'') to obtain the electronic

filing software co-developed by CME and the Chicago Board of Trade

(``CBT'') and used by CME, CBT and their members.

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In addition, the Commission is amending Rules 1.10(g) and 31.13(m)

to clarify that certain portions of the financial reports will be

deemed public and other portions nonpublic, and to eliminate the

requirement that firms filing financial reports need to separately bind

portions of such reports generally treated as nonpublic in order for

such portions of the reports to be accorded nonpublic treatment.

EFFECTIVE DATE: April 7, 1997.

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

Counsel, or Lawrence T. Eckert, Attorney Adviser, Division of Trading

and Markets, Commodity Futures Trading Commission, 1155 21st Street,

N.W., Washington D.C. 20581. Telephone (202) 418-5450.

SUPPLEMENTARY INFORMATION:

I. Background

On October 25, 1996, the Commission published for comment proposed

amendments to Rule 1.10 (the ``Proposals''),3 which sets forth the

financial reporting requirements for futures commission merchants

(``FCMs'') and independent introducing brokers (``IBIs'').4 Rule

1.10 requires

[[Page 10442]]

generally that FCMs file with the Commission financial reports on Form

1-FR-FCM each quarter and that IBIs file financial reports on Form 1-

FR-IB semiannually.5 The Proposals consisted of several amendments

concerning the electronic filing of such financial reports, as well as

the treatment of the various portions of financial reports as either

public or nonpublic, whether filed electronically or in paper form.

Specifically, the Proposals: (1) provide that for the purposes of

making the attestation under Rule 1.10(d)(4) as to the truth and

correctness of information contained in electronically filed financial

reports, the use of a PIN would be deemed to be the equivalent of a

manual signature; 6 (2) account for the possibility that

registrants may choose to file electronically financial reports which

need not be certified by an independent public accountant; (3) clarify

that certified financial reports may not be filed electronically; (4)

clarify that certain portions of the financial reports will be deemed

public and other portions nonpublic; and (5) eliminate the requirement

that firms filing financial reports bind separately the portions of

such reports generally treated as nonpublic in order for such portions

of the reports to be accorded nonpublic treatment.

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\3\ 61 FR 55235.

\4\ Approximately two-thirds of introducing brokers enter into a

guarantee agreement with an FCM and thus are not required to raise

their own regulatory capital or file financial reports.

\5\ The Commission recently adopted amendments to certain of its

financial reporting requirements for FCMs and IBIs, including time

requirements for filing Form 1-FR. See 62 FR 4633 (Jan. 31, 1997).

\6\ See also, CFTC Interpretative Letter 96-21, [1994-1996

Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,633 (Feb. 29,

1996) (no-action letter issued to the CBT concerning the attestation

of financial reports where an FCM is organized as a partnership);

Advisory 12-96, reprinted as CFTC Advisory 96-21 in [1994-1996

Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,640 (March 8,

1996) (making relief provided to CBT available to all FCMs, IBIs and

self-regulatory organizations (``SROs'')); Advisory 28-96, [1994-

1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,711 (May 28,

1996) (alerting FCMs, IBs and SROs that to the extent that any SRO

program for electronic filing of financial reports approved by the

Commission does not require a manual signature for purposes of

attestation, the use of a PIN would be deemed to be the equivalent

of a manual signature for purposes of attestation under Commission

Rule 1.10(d)(4)).

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

November 25, 1996. The Commission received one written comment on the

Proposals, submitted by National Futures Association (``NFA''). In

general, NFA noted its strong support for the Commission's Proposals to

allow FCMs and IBIs to file certain financial reports electronically,

but requested that the Commission clarify and revise certain aspects of

the proposed amendments. The Commission has considered carefully the

comments received from NFA. The Commission has determined to adopt the

amendments as proposed with one minor modification. Amended Rule

1.10(c) now clarifies that, while the Commission intends to permit the

electronic filing of noncertified financial reports, it will permit

such electronic filing only after such time as the Commission obtains

the necessary computer software to read and process the electronically

transmitted data. The Commission also has clarified various matters

relevant to the operation of the amended rules in the discussion below.

II. Rule Amendments

A. Electronic Filing Issues

The Commission proposed to amend Rule 1.10(d)(4) such that the use

of a PIN in filing a Form 1-FR pursuant to Rule 1.10 will be deemed to

be the equivalent of a manual signature under the rule. The Commission

did not receive any comments concerning the language of this proposed

amendment and is adopting the provision as proposed. The amended rule,

therefore, makes clear that the transmission of a financial report to

the Commission or an SRO under a PIN constitutes a representation that

the person whose PIN is used in such transmission attests that, to the

best knowledge and belief of that person, the information contained in

the financial report is true, correct and complete.7 The

Commission hopes that this amendment will encourage and facilitate the

process of electronic filing of such reports with the Commission but

notes that, while it encourages the use of the electronic filing

option, the amendments do not mandate electronic filing with the

Commission.8

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\7\ Commission Rule 1.10(c) provides that financial reports must

be filed with the Commission and the firm's designated self-

regulatory organization (``DSRO'').

\8\ The Commission may determine to require electronic filing at

some later period, but believes such a requirement would be

premature at this time. The Commission also encourages the industry

to develop a system of electronic filing of financial reports that

will provide for the development of a uniform database of financial

information with the least burden upon filers, SROs and the

Commission.

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In the Proposals, the Commission noted that it intends to adopt

procedures for issuing PINs to facilitate electronic filing with the

Commission consistent with the procedure currently in use by SROs such

as CBT and the CME.9 In this regard, NFA stated in its comment

letter that it fully supports the use of PINs as described in the

Proposals. However, NFA recommended that, with respect to those firms

that are members of an SRO, the Commission should permit the

registrant's SRO to assign one PIN to be used by the registrant to file

financial reports with both the Commission and the firm's DSRO. Thus,

the Commission could avoid the situation where a registrant would need

to use multiple PINs to file electronically. NFA stated its belief that

such a situation could be a disincentive to filing electronically with

the Commission. The Commission has discussed this issue with CME, which

did not provide a written comment on this issue, but would be affected

along with the other exchanges by adoption of NFA's proposal. CME

stated that, for security reasons, each entity receiving an

electronically filed financial report should assign a unique PIN to

each filer. If a PIN is too widely known, an issue arises as to the

value of the use of the PIN for attestation purposes. Additionally, CME

noted that the software used by FCMs would have to be modified in order

to allow the PIN number currently used with the exchange also to be

used when filing with the Commission. Finally, as NFA's proposed

electronic filing system is evolving, it appears that there may not be

a need for the Commission to have a PIN for firms for which NFA is the

DSRO. NFA is proposing to have the firms for which it is the DSRO file

financial reports directly with NFA. Under this framework, NFA would

then transmit the electronically filed reports to the Commission. In

light of the foregoing, the Commission anticipates that it will issue

unique PINs to FCMs that choose to file their financial reports with

the Commission electronically.

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\9\ 61 FR 55235, at 55236.

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The Commission also proposed to add new Rule 1.10(b)(2)(iii) and to

amend paragraph (c) of Rule 1.10 to provide certain clarifications

regarding the Commission's electronic filing program. New Rule

1.10(b)(2)(iii), as set forth in the Proposals, clarified that firms

may not file electronically their certified financial reports, which

must accompany the application for registration and be submitted as of

each fiscal year-end following registration. The amendment to Rule

1.10(c) clarified that a registrant may file non-certified financial

reports via electronic transmission using a Commission issued PIN in

accordance with instructions issued by the Commission. NFA requested

that the Commission delete the proposed addition of Rule

1.10(b)(2)(iii) as well as the reference in the proposed amendment to

Rule 1.10(c) with respect to ``reports which need not be certified * *

*.'' NFA acknowledged that technology does not yet permit the

electronic filing of a complete certified report, but recommended that

the Commission include any electronic

[[Page 10443]]

filing restrictions in the instructions to the forms to be filed rather

than in Rule 1.10 itself, in order to accommodate future technology.

The Commission believes that references to filing restrictions in the

rules themselves promote clarity. Should the Commission wish to permit

the filing of certified financial reports in order to accommodate new

technology as it becomes available, the Commission could readily amend

Rule 1.10 to account for such change. Accordingly, the Commission is

adopting new Rule 1.10(b)(2)(iii) as proposed. The Commission is,

however, making one minor modification to the proposed amendment to

Rule 1.10(c). As adopted, amended Rule 1.10(c) clarifies that the

Commission's electronic filing program will begin only if the

Commission can obtain the computer software necessary to read and to

process the data contained in the electronically filed reports. The

Commission wishes to avoid a situation in which registrants would be

required to use software to file their financial reports with the

Commission that is different from the software used to file such

reports with their DSRO. As noted above, the Commission currently is

engaged in discussions with CME in an attempt to obtain the computer

software co-developed by CME and CBT and used by CME, CBT and their

members as part of CME's and CBT's electronic filing programs.

The Commission further noted in the Proposals that, at the outset

of its electronic filing program, firms filing non-certified financial

reports electronically must continue to file a paper report with the

appropriate regional office of the Commission. The Commission explained

that, following some experience with electronic transmission of

financial data (the ``Pilot Period''), it may be permissible for firms

to submit non-certified financial reports to the Commission solely via

electronic transmission. In this regard, NFA encouraged the Commission

to keep its Pilot Period with respect to its electronic filing program

brief, stating that firms have little incentive to file with the

Commission electronically if they also are required to file their

reports in paper form. NFA also requested that the Commission clarify

that the Pilot Period is intended for the Commission to gain experience

with the electronic filing program itself and is not meant to serve as

a testing period for each individual firm's use of the system. The

Commission shares NFA's views on these points and anticipates

permitting firms to file their non-certified financial reports solely

via electronic transmission as quickly as practicable, given an

adequate time period in which the Commission can gain experience with

the electronic filing program. At the conclusion of its Pilot Period,

the Commission intends to change its instructions regarding filing to

eliminate the requirement that a firm file a paper copy of its

financial report in addition to filing such report electronically. The

Commission does not anticipate that additional rulemaking would be

necessary to accomplish this.

B. Freedom of Information Act Issues

In the Proposals, the Commission noted that, consistent with

current practice, the Commission intends to respond to a Freedom of

Information Act (``FOIA'') request for a financial report that was

filed with the Commission solely by electronic transmission by printing

a paper copy of the responsive public data and forwarding it to the

requestor. The data which the Commission would print and forward to the

requestor would be the public portions of a Form 1-FR. Commission Rule

1.10(g) provides that these public portions are, for FCMs and IBIs, the

statement of financial condition and the statement of the computation

of the minimum capital requirements, and, in addition, for FCMs only,

the statements concerning segregation of customer funds and the secured

amount for foreign futures and option customers. The proposed

amendments to Rule 1.10(g) would reconfirm the current demarcation as

to which portions of the Form 1-FR are generally treated as public and

nonpublic and eliminate the need for firms to use a separate binding

procedure to receive such treatment for their reports, whether reports

are filed in paper form or electronically. The Commission received no

comments with respect to the proposed amendments to Rule 1.10(g)

10 and is adopting them as proposed.

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\10\ Although there are currently no registered leverage

transaction merchants (``LTMs''), the Commission is also amending

Rule 31.13(m) which currently provides for a separate binding

procedure similar to that set forth in Rule 1.10(g) with respect to

LTMs submitting financial reports on Form 2-FR.

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The Commission has proposed to clarify, in a separate release, its

rules under FOIA and the Government in the Sunshine Act (``GINSA'') in

order to, among other things: (1) reaffirm that certain portions of the

Form 1-FR are generally public and the remainder are nonpublic; and (2)

state that it will no longer process petitions for confidential

treatment of the generally public portions of a Form 1-FR.11 The

amendments to Rule 1.10(g)(1) and(2) 12 are intended to complement

these proposed amendments of the FOIA and GINSA rules and to eliminate

a burden on firms to bind separately certain portions of a Form 1-FR to

assure nonpublic treatment.

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\11\ 61 FR 66949 (Dec. 19, 1996).

\12\ The Commission has removed and reserved paragraph (g)(3)

and revised paragraph (g)(5) of Rule 1.10. 62 FR 4633, 4637 and

n.17, 4640. The amendments discussed herein do not interfere with or

require further amendment of those earlier amendments.

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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 rules discussed herein will affect

FCMs, LTMs and IBIs. The Commission already has established certain

definitions of ``small entities'' to be used by the Commission in

evaluating the impact of its rules on such small entities in accordance

with the RFA.13 FCMs and LTMs 14 have been determined not to

be small entities under the RFA.

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\13\ 47 FR 18618-18621 (April 30, 1982).

\14\ See 50 FR 102, 108 n.11 (Jan. 2, 1985).

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With respect to IBIs, 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.15 These rule amendments do not require any IBI to

submit financial reports electronically but only govern the attestation

of the completeness and accuracy of such reports so filed. Presumably,

an IBI would choose to file a financial report electronically only if

it were cost-effective to do so. These rule amendments should impose no

additional burden or requirements on an IBI and thus would not have a

significant economic impact on a substantial number of IBIs.

Accordingly, pursuant to Rule 3(a) of the RFA, 5 U.S.C. 605(b), the

Chairperson, on behalf of the Commission, certifies that these

amendments will not have a significant economic impact on a substantial

number of small entities.

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\15\ See 48 FR 35248, 35275-78 (Aug. 3, 1983).

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B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA), 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

[[Page 10444]]

information as defined by the PRA. While these rule amendments have no

burden, the group of rules (3038-0024) of which they are a part has the

following burden:

Average Burden Hours Per Response: 128.

Number of Respondents: 3,988.

Frequency of Response: Quarterly, Monthly or On Occasion.

Copies of the OMB approved information collection package may be

obtained from Desk Officer, CFTC, Office of Management and Budget, Room

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

List of Subjects

17 CFR Part 1

Commodity futures; Minimum financial and related reporting

requirements.

17 CFR Part 31

Leverage transactions; Reporting and recordkeeping requirements.

In consideration of the foregoing, and pursuant to the authority

contained in the Commodity Exchange Act, and in partic ular, Sections

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

hereby amends parts 1 and 31 of 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, 6m, 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 adding paragraph (b)(2)(iii) and

revising paragraphs (c), (d)(4), (g)(1) and (g)(2) to read as follows:

Sec. 1.10 Financial reports of futures commission merchants and

introducing brokers.

* * * * *

(b) * * *

(2) * * *

(iii) A Form 1-FR required to be certified by an independent public

accountant in accordance with Sec. 1.16 which is filed by a futures

commission merchant, an introducing broker or an applicant for

registration in either category, must be filed in paper form and may

not be filed electronically.

* * * * *

(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 Southwestern

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 Southwestern Regional

Office): Provided, however, That any report filed pursuant to

paragraphs (b)(1), (b)(2) or (b)(4) of this section or Sec. 1.12(a) or

(b) which need not be certified in accordance with Sec. 1.16 may be

submitted to the Commission in electronic form using a Commission-

assigned Personal Identification Number, and otherwise in accordance

with instructions issued by the Commission, if the Commission has

obtained the means necessary to read and to process the information

contained in such report: And, provided further, 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) * * *

(4) Attached to each Form 1-FR filed pursuant to this section must

be an oath or affirmation that to the best knowledge and belief of the

individual making such oath or affirmation the information contained in

the Form 1-FR is true and correct. If the applicant or registrant is a

sole proprietorship, then the oath or affirmation must be made by the

proprietor; if a partnership, by a general partner; or if a

corporation, by the chief executive officer or chief financial officer.

In the case of a Form 1-FR filed via electronic transmission in

accordance with procedures established by the Commission, such

transmission must be accompanied by the Commission-assigned Personal

Identification Number of the authorized signer and such Personal

Identification Number will constitute and become a substitute for the

manual signature of the authorized signer for the purpose of making the

oath or affirmation referred to in this paragraph.

* * * * *

(g) Nonpublic treatment of reports. (1) The following portions of

Forms 1-FR filed pursuant to this section will be public: the statement

of financial condition, the statement of the computation of the minimum

capital requirements, the statements (to be filed by a futures

commission merchant only) of segregation requirements and funds in

segregation for customers trading on U.S. commodity exchanges and for

customers' dealer options accounts, and the statement (to be filed by a

futures commission merchant only) 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. The other financial

statements (including the statement of income (loss)), footnote

disclosures and schedules of Form 1-FR, trade secrets and certain other

commercial or financial information on such other statements and

schedules will be treated as nonpublic for purposes of the Freedom of

Information Act and the Government in the Sunshine Act and parts 145

and 147 of this chapter.

(2) The following portions of copies of the Financial and

Operational Combined Uniform Single Report under the Securities

Exchange Act of 1934, Part II or Part IIA filed pursuant to paragraph

(h) of this section, will be public: The statement of financial

condition, the computations of net capital and the minimum capital

requirements, the statements (to be filed by a futures commission

merchant only) of segregation requirements and funds in segregation for

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

options accounts, and the statement (to be filed by a futures

commission merchant only) 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. The other financial

statements (including the statement of income (loss)), footnote

disclosures and schedules of the Financial and Operational Combined

Uniform Single Report under the Securities and Exchange Act of 1934,

Part II or Part IIA, trade secrets and certain other commercial or

financial

[[Page 10445]]

information on such other statements and schedules will be treated as

nonpublic for purposes of the Freedom of Information Act and the

Government in the Sunshine Act and parts 145 and 147 of this chapter.

* * * * *

PART 31--LEVERAGE TRANSACTIONS

3. The authority citation for Part 31 continues to read as follows:

Authority: 7 U.S.C. 12a and 23.

4. Section 31.13 is amended by revising paragraph (m) to read as

follows:

Sec. 31.13 Financial reports of leverage transaction merchants.

* * * * *

(m) The following portions of Form 2-FR filed pursuant to this

section will be public: The statement of financial condition, the

computation of the minimum capital requirements pursuant to Sec. 31.9,

the schedule of coverage requirements and cover provided, and the

schedule of segregation requirements and funds on deposit in

segregation. The other financial statements (including the statement of

income (loss)), footnote disclosures and schedules of Form 2-FR, trade

secrets and certain other commercial or financial information on such

other statements and schedules, will be treated as nonpublic for

purposes of the Freedom of Information Act and the Government in the

Sunshine Act and parts 145 and 147 of this chapter. All information on

such other statements, footnote disclosures and schedules will,

however, be available for official use by any official or employee of

the United States or any State, by any self-regulatory organization of

which the person filing such report is a member, by the National

Futures Association in the case of an applicant, and by any other

person to whom the Commission believes disclosure of such information

is in the public interest. The independent public accountant's opinion

filed pursuant to this section will be deemed to be public information.

* * * * *

Issued in Washington, D.C. on February 27, 1997 by the

Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97-5561 Filed 3-6-97; 8:45 am]

BILLING CODE 6351-01-P