Temporary Licenses for Associated Persons, Floor Brokers, Floor Traders and Guaranteed Introducing Brokers

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

Temporary Licenses for Associated Persons, Floor Brokers, Floor

Traders and Guaranteed Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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

is proposing amendments to its rules governing the granting of a

temporary license (TL) by the National Futures Association (NFA) to

applicants for registration in the categories of associated person

(AP), floor broker (FB), floor trader (FT), and guaranteed introducing

broker (IBG). These amendments would authorize NFA, in appropriate

cases, to grant a TL to an applicant despite a ``yes'' answer to a

Disciplinary History question, which currently makes an applicant

ineligible for a TL. The Commission is proposing these amendments so

that it may approve certain registration rules submitted by NFA without

creating any inconsistency between the Commission's rules and those of

NFA.

DATES: Comments must be submitted on or before October 26, 1998.

ADDRESSES: Comments on the proposed rules should be sent to Jean A.

Webb, Secretary, Commodity Futures Trading Commission, Three Lafayette

Center, 1155 21st Street, NW., Washington, DC 20581. Comments may be

sent by facsimile transmission to (202) 418-5521, or by e-mail to

[email protected]. Reference should be made to ``Temporary License

Eligibility.''

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief Counsel, Division of Trading and

Markets, Commodity Futures Trading Commission, Three Lafayette Center,

1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5439.

SUPPLEMENTARY INFORMATION:

I. Background

Section 8a(1) of the Commodity Exchange Act (Act) was amended in

1983 to authorize the Commission to grant a TL to an applicant for

registration for a period not to exceed six months, subject to such

rules, regulations and orders as the Commission may adopt.\1\ This

amendment to the Act was intended to ``streamline and simplify the

current registration procedures to enable the Commission to register

fit persons more expeditiously.'' \2\

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\1\ Futures Trading Act of 1982, Pub. L. 97-444, Section 223, 96

Stat. 2310 (1983).

\2\ H.R. Rep. No. 565 (Part 1), 97th Cong., 2d Sess. 50 (1982).

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The Commission adopted Rules 3.40-3.43 on February 27, 1984, to

implement this authority with respect to AP applicants \3\ and

simultaneously authorized NFA to perform the function of granting TLs

to AP applicants in appropriate cases.\4\ The Commission added Rules

3.44-3.47 to govern TLs for IBG applicants on December 16, 1986,\5\ and

amended Rules 3.11 and 3.40-3.43 to govern TLs for FB and FT applicants

on April 9, 1993.\6\ NFA adopted its own rules concerning TLs for APs

and IBGs, which the Commission has approved.\7\ The Commission's rules

and the NFA's rules currently in effect provide that, except as

described below, one of the conditions for obtaining a TL is that an

applicant have no ``yes'' answers to the Disciplinary History questions

on the registration application.\8\ The exception concerns an applicant

for registration as an AP, FB or FT whose previous registration in

these capacities was terminated within the preceding 60 days. These

applicants will receive a TL upon mailing of a new registration

application (Form 8-R) if, among other things, the new registration

application (1) contains no ``yes'' answers to the Disciplinary History

questions, or (2)

[[Page 51049]]

none except those arising from a matter that already has been disclosed

in connection with a previous registration application if registration

was granted, or (3) the ``yes'' answer was disclosed more than 30 days

previously in an amendment to the prior registration application.\9\

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\3\ 49 FR 8208 (March 5, 1984). An AP is a natural person who

(1) solicits or accepts customer orders for a futures commission

merchant (FCM) or IB, (2) solicits a client's or prospective

client's discretionary account for a commodity trading advisor, (3)

solicits funds, securities or property for a participation in a

commodity pool on behalf of a commodity pool operator, or (4)

supervises any of the foregoing persons so engaged. Section 4k(1)-

(3) of the Act; Commission Rule 1.3(aa).

\4\ 49 FR 8226 (March 5, 1984).

\5\ 51 FR 45759 (Dec. 22, 1986). An IBG is a person (except an

individual who elects to be and is registered as an AP of an FCM)

engaged in soliciting or accepting customer orders but not the

margin funds related thereto and who enters into a guarantee

agreement with an FCM. The guarantee agreement relieves the IBG of

the need to raise its own capital and restricts it to introducing

accounts only to its guarantor FCM. Section 1a(14) of the Act;

Commission Rules 1.3(mm), 1.17(a)(2)(ii) and 1.57(a)(1).

\6\ 58 FR 19575 (Apr. 15, 1993). The related delegation order to

NFA was issued simultaneously and published at 58 FR 19657 (Apr. 15,

1993). An FB can trade for others or for his or her own account on

or subject to the rules of any contract market; an FT can trade only

for his or her own account on or subject to the rules of any

contract market. Section 1a(8) and (9) of the Act; Commission Rule

1.3(n) and (x).

\7\ NFA Rules 301 and 302, respectively.

\8\ Commission Rules 3.40(a) and 3.44(a)(2). The no ``yes''

answer restriction extends to principals of an IBG as well.

Commission Rule 3.44(a)(3). See also Commission Rules

3.11(c)(1)(ii)(D) and 3.11(c)(2)(ii) concerning an FT, or a person

whose registration as an FT terminated within the preceding 60 days,

seeking to become an FB.

\9\ Commission Rules 3.11(c)(1)(i)(C), 3.11(c)(1)(ii)(C) and

3.12(d)(1)(vi); NFA Rule 301(b)(1)(D). See also Commission Rule

3.44(a)(3) and NFA Rule 302(a)(3) concerning principals of an IBG.

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Rules authorizing the issuance of TLs were adopted so that

apparently fit persons (i.e., those who had not self-declared any

derogatory information on their registration applications) could begin

acting like registrants in certain categories while various background

checks were conducted. For example, checking an individual's

fingerprints through the Federal Bureau of Investigation database can

take six to eight weeks. The Commission believes that providing TLs is

appropriate in light of the time required to complete the various

background checks on applicants for registration.

II. NFA Proposals

NFA has adopted and submitted for Commission approval amendments to

NFA Rules 301 and 302, governing TLs for APs and IBGs, as well as new

NFA Rule 303 to govern TLs for FBs and FTs. NFA's submission was made

pursuant to Section 17(j) of the Act by letter dated August 25, 1997.

In response to letters from the Commission's Division of Trading and

Markets, NFA supplemented its submission by letters dated January 22,

February 19 and August 11, 1998.\10\

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\10\ Copies of the NFA rules submitted for Commission approval

may be obtained upon request from the Commission's Office of the

Secretariat at the address listed above.

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NFA's rule amendments and the new rule would eliminate the no

``yes'' answer criterion as an absolute bar to issuance of a TL. NFA

notes that it now may not grant TLs to new applicants (i.e., those not

registered within the preceding 60 days) with ``yes'' answers no matter

how innocuous the disclosed matter may be, even if NFA has previously

granted registration despite the ``yes'' answer. NFA believes that this

restriction is no longer necessary because it has developed sufficient

expertise exercising the authority granted to it in various Commission

delegation orders to identify in an accurate and prompt manner those

types of disciplinary matters that it would not use to disqualify an

applicant from registration.

NFA represents that under its proposed approach it would use its

authority to grant TLs to applicants with ``yes'' answers that (1) NFA

had previously cleared, or (2) NFA knew that it intended to clear. NFA

further represents that it only brings adverse actions in circumstances

that are ``similar to those in which the Commission has instituted

registration actions based upon disciplinary offenses'' and that, in

evaluating whether any applicant should be granted a TL despite a

``yes'' answer to a Disciplinary History question, it will follow the

recent guidance set forth by the Commission concerning the treatment of

disciplinary histories of FBs, FTs and applicants for registration in

either category.\11\

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\11\ See Commission Advisory 61-97 (Dec. 8, 1997), to which is

attached a letter to Robert K. Wilmouth, NFA President, from Jean A.

Webb, Secretary of the Commission, dated Dec. 4, 1997.

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NFA's new rule and rule amendments would also affect applicants for

AP, FB and FT registration applying within 60 days of their last

registration. Currently, these applicants may receive TLs upon mailing

of a new Form 8-R if they have no new ``yes'' answers to Disciplinary

History questions. A new ``yes'' answer in these circumstances is an

answer that the applicant has not previously disclosed or has disclosed

for the first time within 30 days of the submitted application.

NFA represents that this ``no-new-yes'' answer requirement creates

processing difficulties for NFA's automated registration processing

system, the Membership Registration Receivables System (MRRS). NFA

explained that, in order to process transfer TLs,\12\ MRRS must compare

the date of the application and the date of the applicant's last

registration termination in order to determine if the 60-day

requirement is met. Next, MRRS must determine whether the applicant has

previously disclosed the ``yes'' answer. MRRS then compares the date of

the current application to the date the applicant previously disclosed

the ``yes'' answer to determine if the 30-day requirement is satisfied.

NFA represents that the procedures for transferring registrations also

can produce processing errors that must be manually reviewed and

corrected, thus consuming a significant amount of staff resources.\13\

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\12\ The term ``transfer TL'' is used because the Commission's

rules and similar NFA rules in this area were intended to permit an

AP to move from one firm to another without an interruption. For

example, an AP could leave Firm A on Friday, mail in his new Form 8-

R with a sponsor certification from Firm B, and be at work for Firm

B under a TL on Monday morning.

\13\ As an example, NFA indicates that in 1996 there were 24

instances in which it did not grant TLs because of new ``yes''

answers. However, NFA ultimately granted registration to all but one

of those individuals, while the remaining individual withdrew his

application.

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NFA proposes to eliminate the no-new-yes answer requirement from

its Registration Rules. NFA believes that its proposal would enable it

to achieve its regulatory goals more efficiently. NFA contends that,

under this proposed approach, MRRS would operate more efficiently and

staff resources could be redirected to facilitate the quick

identification of transfer applicants who receive TLs despite

problematic disciplinary history information. NFA represents that, when

appropriate, it would promptly terminate such TLs and institute

registration denial proceedings.

III. Proposed Commission Rule Amendments

Although the NFA rule amendments concerning TLs submitted for

Commission approval remain subject to Commission review and possible

further refinement, the Commission preliminarily views the NFA rule

amendments positively. As noted above, however, the NFA rule amendments

are not consistent with Commission rules issued under Section 8a(1) of

the Act, and therefore, the Commission could not approve them pursuant

to Section 17(j) of the Act.\14\ Accordingly, in order to permit the

Commission to approve the NFA rule amendments, the Commission is

proposing to amend its rules governing TLs.\15\ The Commission's rule

amendments would eliminate the provision that NFA may not grant a TL to

an AP, FB, FT or IBG applicant if the applicant's registration

application contains a ``yes'' answer to a Disciplinary History

question.\16\ The Commission is also proposing to eliminate the no-new-

yes answer requirement from its rules governing TLs of AP, FB and FT

applicants whose

[[Page 51050]]

registration terminated within the preceding 60 days.\17\

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\14\ Section 17(j) of the Act provides in pertinent part that

``A registered futures association shall submit to the Commission

any change in or addition to its rules * * *. The Commission shall

approve such rules, if such rules are determined by the Commission

to be consistent with the requirements of this section and not

otherwise in violation of this Act or the regulations issued

pursuant to this Act * * *.''

\15\ The Commission anticipates that, if it determines to

approve NFA's rule amendments discussed above, such approval will be

made concurrent with adoption of final Commission rule amendments

that are being proposed herein.

\16\ In the case of an IBG applicant, the provision pertaining

to principals of the applicant would be amended similarly. See

proposed amendments to Rules 3.40(a) and 3.44(a) (2) and (3).

\17\ See proposed amendments to Commission Rules 3.11(c)(1)(i)

and (c)(1)(ii), and 3.12(d)(1) and (d)(3).

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There are two provisions of the Commission's rules where a ``yes''

answer to a Disciplinary History question will prevent granting of

registration, not merely at TL. These circumstances pertain to: (1) a

registered FT seeking to become registered as an FB (Commission Rule

3.11(c)(2)(ii)); and (2) an AP whose registration is terminated because

of the revocation or withdrawal of the sponsor's registration and who

becomes associated with a new sponsor (Commission Rule 3.12(i)).\18\

Since these provisions are modeled upon those governing TLs, the

Commission believes that it is appropriate to amend these provisions to

remove the no ``yes'' answer restriction as well.

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\18\ The AP situation could arise where, for example, one FCM

merges into another, the merged FCM withdraws its registration and

the surviving FCM absorbs the APs of the disappearing FCM.

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The Commission also wishes to note that certain of its rules

related to TLs are not being amended. Commission rules provide that a

TL shall terminate immediately upon notice to an applicant that the

applicant failed to disclose relevant disciplinary history or to

disclose that, following the submission of the application, an event

has occurred leading to an affirmative response. Such a notice must

also be provided to the applicant's sponsor (in the case of an AP

applicant), the contract market that has granted trading privileges (in

the case of an FB or FT applicant) or the guarantor FCM (in the case of

an IBG applicant).\19\ The Commission emphasizes that it is important

for all applicants to continue to declare derogatory information as

required by the registration forms since failure to do so can lead to

termination of a TL and, if willful, to denial or conditioning of

registration.\20\

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\19\ The notice concerning failure to disclose or the occurrence

of an event leading to an affirmative response also applies to a

principal of an IBG. Commission Rules 3.42(a)(8) and 3.46(a)(10).

\20\ See Section 8a(2)(G) and (3)(G) of the Act.

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The Commission further notes that it is not amending the provisions

of its rules governing TLs for FB applicants that restrict such persons

to operating as an FT while the applicant has a TL prior to being

granted registration as an FB.\21\

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\21\ This restriction to acting only in the capacity of an FT

during the pendency of the TL does not apply if the FB applicant was

registered as an FB within the preceding 60 days. Commission Rule

3.41(a).

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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 discussed herein

would affect APs, FBs, FTs and IBGs. The Commission has previously

determined to evaluate within the context of a particular rule proposal

whether all or some FBs, FTs, and IBGs should be considered ``small

entities'' for purposes of the RFA and, if so, to analyze the economic

impact on FBs, FTs and IBGs of any such rule at that time.\22\ The rule

amendments proposed herein will not affect the requirements for filing

an application for registration. If adopted, these amendments will

permit certain persons to obtain a TL where it now is not possible and

thus permit them to begin lawfully acting as industry professionals

sooner. Accordingly, the Chairperson, on behalf of the Commission,

hereby certifies, pursuant to 5 U.S.C. 605(b), that the action taken

herein will not have a significant economic impact on a substantial

number of small entities.

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\22\ See 47 FR 18618, 18620 (Apr. 30, 1982) (FBs); 48 FR 35248,

35276-35278 (Aug. 3, 1983) (IBGs); and 58 FR 19575, 19588 (Apr. 15,

1993) (FTs). With respect to APs, the Commission has previously

stated that the RFA does not apply to APs because APs must be

individuals under Section 4k of the Act and Rule 1.3(aa). See 48 FR

14933, 14954 n.115 (Apr. 6, 1983).

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B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.

(Supp. I 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 PRA. While

the proposed rule amendments have no burden, the group of rules (3038-

0023) of which they are a part has the following burden:

Average Burden Hours Per Response......... 15.76

Numberr of Respondents.................... 73,435

Frequency of Response..................... Annually and on occasion.

Copies of the OMB approved information collection package

associated with these rules may be obtained from Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB, Washington, DC

20503, (202) 395-7340.

List of Subjects in 17 CFR Part 3

Brokers, Registration.

In consideration of the foregoing, and pursuant to the authority

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

4d, 4e, 4k, 8a and 17 thereof, 7 U.S.C. 6d, 6e, 6k, 12a and 21, the

Commission hereby proposes to amend Part 3 of Chapter I of Title 17 of

the Code of Federal Regulations as follows:

PART 3--REGISTRATION

1. The authority citation for Part 3 continues 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, 6n, 6o, 6p, 8, 9, 9a, 12, 12a,

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

2. Section 3.11 is proposed to be amended by revising paragraphs

(c)(1)(i)(A) and (c)(1)(i)(B), by removing paragraph (c)(1)(i)(C), by

revising paragraphs (c)(1)(ii)(A), (c)(1)(ii)(B) and (c)(1)(ii)(C), by

removing paragraph (c)(1)(ii)(D) and redesignating paragraph

(c)(1)(ii)(E) as paragraph (c)(1)(ii)(D), and by revising paragraph

(c)(2)(ii) to read as follows:

Sec. 3.11 Registration of floor brokers and floor traders.

* * * * *

(c) * * *

(1) * * *

(i) * * *

(A) The person's registration as a floor broker is not suspended or

revoked; and

(B) There is no pending adjudicatory proceeding against the person

under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55

or 3.60 and, within the preceding twelve months, the Commission has not

permitted the withdrawal of an application for registration in any

capacity after initiating the procedures provided in Sec. 3.51.

(ii) * * *

(A) The person's registration as a floor trader is not suspended or

revoked; and

(B) There is no pending adjudicatory proceeding against the person

under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Secs. 3.55 or

3.60 and, within the preceding twelve months, the Commission has not

permitted the withdrawal of an application for registration in any

capacity after initiating the procedures provided in Sec. 3.51.

(C) If such person is seeking registration as a floor broker, the

person will be granted a temporary license to act in the capacity of

floor trader only if the person's prior registration was not subject to

conditions or restrictions.

* * * * *

(2) * * *

(ii) Any person registered as a floor trader whose registration is

not subject

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to conditions or restrictions and who continuously maintains trading

privileges at any contract market that has made the certification

required under Sec. 3.40 will be registered as, and in the capacity of,

a floor broker upon mailing to the National Futures Association of a

Form 3-R completed and filed in accordance with the instructions

thereto indicating the intention to change registration category,

accompanied by evidence of the granting of trading privileges at the

new contract market, if applicable.

* * * * *

3. Section 3.12 is proposed to be amended by revising paragraphs

(d)(1)(iv) and (d)(1)(v), by removing paragraph (d)(1)(vi), by revising

paragraphs (d)(3) and (i)(1)(v), by removing paragraph (i)(1)(vi) and

redesignating paragraph (i)(1)(vii) as paragraph (i)(1)(vi), and by

revising paragraph (i)(2) to read as follows:

Sec. 3.12 Registration of associated persons of futures commission

merchants, introducing brokers, commodity trading advisors, commodity

pool operators and leverage transaction merchants.

* * * * *

(d) * * *

(1) * * *

(iv) Whether there is a pending adjudicatory proceeding under

sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Secs. 3.55, 3.56 or

3.60 or if, within the preceding twelve months, the Commission has

permitted the withdrawal of an application for registration in any

capacity after instituting the procedures provided in Sec. 3.51 and, if

so, that the sponsor has been given a copy of the notice of the

institution of a proceeding in connection therewith; and

(v) That the sponsor has received a copy of the notice of the

institution of a proceeding if the applicant has certified, in

accordance with paragraph (d)(1)(iv) of this section, that there is a

proceeding pending against the applicant as described in that paragraph

or that the Commission has permitted the withdrawal of an application

for registration as described in that paragraph.

* * * * *

(3) The certifications permitted by paragraphs (d)(1)(i) and (v) of

this section must be signed and dated by an officer, if the sponsor is

a corporation, a general partner, if a partnership, or the proprietor,

if a sole proprietorship. The certifications permitted by paragraphs

(d)(1)(ii)-(iv) of this section must be signed and dated by the

applicant for registration as an associated person.

* * * * *

(i) * * *

(1) * * *

(v) That the new sponsor has received a copy of the notice of the

institution of a proceeding if the applicant for registration has

certified, in accordance with paragraph (i)(1)(iv) of this section,

that there is a proceeding pending against the applicant as described

in that paragraph or that the Commission has permitted the withdrawal

of an application for registration as described in that paragraph; and

* * * * *

(2) The certifications required by paragraphs (i)(1)(i), (i)(1)(v),

and (i)(1)(vi) of this section must be signed and dated by an officer,

if the sponsor is a corporation, a general partner, if a partnership,

or the proprietor, if a sole proprietorship. The certifications

required by paragraphs (i)(1)(ii)-(iv) of this section must be signed

and dated by the applicant for registration as an associated person.

* * * * *

4. Section 3.40 is proposed to be amended by revising paragraph (a)

to read as follows:

Sec. 3.40 Temporary licensing of applicants for associated person,

floor broker or floor trader registration.

* * * * *

(a) A Form 8-R, properly completed in accordance with the

instructions thereto;

* * * * *

5. Section 3.44 is proposed to be amended by revising paragraphs

(a)(2) and (a)(3) to read as follows:

Sec. 3.44 Temporary licensing of applicants for guaranteed introducing

broker registration.

* * * * *

(a) * * *

(2) A Form 7-R properly completed in accordance with the

instructions thereto;

(3) A Form 8-R for the applicant, if a sole proprietor, and each

principal (including each branch office manager) thereof, properly

completed in accordance with the instructions thereto, all of whom

would be eligible for a temporary license if they had applied as

associated persons;

* * * * *

Issued in Washington, DC on September 21, 1998, by the

Commission.

Jean A. Webb,

Secretary of Commission.

[FR Doc. 98-25622 Filed 9-23-98; 8:45 am]

BILLING CODE 6351-01-M