[Title 17 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2004 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



          17


          Parts 1 to 199

                         Revised as of April 1, 2004


          Commodity and Securities Exchanges
          
          


________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2004
          With Ancillaries
                    Published by
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

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                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2004



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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 17:
          Chapter I--Commodity Futures Trading Commission            3
  Finding Aids:
      Table of CFR Titles and Chapters........................     645
      Alphabetical List of Agencies Appearing in the CFR......     663
      List of CFR Sections Affected...........................     673

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

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  17 CFR 1.1 refers 
                       to title 17, part 1, 
                       section 1.

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

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                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2004), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
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instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
and parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
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ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers, Weekly Compilation of Presidential 
Documents and the Privacy Act Compilation are available in electronic 
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gpoaccess@gpo.gov.

[[Page vii]]

    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.archives.gov/federal--
register. The NARA site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

April 1, 2004.

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                               THIS TITLE

    Title 17--Commodity and Securities Exchanges is composed of three 
volumes. The first volume containing parts 1 to 199, comprises Chapter 
I--Commodity Futures Trading Commission. The second volume contains 
Chapter II--Securities and Exchange Commission, parts 200 to 239. The 
third volume, comprising part 240 to end, contains the remaining 
regulations of the Securities and Exchange Commission, and Chapter IV--
Department of the Treasury. The contents of these volumes represent all 
current regulations issued by the Commodity Futures Trading Commission, 
the Securities and Exchange Commission, and the Department of the 
Treasury as of April 1, 2004.

    The OMB control numbers for the Securities and Exchange Commission 
appear in Sec.  200.800 of chapter II. For the convenience of the user, 
Sec.  200.800 is reprinted in the Finding Aids section of the volume 
containing part 240 to end.

    For this volume, Ruth Green was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of Frances D. 
McDonald, assisted by Alomha S. Morris.

[[Page x]]




[[Page 1]]



              TITLE 17--COMMODITY AND SECURITIES EXCHANGES




                   (This book contains parts 1 to 199)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Commodity Futures Trading Commission.............           1

[[Page 3]]



             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION




  --------------------------------------------------------------------
Part                                                                Page
1               General regulations under the Commodity 
                    Exchange Act............................           5
2               Official seal...............................         116
3               Registration................................         117
4               Commodity pool operators and commodity 
                    trading advisors........................         158
5               [Reserved]
7               Contract market rules altered or 
                    supplemented by the Commission..........         208
8               Exchange procedures for disciplinary, 
                    summary, and membership denial actions..         208
9               Rules relating to review of exchange 
                    disciplinary, access denial or other 
                    adverse actions.........................         215
10              Rules of practice...........................         226
11              Rules relating to investigations............         258
12              Rules relating to reparations...............         263
13              Public rulemaking procedures................         302
14              Rules relating to suspension or disbarment 
                    from appearance and practice............         303
15              Reports--general provisions.................         306
16              Reports by contract markets.................         311
17              Reports by futures commission merchants, 
                    members of contract markets and foreign 
                    brokers.................................         314
18              Reports by traders..........................         319
19              Reports by persons holding bona fide hedge 
                    positions pursuant to Sec. 1.3(z) of 
                    this chapter and by merchants and 
                    dealers in cotton.......................         322
20              [Reserved]
21              Special calls...............................         324
30              Foreign futures and foreign options 
                    transactions............................         328
31              Leverage transactions.......................         344
32              Regulation of commodity option transactions.         377
33              Regulation of domestic exchange-traded 
                    commodity option transactions...........         391
34              Regulation of hybrid instruments............         401

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35              Exemption of swap agreements................         402
36              Exempt markets..............................         404
37              Derivatives transaction execution facilities         406
38              Designated contract markets.................         416
39              Derivatives clearing organizations..........         428
40              Provisions common to contract markets, 
                    derivatives transaction execution 
                    facilities and derivatives clearing 
                    organizations...........................         435
41              Security futures products...................         446
42              Anti-money laundering, terrorist financing..         470
100             Delivery period required....................         470
140             Organization, functions, and procedures of 
                    the Commission..........................         470
141             Salary offset...............................         496
142             Indemnification of CFTC employees...........         500
143             Collection of claims owed the United States 
                    arising from activities under the 
                    Commission's jurisdiction...............         501
144             Procedures regarding the disclosure of 
                    information and the testimony of present 
                    or former officers and employees in 
                    response to subpoenas or other demands 
                    of a court..............................         503
145             Commission records and information..........         505
146             Records maintained on individuals...........         520
147             Open Commission meetings....................         529
148             Implementation of the Equal Access to 
                    Justice Act in covered adjudicatory 
                    proceedings before the Commission.......         537
149             Enforcement of nondiscrimination on the 
                    basis of handicap in programs or 
                    activities conducted by the Commodity 
                    Futures Trading Commission..............         543
150             Limits on positions.........................         549
155             Trading standards...........................         555
156             Broker Associations.........................         558
160             Privacy of consumer financial information...         560
166             Customer protection rules...................         578
170             Registered futures associations.............         581
171             Rules relating to review of National Futures 
                    Association decisions in disciplinary, 
                    membership denial, registration and 
                    member responsibility actions...........         585
190             Bankruptcy..................................         599
191-199         [Reserved]

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PART 1_GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of Contents




                               Definitions

Sec.
1.1 Fraud in or in connection with transactions in foreign currency 
          subject to the Commodity Exchange Act.
1.2 Liability of principal for act of agent.
1.3 Definitions.
1.4 Use of electronic signatures.

          Minimum Financial and Related Reporting Requirements

1.10 Financial reports of futures commission merchants and introducing 
          brokers.
1.11 [Reserved]
1.12 Maintenance of minimum financial requirements by futures commission 
          merchants and introducing brokers.
1.13 [Reserved]
1.14 Risk assessment recordkeeping requirements for futures commission 
          merchants.
1.15 Risk assessment reporting requirements for futures commission 
          merchants.
1.16 Qualifications and reports of accountants.
1.17 Minimum financial requirements for futures commission merchants and 
          introducing brokers.
1.18 Records for and relating to financial reporting and monthly 
          computation by futures commission merchants and introducing 
          brokers.

                 Prohibited Trading in Commodity Options

1.19 Prohibited trading in certain ``puts'' and ``calls''.

               Customers' Money, Securities, and Property

1.20 Customer funds to be segregated and separately accounted for.
1.21 Care of money and equities accruing to customers.
1.22 Use of customer funds restricted.
1.23 Interest of futures commission merchant in segregated funds; 
          additions and withdrawals.
1.24 Segregated funds; exclusions therefrom.
1.25 Investment of customer funds.
1.26 Deposit of instruments purchased with customer funds.
1.27 Record of investments.
1.28 Appraisal of instruments purchased with customer funds.
1.29 Increment or interest resulting from investment of customer funds.
1.30 Loans by futures commission merchants; treatment of proceeds.

                              Recordkeeping

1.31 Books and records; keeping and inspection.
1.32 Segregated account; daily computation and record.
1.33 Monthly and confirmation statements.
1.34 Monthly record, ``point balance''.
1.35 Records of cash commodity, futures, and option transactions.
1.36 Record of securities and property received from customers and 
          option customers.
1.37 Customer's or option customer's name, address, and occupation 
          recorded; record of guarantor or controller of account.
1.38 Execution of transactions.
1.39 Simultaneous buying and selling orders of different principals; 
          execution of, for and between principals.

                              Miscellaneous

1.40 Crop, market information letters, reports; copies required.
1.41 [Reserved]
1.41a-1.41c [Reserved]
1.42-1.43 [Reserved]
1.44 Records and reports of warehouses, depositories, and other similar 
          entities; visitation of premises.
1.45 [Reserved]
1.46 Application and closing out of offsetting long and short positions.
1.47 Requirements for classification of purchases or sales of contracts 
          for future delivery as bona fide hedging under Sec. 1.3(z)(3) 
          of the regulations.
1.48 Requirements for classification of sales or purchases for future 
          delivery as bona fide hedging of unsold anticipated production 
          or unfilled anticipated requirements under Sec. 1.3(z)(2) 
          (i)(B) or (ii)(C) of the regulations.
1.49 Denomination of customer funds and location of depositories.
1.50-1.51 [Reserved]
1.52 Self-regulatory organization adoption and surveillance of minimum 
          financial requirements.
1.53 Enforcement of contract market bylaws, rules, regulations, and 
          resolutions.
1.54 Contract market rules submitted to and approved or not disapproved 
          by the Secretary of Agriculture.
1.55 Distribution of ``Risk Disclosure Statement'' by futures commission 
          merchants and introducing brokers.
1.56 Prohibition of guarantees against loss.
1.57 Operations and activities of introducing brokers.
1.58 Gross collection of exchange-set margins.
1.59 Activities of self-regulatory organization employees, governing 
          board members, committee members, and consultants.
1.60 Pending legal proceedings.

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1.61 [Reserved]
1.62 Contract market requirement for floor broker and floor trader 
          registration.
1.63 Service on self-regulatory organization governing boards or 
          committees by persons with disciplinary histories.
1.64 Composition of various self-regulatory organization governing 
          boards and major disciplinary committees.
1.65 Notice of bulk transfers and disclosure obligations to customers.
1.66 No-action positions with respect to floor traders.
1.67 Notification of final disciplinary action involving financial harm 
          to a customer.
1.68 Customer election not to have funds, carried by a futures 
          commission merchant for trading on a registered derivatives 
          transaction execution facility, separately accounted for and 
          segregated.
1.69 Voting by interested members of self-regulatory organization 
          governing boards and various committees.
1.70 Notification of State enforcement actions brought under the 
          Commodity Exchange Act.

Appendix A to Part 1 [Reserved]
Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews 
          and Financial Reviews

    Authority: 7 U.S.C. 1a, 2, 5, 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, as amended by the Commodity Futures 
Modernization Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 
(2000).

    Source: 41 FR 3194, Jan. 21, 1976, unless otherwise noted.

                               Definitions



Sec. 1.1  Fraud in or in connection with transactions in foreign currency 
subject to the Commodity Exchange Act.

    (a) Scope. The provisions of this section shall be applicable to 
accounts, agreements, contracts, or transactions described in section 
2(c)(1) of the Act, to the extent that the Commission exercises 
jurisdiction over such accounts, agreements, contracts and transactions 
as provided in section 2(c)(2)(B) of the Act (except that this section 
shall not be applicable to persons described in section 
2(c)(2)(B)(ii)(II) or 2(c)(2)(B)(ii)(III) of the Act).
    (b) Fraudulent conduct prohibited. It shall be unlawful for any 
person, directly or indirectly, in or in connection with any account, 
agreement, contract or transaction that is subject to paragraph (a) of 
this section:
    (1) To cheat or defraud or attempt to cheat or defraud any person;
    (2) Willfully to make or cause to be made to any person any false 
report or statement or cause to be entered for any person any false 
record; or
    (3) Willfully to deceive or attempt to deceive any person by any 
means whatsoever.

[66 FR 42269, Aug. 10, 2001]



Sec. 1.2  Liability of principal for act of agent.

    The act, omission, or failure of any official, agent, or other 
person acting for any individual, association, partnership, corporation, 
or trust, within the scope of his employment or office, shall be deemed 
the act, omission, or failure of such individual, association, 
partnership, corporation, or trust as well as of such official, agent, 
or other person.



Sec. 1.3  Definitions.

    Words used in the singular form in the rules and regulations in this 
chapter shall be deemed to import the plural and vice versa, as the 
context may require. The following terms, as used in the Commodity 
Exchange Act, or in the rules and regulations in this chapter, shall 
have the meanings hereby assigned to them, unless the context otherwise 
requires:
    (a) Board of Trade. This term means any exchange or association, 
whether incorporated or unincorporated, of persons who shall be engaged 
in the business of buying or selling any commodity or receiving the same 
for sale on consignment.
    (b) Business day. This term means any day other than a Sunday or 
holiday. In all notices required by the act or by the rules and 
regulations in this chapter to be given in terms of business days the 
rule for computing time shall be to exclude the day on which notice is 
given and include the day on which shall take place the act of which 
notice is given.
    (c) Clearing member. This term means any person who is a member of, 
or enjoys the privilege of clearing trades in his own name through, the 
clearing organization of a contract market.
    (d) Clearing organization. This term means the person or 
organization

[[Page 7]]

which acts as a medium for clearing transactions in commodities for 
future delivery or commodity option transactions, or for effecting 
settlements of contracts for future delivery or commodity option 
transactions, for and between members of any contract market.
    (e) Commodity. This term means and includes wheat, cotton, rice, 
corn, oats, barley, rye, flaxseed, grain sorghums, millfeeds, butter, 
eggs, Irish potatoes, wool, wool tops, fats and oils (including lard, 
tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and 
oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, 
livestock, livestock products, and frozen concentrated orange juice, and 
all other goods and articles, except onions as provided in Pub. L. 85-
839, and all services, rights and interests in which contracts for 
future delivery are presently or in the future dealt in.

(Sec. 2(a)(1), 88 Stat. 1395; 7 U.S.C. 2(1))

    (f) Commodity Exchange Act; the Act. These terms mean the Commodity 
Exchange Act, as amended, 7 U.S.C. 1 et seq.
    (g) Institutional customer. This term has the same meaning as 
``eligible contract participant'' as defined in section 1a(12) of the 
Act.
    (h) Contract market. This term means a board of trade designated by 
the Commission as a contract market under the Commodity Exchange Act or 
in accordance with the provisions of part 33 of this chapter.
    (i) Contract of sale. This term includes sales, purchases, 
agreements of sale or purchase and agreements to sell or purchase.
    (j) Controlled account. An account shall be deemed to be controlled 
by a person if such person by power of attorney or otherwise actually 
directs trading for such account.
    (k) Customer; commodity customer. These terms have the same meaning 
and refer to a customer trading in any commodity named in the definition 
of commodity herein: Provided, however, An owner or holder of a 
proprietary account as defined in paragraph (y) of this section shall 
not be deemed to be a customer within the meaning of section 4d of the 
Act, the regulations that implement sections 4d and 4f of the Act and 
Sec. 1.35, and such an owner or holder of such a proprietary account 
shall otherwise be deemed to be a customer within the meaning of the Act 
and Sec. Sec. 1.37 and 1.46 and all other sections of these rules, 
regulations and orders which do not implement sections 4d and 4f.
    (l) Delivery month. This term means the month of delivery specified 
in a contract of sale of any commodity for future delivery.
    (m) [Reserved]
    (n) Floor broker. This term means any person who, in or surrounding 
any pit, ring, post or other place provided by a contract market for the 
meeting of persons similarly engaged, shall purchase or sell for any 
other person any commodity for future delivery on or subject to the 
rules of any contract market and shall include any person required to 
register as a floor broker under the Act by virtue of part 33 of this 
chapter.
    (o) Future delivery. This term does not include any sale of a cash 
commodity for deferred shipment or delivery.
    (p) Futures commission merchant. This term means:
    (1) Individuals, associations, partnerships, corporations, and 
trusts engaged in soliciting or in accepting orders for the purchase or 
sale of any commodity for future delivery on or subject to the rules of 
any contract market and that, in or in connection with such solicitation 
or acceptance of orders, accepts any money, securities, or property (or 
extends credit in lieu thereof) to margin, guarantee or secure any 
trades or contracts that result or may result therefrom; and
    (2) Shall include any person required to register as a futures 
commission merchant under the Act by virtue of part 32 or part 33 of 
this chapter.
    (q) Member of a contract market. This term means and includes 
individuals, associations, partnerships, corporations, and trusts owning 
or holding membership in, or admitted to membership representation on, a 
contract market or given members' trading privileges thereon.
    (r) Net equity. This term means the credit balance which would be 
obtained

[[Page 8]]

by combining the commodity margin balance of any person with the net 
profit or loss, if any, accruing on the open trades or contracts or 
commodity option transactions of such person.
    (s) Net deficit. This term means the debit balance which would be 
obtained by combining the commodity margin balance of any person with 
the net profit or loss, if any, accruing on the open trades or contracts 
or commodity option transactions of such person.
    (t) Open contracts. This term means contracts of purchase or sale of 
any commodity made by or for any person on or subject to the rules of a 
board of trade for future delivery during a specified month or delivery 
period which have not been fulfilled by delivery nor offset by other 
contracts of sale or purchase in the same commodity and delivery month.
    (u) Person. This term includes individuals, associations, 
partnerships, corporations, and trusts.
    (v) [Reserved]
    (w) Secretary of Agriculture. This term means the Secretary of 
Agriculture or any person to whom authority has heretofore lawfully been 
delegated or to whom authority may hereafter lawfully be delegated to 
act in his stead.
    (x) Floor trader. This term means any person who, in our surrounding 
any pit, ring, post, or other place provided by a contract market for 
the meeting of persons similarly engaged, purchases or sells solely for 
such person's own account, or has been authorized by a contract market 
to purchase or sell for such person's own account, any commodity for 
future delivery on or subject to the rules of any contract market and 
shall include any person required to register as a floor trader under 
the Act by virtue of part 33 of this chapter or by rule or regulation of 
the Commission pertaining to the operation of an electronic trading 
system.
    (y) Proprietary account. This term means a commodity futures or 
commodity option trading account carried on the books and records of an 
individual, a partnership, corporation or other type association (1) for 
one of the following persons, or (2) of which ten percent or more is 
owned by one of the following persons, or an aggregate of ten percent or 
more of which is owned by more than one of the following persons:
    (i) Such individual himself, or such partnership, corporation or 
association itself;
    (ii) In the case of a partnership, a general partner in such 
partnership;
    (iii) In the case of a limited partnership, a limited or special 
partner in such partnership whose duties include:
    (A) The management of the partnership business or any part thereof,
    (B) The handling of the trades or customer funds of customers or 
option customers of such partnership,
    (C) The keeping of records pertaining to the trades or customer 
funds of customers or option customers of such partnership, or
    (D) The signing or co-signing of checks or drafts on behalf of such 
partnership;
    (iv) In the case of a corporation or association, an officer, 
director or owner of ten percent or more of the capital stock, of such 
organization;
    (v) An employee of such individual, partnership, corporation or 
association whose duties include:
    (A) The management of the business of such individual, partnership, 
corporation or association or any part thereof,
    (B) The handling of the trades or customer funds of customers or 
option customers of such individual, partnership, corporation or 
association,
    (C) The keeping of records pertaining to the trades or customer 
funds of customers or option customers of such individual, partnership, 
corporation or association, or
    (D) The signing or co-signing of checks or drafts on behalf of such 
individual, partnership, corporation or association;
    (vi) A spouse or minor dependent living in the same household of any 
of the foregoing persons;
    (vii) A business affiliate that directly or indirectly controls such 
individual, partnership, corporation or association.
    (viii) A business affiliate that, directly or indirectly is 
controlled by or is under common control with, such individual, 
partnership, corporation or association. Provided, however, That an 
account owned by any shareholder or

[[Page 9]]

member of a cooperative association of producers, within the meaning of 
sections 5(5) and 6a of the Act, which association is registered as a 
futures commission merchant and carries such account on its records, 
shall be deemed to be an account of a customer or option customer and 
not a proprietary account of such association, unless the shareholder or 
member is an officer, director or manager of the association.
    (z) Bona fide hedging transactions and positions--(1) General 
definition. Bona fide hedging transactions and positions shall mean 
transactions or positions in a contract for future delivery on any 
contract market, or in a commodity option, where such transactions or 
positions normally represent a substitute for transactions to be made or 
positions to be taken at a later time in a physical marketing channel, 
and where they are economically appropriate to the reduction of risks in 
the conduct and management of a commercial enterprise, and where they 
arise from:
    (i) The potential change in the value of assets which a person owns, 
produces, manufactures, processes, or merchandises or anticipates 
owning, producing, manufacturing, processing, or merchandising,
    (ii) The potential change in the value of liabilities which a person 
owns or anticipates incurring, or
    (iii) The potential change in the value of services which a person 
provides, purchases, or anticipates providing or purchasing.

Notwithstanding the foregoing, no transactions or positions shall be 
classified as bona fide hedging unless their purpose is to offset price 
risks incidental to commercial cash or spot operations and such 
positions are established and liquidated in an orderly manner in 
accordance with sound commercial practices and, for transactions or 
positions on contract markets subject to trading and position limits in 
effect pursuant to section 4a of the Act, unless the provisions of 
paragraphs (z) (2) and (3) of this section and Sec. Sec. 1.47 and 1.48 
of the regulations have been satisfied.
    (2) Enumerated hedging transactions. The definitions of bona fide 
hedging transactions and positions in paragraph (z)(1) of this section 
includes, but is not limited to, the following specific transactions and 
positions:
    (i) Sales of any commodity for future delivery on a contract market 
which do not exceed in quantity:
    (A) Ownership or fixed-price purchase of the same cash commodity by 
the same person; and
    (B) Twelve months' unsold anticipated production of the same 
commodity by the same person provided that no such position is 
maintained in any future during the five last trading days of that 
future.
    (ii) Purchases of any commodity for future delivery on a contract 
market which do not exceed in quantity.
    (A) The fixed-price sale of the same cash commodity by the same 
person.
    (B) The quantity equivalent of fixed-price sales of the cash 
products and by-products of such commodity by the same person; and
    (C) Twelve months' unfilled anticipated requirements of the same 
cash commodity for processing, manufacturing, or feeding by the same 
person, provided that such transactions and positions in the five last 
trading days of any one future do not exceed the person's unfilled 
anticipated requirements of the same cash commodity for that month and 
for the next succeeding month.
    (iii) Offsetting sales and purchases for future delivery on a 
contract market which do not exceed in quantity that amount of the same 
cash commodity which has been bought and sold by the same person at 
unfixed prices basis different delivery months of the contract market, 
provided that no such position is maintained in any future during the 
five last trading days of that future.
    (iv) Sales and purchases for future delivery described in paragraphs 
(z)(2) (i), (ii), and (iii) of this section may also be offset other 
than by the same quantity of the same cash commodity, provided that the 
fluctuations in value of the position for future delivery are 
substantially related to the fluctuations in value of the actual or 
anticipated cash position, and provided that the positions in any one 
future shall not be maintained during the five last trading days of that 
future.

[[Page 10]]

    (3) Non-enumerated cases. Upon specific request made in accordance 
with Sec. 1.47 of the regulations, the Commission may recognize 
transactions and positions other than those enumerated in paragraph 
(z)(2) of this section as bona fide hedging in such amount and under 
such terms and conditions as it may specify in accordance with the 
provisions of Sec. 1.47. Such transactions and positions may include, 
but are not limited to, purchases or sales for future delivery on any 
contract market by an agent who does not own or who has not contracted 
to sell or purchase the offsetting cash commodity at a fixed price, 
provided That the person is responsible for the merchandising of the 
cash position which is being offset.
    (aa) Associated person. This term means any natural person who is 
associated in any of the following capacities with:
    (1) A futures commission merchant as a partner, officer, or employee 
(or any natural person occupying a similar status or performing similar 
functions), in any capacity which involves (i) the solicitation or 
acceptance of customers' or option customers' orders (other than in a 
clerical capacity) or (ii) the supervision of any person or persons so 
engaged;
    (2) An introducing broker as a partner, officer, employee, or agent 
(or any natural person occupying a similar status or performing similar 
functions), in any capacity which involves (i) the solicitation or 
acceptance of customers' or option customers' orders (other than in a 
clerical capacity) or (ii) the supervision of any person or persons so 
engaged;
    (3) A commodity pool operator as a partner, officer, employee, 
consultant, or agent (or any natural person occupying a similar status 
or performing similar functions), in any capacity which involves (i) the 
solicitation of funds, securities, or property for a participation in a 
commodity pool or (ii) the supervision of any person or persons so 
engaged; or
    (4) A commodity trading advisor as a partner, officer, employee, 
consultant, or agent (or any natural person occupying a similar status 
or performing similar functions), in any capacity which involves: (i) 
The solicitation of a client's or prospective client's discretionary 
account, or (ii) the supervision of any person or persons so engaged; 
and
    (5) A leverage transaction merchant as a partner, officer, employee, 
consultant, or agent (or any natural person occupying a similar status 
or performing similar functions), in any capacity which involves: (i) 
The solicitation or acceptance of leverage customers' orders (other than 
in a clerical capacity) for leverage transactions as defined in Sec. 
31.4(x) of this chapter, or (ii) the supervision of any person or 
persons so engaged.
    (bb)(1) Commodity trading advisor. This term means any person who, 
for compensation or profit, engages in the business of advising others, 
either directly or through publications, writings or electronic media, 
as to the value of or the advisability of trading in any contract of 
sale of a commodity for future delivery made or to be made on or subject 
to the rules of a contract market, any commodity option authorized under 
section 4c of the Act, or any leverage transaction authorized under 
section 19 of the Act, or who, for compensation or profit, and as part 
of a regular business, issues or promulgates analyses or reports 
concerning any of the foregoing; but such term does not include (i) any 
bank or trust company or any person acting as an employee thereof, (ii) 
any news reporter, news columnist, or news editor of the print or 
electronic media, or any lawyer, accountant, or teacher, (iii) any floor 
broker or futures commission merchant, (iv) the publisher or producer of 
any print or electronic data of general and regular dissemination, 
including its employees, (v) the named fiduciary, or trustee, of any 
defined benefit plan which is subject to the provisions of the Employee 
Retirement Income Security Act of 1974, or any fiduciary whose sole 
business is to advise that plan, (vi) any contract market, and (vii) 
such other persons not within the intent of this definition as the 
Commission may specify by rule, regulation or order: Provided, That the 
furnishing of such services by the foregoing persons is solely 
incidental to the conduct of their business or profession: Provided 
further, That the Commission, by rule

[[Page 11]]

or regulation, may include within this definition, any person advising 
as to the value of commodities or issuing reports or analyses concerning 
commodities, if the Commission determines that such rule or regulation 
will effectuate the purposes of this provision.
    (cc) Commodity pool operator. This term means any person engaged in 
a business which is of the nature of an investment trust, syndicate, or 
similar form of enterprise, and who, in connection therewith, solicits, 
accepts, or receives from others, funds, securities, or property, either 
directly or through capital contributions, the sale of stock or other 
forms of securities, or otherwise, for the purpose of trading in any 
commodity for future delivery or commodity option on or subject to the 
rules of any contract market, but does not include such persons not 
within the intent of this definition as the Commission may specify by 
rule or regulation or by order.
    (dd) Commission. This term means the Commodity Futures Trading 
Commission.
    (ee) Self-regulatory organization. This term means a contract market 
(as defined in Sec. 1.3(h)), or a registered futures association under 
section 17 of the Act.
    (ff) Designated self-regulatory organization. This term means:
    (1) Self-regulatory organization of which a futures commission 
merchant, an introducing broker or a leverage transaction merchant is a 
member; or
    (2) If a futures commission merchant or an introducing broker is a 
member of more than one self-regulatory organization and such futures 
commission merchant or introducing broker is the subject of an approved 
plan under Sec. 1.52 of this part, then a self-regulatory organization 
delegated the responsibility by such a plan for monitoring and auditing 
such futures commission merchant or introducing broker for compliance 
with the minimum financial and related reporting requirements of the 
self-regulatory organizations of which the futures commission merchant 
or introducing broker is a member, and for receiving the financial 
reports necessitated by such minimum financial and related reporting 
requirements from such futures commission merchant or introducing 
broker; or
    (3) If a leverage transaction merchant is a member of more than one 
self-regulatory organization and such leverage transaction merchant is 
the subject of an approved plan under Sec. 31.28 of this chapter, then 
a self-regulatory organization delegated the responsibility by such a 
plan for monitoring and auditing such leverage transaction merchant for 
compliance with the minimum financial, cover, segregation and sales 
practice, and related reporting requirements of the self-regulatory 
organizations of which the leverage transaction merchant is a member, 
and for receiving the reports necessitated by such minimum financial, 
cover, segregation and sales practice, and related reporting 
requirements from such leverage transaction merchant.
    (gg) Customer funds. This term means all money, securities, and 
property received by a futures commission merchant or by a clearing 
organization from, for, or on behalf of, customers or option customers:
    (1) In the case of commodity customers, to margin, guarantee, or 
secure contracts for future delivery on or subject to the rules of a 
contract market and all money accruing to such customers as the result 
of such contracts; and
    (2) In the case of option customers, in connection with a commodity 
option transaction on or subject to the rules of a contract market:
    (i) To be used as a premium for the purchase of a commodity option 
for an option customer;
    (ii) As a premium payable to an option customer;
    (iii) To guarantee or secure performance of a commodity option by an 
option customer; or
    (iv) Representing accruals (including, for purchasers of a commodity 
option for which the full premium has been paid, the market value of 
such commodity option) to an option customer.
    (3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the 
term customer funds shall exclude money, securities or property received 
to margin, guarantee or secure the trades or contracts of opt-out 
customers, and all money accruing to opt-out customers

[[Page 12]]

as the result of such trades or contracts, to the extent that such 
trades or contracts are made on or subject to the rules of any 
registered derivatives transaction execution facility that has 
authorized opting out in accordance with Sec. 37.7 of this chapter.
    (4) Notwithstanding paragraphs (gg)(1), (2) and (3) of this section, 
the term customer funds shall exclude money, securities or property held 
to margin, guarantee or secure security futures products held in a 
securities account, and all money accruing as the result of such 
security futures products.
    (hh) Commodity option transaction; commodity option. These terms 
each mean any transaction or agreement in interstate commerce which is 
or is held out to be of the character of, or is commonly known to the 
trade as, an ``option,'' ``privilege,'' ``indemnity,'' ``bid,'' 
``offer,'' ``call,'' ``put.'' ``advance guaranty,'' or ``decline 
guaranty,'' and which is subject to regulation under the Act and these 
regulations.
    (ii) Premium. This term means the amount agreed upon between the 
purchaser and seller, or their agents, for the purchase or sale of a 
commodity option on or subject to the rules of a contract market.
    (jj) Option customer. This term means any person who directly or 
indirectly, purchases or grants (sells), or otherwise acquires or 
disposes of any interest in a commodity option for value, but does not 
include: (1) For purposes of Sec. Sec. 1.16, 1.17, 1.20-1.30, 1.32, 
1.36, 33.3 and 33.7 of this chapter, the owner or holder of a 
proprietary account; and (2) option customers whose option transactions 
are conducted in accordance with the requirements of part 32 of this 
chapter.
    (kk) Strike price. This term means the price, per unit, at which a 
person may purchase or sell the contract of sale of a commodity for 
future delivery or the physical which is the subject of a commodity 
option: Provided, That for purposes of Sec. 1.17, the term ``strike 
price'' means the total price at which a person may purchase or sell the 
contract of sale of a commodity for future delivery or the physical 
which is the subject of a commodity option (i.e., price per unit times 
the number of units).
    (ll) Physical. This term means any good, article, service, right or 
interest upon which a commodity option may be traded in accordance with 
the Act and these regulations.
    (mm) Introducing broker. This term means:
    (1) Any person who, for compensation or profit, whether direct or 
indirect, is engaged in soliciting or in accepting orders (other than in 
a clerical capacity) for the purchase or sale of any commodity for 
future delivery on or subject to the rules of any contract market who 
does not accept any money, securities, or property (or extend credit in 
lieu thereof) to margin, guarantee, or secure any trades or contracts 
that result or may result therefrom; and
    (2) Includes any person required to register as an introducing 
broker by virtue of part 33 of this chapter: Provided, That the term 
``introducing broker'' shall not include:
    (i) Any futures commission merchant, floor broker, or associated 
person, acting in its capacity as such, regardless of whether that 
futures commission merchant, floor broker, or associated person is 
registered or exempt from registration in such capacity;
    (ii) Any commodity trading advisor, which, acting in its capacity as 
a commodity trading advisor, is not compensated on a per-trade basis or 
which solely manages discretionary accounts pursuant to a power of 
attorney, regardless of whether that commodity trading advisor is 
registered or exempt from registration in such capacity; and
    (iii) Any commodity pool operator which, acting in its capacity as a 
commodity pool operator, solely operates commodity pools, regardless of 
whether that commodity pool operator is registered or exempt from 
registration in such capacity.
    (nn) Guarantee agreement. This term means an agreement of guaranty 
in the form set forth in part B of Form 1-FR, executed by a registered 
futures commission merchant and by an introducing broker or applicant 
for registration as an introducing broker on behalf of an introducing 
broker or applicant for registration as an introducing

[[Page 13]]

broker in satisfaction of the alternative adjusted net capital 
requirement set forth in Sec. 1.17(a)(2)(ii).
    (oo) Leverage transaction merchant. Means and includes any 
individual, association, partnership, corporation, trust or other person 
that is engaged in the business of offering to enter into, entering into 
or confirming the execution of leverage contracts, or soliciting or 
accepting orders for leverage contracts, and who accepts leverage 
customer funds (or extends credit in lieu thereof) in connection 
therewith.
    (pp) Leverage customer funds. Means all money, securities and 
property received, directly or indirectly by a leverage transaction 
merchant from, for, or on behalf of leverage customers to margin, 
guarantee or secure leverage contracts and all money, securities and 
property accruing to such customers as the result of such contracts, or 
the customers' leverage equity. In the case of a long leverage 
transaction, profit or loss accruing to a leverage customer is the 
difference between the leverage transaction merchant's current bid price 
for the leverage contract and the ask price of the leverage contract 
when entered into. In the case of a short leverage transaction, profit 
or loss accruing to a leverage customer is the difference between the 
bid price of the leverage contract when entered into and the leverage 
transaction merchant's current ask price for the leverage contract.
    (qq) Leverage contract. Shall have the same meaning as that set 
forth in Sec. 31.4(w) of this chapter.
    (rr) Foreign futures or foreign options secured amount. This term 
means all money, securities and property held by or held for or on 
behalf of a futures commission merchant from, for, or on behalf of 
foreign futures or foreign options customers as defined in Sec. 30.1 of 
this chapter:
    (1) In the case of foreign futures customers, money, securities and 
property required by a futures commission merchant to margin, guarantee, 
or secure open foreign futures contracts plus or minus any unrealized 
gain or loss on such contracts; and
    (2) In the case of foreign options customers in connection with open 
foreign options transactions money, securities and property representing 
premiums paid or received, plus any other funds required to guarantee or 
secure open transactions plus or minus any unrealized gain or loss on 
such transactions.
    (ss) Foreign board of trade. This term means any board of trade, 
exchange or market located outside the United States, its territories or 
possessions, whether incorporated or unincorporated, where foreign 
futures or foreign options transactions are entered into.
    (tt) Electronic signature means an electronic sound, symbol, or 
process attached to or logically associated with a record and executed 
or adopted by a person with the intent to sign the record.
    (uu) Opt-out customer. This term means a customer that is an 
eligible contract participant, as defined in section 1a(12) of the Act, 
and that, in accordance with Sec. 1.68, has elected not to have funds 
that are being carried for purposes of trading on or through the 
facilities of a registered derivatives transaction execution facility, 
separately accounted for and segregated by the futures commission 
merchant pursuant to section 4d of the Act and Sec. Sec. 1.20-1.30, 
1.32 and 1.36. A customer is an opt-out customer solely with respect to 
agreements, contracts or transactions, and the money, securities or 
property received by a futures commission merchant to margin, guarantee 
or secure such agreements, contracts or transactions, made on or subject 
to the rules of any derivatives transaction execution facility that has 
adopted rules permitting a customer to elect to be an opt-out customer 
and with respect to which the customer has made such an election. For 
all other purposes under the Act and the rules thereunder, except where 
otherwise provided, an opt-out customer shall be a customer as defined 
in Sec. 1.3(k).
    (vv) Futures account. This term means an account that is maintained 
in accordance with the segregation requirements of section 4d of the 
Commodity Exchange Act and the rules thereunder.
    (ww) Securities account. This term means an account that is 
maintained in accordance with the requirements of

[[Page 14]]

section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-3 
thereunder.

[41 FR 3194, Jan. 21, 1976]

    Editorial Note: For Federal Register citations affecting Sec. 1.3, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
sections of the printed volume and on GPO Access.



Sec. 1.4   Use of electronic signatures.

    For purposes of complying with any provision in the Commodity 
Exchange Act or the rules or regulations in this Chapter I that requires 
a document to be signed by a customer of a futures commission merchant 
or introducing broker, a pool participant or a client of a commodity 
trading advisor, an electronic signature executed by the customer, 
participant or client will be sufficient, if the futures commission 
merchant, introducing broker, commodity pool operator or commodity 
trading advisor elects generally to accept electronic signatures; 
Provided, however, That the electronic signature must comply with 
applicable Federal laws and other Commission rules; And, Provided 
further, That the futures commission merchant, introducing broker, 
commodity pool operator or commodity trading advisor must adopt and 
utilize reasonable safeguards regarding the use of electronic 
signatures, including at a minimum safeguards employed to prevent 
alteration of the electronic record with which the electronic signature 
is associated, after such record has been electronically signed.

[65 FR 12469, Mar. 9, 2000]

          Minimum Financial and Related Reporting Requirements



Sec. 1.10  Financial reports of futures commission merchants and introducing 
brokers.

    (a) Application for registration. (1) Except as otherwise provided, 
a futures commission merchant or an applicant for registration as a 
futures commission merchant, in order to satisfy any requirement in this 
part that it file a Form 1-FR, must file a Form 1-FR-FCM, and any 
reference in this part to Form 1-FR with respect to a futures commission 
merchant or applicant therefor shall be deemed to be a reference to Form 
1-FR-FCM. Except as otherwise provided, an introducing broker or an 
applicant for registration as an introducing broker, in order to satisfy 
any requirement in this part that it file a Form 1-FR, must file a Form 
1-FR-IB, and any reference in this part to Form 1-FR with respect to an 
introducing broker or applicant therefor shall be deemed to be a 
reference to Form 1-FR-IB.
    (2) (i) (A) Except as provided in paragraphs (a)(3) and (h) of this 
section, each person who files an application for registration as a 
futures commission merchant and who is not so registered at the time of 
such filing, must, concurrently with the filing of such application, 
file either:
    (1) 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
    (2) 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 one year prior to the date on which such 
report is filed.
    (B) Each such person must include with such financial report a 
statement describing the source of his current assets and representing 
that his capital has been contributed for the purpose of operating his 
business and will continue to be used for such purpose.
    (ii) (A) Except as provided in paragraphs (a)(3) and (h) of this 
section, each person who files an application for registration as an 
introducing broker and who is not so registered at the time of such 
filing, must, concurrently with the filing of such application, file 
either:
    (1) 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;
    (2) 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

[[Page 15]]

than one year prior to the date on which such report is filed;
    (3) 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, Provided, however, that such 
applicant shall be subject to a review by the applicant's designated 
self-regulatory organization within six months of registration; or
    (4) A guarantee agreement.
    (B) Each person filing in accordance with paragraphs (a)(2)(ii)(A) 
(1), (2) or (3) of this section must include with such financial report 
a statement describing the source of his current assets and representing 
that his capital has been contributed for the purpose of operating his 
business and will continue to be used for such purpose.
    (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) The provisions of paragraph (a)(2) of this section do not apply 
to any person succeeding to and continuing the business of another 
introducing broker.
    (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) Each such person who succeeds to and continues the business of 
an introducing broker which was operating pursuant to a guarantee 
agreement and which was not 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 or a Form 1-FR-IB with his application for 
registration. If such person files a Form 1-FR-IB with his application 
for registration, such person must also file a Form 1-FR-IB, certified 
by an independent public accountant, as of a date no later than the end 
of the month registration is granted. The Form 1-FR-IB certified by an 
independent public accountant must be filed with the National Futures 
Association not more than 45 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

[[Page 16]]

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 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.
    (B) If an introducing broker has filed previously a Form 1-FR-IB, 
certified by an independent public accountant in accordance with the 
provisions of paragraphs (a)(2)(ii) or (j)(8) of this section and Sec. 
1.16 of this part, as of a date not more than one year prior to the 
close of such introducing broker's fiscal year, it need not have 
certified by an independent public accountant the Form 1-FR-IB filed as 
of the introducing broker's first fiscal year-end following the as of 
date of its initial certified Form 1-FR-IB. In such a case, the 
introducing broker's Form 1-FR-IB filed as of the close of the second 
fiscal year-end following the as of date of its initial certified Form 
1-FR-IB must cover the period of time between those two dates and must 
be certified by an independent public accountant in accordance with 
Sec. 1.16 of this part.
    (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.
    (3) The provisions of paragraphs (b)(1) and (b)(2) of this section 
may be met by any person registered as a futures commission merchant or 
as an introducing broker who is a member of a designated self-regulatory 
organization and conforms to minimum financial standards and related 
reporting requirements set by such designated self-regulatory 
organization in its bylaws, rules, regulations, or resolutions and 
approved after the effective date of these regulations by the Commission 
pursuant to section 4f(b) of the Act and Sec. 1.52: Provided, however, 
That each such registrant shall promptly file with the Commission a true 
and exact copy of each financial report which it files with such 
designated self-regulatory organization.
    (4) Upon receiving written notice from any representative of the 
National Futures Association, the Commission or any self-regulatory 
organization of which it is a member, an applicant or registrant, except 
an applicant for registration as an introducing broker which has filed 
concurrently with its application for registration a guarantee agreement 
and which is not also a securities broker or dealer, must, monthly or at 
such times as specified, furnish the National Futures

[[Page 17]]

Association, the Commission or the self-regulatory organization 
requesting such information a Form 1-FR or such other financial 
information as requested by the National Futures Association, the 
Commission or the self-regulatory organization. Each such Form 1-FR or 
such other information must be furnished within the time period 
specified in the written notice, and in accordance with the provisions 
of paragraph (c) of this section.
    (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 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 futures commission merchant, 
introducing broker or a designated self-regulatory organization has 
provided the Commission with the means necessary to read and to process 
the information contained in such report: 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) Contents of financial reports. (1) Each Form 1-FR filed pursuant 
to this Sec. 1.10 which is not required to be certified by an 
independent public accountant must be completed in accordance with the 
instructions to the form and contain:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) A statement of changes in ownership equity for the period 
between the date of the most recent statement of financial condition 
filed with the Commission and the date for which the report is made;
    (iii) A statement of changes in liabilities subordinated to claims 
of general creditors for the period between the date of the most recent 
statement of financial condition filed with the Commission and the date 
for which the report is made;
    (iv) A statement of the computation of the minimum capital 
requirements pursuant to Sec. 1.17 as of the date for which the report 
is made;
    (v) 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 options 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 as of the date for which the report is made; 
and
    (vi) In addition to the information expressly required, such futher 
material information as may be necessary to make the required statements 
and schedules not misleading.
    (2) Each Form 1-FR filed pursuant to this Sec. 1.10 which is 
required to be certified by an independent public accountant must be 
completed in accordance with the instructions to the form and contain:
    (i) A statement of financial condition as of the date for which the 
report is made;
    (ii) Statements of income (loss), cash flows, changes in ownership 
equity, and changes in liabilities subordinated to claims of general 
creditors, for the period between the date of the most recent certified 
statement of financial

[[Page 18]]

condition filed with the Commission and the date for which the report is 
made: Provided, That for an applicant filing pursuant to paragraph 
(a)(2) of this section the period must be the year ending as of the date 
of the statement of financial condition;
    (iii) A statement of the computation of the minimum capital 
requirements pursuant to Sec. 1.17 as of the date for which the report 
is made;
    (iv) 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 options 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 as of the date for which the report is made;
    (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
    (vii) In addition to the information expressly required, such 
further material information as may be necessary to make the required 
statements not misleading.
    (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.
    (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.
    (e) Election of fiscal year. (1) An applicant wishing to establish a 
fiscal year other than the calendar year may do so by notifying the 
National Futures Association of its election of such fiscal year, in 
writing, concurrently with the filing of the Form 1-FR pursuant to 
paragraph (a)(2) of this section, but in no event may such fiscal year 
end more than one year from the date of the Form 1-FR filed pursuant to 
paragraph (a)(2) of this section. A copy of such written notice must 
also be filed 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

[[Page 19]]

must file such a notice with the Commission's Southwestern Regional 
Office). An applicant which does not so notify the National Futures 
Association and the Commission will be deemed to have elected the 
calendar year as its fiscal year. A registrant must continue to use its 
elected fiscal year, calendar or otherwise, unless a change in such 
fiscal year is approved upon written application to the principal office 
of the Commission in Washington, DC, and written notice of such change 
is given to the designated self-regulatory organization, if any.
    (2) An applicant may elect to file its Form 1-FR for each calendar 
quarter in lieu of each fiscal quarter by notifying the National Futures 
Association of its election, in writing, concurrently with the filing of 
the Form 1-FR pursuant to paragraph (a)(2) of this section. A copy of 
such written notice must also be filed 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 must file such a notice with the Commission's 
Southwestern Regional Office). A registrant wishing to change such 
election or to make such election other than concurrently with the 
filing of the Form 1-FR pursuant to paragraph (a)(2) of this section may 
do so only if such change or election is approved by the Commission upon 
written application to the principal office of the Commission in 
Washington, DC, and written notice of such change is given to the 
designated self-regulatory organization, if any.
    (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.)
    (2) In the event an applicant finds that it cannot file its report 
for any period within the time specified in paragraph (b)(4) of this 
section or Sec. 1.12(b) without substantial undue hardship, it may file 
with the National Futures Association 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 National Futures Association 
before the time specified in paragraph (b)(4) of this section or Sec. 
1.12(b) for filing the report. Notice of such application must be filed 
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 must file such 
a notice with the Commission's Southwestern Regional Office) 
concurrently with the filing of such application with the National 
Futures Association. Within ten calendar days after receipt of the 
application for an extension of time, the National Futures Association 
shall:
    (i) Notify the applicant of the grant or denial of the requested 
extension; or
    (ii) Indicate to the applicant that additional time is required to 
analyze the request, in which case the amount of time needed will be 
specified.

[[Page 20]]

    (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 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.
    (3) [Reserved]
    (4) 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. Nothing in this paragraph 
(g) will limit the authority of any self-regulatory organization to 
request or receive any information relative to its members' financial 
condition.
    (5) The independent accountant's opinion and a guarantee agreement 
filed pursuant to this section will be deemed public information.
    (h) Filing option available to a futures commission merchant or an 
introducing broker which is also a securities broker or dealer. Any 
applicant or registrant which is registered with the Securities and 
Exchange Commission as a securities broker or dealer may comply with the 
requirements of this section by filing (in accordance with paragraphs 
(a), (b), (c), and (j) of this section) a copy of its 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: Provided, 
however, That all information which is required to be furnished on and 
submitted with Form 1-FR is provided with such Report.
    (i) Filing option available to an introducing broker or applicant 
for registration as an introducing broker which is also a country 
elevator. Any introducing broker or applicant for registration as an 
introducing broker which is also a country elevator but which is not 
also a securities broker or dealer may comply with the requirements of 
this section by filing (in accordance with paragraphs (a), (b) and (c) 
of this section) a copy of a financial report prepared by a grain 
commission firm which has been

[[Page 21]]

authorized by the Deputy Vice President of the Commodity Credit 
Corporation of the United States Department of Agriculture to provide a 
compilation report of financial statements of warehousemen for purposes 
of Uniform Grain Storage Agreements, and which complies with the 
standards for independence set forth in Sec. 1.16(b)(2) with respect to 
the registrant or applicant: Provided, however, That all information 
which is required to be furnished on and submitted with Form 1-FR is 
provided with such financial report, including a statement of the 
computation of the minimum capital requirements pursuant to Sec. 1.17: 
And, provided further, That the balance sheet is presented in a format 
as consistent as possible with the Form 1-FR and a reconciliation is 
provided reconciling such balance sheet to the statement of the 
computation of the minimum capital requirements pursuant to Sec. 1.17. 
Attached to each financial report filed pursuant to this paragraph (i) 
must be an oath or affirmation that to the best knowledge and belief of 
the individual making such oath or affirmation the information contained 
therein 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.
    (j) Requirements for guarantee agreement. (1) A guarantee agreement 
filed pursuant to this section must be signed in a manner sufficient to 
be a binding guarantee under local law by an appropriate person on 
behalf of the futures commission merchant and the introducing broker, 
and each signature must be accompanied by evidence that the signatory is 
authorized to enter the agreement on behalf of the futures commission 
merchant or introducing broker and is such an appropriate person. For 
purposes of this paragraph (j), an appropriate person shall be the 
proprietor, if the firm is a sole proprietorship; a general partner, if 
the firm is a partnership; and either the chief executive officer or the 
chief financial officer, if the firm is a corporation.
    (2) No futures commission merchant may enter into a guarantee 
agreement if:
    (i) It knows or should have known that its adjusted net capital is 
less than the amount set forth in Sec. 1.12(b); or
    (ii) There is filed against the futures commission merchant an 
adjudicatory proceeding brought by or before the Commission pursuant to 
the provisions of sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or 
Sec. Sec. 3.55, 3.56 or 3.60 of this chapter.
    (3) A guarantee agreement filed in connection with an application 
for initial registration as an introducing broker in accordance with the 
provisions of Sec. 3.10(a) of this chapter shall become effective upon 
the granting of registration or, if appropriate, a temporary license, to 
the introducing broker. A guarantee agreement filed other than in 
connection with an application for initial registration as an 
introducing broker shall become effective as of the date agreed to by 
the parties.
    (4)(i) If the registration of the introducing broker is suspended, 
revoked, or withdrawn in accordance with the provisions of this chapter, 
the guarantee agreement shall expire as of the date of such suspension, 
revocation or withdrawal.
    (ii) If the registration of the futures commission merchant is 
suspended or revoked, the guarantee agreement shall expire 30 days after 
such suspension or revocation, or at such earlier time as may be 
approved by the Commission, the introducing broker, and the introducing 
broker's designated self-regulatory organization.
    (5) A guarantee agreement may be terminated at any time during the 
term thereof:
    (i) By mutual written consent of the parties, signed by an 
appropriate person on behalf of each party, with prompt written notice 
thereof, signed by an appropriate person on behalf of each party, to the 
Commission and to the designated self-regulatory organizations of the 
futures commission merchant and the introducing broker;
    (ii) For good cause shown, by either party giving written notice of 
its intention to terminate the agreement,

[[Page 22]]

signed by an appropriate person, to the other party to the agreement, to 
the Commission, and to the designated self-regulatory organizations of 
the futures commission merchant and the introducing broker; or
    (iii) By either party giving written notice of its intention to 
terminate the agreement, signed by an appropriate person, at least 30 
days prior to the proposed termination date, to the other party to the 
agreement, to the Commission, and to the designated self-regulatory 
organizations of the futures commission merchant and the introducing 
broker.
    (6) The termination of a guarantee agreement by a futures commission 
merchant or an introducing broker, or the expiration of such an 
agreement, shall not relieve either party from any liability or 
obligation arising from acts or omissions which occurred during the term 
of the agreement.
    (7) An introducing broker may not simultaneously be a party to more 
than one guarantee agreement: Provided, however, That the provisions of 
this paragraph (j)(7) shall not be deemed to preclude an introducing 
broker from entering into a guarantee agreement with another futures 
commission merchant if the introducing broker or the futures commission 
merchant which is a party to the existing agreement has provided notice 
of termination of the existing agreement in accordance with the 
provisions of paragraph (j)(5) of this section, and the new guarantee 
agreement does not become effective until the day following the date of 
termination of the existing agreement: And, provided further, That the 
provisions of this paragraph (j)(7) shall not be deemed to preclude an 
introducing broker from entering into a guarantee agreement with another 
futures commission merchant if the futures commission merchant which is 
a party to the existing agreement ceases to remain registered and the 
existing agreement would therefore expire in accordance with the 
provisions of paragraph (j)(4)(ii) of this section.
    (8)(i)(A) An introducing broker that is a party to a guarantee 
agreement that has been terminated in accordance with the provisions of 
paragraph (j)(5) of this section, or that is due to expire in accordance 
with the provisions of paragraph (j)(4)(ii) of this section, must cease 
doing business as an introducing broker on or before the effective date 
of such termination or expiration unless, on or before 10 days prior to 
the effective date of such termination or expiration or such other 
period of time as the Commission or the designated self-regulatory 
organization may allow for good cause shown, the introducing broker 
files with its designated self-regulatory organization either a new 
guarantee agreement effective as of the day following the date of 
termination of the existing agreement, or, in the case of a guarantee 
agreement that is due to expire in accordance with the provisions of 
paragraph (j)(4)(ii) of this section, a new guarantee agreement 
effective on or before such expiration, or either:
    (1) 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 the report is filed; or
    (2) 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.
    (B) Each person filing a Form 1-FR-IB in accordance with this 
section must include with the financial report a statement describing 
the source of his current assets and representing that his capital has 
been contributed for the purpose of operating his business and will 
continue to be used for such purpose.
    (ii) (A) Notwithstanding the provisions of paragraph (j)(8)(i) of 
this section or of Sec. 1.17(a), an introducing broker that is a party 
to a guarantee agreement that has been terminated in accordance with the 
provisions of paragraph (j)(5)(ii) of this section shall not be deemed 
to be in violation of the minimum adjusted net capital requirement of 
Sec. 1.17(a)(1)(ii) or (a)(2) for 30 days following such termination. 
Such an introducing broker must cease doing business as an introducing 
broker on or after the effective date of such termination, and may not 
resume

[[Page 23]]

doing business as an introducing broker unless and until it files a new 
agreement or either:
    (1) 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 the report is filed; or
    (2) 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.
    (B) Each person filing a Form 1-FR-IB in accordance with this 
section must include with the financial report a statement describing 
the source of his current assets and representing that his capital has 
been contributed for the purpose of operating his business and will 
continue to be used for such purpose.
    (k) Filing option available to an introducing broker. (1) Any 
introducing broker or applicant for registration as an introducing 
broker which is not operating or intending to operate pursuant to a 
guarantee agreement may comply with the requirements of this section by 
filing (in accordance with paragraphs (a), (b) and (c) of this section) 
a Form 1-FR-IB in lieu of a Form 1-FR-FCM.
    (2) If an introducing broker or applicant therefor avails itself of 
the filing option available under paragraph (k)(1) of this section, the 
report required to be filed in accordance with Sec. 1.16(c)(5) of this 
part must be filed as of the date of the Form 1-FR-IB being filed, and 
such an introducing broker or applicant therefor must maintain its 
financial records and make its monthly formal computation of its 
adjusted net capital, as required by Sec. 1.18 of this part, in a 
manner consistent with Form 1-FR-IB.

(The information collection requirements contained in Sec. 1.10 were 
approved by the Office of Management and Budget under control number 
3038-0024; in paragraphs (a) and (b) under control number 3038-0023; and 
in paragraph (f) under control number 3038-0003.)

[43 FR 39967, Sept. 8, 1978, as amended at 45 FR 80491, Dec. 5, 1980; 46 
FR 63035, Dec. 30, 1981; 48 FR 35280, Aug. 3, 1983; 49 FR 39524, Oct. 9, 
1984; 53 FR 4611, Feb. 17, 1988; 53 FR 7179, Mar. 7, 1988; 57 FR 23143, 
June 2, 1992; 58 FR 10953, Feb. 23, 1993; 58 FR 12988, Mar. 8, 1993; 58 
FR 19589, Apr. 15, 1993; 59 FR 5525, Feb. 7, 1994; 62 FR 4639, Jan. 31, 
1997; 62 FR 10444, Mar. 7, 1997; 62 FR 33007, June 18, 1997; 66 FR 
53516, Oct. 23, 2001]



Sec. 1.11  [Reserved]



Sec. 1.12  Maintenance of minimum financial requirements by futures 
commission merchants and introducing brokers.

    (a) Each person registered as a futures commission merchant or who 
files an application for registration as a futures commission merchant, 
and each person registered as an introducing broker or who files an 
application for registration as an introducing broker (except for an 
introducing broker or applicant for registration as an introducing 
broker operating pursuant to, or who has filed concurrently with its 
application for registration, a guarantee agreement and who is not also 
a securities broker or dealer), who knows or should have known that its 
adjusted net capital at any time is less than the minimum required by 
Sec. 1.17 or by the capital rule of any self-regulatory organization to 
which such person is subject, if any, must:
    (1) Give telephonic notice, to be confirmed in writing by 
telegraphic or facsimile notice, as set forth in paragraph (i) of this 
section that the applicant's or registrant's adjusted net capital is 
less than required by Sec. 1.17 or by other capital rule, identifying 
the applicable capital rule. The notice must be given

[[Page 24]]

immediately after the applicant or registrant knows or should know that 
its adjusted net capital is less than required by any of the aforesaid 
rules to which the applicant or registrant is subject; and
    (2) If the person is a futures commission merchant or applicant 
therefor, within 24 hours after giving such notice file a statement of 
financial condition, a statement of the computation of the minimum 
capital requirements pursuant to Sec. 1.17 (computed in accordance with 
the applicable capital rule), the statements of segregation requirements 
and funds in segregation for customers trading on U.S. commodity 
exchanges and for customers' dealer options 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, all as of the date such applicant's or registrant's 
adjusted net capital is less than the minimum required; or
    (3) If the person is an introducing broker or applicant therefor, 
within 24 hours after giving such notice file a statement of financial 
condition and a statement of the computation of the minimum capital 
requirements pursuant to Sec. 1.17 (computed in accordance with the 
applicable capital rule) all as of the date such applicant's or 
registrant's adjusted net capital is less than the minimum required.
    (b) Each person registered as a futures commission merchant, or who 
files an application for registration as a futures commission merchant, 
who knows or should have known that its adjusted net capital at any time 
is less than the greatest of:
    (1) 150 percent of the appropriate minimum dollar amount required by 
Sec. 1.17(a)(1)(i);
    (2) Six percent of the following amount: The customer funds required 
to be segregated pursuant to the Act and the regulations in this part, 
plus the funds of opt-out customers that, but for the election to opt 
out pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by such customers on or subject to the 
rules of a contract market or a foreign board of trade for which the 
full premiums have been paid: Provided, however, that the deduction for 
each such customer shall be limited to the amount of customer funds in 
such customer's account(s) and foreign futures and foreign options 
secured amounts;
    (3) 150 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member; or
    (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 240.17a-11(b)), must file written notice to that effect as set 
forth in paragraph (i) 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.

[[Page 25]]

    (c) If an applicant or registrant at any time fails to make or keep 
current the books and records required by these regulations, such 
applicant or registrant must, on the same day such event occurs, give 
telegraphic or facsimile notice of such fact, specifying the books and 
records which have not been made or which are not current, and within 5 
business days after giving such notice file a written report stating 
what steps have been and are being taken to correct the situation.
    (d) Whenever any applicant or registrant discovers or is notified by 
an independent public accountant, pursuant to Sec. 1.16(e)(2) of these 
regulations, of the existence of any material inadequacy, as specified 
in Sec. 1.16(d)(2) of these regulations, such applicant or registrant 
must give telegraphic or facsimile notice of such material inadequacy 
within 3 business days, and within 5 business days after giving such 
notice file a written report stating what steps have been and are being 
taken to correct the material inadequacy.
    (e) Whenever any self-regulatory organization learns that a member 
registrant has failed to file a notice or written report as required by 
Sec. 1.12, that self-regulatory organization must immediately report 
this failure by telephone, confirmed in writing immediately by 
telegraphic or facsimile notice, as provided in paragraph (i) of this 
section.
    (f)(1) Whenever a clearing organization determines that any position 
it carries for one of its clearing members which is registered as a 
futures commission merchant or as a leverage transaction merchant must 
be liquidated immediately, transferred immediately or that the trading 
of any account of such futures commission merchant or such leverage 
transaction merchant shall be only for the purposes of liquidation, 
because that clearing member has failed to meet a call for margin or to 
make other required deposits, the clearing organization must give 
telephonic, confirmed in writing by telegraphic or facsimile notice of 
such a determination to the principal office of the Commission at 
Washington, DC immediately.
    (2) Whenever a registered futures commission merchant determines 
that any position it carries for another registered futures commission 
merchant or for a registered leverage transaction merchant must be 
liquidated immediately, transferred immediately or that the trading of 
any account of such futures commission merchant or leverage transaction 
merchant shall be only for purposes of liquidation, because the other 
futures commission merchant or the leverage transaction merchant has 
failed to meet a call for margin or to make other required deposits, the 
carrying futures commission merchant must give telephonic, confirmed in 
writing by telegraphic or facsimile notice of such a determination to 
the principal office of the Commission at Washington, DC, immediately.
    (3) Whenever a registered futures commission merchant determines 
that an account which it is carrying is undermargined by an amount which 
exceeds the futures commission merchant's adjusted net capital 
determined in accordance with Sec. 1.17, the futures commission 
merchant must give immediate telephonic, confirmed in writing by 
telegraphic or facsimile notice of such a determination to the 
designated self-regulatory organization and the principal office of the 
Commission at Washington, DC. This paragraph (f)(3) shall apply to any 
account carried by the futures commission merchant, whether a customer, 
noncustomer, omnibus or proprietary account. For purposes of this 
paragraph (f)(3), if any person has an interest of 10 percent or more in 
ownership or equity in, or guarantees, more than one account, or has 
guaranteed an account in addition to his own account, all such accounts 
shall be combined. A designated self-regulatory organization may grant 
an exemption from the provisions of this paragraph to a futures 
commission merchant with respect to any particular account on a 
continuous basis provided the designated self-regulatory organization 
documents the reasons for granting such an exemption and continues to 
monitor any such account.
    (4) A futures commission merchant shall report immediately by 
telephone, confirmed in writing immediately by

[[Page 26]]

telegraphic or facsimile notice, whenever any commodity interest account 
it carries is subject to a margin call, or call for other deposits 
required by the futures commission merchant, that exceeds the futures 
commission merchant's excess adjusted net capital, determined in 
accordance with Sec. 1.17, and such call has not been answered by the 
close of business on the day following the issuance of the call. This 
applies to all accounts carried by the futures commission merchant, 
whether customer, noncustomer, or omnibus, that are subject to 
margining, including commodity futures and options. In addition to 
actual margin deposits by an account owner, a futures commission 
merchant may also take account of favorable market moves in determining 
whether the margin call is required to be reported under this paragraph.
    (5)(i) A futures commission merchant shall report immediately by 
telephone, confirmed in writing immediately by telegraphic or facsimile 
notice, whenever its excess adjusted net capital is less than six 
percent of the maintenance margin required by the futures commission 
merchant on all positions held in accounts of a noncustomer other than a 
noncustomer who is subject to the minimum financial requirements of:
    (A) A futures commission merchant, or
    (B) The Securities and Exchange Commission for a securities broker 
and dealer.
    (ii) For purposes of paragraph (f)(5)(i), maintenance margin shall 
include all deposits which the futures commission merchant requires the 
noncustomer to maintain in order to carry its positions at the futures 
commission merchant.
    (g) A futures commission merchant shall provide written notice of a 
substantial reduction in capital as compared to that last reported in a 
financial report filed with the Commission pursuant to Sec. 1.10. This 
notice shall be provided as follows:
    (1) If any event or series of events, including any withdrawal, 
advance, loan or loss cause, on a net basis, a reduction in net capital 
(or, if the futures commission merchant is qualified to use the filing 
option available under Sec. 1.10(h), tentative net capital as defined 
in the rules of the Securities and Exchange Commission) of 20 percent or 
more, notice must be provided within two business days of the event or 
series of events causing the reduction; and
    (2) If equity capital of the futures commission merchant or a 
subsidiary or affiliate of the futures commission merchant consolidated 
pursuant to Sec. 1.17(f) (or 17 CFR 240.15c3-1e) would be withdrawn by 
action of a stockholder or a partner or by redemption or repurchase of 
shares of stock by any of the consolidated entities or through the 
payment of dividends or any similar distribution, or an unsecured 
advance or loan would be made to a stockholder, partner, sole 
proprietor, employee or affiliate, such that the withdrawal, advance or 
loan would cause, on a net basis, a reduction in excess adjusted net 
capital (or, if the futures commission merchant is qualified to use the 
filing option available under Sec. 1.10(h), excess net capital as 
defined in the rules of the Securities and Exchange Commission) of 30 
percent or more, notice must be provided at least two business days 
prior to the withdrawal, advance or loan that would cause the reduction: 
Provided, however, That the provisions of paragraphs (g)(1) and (g)(2) 
of this section do not apply to any futures or securities transaction in 
the ordinary course of business between a futures commission merchant 
and any affiliate where the futures commission merchant makes payment to 
or on behalf of such affiliate for such transaction and then receives 
payment from such affiliate for such transaction within two business 
days from the date of the transaction.
    (3) Upon receipt of such notice from a futures commission merchant, 
the Director of the Division of Clearing and Intermediary Oversight or 
the Director's designee may require that the futures commission merchant 
provide or cause a Material Affiliated Person (as that term is defined 
in Sec. 1.14(a)(2)) to provide, within three business days from the 
date of request or such shorter period as the Division Director or 
designee may specify, such other information as the Division Director or 
designee determines to be necessary based

[[Page 27]]

upon market conditions, reports provided by the futures commission 
merchant, or other available information.
    (h) Whenever a person registered as a futures commission merchant 
knows or should know that the total amount of its funds on deposit in 
segregated accounts on behalf of customers, or that the total amount set 
aside on behalf of customers trading on non-United States markets, is 
less than the total amount of such funds required by the Act and the 
Commission's rules to be on deposit in segregated or secured amount 
accounts on behalf of such customers, the registrant must report 
immediately by telephone, confirmed in writing immediately by 
telegraphic or facsimile notice, such deficiency to the registrant's 
designated self-regulatory organization and the principal office of the 
Commission in Washington, D.C., to the attention of the Director and the 
Chief Accountant of the Division of Clearing and Intermediary Oversight.
    (i)(1) Every notice and written report required to be given or filed 
by this section (except for notices required by paragraph (f) of this 
section) by a futures commission merchant, an applicant for registration 
as a futures commission merchant or a self-regulatory organization must 
be filed with the regional office of the Commission nearest the 
principal place of business of the applicant or registrant (except that 
an applicant, registrant or self-regulatory organization under the 
jurisdiction of the Commission's Western Regional Office must file such 
notices and reports with the Southwestern Regional Office), with the 
designated self-regulatory organization, if any, with the Securities and 
Exchange Commission, if such applicant or registrant is a securities 
broker or dealer, and with the National Futures Association, if the firm 
is an applicant. In addition, every notice required to be given by this 
section must also be filed with the principal office of the Commission 
in Washington, DC. Each statement of financial condition, each statement 
of the computation of the minimum capital requirements pursuant to Sec. 
1.17 of this part, and each schedule of segregation requirements and 
funds on deposit in segregation required by this section must be filed 
in accordance with the provisions of Sec. 1.10(d) of this part unless 
otherwise indicated.
    (2) Every notice and written report which an introducing broker or 
applicant for registration as an introducing broker is required to give 
or file by paragraphs (a), (c) and (d) of this section must be filed 
with the National Futures Association (on behalf of the Commission), 
with the designated self-regulatory organization, if any, and with every 
futures commission merchant carrying or intending to carry customer 
accounts for the introducing broker or applicant for registration as an 
introducing broker. Any notice or report filed with the National Futures 
Association pursuant to this paragraph shall be deemed for all purposes 
to be filed with, and to be the official record of, the Commission.

(Approved by the Office of Management and Budget under control number 
3038-0024)

[43 FR 39969, Sept. 8, 1978, as amended at 45 FR 6539, Jan. 29, 1980; 46 
FR 63035, Dec. 30, 1981; 47 FR 41516, Sept. 21, 1982; 48 FR 35283, Aug. 
3, 1983; 49 FR 5521, Feb. 13, 1984; 49 FR 39525, Oct. 9, 1984; 52 FR 
28248, July 29, 1987; 52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17, 
1988; 58 FR 10953, Feb. 23, 1993; 59 FR 66688, Dec. 28, 1994; 61 FR 
19185, May 1, 1996; 62 FR 4640, Jan. 31, 1997; 63 FR 32731, June 16, 
1998; 63 FR 45715, Aug. 27, 1998; 66 FR 20744, Apr. 25, 2001; 67 FR 
62351, Oct. 7, 2002]



Sec. 1.13  [Reserved]



Sec. 1.14  Risk assessment recordkeeping requirements for futures 
commission merchants.

    (a) Requirement to maintain and preserve information. (1) Each 
futures commission merchant registered with the Commission pursuant to 
Section 4d of the Act, unless exempt pursuant to paragraph (d) of this 
section, shall prepare, maintain and preserve the following information:
    (i) An organizational chart which includes the futures commission 
merchant and each of its affiliated persons. Included in the 
organizational chart shall be a designation of which affiliated persons 
are ``Material Affiliated Persons'' as that term is used in paragraph 
(a)(2) of this section, which Material Affiliated Persons file routine 
financial or risk exposure reports with

[[Page 28]]

the Securities and Exchange Commission, a federal banking agency, an 
insurance commissioner or other similar official or agency of a state, 
or a foreign regulatory authority, and which Material Affiliated Persons 
are dealers in financial instruments with off-balance sheet risk and, if 
a Material Affiliated Person is such a dealer, whether it is also an 
end-user of such instruments;
    (ii) Written policies, procedures, or systems concerning the futures 
commission merchant's:
    (A) Method(s) for monitoring and controlling financial and 
operational risks to it resulting from the activities of any of its 
affiliated persons;
    (B) Financing and capital adequacy, including information regarding 
sources of funding, together with a narrative discussion by management 
of the liquidity of the material assets of the futures commission 
merchant, the structure of debt capital, and sources of alternative 
funding;
    (C) Establishing and maintaining internal controls with respect to 
market risk, credit risk, and other risks created by the futures 
commission merchant's proprietary and noncustomer clearing activities, 
including systems and policies for supervising, monitoring, reporting 
and reviewing trading activities in securities, futures contracts, 
commodity options, forward contracts and financial instruments; policies 
for hedging or managing risks created by trading activities or 
supervising accounts carried for noncustomer affiliates, including a 
description of the types of reviews conducted to monitor positions; and 
policies relating to restrictions or limitations on trading activities: 
Provided, however, that if the futures commission merchant has no such 
written policies, procedures or systems, it must so state in writing;
    (iii) Fiscal year-end consolidated and consolidating balance sheets 
for the highest level Material Affiliated Person within the futures 
commission merchant's organizational structure, which shall include the 
futures commission merchant and its other Material Affiliated Persons, 
prepared in accordance with generally accepted accounting principles, 
which consolidated balance sheets shall be audited by an independent 
certified public accountant if an annual audit is performed in the 
ordinary course of business, but which otherwise may be unaudited, and 
which shall include appropriate explanatory notes. The consolidating 
balance sheets may be those prepared by the futures commission 
merchant's highest level Material Affiliated Person as part of its 
internal financial reporting process. Any additional information 
required to be filed under Sec. 1.15(a)(2)(iii) shall also be 
maintained and preserved; and
    (iv) Fiscal year-end consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the futures commission merchant's 
organizational structure, which shall include the futures commission 
merchant and its other Material Affiliated Persons, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary course 
of business, but which otherwise may be unaudited, and which shall 
include appropriate explanatory notes. The consolidating statements may 
be those prepared by the futures commission merchant's highest level 
Material Affiliated Person as part of its internal financial reporting 
process. Any additional information required to be filed under Sec. 
1.15(a)(2)(iii) shall also be maintained and preserved.
    (2) The determination of whether an affiliated person of a futures 
commission merchant is a Material Affiliated Person shall involve 
consideration of all aspects of the activities of, and the relationship 
between, both entities, including without limitation, the following 
factors:
    (i) The legal relationship between the futures commission merchant 
and the affiliated person;
    (ii) The overall financing requirements of the futures commission 
merchant and the affiliated person, and the degree, if any, to which the 
futures commission merchant and the affiliated person are financially 
dependent on each other;

[[Page 29]]

    (iii) The degree, if any, to which the futures commission merchant 
or its customers rely on the affiliated person for operational support 
or services in connection with the futures commission merchant's 
business;
    (iv) The level of market, credit or other risk present in the 
activities of the affiliated person; and
    (v) The extent to which the affiliated person has the authority or 
the ability to cause a withdrawal of capital from the futures commission 
merchant.
    (3) For purposes of this section and Sec. 1.15, the term Material 
Affiliated Person does not include a natural person.
    (4) The information, reports and records required by this section 
shall be maintained and preserved, and made readily available for 
inspection, in accordance with the provisions of Sec. 1.31.
    (b) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic regulators. A futures 
commission merchant shall be deemed to be in compliance with the 
recordkeeping requirements of paragraphs (a)(1)(i), (a)(1)(iii) and 
(a)(1)(iv) of this section with respect to a Material Affiliated Person 
if:
    (1) The futures commission merchant is required, or that Material 
Affiliated Person is required, to maintain and preserve information, or 
such information is maintained and preserved by the futures commission 
merchant on behalf of the Material Affiliated Person, pursuant to Sec. 
240.17h-1T of this title, or such other risk assessment regulations as 
the Securities and Exchange Commission may adopt, and maintains and 
makes available for inspection by the Commission in accordance with the 
provisions of this section copies of the records and reports maintained 
and filed on Form 17-H (or such other forms or reports as may be 
required) by such futures commission merchant or its Material Affiliated 
Person with the Securities and Exchange Commission pursuant to 
Sec. Sec. 240.17h-1T and 240.17h-2T of this title, or such other risk 
assessment regulations as the Securities and Exchange Commission may 
adopt;
    (2) In the case of a Material Affiliated Person (including a foreign 
banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the futures 
commission merchant or such Material Affiliated Person maintains and 
makes available for inspection by the Commission in accordance with the 
provisions of this section copies of all reports submitted by such 
Material Associated Person to the Federal banking agency pursuant to 
section 5211 of the Revised Statutes, section 9 of the Federal Reserve 
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) of 
the Home Owners' Loan Act, or section 5 of the Bank Holding Company Act 
of 1956; or
    (3) In the case of a Material Affiliated Person that is subject to 
the supervision of an insurance commissioner or other similar official 
or agency of a state, the futures commission merchant or such Material 
Affiliated Person maintains and makes available for inspection by the 
Commission in accordance with the provisions of this section copies of 
the annual statements with schedules and exhibits prepared by the 
Material Affiliated Person on forms prescribed by the National 
Association of Insurance Commissioners or by a state insurance 
commissioner.
    (c) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of a Foreign Regulatory Authority. A futures 
commission merchant shall be deemed to be in compliance with the 
recordkeeping requirements of paragraphs (a)(1)(iii) and (a)(1)(iv) of 
this section with respect to a Material Affiliated Person if such 
futures commission merchant maintains and makes available, or causes 
such Material Affiliated Person to make available, for inspection by the 
Commission in accordance with the provisions of this section copies of 
any financial or risk exposure reports filed by such Material Affiliated 
Person with a foreign futures authority or other foreign regulatory 
authority, provided that: (1) the futures commission merchant agrees to 
use its best efforts to obtain from the Material Affiliated Person and 
to cause the Material Affiliated Person to provide, directly or through 
its foreign futures authority or other foreign regulatory authority, any 
supplemental information the Commission may request and there is no 
statute or other bar in the

[[Page 30]]

foreign jurisdiction that would preclude the futures commission 
merchant, the Material Affiliated Person, the foreign futures authority 
or other foreign regulatory authority from providing such information to 
the Commission; or (2) the foreign futures authority or other foreign 
regulatory authority with whom the Material Affiliated Person files such 
reports has entered into an information-sharing agreement with the 
Commission which is in effect as of the futures commission merchant's 
fiscal year-end and which will allow the Commission to obtain the type 
of information required herein. The futures commission merchant shall 
maintain a copy of the original report and a copy translated into the 
English language. For the purposes of this section, the term ``Foreign 
Futures Authority'' shall have the meaning set forth in section 1a(10) 
of the Act.
    (d) Exemptions. (1) The provisions of this section shall not apply 
to any futures commission merchant which holds funds or property of or 
for futures customers of less than $6,250,000 and has less than 
$5,000,000 in adjusted net capital as of the futures commission 
merchant's current fiscal year-end; provided, however, that such futures 
commission merchant is not a clearing member of an exchange.
    (2) The Commission may, upon written application by a Reporting 
Futures Commission Merchant, exempt from the provisions of this section, 
other than paragraph (a)(1)(ii) of this section, either unconditionally 
or on specified terms and conditions, any futures commission merchant 
affiliated with such Reporting Futures Commission Merchant. The term 
``Reporting Futures Commission Merchant'' shall mean, in the case of a 
futures commission merchant that is affiliated with another registered 
futures commission merchant, the futures commission merchant which 
maintains the greater amount of adjusted net capital as last reported on 
financial reports filed with the Commission pursuant to Sec. 1.10 
unless another futures commission merchant is acting as the Reporting 
Broker or Dealer under Sec. 240.17h-2T of this title, or the Commission 
permits another futures commission merchant to act as the Reporting 
Futures Commission Merchant. In granting exemptions under this section, 
the Commission shall consider, among other factors, whether the records 
required by this section concerning the Material Affiliated Persons of 
the futures commission merchant affiliated with the Reporting Futures 
Commission Merchant will be available to the Commission pursuant to this 
section or Sec. 1.15. A request for exemption filed under this 
paragraph (d)(2) shall explain the basis for the designation of a 
particular futures commission merchant as the Reporting Futures 
Commission Merchant and will become effective on the thirtieth day after 
receipt of such request by the Commission unless the Commission objects 
to the request by that date.
    (3) The Commission may exempt any futures commission merchant from 
any provision of this section if it finds that the exemption is not 
contrary to the public interest and the purposes of the provisions from 
which the exemption is sought. The Commission may grant the exemption 
subject to such terms and conditions as it may find appropriate.
    (e) Location of records. A futures commission merchant required to 
maintain records concerning Material Affiliated Persons pursuant to this 
section may maintain those records either at the principal office of the 
Material Affiliated Person or at a records storage facility, provided 
that, except as set forth in paragraph (c) of this section, the records 
are located within the boundaries of the United States and the records 
are kept and available for inspection in accordance with Sec. 1.31. If 
such records are maintained at a place other than the futures commission 
merchant's principal place of business, the Material Affiliated Person 
or other entity maintaining the records shall file with the Commission a 
written undertaking, in a form acceptable to the Commission, signed by a 
duly authorized person, to the effect that the records will be treated 
as if the futures commission merchant were maintaining the records 
pursuant to this section and that the entity maintaining the records 
will permit examination of such records at any time, or from time

[[Page 31]]

to time during business hours, by representatives or designees of the 
Commission and promptly furnish the Commission representative or its 
designee true, correct, complete and current hard copy of all or any 
part of such records. The election to maintain records at the principal 
place of business of the Material Affiliated Person or at a records 
storage facility pursuant to the provisions of this paragraph shall not 
relieve the futures commission merchant required to maintain and 
preserve such records from any of its responsibilities under this 
section or Sec. 1.15.
    (f) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a futures commission 
merchant concerning a Material Affiliated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (g) Implementation schedule. (1) Each futures commission merchant 
registered as of December 31, 1994 and subject to the requirements of 
this section shall maintain and preserve the information required by 
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing April 30, 
1995 and the information required by paragraphs (a)(1)(iii) and 
(a)(1)(iv) of this section commencing May 15, 1995 or, if December 31, 
1994 is not the futures commission merchant's fiscal year-end, 135 
calendar days following the first fiscal year-end occurring after 
December 31, 1994.
    (2) Each futures commission merchant whose registration becomes 
effective after December 31, 1994 and is subject to the requirements of 
this section shall maintain and preserve the information required by 
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing 60 
calendar days after registration become effective and the information 
required by paragraphs (a)(1)(iii) and (a)(1)(iv) of this section 
commencing 105 calendar days following the first fiscal year-end 
occurring after registration becomes effective.

[59 FR 66688, Dec. 28, 1994]



Sec. 1.15  Risk assessment reporting requirements for futures commission 
merchants.

    (a) Reporting requirements with respect to information required to 
be maintained by Sec. 1.14. (1) Each futures commission merchant 
registered with the Commission pursuant to Section 4d of the Act, unless 
exempt pursuant to paragraph (c) of this section, shall file the 
following with the regional office with which it files periodic 
financial reports by no later than April 30, 1995, provided that in the 
case of a futures commission merchant whose registration becomes 
effective after December 31, 1994, such futures commission merchant 
shall file the following within 60 calendar days after the effective 
date of such registration, or by April 30, 1995, whichever comes later:
    (i) A copy of the organizational chart maintained by the futures 
commission merchant pursuant to paragraph (a)(l)(i) of Sec. 1.14. Where 
there is a material change in information provided, an updated 
organizational chart shall be filed within sixty calendar days after the 
end of the fiscal quarter in which the change has occurred; and
    (ii) Copies of the financial, operational, and risk management 
policies, procedures and systems maintained by the futures commission 
merchant pursuant to paragraph (a)(l)(ii) of Sec. 1.14. If the futures 
commission merchant has no such written policies, procedures or systems, 
it must file a statement so indicating. Where there is a material change 
in information provided, such change shall be reported within sixty 
calendar days after the end of the fiscal quarter in which the change 
has occurred.
    (2) Each futures commission merchant registered with the Commission 
pursuant to Section 4d of the Act, unless exempt pursuant to paragraph 
(c) of this section, shall file the following with the regional office 
with which it files periodic financial reports within 105 calendar days 
after the end of each fiscal year or, if a filing is made pursuant to a 
written notice issued under paragraph (a)(2)(iii) of this section, 
within the time period specified in the written notice:
    (i) Fiscal year-end consolidated and consolidating balance sheets 
for the

[[Page 32]]

highest level Material Affiliated Person within the futures commission 
merchant's organizational structure, which shall include the futures 
commission merchant and its other Material Affiliated Persons, prepared 
in accordance with generally accepted accounting principles, which 
consolidated balance sheets shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary course 
of business, but which otherwise may be unaudited, and which 
consolidated balance sheets shall include appropriate explanatory notes. 
The consolidating balance sheets may be those prepared by the futures 
commission merchant's highest level Material Affiliated Person as part 
of its internal financial reporting process;
    (ii) Fiscal year-end annual consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the futures commission merchant's 
organizational structure, which shall include the futures commission 
merchant and its other Material Affiliated Persons, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary course 
of business, but which otherwise may be unaudited, and which 
consolidated statements shall include appropriate explanatory notes. The 
consolidating statements may be those prepared by the futures commission 
merchant's highest level Material Affiliated Person as part of its 
internal financial reporting process; and
    (iii) Upon receiving written notice from any representative of the 
Commission and within the time period specified in the written notice, 
such additional information which the Commission determines is necessary 
for a complete understanding of a particular affiliate's financial 
impact on the futures commission merchant's organizational structure.
    (3) For the purposes of this section, the term Material Affiliated 
Person shall have the meaning used in Sec. 1.14.
    (4) The reports required to be filed pursuant to paragraphs (a)(1) 
and (a)(2) of this section shall be considered filed when received by 
the regional office of the Commission with whom the futures commission 
files financial reports pursuant to Sec. 1.10.
    (b) [Reserved]
    (c) Exemptions. (1) The provisions of this section shall not apply 
to any futures commission merchant which holds funds or property of or 
for futures customers of less than $6,250,000 and has less than 
$5,000,000 in adjusted net capital as of the futures commission 
merchant's fiscal year-end; provided, however, that such futures 
commission merchant is not a clearing member of an exchange.
    (2) The Commission may, upon written application by a Reporting 
Futures Commission Merchant, exempt from the provisions of this section, 
other than paragraph (a)(1)(ii) of this section, either unconditionally 
or on specified terms and conditions, any futures commission merchant 
affiliated with such Reporting Futures Commission Merchant. The term 
``Reporting Futures Commission Merchant'' shall mean, in the case of a 
futures commission merchant that is affiliated with another registered 
futures commission merchant, the futures commission merchant which 
maintains the greater amount of net capital as last reported on its 
financial reports filed with the Commission pursuant to Sec. 1.10 
unless another futures commission merchant is acting as the Reporting 
Broker or Dealer under Sec. 240.17h-2T of this title or the Commission 
permits another futures commission merchant to act as the Reporting 
Futures Commission Merchant. In granting exemptions under this section, 
the Commission shall consider, among other factors, whether the records 
and other information required to be maintained pursuant to Sec. 1.14 
concerning the Material Affiliated Persons of the futures commission 
merchant affiliated with the Reporting Futures Commission Merchant will 
be available to the Commission pursuant to the provisions of this 
section. A request for exemption filed under this paragraph (c)(2) shall 
explain the basis for the designation of a

[[Page 33]]

particular futures commission merchant as the Reporting Futures 
Commission Merchant and will become effective on the thirtieth day after 
receipt of such request by the Commission unless the Commission objects 
to the request by that date. The Reporting Futures Commission Merchant 
must submit the information required by paragraph (a)(1)(ii) of this 
section on behalf of its affiliated futures commission merchants.
    (3) The Commission may exempt any futures commission merchant from 
any provision of this section if it finds that the exemption is not 
contrary to the public interest and the purposes of the provisions from 
which the exemption is sought. The Commission may grant the exemption 
subject to such terms and conditions as it may find appropriate.
    (d) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic regulators. (1) In the 
case of a futures commission merchant which is required to file, or has 
a Material Affiliated Person which is required to file, Form 17-H (or 
such other forms or reports as may be required) with the Securities and 
Exchange Commission pursuant to Sec. 240.17h-2T of this title, or such 
other risk assessment regulations as the Securities and Exchange 
Commission may adopt, such futures commission merchant shall be deemed 
to be in compliance with the reporting requirements of paragraphs 
(a)(1)(i) and (a)(2) of this section if the futures commission merchant 
furnishes, in accordance with paragraph (a)(2) of this section, a copy 
of the most recent Form 17-H filed by the futures commission merchant or 
its Material Affiliated Person with the Securities and Exchange 
Commission, provided however, that if the futures commission merchant 
has designated any of its affiliated persons as Material Affiliated 
Persons for purposes of this section and Sec. 1.14 which are not 
designated as Material Associated Persons for purposes of the Form 17-H 
filed pursuant to Sec. Sec. 240.17h-1T and 240.17h-2T of this title, 
the futures commission must also designate any such affiliated person as 
a Material Affiliated Person on the organizational chart required as 
Item 1 of Part I of Form 17-H. To comply with paragraphs (a)(1)(i) and 
(a)(2) of this section, such futures commission merchant may, at its 
option, file Form 17-H in its entirety or file such form without the 
information required under Part II of Form 17-H.
    (2) In the case of a Material Affiliated Person (including a foreign 
banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the futures 
commission merchant shall be deemed to be in compliance with the 
reporting requirements of paragraph (a)(2) of this section with respect 
to such Material Affiliated Person if the futures commission merchant or 
such Material Affiliated Person maintains in accordance with Sec. 1.14 
copies of all reports filed by the Material Affiliated Person with the 
Federal banking agency pursuant to section 5211 of the Revised Statutes, 
section 9 of the Federal Reserve Act, section 7(a) of the Federal 
Deposit Insurance Act, section 10(b) of the Home Owners' Loan Act, or 
section 5 of the Bank Holding Company Act of 1956.
    (3) In the case of a futures commission merchant that has a Material 
Affiliated Person that is subject to the supervision of an insurance 
commissioner or other similar official or agency of a state, such 
futures commission merchant shall be deemed to be in compliance with the 
reporting requirements of paragraph (a)(2) of this section with respect 
to the Material Affiliated Person if:
    (i) With respect to a Material Affiliated Person organized as a 
mutual insurance company or a non-public stock company, the futures 
commission merchant or such Material Affiliated Person maintains in 
accordance with Sec. 1.14 copies of the annual statements with 
schedules and exhibits prepared by the Material Affiliated Person on 
forms prescribed by the National Association of Insurance Commissioners 
or by a state insurance commissioner; and
    (ii) With respect to a Material Affiliated Person organized as a 
public stock company, the futures commission merchant or such Material 
Affiliated Person maintains, in addition to the annual statements with 
schedules and exhibits required to be maintained pursuant to Sec. 1.14, 
copies of the filings made

[[Page 34]]

by the Material Affiliated Person pursuant to sections 13 or 15 of the 
Securities Exchange Act of 1934 and the Investment Company Act of 1940.
    (4) No futures commission merchant shall be required to furnish to 
the Commission any examination report of any Federal banking agency or 
any supervisory recommendations or analyses contained therein with 
respect to a Material Affiliated Person that is subject to the 
regulation of a Federal banking agency. All information received by the 
Commission pursuant to this section concerning a Material Affiliated 
Person that is subject to examination by or the reporting requirements 
of a Federal banking agency shall be deemed confidential for the 
purposes of section 8 of the Act.
    (5) The furnishing of any information or documents by a futures 
commission merchant pursuant to this section shall not constitute an 
admission for any purpose that a Material Affiliated Person is otherwise 
subject to the Act.
    (e) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of a Foreign Regulatory Authority. A futures 
commission merchant shall be deemed to be in compliance with the 
reporting requirements of paragraph (a)(2) of this section with respect 
to a Material Affiliated Person if such futures commission merchant 
furnishes, or causes such Material Affiliated Person to make available, 
in accordance with the provisions of this section, copies of any 
financial or risk exposure reports filed by such Material Affiliated 
Person with a foreign futures authority or other foreign regulatory 
authority, provided that:
    (1) The futures commission merchant agrees to use its best efforts 
to obtain from the Material Affiliated Person and to cause the Material 
Affiliated Person to provide, directly or through its foreign futures 
authority or other foreign regulatory authority, any supplemental 
information the Commission may request and there is no statute or other 
bar in the foreign jurisdiction that would preclude the futures 
commission merchant, the Material Affiliated Person, the foreign futures 
authority or other foreign regulatory authority from providing such 
information to the Commission; or
    (2) The foreign futures authority or other foreign regulatory 
authority with whom the Material Affiliated Person files such reports 
has entered into an information sharing agreement with the Commission 
which is in effect as of the futures commission merchant's fiscal year-
end and which will allow the Commission to obtain the type of 
information required herein. The futures commission merchant shall file 
a copy of the original report and a copy translated into the English 
language. For the purposes of this section, the term ``Foreign Futures 
Authority'' shall have the meaning set forth in section 1a(10) of the 
Act.
    (f) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a futures commission 
merchant concerning a Material Associated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (g) Implementation schedule. Each futures commission merchant 
registered as of December 31, 1994 and subject to the requirements of 
this section shall file the information required by paragraph (a)(1) of 
this section no later than April 30, 1995 and the information required 
by paragraph (a)(2) of this section no later than May 15, 1995. Each 
futures commission merchant whose registration becomes effective after 
December 31, 1994 and is subject to the requirements of this section 
shall file the information required by paragraph (a)(1) of this section 
within 60 calendar days after registration is granted, or by April 30, 
1995, whichever comes later and the information required by paragraph 
(a)(2) of this section within 105 calendar days after registration is 
granted or by May 15, 1995, whichever comes later.

[59 FR 66690, Dec. 28, 1994; 60 FR 13901, Mar. 15, 1995]



Sec. 1.16  Qualifications and reports of accountants.

    (a) Definitions--(1) Accountant's report. The term ``accountant's 
report,'' when used in regard to financial statements and schedules, 
means a document in which an independent licensed or certified public 
accountant indicates the scope of the audit (or examination) which he 
has made and sets forth his

[[Page 35]]

opinion regarding the financial statements and schedules taken as a 
whole or an assertion to the fact that an overall opinion cannot be 
expressed. When an overall opinion cannot be expressed, the reasons 
therefore must be stated.
    (2) Audit or examination. The terms ``audit'' and ``examination,'' 
when used in regard to financial statements and schedules, mean an 
examination of the statements and schedules by an accountant in 
accordance with generally accepted auditing standards for the purposes 
of expressing an opinion thereon.
    (3) Certified. The term ``certified,'' when used in regard to 
financial statements and schedules, means audited and reported upon with 
an opinion expressed by an independent certified public accountant or 
independent licensed public accountant.
    (4) Customer. The term ``customer'' means customer (as defined in 
Sec. 1.3(k)) and option customer (as defined in Sec. 1.3(jj) of this 
part and in Sec. 32.1(c) of this chapter) and includes a foreign 
futures and foreign options customer (as defined in Sec. 30.1(c) of 
this chapter).
    (b) Qualifications of accountants. (1) The Commission will recognize 
any person as a certified public accountant who is duly registered and 
in good standing as such under the laws of the place of his residence or 
principal office. The Commission will recognize any person as a licensed 
public accountant who was duly licensed on or before December 31, 1970, 
and is in good standing as such under the laws of the place of his 
residence or principal office.
    (2) The Commission will not recognize any certified public 
accountant or licensed public accountant as independent who is not in 
fact independent. For example, an accountant will not be considered 
independent with respect to any applicant or registrant or any parent, 
subsidiary, or other affiliate of such applicant or registrant (i) in 
which, during the period of his professional engagement to examine the 
financial statements and schedules being reported on or at the date of 
his report, he or his firm or a member thereof had, or was committed to 
acquire, any direct financial interest or any material indirect 
financial interest, or (ii) with which, during the period of his 
professional engagement to examine the financial statements and 
schedules being reported on, at the date of his report or during the 
period covered by the financial statements, he or his firm or a member 
thereof was connected as a promoter, underwriter, voting trustee, 
director, officer, or employee, except that a firm will be deemed 
independent with respect to an applicant or registrant and its 
affiliates if a former employee or officer of such applicant or 
registrant or any such affiliate is employed by the firm and such 
individual has completely disassociated himself from the applicant or 
registrant and its affiliates and does not participate in auditing 
financial statements and schedules of the applicant or registrant or its 
affiliates covering any period of his employment by the applicant or 
registrant or its affiliates. An accountant will not be considered 
independent if he or his firm or a member thereof performs manual or 
automated bookkeeping services or assumes responsibility for maintenance 
of the accounting records, including accounting classification 
decisions, of such applicant or registrant or any of its affiliates. For 
the purposes of this Sec. 1.16(b), the term ``member'' means all 
partners in the firm and all professional employees participating in the 
audit or located in the office of the firm participating in a 
significant portion of the audit.
    (3) In determining whether an accountant may in fact not be 
independent with respect to a particular applicant or registrant, the 
Commission will give appropriate consideration to all relevant 
circumstances, including evidence bearing on all relationships between 
the accountant and that applicant or registrant or any affiliate 
thereof, and will not confine itself to the relationship existing in 
connection with the filing of reports with the Commission.
    (c) Accountant's reports--(1) Technical requirements. The 
accountant's report (i) must be dated, (ii) must be signed manually, 
(iii) must indicate the city and State where issued and (iv) must 
identify without detailed enumeration

[[Page 36]]

the financial statements covered by the report.
    (2) Representations as to the audit. The accountant's report (i) 
must state whether the audit was made in accordance with generally 
accepted auditing standards, and (ii) must designate any auditing 
procedures deemed necessary by the accountant under the circumstances of 
the particular case which have been omitted and the reasons for their 
omission. However, nothing in this paragraph (c)(2) shall be construed 
to imply authority for the omission of any procedure which independent 
accountants would ordinarily employ in the course of an audit made for 
the purposes of expressing the opinion required by paragraph (c)(3) of 
this section.
    (3) Opinion to be expressed. The accountant's report must state 
clearly: (i) The opinion of the accountant with respect to the financial 
statements and schedules covered by the report and the accounting 
principles and practices reflected therein and (ii) the opinion of the 
accountant as to the consistency of the application of the accounting 
principles, or as to any changes in such principles which have material 
effect on the financial statements and schedules.
    (4) Exceptions. Any matters to which the accountant takes exception 
must be clearly identified, such exceptions specifically and clearly 
stated, and to the extent practicable, the effect of each exception on 
related financial statements and schedules given.
    (5) Accountant's report on material inadequacies. A registrant must 
file concurrently with the annual audit report a supplemental report by 
the accountant describing any material inadequacies found to exist or 
found to have existed since the date of the previous audit. An applicant 
must file concurrently with the audit report a supplemental report by 
the accountant describing any material inadequacies found to exist as of 
the date of the Form 1-FR being filed: Provided, however, That if such 
applicant is registered with the Securities and Exchange Commission as a 
securities broker or dealer, and it files (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 or part IIA, 
in lieu of Form 1-FR, the accountant's supplemental report must be made 
as of the date of such report. The supplemental report must indicate any 
corrective action taken or proposed by the applicant or registrant in 
regard thereto. If the audit did not disclose any material inadequacies, 
the supplemental report must so state.
    (d) Audit objectives. (1) The audit must be made in accordance with 
generally accepted auditing standards and must include a review and 
appropriate tests of the accounting system, the internal accounting 
control, and the procedures for safeguarding customer and firm assets in 
accordance with the provisions of the Act and the regulations 
thereunder, since the prior examination date. The audit must include all 
procedures necessary under the circumstances to enable the independent 
licensed or certified public accountant to express an opinion on the 
financial statements and schedules. The scope of the audit and review of 
the accounting system, the internal controls, and procedures for 
safeguarding customer and firm assets must be sufficient to provide 
reasonable assurance that any material inadequacies existing at the date 
of the examination in (i) the accounting system, (ii) the internal 
accounting controls, and (iii) the procedures for safeguarding customer 
and firm assets (including, in the case of a futures commission 
merchant, the segregation requirements of section 4d(2) of the Act and 
these regulations and the secured amount requirements of the Act and 
these regulations) will be discovered. Additionally, as specified 
objectives the audit must include reviews of the practices and 
procedures followed by the registrant in making (A) periodic 
computations of the minimum financial requirements pursuant to Sec. 
1.17 and (B) in the case of a futures commission merchant, daily 
computations of the segregation requirements of section 4d(2) of the Act 
and these regulations and the secured amount requirements of the Act and 
these regulations.
    (2) A material inadequacy in the accounting system, the internal 
accounting controls, the procedures for safeguarding customer and firm 
assets, and

[[Page 37]]

the practices and procedures referred to in paragraph (d)(1) of this 
section which is to be reported in accordance with paragraph (e)(2) of 
this section includes any conditions which contributed substantially to 
or, if appropriate corrective action is not taken, could reasonably be 
expected to:
    (i) Inhibit an applicant or registrant from promptly completing 
transactions or promptly discharging his responsibilities to customers 
or other creditors;
    (ii) Result in material financial loss;
    (iii) Result in material misstatement of the applicant's or 
registrant's financial statements and schedules; or
    (iv) Result in violations of the Commission's segregation or secured 
amount (in the case of a futures commission merchant), recordkeeping or 
financial reporting requirements to the extent that could reasonably be 
expected to result in the conditions described in paragraph (d)(2) (i), 
(ii), or (iii) of this section.
    (e) Extent and timing of audit procedures. (1) The extent and timing 
of audit procedures are matters for the independent public accountant to 
determine on the basis of his review and evaluation of existing internal 
controls and other audit procedures performed in accordance with 
generally accepted auditing standards and the audit objectives set forth 
in paragraph (d) of this section. In determining the extent of testing, 
consideration must be given to the materiality of an area and to the 
possible effect on the financial statements and schedules of a material 
misstatement in a related account.
    (2) If during the course of an audit or interim work, the 
independent public accountant determines that any material inadequacies 
exist in the accounting system, in the internal accounting control, in 
the procedures for safeguarding customer or firm assets, or as otherwise 
defined in paragraph (d) of this section, he must call such inadequacies 
to the attention of the applicant or registrant, which has the 
responsibility to give notice to the National Futures Association and, 
if an applicant, or the Commission and the designated self-regulatory 
organization, if any, if a registrant, in accordance with paragraphs (d) 
and (g) of Sec. 1.12: Provided, however, That if the applicant or 
registrant is an introducing broker or applicant for registration as an 
introducing broker, it also has the responsibility to give notice to the 
National Futures Association, the designated self-regulatory 
organization, if any, and every futures commission merchant carrying or 
intending to carry customer accounts for the introducing broker or 
applicant for registration as an introducing broker. The applicant or 
registrant must also furnish the accountant with a copy of said notice 
within three (3) business days. If the accountant fails to receive such 
notice from the applicant or registrant within three (3) business days, 
or if he disagrees with the statements contained in the notice of the 
applicant or registrant, the accountant must inform the National Futures 
Association, in the case of an applicant, or the Commission and the 
designated self-regulatory organization, if any, in the case of a 
registrant, by reporting the material inadequacy and, in the case of an 
applicant or registrant which is an introducing broker or applicant for 
registration as in introducing broker, the accountant must also inform 
the National Futures Association, the designated self-regulatory 
organization, if any, and every futures commission merchant carrying or 
intending to carry customer accounts for the introducing an introducing 
broker, within three (3) business days thereafter. Such report from the 
accountant must, if the applicant or registrant failed to file a notice, 
describe the material inadequacies found to exist. If the applicant or 
registrant filed a notice, the accountant must file a report detailing 
the aspects, if any, of the applicant's or registrant's notice with 
which the accountant does not agree.
    (f) Extension of time for filing audited reports. (1) In the event a 
registrant finds that it cannot file its certified financial statements 
and schedules for any year within the time specified in Sec. 1.10 
without substantial undue hardship, it may file with the principal 
office of the Commission in Washington, DC, an application for extension 
of time to a specified date not more than 90 days after the date as of 
which the certified financial statements and

[[Page 38]]

schedules were to have been filed. Notice of such application must be 
sent to the designated self-regulatory organization, if any. The 
application must be made by the registrant and must:
    (i) State the reasons for the requested extension;
    (ii) Indicate that the inability to make a timely filing is due to 
circumstances beyond the control of the registrant, if such is the case, 
and describe briefly the nature of such circumstances;
    (iii) Be accompanied by the latest available formal computation of 
the registrant's adjusted net capital and minimum financial requirements 
computed in accordance with Sec. 1.17;
    (iv) In the case of a futures commission merchant, be accompanied by 
the latest available computation of required segregation and by a 
computation of the amount of money, securities, and property segregated 
on behalf of customers, and by a computation 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, as of the date 
of the latest available computation;
    (v) Contain an agreement to file the report on or before the date 
specified by the registrant in the application;
    (vi) Be received by the principal office of the Commission in 
Washington, DC and by the designated self-regulatory organization, if 
any, prior to the date on which the report is due; and
    (vii) Be accompanied by a letter from the independent public 
accountant answering the following questions:
    (A) What specifically are the reasons for the extension request?
    (B) On the basis of that part of your audit to date, do you have any 
indication that may cause you to consider commenting on any material 
inadequacies in the accounting system, internal accounting controls or 
procedures for safeguarding customer or firm assets?
    (C) Do you have any indication from the part of your audit completed 
to date that would lead you to believe that the firm was or is not 
meeting the minimum capital requirements specified in Sec. 1.17 or (in 
the case of a futures commission merchant) either the segregation 
requirements of section 4d(2) of the Act and these regulations or the 
secured amount requirements of the Act and these regulations, or has any 
significant financial or recordkeeping problems?
    (2) Within ten calendar days after receipt of an application for 
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.
    (3) On the written request of any designated self-regulatory 
organization or registrant, or on its own motion, the Commission may 
grant an extension of time or an exemption from any of the certified 
financial reporting requirements of this chapter either unconditionally 
or on specified terms and conditions.
    (g) Replacement of accountant. (1) In the event (i) the independent 
public accountant who was previously engaged as the principal accountant 
to audit an applicant's or registrant's financial statements resigns (or 
indicates he declines to stand for re-election after the completion of 
the current audit) or is dismissed as the applicant's or registrant's 
principal accountant, (ii) another independent accountant is engaged as 
principal accountant, or (iii) an independent accountant on whom the 
principal accountant expresses reliance in his report regarding a 
subsidiary resigns (or formally indicates he declines to stand for re-
election after completion of the current audit) or is dismissed or 
another independent public accountant is engaged to audit that 
subsidiary, an applicant shall file written notice of such occurrence 
with the National Futures Association, and a registrant shall file 
written notice of such occurrence with the Commission at its principal 
office in Washington, DC, and with the designated self-regulatory 
organization, if any, not more than 15 business days after such 
occurrence.
    (2) Such notice must state (i) the date of such resignation (or 
declination to stand for re-election, dismissal or engagement) and (ii) 
whether, in connection with the audit of the two most recent fiscal 
years and any subsequent

[[Page 39]]

interim period preceding such resignation, dismissal or engagement, 
there were any disagreements with the former accountant on any matter of 
accounting principles or practices, financial statements disclosure, 
auditing scope or procedures, or compliance with the applicable rules of 
the Commission, which, if not resolved to the satisfaction of the former 
accountant, would have caused him to make reference in connection with 
his report to the subject matter of the disagreements (if so, describe 
such disagreements). The disagreements required to be reported in this 
paragraph (g)(2) include both those resolved to the former accountant's 
satisfaction and those not resolved to the former accountant's 
satisfaction. Disagreements contemplated by this paragraph (g)(2) are 
those which occur at the decision-making level, i.e., between personnel 
of the applicant or registrant responsible for presentation of its 
financial statements and schedules and personnel of the accounting firm 
responsible for rendering its report. The notice must also state whether 
the accountant's report on the financial statements and schedules for 
any of the past two years contained an adverse opinion or a disclaimer 
of opinion or was qualified as to uncertainties, audit scope, or 
accounting principles (if so, describe the nature of each such adverse 
opinion, disclaimer of opinion, or qualification). An applicant must 
also request the former accountant to furnish the applicant with a 
letter addressed to the National Futures Association, and a registrant 
must also request the former accountant to furnish the registrant with a 
letter addressed to the Commission, stating whether he agrees with the 
statements contained in the notice of the applicant or registrant and, 
if not, stating the respects in which he does not agree. Each copy of 
the notice and accountant's letter must be manually signed by the sole 
proprietor or a general partner or a duly authorized corporate officer 
of the applicant or registrant, as appropriate, and by the accountant.
    (3) If (i) within the 24 months prior to the date of the most recent 
audited financial statement, a notice has been filed pursuant to 
paragraph (g)(1) of this section reporting a change of accountants, (ii) 
included in such filing there is a reported disagreement on any matters 
of accounting principles or practices, financial statements disclosure, 
auditing scope, or noncompliance with the applicable rules of the 
Commission, (iii) during the fiscal year in which the change in 
accountants took place or during the subsequent fiscal year, there have 
been any transactions or events similar to those which involved a 
reported disagreement, and (iv) such transactions or events are material 
and were accounted for or disclosed in a manner different from that 
which the former accountant apparently would have concluded was 
required, the existence and nature of the disagreements and also the 
effect on the financial statements must be stated in a written notice to 
the National Futures Association, in the case of an applicant, or to the 
Commission at its principal office in Washington, DC, and the designated 
self-regulatory organization, if any, in the case of a registrant, if 
the method which the former accountant apparently would have concluded 
was required had been followed. These disclosures need not be made if 
the method asserted by the former accountant ceases to be generally 
accepted because of authoritative standards or interpretations 
subsequently issued. The notice required by this paragraph (g)(3) must 
be filed by the applicant or registrant concurrently with the financial 
statements and schedules to which it pertains.
    (h) Exemption for introducing broker or applicant therefor. The 
provisions of this section do not apply to an introducing broker which 
is operating pursuant to a guarantee agreement, nor do such provisions 
apply to an applicant for registration as an introducing broker who 
files concurrently with such application a guarantee agreement, provided 
such introducing

[[Page 40]]

broker or applicant therefor is not also a securities broker or dealer.

(Approved by the Office of Management and Budget under control numbers 
3038-0007, 3038-0024)

[43 FR 39970, Sept. 8, 1978, as amended at 46 FR 54516, Nov. 3, 1981; 46 
FR 63035, Dec. 30, 1981; 48 FR 35284, Aug. 3, 1983; 49 FR 39526, Oct. 9, 
1984; 52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17, 1988]



Sec. 1.17  Minimum financial requirements for futures commission merchants 
and introducing brokers.

    (a)(1)(i) Except as provided in paragraph (a)(2)(i) of this section, 
each person registered as a futures commission merchant must maintain 
adjusted net capital equal to or in excess of the greatest of:
    (A) $250,000;
    (B) Four percent of the following amount: The customer funds 
required to be segregated pursuant to the Act and the regulations in 
this part, plus the funds of opt-out customers that, but for the 
election to opt out pursuant to Sec. 1.68, would be required to be 
segregated, plus the foreign futures or foreign options secured amount, 
less the market value of commodity options purchased by customers on or 
subject to the rules of a contract market or a foreign board of trade 
for which the full premiums have been paid: Provided, however, that the 
deduction for each customer shall be limited to the amount of segregated 
customer funds in such customer's account(s) and foreign futures and 
foreign options secured accounts;
    (C) The amount of adjusted net capital required by a registered 
futures association of which it is a member; or
    (D) For securities brokers and dealers, the amount of net capital 
required by Rule 15c3-1(a) of the Securities and Exchange Commission (17 
CFR 240.15c3-1(a)).
    (ii) Each person registered as a futures commission merchant engaged 
in soliciting or accepting orders and customer funds related thereto for 
the purchase or sale of any commodity for future delivery or any 
commodity option on or subject to the rules of a registered derivatives 
transaction execution facility from any customer who does not qualify as 
an ``institutional customer'' as defined in Sec. 1.3(g) must:
    (A) Be a clearing member of a derivatives clearing organization and 
maintain net capital in the amount of the greater of $20,000,000 or the 
amounts otherwise specified in paragraph (a)(1)(i) of this section; or
    (B) Receive orders on behalf of the customer from a commodity 
trading advisor acting in accordance with Sec. 4.32 of this chapter.
    (iii) Except as provided in paragraph (a)(2) of this section, each 
person registered as an introducing broker must maintain adjusted net 
capital equal to or in excess of the greatest of:
    (A) $30,000;
    (B) The amount of adjusted net capital required by a registered 
futures association of which it is a member; or
    (C) For securities brokers and dealers, the amount of net capital 
required by Rule 15c3-1(a) of the Securities and Exchange Commission (17 
CFR 240.15c3-1(a)).
    (2)(i) The requirements of paragraph (a)(1) of this section shall 
not be applicable if the registrant is a member of a designated self-
regulatory organization and conforms to minimum financial standards and 
related reporting requirements set by such designated self-regulatory 
organization in its bylaws, rules, regulations or resolutions approved 
by the Commission pursuant to section 4f(b) of the Act and Sec. 1.52.
    (ii) The minimum requirements of paragraph (a)(1)(ii) of this 
section shall not be applicable to an introducing broker which elects to 
meet the alternative adjusted net capital requirement for introducing 
brokers by operating pursuant to a guarantee agreement which meets the 
requirements set forth in Sec. 1.10(j). Such an introducing broker 
shall be deemed to meet the adjusted net capital requirement under this 
section so long as such agreement is binding and in full force and 
effect, and, if the introducing broker is also a securities broker or 
dealer, it maintains the amount of net capital required by Rule 15c3-
1(a) of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).
    (3) No person applying for registration as a futures commission 
merchant or as an introducing broker shall be so

[[Page 41]]

registered unless such person affirmatively demonstrates to the 
satisfaction of the National Futures Association that it complies with 
the financial requirements of this section. Each registrant must be in 
compliance with this section at all times and must be able to 
demonstrate such compliance to the satisfaction of the Commission or the 
designated self-regulatory organization.
    (4) A futures commission merchant who is not in compliance with this 
section, or is unable to demonstrate such compliance as required by 
paragraph (a)(3) of this section, must transfer all customer accounts 
and immediately cease doing business as a futures commission merchant 
until such time as the firm is able to demonstrate such compliance: 
Provided, however, The registrant may trade for liquidation purposes 
only unless otherwise directed by the Commission and/or the designated 
self-regulatory organization: And, Provided further, That if such 
registrant immediately demonstrates to the satisfaction of the 
Commission or the designated self-regulatory organization the ability to 
achieve compliance, the Commission or the designated self-regulatory 
organization may in its discretion allow such registrant up to a maximum 
of 10 business days in which to achieve compliance without having to 
transfer accounts and cease doing business as required above. Nothing in 
this paragraph (a)(4) shall be construed as preventing the Commission or 
the designated self-regulatory organization from taking action against a 
registrant for non-compliance with any of the provisions of this 
section.
    (5) An introducing broker who is not in compliance with this 
section, or is unable to demonstrate such compliance as required by 
paragraph (a)(3) of this section, must immediately cease doing business 
as an introducing broker until such time as the registrant is able to 
demonstrate such compliance: Provided, however, That if such registrant 
immediately demonstrates to the satisfaction of the Commission or the 
designated self-regulatory organization the ability to achieve 
compliance, the Commission or the designated self-regulatory 
organization may in its discretion allow such registrant up to a maximum 
of 10 business days in which to achieve compliance without having to 
cease doing business as required above. If the introducing broker is 
required to cease doing business in accordance with this paragraph 
(a)(5), the introducing broker must immediately notify each of its 
customers and the futures commission merchants carrying the account of 
each customer that it has ceased doing business. Nothing in this 
paragraph (a)(5) shall be construed as preventing the Commission or the 
designated self-regulatory organization from taking action against a 
registrant for non-compliance with any of the provisions of this 
section.
    (b) For the purposes of this section:
    (1) Where the applicant or registrant has an asset or liability 
which is defined in Securities Exchange Act Rule 15c3-1 (Sec. 240.15c3-
1 of this title) the inclusion or exclusion of all or part of such asset 
or liability for the computation of adjusted net capital shall be in 
accordance with Sec. 240.15c3-1 of this title, unless specifically 
stated otherwise in this section.
    (2) Customer means customer (as defined in Sec. 1.3(k)), option 
customer (as defined in Sec. 1.3(jj) of this part and in Sec. 32.1(c) 
of this chapter) and includes a foreign futures and foreign options 
customer (as defined in Sec. 30.1(c) of this chapter).
    (3) Proprietary account means a commodity futures or options account 
carried on the books of the applicant or registrant for the applicant or 
registrant itself, or for general partners in the applicant or 
registrant.
    (4) Noncustomer account means a commodity futures or option account 
carried on the books of the applicant or registrant which is not 
included in the definition of customer (as defined in paragraph (b)(2)) 
or proprietary account (as defined in paragraph (b)(3) of this section).
    (5) Clearing organization means clearing organization (as defined in 
Sec. 1.3(d)) and includes a clearing organization of any board of 
trade.
    (6) Business day means any day other than a Sunday, Saturday, or 
holiday.
    (c) Definitions: For the purposes of this section:

[[Page 42]]

    (1) Net capital means the amount by which current assets exceed 
liabilities. In determining ``net capital'':
    (i) Unrealized profits shall be added and unrealized losses shall be 
deducted in the accounts of the applicant or registrant, including 
unrealized profits and losses on fixed price commitments and forward 
contracts;
    (ii) All long and all short positions in commodity options which are 
traded on a contract market and listed security options shall be marked 
to their market value and all long and all short securities and 
commodities positions shall be marked to their market value;
    (iii) The value attributed to any commodity option which is not 
traded on a contract market shall be the difference between the option's 
strike price and the market value for the physical or futures contract 
which is the subject of the option. In the case of a call commodity 
option which is not traded on a contract market, if the market value for 
the physical or futures contract which is the subject of the option is 
less than the strike price of the option, it shall be given no value. In 
the case of a put commodity option which is not traded on a contract 
market, if the market value for the physical or futures contract which 
is the subject of the option is more than the strike price of the 
option, it shall be given no value; and
    (iv) The value attributed to any unlisted security option shall be 
the difference between the option's exercise value or striking value and 
the market value of the underlying security. In the case of an unlisted 
call, if the market value of the underlying security is less than the 
exercise value or striking value of such call, it shall be given no 
value; and, in the case of an unlisted put, if the market value of the 
underlying security is more than the exercise value or striking value of 
the unlisted put, it shall be given no value.
    (2) The term current assets means cash and other assets or resources 
commonly identified as those which are reasonably expected to be 
realized in cash or sold during the next 12 months. ``Current assets'' 
shall:
    (i) Exclude any unsecured commodity futures or option account 
containing a ledger balance and open trades, the combination of which 
liquidates to a deficit or containing a debit ledger balance only: 
Provided, however, Deficits or debit ledger balances in unsecured 
customers', non-customers', and proprietary accounts, which are the 
subject of calls for margin or other required deposits may be included 
in current assets until the close of business on the business day 
following the date on which such deficit or debit ledger balance 
originated providing that the account had timely satisfied, through the 
deposit of new funds, the previous day's debit or deficits, if any, in 
its entirety.
    (ii) Exclude all unsecured receivables, advances and loans except 
for:
    (A) Receivables resulting from the marketing of inventories commonly 
associated with the business activities of the applicant or registrant 
and advances on fixed price purchases commitments: Provided, Such 
receivables or advances are outstanding no longer than 3 calendar months 
from the date that they are accrued;
    (B) Interest receivable, floor brokerage receivable, commissions 
receivable from other brokers or dealers (other than syndicate profits), 
mutual fund concessions receivable and management fees receivable from 
registered investment companies and commodity pools: Provided, Such 
receivables are outstanding no longer than thirty (30) days from the 
date they are due; and dividends receivable outstanding no longer than 
thirty (30) days from the payable date;
    (C) Receivables from clearing organizations and securities clearing 
organizations;
    (D) Receivables from registered futures commission merchants or 
brokers, resulting from commodity futures or option transactions, except 
those specifically excluded under paragraph (c)(2)(i) of this section;
    (E) Insurance claims which arise from a reportable segment of the 
applicant's or registrant's overall business activities, as defined in 
generally accepted accounting principles, other than in the commodity 
futures, commodity option, security and security option segments of the 
applicant's or registrant's business activities which

[[Page 43]]

are not outstanding more than 3 calendar months after the date they are 
recorded as a receivable;
    (F) All other insurance claims not subject to paragraph 
(c)(2)(ii)(E) of this section, which are not older than seven (7) 
business days from the date the loss giving rise to the claim is 
discovered; insurance claims which are not older than twenty (20) 
business days from the date the loss giving rise to the claim is 
discovered and which are covered by an option of outside counsel that 
the claim is valid and is covered by insurance policies presently in 
effect; insurance claims which are older than twenty (20) business days 
from the date the loss giving rise to the claim is discovered and which 
are covered by an opinion of outside counsel that the claim is valid and 
is covered by insurance policies presently in effect and which have been 
acknowledged in writing by the insurance carrier as due and payable: 
Provided, Such claims are not outstanding longer than twenty (20) 
business days from the date they are so acknowledged by the carrier;
    (iii) Exclude all prepaid expenses and deferred charges;
    (iv) Exclude all inventories except for:
    (A) Readily marketable spot commodities; or spot commodities which 
``adequately collateralize'' indebtedness under paragraph (c)(7) of this 
section;
    (B) Securities which are considered ``readily marketable'' (as 
defined in Sec. 240.15c3-1(c)(11) of this title) or which ``adequately 
collateralize'' indebtedness under paragraph (c)(7) of this section;
    (C) Work in process and finished goods which result from the 
processing of commodities at market value;
    (D) Raw materials at market value which will be combined with spot 
commodities to produce a finished proc- essed commodity; and
    (E) Inventories held for resale commonly associated with the 
business activities of the applicant or registrant;
    (v) Include fixed assets and assets which otherwise would be 
considered noncurrent to the extent of any long-term debt adequately 
collateralized by assets acquired for use in the ordinary course of the 
trade or business of an applicant or registrant and any other long-term 
debt adequately collateralized by assets of the applicant or registrant 
if the sole recourse of the creditor for nonpayment of such liability is 
to such asset: Provided, Such liabilities are not excluded from 
liabilities in the computation of net capital under paragraph (c)(4)(vi) 
of this section;
    (vi) Exclude all assets doubtful of collection or realization less 
any reserves established therefor;
    (vii) Include, in the case of future income tax benefits arising as 
a result of unrealized losses, the amount of such benefits not exceeding 
the amount of income tax liabilities accrued on the books and records of 
the applicant or registrant, but only to the extent such benefits could 
have been applied to reduce accrued tax liabilities on the date of the 
capital computation, had the related unrealized losses been realized on 
that date;
    (viii) Include guaranteee deposits with clearing organizations and 
stock in clearing organizations to the extent of its margin value;
    (ix) In the case of an introducing broker or an applicant for 
registration as an introducing broker, include 50 percent of the value 
of a guarantee or security deposit with a futures commission merchant 
which carries or intends to carry accounts for the customers of the 
introducing broker; and
    (x) Exclude exchange memberships.
    (3) A loan or advance or any other form of receivable shall not be 
considered ``secured'' for the purposes of paragraph (c)(2) of this 
section unless the following conditions exist:
    (i) The receivable is secured by readily marketable collateral which 
is otherwise unencumbered and which can be readily converted into cash: 
Provided, however, That the receivable will be considered secured only 
to the extent of the market value of such collateral after application 
of the percentage deductions specified in paragraph (c)(5) of this 
section; and
    (ii)(A) The readily marketable collateral is in the possession or 
control of the applicant or registrant; or
    (B) The applicant or registrant has a legally enforceable, written 
security agreement, signed by the debtor, and

[[Page 44]]

has a perfected security interest in the readily marketable collateral 
within the meaning of the laws of the State in which the readily 
marketable collateral is located.
    (4) The term liabilities means the total money liabilities of an 
applicant or registrant arising in connection with any transaction 
whatsoever, including economic obligations of an applicant or registrant 
that are recognized and measured in conformity with generally accepted 
accounting principles. ``Liabilities'' also include certain deferred 
credits that are not obligations but that are recognized and measured in 
conformity with generally accepted accounting principles. For the 
purposes of computing ``net capital'', the term ``liabilities'':
    (i) Excludes liabilities of an applicant or registrant which are 
subordi- nated to the claims of all general creditors of the applicant 
or registrant pursuant to a satisfactory subordination agreement, as 
defined in paragraph (h) of this section;
    (ii) Excludes, in the case of a futures commission merchant, the 
amount of money, securities and property due to commodity futures or 
option customers which is held in segregated accounts in compliance with 
the requirements of the Act and these regulations: Provided, however, 
That such exclusion may be taken only if such money, securities and 
property held in segregated accounts have been excluded from current 
assets in computing net capital;
    (iii) Includes, in the case of an applicant or registrant who is a 
sole proprietor, the excess of liabilities which have not been incurred 
in the course of business as a futures commission merchant or as an 
introducing broker over assets not used in the business;
    (iv) Excludes the lesser of any deferred income tax liability 
related to the items in paragraphs (c)(4)(i) (A), (B), and (C) below, or 
the sum of paragraphs (c)(4)(i) (A), (B), and (C) below:
    (A) The aggregate amount resulting from applying to the amount of 
the deductions computed in accordance with paragraph (c)(5) of this 
section the appropriate Federal and State tax rate(s) applicable to any 
unrealized gain on the asset on which the deduction was computed;
    (B) Any deferred tax liability related to income accrued which is 
directly related to an asset otherwise deducted pursuant to this 
section;
    (C) Any deferred tax liability related to unrealized appreciation in 
value of any asset(s) which has been otherwise excluded from current 
assets in accordance with the provisions of this section;
    (v) Excludes any current tax liability related to income accrued 
which is directly related to an asset otherwise deducted pursuant to 
this section; and
    (vi) Excludes liabilities which would be classified as long term in 
accordance with generally accepted accounting principles to the extent 
of the net book value of plant, property and equipment which is used in 
the ordinary course of any trade or business of the applicant or 
registrant which is a reportable segment of the applicant's or 
registrant's overall business activities, as defined in generally 
accepted accounting principles, other than in the commodity futures, 
commodity option, security and security option segments of the 
applicant's or registrant's business activities: Provided, That such 
plant, property and equipment is not included in current assets pursuant 
to paragraph (c)(2)(v) of this section.
    (5) The term adjusted net capital means net capital less:
    (i) The amount by which any advances paid by the applicant or 
registrant on cash commodity contracts and used in computing net capital 
exceeds 95 percent of the market value of the commodities covered by 
such contracts;
    (ii) In the case of all inventory, fixed price commitments and 
forward contracts, except for inventory and forward contracts in those 
foreign currencies which are purchased or sold for future delivery on or 
subject to the rules of a contract market and covered by an open futures 
contract for which there will be no charge, the applicable percentage of 
the net position specified below:
    (A) Inventory which is currently registered as deliverable on a 
contract market and covered by an open futures contract or by a 
commodity option on a physical.--No charge.

[[Page 45]]

    (B) Inventory which is covered by an open futures contract or 
commodity option.--5 percent of the market value.
    (C) Inventory which is not covered.--20 percent of the market value.
    (D) Fixed price commitments (open purchases and sales) and forward 
contracts which are covered by an open futures contract or commodity 
option.--10 percent of the market value.
    (E) Fixed price commitments (open purchases and sales) and forward 
contracts which are not covered by an open futures contract or commodity 
option.--20 percent of the market value.
    (iii)-(iv) [Reserved]
    (v) In the case of securities and obligations used by the applicant 
or registrant in computing net capital, and in the case of a futures 
commission merchant with securities in segregation pursuant to section 
4d(2) of the Act and the regulations in this chapter which were not 
deposited by customers, the percentages specified in Rule 240.15c3-
1(c)(2)(vi) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi)) (``securities haircuts'') and 100 percent of the value of 
``nonmarketable securities'' as specified in Rule 240.15c3-1(c)(2)(vii) 
of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vii));
    (vi) In the case of securities options and/or other options for 
which a haircut has been specified for the option or for the underlying 
instrument in Sec. 240.15c3-1 appendix A of this title, the treatment 
specified in, or under, Sec. 240.15c3-1 appendix A, after effecting 
certain adjustments to net capital for listed and unlisted options as 
set forth in such appendix;
    (vii) In the case of an applicant or registrant who has open 
contractual commitments, as hereinafter defined, the deductions 
specified in Sec. 240.15c3-1(c)(2)(viii) of this title;
    (viii) In the case of a futures commission merchant, for 
undermargined customer commodity futures accounts and commodity option 
customer accounts the amount of funds required in each such account to 
meet maintenance margin requirements of the applicable board of trade or 
if there are no such maintenance margin requirements, clearing 
organization margin requirements applicable to such positions, after 
application of calls for margin or other required deposits which are 
outstanding three business days or less. If there are no such 
maintenance margin requirements or clearing organization margin 
requirements, then the amount of funds required to provide margin equal 
to the amount necessary after application of calls for margin or other 
required deposits outstanding three business days or less to restore 
original margin when the original margin has been depleted by 50 percent 
or more: Provided, To the extent a deficit is excluded from current 
assets in accordance with paragraph (c)(2)(i) of this section such 
amount shall not also be deducted under this paragraph (c)(5)(viii). In 
the event that an owner of a customer account has deposited an asset 
other than cash to margin, guarantee or secure his account, the value 
attributable to such asset for purposes of this subparagraph shall be 
the lesser of (A) the value attributable to the asset pursuant to the 
margin rules of the applicable board of trade, or (B) the market value 
of the asset after application of the percentage deductions specified in 
this paragraph (c)(5);
    (ix) In the case of a futures commission merchant, for undermargined 
commodity futures and commodity option noncustomer and omnibus accounts 
the amount of funds required in each such account to meet maintenance 
margin requirements of the applicable board of trade or if there are no 
such maintenance margin requirements, clearing organization margin 
requirements applicable to such positions, after application of calls 
for margin or other required deposits which are outstanding two business 
days or less. If there are no such maintenance margin requirements or 
clearing organization margin requirements, then the amount of funds 
required to provide margin equal to the amount necessary after 
application of calls for margin or other required deposits outstanding 
two business days or less to restore original margin when the original 
margin has been depleted by 50 percent or more: Provided, To the extent 
a deficit is excluded from current assets in accordance with paragraph 
(c)(2)(i) of this section such amount shall not also be

[[Page 46]]

deducted under this paragraph (c)(5)(ix). In the event that an owner of 
a noncustomer or omnibus account has deposited an asset other than cash 
to margin, guarantee or secure his account the value attributable to 
such asset for purposes of this subparagraph shall be the lesser of (A) 
the value attributable to such asset pursuant to the margin rules of the 
applicable board of trade, or (B) the market value of such asset after 
application of the percentage deductions specified in this paragraph 
(c)(5);
    (x) In the case of open futures contracts and granted (sold) 
commodity options held in proprietary accounts carried by the applicant 
or registrant which are not covered by a position held by the applicant 
or registrant or which are not the result of a ``changer trade'' made in 
accordance with the rules of a contract market:
    (A) For an applicant or registrant which is a clearing member of a 
clearing organization for the positions cleared by such member, the 
applicable margin requirement of the applicable clearing organization;
    (B) For an applicant or registrant which is a member of a self-
regulatory organization 150 percent of the applicable maintenance margin 
requirement of the applicable board of trade, or clearing organization, 
whichever is greater;
    (C) For all other applicants or registrants, 200 percent of the 
applicable maintenance margin requirements of the applicable board of 
trade or clearing organization, whichever is greater; or
    (D) For open contracts or granted (sold) commodity options for which 
there are no applicable maintenance margin requirements, 200 percent of 
the applicable initial margin requirement: Provided, The equity in any 
such proprietary account shall reduce the deduction required by this 
paragraph (c)(5)(x) if such equity is not otherwise includable in 
adjusted net capital;
    (xi) In the case of an applicant or registrant which is a purchaser 
of a commodity option not traded on a contract market which has value 
and such value is used to increase adjusted net capital, ten percent of 
the market value of the physical or futures contract which is the 
subject of such option but in no event more than the value attributed to 
such option;
    (xii) In the case of an applicant or registrant which is a purchaser 
of a commodity option which is traded on a contract market the same 
safety factor as if the applicant or registrant were the grantor of such 
option in accordance with paragraph (c)(5)(x) of this section, but in no 
event shall the safety factor be greater than the market value 
attributed to such option;
    (xiii) Five percent of all unsecured receivables includable under 
paragraph (c)(2)(ii)(D) of this section used by the applicant or 
registrant in computing ``net capital'' and which are not due from:
    (A) A registered futures commission merchant;
    (B) A broker or dealer that is registered as such with the 
Securities and Exchange Commission; or
    (C) A foreign broker that has been granted comparability relief 
pursuant to Sec. 30.10 of this chapter, Provided, however, that the 
amount of the unsecured receivable not subject to the five percent 
capital charge is no greater than 150 percent of the current amount 
required to maintain futures and option positions in accounts with the 
foreign broker, or 100 percent of such greater amount required to 
maintain futures and option positions in the accounts at any time during 
the previous six-month period, and Provided, that, in the case of 
customer funds, such account is treated in accordance with the special 
requirements of the applicable Commission order issued under Sec. 30.10 
of this chapter.
    (xiv) For securities brokers and dealers, all other deductions 
specified in Sec. 240.15c3-1 of this title.
    (6) [Reserved]
    (7) Liabilities are ``adequately collateralized'' when, pursuant to 
a legally enforceable written instrument, such liabilities are secured 
by identified assets that are otherwise unencumbered and the market 
value of which exceeds the amount of such liabilities.
    (8) The term contractual commitments shall include underwriting, 
when issued, when distributed, and delayed delivery contracts; and the 
writing or

[[Page 47]]

endorsement of security puts and calls and combinations thereof; but 
shall not include uncleared regular way purchases and sales of 
securities. A series of contracts of purchase or sale of the same 
security, conditioned, if at all, only upon issuance, may be treated as 
an individual commitment.
    (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):
    (1) Equity capital means a satisfactory subordination agreement 
entered into by a partner or stockholder which has an initial term of at 
least 3 years and has a remaining term of not less than 12 months if:
    (i) It does not have any of the provisions for accelerated maturity 
provided for by paragraphs (h)(2) (ix)(A), (x)(A), or (x)(B) of this 
section, or the provisions allowing for special prepayment provided for 
by paragraph (h)(2)(vii)(B) of this section, and is maintained as 
capital subject to the provisions restricting the withdrawal thereof 
required by paragraph (e) of this section; or
    (ii) The partnership agreement provides that capital contributed 
pursuant to a satisfactory subordination agreement as defined in 
paragraph (h) of this section shall in all respects be partnership 
capital subject to the provisions restricting the withdrawal thereof 
required by paragraph (e) of this section, and
    (A) 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.
    (B) In the case of a partnership, the sum of its capital accounts of 
partners (inclusive of such partners' commodities, options and 
securities accounts subject to the provisions of paragraph (e) of this 
section), and unrealized profit and loss.
    (C) In the case of a sole proprietorship, the sum of its capital 
accounts of the sole proprietorship and unrealized profit and loss.
    (2) Debt-equity total means equity capital as defined in paragraph 
(d)(1) of this section plus the outstanding principal amount of 
satisfactory subordination agreements.
    (e) No equity capital of the applicant or registrant or a 
subsidiary's or affiliate's equity capital consolidated pursuant to 
paragraph (f) of this section, whether in the form of capital 
contributions by partners (including amounts in the commodities, options 
and securities trading accounts of partners which are treated as equity 
capital but excluding amounts in such trading accounts which are not 
equity capital and excluding balances in limited partners' capital 
accounts in excess of their stated capital contributions), par or stated 
value of capital stock, paid-in capital in excess of par or stated 
value, retained earnings or other capital accounts, may be withdrawn by 
action of a stockholder or partner or by redemption or repurchase of 
shares of stock by any of the consolidated entities or through the 
payment of dividends or any similar distribution, nor may any unsecured 
advance or loan be made to a stockholder, partner, sole proprietor, or 
employee if, after giving effect thereto and to any other such 
withdrawals, advances, or loans and any payments of payment obligations 
(as defined in paragraph (h) of this section) under satisfactory 
subordination agreements and any payments of liabilities excluded 
pursuant to paragraph (c)(4)(vi) of this section which are scheduled to 
occur within six months following such withdrawal, advance or loan:
    (1) Either adjusted net capital of any of the consolidated entities 
would be less than the greatest of:
    (i) 120 percent of the appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (ii) For a futures commission merchant or applicant therefor, 6 
percent of the following amount: The customer

[[Page 48]]

funds required to be segregated pursuant to the Act and the regulations 
in this part, plus the funds of opt-out customers that, but for the 
election to opt out pursuant to Sec. 1.68, would be required to be 
segregated, plus the foreign futures or foreign options secured amount, 
less the market value of commodity options purchased by customers on or 
subject to the rules of a contract market or a foreign board of trade 
for which the full premiums have been paid: Provided, however, That the 
deduction for each customer shall be limited to the amount of customer 
funds in such customer's account(s) and foreign futures and foreign 
options secured amounts;
    (iii) 120 percent of the amount of adjusted net capital required by 
a registered futures association of which it is a member; or
    (iv) For an applicant or registrant which is also a securities 
broker or dealer, the amount of net capital specified in Rule 15c3-1(e) 
of the Securities and Exchange Commission (17 CFR 240.15c3-1(e)); or
    (2) In the case of any applicant or registrant included within such 
consolidation, if equity capital of the applicant or registrant 
(inclusive of satisfactory subordination agreements which qualify as 
equity under paragraph (d) of this section) would be less than 30 
percent of the required debt-equity total as defined in paragraph (d) of 
this section.

Provided, That this paragraph (e) shall not preclude an applicant or 
registrant from making required tax payments or preclude the payment to 
partners of reasonable compensation. The Commission may, upon 
application of the applicant or registrant, grant relief from this 
paragraph (e) if the Commission deems it to be in the public interest or 
for the protection of nonproprietary accounts.
    (f)(1) Every applicant or registrant, in computing its net capital 
pursuant to this section must, subject to the provisions of paragraphs 
(f)(2) and (f)(4) of this section, consolidate in a single computation, 
assets and liabilities of any subsidiary or affiliate for which it 
guarantees, endorses, or assumes directly or indirectly the obligations 
or liabilities. The assets and liabilities of a subsidiary or affiliate 
whose liabilities and obligations have not been guaranteed, endorsed, or 
assumed directly or indirectly by the applicant or registrant may also 
be so consolidated if an opinion of counsel is obtained as provided for 
in paragraph (f)(2) of this section.
    (2)(i) If the consolidation, provided for in paragraph (f)(1) of 
this section, of any such subsidiary or affiliate results in the 
increase of the applicant's or registrant's adjusted net capital or 
decreases the minimum adjusted net capital requirement, and an opinion 
of counsel called for in paragraph (f)(2)(ii) of this section has not 
been obtained, such benefits shall not be recognized in the applicant's 
or registrant's computation required by this section.
    (ii) Except as provided for in paragraph (f)(2)(i) of this section, 
consolidation shall be permitted with respect to any subsidiaries or 
affiliates which are majority owned and controlled by the applicant or 
registrant, and for which the applicant can demonstrate to the 
satisfaction of the National Futures Association, or for which the 
registrant can demonstrate to the satisfaction of the Commission and the 
designated self-regulatory organization, if any, by an opinion of 
counsel, that the net asset values or the portion thereof related to the 
parent's ownership interest in the subsidiary or affiliate, may be 
caused by the applicant or registrant or an appointed trustee to be 
distributed to the applicant or registrant within 30 calendar days. Such 
opinion must also set forth the actions necessary to cause such a 
distribution to be made, identify the parties having the authority to 
take such actions, identify and describe the rights of other parties or 
classes of parties, including but not limited to customers, general 
creditors, subordinated lenders, minority shareholders, employees, 
litigants, and governmental or regulatory authorities, who may delay or 
prevent such a distribution and such other assurances as the National 
Futures Association, the Commission or the designated self-regulatory 
organization by rule or interpretation may require. Such opinion must be 
current and periodically renewed in connection with the applicant's or 
registrant's annual

[[Page 49]]

audit pursuant to Sec. 1.10 or upon any material change in 
circumstances.
    (3) In preparing a consolidated computation of adjusted net capital 
pursuant to this section, the following minimum and non-exclusive 
requirements shall be observed;
    (i) Consolidated adjusted net capital shall be reduced by the 
estimated amount of any tax reasonably anticipated to be incurred upon 
distribution of the assets of the subsidiary or affiliate.
    (ii) Liabilities of a consolidated subsidiary or affiliate which are 
subordinated to the claims of present and future creditors pursuant to a 
satisfactory subordination agreement shall be deducted from consolidated 
adjusted net capital unless such subordination extends also to the 
claims of present or future creditors of the parent applicant or 
registrant and all consolidated subsidiaries.
    (iii) Subordinated liabilities of a consolidated subsidiary or 
affiliate which are consolidated in accordance with paragraph (f)(3)(ii) 
of this section may not be prepaid, repaid, or accelerated if any of the 
entities included in such consolidation would otherwise be unable to 
comply with the provisions of paragraph (h) of this section.
    (iv) Each applicant or registrant included within the consolidation 
shall at all times be in compliance with the adjusted net capital 
requirement to which it is subject.
    (4) No applicant or registrant shall guarantee, endorse, or assume 
directly or indirectly any obligation or liability of a subsidiary or 
affiliate unless the obligation or liability is reflected in the 
computation of adjusted net capital pursuant to this section except as 
provided in paragraph (f)(2)(i) of this section.
    (g) [Reserved]
    (h) The term satisfactory subordination agreement (``subordination 
agreement'') means an agreement which contains the minimum and 
nonexclusive requirements set forth below.
    (1) Certain definitions for purposes of this section:
    (i) A subordination agreement may be either a subordinated loan 
agreement or a secured demand note agreement.
    (ii) The term subordinated loan agreement means the agreement or 
agreements evidencing or governing a subordinated borrowing of cash.
    (iii) The term ``collateral value'' of any securities pledged to 
secure a secured demand note means the market value of such securities 
after giving effect to the percentage deductions specified in Rule 
240.15c3-1d(a)(2)(iii) of the Securities and Exchange Commission (17 CFR 
240.15c3-1d(a)(2)(iii)).
    (iv) The term payment obligation means the obligation of an 
applicant or registrant in respect to any subordination agreement:
    (A) To repay cash loaned to the applicant or registrant pursuant to 
a subordinated loan agreement; or
    (B) To return a secured demand note contributed to the applicant or 
registrant or to reduce the unpaid principal amount thereof and to 
return cash or securities pledged as collateral to secure the secured 
demand note; and (C) ``payment'' shall mean the performance by an 
applicant or registrant of a payment obligation.
    (v)(A) The term secured demand note agreement means an agreement 
(including the related secured demand note) evidencing or governing the 
contribution of a secured demand note to an applicant or registrant and 
the pledge of securities and/or cash with the applicant or registrant as 
collateral to secure payment of such secured demand note. The secured 
demand note agreement may provide that neither the lender, his heirs, 
executors, administrators, or assigns shall be personally liable on such 
note and that in the event of default the applicant or registrant shall 
look for payment of such note solely to the collateral then pledged to 
secure the same.
    (B) The secured demand note shall be a promissory note executed by 
the lender and shall be payable on the demand of the applicant or 
registrant to which it is contributed: Provided, however, That the 
making of such demand may be conditioned upon the occurrence of any of 
certain events which are acceptable to the designated self-regultory 
organization and the Commission.
    (C) If such note is not paid upon presentment and demand as provided 
for

[[Page 50]]

therein, the applicant or registrant shall have the right to liquidate 
all or any part of the securities then pledged as collateral to secure 
payment of the same and to apply the net proceeds of such liquidation, 
together with any cash then included in the collateral, in payment of 
such note. Subject to the prior rights of the applicant or registrant as 
pledgee, the lender, as defined in paragraph (h)(i)(v)(F) of this 
section may retain ownership of the collateral and have the benefit of 
any increases and bear the risks fo any decreases in the value of the 
collateral and may retain the right to vote securities contained within 
the collateral and any right to income therefrom or distributions 
thereon, except the applicant or registrant shall have the right to 
receive and hold as pledgee all dividends payable in securities and all 
partial and complete liquidating dividends.
    (D) Subject to the prior rights of the applicant or registrant as 
pledgee, the lender may have the right to direct the sale of any 
securities included in the collateral, to direct the purchase of 
securities with any cash included therein, to withdraw excess collateral 
or to substitute cash or other securities as collateral: Provided, That 
the net proceeds of any such sale and the cash so substituted and the 
securities so purchased or substituted are held by the applicant or 
registrant as pledgee, and are included within the collateral to secure 
payment of the secured demand note: And provided further, That no such 
transaction shall be permitted, if, after giving effect therto, the sum 
of the amount of any cash, plus the collateral value of the securities, 
then pledged as collateral to secure the secured demand note would be 
less than the unpaid principal amount of the secured demand note.
    (E) Upon payment by the lender, as distinguished from a reduction by 
the lender which is provided for in paragraph (h)(2)(vi)(C) of this 
section or reduction by the applicant or registrant as provided for in 
paragraph (h)(2)(vii) of this section, of all or any part of the unpaid 
principal amount of the secured demand note, the applicant or registrant 
shall issue to the lender a subordinated loan agreement in the amout of 
such payment (or in the case of an pplicant or registrant that is a 
partnership, credit a capital account of the lender), or issue preferred 
or common stock of the applicant or registrant in the amount of such 
payment, or any combination of the foregoing, as provided for in the 
secured demand note agreement.
    (F) The term lender means the person who lends cash to an applicant 
or registrant pursuant to a subordinated loan agreement and the person 
who contributes a secured demand note to an applicant or registrant 
pursuant to a secured demand note agreement.
    (2) Minimum requirements for subordination agreements:
    (i) Subject to paragraph (h)(1) of this section, a subordination 
agreement shall mean a written agreement between the applicant or 
registrant and the lender, which:
    (A) Has a minimum term of 1 year, except for temporary subordination 
agreements provided for in paragraph (h)(3)(v) of this section, and
    (B) Is a valid and binding obligation enforceable in accordance with 
its terms (subject as to enforcement to applicable bankruptcy, 
insolvency, reorganization, moratorium, and other similar laws) against 
the applicant or registrant and the lender and their respective heirs, 
executors, administrators, successors, and assigns.
    (ii) Specific amount. All subordination agreements shall be for a 
specific dollar amount which shall not be reduced for the duration of 
the agreement except by installments as specifically provided for 
therein and except as otherwise provided in this paragraph (h)(2) of 
this section.
    (iii) Effective subordination. The subordination agreement shall 
effectively subordinate any right of the lender to receive any payment 
with respect thereto, together with accrued interest or compensation, to 
the prior payment or provision for payment in full of all claims of all 
present and future creditors of the applicant or registrant arising out 
of any matter occurring prior to the date on which the related payment 
obligation matures, except for claims which are the subject of 
subordination agreements which rank on the same priority as or junior to 
the claim

[[Page 51]]

of the lender under such subordination agreements.
    (iv) Proceeds of subordinated loan agreements. The subordinated loan 
agreement shall provide that the cash proceeds thereof shall be used and 
dealt with by the applicant or registrant as part of its capital and 
shall be subject to the risks of the business.
    (v) Certain rights of the borrower. The subordination agreement 
shall provide that the applicant or registrant shall have the right to:
    (A) Deposit any cash proceeds of a subordinated loan agreement and 
any cash pledged as collateral to secure a secured demand note in an 
account or accounts in its own name in any bank or trust company;
    (B) Pledge, repledge, hypothecate and rehypothecate, any or all of 
the securities pledged as collateral to secure a secured demand note, 
without notice, separately or in common with other securities or 
property for the purpose of securing any indebtedness of the applicant 
or registrant; and
    (C) Lend to itself or others any or all of the securities and cash 
pledged as collateral to secure a secured demand note.
    (vi) Collateral for secured demand notes. Only cash and securities 
which are fully paid for and which may be publicly offered or sold 
without registration under the Securities Act of 1933, and the offer, 
sale, and transfer of which are not otherwise restricted, may be pledged 
as collateral to secure a secured demand note. The secured demand note 
agreement shall provide that if at any time the sum of the amount of any 
cash, plus the collateral value of any securities, then pledged as 
collateral to secure the secured demand note is less than the unpaid 
principal amount of the secured demand note, the applicant or registrant 
must immediately transmit written notice to that effect to the lender. 
The secured demand note agreement shall also provide that if the 
borrower is an applicant, such notice must also be transmitted 
immediately to the National Futures Association, and if the borrower is 
a registrant, such notice must also be transmitted immediately to the 
designated self-regulatory organization, if any, and the Commission. The 
secured demand note agreement shall also require that following such 
transmittal:
    (A) The lender, prior to noon of the business day next succeeding 
the transmittal of such notice, may pledge as collateral additional cash 
or securities sufficient, after giving effect to such pledge, to bring 
the sum of the amount of any cash plus the collateral value of any 
securities, then pledged as collateral to secure the secured demand 
note, up to an amount not less than the unpaid principal amount of the 
secured demand note; and
    (B) Unless additional cash or securities are pledged by the lender 
as provided in paragraph (h)(2)(vi)(A) above, the applicant or 
registrant at noon on the business day next succeeding the transmittal 
of notice to the lender must commence sale, for the account of the 
lender, of such of the securities then pledged as collateral to secure 
the secured demand note and apply so much of the net proceeds thereof, 
together with such of the cash then pledged as collateral to secure the 
secured demand note as may be necessary to eliminate the unpaid 
principal amount of the secured demand note: Provided, however, That the 
unpaid principal amount of the secured demand note need not be reduced 
below the sum of the amount of any remaining cash, plus the collateral 
value of the remaining securities, then pledged as collateral to secure 
the secured demand note. The applicant or registrant may not purchase 
for its own account any securities subject to such a sale; and
    (C) The secured demand note agreement may also provide that, in lieu 
of the procedures specified in the provisions required by paragraph 
(h)(2)(vi)(B) of this section, the lender, with the prior written 
consent of the applicant and the National Futures Association, or with 
the prior written consent of the registrant and the designated self-
regulatory organization or, if the registrant is not a member of a 
designated self-regulatory organization, the Commission, may reduce the 
unpaid principal amount of the secured demand note: Provided, That after 
giving effect to such reduction the adjusted net capital of the 
applicant or

[[Page 52]]

registrant would not be less than the greatest of:
    (1) 120 percent of the appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 7 
percent of the following amount: The customer funds required to be 
segregated pursuant to the Act and the regulations in this part, plus 
the funds of opt-out customers that, but for the election to opt out 
pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by customers on or subject to the rules 
of a contract market or a foreign board of trade for which the full 
premiums have been paid: Provided, however, That the deduction for each 
customer shall be limited to the amount of customer funds in such 
customer's account(s) and foreign futures and foreign options secured 
amounts;
    (3) 120 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member; or
    (4) For an applicant or registrant which is also a securities broker 
or dealer, the amount of net capital specified in Rule 15c3-
1d(b)(6)(iii) of the Securities and Exchange Commission (17 CFR 
240.15c3-1d(b)(6)(iii)): Provided, further, That no single secured 
demand note shall be permitted to be reduced by more than 15 percent of 
its original principal amount and after such reduction no excess 
collateral may be withdrawn.
    (vii) Permissive prepayments and special prepayments. (A) An 
applicant or registrant at its option, but not at the option of the 
lender, may, if the subordination agreement so provides, make a payment 
of all or any portion of the payment obligation thereunder prior to the 
scheduled maturity date of such payment obligation (hereinafter referred 
to as a ``prepayment''), but in no event may any prepayment be made 
before the expiration of one year from the date such subordination 
agreement became effective: Provided, however, That the foregoing 
restriction shall not apply to temporary subordination agreements which 
comply with the provisions of paragraph (h)(3)(v) of this section nor 
shall it apply to ``special prepayments'' made in accordance with the 
provisions of paragraph (h)(2)(vii)(B) of this section. No prepayment 
shall be made if, after giving effect thereto (and to all payments of 
payment obligations under any other subordination agreements then 
outstanding, the maturity or accelerated maturities of which are 
scheduled to fall due within six months after the date such prepayment 
is to occur pursuant to this provision, or on or prior to the date on 
which the payment obligation in respect to such prepayment is scheduled 
to mature disregarding this provision, whichever date is earlier) 
without reference to any projected profit or loss of the applicant or 
registrant, the adjusted net capital of the applicant or registrant is 
less than the greatest of:
    (1) 120 percent of the appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 7 
percent of the following amount: The customer funds required to be 
segregated pursuant to the Act and the regulations in this part, plus 
the funds of opt-out customers that, but for the election to opt out 
pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by customers on or subject to the rules 
of a contract market or a foreign board of trade for which the full 
premiums have been paid: Provided, however, That the deduction for each 
customer shall be limited to the amount of customer funds in such 
customer's account(s) and foreign futures and foreign options secured 
amounts;
    (3) 120 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member; or
    (4) For an applicant or registrant which is also a securities broker 
or dealer, the amount of net capital specified in Rule 15c3-1d(b)(7) of 
the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(7)).

[[Page 53]]

    (B) An applicant or registrant at its option, but not at the option 
of the lender, may, if the subordination agreement so provides, make a 
payment at any time of all or any portion of the payment obligation 
thereunder prior to the scheduled maturity date of such payment 
obligation (hereinafter referred to as a ``special prepayment''). No 
special prepayment shall be made if, after giving effect thereto (and to 
all payments of payment obligations under any other subordination 
agreements then outstanding, the maturity or accelerated maturities of 
which are scheduled to fall due within six months after the date such 
special prepayment is to occur pursuant to this provision, or on or 
prior to the date on which the payment obligation in respect to such 
special prepayment is scheduled to mature disregarding this provision, 
whichever date is earlier) without reference to any projected profit or 
loss of the applicant or registrant, the adjusted net capital of the 
applicant or registrant is less than the greatest of:
    (1) 200 percent of the appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 10 
percent of the following amount: The customer funds required to be 
segregated pursuant to the Act and the regulations in this part, plus 
the funds of opt-out customers that, but for the election to opt out 
pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by customers on or subject to the rules 
of a contract market or a foreign board of trade for which the full 
premiums have been paid: Provided, however, That the deduction for each 
customer shall be limited to the amount of customer funds in such 
customer's account(s) and foreign futures and foreign options secured 
amounts;
    (3) 120 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member; or
    (4) For an applicant or registrant which is also a securities broker 
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(5)(ii) 
of the Securities and Exchange Commission (17 CFR 240.15c3-
1d(c)(5)(ii)): Provided, however, That no special prepayment shall be 
made if pre-tax losses during the latest three-month period were greater 
than 15 percent of current excess adjusted net capital.
    (C)(1) Notwithstanding the provisions of paragraphs (h)(2)(vii)(A) 
and (h)(2)(vii)(B) of this section, in the case of an applicant, no 
prepayment or special prepayment shall occur without the prior written 
approval of the National Futures Association; in the case of a 
registrant, no prepayment or special prepayment shall occur without the 
prior written approval of the designated self-regulatory organization, 
if any, or of the Commission if the registrant is not a member of a 
self-regulatory organization.
    (2) A registrant may make a prepayment or special prepayment without 
the prior written approval of the designated self-regulatory 
organization: Provided, That the registrant: Is a securities broker or 
dealer registered with the Securities and Exchange Commission; files a 
request to make a prepayment or special prepayment with its applicable 
securities designated examining authority, as defined in Rule 15c3-
1(c)(12) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(12)), in the form and manner prescribed by the designated examining 
authority; files a copy of the prepayment request or special prepayment 
request with the designated self-regulatory organization at the time it 
files such request with the designated examining authority in the form 
and manner prescribed by the designated self-regulatory organization; 
and files a copy of the designated examining authority's approval of the 
prepayment or special prepayment with the designated self-regulatory 
organization immediately upon receipt of such approval. The approval of 
the prepayment or special prepayment by the designated examining 
authority will be deemed approval by the designated self-regulatory 
organization, unless the designated self-regulatory organization

[[Page 54]]

notifies the registrant that the designated examining authority's 
approval shall not constitute designated self-regulatory organization 
approval.
    (3) The designated self-regulatory organization shall immediately 
provide the Commission with a copy of any notice of approval issued 
where the requested prepayment or special prepayment will result in the 
reduction of the registrant's net capital by 20 percent or more or the 
registrant's excess adjusted net capital by 30 percent or more.
    (viii) Suspended repayment. (A) The payment obligation of the 
applicant or registrant in respect of any subordination agreement shall 
be suspended and shall not mature if, after giving effect to payment of 
such payment obligation (and to all payments of payment obligations of 
the applicant or registrant under any other subordination agreement(s) 
then outstanding which are scheduled to mature on or before such payment 
obligation), the adjusted net capital of the applicant or registrant 
would be less than the greatest of:
    (1) 120 percent of the appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 6 
percent of the following amount: The customer funds required to be 
segregated pursuant to the Act and the regulations in this part, plus 
the funds of opt-out customers that, but for the election to opt out 
pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by customers on or subject to the rules 
of a contract market or a foreign board of trade for which the full 
premiums have been paid: Provided, however, That the deduction for each 
customer shall be limited to the amount of customer funds in such 
customer's account(s) and foreign futures and foreign options secured 
amounts;
    (3) 120 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member; or
    (4) For an applicant or registrant which is also a securities broker 
or dealer, the amount of net capital specified in Rule 15c3-1d(b)(8)(i) 
of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(8)(i)): 
Provided, That the subordination agreement may provide that if the 
payment obligation of the applicant or registrant thereunder does not 
mature and is suspended as a result of the requirement of this paragraph 
(h)(2)(viii) for a period of not less than six months, the applicant or 
registrant shall then commence the rapid and orderly liquidation of its 
business, but the right of the lender to receive payment, together with 
accrued interest or compensation, shall remain subordinate as required 
by the provisions of this section.
    (B) [Reserved]
    (ix) Accelerated maturity. Obligation to repay to remain 
subordinate:
    (A) Subject to the provisions of paragraph (h)(2)(viii) of this 
section, a subordination agreement may provide that the lender may, upon 
prior written notice to the applicant and the National Futures 
Association, or upon prior written notice to the registrant and the 
designated self-regulatory organization or, if the registrant is not a 
member of a designated self-regulatory organization, the Commission, 
given not earlier than six months after the effective date of such 
subordination agreement, accelerate the date on which the payment 
obligation of the borrower, together with accrued interest or 
compensation, is scheduled to mature to a date not earlier than six 
months after giving of such notice, but the right of the lender to 
receive payment, together with accrued interest or compensation, shall 
remain subordinate as required by the provisions of this paragraph 
(h)(2) of this section.
    (B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this 
section, the payment obligation of the applicant or registrant with 
respect to a subordination agreement, together with accrued interest and 
compensation, shall mature in the event of any receivership, insolvency, 
liquidation pursuant to the Securities Investor Protection Act of 1970 
or otherwise, bankruptcy, assignment for the benefit of creditors, 
reorganization whether or not pursuant to the bankruptcy laws, or any 
other marshalling of the assets

[[Page 55]]

and liabilities of the applicant or registrant, but the right of the 
lender to receive payment, together with accrued interest or 
compensation, shall remain subordinate as required by the provisions of 
paragraph (h)(2) of this section.
    (x) Accelerated maturity of subordination agreements on event of 
default and event of acceleration. Obligation to repay to remain 
subordinate:
    (A) A subordination agreement may provide that the lender may, upon 
prior written notice to the applicant and the National Futures 
Association, or upon prior written notice to the registrant and the 
designated self-regulatory organization or, if the registrant is not a 
member of a designated self-regulatory organization, the Commission, of 
the occurrence of any event of acceleration (as hereinafter defined) 
given no sooner than six months after the effective date of such 
subordination agreement, accelerate the date on which the payment 
obligation of the applicant or registrant, together with accrued 
interest or compensation, is scheduled to mature, to the last business 
day of a calendar month which is not less than six months after notice 
of acceleration is received by the applicant and by the National Futures 
Association, or by the registrant and the designated self-regulatory 
organization or, if the registrant is not a member of a designated self-
regulatory organization, the Commission. Any subordination agreement 
containing such events of acceleration may also provide that, if upon 
such accelerated maturity date the payment obligation of the applicant 
or registrant is suspended as required by paragraph (h)(2)(viii) of this 
section and liquidation of the applicant or registrant has not commenced 
on or prior to such accelerated maturity date, notwithstanding paragraph 
(h)(2)(viii) of this section, the payment obligation of the applicant or 
registrant with respect to such subordination agreement shall mature on 
the day immediately following such accelerated maturity date and in any 
such event the payment obligations of the applicant or registrant with 
respect to all other subordination agreements then outstanding shall 
also mature at the same time but the rights of the respective lenders to 
receive payment, together with accrued interest or compensation, shall 
remain subordinate as required by the provisions of paragraph (h)(2) of 
this section. Events of acceleration which may be included in a 
subordination agreement complying with this paragraph (h)(2)(x) of this 
section shall be limited to:
    (1) Failure to pay interest or any installment of principal on a 
subordination agreement as scheduled;
    (2) Failure to pay when due other money obligations of a specified 
material amount;
    (3) Discovery that any material, specified representation or 
warranty of the applicant or registrant which is included in the 
subordination agreement and on which the subordination agreement was 
based or continued was inaccurate in a material respect at the time 
made;
    (4) Any specified and clearly measurable event which is included in 
the subordination agreement and which the lender and the applicant or 
registrant agree, (a) is a significant indication that the financial 
position of the applicant or registrant has changed materially and 
adversely from agreed upon specified norms; or (b) could materially and 
adversely affect the ability of the applicant or registrant to conduct 
its business as conducted on the date the subordination agreement was 
made; or (c) is a significant change in the senior management of the 
applicant or registrant or in the general business conducted by the 
applicant or registrant from that which obtained on the date the 
subordination agreement became effective;
    (5) Any continued failure to perform agreed covenants included in 
the subordination agreement relating to the conduct of the business of 
the applicant or registrant or relating to the maintenance and reporting 
of its financial position; and
    (B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this 
section, a subordination agreement may provide that, if liquidation of 
the business of the applicant or registrant has not already commenced, 
the payment obligation of the applicant or registrant shall mature, 
together with accrued interest or compensation, upon the occurrence

[[Page 56]]

of an event of default (as hereinafter defined). Such agreement may also 
provide that, if liquidation of the business of the applicant or 
registrant has not already commenced, the rapid and orderly liquidation 
of the business of the applicant or registrant shall then commence upon 
the happening of an event of default. Any subordination agreement which 
so provides for maturity of the payment obligation upon the occurrence 
of an event of default shall also provide that the date on which such 
event of default occurs shall, if liquidation of the applicant or 
registrant has not already commenced, be the date on which the payment 
obligation of the applicant or registrant with respect to all other 
subordination agreements then outstanding shall mature but the rights of 
the respective lenders to receive payment, together with accrued 
interest or compensation, shall remain subordinate as required by the 
provisions of paragraph (h)(2) of this section. Events of default which 
may be included in a subordination agreement shall be limited to:
    (1) The making of an application by the Securities Investor 
Protection Corporation for a decree adjudicating that customers of the 
applicant or registrant are in need of protection under the Securities 
Investor Protection Act of 1970 and the failure of the applicant or 
registrant to obtain the dismissal of such application within 30 days;
    (2) Failure to meet the minimum capital requirements of the 
designated self-regulatory organization, or of the Commission, 
throughout a period of 15 consecutive business days, commencing on the 
day the borrower first determines and notifies the designated self-
regulatory organization, if any, of which he is a member and the 
Commission, in the case of a registrant, or the National Futures 
Association, in the case of an applicant, or commencing on the day any 
self-regulatory organization, the Commission or the National Futures 
Association first determines and notifies the applicant or registrant of 
such fact;
    (3) The Commission shall revoke the registration of the applicant or 
registrant;
    (4) The self-regulatory organization shall suspend (and not 
reinstate within 10 days) or revoke the applicant or registrant's status 
as a member thereof;
    (5) Any receivership, insolvency, liquidation pursuant to the 
Securities Investor Protection Act of 1970 or otherwise, bankruptcy, 
assignment for the benefit of creditors, reorganization whether or not 
pursuant to bankruptcy laws, or any other marshalling of the assets and 
liabilities of the applicant or registrant. A subordination agreement 
which contains any of the provisions permitted by this subparagraph 
(2)(x) shall not contain the provision otherwise permitted by paragraph 
(h)(2)(ix)(A) of this section.
    (3) Miscellaneous provisions--(i) Prohibited cancellation. The 
subordination agreement shall not be subject to cancellation by either 
party; no payment shall be made with respect thereto and the agreement 
shall not be terminated, rescinded or modified by mutual consent or 
otherwise if the effect thereof would be inconsistent with the 
requirements of paragraph (h) of this section.
    (ii) Notice of maturity or accelerated maturity. Every applicant or 
registrant shall immediately notify the National Futures Association, 
and the registrant shall immediately notify the designated self-
regulatory organization, if any, and the Commission if, after giving 
effect to all payments of payment obligations under subordination 
agreements then outstanding which are then due or mature within the 
following six months without reference to any projected profit or loss 
of the applicant or registrant, its adjusted net capital would be less 
than:
    (A) 120 percent of the minimum dollar amount required by paragraphs 
(a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (B) For a futures commission merchant or applicant therefor, 6 
percent of the following amount: The customer funds required to be 
segregated pursuant to the Act and the regulations in this part, plus 
the funds of opt-out customers that, but for the election to opt out 
pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by customers on or subject to the rules 
of a contract market or a foreign board of

[[Page 57]]

trade for which the full premiums have been paid: Provided, however, 
That the deduction for each customer shall be limited to the amount of 
customer funds in such customer's account(s) and foreign futures and 
foreign options secured amounts;
    (C) 120 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member; or
    (D) For an applicant or registrant which is also a securities broker 
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(2) of 
the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(2)).
    (iii) Certain legends. If all the provisions of a satisfactory 
subordination agreement do not appear in a single instrument, then the 
debenture or other evidence of indebtedness shall bear on its face an 
appropriate legend stating that it is issued subject to the provisions 
of a satisfactory subordination agreement which shall be adequately 
referred to and incorporated by reference.
    (iv) Legal title to securities. All securities pledged as collateral 
to secure a secured demand note must be in bearer form, or registered in 
the name of the applicant or registrant or the name of its nominee or 
custodian.
    (v) Temporary subordinations. To enable an applicant or registrant 
to participate as an underwriter of securities or undertake other 
extraordinary activities and remain in compliance with the adjusted net 
capital requirements of this section, an applicant or registrant shall 
be permitted, on no more than three occasions in any 12-month period, to 
enter into a subordination agreement on a temporary basis which has a 
stated term of no more than 45 days from the date the subordination 
agreement became effective: Provided, That this temporary relief shall 
not apply to any applicant or registrant if the adjusted net capital of 
the applicant or registrant is less than the greatest of:
    (A) 120 percent of the appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
    (B) For a futures commission merchant or applicant therefor, 7 
percent of the following amount: The customer funds required to be 
segregated pursuant to the Act and the regulations in this part, plus 
the funds of opt-out customers that, but for the election to opt out 
pursuant to Sec. 1.68, would be required to be segregated, plus the 
foreign futures or foreign options secured amount, less the market value 
of commodity options purchased by customers on or subject to the rules 
of a contract market or a foreign board of trade for which the full 
premiums have been paid: Provided, however, That the deduction for each 
customer shall be limited to the amount of customer funds in such 
customer's account(s) and foreign futures and foreign options secured 
amounts;
    (C) 120 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member;
    (D) For an applicant or registrant which is also a securities broker 
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(5)(i) 
of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(i)); 
or
    (E) The amount of equity capital as defined in paragraph (d) of this 
section is less than the limits specified in paragraph (d) of this 
section. Such temporary subordination agreement shall be subject to all 
the other provisions of this section.
    (vi) Filing. An applicant shall file a signed copy of any proposed 
subordination agreement (including nonconforming subordination 
agreements) with the National Futures Association at least ten days 
prior to the proposed effective date of the agreement or at such other 
time as the National Futures Association for good cause shall accept 
such filing. A registrant that is not a member of any designated self-
regulatory organization shall file two signed copies of any proposed 
subordination agreement (including nonconforming subordination 
agreements) with 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 shall 
file such copies with the Commission's Southwestern Regional Office) at

[[Page 58]]

least ten days prior to the proposed effective date of the agreement or 
at such other time as the Commission for good cause shall accept such 
filing. A registrant that is a member of a designated self-regulatory 
organization shall file signed copies of any proposed subordination 
agreement (including nonconforming subordination agreements) with the 
designated self-regulatory organization in such quantities and at such 
time as the designated self-regulatory organization may require prior to 
the effective date. The applicant or registrant shall also file with 
said parties a statement setting forth the name and address of the 
lender, the business relationship of the lender to the applicant or 
registrant and whether the applicant or registrant carried funds or 
securities for the lender at or about the time the proposed agreement 
was so filed. A proposed agreement filed by an applicant with the 
National Futures Association shall be reviewed by the National Futures 
Association, and no such agreement shall be a satisfactory subordination 
agreement for the purposes of this section unless and until the National 
Futures Association has found the agreement acceptable and such 
agreement has become effective in the form found acceptable. A proposed 
agreement filed by a registrant shall be reviewed by the designated 
self-regulatory organization with whom such an agreement is required to 
be filed prior to its becoming effective or, if the registrant is not a 
member of any designated self-regulatory organization, by the regional 
office of the Commission where the agreement is required to be filed 
prior to its becoming effective. No proposed agreement shall be a 
satisfactory subordination agreement for the purposes of this section 
unless and until the designated self-regulatory organization or, if a 
registrant is not a member of any designated self-regulatory 
organization, the Commission, has found the agreement acceptable and 
such agreement has become effective in the form found acceptable: 
Provided, however, That a proposed agreement shall be a satisfactory 
subordination agreement for purpose of this section if the registrant: 
is a securities broker or dealer registered with the Securities and 
Exchange Commission; files signed copies of the proposed subordination 
agreement with the applicable securities designated examining authority, 
as defined in Rule 15c3-1(c)(12) of the Securities and Exchange 
Commission (17 CFR 240.15c3-1(c)(12)), in the form and manner prescribed 
by the designated examining authority; files signed copies of the 
proposed subordination agreement with the designated self-regulatory 
organization at the time it files such copies with the designated 
examining authority in the form and manner prescribed by the designated 
self-regulatory organization; and files a copy of the designated 
examining authority's approval of the proposed subordination agreement 
with the designated self-regulatory organization immediately upon 
receipt of such approval. The designated examining authority's 
determination that the proposed subordination agreement satisfies the 
requirements for a satisfactory subordination agreement will be deemed a 
like finding by the designated self-regulatory organization, unless the 
designated self-regulatory organization notifies the registrant that the 
designated examining authority's determination shall not constitute a 
like finding by the designated self-regulatory organization.
    (vii) Subordination agreements in effect prior to adoption. Any 
subordination agreement which has been entered into prior to the 
effective date of this section and which has been deemed to be 
satisfactorily subordinated pursuant to this section previously in 
effect or the adjusted net capital rules of a self-regulatory 
organization shall continue to be deemed a satisfactory subordination 
agreement until the maturity of such agreement. Provided, That no 
renewal of an agreement which provides for automatic or optional renewal 
by the applicant or registrant or lender shall be deemed to be a 
satisfactory subordination agreement unless such renewal agreement meets 
the requirements of this section, within 6 months of the effective date 
of this section. Provided further, That all subordination agreements 
must meet the requirements of this rule within 5 years of the effective 
date of this section.

[[Page 59]]

    (4) A designated self-regulatory organization and the Commission may 
allow debt with a maturity date of 1 year or more to be treated as 
meeting the provisions of this paragraph (h): Provided, (i) Such 
exemption shall only be given when the registrant's adjusted net capital 
is less than the minimum required by this section or by the capital rule 
of the designated self-regulatory organization to which such registrant 
is subject;
    (ii) That such debt did not exist prior to its use under this 
paragraph (h)(4);
    (iii) Such exemption shall be for a period of 30 days or such lesser 
period as the designated self-regulatory organization and the Commission 
may determine;
    (iv) Such exemption shall not be allowed more than once in any 12 
month period; and
    (v) At all times during such exemption the registrant shall make a 
good faith effort to comply with the provisions of this section or the 
capital rule of the designated self-regulatory organization to which 
such registrant is subject exclusive of any benefits derived from this 
paragraph (h)(4).
    (i) [Reserved]
    (j) For the purposes of this section cover is defined as follows:
    (1) General definition. Cover shall mean transactions or positions 
in a contract for future delivery on a board of trade or a commodity 
option where such transactions or positions normally represent a 
substitute for transactions to be made or positions to be taken at a 
later time in a physical marketing channel, and where they are 
economically appropriate to the reduction of risks in the conduct and 
management of a commercial enterprise, and where they arise from:
    (i) The potential change in the value of assets which a person owns, 
produces, manufactures, processes, or merchandises or anticipates 
owning, producing, manufacturing, processing, or merchandising.
    (ii) The potential change in the value of liabilities which a person 
owes or anticipates incurring, or
    (iii) The potential change in the value of services which a person 
provides, purchases or anticipates providing or purchasing. 
Notwithstanding the foregoing, no transactions or positions shall be 
classified as cover for the purposes of this section unless their 
purpose is to offset price risks incidental to commercial cash or spot 
operations and such positions are established and liquidated in 
accordance with sound commercial practices and unless the provisions of 
paragraphs (j) (2) and (3) of this section have been satisfied.
    (2) Enumerated cover transactions. The definition of covered 
transactions and positions in paragraph (j)(1) of this section includes, 
but is not limited to, the following specific transactions and 
positions:
    (i) Ownership or fixed-price purchase of any commodity which does 
not exceed in quantity (A) the sales of the same commodity for future 
delivery on a board of trade or (B) the purchase of a put commodity 
option of the same commodity for which the market value for the actual 
commodity or futures contract which is the subject of the option is less 
than the strike price of the option or (C) the ownership of a commodity 
option position established by the sale (grant) of a call commodity 
option of the same commodity for which the market value for the actual 
commodity or futures contract which is the subject of the option is more 
than the strike price of the option: Provided, That for purposes of 
paragraph (c)(5)(x) of this section the market value for the actual 
commodity or futures contract which is the subject of such option need 
not be more than the strike price of that option;
    (ii) Fixed-price sale of any commodity which does not exceed in 
quantity (A) the purchase of the same commodity for future delivery on a 
board of trade or (B) the purchase of a call commodity option of the 
same commodity for which the market value for the actual commodity or 
futures contract which is the subject of such option is more than the 
strike price of the option or (C) ownership of a commodity option 
position established by the sale (grant) of a put commodity option of 
the same commodity for which the market value for the actual commodity 
or futures comtract which is the subject of the option is less than the 
strike price of the option: Provided,

[[Page 60]]

That for purposes of paragraph (c)(5)(x) of this section the market 
value for the actual commodity or futures contract which is the subject 
of such option need not be less than the strike price of that option; 
and
    (iii) Ownership or fixed-price contracts of a commodity described in 
paragraphs (j)(2)(i) and (j)(2)(ii) of this section may also be covered 
other than by the same quantity of the same cash commodity, provided 
that the fluctuations in value of the position for future delivery or 
commodity option are substantially related to the fluctuations in value 
of the actual cash position.
    (3) Nonenumerated cases. Upon specific request, the Commission may 
recognize transactions and positions other than those enumerated in 
paragraph (j)(2) of this section as cover in amounts and under the terms 
and conditions as it may specify. Any applicant or registrant who wishes 
to avail itself of the provisions of this paragraph (j)(3) must apply to 
the Commission in writing at its principal office in Washington, DC 
giving full details of the transaction including detailed information 
which will demonstrate that the transaction is economically appropriate 
to the reduction of risk exposure attendant to the conduct and 
management of a commercial enterprise.

(Approved by the Office of Management and Budget under control number 
3038-0024)

[43 FR 39972, Sept. 8, 1978]

    Editorial Note: For Federal Register citations affecting Sec. 1.17, 
see the List of Sections Affected, which appears in the Finding Aids 
section of the printed volume and on GPO Access.



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.
    (c) The provisions of this section do not apply to an introducing 
broker

[[Page 61]]

which is operating pursuant to a guarantee agreement, nor do such 
provisions apply to an applicant for registration as an introducing 
broker who files concurrently with such application a guarantee 
agreement, provided such introducing broker or applicant therefor is not 
also a securities broker or dealer.

[48 FR 35288, Aug. 3, 1983, as amended at 49 FR 39530, Oct. 9, 1984; 62 
FR 4641, Jan. 31, 1997]

                 Prohibited Trading in Commodity Options



Sec. 1.19  Prohibited trading in certain ``puts'' and ``calls''.

    No futures commission merchant or introducing broker may make, 
underwrite, issue, or otherwise assume any financial responsibility for 
the fulfillment of, any commodity option except:
    (a) Commodity options traded on or subject to the rules of a 
contract market in accordance with the requirements of part 33 of this 
chapter;
    (b) Commodity options traded on or subject to the rules of a foreign 
board of trade in accordance with the requirements of part 30 of this 
chapter; or
    (c) For futures commission merchants, any option permitted under 
Sec. 32.4 of this chapter, provided however, that a capital treatment 
for such options is referenced in Sec. 1.17(c)(5)(vi).

[52 FR 28997, Aug. 5, 1987, as amended at 58 FR 68520, Dec. 28, 1993]

               Customers' Money, Securities, and Property



Sec. 1.20  Customer funds to be segregated and separately accounted for.

    (a) All customer funds shall be separately accounted for and 
segregated as belonging to commodity or option customers. Such customer 
funds when deposited with any bank, trust company, clearing organization 
or another futures commission merchant shall be deposited under an 
account name which clearly identifies them as such and shows that they 
are segregated as required by the Act and this part. Each registrant 
shall obtain and retain in its files for the period provided in Sec. 
1.31 a written acknowledgment from such bank, trust company, clearing 
organization, or futures commission merchant, that it was informed that 
the customer funds deposited therein are those of commodity or option 
customers and are being held in accordance with the provisions of the 
Act and this part: Provided, however, that an acknowledgment need not be 
obtained from a clearing organization that has adopted and submitted to 
the Commission rules that provide for the segregation as customer funds, 
in accordance with all relevant provisions of the Act and the rules and 
orders promulgated thereunder, of all funds held on behalf of customers. 
Under no circumstances shall any portion of customer funds be obligated 
to a clearing organization, any member of a contract market, a futures 
commission merchant, or any depository except to purchase, margin, 
guarantee, secure, transfer, adjust or settle trades, contracts or 
commodity option transactions of commodity or option customers. No 
person, including any clearing organization or any depository, that has 
received customer funds for deposit in a segregated account, as provided 
in this section, may hold, dispose of, or use any such funds as 
belonging to any person other than the option or commodity customers of 
the futures commission merchant which deposited such funds.
    (b) All customer funds received by a clearing organization from a 
member of the clearing organization to purchase, margin, guarantee, 
secure or settle the trades, contracts or commodity options of the 
clearing member's commodity or option customers and all money accruing 
to such commodity or option customers as the result of trades, contracts 
or commodity options so carried shall be separately accounted for and 
segregated as belonging to such commodity or option customers, and a 
clearing organization shall not hold, use or dispose of such customer 
funds except as belonging to such commodity or option customers. Such 
customer funds when deposited in a bank or trust company shall be 
deposited under an account name which clearly shows that they are the 
customer funds of the commodity or option customers of clearing members, 
segregated as required by the Act and

[[Page 62]]

these regulations. The clearing organization shall obtain and retain in 
its files for the period provided by Sec. 1.31 an acknowledgment from 
such bank or trust company that it was informed that the customer funds 
deposited therein are those of commodity or option customers of its 
clearing members and are being held in accordance with the provisions of 
the Act and these regulations.
    (c) Each futures commission merchant shall treat and deal with the 
customer funds of a commodity customer or of an option customer as 
belonging to such commodity or option customer. All customer funds shall 
be separately accounted for, and shall not be commingled with the money, 
securities or property of a futures commission merchant or of any other 
person, or be used to secure or guarantee the trades, contracts or 
commodity options, or to secure or extend the credit, of any person 
other than the one for whom the same are held: Provided, however, That 
customer funds treated as belonging to the commodity or option customers 
of a futures commission merchant may for convenience be commingled and 
deposited in the same account or accounts with any bank or trust 
company, with another person registered as a futures commission 
merchant, or with a clearing organization, and that such share thereof 
as in the normal course of business is necessary to purchase, margin, 
guarantee, secure, transfer, adjust, or settle the trades, contracts or 
commodity options of such commodity or option customers or resulting 
market positions, with the clearing organization or with any other 
person registered as a futures commission merchant, may be withdrawn and 
applied to such purposes, including the payment of premiums to option 
grantors, commissions, brokerage, interest, taxes, storage and other 
fees and charges, lawfully accruing in connection with such trades, 
contracts or commodity options: Provided, further, That customer funds 
may be invested in instruments described in Sec. 1.25.

(Approved by the Office of Management and Budget under control numbers 
3038-0007, and 3038-0024)

[46 FR 54518, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 50 
FR 36051, Sept. 5, 1985; 65 FR 78009, Dec. 13, 2000]



Sec. 1.21  Care of money and equities accruing to customers.

    All money received directly or indirectly by, and all money and 
equities accruing to, a futures commission merchant from any clearing 
organization or from any clearing member or from any member of a 
contract market incident to or resulting from any trade, contract or 
commodity option made by or through such futures commission merchant on 
behalf of any commodity or option customer shall be considered as 
accruing to such commodity or option customer within the meaning of the 
Act and these regulations. Such money and equities shall be treated and 
dealt with as belonging to such commodity or option customer in 
accordance with the provisions of the Act and these regulations. Money 
and equities accruing in connection with commodity or option customers' 
open trades, contracts, or commodity options need not be separately 
credited to individual accounts but may be treated and dealt with as 
belonging undivided to all commodity or option customers having open 
trades, contracts, or commodity option positions which if closed would 
result in a credit to such commodity or option customers.

[46 FR 54519, Nov. 3, 1981]



Sec. 1.22  Use of customer funds restricted.

    No futures commission merchant shall use, or permit the use of, the 
customer funds of one commodity and/or option customer to purchase, 
margin, or settle the trades, contracts, or commodity options of, or to 
secure or extend the credit of, any person other than such customer or 
option customer. Customer funds shall not be

[[Page 63]]

used to carry trades or positions of the same commodity and/or option 
customer other than in commodities or commodity options traded throught 
the facilities of a contract market.

[47 FR 57007, Dec. 22, 1982]



Sec. 1.23  Interest of futures commission merchant in segregated funds; 
additions and withdrawals.

    The provision in section 4d(2) of the Act and the provision in Sec. 
1.20(c), which prohibit the commingling of customer funds with the funds 
of a futures commission merchant, shall not be construed to prevent a 
futures commission merchant from having a residual financial interest in 
the customer funds, segregated as required by the Act and the rules in 
this part and set apart for the benefit of commodity or option 
customers; nor shall such provisions be construed to prevent a futures 
commission merchant from adding to such segregated customer funds such 
amount or amounts of money, from its own funds or unencumbered 
securities from its own inventory, of the type set forth in Sec. 1.25, 
as it may deem necessary to ensure any and all commodity or option 
customers' accounts from becoming undersegregated at any time. The books 
and records of a futures commission merchant shall at all times 
accurately reflect its interest in the segregated funds. A futures 
commission merchant may draw upon such segregated funds to its own 
order, to the extent of its actual interest therein, including the 
withdrawal of securities held in segregated safekeeping accounts held by 
a bank, trust company, contract market clearing organization or other 
futures commission merchant. Such withdrawal shall not result in the 
funds of one commodity and/or option customer being used to purchase, 
margin or carry the trades, contracts or commodity options, or extend 
the credit of any other commodity customer, option customer or other 
person.

[62 FR 42400, Aug. 7, 1997]



Sec. 1.24  Segregated funds; exclusions therefrom.

    Money held in a segregated account by a futures commission merchant 
shall not include: (a) Money invested in obligations or stocks of any 
clearing organization or in memberships in or obligations of any 
contract market; or (b) money held by any clearing organization which it 
may use for any purpose other than to purchase, margin, guarantee, 
secure, transfer, adjust, or settle the contracts, trades, or commodity 
options of the commodity or option customers of such futures commission 
merchant.

[46 FR 54519, Nov. 3, 1981]



Sec. 1.25  Investment of customer funds.

    (a) Permitted investments. (1) Subject to the terms and conditions 
set forth in this section, a futures commission merchant or a clearing 
organization may invest customer funds in the following instruments 
(permitted investments):
    (i) Obligations of the United States and obligations fully 
guaranteed as to principal and interest by the United States (U.S. 
government securities);
    (ii) General obligations of any State or of any political 
subdivision thereof (municipal securities);
    (iii) General obligations issued by any agency sponsored by the 
United States (government sponsored agency securities);
    (iv) Certificates of deposit issued by a bank (certificates of 
deposit) as defined in section 3(a)(6) of the Securities Exchange Act of 
1934, or a domestic branch of a foreign bank that carries deposits 
insured by the Federal Deposit Insurance Corporation;
    (v) Commercial paper;
    (vi) Corporate notes;
    (vii) General obligations of a sovereign nation; and
    (viii) Interests in money market mutual funds.
    (2)(i) In addition, a futures commission merchant or derivatives 
clearing organization may buy and sell the permitted investments listed 
in paragraphs (a)(1)(i) through (viii) of this section pursuant to 
agreements for resale or repurchase of the instruments, in accordance 
with the provisions of paragraph (d) of this section.
    (ii) A futures commission merchant or a derivatives clearing 
organization may sell securities deposited by customers as margin 
pursuant to agreements to repurchase subject to the following:

[[Page 64]]

    (A) Securities subject to such repurchase agreements must meet the 
marketability requirement of paragraph (b)(1) of this section.
    (B) Securities subject to such repurchase agreements must not be 
``specifically identifiable property'' as defined in Sec. 190.01(kk) of 
this chapter.
    (C) The terms and conditions of such an agreement to repurchase must 
be in accordance with the provisions of paragraph (d) of this section.
    (D) Upon the default by a counterparty to a repurchase agreement, 
the futures commission merchant or derivatives clearing organization 
shall act promptly to ensure that the default does not result in any 
direct or indirect cost or expense to the customer.
    (b) General terms and conditions. A futures commission merchant or a 
clearing organization is required to manage the permitted investments 
consistent with the objectives of preserving principal and maintaining 
liquidity and according to the following specific requirements.
    (1) Marketability. Except for interests in money market mutual 
funds, investments must be ``readily marketable'' as defined in Sec. 
240.15c3-1 of this title.
    (2) Ratings. (i) Initial requirement. Instruments that are required 
to be rated by this section must be rated by an NRSRO. For an investment 
to qualify as a permitted investment, ratings are required as follows:
    (A) U.S. government securities need not be rated;
    (B) Municipal securities, government sponsored agency securities, 
certificates of deposit, commercial paper, and corporate notes, except 
notes that are asset-backed, must have the highest short-term rating of 
an NRSRO or one of the two highest long-term ratings of an NRSRO;
    (C) Corporate notes that are asset-backed must have the highest 
ratings of an NRSRO;
    (D) Sovereign debt must be rated in the highest category by at least 
one NRSRO; and
    (E) Money market mutual funds that are rated by an NRSRO must be 
rated at the highest rating of the NRSRO.
    (ii) Effect of downgrade. If an NRSRO lowers the rating of an 
instrument that was previously a permitted investment on the basis of 
that rating to below the minimum rating required under this section, the 
value of the instrument recognized for segregation purposes will be the 
lesser of:
    (A) The current market value of the instrument; or
    (B) The market value of the instrument on the business day preceding 
the downgrade, reduced by 20 percent of that value for each business day 
that has elapsed since the downgrade.
    (3) Restrictions on instrument features. (i) With the exception of 
money market mutual funds, no permitted investment may contain an 
embedded derivative of any kind, including but not limited to a call 
option, put option, or collar, cap, or floor on interest paid.
    (ii) No instrument may contain interest-only payment features.
    (iii) No instrument may provide payments linked to a commodity, 
currency, reference instrument, index, or benchmark except as provided 
in paragraph (b)(3)(iv) of this section.
    (iv) Variable-rate securities are permitted, provided the interest 
rates paid correlate closely and on an unleveraged basis to a benchmark 
of either the Federal Funds target or effective rate, the prime rate, 
the three-month Treasury Bill rate, or the one-month or three-month 
LIBOR rate.
    (v) Certificates of deposit, if negotiable, must be able to be 
liquidated within one business day or, if not negotiable, must be 
redeemable at the issuing bank within one business day, with any penalty 
for early withdrawal limited to any accrued interest earned according to 
its written terms.
    (4) Concentration. (i) Direct investments. (A) U.S. government 
securities and money market mutual funds shall not be subject to a 
concentration limit or other limitation.
    (B) Securities of any single issuer of government sponsored agency 
securities held by a futures commission merchant or clearing 
organization may not exceed 25 percent of total assets held in 
segregation by the futures commission merchant or clearing organization.
    (C) Securities of any single issuer of municipal securities, 
certificates of deposit, commercial paper, or corporate notes held by a 
futures commission

[[Page 65]]

merchant or clearing organization may not exceed 5 percent of total 
assets held in segregation by the futures commission merchant or 
clearing organization.
    (D) Sovereign debt is subject to the following limits: a futures 
commission merchant may invest in the sovereign debt of a country to the 
extent it has balances in segregated accounts owed to its customers 
denominated in that country's currency; a clearing organization may 
invest in the sovereign debt of a country to the extent it has balances 
in segregated accounts owed to its clearing member futures commission 
merchants denominated in that country's currency.
    (ii) Repurchase agreements. For purposes of determining compliance 
with the concentration limits set forth in this section, securities sold 
by a futures commission merchant or clearing organization subject to 
agreements to repurchase shall be combined with securities held by the 
futures commission merchant or clearing organization as direct 
investments.
    (iii) Reverse repurchase agreements. The concentration limit 
applicable to securities of each issuer that are held by a futures 
commission merchant or clearing organization subject to agreements to 
resell to a particular counterparty shall be as follows:
    (A) For a portfolio of securities held that are subject to resale to 
a counterparty that has been rated single A or higher by two or more 
NRSROs, or whose obligation under an agreement is guaranteed by a parent 
or affiliate company that has been rated single A or higher by two or 
more NRSROs:
    (1) Government sponsored agency debt, issued by the same issuer and 
supplied by the counterparty, may not exceed 50 percent of the total 
amount of securities supplied by such counterparty; and
    (2) Municipal securities, certificates of deposit, commercial paper, 
and corporate notes, issued by the same issuer and supplied by the 
counterparty, may not exceed 10 percent of the total amount of 
securities supplied by such counterparty; and
    (B) For a portfolio of securities held that are subject to resale to 
a counterparty that does not have a rating or guarantee as specified in 
paragraph (b)(4)(iii)(A) of this section:
    (1) Government sponsored agency debt, issued by the same issuer and 
supplied by the counterparty, may not exceed 25 percent of the total 
amount of securities supplied by such counterparty; and
    (2) Municipal securities, certificates of deposit, commercial paper, 
and corporate notes, issued by the same issuer and supplied by the 
counterparty, may not exceed 5 percent of the total amount of securities 
supplied by such counterparty.
    (iv) Treatment of securities issued by affiliates. For purposes of 
determining compliance with the concentration limits set forth in this 
section, securities issued by entities that are affiliated, as defined 
in paragraph (b)(6) of this section, shall be aggregated and deemed the 
securities of a single issuer. An interest in a permitted money market 
mutual fund is not deemed to be a security issued by its sponsoring 
entity.
    (v) Treatment of customer-owned securities. For purposes of 
determining compliance with the concentration limits set forth in this 
section, securities owned by the customers of a futures commission 
merchant and posted as margin collateral are not included in total 
assets held in segregation by the futures commission merchant, and 
securities posted by a futures commission merchant with a clearing 
organization are not included in total assets held in segregation by the 
clearing organization.
    (5) Time-to-maturity. (i) Except for investments in money market 
mutual funds, the dollar-weighted average of the time-to-maturity of the 
portfolio, as that average is computed pursuant to Sec. 270.2a-7 of 
this title, may not exceed 24 months.
    (ii) For purposes of determining the time-to-maturity of the 
portfolio, an instrument that is set forth in paragraphs (a)(1)(i) 
through (vii) of this section may be treated as having a one-day time-
to-maturity if the following terms and conditions are satisfied:
    (A) The instrument is deposited solely on an overnight basis with a 
derivatives clearing organization pursuant to

[[Page 66]]

the terms and conditions of a collateral management program that has 
become effective in accordance with Sec. 39.4 of this chapter;
    (B) The instrument is one that the futures commission merchant owns 
or has an unqualified right to pledge, is not subject to any lien, and 
is deposited by the futures commission merchant into a segregated 
account at a derivatives clearing organization;
    (C) The derivatives clearing organization prices the instrument each 
day based on the current mark-to-market value; and
    (D) The derivatives clearing organization reduces the assigned value 
of the instrument each day by a haircut of at least 2 percent.
    (6) Investments in instruments issued by affiliates. (i) A futures 
commission merchant shall not invest customer funds in obligations of an 
entity affiliated with the futures commission merchant, and a clearing 
organization shall not invest customer funds in obligations of an entity 
affiliated with the clearing organization. An affiliate includes parent 
companies, including all entities through the ultimate holding company, 
subsidiaries to the lowest level, and companies under common ownership 
of such parent company or affiliates.
    (ii) A futures commission merchant or clearing organization may 
invest customer funds in a fund affiliated with that futures commission 
merchant or clearing organization.
    (7) Recordkeeping. A futures commission merchant and a clearing 
organization shall prepare and maintain a record that will show for each 
business day with respect to each type of investment made pursuant to 
this section, the following information:
    (i) The type of instruments in which customer funds have been 
invested;
    (ii) The original cost of the instruments; and
    (iii) The current market value of the instruments.
    (c) Money market mutual funds. The following provisions will apply 
to the investment of customer funds in money market mutual funds (the 
fund).
    (1) Generally, the fund must be an investment company that is 
registered under the Investment Company Act of 1940 with the Securities 
and Exchange Commission and that holds itself out to investors as a 
money market fund, in accordance with Sec. 270.2a-7 of this title. A 
fund sponsor, however, may petition the Commission for an exemption from 
this requirement. The Commission may grant such an exemption provided 
that the fund can demonstrate that it will operate in a manner designed 
to preserve principal and to maintain liquidity. The application for 
exemption must describe how the fund's structure, operations and 
financial reporting are expected to differ from the requirements 
contained in Sec. 270.2a-7 of this title and the risk-limiting 
provisions for direct investments contained in this section. The fund 
must also specify the information that the fund would make available to 
the Commission on an ongoing basis.
    (2) The fund must be sponsored by a federally-regulated financial 
institution, a bank as defined in section 3(a)(6) of the Securities 
Exchange Act of 1934, an investment adviser registered under the 
Investment Advisers Act of 1940, or a domestic branch of a foreign bank 
insured by the Federal Deposit Insurance Corporation, except for a fund 
exempted in accordance with paragraph (c)(1) of this section.
    (3) A futures commission merchant or clearing organization shall 
maintain the confirmation relating to the purchase in its records in 
accordance with Sec. 1.31 and note the ownership of fund shares (by 
book-entry or otherwise) in a custody account of the FCM or clearing 
organization in accordance with Sec. 1.26(a). If the futures commission 
merchant or the clearing organization holds its shares of the fund with 
the fund's shareholder servicing agent, the sponsor of the fund and the 
fund itself are required to provide the acknowledgment letter required 
by Sec. 1.26.
    (4) The net asset value of the fund must be computed by 9 a.m. of 
the business day following each business day and made available to the 
futures commission merchant or clearing organization by that time.
    (5) A fund must be able to redeem an interest by the business day 
following a redemption request by the futures commission merchant or 
clearing organization. Demonstration that this requirement has been met 
may include

[[Page 67]]

either an appropriate provision in the offering memorandum of the fund 
or a separate side agreement between the fund and a futures commission 
merchant or clearing organization.
    (6) The agreement pursuant to which the futures commission merchant 
or clearing organization has acquired and is holding its interest in a 
fund must contain no provision that would prevent the pledging or 
transferring of shares.
    (d) Repurchase and reverse repurchase agreements. A futures 
commission merchant or clearing organization may buy and sell the 
permitted investments listed in paragraphs (a)(1)(i) through (viii) of 
this section pursuant to agreements for resale or repurchase of the 
securities (agreements to repurchase or resell), provided the agreements 
to repurchase or resell conform to the following requirements:
    (1) The securities are specifically identified by coupon rate, par 
amount, market value, maturity date, and CUSIP or ISIN number.
    (2) Counterparties are limited to a bank as defined in section 
3(a)(6) of the Securities Exchange Act of 1934, a domestic branch of a 
foreign bank insured by the Federal Deposit Insurance Corporation, a 
securities broker or dealer, or a government securities broker or 
government securities dealer registered with the Securities and Exchange 
Commission or which has filed notice pursuant to section 15C(a) of the 
Government Securities Act of 1986.
    (3) The transaction is executed in compliance with the concentration 
limit requirements applicable to the securities held in connection with 
the agreements to repurchase referred to in paragraphs (b)(4)(ii) and 
(iii) of this section.
    (4) The transaction is made pursuant to a written agreement signed 
by the parties to the agreement, which is consistent with the conditions 
set forth in paragraphs (d)(1) through (d)(12) of this section and which 
states that the parties thereto intend the transaction to be treated as 
a purchase and sale of securities.
    (5) The term of the agreement is no more than one business day, or 
reversal of the transaction is possible on demand.
    (6) The securities transferred under the agreement are held in a 
safekeeping account with a bank as referred to in paragraph (d)(2) of 
this section, a clearing organization, or the Depository Trust Company 
in an account that complies with the requirements of Sec. 1.26.
    (7) The futures commission merchant or the clearing organization may 
not use securities received under the agreement in another similar 
transaction and may not otherwise hypothecate or pledge such securities, 
except securities may be pledged on behalf of customers at another 
futures commission merchant or clearing organization. Substitution of 
securities is allowed, provided, however, that:
    (i) The qualifying securities being substituted and original 
securities are specifically identified by date of substitution, market 
values substituted, coupon rates, par amounts, maturity dates and CUSIP 
or ISIN numbers;
    (ii) Substitution is made on a ``delivery versus delivery'' basis; 
and
    (iii) The market value of the substituted securities is at least 
equal to that of the original securities.
    (8) The transfer of securities is made on a delivery versus payment 
basis in immediately available funds. The transfer is not recognized as 
accomplished until the funds and/or securities are actually received by 
the custodian of the futures commission merchant's or clearing 
organization's customer funds or securities purchased on behalf of 
customers. The transfer or credit of securities covered by the agreement 
to the futures commission merchant's or clearing organization's customer 
segregated custodial account is made simultaneously with the 
disbursement of funds from the futures commission merchant's or clearing 
organization's customer segregated cash account at the custodian bank. 
On the sale or resale of securities, the futures commission merchant's 
or clearing organization's customer segregated cash account at the 
custodian bank must receive same-day funds credited to such segregated 
account simultaneously with the delivery or transfer of securities from 
the customer segregated custodial account.

[[Page 68]]

    (9) A written confirmation to the futures commission merchant or 
clearing organization specifying the terms of the agreement and a 
safekeeping receipt are issued immediately upon entering into the 
transaction and a confirmation to the futures commission merchant or 
clearing organization is issued once the transaction is reversed.
    (10) The transactions effecting the agreement are recorded in the 
record required to be maintained under Sec. 1.27 of investments of 
customer funds, and the securities subject to such transactions are 
specifically identified in such record as described in paragraph (d)(1) 
of this section and further identified in such record as being subject 
to repurchase and reverse repurchase agreements.
    (11) An actual transfer of securities by book entry is made 
consistent with Federal or State commercial law, as applicable. At all 
times, securities received subject to an agreement are reflected as 
``customer property.''
    (12) The agreement makes clear that, in the event of the bankruptcy 
of the futures commission merchant or clearing organization, any 
securities purchased with customer funds that are subject to an 
agreement may be immediately transferred. The agreement also makes clear 
that, in the event of a futures commission merchant or clearing 
organization bankruptcy, the counterparty has no right to compel 
liquidation of securities subject to an agreement or to make a priority 
claim for the difference between current market value of the securities 
and the price agreed upon for resale of the securities to the 
counterparty, if the former exceeds the latter.
    (e) Deposit of firm-owned securities into segregation. A futures 
commission merchant shall not be prohibited from directly depositing 
unencumbered securities of the type specified in this section, which it 
owns for its own account, into a segregated safekeeping account or from 
transferring any such securities from a segregated account to its own 
account, up to the extent of its residual financial interest in 
customers' segregated funds; provided, however, that such investments, 
transfers of securities, and disposition of proceeds from the sale or 
maturity of such securities are recorded in the record of investments 
required to be maintained by Sec. 1.27. All such securities may be 
segregated in safekeeping only with a bank, trust company, clearing 
organization, or other registered futures commission merchant. 
Furthermore, for purposes of Sec. Sec. 1.25, 1.26, 1.27, 1.28 and 1.29, 
investments permitted by Sec. 1.25 that are owned by the futures 
commission merchant and deposited into such a segregated account shall 
be considered customer funds until such investments are withdrawn from 
segregation.

[65 FR 78010, Dec. 13, 2000, as amended at 65 FR 82271, Dec. 28, 2000; 
69 FR 6145, Feb. 10, 2004]



Sec. 1.26  Deposit of instruments purchased with customer funds.

    (a) Each futures commission merchant who invests customer funds in 
instruments described in Sec. 1.25 shall separately account for such 
instruments and segregate such instruments as belonging to such 
commodity or option customers. Such instruments, when deposited with a 
bank, trust company, clearing organization or another futures commission 
merchant, shall be deposited under an account name which clearly shows 
that they belong to commodity or option customers and are segregated as 
required by the Act and this part. Each futures commission merchant upon 
opening such an account shall obtain and retain in its files an 
acknowledgment from such bank, trust company, clearing organization or 
other futures commission merchant that it was informed that the 
instruments belong to commodity or option customers and are being held 
in accordance with the provisions of the Act and this part. Provided, 
however, that an acknowledgment need not be obtained from a clearing 
organization that has adopted and submitted to the Commission rules that 
provide for the segregation as customer funds, in accordance with all 
relevant provisions of the Act and the rules and orders promulgated 
thereunder, of all funds held on behalf of customers and all instruments 
purchased with customer funds. Such acknowledgment shall be retained in 
accordance with Sec. 1.31. Such bank, trust company, clearing 
organization or other futures commission

[[Page 69]]

merchant shall allow inspection of such obligations at any reasonable 
time by representatives of the Commission.
    (b) Each clearing organization which invests money belonging or 
accruing to commodity or option customers of its clearing members in 
instruments described in Sec. 1.25 shall separately account for such 
instruments and segregate such instruments as belonging to such 
commodity or option customers. Such instruments, when deposited with a 
bank or trust company, shall be deposited under an account name which 
will clearly show that they belong to commodity or option customers and 
are segregated as required by the Act and this part. Each clearing 
organization upon opening such an account shall obtain and retain in its 
files a written acknowledgment from such bank or trust company that it 
was informed that the instruments belong to commodity or option 
customers of clearing members and are being held in accordance with the 
provisions of the Act and this part. Such acknowledgment shall be 
retained in accordance with Sec. 1.31. Such bank or trust company shall 
allow inspection of such instruments at any reasonable time by 
representatives of the Commission.

[65 FR 78012, Dec. 13, 2000]



Sec. 1.27  Record of investments.

    (a) Each futures commission merchant which invests customer funds, 
and each clearing organization which invests customer funds of its 
clearing members' customers or option customers, shall keep a record 
showing the following:
    (1) The date on which such investments were made;
    (2) The name of the person through whom such investments were made;
    (3) The amount of money so invested;
    (4) A description of the instruments in which such investments were 
made, including the CUSIP or ISIN numbers;
    (5) The identity of the depositories or other places where such 
instruments are segregated;
    (6) The date on which such investments were liquidated or otherwise 
disposed of and the amount of money received of such disposition, if 
any; and
    (7) The name of the person to or through whom such investments were 
disposed of.
    (b) Each clearing organization which receives documents from its 
clearing members representing investment of customer funds shall keep a 
record showing separately for each clearing member the following:
    (1) The date on which such documents were received from the clearing 
member;
    (2) A description of such documents, including the CUSIP or ISIN 
numbers; and
    (3) The date on which such documents were returned to the clearing 
member or the details of disposition by other means.
    (c) Such records shall be retained in accordance with Sec. 1.31. No 
such investments shall be made except in instruments described in Sec. 
1.25.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0024)

[46 FR 54520, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62 
FR 42401, Aug. 7, 1997; 65 FR 78013, Dec. 13, 2000]



Sec. 1.28  Appraisal of instruments purchased with customer funds.

    Futures commission merchants who invest customer funds in 
instruments described in Sec. 1.25 of this part shall include such 
instruments in segregated account records and reports at values which at 
no time exceed current market value, determined as of the close of the 
market on the date for which such computation is made.

[58 FR 10953, Feb. 23, 1993, as amended at 65 FR 78013, Dec. 13, 2000]



Sec. 1.29  Increment or interest resulting from investment of customer funds.

    The investment of customer funds in instruments described in Sec. 
1.25 shall not prevent the futures commission merchant or clearing 
organization so investing such funds from receiving and retaining as its 
own any increment or interest resulting therefrom.

[46 FR 54520, Nov. 3, 1981, as amended at 65 FR 78013, Dec. 13, 2000]

[[Page 70]]



Sec. 1.30  Loans by futures commission merchants; treatment of proceeds.

    Nothing in these regulations shall prevent a futures commission 
merchant from lending its own funds to commodity or option customers on 
securities and property pledged by such commodity or option customers, 
or from repledging or selling such securities and property pursuant to 
specific written agreement with such commodity or option customers. The 
proceeds of such loans used to purchase, margin, guarantee, or secure 
the trades, contracts, or commodity options of commodity or option 
customers shall be treated and dealt with by a futures commission 
merchant as belonging to such commodity or option customers, in 
accordance with and subject to the provisions of section 4d(2) of the 
Act and these regulations.

[46 FR 54520, Nov. 3, 1981]

                              Recordkeeping



Sec. 1.31  Books and records; keeping and inspection.

    (a)(1) All books and records required to be kept by the Act or by 
these regulations shall be kept for a period of five years from the date 
thereof and shall be readily accessible during the first 2 years of the 
5-year period. All such books and records shall be open to inspection by 
any representative of the Commission or the United States Department of 
Justice.
    (2) A copy of any book or record required to be kept by the Act or 
by these regulations shall be provided, at the expense of the person 
required to keep the book or record, to a Commission representative upon 
the representative's request. Instead of furnishing a copy, such person 
may provide the original book or record for reproduction, which the 
representative may temporarily remove from such person's premises for 
this purpose. All copies or originals shall be provided promptly. Upon 
request, the Commission representative shall issue a receipt provided by 
such person for any copy or original book or record received. At the 
request of the Commission representative, such person shall, upon the 
return thereof, issue a receipt for any copy or original book or record 
returned by the representative.
    (b) Except as provided in paragraph (d) of this section, immediate 
reproductions on either ``micrographic media'' (as defined in paragraph 
(b)(1)(i) of this section) or ``electronic storage media'' (as defined 
in paragraph (b)(1)(ii) this section) may be kept in that form for the 
required time period under the conditions set forth in this paragraph 
(b).
    (1) For purposes of this section:
    (i) The term ``micrographic media'' means microfilm or microfiche or 
any similar medium.
    (ii) The term ``electronic storage media'' means any digital storage 
medium or system that:
    (A) Preserves the records exclusively in a non-rewritable, non-
erasable format;
    (B) Verifies automatically the quality and accuracy of the storage 
media recording process;
    (C) Serializes the original and, if applicable, duplicate units of 
storage media and creates a time-date record for the required period of 
retention for the information placed on such electronic storage media; 
and
    (D) Permits the immediate downloading of indexes and records 
preserved on the electronic storage media onto paper, microfilm, 
microfiche or other medium acceptable under this paragraph upon the 
request of representatives of the Commission or the Department of 
Justice.
    (2) Persons who use either micrographic media or electronic storage 
media to maintain records in accordance with this section must:
    (i) Have available at all times, for examination by representatives 
of the Commission or the Department of Justice, facilities for 
immediate, easily readable projection or production of micrographic 
media or electronic storage media images;
    (ii) Be ready at all times to provide, and immediately provide at 
the expense of the person required to keep such records, any easily 
readable hard-copy image that representatives of the Commission or 
Department of Justice may request;

[[Page 71]]

    (iii) Keep only Commission-require records on the individual medium 
employed (e.g., a disk or sheets of microfiche);
    (iv) Store a duplicate of the record, in any medium acceptable under 
this regulation, at a location separate from the original for the period 
of time required for maintenance of the original; and
    (v) Organize and maintain an accurate index of all information 
maintained on both the original and duplicate storage media such that:
    (A) The location of any particular record stored on the media may be 
immediately ascertained;
    (B) The index is available at all times for immediate examination by 
representatives of the Commission or the Department of Justice;
    (C) A duplicate of the index is stored at a location separate from 
the original index; and
    (D) Both the original index and the duplicate index are preserved 
for the time period required for the records included in the index.
    (3) In addition to the foregoing conditions, persons using 
electronic storage media must:
    (i) Be ready at all times to provide, and immediately provide at the 
expense of the person required to keep such records, copies of such 
records on such approved machine-readable media as defined in Sec. 
15.00(1) of this chapter which any representative of the Commission or 
the Department of Justice may request. Records must use a format and 
coding structure specified in the request.
    (ii) Develop and maintain written operational procedures and 
controls (an ``audit system'') designed to provide accountability over 
both the initial entry of required records to the electronic storage 
media and the entry of each change made to any original or duplicate 
record maintained on the electronic storage media such that:
    (A) The results of such audit system are available at all times for 
immediate examination by representatives of the Commission or the 
Department of Justice;
    (B) The results of such audit system are preserved for the time 
period required for the records maintained on the electronic storage 
media; and
    (C) The written operational procedures and controls are available at 
all times for immediate examination by representatives of the Commission 
or the Department of Justice.
    (iii) Either
    (A) Maintain, keep current, and make available at all times for 
immediate examination by representatives of the Commission or Department 
of Justice all information necessary to access records and indexes 
maintained on the electronic storage media; or
    (B) Place in escrow and keep current a copy of the physical and 
logical format of the electronic storage media, the file format of all 
different information types maintained on the electronic storage media 
and the source code, documentation, and information necessary to access 
the records and indexes maintained on the electronic storage media.
    (4) In addition to the foregoing conditions, any person who uses 
only electronic storage media to preserve some or all of its required 
records (``Electronic Recordkeeper'') shall, prior to the media's use, 
enter into an arrangement with at least one third party technical 
consultant (``Technical Consultant'') who has the technical and 
financial capability to perform the undertakings described in this 
paragraph (b)(4). The arrangement shall provide that the Technical 
Consultant will have access to, and the ability to download, information 
from the Electronic Recordkeeper's electronic storage media to any 
medium acceptable under this regulation.
    (i) The Technical Consultant must file with the Commission an 
undertaking in a form acceptable to the Commission, signed by the 
Technical Consultant or a person duly authorized by the Technical 
Consultant. An acceptable undertaking must include the following 
provision with respect to the Electronic Recordkeeper:

    With respect to any books and records maintained or preserved on 
behalf of the Electronic Recordkeeper, the undersigned hereby undertakes 
to furnish promptly to any representative of the United States Commodity 
Futures Trading Commission or the United States Department of Justice

[[Page 72]]

(the ``Representative''), upon reasonable request, such information as 
is deemed necessary by the Representative to download information kept 
on the Electronic Recordkeeper's electronic storage media to any medium 
acceptable under 17 CFR 1.31. The undersigned also undertakes to take 
reasonable steps to provide access to information contained on the 
Electronic Recordkeeper's electronic storage media, including, as 
appropriate, arrangements for the downloading of any record required to 
be maintained under the Commodity Exchange Act or the rules, 
regulations, or orders of the United States Commodity Futures Trading 
Commission, in a format acceptable to the Representative. In the event 
the Electronic Recordkeeper fails to download a record into a readable 
format and after reasonable notice to the Electronic Recordkeeper, upon 
being provided with the appropriate electronic storage medium, the 
undersigned will undertake to do so, at no charge to the United States, 
as the Representative may request.

    (ii) [Reserved]
    (c) Persons employing an electronic storage system shall provide a 
representation to the Commission prior to the initial use of the system. 
The representation shall be made by the person required to maintain the 
records, the storage system vendor, or another third party with 
appropriate expertise and shall state that the selected electronic 
storage system meets the requirements set forth in paragraph (b)(1)(ii) 
of this section. Persons employing an electronic storage system using 
media other than optical disk or CD-ROM technology shall so state. The 
representation shall be accompanied by the type of oath or affirmation 
described in Sec. 1.10(d)(4).
    (d) Trading cards, documents on which trade information is 
originally recorded in writing, and written orders required to be kept 
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d) must be retained 
in hard-copy for the required time period.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0022)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 22, Jan. 2, 1981; 46 FR 
63035, Dec. 30, 1981; 58 FR 27464, 27467, May 10, 1993; 62 FR 24031, May 
2, 1997; 64 FR 28742, May 27, 1999]



Sec. 1.32  Segregated account; daily computation and record.

    (a) Each futures commission merchant must compute as of the close of 
each business day, on a currency-by-currency basis:
    (1) The total amount of customer funds on deposit in segregated 
accounts on behalf of commodity and option customers;
    (2) the amount of such customer funds required by the Act and these 
regulations to be on deposit in segregated accounts on behalf of such 
commodity and option customers; and
    (3) the amount of the futures commission merchant's residual 
interest in such customer funds.
    (b) In computing the amount of funds required to be in segregated 
accounts, a futures commission merchant may offset any net deficit in a 
particular customer's account against the current market value of 
readily marketable securities, less applicable percentage deductions 
(i.e., ``securities haircuts'') as set forth in Rule 15c3-1(c)(2)(vi) of 
the Securities and Exchange Commission (17 CFR 241.15c3-1(c)(2)(vi)), 
held for the same customer's account. The futures commission merchant 
must maintain a security interest in the securities, including a written 
authorization to liquidate the securities at the futures commission 
merchant's discretion, and must segregate the securities in a 
safekeeping account with a bank, trust company, clearing organization of 
a contract market, or another futures commission merchant. For purposes 
of this section, a security will be considered readily marketable if it 
is traded on a ``ready market'' as defined in Rule 15c3-1(c)(11)(i) of 
the Securities and Exchange Commission (17 CFR 240.15c3-1(c)(11)(i)).
    (c) The daily computations required by this section must be 
completed by the futures commission merchant prior to noon on the next 
business day and must be kept, together with all supporting data, in 
accordance with the requirements of Sec. 1.31.

[66 FR 41133, Aug. 7, 2001, as amended at 68 FR 5551, Feb. 4, 2003]

[[Page 73]]



Sec. 1.33  Monthly and confirmation statements.

    (a) Monthly statements. Each futures commission merchant must 
promptly furnish in writing to each commodity customer and to each 
option customer and to each foreign futures and foreign options 
customer, as of the close of the last business day of each month or as 
of any regular monthly date selected, except for accounts in which there 
are neither open positions at the end of the statement period nor any 
changes to the account balance since the prior statement period, but in 
any event not less frequently than once every three months, a statement 
which clearly shows:
    (1) For each commodity customer and foreign futures customer--
    (i) The open contracts with prices at which acquired;
    (ii) The net unrealized profits or losses in all open contracts 
marked to the market; and
    (iii) Any customer funds carried with the futures commission 
merchant; and
    (iv) A detailed accounting of all financial charges and credits to 
such customer accounts during the monthly reporting period, including 
all customer funds and funds on deposit with respect to foreign futures 
transactions in accordance with Sec. 30.7 of this chapter received from 
or disbursed to such customer and realized profits and losses; and
    (2) For each option customer and foreign options customer--
    (i) All commodity options and foreign options purchased, sold, 
exercised, or expired during the monthly reporting period, identified by 
underlying futures contract or underlying physical, strike price, 
transaction date, and expiration date;
    (ii) The open commodity option and foreign option positions carried 
for such customer as of the end of the monthly reporting period, 
identified by underlying futures contract or underlying physical, strike 
price, transaction date, and expiration date;
    (iii) All open commodity option and foreign option positions marked 
to the market and the amount each position is in the money, if any;
    (iv) Any customer funds carried in such customer's account(s); and
    (v) A detailed accounting of all financial charges and credits to 
such customer's account(s) during the monthly reporting period, 
including all customer funds and funds on deposit with respect to 
foreign options transactions received from or disbursed to such 
customer, premiums charged and received, and realized profits and 
losses.
    (b) Confirmation statement. Each futures commission merchant must, 
not later than the next business day after any commodity futures or 
commodity option transaction, including any foreign futures or foreign 
options transactions, furnish:
    (1) To each commodity customer, a written confirmation of each 
commodity futures transaction caused to be executed by it for the 
customer.
    (2) To each option customer, a written confirmation of each 
commodity option transaction, containing at least the following 
information:
    (i) The option customer's account identification number;
    (ii) A separate listing of the actual amount of the premium, as well 
as each mark-up thereon, if applicable, and all other commissions, 
costs, fees and other charges incurred in connection with the commodity 
option transaction;
    (iii) The strike price;
    (iv) The underlying futures contract or underlying physical;
    (v) The final exercise date of the commodity option purchased or 
sold; and
    (vi) The date the commodity option transaction was executed.
    (3) To each option customer, upon the expiration or exercise of any 
commodity option, a written confirmation statement thereof, which 
statement shall include the date of such occurrence, a description of 
the option involved, and, in the case of exercise, the details of the 
futures or physical position which resulted therefrom including, if 
applicable, the final trading date of the contract for future delivery 
underlying the option.
    (4) Notwithstanding the provisions of paragraphs (b)(1) through 
(b)(3) of this section, a commodity futures or commodity option 
transaction that is caused to be executed for a commodity

[[Page 74]]

pool need be confirmed only to the operator of the commodity pool.
    (c) Exemptions. The requirements of paragraphs (a)(1)(i), 
(a)(1)(ii), and (b)(1) of this section shall not apply to the following:
    (1) Any account carried for a person who is a member of any contract 
market;
    (2) Any omnibus account carried for another futures commission 
merchant; and
    (3) Any account containing only bona fide hedge positions, except 
that confirmations must be furnished to accounts containing only bona 
fide hedge positions.
    (d) Controlled accounts. With respect to any account controlled by 
any person other than the commodity customer or option customer for whom 
such account is carried, each futures commission merchant shall:
    (1) Promptly furnish in writing to such other person the information 
required by paragraphs (a) and (b) of this section;
    (2) [Reserved]
    (3) Promptly furnish in writing to such other person a copy of the 
statement required by Sec. 1.46: Provided, however, That the provisions 
of this paragraph (d) shall not apply to an account controlled by the 
spouse, parent or child of the customer for whom such account is 
carried.
    (e) Recordkeeping. Each futures commission merchant shall retain, in 
accordance with Sec. 1.31, a copy of each monthly statement and 
confirmation required by this section.
    (f) Introduced accounts. Each statement provided pursuant to the 
provisions of this section must, if applicable, show that the account 
for which the futures commission merchant is providing the statement was 
introduced by an introducing broker and the names of the futures 
commission merchant and introducing broker.
    (g) Electronic transmission of statements. (1) The statements 
required by this section, and by Sec. 1.46, may be furnished to any 
customer by means of electronic media if the customer so consents, 
Provided, however, that a futures commission merchant must, prior to the 
transmission of any statement by means of electronic media, disclose the 
electronic medium or source through which statements will be delivered, 
the duration, whether indefinite or not, of the period during which 
consent will be effective, any charges for such service, the information 
that will be delivered by such means, and that consent to electronic 
delivery may be revoked at any time.
    (2) In the case of a customer who does not qualify as an 
``institutional customer'' as defined in Sec. 1.3(g), a futures 
commission merchant must obtain the customer's signed consent 
acknowledging disclosure of the information set forth in paragraph 
(g)(1) of this section prior to the transmission of any statement by 
means of electronic media.
    (3) Any statement required to be furnished to a person other than a 
customer in accordance with paragraph (d) of this section may be 
furnished by electronic media.
    (4) A futures commission merchant who furnishes statements to any 
customer by means of electronic media must retain a daily confirmation 
statement for such customer as of the end of the trading session, 
reflecting all transactions made during that session for the customer, 
in accordance with Sec. 1.31.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0024; the information collection requirements in 
paragraph (c) were approved under control number 3038-0005)

[46 FR 54520, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57008, Dec. 22, 1982; 48 FR 1185, Jan. 11, 1983; 48 FR 35289, Aug. 3, 
1983; 52 FR 28997, Aug. 5, 1987; 66 FR 53517, Oct. 23, 2001]



Sec. 1.34  Monthly record, ``point balance''.

    (a) Each futures commission merchant shall prepare, and retain in 
accordance with the requirements of Sec. 1.31, a statement commonly 
known as a ``point balance,'' which accrues or brings to the official 
closing price, or settlement price fixed by the clearing organization, 
all open contracts of customers as of the last business day of each 
month or of any regular monthly date selected: Provided, however, That a 
futures commission merchant who carries part or all of customers' open 
contracts with other futures commission

[[Page 75]]

merchants on an ``instruct basis'' will be deemed to have met the 
requirements of this section as to open contracts so carried if a 
monthly statement is prepared which shows that the prices and amounts of 
such contracts long and short in the customers' accounts are in balance 
with those in the carrying futures commission merchants' accounts, and 
such statements are retained in accordance with the requirements of 
Sec. 1.31.
    (b) Each futures commission merchant shall prepare, and retain in 
accordance with the requirements of Sec. 1.31, a listing in which all 
open commodity option positions carried for option customers are marked 
to the market. Such listing shall be prepared as of the last business 
day of each month, or as of any regular monthly date selected, and shall 
be by put or by call, by underlying contract for future delivery (by 
delivery month) or underlying physical (by option expiration date), and 
by strike price.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0024)

[46 FR 54521, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57008, Dec. 22, 1982]



Sec. 1.35  Records of cash commodity, futures, and option transactions.

    (a) Futures commission merchants, introducing brokers, and members 
of contract markets. Each futures commission merchant, introducing 
broker, and member of a contract market shall keep full, complete, and 
systematic records, together with all pertinent data and memoranda, of 
all transactions relating to its business of dealing in commodity 
futures, commodity options, and cash commodities. Each futures 
commission merchant, introducing broker, and member of a contract market 
shall retain the required records, data, and memoranda in accordance 
with the requirements of Sec. 1.31, and produce them for inspection and 
furnish true and correct information and reports as to the contents or 
the meaning thereof, when and as requested by an authorized 
representative of the Commission or the United States Department of 
Justice. Included among such records shall be all orders (filled, 
unfilled, or canceled), trading cards, signature cards, street books, 
journals, ledgers, canceled checks, copies of confirmations, copies of 
statements of purchase and sale, and all other records, data and 
memoranda, which have been prepared in the course of its business of 
dealing in commodity futures, commodity options, and cash commodities. 
Among such records each member of a contract market must retain and 
produce for inspection are all documents on which trade information is 
originally recorded, whether or not such documents must be prepared 
pursuant to the rules or regulations of either the Commission or the 
contract market. For purposes of this section, such documents are 
referred to as ``original source documents.''
    (a-1) Futures commission merchants, introducing brokers, and members 
of contract markets: Recording of customers' and option customers' 
orders. (1) Each futures commission merchant and each introducing broker 
receiving a customer's or option customer's order shall immediately upon 
receipt thereof prepare a written record of the order including the 
account identification, except as provided in paragraph (a-1)(5) of this 
section, and order number, and shall record thereon, by timestamp or 
other timing device, the date and time, to the nearest minute, the order 
is received, and in addition, for option customers' orders, the time, to 
the nearest minute, the order is transmitted for execution.
    (2)(i) Each member of a contract market who on the floor of such 
contract market receives a customer's or option customer's order which 
is not in the form of a written record including the account 
identification, order number, and the date and time, to the nearest 
minute, the order was transmitted or received on the floor of such 
contract market, shall immediately upon receipt thereof prepare a 
written record of the order in nonerasable ink, including the account 
identification, except as provided in paragraph (a-1)(5) of this section 
or appendix C to this part, and order number and shall record thereon, 
by timestamp or other timing device, the date and time, to the nearest 
minute, the order is received.

[[Page 76]]

    (ii) Except as provided in paragraph (a-1)(3) of this section:
    (A) Each contract market member who on the floor of such contract 
market receives an order from another member present on the floor which 
is not in the form of a written record shall, immediately upon receipt 
of such order, prepare a written record of the order or obtain from the 
member who placed the order a written record of the order, in non-
erasable ink including the account identification and order number and 
shall record thereon, by time-stamp or other timing device, the date and 
time, to the nearest minute, the order is received; or
    (B) When a contract market member present on the floor places an 
order, which is not in the form of a written record, for his own account 
or an account over which he has control, with another member of such 
contract market for execution:
    (1) The member placing such order immediately upon placement of the 
order shall record the order and time of placement to the nearest minute 
on a sequentially-numbered trading card maintained in accordance with 
the requirements of paragraph (d) of this section;
    (2) The member receiving and executing such order immediately upon 
execution of the order shall record the time of execution to the nearest 
minute on a trading card or other record maintained pursuant to the 
requirements of paragraph (d) of this section; and
    (3) The member receiving and executing the order shall return such 
trading card or other record to the member placing the order. The member 
placing the order then must submit together both of the trading cards or 
other records documenting such trade to contract market personnel or the 
clearing member, in accordance with contract market rules adopted 
pursuant to paragraph (j)(1) of this section.
    (iii) Each contract market may adopt rules, which must be submitted 
to the Commission pursuant to section 5a(a)(12)(A) of the Act and 
Commission Regulation 1.41, that provide alternative requirements to 
those contained in paragraph (a-1)(2)(ii) of this section. Such rules 
shall, at a minimum, require that the contemporaneous written records:
    (A) Contain the terms of the order;
    (B) Include reliable timing data for the initiation and execution of 
the order which would permit complete and effective reconstruction of 
the order placement and execution; and
    (C) Be submitted to contract market personnel or clearing members in 
accordance with contract market rules adopted pursuant to paragraph 
(j)(1) of this section.
    (3)(i) The requirements of paragraph (a-1)(2)(ii) of this section 
will not apply if a contract market maintains in effect rules which have 
been submitted to the Commission pursuant to section 5a(a)(12)(A) of the 
Act and Commission Regulation 1.41, which provide for an exemption 
where:
    (A) A contract market member places with another member of such 
contract market an order that is part of a spread transaction;
    (B) The member placing the order personally executes one or more 
legs of the spread; and
    (C) The member receiving and executing such order immediately upon 
execution of the order records the time of execution to the nearest 
minute on his trading card or other record maintained in accordance with 
the requirements of paragraph (d) of this section.
    (ii) Each contract market shall, as part of its trade practice 
surveillance program, conduct surveillance for compliance with the 
recordkeeping and other requirements under paragraphs (a-1) (2) and (3) 
of this section, and for trading abuses related to the execution of 
orders for members present on the floor of the contract market.
    (4) Each member of a contract market reporting the execution from 
the floor of the contract market of a customer's or option customer's 
order or the order of another member of the contract market received in 
accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this 
section, shall record on a written record of the order, including the 
account identification, except as provided in paragraph (a-1)(5) of this 
section, and order number, by timestamp or other timing device, the date 
and time to the nearest minute such report of execution is made. Each

[[Page 77]]

member of a contract market shall submit the written records of customer 
orders or orders from other contract market members to contract market 
personnel or to the clearing member responsible for the collection of 
orders prepared pursuant to this paragraph as required by contract 
market rules adopted in accordance with paragraph (j)(1) of this 
section. The execution price and other information reported on the order 
tickets must be written in nonerasable ink.
    (5) Post-execution allocation of bunched orders. Specific customer 
account identifiers for accounts included in bunched orders need not be 
recorded at time of order placement or upon report of execution if the 
requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.
    (i) Eligible account managers. The person placing and directing the 
allocation of an order eligible for post-execution allocation must have 
been granted written investment discretion with regard to participating 
customer accounts. The following persons shall qualify as eligible 
account managers:
    (A) A commodity trading advisor registered with the Commission 
pursuant to the Act or excluded or exempt from registration under the 
Act or the Commission's rules, except for entities exempt under Sec. 
4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;
    (B) An investment adviser registered with the Securities and 
Exchange
    Commission pursuant to the Investment Advisers Act of 1940 or with a 
state pursuant to applicable state law or excluded or exempt from 
registration under such Act or applicable state law or rule;
    (C) A bank, insurance company, trust company, or savings and loan 
association subject to federal or state regulation; or
    (D) A foreign adviser that exercises discretionary trading authority 
solely over the accounts of non-U.S. persons, as defined in Sec. 
4.7(a)(1)(iv) of this chapter.
    (ii) Information. Eligible account managers shall make the following 
information available to customers upon request:
    (A) The general nature of the allocation methodology the account 
manager will use;
    (B) Whether accounts in which the account manager may have any 
interest may be included with customer accounts in bunched orders 
eligible for post-execution allocation; and
    (C) Summary or composite data sufficient for that customer to 
compare its results with those of other comparable customers and, if 
applicable, any account in which the account manager has an interest.
    (iii) Allocation. Orders eligible for post-execution allocation must 
be allocated by an eligible account manager in accordance with the 
following:
    (A) Allocations must be made as soon as practicable after the entire 
transaction is executed, but in any event account managers must provide 
allocation information to futures commission merchants no later than a 
time sufficiently before the end of the day the order is executed to 
ensure that clearing records identify the ultimate customer for each 
trade.
    (B) Allocations must be fair and equitable. No account or group of 
accounts may receive consistently favorable or unfavorable treatment.
    (C) The allocation methodology must be sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
    (iv) Records. (A) Eligible account managers shall keep and must make 
available upon request of any representative of the Commission, the 
United States Department of Justice, or other appropriate regulatory 
agency, the information specified in paragraph (a-1)(5)(ii) of this 
section.
    (B) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, records 
sufficient to demonstrate that all allocations meet the standards of 
paragraph (a-1)(5)(iii) of this section and to permit the reconstruction 
of the handling of the order

[[Page 78]]

from the time of placement by the account manager to the allocation to 
individual accounts.
    (C) Futures commission merchants that execute orders or that carry 
accounts eligible for post-execution allocation, and members of contract 
markets that execute such orders, must maintain records that, as 
applicable, identify each order subject to post-execution allocation and 
the accounts to which contracts executed for such order are allocated.
    (D) In addition to any other remedies that may be available under 
the Act or otherwise, if the Commission has reason to believe that an 
account manager has failed to provide information requested pursuant to 
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the 
Commission may inform in writing any designated contract market or 
derivatives transaction execution facility and that designated contract 
market or derivatives transaction execution facility shall prohibit the 
account manager from submitting orders for execution except for 
liquidation of open positions and no futures commission merchants shall 
accept orders for execution on any designated contract market or 
derivatives transaction execution facility from the account manager 
except for liquidation of open positions.
    (E) Any account manager that believes he or she is or may be 
adversely affected or aggrieved by action taken by the Commission under 
paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity for 
a prompt hearing in accordance with the provisions of Sec. 21.03(g) of 
this chapter.
    (a-2)(1) Futures commission merchants, introducing brokers, and 
members of contract markets. Upon request of the contract market, the 
Commission, or the United States Department of Justice, each futures 
commission merchant, introducing broker, and member of a contract market 
shall request from its customers and, upon receipt thereof, provide to 
the requesting body documentation of cash transactions underlying 
exchanges of futures for cash commodities or exchanges of futures in 
connection with cash commodity transactions.
    (2) Customers. Each customer of a futures commission merchant, 
introducing broker, or member of a contract market shall create, retain, 
and produce upon request of the contract market, the Commission, or the 
United States Department of Justice documentation of cash transactions 
underlying exchanges of futures for cash commodities or exchanges of 
futures in connection with cash commodity transactions.
    (3) Contract markets. Every contract market shall adopt rules which 
require its members to provide documentation of cash transactions 
underlying exchanges of futures for cash commodities or exchanges of 
futures in connection with cash commodity transactions upon request of 
the contract market.
    (4) Documentation. For the purposes of this paragraph, documentation 
means those documents customarily generated in accordance with cash 
market practices which demonstrate the existence and nature of the 
underlying cash transactions, including, but not limited to, contracts, 
confirmation statements, telex printouts, invoices, and warehouse 
receipts or other documents of title.
    (b) Futures commission merchants, introducing brokers, and clearing 
members of contract markets. Each futures commission merchant and each 
clearing member of a contract market and, for purposes of paragraph 
(b)(3) of this section, each introducing broker, shall, as a minimum 
requirement, prepare regularly and promptly, and keep systematically and 
in permanent form, the following:
    (1) A financial ledger record which will show separately for each 
customer or option customer all charges against and credits to such 
customer's or option customer's account, including but not limited to 
customer funds deposited, withdrawn, or transferred, and charges or 
credits resulting from losses or gains on closed transactions;
    (2) A record of transactions which will show separately for each 
account (including proprietary accounts):
    (i) All commodity futures transactions executed for such account, 
including the date, price, quantity, market, commodity and future; and

[[Page 79]]

    (ii) All commodity option transactions executed for such account, 
including the date, whether the transaction involved a put or call, 
expiration date, quantity, underlying contract for future delivery or 
underlying physical, strike price, and details of the purchase price of 
the option, including premium, mark-up, commission and fees; and
    (3) A record or journal which will separately show for each business 
day complete details of:
    (i) All commodity futures transactions executed on that day, 
including the date, price, quantity, market, commodity, future and the 
person for whom such transaction was made;
    (ii) All commodity option transactions executed on that day, 
including the date, whether the transaction involved a put or call, the 
expiration date, quantity, underlying contract for future delivery, or 
underlying physical, strike price, details of the purchase price of the 
option, including premium, mark-up, commission and fees and the person 
for whom the transaction was made; and
    (iii) In the case of an introducing broker, the record or journal 
required by this paragraph (b)(3) shall also include the futures 
commission merchant carrying the account for which each commodity 
futures and commodity option transaction was executed on that day. 
Provided, however, that where reproductions on microfilm, microfiche or 
optical disk are substituted for hard copy in accordance with the 
provisions of Sec. 1.31(b) of this part, the requirements of paragraphs 
(b)(1) and (b)(2) of this section will be considered met if the person 
required to keep such records is ready at all times to provide, and 
immediately provides in the same city as that in which such person's 
commodity or commodity option books and records are maintained, at the 
expense of such person, reproduced copies which show the records as 
specified in paragraphs (b)(1) and (b)(2) of this section, on request of 
any representatives of the Commission or the U.S. Department of Justice.
    (c) Clearing members of contract markets. In the daily record or 
journal required to be kept under paragraph (b)(3) of this section, each 
clearing member of a contract market shall also show the floor broker or 
floor trader executing each transaction, the opposite floor broker or 
floor trader, and the opposite clearing member with whom it was made.
    (d) Members of contract markets. (1) Each member of a contract 
market who, in the place provided by the contract market for the meeting 
of persons similarly engaged, executes purchases or sales of any 
commodity for future delivery or commodity option on or subject to the 
rules of such contract market, shall prepare regularly and promptly a 
trading card or other record showing such purchases and sales. Such 
trading card or record shall show the member's name, the name of the 
clearing member, transaction date, time (as specified in rules of the 
contract market which comply with the requirements of this section), 
quantity, and, as applicable, underlying commodity, contract for future 
delivery or physical, price or premium, delivery month or expiration 
date, whether the transaction involved a put or a call and strike price. 
Such trading card or other record shall also clearly identify the 
opposite floor broker or floor trader with whom the transaction was 
executed, and the opposite clearing member (if, in accordance with the 
rules or practice of the contract market, such opposite clearing member 
is made known to the member).
    (2) Each member of a contract market recording purchases and sales 
on trading cards must record such purchases and sales in exact 
chronological order of execution on sequential lines of the trading card 
without skipping lines between trades; Provided, however; That if lines 
remain after the last execution recorded on a trading card, the 
remaining lines must be marked through.
    (3) Each member of a contract market must identify on his trading 
cards in the manner prescribed by the rules of the contract market the 
purchases and sales executed during the opening and closing periods 
designated by the contract market pursuant to paragraph (j)(7) of this 
section.
    (4) Trading cards prepared by a member of a contract market pursuant 
to contract market rules must contain:

[[Page 80]]

    (i) Pre-printed member identification or other unique identifying 
information which would permit the trading cards of one member to be 
distinguished from those of all other members;
    (ii) Pre-printed sequence numbers to permit the intra-day sequencing 
of the cards; and
    (iii) Unique and pre-printed identifying information which would 
distinguish each of the trading cards prepared by the member from other 
such trading cards for no less than a one-week period.
    (5) Trading cards prepared by a member of a contract market and 
collected pursuant to paragraph (j)(1) of this section must be 
timestamped promptly to the nearest minute upon collection by either the 
contract market or the relevant clearing member.
    (6) Each member of a contract market shall be accountable for all 
trading cards prepared pursuant to contract market rules in exact 
numerical sequence, whether or not such trading cards are relied on as 
original source documents.
    (7) Trading records prepared by a member of a contract market 
pursuant to contract market rules must:
    (i) Be submitted in accordance with contract market rules adopted 
pursuant to paragraph (j)(1) of this section; and
    (ii) Be completed in non-erasable ink. A member may correct any 
errors by crossing out erroneous information without obliterating or 
otherwise making illegible any of the originally recorded information. 
With regard to trading cards only, a member may correct erroneous 
information by rewriting the trading card; provided, however, that the 
member must submit a ply of the trading card, or in the absence of plies 
the original trading card, that is subsequently rewritten in accordance 
with contract market rules which set forth the required collection 
schedule for trading cards and provided further that the member is 
accountable for any trading card that subsequently is rewritten pursuant 
to paragraph (d)(6) of this section.
    (8) Each member of a contract market must use a new trading card at 
the beginning of each designated 30-minute interval required by 
paragraph (j)(1) of this section (or such lesser interval as may be 
determined appropriate by the applicable contract market) or as may be 
required pursuant hereto.
    (e) Contract markets. Each contract market shall maintain or cause 
to be maintained by its clearing organization a single record which 
shall show for each futures or option trade: the transaction date, time 
(as described in paragraph (g) of this section), quantity, and, as 
applicable, underlying commodity, contract for future delivery or 
physical, price or premium, delivery month or expiration date, whether 
the transaction involved a put or a call, strike price, floor broker or 
floor trader buying, clearing member buying, floor broker or floor 
trader selling, clearing member selling, and symbols indicating the 
buying and selling customer or option customer types. The customer and 
option customer type indicators shall show, with respect to each person 
executing the trade, whether such person:
    (1) Was trading for his own account, or an account for which he has 
discretion;
    (2) Was trading for his clearing member's house account;
    (3) Was trading for another member present on the exchange floor, or 
an account controlled by such other member; or
    (4) Was trading for any other type of customer or option customer. 
The record required by this paragraph (e) shall also show, by 
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with written rules of the contract market 
which have been submitted to and approved by the Commission in 
accordance with the provisions of Sec. 1.38, and trades cleared on 
dates other than the date of execution. Except as otherwise approved by 
the Commission for good cause shown, the record required by this 
paragraph (e) shall be maintained in a format and coding structure 
approved by the Commission (i) in hard copy or on microfilm as specified 
in Sec. 1.31 and (ii) for 60 days in computer-readable form on 
compatible magnetic tapes or discs.

[[Page 81]]

    (f) Each contract market shall provide for the identification of 
floor brokers, floor traders, and clearing members, in the records 
required to be kept under paragraphs (c), (d), and (e) of this section, 
by the use of a distinctive, nonvariable designation for each such floor 
broker, floor trader, and clearing member.
    (g) Time of trade execution. For purposes of paragraph (e) of this 
section: (1) The actual time of the execution of each side of a 
transaction must be obtained, or (2) if a contract market identifies and 
records the time of a transaction, a single actual time of execution for 
both sides of the transaction may be obtained. Actual times of execution 
shall be stated in increments of no more than one minute in length. If a 
contract market submits rules to the Commission, in accordance with the 
provisions of section 5a(a)(12)(A) of the Act and Sec. 1.41, defining 
and separately identifying opening and closing time periods, the 
contract market may, for purposes of paragraph (e) of this section, use 
those time periods for trades occurring during the opening and closing 
periods. Contract market rules in effect prior to the effective date of 
this paragraph (g) upon which a contract market intends to rely in 
complying herewith must be submitted for this purpose to the Commission 
in accordance with the provisions of section 5a(a)(12)(A) of the Act and 
Sec. 1.41.
    (h) Contract market price change register. Each contract market 
shall establish and maintain a record of all changes in the price of 
futures or option transactions executed on the floor of the contract 
market. This record shall include the time of all changes in price to 
the nearest ten seconds.
    (i) Contract markets. A contract market, in order to demonstrate 
that it is exercising due diligence in maintaining the continuing 
affirmative action program required by the Act and Sec. 1.51, shall, at 
a minimum:
    (1) Demonstrate effective use in its continuing affirmative action 
program of the information required to be obtained by paragraph (e) of 
this section to reconstruct rapidly and accurately transactions executed 
on or subject to the rules of such contract market; and
    (2) Submit to the Commission such reports as the Commission or the 
Director of the Division of Trading and Markets, or such persons under 
the supervision of the Director as may be specified from time to time, 
may require concerning the accuracy of all information recorded under 
paragraph (e) of this section and the use of such information in the 
contract market's affirmative action program.
    (j) Contract markets. Each contract market must maintain in effect 
rules which require that:
    (1) Trading records prepared by a member of the contract market 
pursuant to paragraphs (a-1) and (d) of this section be submitted to 
contract market personnel or the clearing member within 15 minutes of 
designated intervals not to exceed 30 minutes, commencing with the 
beginning of each trading session. The time period permitted for the 
submission of trading records after the close of trading in each market 
shall not exceed 15 minutes from the close. Such documents should 
nevertheless be collected as often as is practicable by the contract 
market or relevant clearing member. Such contract market rules need not, 
however, require that those original source documents which cannot be 
relied upon by the contract market or clearing member for clearing 
purposes be submitted pursuant to this paragraph. Each contract market 
shall submit a written report to the Commission no later than nine 
months after the effective date of this paragraph describing with 
particularity the contract market's system(s) in place to comply with 
this paragraph and the level of compliance achieved to date.
    (2) Trading cards collected pursuant to this paragraph must be 
timestamped promptly to the nearest minute upon collection by either the 
contract market or relevant clearing member.
    (3) A member of the contract market must use a new trading card at 
the beginning of each designated 30-minute interval required by 
paragraph (j)(1) of this section.
    (4) A member of the contract market must record trades in the manner 
prescribed by paragraph (d)(2) of this section.

[[Page 82]]

    (5) Trading cards prepared by a member of the contract market must 
contain the identifying information prescribed by paragraph (d)(4) of 
this section.
    (6) A member of the contract market must be accountable for all 
trading cards prepared pursuant to contract market rules in exact 
numerical sequence, whether or not such trading cards are relied on as 
original source documents.
    (7) A member of the contract market must identify on his trading 
cards trades executed during opening and closing periods either by 
drawing a line on the trading card to separate those trades from others 
recorded thereon or by some other method. Each contract market must 
designate as opening and closing periods for this purpose those periods 
upon which the opening and closing trading ranges are based for each of 
its markets.
    (8) A member of the contract market must complete trades in non-
erasable ink in the manner prescribed by paragraph (d)(7)(ii) of this 
section.
    (k) Collection of trading cards in intervals not to exceed 15 
minutes. The Commission, in its discretion, may publish a schedule in 
the Federal Register no earlier than 11 months after paragraph (j)(1) of 
this section becomes effective, indicating when the records required to 
be submitted pursuant to that paragraph must be submitted to contract 
market personnel or the clearing member within 15 minutes of designated 
intervals not to exceed 15 minutes, commencing with the beginning of 
each trading session.
    (l) A contract market which can demonstrate that it currently has 
available hand-held terminals or such other automated means for the 
recordation of trades which can eliminate the opportunity for improper 
alteration or fabrication of trading records, may petition the 
Commission for an exemption from Regulations 1.35(a-1) (2) and (4), (d), 
(j) or (k), as appropriate.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0022)

[41 FR 3194, Jan. 21, 1976, as amended by 46 FR 54521, Nov. 3, 1981; 46 
FR 55925, Nov. 13, 1981; 46 FR 63035, Dec. 30, 1981; 47 FR 57008, Dec. 
22, 1982; 48 FR 35389, Aug. 3, 1983; 51 FR 2691, Jan. 21, 1986; 54 FR 
33881, Aug. 17, 1989; 55 FR 8137, Mar. 7, 1990; 58 FR 27465, May 10, 
1993; 58 FR 31166, June 1, 1993; 58 FR 40348, July 28, 1993; 59 FR 5525, 
Feb. 7, 1994; 61 FR 43001, Aug. 20, 1996; 63 FR 45709, Aug. 27, 1998; 63 
FR 49955, Sept. 18, 1998; 68 FR 34794, June 11, 2003]



Sec. 1.36  Record of securities and property received from customers and 
option customers.

    (a) Each futures commission merchant shall maintain, as provided in 
Sec. 1.31, a record of all securities and property received from 
customers or option customers in lieu of money to margin, purchase, 
guarantee, or secure the commodity or commodity option transactions of 
such customers or option customers. Such record shall show separately 
for each customer or option customer: a description of the securities or 
property received; the name and address of such customer or option 
customer; the dates when the securities or property were received; the 
identity of the depositories or other places where such securities or 
property are segregated; the dates of deposits and withdrawals from such 
depositories; and the dates of return of such securities or property to 
such customer or option customer, or other disposition thereof, together 
with the facts and circumstances of such other disposition. In the event 
any futures commission merchant deposits with the clearing organization 
of a contract market, directly or with a bank or trust company acting as 
custodian for such clearing organization, securities and/or property 
which belong to a particular customer or option customer, such futures 
commission merchant shall obtain written acknowledgment from such

[[Page 83]]

clearing organization that it was informed that such securities or 
property belong to customers or option customers of the futures 
commission merchant making the deposit. Such acknowledgment shall be 
retained as provided in Sec. 1.31.
    (b) Each clearing organization of a contract market which receives 
from members securities or property belonging to particular customers or 
option customers of such members in lieu of money to margin, purchase, 
guarantee, or secure the commodity or commodity option transactions of 
such customers or option customers, or receives notice that any such 
securities or property have been received by a bank or trust company 
acting as custodian for such clearing organization, shall maintain, as 
provided in Sec. 1.31, a record which will show separately for each 
member, the dates when such securities or property were received, the 
identity of the depositories or other places where such securities or 
property are segregated, the dates such securities or property were 
returned to the member, or otherwise disposed of, together with the 
facts and circumstances of such other disposition including the 
authorization therefor.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0024)

[46 FR 54522, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48 
FR 8435, Mar. 1, 1983]



Sec. 1.37  Customer's or option customer's name, address, and occupation 
recorded; record of guarantor or controller of account.

    (a)(1) Each futures commission merchant, introducing broker, and 
member of a contract market shall keep a record in permanent form which 
shall show for each commodity futures or option account carried or 
introduced by it the true name and address of the person for whom such 
account is carried or introduced and the principal occupation or 
business of such person as well as the name of any other person 
guaranteeing such account or exercising any trading control with respect 
to such account. For each such commodity option account, the records 
kept by such futures commission merchant, introducing broker, and member 
of a contract market must also show the name of the person who has 
solicited and is responsible for each option customer's account or 
assign account numbers in such a manner to identify that person.
    (2) Each futures commission merchant who receives a customer's 
election not to have the customer's funds separately accounted for and 
segregated, in accordance with Sec. 1.68, shall keep a record in 
permanent form that indicates such customer's election. The record of 
such a customer election may be indicated on the record required by 
paragraph (a)(1) of this section.
    (b) As of the close of the market each day, each futures commission 
merchant which carries an account for another futures commission 
merchant, foreign broker (as defined in Sec. 15.00 of this chapter), 
member of a contract market, or other person, on an omnibus basis shall 
maintain a daily record for each such omnibus account of the total open 
long contracts and the total open short contracts in each future and, 
for commodity option transactions, the total open put options purchased, 
the total open put options granted, the total open call options 
purchased, and the total open call options granted for each commodity 
option expiration date.
    (c) Each designated contract market shall keep a record in permanent 
form, which shall show the true name, address, and principal occupation 
or business of any foreign trader executing transactions on the facility 
or exchange. In addition, upon request, a designated contract market 
shall provide to the Commission information regarding the name of any 
person guaranteeing such transactions or exercising any control over the 
trading of such foreign trader.
    (d) Paragraph (c) of this section shall not apply to a designated 
contract market on which transactions in futures or option contracts of 
foreign traders are executed through, or the resulting transactions are 
maintained in, accounts carried by a registered futures commission 
merchant or introduced by a registered introducing

[[Page 84]]

broker subject to the provisions of paragraph (a) of this section.

(The information collection requirements contained in Sec. 1.37 were 
approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0024; and in paragraph (b) under control number 3038-
0009)

[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48 
FR 35289, Aug. 3, 1983; 58 FR 28501, May 14, 1993; 66 FR 20744, Apr. 25, 
2001; 66 FR 42269, Aug. 10, 2001]



Sec. 1.38  Execution of transactions.

    (a) Competitive execution required; exceptions. All purchases and 
sales of any commodity for future delivery, and of any commodity option, 
on or subject to the rules of a contract market shall be executed openly 
and competitively by open outcry or posting of bids and offers or by 
other equally open and competitive methods, in the trading pit or ring 
or similar place provided by the contract market, during the regular 
hours prescribed by the contract market for trading in such commodity or 
commodity option: Provided, however, That this requirement shall not 
apply to transactions which are executed non-competitively in accordance 
with written rules of the contract market which have been submitted to 
and approved by the Commission, specifically providing for the non-
competitive execution of such transactions.
    (b) Noncompetitive trades; exchange of futures, etc.; requirements. 
Every person handling, executing, clearing, or carrying trades, 
transactions or positions which are not competitively executed, 
including transfer trades or office trades, or trades involving the 
exchange of futures for cash commodities or the exchange of futures in 
connection with cash commodity transactions, shall identify and mark by 
appropriate symbol or designation all such transactions or contracts and 
all orders, records, and memoranda pertaining thereto.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0022)

[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981]



Sec. 1.39  Simultaneous buying and selling orders of different principals; 
execution of, for and between principals.

    (a) Conditions and requirements. A member of a contract market who 
shall have in hand at the same time both buying and selling orders of 
different principals for the same commodity for future delivery in the 
same delivery month or the same option (both puts or both calls, with 
the same underlying contract for future delivery or the same underlying 
physical, expiration date and strike price) may execute such orders for 
and directly between such principals at the market price, if in 
conformity with written rules of such contract market which have been 
approved by the Commission, and:
    (1)(i) When trading is conducted in a trading pit or ring, such 
orders are first offered openly and competitively by open outcry in such 
trading pit or ring (A) by both bidding and offering at the same price, 
and neither such bid nor offer is accepted, or (B) by bidding and 
offering to a point where such offer is higher than such bid by not more 
than the minimum permissible price fluctuation applicable to such 
futures contract or commodity option on such contract market, and 
neither such bid nor offer is accepted; or
    (ii) When in nonpit trading in contracts of sale for future 
delivery, bids and offers are posted on a board, such member (A) 
pursuant to such buying order posts a bid on the board and, incident to 
the execution of such selling order, accepts such bid and all other bids 
posted at prices equal to or higher than the bid posted by him, or (B) 
pursuant to such selling order posts an offer on the board and, incident 
to the execution of such buying order, accepts such offer and all other 
offers posted at prices equal to or lower than the offer posted by him;
    (2) Such member executes such orders in the presence of an official 
representative of such contract market designated to observe such 
transactions and, by appropriate descriptive words or symbol, clearly 
identifies all such transactions on his trading card or other similar 
record, made at the time of execution, and notes thereon the exact time 
of execution and

[[Page 85]]

promptly presents said record to such official representative for 
verification and initialing;
    (3) Such contract market keeps a record in permanent form of each 
such transaction showing the transaction date, by whom executed, the 
exact time of execution, quantity, and, as applicable, underlying 
commodity, contract for future delivery or physical, price or premium, 
whether a put or a call, and strike price; and
    (4) Neither the futures commission merchant receiving nor the member 
executing such orders has any interest therein, directly or indirectly, 
except as a fiduciary.
    (b) Large Order Execution Procedures. A member of a contract market 
may execute simultaneous buying and selling orders of different 
principals directly between the principals in compliance with large 
order execution procedures established by written rules of the contract 
market that have been approved by the Commission: Provided, That, to the 
extent such large order execution procedures do not meet the conditions 
and requirements of paragraph (a) of this section, the contract market 
has petitioned the Commission for, and the Commission has granted, an 
exemption from the conditions and requirements of paragraph (a) of this 
section. Any such petition must be accompanied by proposed contract 
market rules to implement the large order execution procedures. The 
petition shall include:
    (1) An explanation of why the proposed large order execution rules 
do not comply with paragraph (a) of this section; and
    (2) A description of a special surveillance program that would be 
followed by the contract market in monitoring the large order execution 
procedures.

The Commission may, in its discretion and upon such terms and conditions 
as it deems appropriate, grant such petition for exemption if it finds 
that the exemption is not contrary to the public interest and the 
purposes of the provision from which exemption is sought. The petition 
shall be considered concurrently with the proposed large order execution 
rules.
    (c) Not deemed filling orders by offset nor cross trades. The 
execution of orders in compliance with the conditions herein set forth 
will not be deemed to constitute the filling of orders by offset within 
the meaning of paragraph (iv) of section 4b(a) of the Act, nor to 
constitute cross trades within the meaning of paragraph (A) of section 
4c(a) of the Act.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0022)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57008, Dec. 22, 1982; 56 FR 12344, Mar. 25, 1991; 59 FR 5525, Feb. 7, 
1994]

                              Miscellaneous



Sec. 1.40  Crop, market information letters, reports; copies required.

    Each futures commission merchant and each member of a contract 
market shall, upon request, furnish or cause to be furnished to the 
Commission a true copy of any letter, circular, telegram, or report 
published or given general circulation by such futures commission 
merchant or member which concerns crop or market information or 
conditions that affect or tend to affect the price of any commodity, and 
the true source of or authority for the information contained therein.

(Approved by the Office of Management and Budget under control number 
3038-0015)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981]



Sec. 1.41  [Reserved]



Sec. 1.41a-1.41c  [Reserved]



Sec. Sec. 1.42-1.43  [Reserved]



Sec. 1.44  Records and reports of warehouses, depositories, and other 
similar entities; visitation of premises.

    Each contract market shall require the operators of warehouses, 
depositories and other similar entities whose receipts are deliverable 
in satisfaction of commodity futures contracts or options on physicals 
made on or subject to the rules of such contract market:
    (a) To keep records showing the stocks of each commodity traded for 
future delivery or upon which option contracts are traded on such 
contract market in store in such warehouses,

[[Page 86]]

depositories and other similar entities by kinds, by classes, and by 
grades, if stored under conditions requiring such designation or 
identification, and including also lots and parcels stored specially or 
separately or in specially leased space of the warehouse, depository or 
other similar entity;
    (b) Upon call from the Commission, to report the stocks of 
commodities in such warehouses, depositories and other similar entities 
and to furnish information concerning stocks of each commodity traded 
for future delivery or upon which option contracts are traded on such 
contract market about to be transferred or in the process of being 
transferred or otherwise moved into or out of such warehouses, 
depositories and other similar entities, as well as any other 
information concerning commodities stored in such warehouse, 
depositories and other similar entities and which are or may be 
available for delivery on futures contracts or options on physicals; and
    (c) To permit visitation of the premises and inspection of the books 
and records of such warehouses, depositories and other similar entities 
by duly authorized representatives of the Commission or the Department 
of Justice, and to keep all books, records, papers, and memoranda 
relating to the storage and warehousing of commodities in such 
warehouse, depository or other similar entity for a period of 5 years 
from the date thereof.

(Approved by the Office of Management and Budget under control number 
3038-0019)

(Sec. 5a, 49 Stat. 1497; 7 U.S.C. 7a)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57009, Dec. 22, 1982]



Sec. 1.45  [Reserved]



Sec. 1.46  Application and closing out of offsetting long and short positions.

    (a) Application of purchases and sales. Except with respect to 
purchases or sales which are for omnibus accounts, or where the customer 
has instructed otherwise, any futures commission merchant who, on or 
subject to the rules of a designated contract market or registered 
derivatives transaction execution facility:
    (1) Purchases any commodity for future delivery for the account of 
any customer when the account of such customer at the time of such 
purchase has a short position in the same future of the same commodity 
on the same market;
    (2) Sells any commodity for future delivery for the account of any 
customer when the account of such customer at the time of such sale has 
a long position in the same future of the same commodity on the same 
market;
    (3) Purchases a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
purchase has a short put or call option position with the same 
underlying futures contract or same underlying physical, strike price, 
expiration date and contract market as that purchased; or
    (4) Sells a put or call option for the account of any option 
customer when the account of such option customer at the time of such 
sale has a long put or call option position with the same underlying 
futures contract or same underlying physical, strike price, expiration 
date and contract market as that sold shall on the same day apply such 
purchase or sale against such previously held short or long futures or 
option position, as the case may be, and shall, for futures 
transactions, promptly furnish such customer a statement showing the 
financial result of the transactions involved and, if applicable, that 
the account was introduced to the futures commission merchant by an 
introducing broker and the names of the futures commission merchant and 
introducing broker.
    (b) Close-out against oldest open position. In all instances wherein 
the short or long futures or option position in such customer's or 
option customer's account immediately prior to such offsetting purchase 
or sale is greater than the quantity purchased or sold, the futures 
commission merchant shall apply such offsetting purchase or sale to the 
oldest portion of the previously held short or long position: Provided, 
That upon specific instructions from the customer or option customer the 
offsetting transaction shall be applied as specified by the customer or 
option customer without regard to the date of

[[Page 87]]

acquisition of the previously held position. Such instructions may also 
be accepted from any person who, by power of attorney or otherwise, 
actually directs trading in the customer's or option customer's account 
unless the person directing the trading is the futures commission 
merchant (including any partner thereof), or is an officer, employee, or 
agent of the futures commission merchant. With respect to every such 
offsetting transaction that, in accordance with such specific 
instructions, is not applied to the oldest portion of the previously 
held position, the futures commission merchant shall clearly show on the 
statement issued to the customer or option customer in connection with 
the transaction, that because of the specific instructions given by or 
on behalf of the customer or option customer the transaction was not 
applied in the usual manner, i.e., against the oldest portion of the 
previously held position. However, no such showing need be made if the 
futures commission merchant has received such specific instructions in 
writing from the customer or option customer for whom such account is 
carried.
    (c) In-and-out trades; day trades. Notwithstanding the provisions of 
paragraphs (a) and (b) of this section shall not be deemed to require 
the application of purchases or sales closed out during the same day 
(commonly known as ``in-and-out trades'' or ``day trades'') against 
short or long positions carried forward from a prior date.
    (d) Exceptions. The provisions of this section shall not apply to:
    (1) Purchases or sales of commodity options constituting ``bona fide 
hedging transactions'' pursuant to rules of the contract market which 
have been adopted in accordance with the requirements of Sec. 1.61(b) 
and approved by the Commission pursuant to; section 5a(a)(12)(A) of the 
Act Provided, That no contract market or futures commission merchant 
shall permit such option positions to be offset other than by open and 
competitive execution in the trading pit or ring provided by the 
contract market, during the regular hours prescribed by the contract 
market for trading in such commodity option.
    (2) Purchases or sales constituting ``bona fide hedging 
transactions'' as defined in Sec. 1.3(z); nor
    (3) Sales during a delivery period for the purpose of making 
delivery during such delivery period if such sales are accompanied by 
instructions to make delivery thereon, together with warehouse receipts 
or other documents necessary to effectuate such delivery.
    (4)-(7) [Reserved]
    (8) Purchases or sales held in error accounts, including but not 
limited to floor broker error accounts, and purchases or sales 
identified as errors at the time they are assigned to an account that 
contains other purchases or sales not identified as errors and held in 
that account (``error trades''), provided that:
    (i) Each error trade does not offset another error trade held in the 
same account;
    (ii) Each error trade is offset by open and competitive means on or 
subject to the rules of a contract market by not later than the close of 
business on the business day following the day the error trade is 
discovered and assigned to an error account or identified as an error 
trade, unless at the close of business on the business day following the 
discovery of the error trade, the relevant market has reached a daily 
price fluctuation limit and the trader is unable to offset the error 
trade, in which case the error trade must be offset as soon as 
practicable thereafter; and
    (iii) No error trade is closed out by transferring such an open 
position to another account also controlled by that same trader.
    (e) The statements required by paragraph (a) of this section may be 
furnished to the customer or the person

[[Page 88]]

described in Sec. 1.33(d) by means of electronic transmission, in 
accordance with Sec. 1.33(g).

(Approved by the Office of Management and Budget under control number 
3038-0007)

(Secs. 4g, 5, 42 Stat. 1000, 49 Stat. 1496; 7 U.S.C. 6g, 7; secs. 4g, 5, 
8a; 7 U.S.C. 6g, 7, 12a)

[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 54524, Nov. 3, 1981; 46 
FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22, 1982; 48 FR 35289, Aug. 
3, 1983; 49 FR 19972, May 11, 1984; 50 FR 26, Jan. 2, 1985; 51 FR 17473, 
May 13, 1986; 53 FR 614, Jan. 11, 1988; 56 FR 14314, Apr. 9, 1991; 57 FR 
55085, Nov. 24, 1992; 59 FR 5526, Feb. 7, 1994; 66 FR 53517, Oct. 23, 
2001]



Sec. 1.47  Requirements for classification of purchases or sales of 

contracts for future delivery as bona fide hedging under Sec. 1.3(z)(3) 
of the regulations.

    (a) Any person who wishes to avail himself of the provisions of 
Sec. 1.3(z)(3) of the regulations and to make purchases or sales of any 
commodity for future delivery in any commodity in excess of trading and 
position limits then in effect pursuant to section 4a of the Act shall 
file statement with the Commission in conformity with the requirements 
of this section. All or a specified portion of the transactions and 
positions described in these statements shall not be considered as bona 
fide hedging if such person is so notified by the Commission:
    (1) Within 30 days after the Commission is furnished the information 
required under paragraph (b) of this section, or
    (2) Within 10 days after the Commission is furnished with the 
information required under paragraph (c) of this section.

The Commission may request the person notified to file specific 
additional information with the Commission to support a determination 
that all, or the specified portion, of the transactions and positions be 
considered as bona fide hedging transactions and positions. In such 
cases, the Commission shall consider all information so filed and, by 
notice to such person, shall specify the extent to which the Commission 
has determined that the transactions and positions may be classified as 
bona fide hedging. In no case shall transactions and positions described 
be considered as bona fide hedging if they exceed the levels specified 
in paragraph (d) of this section.
    (b) Initial statement. Initial statements concerning the 
classification of transactions and positions as bona fide hedging 
pursuant to Sec. 1.3(z)(3) shall be filed with the Commission at least 
30 days in advance of the date that such transactions or positions would 
be in excess of limits then in effect pursuant to section 4a of the Act. 
Such statements shall:
    (1) Describe the transactions and positions for future delivery and 
the offsetting cash positions;
    (2) Set forth in detail information which will demonstrate that the 
purchases and sales are economically appropriate to the reduction of 
risk exposure attendant to the conduct and management of a commercial 
enterprise;
    (3) Contain, and upon request of the Commission be supplemented by, 
such other information which is necessary to enable the Commission to 
make a determination whether the particular purchases and sales for 
future delivery fall within the scope of those described in section 
1.3(z)(1) of the regulations;
    (4) Include a statement concerning the maximum size of positions for 
future delivery (both long and short) which will be acquired any time 
during the next fiscal year or marketing season of the person filing or 
on whose behalf the filing is made.
    (5) In addition: statements filed by an agent, concerning a futures 
position which would offset a cash position which the agent does not own 
or has not contracted to buy or sell, shall contain information 
describing all contractual arrangements between the agent filing and the 
person who owns the commodity or holds the cash market commitment being 
offset;
    (6) Statements concerning futures positions to be acquired against 
unsold anticipated production or unfilled anticipated requirements for 
manufacturing, processing or feeding shall also include the information 
required under Sec. 1.48 of the regulations.
    (c) Supplemental reports. Whenever the purchases or sales which a 
person wishes to classify as bona fide hedging shall

[[Page 89]]

exceed the amount provided in the person's most recent filing pursuant 
to this section or the amount previously specified by the Commission 
pursuant to paragraph (a) of this section, such person shall file with 
the Commission a statement which updates the information provided in the 
person's most recent filing and provides the reasons for this change at 
least ten days in advance of the date that person wishes to exceed those 
amounts.
    (d) Maximum purchases and sales. Purchases and sales for future 
delivery considered bona fide hedging pursuant to Sec. 1.3(z)(3) of the 
regulations shall at no time exceed the lesser of:
    (1) The value fluctuation equivalent (in terms of the commodity for 
future delivery) of the current cash position described in the 
information most recently filed pursuant to this section, or
    (2) The maximum level of long or short open positions provided in 
the information most recently filed pursuant to this section or most 
recently specified by the Commission pursuant to paragraph (a) of this 
section.
    (e) Updated reports. Reports updating the information required 
pursuant to this section also shall be filed with the Commission upon 
specific request.

(Approved by the Office of Management and Budget under control number 
3038-0013)

[42 FR 42751, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]



Sec. 1.48  Requirements for classification of sales or purchases for 

future delivery as bona fide hedging of unsold anticipated production 
or unfilled anticipated requirements under Sec. 1.3(z)(2) (i)(B) or 
(ii)(C) of the regulations.

    (a) Any person who wishes to avail himself of the provisions of 
Sec. 1.3(z)(2) (i)(B) or (ii)(C) of the regulations and to make sales 
or purchases for future delivery in any commodity in excess of trading 
and position limits then in effect pursuant to section 4a of the Act for 
the purposes of bona fide hedging shall file statements with the 
Commission in conformity with the requirements of this section. All or a 
specified portion of the unsold anticipated production or unfilled 
anticipated requirements described in these statements shall not be 
considered as offsetting positions for bona fide hedging transactions 
and positions if such person is so notified by the Commission within ten 
days after the Commission is furnished with the information required 
under paragraphs (b) or (c) of this section. The Commission may request 
the person notified to file specific additional information with the 
Commission to support a determination that the statement filed 
accurately reflects unsold anticipated production or unfilled 
anticipated requirements for manufacturing, processing or feeding. In 
such cases, the Commission shall consider all additional information so 
filed and, by notice to such person, shall specify its determination as 
to what portion of the production or requirements described constitutes 
unsold anticipated production or unfilled anticipated requirements for 
the purposes of bona fide hedging. In no case shall such transactions 
and positions which offset unsold anticipated production or unfilled 
anticipated requirements be considered bona fide hedging if they exceed 
the levels specified in paragraph (d) of this section of the 
regulations.
    (b) Initial statement. Initial statements concerning the 
classification of transactions and positions as bona fide hedging 
pursuant to Sec. 1.3(z)(2) (i)(B) or (ii)(C) shall be filed with the 
Commission at least ten days in advance of the date that such 
transactions or positions would be in excess of limits then in effect 
pursuant to section 4a of the Act. Such statements shall set forth in 
detail for a specified operating period not in excess of one year the 
person's unsold anticipated production or unfilled anticipated 
requirements for processing or manufacturing or feeding and explain the 
method of determination thereof, including, but not limited to, the 
following information:
    (1) For unsold anticipated production:
    (i) Annual production of such commodity for the three complete 
fiscal years preceding the current fiscal year;
    (ii) Anticipated production of such commodity for a specified period 
not in excess of one year;
    (iii) Fixed-price forward sales of such commodity;

[[Page 90]]

    (iv) Unsold anticipated production of such commodity for a specified 
period not in excess of one year.
    (2) For unfilled anticipated requirements:
    (i) Annual requirements of such commodity for processing or 
manufacturing or feeding for the three complete fiscal years preceding 
the current fiscal year;
    (ii) Anticipated requirements of such commodity for processing or 
manufacturing or feeding for a specified operating period not in excess 
of one year;
    (iii) Inventory and fixed-price forward purchases of such commodity, 
including any quantity in process of manufacture and finished goods and 
byproducts of manufacture or processing (in terms of such commodity);
    (iv) Unfilled anticipated requirements of such commodity for 
processing or manufacturing or feedings for a specified operating period 
not in excess of one year.
    (3) Additional information: Persons hedging unsold anticipated 
production or unfilled anticipated requirements which are not the same 
quantity or are not the same commodity as the commodity to be sold or 
purchased for future delivery shall furnish this information both in 
terms of the actual commodity produced or used and in terms of the 
commodity to be sold or purchased for future delivery. In addition, such 
persons shall explain the method for determining the ratio of conversion 
between the amount of the actual unsold anticipated production or 
unfilled anticipated requirements and the amount of commodity to be sold 
or purchased for future delivery. Persons hedging unfilled annual 
feeding requirements for livestock and poultry shall provide the number 
of cattle, hogs, sheep, or poultry expected to be fed during the 
specified period, not to exceed one year, and the derivation of their 
annual requirements based upon these numbers. Persons filing as an agent 
shall furnish this information on the basis of the fiscal or operating 
year of the person on whose behalf the filing is made.
    (c) Supplemental reports. Whenever the sales or purchases which a 
person wishes to consider as bona fide hedging of unsold anticipated 
production or unfilled anticipated requirements shall exceed the amounts 
described by the figures for requirements furnished in the most recent 
filing pursuant to this section or the amounts determined by the 
Commission to constitute unsold anticipated production or unfilled 
anticipated requirements pursuant to paragraph (a) of this section, such 
person shall file with the Commission a statement which updates the 
information provided in the person's most recent filing and supplies the 
reason for this change at least ten days in advance of the date that 
person wishes to exceed these amounts.
    (d) Maximum sales and purchases. Sales or purchases for future 
delivery considered as bona fide hedges pursuant to Sec. 1.3(z)(2) 
(i)(B) or (ii)(C) shall at no time exceed the lesser of:
    (1) A person's unsold anticipated production of unfilled anticipated 
requirements as described by the information must recently filed 
pursuant to this section or determined by the Commission pursuant to 
paragraph (a) of this section; or
    (2) A person's actual unsold anticipated production or current 
unfilled anticipated requirements for the length of time specified in 
the information most recently filed pursuant to this section.
    (e) Updated reports. Reports updating the information required 
pursuant to this section shall also be filed with the Commission upon 
specific request.

(Approved by the Office of Management and Budget under control number 
3038-0013)

[42 FR 42752, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]



Sec. 1.49  Denomination of customer funds and location of depositories.

    (a) Definitions. For purposes of this section:
    (1) Money center country. This term means Canada, France, Italy, 
Germany, Japan, and the United Kingdom.
    (2) Money center currency. This term means the currency of any money 
center country and the Euro.
    (b) Permissible denominations of obligations. (1) Subject to the 
terms and conditions set forth in this section, a futures commission 
merchant's obligations to a customer shall be denominated:

[[Page 91]]

    (i) In the United States dollar;
    (ii) In a currency in which funds were deposited by the customer or 
were converted at the request of the customer, to the extent of such 
deposits and conversions; or
    (iii) In a currency in which funds have accrued to the customer as a 
result of trading conducted on a designated contract market or 
registered derivatives transaction execution facility, to the extent of 
such accruals.
    (2)(i) A futures commission merchant shall prepare and maintain a 
written record of each transaction converting customer funds from one 
currency to another.
    (ii) A written record prepared under paragraph (b)(2)(i) of this 
section must include the date the transaction was executed, the 
currencies converted, the amount converted, and the resulting amount.
    (iii) The information required under paragraph (b)(2)(ii) of this 
section must be provided to the customer upon the customer's request.
    (c) Permissible locations of depositories. (1) Unless a customer 
provides instructions to the contrary, a futures commission merchant or 
a derivatives clearing organization may hold customer funds:
    (i) In the United States;
    (ii) In a money center country; or
    (iii) In the country of origin of the currency.
    (2) A futures commission merchant or derivatives clearing 
organization may hold customer funds outside the United States, in a 
jurisdiction that is not a money center country, or the country of 
origin of the currency only to the extent authorized by the customer, 
provided, that the futures commission merchant or derivatives clearing 
organization must make and maintain a written record of such 
authorization. Notwithstanding the foregoing, in no event shall a 
futures commission merchant or a derivatives clearing organization hold 
customer funds in a restricted country subject to sanctions by the 
Office of Foreign Assets Control of the U.S. Department of Treasury.
    (d) Qualifications for depositories. (1) To hold customer funds 
required to be segregated pursuant to the Act and Sec. Sec. 1.20 
through 1.30, 1.32 and 1.36, a depository must provide the depositing 
futures commission merchant or derivatives clearing organization with 
the appropriate written acknowledgment as required under Sec. Sec. 1.20 
and 1.26.
    (2) A depository, if located in the United States, must be:
    (i) A bank or trust company;
    (ii) A futures commission merchant registered as such with the 
Commission; or
    (iii) A derivatives clearing organization.
    (3) A depository, if located outside the United States, must be:
    (i) A bank or trust company:
    (A) That has in excess of $1 billion of regulatory capital; or
    (B) Whose commercial paper or long-term debt instrument or, if a 
part of a holding company system, its holding company's commercial paper 
or long-term debt instrument, is rated in one of the two highest rating 
categories by at least one nationally recognized statistical rating 
organization;
    (ii) A futures commission merchant that is registered as such with 
the Commission; or
    (iii) A derivatives clearing organization.
    (e) Segregation requirements. (1) Each futures commission merchant 
and each derivatives clearing organization must, as of the close of each 
business day, hold in segregated accounts on behalf of commodity or 
option customers:
    (i) Sufficient United States dollars, held in the United States, to 
meet all United States dollar obligations; and
    (ii) Sufficient funds in each other currency to meet obligations in 
such currency.
    (2) Notwithstanding paragraph (e)(1)(ii) of this section, assets 
denominated in one currency may be held to meet obligations denominated 
in another currency as follows:
    (i) United States dollars may be held in the United States or in 
money center countries to meet obligations denominated in any other 
currency; and
    (ii) Funds in money center currencies may be held in the United 
States or in money center countries to meet obligations denominated in 
currencies other than the United States dollar.

[[Page 92]]

    (3) Each futures commission merchant and each derivatives clearing 
organization shall make and maintain records sufficient to demonstrate 
compliance with this paragraph (e).

[68 FR 5551, Feb. 4, 2003]



Sec. Sec. 1.50-1.51  [Reserved]



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 Sec. Sec. 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.
    (b) Each self-regulatory organization shall have in effect and 
enforce rules submitted to the Commission pursuant to paragraph (a) of 
this section and approved by the Commission.
    (c) Any two or more self-regulatory organizations may file with the 
Commission a plan for delegating to a designated self-regulatory 
organization, for any registered futures commission merchant or any 
registered introducing broker which is a member of more than one such 
self-regulatory organization, the responsibility of:
    (1) Monitoring and auditing for compliance with the minimum 
financial and related reporting requirements adopted by such self-
regulatory organizations in accordance with paragraph (a) of this 
section; and
    (2) Receiving the financial reports necessitated by such minimum 
financial and related reporting requirements.

Such plan may also delegate the responsibility of monitoring, and 
examining the books and records kept by, such registered futures 
commission merchant or registered introducing broker relating to its 
business of dealing in commodity futures, commodity options, and cash 
commodities, insofar as such business relates to its dealings on 
contract markets, as required by Sec. 1.51(a)(3) and/or part 33 of this 
chapter.
    (d) Any plan filed under this section may contain provisions for the 
allocation of expenses reasonably incurred by the designated self-
regulatory organization among the self-regulatory organizations 
participating in such a plan.
    (e) A plan's designated self-regulatory organization must report to 
that plan's other self-regulatory organizations any violation of such 
other self-regulatory organizations' rules and regulations for which the 
responsibiity to monitor, audit or examine has been delegated to such 
designated self-regulatory organization under this section.
    (f) The self-regulatory organizations may, among themselves, 
establish programs to provide access to any necessary financial or 
related information.
    (g) After appropriate notice and opportunity for comment, the 
Commission may, by written notice, approve such a plan, or any part of 
the plan, if it finds that the plan, or any part of it:
    (1) Is necessary or appropriate to serve the public interest;

[[Page 93]]

    (2) Is for the protection and in the interest of customers or option 
customers;
    (3) Reduces multiple monitoring and auditing for compliance with the 
minimum financial rules of the self-regulatory organizations submitting 
the plan for any futures commission merchant or introducing broker which 
is a member of more than one self-regulatory organization;
    (4) Reduces multiple reporting of the financial information 
necessitated by such minimum financial and related reporting 
requirements by any futures commission merchant or introducing broker 
which is a member of more than one self-regulatory organization;
    (5) Fosters cooperation and coordination among the contract markets; 
and
    (6) Does not hinder the development of a registered futures 
association under section 17 of the Act.
    (h)(1) Upon the approval of a plan or part of one under paragraph 
(g) of this section, a self-regulatory organization which is included in 
such a plan shall be considered to have met its affirmative action 
responsibilities under Sec. 1.51 to the extent that such 
responsibilities have been delegated to a designated self-regulatory 
organization.
    (2) After the Commission has approved a plan or part of one under 
Sec. 1.52(g), a self-regulatory organization relieved of responsibility 
must notify each of its members which is subject to such a plan: (i) Of 
the limited nature of its responsibility for such a member's compliance 
with its minimum financial and related reporting requirements; and (ii) 
of the identity of the designated self-regulatory organization which has 
been delegated responsibility for such a member.
    (i) The Commission may at any time, after appropriate notice and 
opportunity for hearing, withdraw its approval of any plan or part of 
one established under this section, if such plan or part of one ceases 
to effectuate adequately the purposes of section 4(f)(b) of the Act or 
of this section.
    (j) Whenever a registered futures commission merchant or a 
registered introducing broker holding membership in a self-regulatory 
organization ceases to be a member in good standing of that self-
regulatory organization, such self-regulatory organization must, on the 
same day that event takes place, give telegraphic notice of that event 
to the principal office of the Commission in Washington, DC and send a 
copy of that notification to such futures commission merchant or such 
introducing broker.
    (k) Nothing in this section shall preclude the Commission from 
examining any futures commission merchant or introducing broker for 
compliance with the minimum financial and related reporting requirements 
to which such futures commission merchant or introducing broker is 
subject.
    (l) In the event a plan is not filed and/or approved for each 
registered futures commission merchant or for each registered 
introducing broker which is a member of more than one self-regulatory 
organization, the Commission may design and, after notice and 
opportunity for comment, approve a plan for those futures commission 
merchants or introducing brokers which are not the subject of an 
approved plan (under paragraph (g) of this section), delegating to a 
designated self-regulatory organization the responsibilities described 
in paragraph (c) of this section.

(Approved by the Office of Management and Budget under control numbers 
3038-0007 and 3038-0022)

(7 U.S.C. 6c, 6d, 6f, 6g, 7a, 12a, 19, and 21; 5 U.S.C. 552, 5 U.S.C. 
552b, and secs. 2(a)(11), 4b, 4f, 4g, 5a, 8a, and 17 of the Commodity 
Exchange Act, 7 U.S.C. 4a(j), 6b, 6f, 6g, 7a, 12a, and 21, as amended, 
92 Stat 865 et seq.)

[43 FR 39981, Sept. 8, 1978, as amended at 46 FR 63035, Dec. 30, 1981; 
48 FR 35290, Aug. 3, 1983; 53 FR 4612, Feb. 17, 1988; 59 FR 5526, Feb. 
7, 1994; 62 FR 4641, Jan. 31, 1997]



Sec. 1.53  Enforcement of contract market bylaws, rules, regulations, 
and resolutions.

    Each contract market shall enforce each bylaw, rule, regulation, and 
resolution, made or issued by it or by the governing board thereof or 
any committee thereof, which is in effect as of July 18, 1975, and which 
relates to terms and conditions in contracts of sale to be executed on 
or subject to the rules of such contract market or relates to other 
trading requirements, unless such bylaw, rule, regulation, or resolution 
has been disapproved by the

[[Page 94]]

Commission pursuant to section 5a(a)(12)(A) of the Act, or the amendment 
or revocation of such bylaw, rule, regulation or resolution has been 
approved by the Commission pursuant to section 5a(a)(12)(A) of the Act.

(Secs. 5, 5a, 6, 6b; 42 Stat. 1000, 1001, 49 Stat. 1497, 1498, 82 Stat. 
29, 30, 31, 88 Stat. 1392, 1400, 1401, 1402; 7 U.S.C. 7, 7a, 8, 13a)

[41 FR 3194, Jan. 21, 1976, as amended at 59 FR 5526, Feb. 7, 1994]



Sec. 1.54  Contract market rules submitted to and approved or not 
disapproved by the Secretary of Agriculture.

    Notwithstanding any provision of these rules, any bylaw, rule, 
regulation, or resolution of a contract market that was submitted to the 
Secretary of Agriculture pursuant or Sec. 1.38(a) or Sec. 1.39(a) of 
these rules, and was either approved by the Secretary or not disapproved 
by him, as of April 21, 1975, shall continue in full force and effect 
unless and until disapproved, altered or supplemented by or with the 
approval of the Commission. The adoption of this rule does not 
constitute approval by the Commission of any contract market bylaw, 
rule, regulation or resolution.

(Sec. 411, Pub. L. 93-463, 88 Stat. 1414; 7 U.S.C. 4a note)

[45 FR 2314, Jan. 11, 1980]



Sec. 1.55  Distribution of ``Risk Disclosure Statement'' by futures 
commission merchants and introducing brokers.

    (a)(1) Except as provided in 1.65, no futures commission merchant, 
or in the case of an introduced account no introducing broker, may open 
a commodity futures account for a customer, other than for a customer 
specified in paragraph (f) of this section, unless the futures 
commission merchant or introducing broker first:
    (i) Furnishes the customer with a separate written disclosure 
statement containing only the language set forth in paragraph (b) of 
this section (except for nonsubstantive additions such as captions) or 
as otherwise approved under paragraph (c) of this section; Provided, 
however, that the disclosure statement may be attached to other 
documents as the cover page or the first page of such documents and as 
the only material on such page; and
    (ii) Receives from the customer an acknowledgment signed and dated 
by the customer that he received and understood the disclosure 
statement.
    (b) The language set forth in the written disclosure document 
required by paragraph (a) of this section shall be as follows:

                        Risk Disclosure Statement

    The risk of loss in trading commodity futures contracts can be 
substantial. You should, therefore, carefully consider whether such 
trading is suitable for you in light of your circumstances and financial 
resources. You should be aware of the following points:
    (1) You may sustain a total loss of the funds that you deposit with 
your broker to establish or maintain a position in the commodity futures 
market, and you may incur losses beyond these amounts. If the market 
moves against your position, you may be called upon by your broker to 
deposit a substantial amount of additional margin funds, on short 
notice, in order to maintain your position. If you do not provide the 
required funds within the time required by your broker, your position 
may be liquidated at a loss, and you will be liable for any resulting 
deficit in your account.
    (2) Under certain market conditions, you may find it difficult or 
impossible to liquidate a position. This can occur, for example, when 
the market reaches a daily price fluctuation limit (``limit move'').
    (3) Placing contingent orders, such as ``stop-loss'' or ``stop-
limit'' orders, will not necessarily limit your losses to the intended 
amounts, since market conditions on the exchange where the order is 
placed may make it impossible to execute such orders.
    (4) All futures positions involve risk, and a ``spread'' position 
may not be less risky than an outright ``long'' or ``short'' position.
    (5) The high degree of leverage (gearing) that is often obtainable 
in futures trading because of the small margin requirements can work 
against you as well as for you. Leverage (gearing) can lead to large 
losses as well as gains.
    (6) You should consult your broker concerning the nature of the 
protections available to safeguard funds or property deposited for your 
account.

ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER 
FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING 
FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE 
FOLLOWING ADDITIONAL RISKS:


[[Page 95]]


    (7) Foreign futures transactions involve executing and clearing 
trades on a foreign exchange. This is the case even if the foreign 
exchange is formally ``linked'' to a domestic exchange, whereby a trade 
executed on one exchange liquidates or establishes a position on the 
other exchange. No domestic organization regulates the activities of a 
foreign exchange, including the execution, delivery, and clearing of 
transactions on such an exchange, and no domestic regulator has the 
power to compel enforcement of the rules of the foreign exchange or the 
laws of the foreign country. Moreover, such laws or regulations will 
vary depending on the foreign country in which the transaction occurs. 
For these reasons, customers who trade on foreign exchanges may not be 
afforded certain of the protections which apply to domestic 
transactions, including the right to use domestic alternative dispute 
resolution procedures. In particular, funds received from customers to 
margin foreign futures transactions may not be provided the same 
protections as funds received to margin futures transactions on domestic 
exchanges. Before you trade, you should familiarize yourself with the 
foreign rules which will apply to your particular transaction.
    (8) Finally, you should be aware that the price of any foreign 
futures or option contract and, therefore, the potential profit and loss 
resulting therefrom, may be affected by any fluctuation in the foreign 
exchange rate between the time the order is placed and the foreign 
futures contract is liquidated or the foreign option contract is 
liquidated or exercised.

THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER 
ASPECTS OF THE COMMODITY MARKETS

    I hereby acknowledge that I have received and understood this risk 
disclosure statement.

________________________________________________________________________
Date

________________________________________________________________________
Signature of Customer

    (c) The Commission may approve for use in lieu of the risk 
disclosure document required by paragraph (b) of this section a risk 
disclosure statement approved by one or more foreign regulatory agencies 
or self-regulatory organizations if the Commission determines that such 
risk disclosure statement is reasonably calculated to provide the 
disclosure required by paragraph (b) of this section. Notice of risk 
disclosure statements that may be used to satisfy Commission disclosure 
requirements, what requirements such statements meet and the 
jurisdictions which accept each format will be set forth in appendix A 
to this section.
    (d) Any futures commission merchant, or in the case of an introduced 
account any introducing broker, may open a commodity futures account for 
a customer without obtaining the separate acknowledgments of disclosure 
and elections required by this section and by Sec. 1.33(g), and by 
Sec. Sec. 33.7 and 190.06 of this chapter, provided that:
    (1) Prior to the opening of such account, the futures commission 
merchant or introducing broker obtains an acknowledgment from the 
customer, which may consist of a single signature at the end of the 
futures commission merchant's or introducing broker's customer account 
agreement, or on a separate page, of the disclosure statements and 
elections specified in this section and Sec. 1.33(g), and in Sec. Sec. 
33.7 and 190.06 of this chapter, and which may include authorization for 
the transfer of funds from a segregated customer account to another 
account of such customer, as listed directly above the signature line, 
provided the customer has acknowledged by check or other indication next 
to a description of each specified disclosure statement or election that 
the customer has received and understood such disclosure statement or 
made such election; and
    (2) The acknowledgment referred to in paragraph (d)(1) of this 
section is accompanied by and executed contemporaneously with delivery 
of the disclosures and elective provisions required by this section and 
Sec. 1.33(g), and by Sec. Sec. 33.7 and 190.06 of this chapter.
    (e) The acknowledgment required by paragraph (a) of this section 
must be retained by the futures commission merchant or introducing 
broker in accordance with Sec. 1.31.
    (f) A futures commission merchant or, in the case of an introduced 
account an introducing broker, may open a commodity futures account for 
an ``institutional customer'' as defined in Sec. 1.3(g) without 
furnishing such institutional customer the disclosure statements or 
obtaining the acknowledgments required under paragraph (a) of this 
section, Sec. Sec. 1.33(g) and 1.65(a)(3), and Sec. Sec. 30.6(a), 
33.7(a) and 190.10(c) of this chapter.

[[Page 96]]

    (g) This section does not relieve a futures commission merchant or 
introducing broker from any other disclosure obligation it may have 
under applicable law.
    (h) Notwithstanding any other provision of this section or Sec. 
1.65, a person registered or required to be registered with the 
Commission as a futures commission merchant pursuant to sections 
4f(a)(1) or 4f(a)(2) of the Commodity Exchange Act and registered or 
required to be registered with the Securities and Exchange Commission as 
a broker or dealer pursuant to sections 15(b)(1) or 15(b)(11) of the 
Securities Exchange Act of 1934 and rules thereunder must provide to a 
customer or prospective customer, prior to the acceptance of any order 
for, or otherwise handling any transaction in or in connection with, a 
security futures product for a customer, the disclosures set forth in 
Sec. 41.41(b)(1) of this chapter.

(Approved by the Office of Management and Budget under control number 
3038-0022)

(Secs. 4b, 4c(b), 4g(1), 4l, 4o, and 8a(5), Commodity Exchange Act, 7 
U.S.C. 6b, 6c(b), 6g(1), 6l, 6o, and 12a(5)(1976), and sec. 217, 
Commodity Futures Trading Act of 1974, 88 Stat. 1405; secs. 2(a)(1), 4b, 
4c, 4d, 4f and 8a, Commodity Exchange Act, as amended (7 U.S.C. 2, 6b, 
6c, 6f and 12a))

[[Page 97]]

[GRAPHIC] [TIFF OMITTED] TC05OC91.028


[[Page 98]]


[GRAPHIC] [TIFF OMITTED] TC05OC91.029

                                * * * * *

[The following language should be printed on a page other than the pages 
containing the disclosure language above and may be omitted from the 
required disclosure statement]

    This disclosure document meets the risk disclosure requirements in 
the jurisdictions

[[Page 99]]

identified below ONLY for those instruments which are specified.

United States: Commodity futures, options on commodity futures and 
options on commodities subject to the Commodity Exchange Act.
United Kingdom: Futures, options on futures, options on commodities and 
options on equities traded by members of the United Kingdom Securities 
and Futures Authority pursuant to the Financial Services Act, 1986.
Ireland: Financial futures and options on financial futures traded by 
members of futures exchanges on exchanges whose rules have been approved 
by the Central Bank of Ireland under Chapter VIII of the Central Bank 
Act, 1989.

[43 FR 31890, July 24, 1978, as amended at 46 FR 63035, Dec. 30, 1981; 
48 FR 35290, Aug. 3, 1983; 50 FR 5383, Feb. 5, 1985; 58 FR 17503, Apr. 
5, 1993; 59 FR 34380, July 5, 1994; 59 FR 38119, July 27, 1994; 60 FR 
38182, July 25, 1995; 63 FR 8570, Feb. 20, 1998; 63 FR 52157, Sept. 30, 
1998; 66 FR 53518, Oct. 23, 2001; 67 FR 58297, Sept. 13, 2002]



Sec. 1.56  Prohibition of guarantees against loss.

    (a) For purposes of this section commodity interest means
    (1) Any contract for the purchase or sale of a commodity for future 
delivery; and
    (2) Any contract, agreement or transaction subject to Commission 
regulation under sections 4c or 19 of the Act.
    (b) No futures commission merchant or introducing broker may in any 
way represent that it will, with respect to any commodity interest in 
any account carried by the futures commission merchant for or on behalf 
of any person:
    (1) Guarantee such person against loss;
    (2) Limit the loss of such person; or
    (3) Not call for or attempt to collect initial and maintenance 
margin as established by the rules of the applicable board of trade.
    (c) No person may in any way represent that a futures commission 
merchant or introducing broker will engage in any of the acts or 
practices described in paragraph (b) of this section.
    (d) This section shall not be construed to prevent a futures 
commission merchant or introducing broker from:
    (1) Assuming or sharing in the losses resulting from an error or 
mishandling of an order; or
    (2) Participating as a general partner in a commodity pool which is 
a limited partnership.
    (e) This section shall not affect any guarantee entered into prior 
to January 28, 1982, but this section shall apply to any extension, 
modification or renewal thereof entered into after such date.

[46 FR 62844, Dec. 29, 1981, as amended at 48 FR 35291, Aug. 3, 1983]



Sec. 1.57  Operations and activities of introducing brokers.

    (a) Each introducing broker must:
    (1) Open and carry each customer's and option customer's account 
with a carrying futures commission merchant on a fully-disclosed basis: 
Provided, however, That an introducing broker which has entered into a 
guarantee agreement with a futures commission merchant in accordance 
with the provisions of Sec. 1.10(j) of this part must open and carry 
such customer's and option customer's account with such guarantor 
futures commission merchant on a fully-disclosed basis; and
    (2) Transmit promptly for execution all customer and option customer 
orders to:
    (i) A carrying futures commission merchant; or
    (ii) a floor broker, if the introducing broker identifies its 
carrying futures commission merchant and that carrying futures 
commission merchant is also the clearing member with respect to the 
customer's or option customer's order.
    (b) An introducing broker may not carry proprietary accounts, nor 
may an introducing broker carry accounts in foreign futures.
    (c) An introducing broker may not accept any money, securities or 
property (or extend credit in lieu thereof) to margin, guarantee or 
secure any trades or contracts of customers or option customers, or any 
money, securities or property accruing as a result of such trades or 
contracts: Provided, however, That an introducing broker may deposit a 
check in a qualifying account or forward a check drawn by a customer or 
option customer if:

[[Page 100]]

    (1) The futures commission merchant carrying the customer's or 
option customer's account authorizes the introducing broker, in writing, 
to receive a check in the name of the futures commission merchant, and 
the introducing broker retains such written authorization in its files 
in accordance with Sec. 1.31;
    (2) The check is payable to the futures commission merchant carrying 
the customer's or option customer's account;
    (3) The check is deposited by the introducing broker, on the same 
day upon which it is received, in a bank or trust company located in the 
United States in a qualifying account, or the check is mailed or 
otherwise transmitted by the introducing broker to the futures 
commission merchant on the same day upon which it is received;
    (4) For purposes of this paragraph (c), a qualifying account shall 
be deemed to be an account:
    (i) Which is maintained in an account name which clearly identifies 
the funds therein as belonging to commodity or option customers of the 
futures commission merchant carrying the customer's or option customer's 
account;
    (ii) For which the bank or trust company restricts withdrawals to 
withdrawals by the carrying futures commission merchant;
    (iii) For which the bank or trust company prohibits the introducing 
broker or anyone acting upon its behalf from withdrawing funds; and
    (iv) For which the bank or trust company provides the futures 
commission merchant carrying the customer's or option customer's account 
with a written acknowledgment, which the futures commission merchant 
must retain in its files in accordance with Sec. 1.31, that it was 
informed that the funds deposited therein are those of commodity or 
option customers and are being held in accordance with the provisions of 
the Act and these regulations.

[48 FR 35291, Aug. 3, 1983, as amended at 57 FR 23143, June 2, 1992]



Sec. 1.58  Gross collection of exchange-set margins.

    (a) Each futures commission merchant which carries a commodity 
futures or commodity option position for another futures commission 
merchant or for a foreign broker on an omnibus basis must collect, and 
each futures commission merchant and foreign broker for which an omnibus 
account is being carried must deposit, initial and maintenance margin on 
each position reported in accordance with Sec. 17.04 of this chapter at 
a level no less than that established for customer accounts by the rules 
of the applicable contract market.
    (b) If the futures commission merchant which carries a commodity 
futures or commodity option position for another futures commission 
merchant or for a foreign broker on an omnibus basis allows a position 
to be margined as a spread position or as a hedged position in 
accordance with the rules of the applicable contract market, the 
carrying futures commission merchant must obtain and retain a written 
representation from the futures commission merchant or from the foreign 
broker for which the omnibus account is being carried that each such 
position is entitled to be so margined.

[61 FR 19187, May 1, 1996]



Sec. 1.59  Activities of self-regulatory organization employees, governing 
board members, committee members, and consultants.

    (a) Definitions. For purposes of this section:
    (1) Self-regulatory organization means ``self-regulatory 
organization,'' as defined in Commission regulation 1.3(ee), and 
includes the term ``clearing organization,'' as defined in Commission 
regulation 1.3(d).
    (2) Governing board member means a member, or functional equivalent 
thereof, of the board of governors of a self-regulatory organization.
    (3) Committee member means a member, or functional equivalent 
thereof, of any committee of a self-regulatory organization.
    (4) Employee means any person hired or otherwise employed on a 
salaried or contract basis by a self-regulatory organization, but does 
not include:
    (i) Any governing board member compensated by a self-regulatory 
organization solely for governing board activities; or

[[Page 101]]

    (ii) Any committee member compensated by a self-regulatory 
organization solely for committee activities; or
    (iii) Any consultant hired by a self-regulatory organization.
    (5) Material information means information which, if such 
information were publicly known, would be considered important by a 
reasonable person in deciding whether to trade a particular commodity 
interest on a contract market. As used in this section, ``material 
information'' includes, but is not limited to, information relating to 
present or anticipated cash, futures, or option positions, trading 
strategies, the financial condition of members of self-regulatory 
organizations or members of linked exchanges or their customers or 
option customers, or the regulatory actions or proposed regulatory 
actions of a self-regulatory organization or a linked exchange.
    (6) Non-public information means information which has not been 
disseminated in a manner which makes it generally available to the 
trading public.
    (7) Linked exchange means: (i) any board of trade, exchange or 
market outside the United States, its territories or possessions, which 
has an agreement with a contract market in the United States that 
permits positions in a commodity interest which have been established on 
one of the two markets to be liquidated on the other market; (ii) any 
board of trade, exchange or market outside the United States, its 
territories or possessions, the products of which are listed on a United 
States contract market or a trading facility thereof; (iii) any 
securities exchange, the products of which are held as margin in a 
commodity account or cleared by a securities clearing organization 
pursuant to a cross-margining arrangement with a futures clearing 
organization; or (iv) any clearing organization which clears the 
products of any of the foregoing markets.
    (8) Commodity interest means any commodity futures or commodity 
option contract traded on or subject to the rules of a contract market 
or linked exchange, or cash commodities traded on or subject to the 
rules of a board of trade which has been designated as a contract 
market.
    (9) Related commodity interest means any commodity interest which is 
traded on or subject to the rules of a contract market, linked exchange, 
or other board of trade, exchange or market, other than the self-
regulatory organization by which a person is employed, and with respect 
to which:
    (i) Such employing self-regulatory organization has recognized or 
established intermarket spread margins or other special margin treatment 
between that other commodity interest and a commodity interest which is 
traded on or subject to the rules of the employing self-regulatory 
organization; or
    (ii) Such other self-regulatory organization has recognized or 
established intermarket spread margins or other special margin treatment 
with another commodity interest as to which the person has access to 
material, nonpublic information.
    (10) Pooled investment vehicle means a trading vehicle organized and 
operated as a commodity pool within regulation 4.10(d), and whose units 
of participation have been registered under the Securities Act of 1933, 
or a trading vehicle for which regulation 4.5 makes available relief 
from regulation as a commodity pool operator, i.e., registered 
investment companies, insurance company separate accounts, bank trust 
funds, and certain pension plans.
    (b) Employees of self-regulatory organizations; Self-regulatory 
organization rules. (1) Each self-regulatory organization must maintain 
in effect rules which have been submitted to the Commission pursuant to 
Section 5a(a)(12)(A) of the Act and Sec. 1.41 (or, pursuant to section 
17(j) of the Act in the case of a registered futures association) that, 
at a minimum, prohibit:
    (i) Employees of the self-regulatory organization from:
    (A) Trading, directly or indirectly, in any commodity interest 
traded on or cleared by the employing contract market or clearing 
organization;
    (B) Trading, directly or indirectly, in any related commodity 
interest;
    (C) Trading, directly or indirectly, in a commodity interest traded 
on or cleared by contract markets or clearing organizations other than 
the employing self-regulatory organization if

[[Page 102]]

the employee has access to material, non-public information concerning 
such commodity interest;
    (D) Trading, directly or indirectly, in a commodity interest traded 
on or cleared by a linked exchange if the employee has access to 
material, non-public information concerning such commodity interest; and
    (ii) Employees of the self-regulatory organization from disclosing 
to any other person any material, non-public information which such 
employee obtains as a result of his or her employment at the self-
regulatory organization where such employee has or should have a 
reasonable expectation that the information disclosed may assist another 
person in trading any commodity interest; Provided, however, That such 
rules shall not prohibit disclosures made in the course of an employee's 
duties, or disclosures made to another self-regulatory organization, 
linked exchange, court of competent jurisdiction or representative of 
any agency or department of the federal or state government acting in 
his or her official capacity.
    (2) Each self-regulatory organization may adopt rules, which must be 
submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act 
and Commission regulation 1.41 (or, pursuant to section 17(j) of the Act 
in the case of a registered futures association), which set forth 
circumstances under which exemptions from the trading prohibition 
contained in paragraph (b)(1)(i) of this section may be granted; such 
exemptions are to be administered by the self-regulatory organization on 
a case-by-case basis. Specifically, such circumstances may include:
    (i) Participation by an employee in pooled investment vehicles where 
the employee has no direct or indirect control with respect to 
transactions executed for or on behalf of such vehicles; and
    (ii) Trading by an employee under circumstances enumerated by the 
self-regulatory organization in rules which the self-regulatory 
organization determines are not contrary to the purposes of this 
regulation, the Commodity Exchange Act, the public interest, or just and 
equitable principles of trade.
    (c) Governing board members, committee members, and consultants; 
Self-regulatory organization rules. Each self-regulatory organization 
must maintain in effect rules which have been submitted to the 
Commission pursuant to Section 5a(a)(12)(A) of the Act and Sec. 1.41 
(or, pursuant to Section 17(j) of the Act in the case of a registered 
futures association) which provide that no governing board member, 
committee member, or consultant shall use or disclose--for any purpose 
other than the performance of official duties as a governing board 
member, committee member, or consultant--material, non-public 
information obtained as a result of the performance of such person's 
official duties.
    (d) Prohibited conduct. (1) No employee, governing board member, 
committee member, or consultant shall:
    (i) Trade for such person's own account, or for or on behalf of any 
other account, in any commodity interest, on the basis of any material, 
non-public information obtained through special access related to the 
performance of such person's official duties as an employee, governing 
board member, committee member, or consultant; or
    (ii) Disclose for any purpose inconsistent with the performance of 
such person's official duties as an employee, governing board member, 
committee member, or consultant any material, non-public information 
obtained through special access related to the performance of such 
duties.
    (2) No person shall trade for such person's own account, or for or 
on behalf of any other account, in any commodity interest, on the basis 
of any material, non-public information that such person knows was 
obtained in violation of paragraph (d)(1) of this section from an 
employee, governing board member, committee member, or consultant.

[58 FR 54973, Oct. 25, 1993, as amended at 65 FR 47847, Aug. 4, 2000]



Sec. 1.60  Pending legal proceedings.

    (a) Every contract market shall submit to the Commission copies of 
the complaint, any dispositive or partially dispositive decision, any 
notice of appeal filed concerning such decisions and such further 
documents as the

[[Page 103]]

Commission may thereafter request filed in any material legal proceeding 
to which the contract market is a party or its property or assets is 
subject.
    (b) Every futures commission merchant shall sumit to the Commission 
copies of any dispositive or partially dispositive decision for which a 
notice of appeal has been filed, the notice of appeal and such further 
documents as the Commission may thereafter request filed in any material 
legal proceeding to which the futures commission merchant is a party or 
its property or assets is subjects.
    (c) Every contract market shall submit to the Commission copies of 
the complaint, any dispositive or partially dispositive decision, any 
notice of appeal filed concerning such decisions and such further 
documents as the Commission may thereafter request filed in any material 
legal proceeding instituted against any officer, director, or other 
official of the contract market arising from conduct in such person's 
capacity as a contract market official and alleging violations of:
    (1) The act or any rule, regulation, or order thereunder;
    (2) the constitution, bylaws or rules of the contract market; or
    (3) the applicable provisions of state law relating to the duties of 
officers, directors, or other officials of business organizations.
    (d) Every futures commission merchant shall submit to the Commission 
copies of any dispositive or partially dispositive decision concerning 
which a notice of appeal has been filed, the notice of appeal, and such 
further documents as the Commission may thereafter request filed in any 
material legal proceeding instituted against any person who is a 
principal of the futures commission merchant (as that term is defined in 
Sec. 3.1(a) of this chapter) arising from conduct in such person's 
capacity as a principal of the futures commission merchant and alleging 
violations of: (1) The Act or any rule, regulation, or order thereunder; 
or (2) provisions of state law relating to a duty or obligation owed by 
such a principal.
    (e) All documents required by this section to be submitted to the 
Commission shall be mailed via first-class or submitted by other more 
expeditious means to the Commission's headquarters office in Washington, 
DC, Attention: Office of the General Counsel. All documents required by 
this section to be submitted to the Commission as to matters pending on 
the effective date of the section (May 25, 1984), shall be mailed to the 
Commission within 45 days of that effective date. Thereafter, all 
complaints required by this section to be submitted to the Commission by 
contract markets shall be mailed to the Commission within 10 days after 
the initiation of the legal proceedings to which they relate, all 
decisions required to be submitted by contract markets shall be mailed 
within 10 days of their date of issuance, all notices of appeal required 
to be submitted by contract markets shall be mailed within 10 days of 
the filing or receipt by the contract market of the notice of appeal, 
and all decisions and notices of appeal required to be submitted by 
futures commission merchants shall be mailed within 10 days of the 
filing or receipt by the futures commission merchant of the relevant 
notice of appeal. For purposes of paragraph (a), (b), (c) and (d) of 
this rule, a ``material legal proceeding'' includes but is not limited 
to actions involving alleged violations of the Commodity Exchange Act or 
the Commission's regulations. However, a legal proceeding is not 
``material'' for the purposes of this rule if the proceeding is not in a 
federal or state court or if the Commission is a party.

[49 FR 17750, Apr. 25, 1984]



Sec. 1.61  [Reserved]



Sec. 1.62  Contract market requirement for floor broker and floor trader 
registration.

    (a)(1) Each contract market shall adopt, maintain in effect, and 
enforce rules which have become effective pursuant to section 
5a(a)(12)(A) of the Act and Sec. 1.41 and which provide that no person 
in or surrounding any pit, ring, post, or other place provided by such 
contract market for the meeting of persons similarly engaged may:
    (i) Purchase or sell for any other person any commodity for future 
delivery, or any commodity option, on or subject to the rules of that 
contract market,

[[Page 104]]

unless such person is registered or has been granted a temporary license 
as a floor broker; or
    (ii) Purchase or sell solely for such person's own account, any 
commodity for future delivery, or any commodity option, on or subject to 
the rules of that contract market, unless such person is registered or 
has been granted a temporary license as a floor trader, or has been 
granted a temporary license as a floor broker to act as a floor trader, 
in accordance with section 4f of the Act and Sec. 3.11 or Sec. 3.40 of 
this chapter, and such temporary license or registration has not been 
terminated, revoked or withdrawn: Provided, however, That such contract 
market rules must provide that a floor broker or floor trader will be 
prohibited from engaging in activities requiring registration under the 
Act or from representing himself to be a registrant under the Act or the 
representative or agent of any registrant during the pendency of any 
suspension of such person's registration or the suspension by a contract 
market of access of such person to any pit, ring, post or other place 
provided by such contract market for the meeting of persons engaged in 
purchasing and selling any commodity for future delivery or commodity 
option on or subject to the rules of that contract market.
    (2) Each contract market shall also adopt, maintain in effect and 
enforce rules which have become effective pursuant to section 
5a(a)(12)(A) of the Act and Sec. 1.41 which provide for requests for 
withdrawal of floor broker or floor trader registration using Form 8-W 
in accordance with Sec. 3.33 of this chapter, which require training of 
floor brokers and floor traders in accordance with Sec. 3.34 of this 
chapter and which require review of registration information by floor 
brokers and by floor traders every three years in accordance with Sec. 
3.11(d) of this chapter.
    (b) Each contract market must notify the Commission of any facts 
regarding a floor broker or floor trader or an applicant for 
registration as a floor broker or floor trader, or a floor trader whose 
name appears on a list submitted in accordance with Sec. 1.66 in order 
to qualify for a temporary no-action position thereunder, who has been 
granted trading privileges at the contract market, which are set forth 
as statutory disqualifications in section 8a(2) of the Act (unless such 
facts result from an enforcement action filed by the Commission or a 
disciplinary action taken by another contract market) or which are 
terminations of floor trading privileges for cause under Sec. 9.11(c) 
of this chapter within ten business days of the date upon which the 
contract market first knows of such facts. Notice to the Commission 
shall be sufficient if the contract market gives notice to the Director 
of the Division of Clearing and Intermediary Oversight or the Director's 
designee by facsimile transmission and/or first class mail or equivalent 
means to the Commission at its Washington, DC office (Attn: Division of 
Clearing and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581).

[58 FR 19589, Apr. 15, 1993; 59 FR 5700, Feb. 8, 1994, as amended at 60 
FR 49334, Sept. 25, 1995; 67 FR 62351, Oct. 7, 2002]



Sec. 1.63  Service on self-regulatory organization governing boards 
or committees by persons with disciplinary histories.

    (a) Definitions. For purposes of this section:
    (1) Self-regulatory organization means a ``self-regulatory 
organization'' as defined in Commission regulation 1.3(ee) (Sec. 
1.3(ee)), and includes a ``clearing organization'' as defined in 
Commission regulation 1.3(d) (Sec. 1.3(d)), except as defined in 
paragraph (b)(6) of this section.
    (2) Disciplinary committee means any person or committee of persons, 
or any subcommittee thereof, that is authorized by a self-regulatory 
organization to issue disciplinary charges, to conduct disciplinary 
proceedings, to settle disciplinary charges, to impose disciplinary 
sanctions or to hear appeals thereof.
    (3) Arbitration panel means any person or panel empowered by a self-
regulatory organization to arbitrate disputes involving such 
organization's members or their customers.
    (4) Oversight panel means any panel authorized by a self-regulatory 
organization to review, recommend or establish policies or procedures 
with respect

[[Page 105]]

to the self-regulatory organization's surveillance, compliance, rule 
enforcement or disciplinary responsibilities.
    (5) Final decision means:
    (i) A decision of a self-regulatory organization which cannot be 
further appealed within the self-regulatory organization, is not subject 
to the stay of the Commission or a court of competent jurisdiction, and 
has not been reversed by the Commission or any court of competent 
jurisdiction; or,
    (ii) Any decision by an administrative law judge, a court of 
competent jurisdiction or the Commission which has not been stayed or 
reversed.
    (6) Disciplinary offense means:
    (i) Any violation of the rules of a self-regulatory organization 
except those rules related to
    (A) Decorum or attire,
    (B) Financial requirements, or
    (C) Reporting or recordkeeping unless resulting in fines aggregating 
more than $5,000 within any calendar year;
    (ii) Any rule violation described in subparagraphs (a)(6)(i) (A) 
through (C) of this regulation which involves fraud, deceit or 
conversion or results in a suspension or expulsion;
    (iii) Any violation of the Act or the regulations promulgated 
thereunder; or,
    (iv) Any failure to exercise supervisory responsibility with respect 
to acts described in paragraphs (a)(6) (i) through (iii) of this section 
when such failure is itself a violation of either the rules of a self-
regulatory organization, the Act or the regulations promulgated 
thereunder.
    (v) A disciplinary offense must arise out of a proceeding or action 
which is brought by a self-regulatory organization, the Commission, any 
federal or state agency, or other governmental body.
    (7) Settlement agreement means any agreement consenting to the 
imposition of sanctions by a self-regulatory organization, a court of 
competent jurisdiction or the Commission.
    (b) Each self-regulatory organization must maintain in effect rules 
which have been submitted to the Commission pursuant to section 
5a(a)(12)(A) of the Act and Sec. 1.41 or, in the case of a registered 
futures association, pursuant to section 17(j) of the Act, that render a 
person ineligible to serve on its disciplinary committees, arbitration 
panels, oversight panels or governing board who:
    (1) Was found within the prior three years by a final decision of a 
self-regulatory organization, an administrative law judge, a court of 
competent jurisdiction or the Commission to have committed a 
disciplinary offense;
    (2) Entered into a settlement agreement within the prior three years 
in which any of the findings or, in the absence of such findings, any of 
the acts charged included a disciplinary offense;
    (3) Currently is suspended from trading on any contract market, is 
suspended or expelled from membership with any self-regulatory 
organization, is serving any sentence of probation or owes any portion 
of a fine imposed pursuant to either:
    (i) A finding by a final decision of a self-regulatory organization, 
an administrative law judge, a court of competent jurisdiction or the 
Commission that such person committed a disciplinary offense; or,
    (ii) A settlement agreement in which any of the findings or, in the 
absence of such findings, any of the acts charged included a 
disciplinary offense.
    (4) Currently is subject to an agreement with the Commission or any 
self-regulatory organization not to apply for registration with the 
Commission or membership in any self-regulatory organization;
    (5) Currently is subject to or has had imposed on him within the 
prior three years a Commission registration revocation or suspension in 
any capacity for any reason, or has been convicted within the prior 
three years of any of the felonies listed in section 8a(2)(D) (ii) 
through (iv) of the Act;
    (6) Currently is subject to a denial, suspension or disqualification 
from serving on the disciplinary committee, arbitration panel or 
governing board of any self-regulatory organization as that term is 
defined in section 3(a)(26) of the Securities Exchange Act of 1934.
    (c) No person may serve on a disciplinary committee, arbitration 
panel, oversight panel or governing board of a self-regulatory 
organization if such

[[Page 106]]

person is subject to any of the conditions listed in paragraphs (b) (1) 
through (6) of this section.
    (d) Each self-regulatory organization shall submit to the Commission 
a schedule listing all those rule violations which constitute 
disciplinary offenses as defined in paragraph (a)(6) (i) of this section 
and to the extent necessary to reflect revisions shall submit an amended 
schedule within thirty days of the end of each calendar year. Each self-
regulatory organization must maintain and keep current the schedule 
required by this section, post the schedule in a public place designed 
to provide notice to members and otherwise ensure its availability to 
the general public.
    (e) Each self-regulatory organization shall submit to the Commission 
within thirty days of the end of each calendar year a certified list of 
any persons who have been removed from its disciplinary committees, 
arbitration panels, oversight panels or governing board pursuant to the 
requirements of this regulation during the prior year.
    (f) Whenever a self-regulatory organization finds by final decision 
that a person has committed a disciplinary offense and such finding 
makes such person ineligible to serve on that self-regulatory 
organization's disciplinary committees, arbitration panels, oversight 
panels or governing board, the self-regulatory organization shall inform 
the Commission of that finding and the length of the ineligibility in 
any notice it is required to provide to the Commission pursuant to 
either section 17(h)(1) of the Act or Commission regulation 9.11.

[55 FR 7890, Mar. 6, 1990, as amended at 58 FR 37653, July 13, 1993; 64 
FR 23, Jan. 4, 1999]



Sec. 1.64  Composition of various self-regulatory organization governing 
boards and major disciplinary committees.

    (a) Definitions. For purposes of this section:
    (1) Self-regulatory organization means ``self-regulatory 
organization'' as defined in Sec. 1.3(ee), not including a ``clearing 
organization'' as defined in Sec. 1.3(d).
    (2) Major disciplinary committee means a committee of persons who 
are authorized by a self-regulatory organization to conduct disciplinary 
hearings, to settle disciplinary charges, to impose disciplinary 
sanctions or to hear appeals thereof in cases involving any violation of 
the rules of the self-regulatory organization except those which:
    (i) Are related to:
    (A) Decorum or attire,
    (B) Financial requirements, or
    (C) Reporting or recordkeeping; and,
    (ii) Do not involve fraud, deceit or conversion.
    (3) Regular voting member of a governing board means any person who 
is eligible to vote routinely on matters being considered by the board 
and excludes those members who are only eligible to vote in the case of 
a tie vote by the board.
    (4) Membership interest (i) In the case of a contract market, each 
of the following will be considered a different membership interest:
    (A) Floor brokers,
    (B) Floor traders,
    (C) Futures commission merchants,
    (D) Producers, consumers, processors, distributors, and 
merchandisers of commodities traded on the particular contract market,
    (E) Participants in a variety of pits or principal groups of 
commodities traded on the particular contract market; and,
    (F) Other market users or participants; except that with respect to 
paragraph (c)(2) of this section, a contract market may define 
membership interests according to the different pits or principal groups 
of commodities traded on the contract market.
    (ii) In the case of a registered futures association, each of the 
following will be considered a different membership interest:
    (A) Futures commission merchants,
    (B) Introducing brokers,
    (C) Commodity pool operators,
    (D) Commodity trading advisors; and,
    (E) Associated persons, except that under paragraph (c)(3) of this 
section an associated person will be deemed to represent the same 
membership interest as its sponsor.
    (b) Each self-regulatory organization must maintain in effect 
standards and

[[Page 107]]

procedures with respect to its governing board which have been submitted 
to the Commission pursuant to section 5a(a)(12)(A) of the Act and Sec. 
1.41 or, when applicable to a registered futures association, pursuant 
to section 17(j) of the Act, that ensure:
    (1) That twenty percent or more of the regular voting members of the 
board are persons who:
    (i) Are knowledgeable of futures trading or financial regulation or 
are otherwise capable of contributing to governing board deliberations; 
and,
    (ii) (A) Are not members of the self-regulatory organization,
    (B) Are not currently salaried employees of the self-regulatory 
organization,
    (C) Are not primarily performing services for the self-regulatory 
organization in a capacity other than as a member of the self-regulatory 
organization's governing board, or
    (D) Are not officers, principals or employees of a firm which holds 
a membership at the self-regulatory organization either in its own name 
or through an employee on behalf of the firm;
    (2) In the case of a contract market, that ten percent or more of 
the regular voting members of the governing board be comprised where 
applicable of persons representing farmers, producers, merchants or 
exporters of principal commodities underlying a commodity futures or 
commodity option traded on the contract market; and
    (3) That the board's membership includes a diversity of membership 
interests. The self-regulatory organization must be able to demonstrate 
that the board membership fairly represents the diversity of interests 
at such self-regulatory organization and is otherwise consistent with 
this regulation's composition requirements;
    (c) Each self-regulatory organization must maintain in effect rules 
with respect to its major disciplinary committees which have been 
submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act 
and Sec. 1.41 or, when applicable to a registered futures association, 
pursuant to section 17(j) of the Act, that ensure:
    (1) That at least one member of each major disciplinary committee or 
hearing panel thereof be a person who is not a member of the self-
regulatory organization whenever such committee or panel is acting with 
respect to a disciplinary action in which:
    (i) The subject of the action is a member of the self-regulatory 
organization's:
    (A) Governing board, or
    (B) Major disciplinary committee; or,
    (ii) Any of the charged, alleged or adjudicated contract market rule 
violations involve:
    (A) Manipulation or attempted manipulation of the price of a 
commodity, a futures contract or an option on a futures contract, or
    (B) Conduct which directly results in financial harm to a non-member 
of the contract market;
    (2) In the case of a contract market, that more than fifty percent 
of each major disciplinary committee or hearing panel thereof include 
persons representing membership interests other than that of the subject 
of the disciplinary proceeding being considered;
    (3) In the case of a registered futures association, that each major 
disciplinary committee or hearing panel thereof include persons 
representing membership interests other than that of the subject of the 
disciplinary proceeding being considered; and,
    (4) That each major disciplinary committee or hearing panel thereof 
include sufficient different membership interests so as to ensure 
fairness and to prevent special treatment or preference for any person 
in the conduct of a committee's or the panel's responsibilities.
    (d) Each self-regulatory organization must submit to the Commission 
within thirty days after each governing board election a list of the 
governing board's members, the membership interests they represent and 
how the composition of the governing board otherwise meets the 
requirements of Sec. 1.64(b) and the self-regulatory organization's 
implementing standards and procedures.

[58 FR 37654, July 13, 1993; 59 FR 5082, Feb. 3, 1994]



Sec. 1.65  Notice of bulk transfers and disclosure obligations to customers.

    (a) Notice and Disclosure to Customers. (1) Prior to transferring a 
customer account to another futures commission merchant or introducing 
broker other

[[Page 108]]

than at the request of the customer, a futures commission merchant or 
introducing broker must obtain the customer's specific consent to the 
transfer.
    (2) If the customer account agreement contains a valid consent by 
the customer to prospective transfers of the account, the transferor 
futures commission merchant or introducing broker may transfer the 
account if the customer is provided with written notice of, and a 
reasonable opportunity to object to, the transfer and the customer has 
not asserted an objection to the transfer or given other instructions as 
to the disposition of the account. The notice to the customer must 
include:
    (i) A clear statement of the reason(s) for the transfer, the name, 
address and telephone number of the proposed transferee firm and other 
information material to the transfer;
    (ii) A statement that the customer is not required to accept the 
proposed transfer and may direct the transfer or firm to liquidate the 
account or ransfer the account to a firm of the customer's selection;
    (iii) The name, telephone number and address of a contact person at 
the transferor firm to whom the customer may give instructions as to the 
disposition of the account;
    (iv) Notice that a failure to respond to the letter within a 
specified time period, which must be a reasonable period in the 
circumstances, will be deemed consent to the transfer; and
    (v) A clear statement as to the means by which the customer may 
object to or otherwise respond to the notice of proposed transfer.
    (3) Where customer accounts are transferred to a futures commission 
merchant or introducing broker, other than at the customer's request, 
the transferee introducing broker or futures commission merchant must 
provide each customer whose account is transferred with the risk 
disclosure statements and acknowledgments required by Sec. 1.55 
(domestic futures and foreign futures and options trading), and 
Sec. Sec. 33.7 (domestic exchange-traded commodity options) and 
190.10(c) (non-cash margin--to be furnished by futures commission 
merchants only) of this chapter and receive the required acknowledgments 
within sixty days of the transfer of accounts. This requirement shall 
not apply:
    (i) As to customers owning transferred accounts for which the 
transferee futures commission merchant or introducing broker has clear 
written evidence that the customer has received and acknowledged the 
required disclosure documents; or
    (ii) As to customers for which the transferee futures commission 
merchant or introducing broker has clear evidence that such customer was 
at the time the account was opened by the transferring futures 
commission merchant or introducing broker, or is at the time the account 
is being transferred, a customer listed in Sec. 1.55(f); or
    (iii) If the transfer of accounts is made from one introducing 
broker to another introducing broker guaranteed by the same futures 
commission merchant pursuant to a guarantee agreement in accordance with 
the requirements of Sec. 1.10(j) and such futures commission merchant 
maintains the relevant acknowledgments required by Sec. 1.55(a)(1)(ii) 
and Sec. 33.7(a)(1)(ii) of this chapter and can establish compliance 
with Sec. 190.10(c) of this chapter.
    (b) Notice to the Commission. Each futures commission merchant or 
introducing broker shall file with the Commission, at least five 
business days in advance of the transfer, notice of any transfer of 
customer accounts carried or introduced by such futures commission 
merchant or introducing broker that is not initiated at the request of 
the customer, where the transfer involves the lesser of:
    (1) 25 percent of the total number of customer accounts carried or 
introduced by such firm if that percentage represents at least 100 
accounts; or
    (2) 50 percent or more of the total number of customer accounts 
carried or introduced by such firm. The computation of the percentage 
and number of accounts must be based on the total number of accounts 
carried by the transferor futures commission merchant or introduced by 
the introducing broker, irrespective of whether such accounts are 
transferred to a single or multiple transferees.

[[Page 109]]

    (c) The notice required by paragraph (b) of this section shall 
include:
    (1) The name, principal business address and telephone number of the 
transferor futures commission merchant or introducing broker;
    (2) The name, principal business address and telephone number of 
each transferee futures commission merchant or introducing broker;
    (3) The designated self-regulatory organization for the transferor 
and transferee firms;
    (4) A brief statement as to the reasons for the transfer;
    (5) A copy of the notice to customers informing them of the proposed 
transfer and providing an opportunity to object to such transfer; and
    (6) A statement of the number of accounts to be transferred and the 
estimated liquidating equity of the accounts to be transferred.
    (d) The notice required by paragraph (b) of this section shall be 
filed with the Deputy Director, Compliance and Registration Section, 
Division of Clearing and Intermediary Oversight, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581; the National Futures Association Attn: Vice 
President-Compliance; and the designated self-regulatory organization 
for the transferor firm.
    (e) In the event that the notice required by paragraph (b) of this 
section cannot be filed with the Commission at least five days prior to 
the account transfer, the transferee futures commission merchant or 
introducing broker shall file such notice as soon as practicable and no 
later than the day of the transfer. Such notice shall include a brief 
statement explaining the circumstances necessitating the delay in 
filing.
    (f) The requirements of this section shall not affect the 
obligations of a futures commission merchant or introducing broker under 
the rules of a self-regulatory organization or applicable customer 
account agreement with respect to transfer of accounts.
    (g) If a proposed transfer is not completed in accordance with the 
notice required to be filed by paragraph (b) of this section, a 
corrective notice shall be filed within five business days of the date 
such proposed transfer was to occur explaining why the proposed transfer 
was not completed.

[58 FR 17504, Apr. 5, 1993, as amended at 60 FR 49334, Sept. 25, 1995; 
63 FR 8571, Feb. 20, 1998; 67 FR 62351, Oct. 7, 2002]



Sec. 1.66  No-action positions with respect to floor traders.

    (a) Notwithstanding any other provision of law, if a contract market 
submits to the National Futures Association by April 26, 1993 a list of 
floor traders who were granted trading privileges on that contract 
market on or before April 26, 1993, and whose floor trading privileges 
remain in effect, which includes the name, date of birth and social 
security number of such floor traders, as well as facts regarding such 
floor traders which are set forth as statutory disqualifications in 
section 8a(2) of the Act if the contract market knows of such facts, and 
such list is signed by the chief operating officer of the contract 
market, the Commission will not commence an enforcement proceeding 
against a floor trader on that list based solely upon the floor trader's 
failure to register or receive a temporary license under section 4f of 
the Act and Sec. 3.11 of this chapter, nor will the Commission commence 
an enforcement proceeding against the contract market under Sec. 1.62 
for failing to bar such floor trader from operating as such: Provided, 
however, That for those floor traders listed as to whom the contract 
market knows of facts set forth as statutory disqualifications in 
section 8a(2) of the Act, the no-action position contained in paragraph 
(a) of this section will only apply if the contract market submits a 
supplemental statement signed by the chief operating officer of the 
contract market stating that, in light of the Congressional mandate 
requiring registration of floor traders under the Act, the contract 
market acknowledges its responsibility to take affirmative action to 
conduct appropriate surveillance of such floor traders. These no-action 
positions shall expire upon the floor's trader being granted or denied 
registration under the Act, or on June 11, 1993, whichever comes 
earliest: Provided, however, That if the floor trader files

[[Page 110]]

an application for registration in accordance with Sec. 3.11 of this 
chapter with the National Futures Association by June 11, 1993, the no-
action positions for the floor trader and the contract market as to the 
registration of such floor trader will be extended until the floor 
trader is granted or denied registration under the Act, unless an 
Administrative Law Judge issues an interim order suspending the no-
action position as to such floor trader in accordance with paragraph (b) 
of this section or the application for registration is withdrawn.
    (b) Suspension of no-action position under paragraph (a) of this 
section pursuant to section 8a(2) of the Act--(1) Notice. On the basis 
of information obtained by the Commission, the Commission may at any 
time serve notice upon a floor trader whose name appears on a list 
submitted in accordance with paragraph (a) of this section that:
    (i) The Commission alleges and is prepared to prove that such floor 
trader is subject to one or more of the statutory disqualifications set 
forth in section 8a(2) of the Act;
    (ii) An Administrative Law Judge shall make a determination, based 
upon written evidence, as to whether the floor trader is subject to such 
statutory disqualification; and
    (iii) If the floor trader is found to be subject to a statutory 
disqualification, the no-action status of the floor trader under 
paragraph (a) of this section may be suspended and the floor trader 
ordered to show cause why registration should not be denied.
    (2) Written submission. If the floor trader wishes to challenge the 
accuracy of the allegations set forth in the notice, the floor trader 
may submit written evidence limited to the type described in Sec. 
3.60(b)(1) of this chapter. Such written submission must be served upon 
the Division of Enforcement and filed with the Proceedings Clerk within 
twenty days of the date of service of notice to the floor trader.
    (3) Reply. Within ten days of receipt of any written submission 
filed by the floor trader, the Division of Enforcement may serve upon 
the floor trader and file with the Proceedings Clerk a reply.
    (4) Determination by Administrative Law Judge. A determination by 
the Administrative Law Judge as to whether the floor trader is subject 
to a statutory disqualification must be based upon the evidence of the 
statutory disqualification, notice with proof of service, the written 
submission, if any, filed by the floor trader in response thereto, any 
written reply submitted by the Division of Enforcement and such other 
papers as the Administrative Law Judge may require or permit.
    (5) Suspension and order to show cause. (i) If the floor trader is 
found to be subject to a statutory disqualification, the Administrative 
Law Judge, within thirty days after receipt of the floor trader's 
written submission, if any, and any reply thereto, shall issue an 
interim order suspending the no-action status of the floor trader under 
paragraph (a) of this section and requiring the floor trader to show 
cause within twenty days of the date of the order why, notwithstanding 
the existence of the statutory disqualification, the registration of the 
floor trader should not be denied. The no-action status of the floor 
trader shall be suspended, effective five days after the order to show 
cause is served upon the floor trader in accordance with Sec. 3.50(a) 
of this chapter, until a final order with respect to the order to show 
cause has been issued: Provided, That if the sole basis upon which the 
floor trader is subject to statutory disqualification is the existence 
of a temporary order, judgment or decree of the type described in 
section 8a(2)(C) of the Act, the order to show cause shall not be issued 
and the floor trader shall be suspended until such time as the temporary 
order, judgment or decree shall have expired: Provided, however, That in 
no event shall the floor trader's no-action status be suspended for a 
period to exceed six months.
    (ii) If the floor trader is found not to be subject to a statutory 
disqualification, the Administrative Law Judge shall issue an order to 
that effect and the Proceedings Clerk shall promptly serve a copy of 
such order on the floor trader, the Division of Clearing and 
Intermediary Oversight and the Division of Enforcement. Such order shall

[[Page 111]]

be effective as a final order of the Commission fifteen days after the 
date it is served upon the floor trader in accordance with the 
provisions of Sec. 3.50(a) of this chapter unless a timely application 
for review is filed in accordance with Sec. 10.102 of this chapter. The 
appellate procedures set forth in Sec. Sec. 10.102, 10.103, 10.104, 
10.106, 10.107 and 10.109 of this chapter shall apply to any appeal 
brought under paragraph (c)(5)(ii) of this section.
    (6) Further proceedings. If an order to show cause is issued 
pursuant to paragraph (c)(5)(i) of this section, further proceedings on 
such order shall be conducted in accordance with the provisions of Sec. 
3.60(b) through (j) of this chapter.

[58 FR 19589, Apr. 15, 1993; 58 FR 21776, Apr. 23, 1993, as amended at 
60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 7, 2002]



Sec. 1.67  Notification of final disciplinary action involving financial 
harm to a customer.

    (a) Definitions. For purposes of this section:
    (1) Final disciplinary action means any decision by or settlement 
with a contract market in a disciplinary matter which cannot be further 
appealed at the contract market, is not subject to the stay of the 
Commission or a court of competent jurisdiction, and has not been 
reversed by the Commission or any court of competent jurisdiction.
    (2) [Reserved]
    (b) Upon any final disciplinary action in which a contract market 
finds that a member has committed a rule violation that involved a 
transaction for a customer, whether executed or not, and that resulted 
in financial harm to the customer:
    (1)(i) the contract market shall promptly provide written notice of 
the disciplinary action to the futures commission merchant that cleared 
the transaction; and,
    (ii) a futures commission merchant that receives a notice, under 
paragraph (b)(1)(i) of this section shall promptly provide written 
notice of the disciplinary action to the customer as disclosed on its 
books and records. If the customer is another futures commission 
merchant, such futures commission merchant shall promptly provide the 
notice to the customer.
    (2) A written notice required by paragraph (b)(1) of this section 
must include the principal facts of the disciplinary action and a 
statement that the contract market has found that the member has 
committed a rule violation that involved a transaction for the customer, 
whether executed or not, and that resulted in financial harm to the 
customer. For the purposes of this paragraph, a notice which includes 
the information listed in Sec. 9.11(b) shall be deemed to include the 
principal facts of the disciplinary action thereof.

[58 FR 37655, July 13, 1993]



Sec. 1.68  Customer election not to have funds, carried by a futures 

commission merchant for trading on a registered derivatives transaction 
execution facility, separately accounted for and segregated.

    (a) A futures commission merchant shall not separately account for 
and segregate, in accordance with the provisions of section 4d of the 
Act and Sec. Sec. 1.20-1.30, 1.32 and 1.36, funds received from a 
customer if:
    (1) The customer is an eligible contract participant as defined in 
section 1a(12) of the Act;
    (2) The customer's funds are being carried by the futures commission 
merchant for the purpose of trading on or through the facilities of a 
derivatives transaction execution facility registered under section 
5a(c) of the Act;
    (3) The registered derivatives transaction execution facility has 
authorized, in accordance with Sec. 37.7 of this chapter, futures 
commission merchants to offer eligible contract participants the right 
to elect not to have funds that are being carried for purposes of 
trading on or through the facilities of the registered derivatives 
transaction execution facility, separately accounted for and segregated 
by the futures commission merchant; and
    (4) The futures commission merchant and the customer have entered 
into a written agreement, signed by a person with the authority to bind 
the customer, in which the customer:

[[Page 112]]

    (i) Represents and warrants that the customer is an eligible 
contract participant as defined in section 1a(12) of the Act;
    (ii) Elects not to have its funds separately accounted for and 
segregated in accordance with the provisions of section 4d of the Act 
and Sec. Sec. 1.20-1.30, 1.32 and 1.36 with respect to agreements, 
contracts or transactions traded on or subject to the rules of any 
registered derivatives transaction execution facility that has 
authorized such treatment in accordance with Sec. 37.7 of this chapter;
    (iii) Acknowledges that it has been informed, and by making this 
election agrees that:
    (A) The customer's funds, related to agreements, contracts or 
transactions on any registered derivatives transaction execution 
facility that authorizes the opting out of segregation will not be 
segregated from the funds of the futures commission merchant in 
accordance with the provisions of section 4d of the Act and Sec. Sec. 
1.20-1.30, 1.32 and 1.36;
    (B) The futures commission merchant may use such funds in the course 
of the futures commission merchant's business without the prior consent 
of the customer or any third party;
    (C) In the event the futures commission merchant files, or has a 
petition filed against it, for bankruptcy, the customer, as to those 
funds that the customer has elected not to have separately accounted for 
and segregated by the futures commission merchant in accordance with the 
provisions of section 4d of the Act and Sec. Sec. 1.20-1.30, 1.32 and 
1.36, will not be entitled to the priority for customer claims provided 
for under the Bankruptcy Code and part 190 of this chapter;
    (D) The customer may not retain a security interest in assets 
excluded from segregation in accordance with this section;
    (E) The customer may not enter into any agreement or other 
understanding with the futures commission merchant relating to the 
manner in which the customer's assets will be held at the futures 
commission merchant, that directly or indirectly gives the customer a 
priority in bankruptcy that is equal or superior to the priority 
afforded public customers under the Bankruptcy Code and part 190 of this 
chapter; and
    (iv) Acknowledges that the agreement shall remain in effect unless 
and until the customer abrogates the agreement in accordance with 
paragraph (c) of this section.
    (b) In no event may money, securities or property representing those 
funds that customers have elected not to have separately accounted for 
and segregated by the futures commission merchant, in accordance with 
this section, be held or commingled and deposited with customer funds in 
the same account or accounts required to be separately accounted for and 
segregated pursuant to section 4d of the Act and Sec. Sec. 1.20-1.30, 
1.32 and 1.36.
    (c)(1) A customer that has entered into an agreement in accordance 
with paragraph (a)(4) of this section may abrogate that agreement by so 
informing the futures commission merchant in writing, signed by a person 
with the authority to bind the customer. The effective date of the 
abrogation shall not exceed five business days from the futures 
commission merchant's receipt of the customer's abrogation. The 
abrogation shall not become effective if the futures commission merchant 
files, or has had filed against it, a petition for bankruptcy prior to 
the effective date of the abrogation.
    (2) Upon the effective date of the abrogation, permitted under 
paragraph (c)(1) of this section, provided that the customer's positions 
in the non-segregated account are fully margined and the customer is not 
in default with respect to any of its obligations to the futures 
commission merchant arising out of agreements, contracts or transactions 
entered on, or subject to the rules of, a registered entity, as defined 
in section 1a(29) of the Act, the futures commission merchant shall 
transfer to a customer segregated account:
    (i) All trades or positions of the customer with respect to which 
the customer had previously elected to opt out of segregation; and
    (ii) All money, securities, or property held in such account to 
margin, guarantee or secure such trades or positions.

[[Page 113]]

    (d) Each futures commission merchant shall maintain any agreements 
entered into with customers pursuant to paragraph (a) of this section 
and any abrogations of such agreements, made pursuant to paragraph (c) 
of this section, in accordance with Sec. 1.31.

[66 FR 20744, Apr. 25, 2001]



Sec. 1.69  Voting by interested members of self-regulatory organization 
governing boards and various committees.

    (a) Definitions. For purposes of this section:
    (1) Disciplinary committee means any person or committee of persons, 
or any subcommittee thereof, that is authorized by a self-regulatory 
organization to issue disciplinary charges, to conduct disciplinary 
proceedings, to settle disciplinary charges, to impose disciplinary 
sanctions, or to hear appeals thereof in cases involving any violation 
of the rules of the self-regulatory organization except those cases 
where the person or committee is authorized summarily to impose minor 
penalties for violating rules regarding decorum, attire, the timely 
submission of accurate records for clearing or verifying each day's 
transactions or other similar activities.
    (2) Family relationship of a person means the person's spouse, 
former spouse, parent, stepparent, child, stepchild, sibling, 
stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew, 
niece or in-law.
    (3) Governing board means a self-regulatory organization's board of 
directors, board of governors, board of managers, or similar body, or 
any subcommittee thereof, duly authorized, pursuant to a rule of the 
self-regulatory organization that has been approved by the Commission or 
has become effective pursuant to either Section 5a(a)(12)(A) or 17(j) of 
the Act to take action or to recommend the taking of action on behalf of 
the self-regulatory organization.
    (4) Oversight panel means any panel, or any subcommittee thereof, 
authorized by a self-regulatory organization to recommend or establish 
policies or procedures with respect to the self-regulatory 
organization's surveillance, compliance, rule enforcement, or 
disciplinary responsibilities.
    (5) Member's affiliated firm is a firm in which the member is a 
``principal,'' as defined in Sec. 3.1(a), or an employee.
    (6) Named party in interest means a person or entity that is 
identified by name as a subject of any matter being considered by a 
governing board, disciplinary committee, or oversight panel.
    (7) Self-regulatory organization means a ``self-regulatory 
organization'' as defined in Sec. 1.3(ee) and includes a ``clearing 
organization'' as defined in Sec. 1.3(d), but excludes registered 
futures associations for the purposes of paragraph (b)(2) of this 
section.
    8) Significant action includes any of the following types of self-
regulatory organization actions or rule changes that can be implemented 
without the Commission's prior approval:
    (i) Any actions or rule changes which address an ``emergency'' as 
defined in Sec. 1.41(a)(4)(i) through (iv) and (vi) through (viii); 
and,
    (ii) Any changes in margin levels that are designed to respond to 
extraordinary market conditions such as an actual or attempted corner, 
squeeze, congestion or undue concentration of positions, or that 
otherwise are likely to have a substantial effect on prices in any 
contract traded or cleared at such self-regulatory organization; but 
does not include any rule not submitted for prior Commission approval 
because such rule is unrelated to the terms and conditions of any 
contract traded at such self-regulatory organization.
    (b) Self-regulatory organization rules. Each self-regulatory 
organization shall maintain in effect rules that have been submitted to 
the Commission pursuant to Section 5a(a)(12)(A) of the Act and Sec. 
1.41 or, in the case of a registered futures association, pursuant to 
Section 17(j) of the Act, to address the avoidance of conflicts of 
interest in the execution of its self-regulatory functions. Such rules 
must provide for the following:
    (1) Relationship with named party in interest--(i) Nature of 
relationship. A member of a self-regulatory organization's governing 
board, disciplinary committee or oversight panel must abstain from such 
body's deliberations

[[Page 114]]

and voting on any matter involving a named party in interest where such 
member:
    (A) Is a named party in interest;
    (B) Is an employer, employee, or fellow employee of a named party in 
interest;
    (C) Is associated with a named party in interest through a ``broker 
association'' as defined in Sec. 156.1;
    (D) Has any other significant, ongoing business relationship with a 
named party in interest, not including relationships limited to 
executing futures or option transactions opposite of each other or to 
clearing futures or option transactions through the same clearing 
member; or,
    (E) Has a family relationship with a named party in interest.
    (ii) Disclosure of relationship. Prior to the consideration of any 
matter involving a named party in interest, each member of a self-
regulatory organization governing board, disciplinary committee or 
oversight panel must disclose to the appropriate self-regulatory 
organization staff whether he or she has one of the relationships listed 
in paragraph (b)(1)(i) of this section with a named party in interest.
    (iii) Procedure for determination. Each self-regulatory organization 
must establish procedures for determining whether any member of its 
governing board, disciplinary committees or oversight committees is 
subject to a conflicts restriction in any matter involving a named party 
in interest. Taking into consideration the exigency of the committee 
action, such determinations should be based upon:
    (A) Information provided by the member pursuant to paragraph 
(b)(1)(ii) of this section; and
    (B) Any other source of information that is held by and reasonably 
available to the self-regulatory organization.
    (2) Financial interest in a significant action--(i) Nature of 
interest. A member of a self-regulatory organization's governing board, 
disciplinary committee or oversight panel must abstain from such body's 
deliberations and voting on any significant action if the member 
knowingly has a direct and substantial financial interest in the result 
of the vote based upon either exchange or non-exchange positions that 
could reasonably be expected to be affected by the action.
    (ii) Disclosure of interest. Prior to the consideration of any 
significant action, each member of a self-regulatory organization 
governing board, disciplinary committee or oversight panel must disclose 
to the appropriate self-regulatory organization staff the position 
information referred to in paragraph (b)(2)(iii) of this section that is 
known to him or her. This requirement does not apply to members who 
choose to abstain from deliberations and voting on the subject 
significant action.
    (iii) Procedure for determination. Each self-regulatory organization 
must establish procedures for determining whether any member of its 
governing board, disciplinary committees or oversight committees is 
subject to a conflicts restriction under this section in any significant 
action. Such determination must include a review of:
    (A) Gross positions held at that self-regulatory organization in the 
member's personal accounts or ``controlled accounts,'' as defined in 
Sec. 1.3(j);
    (B) Gross positions held at that self-regulatory organization in 
proprietary accounts, as defined in Sec. 1.17(b)(3), at the member's 
affiliated firm;
    (C) Gross positions held at that self-regulatory organization in 
accounts in which the member is a principal, as defined in Sec. 3.1(a);
    (D) Net positions held at that self-regulatory organization in 
``customer'' accounts, as defined in Sec. 1.17(b)(2), at the member's 
affiliated firm; and,
    (E) Any other types of positions, whether maintained at that self-
regulatory organization or elsewhere, held in the member's personal 
accounts or the proprietary accounts of the member's affiliated firm 
that the self-regulatory organization reasonably expects could be 
affected by the significant action.
    (iv) Bases for determination. Taking into consideration the exigency 
of the significant action, such determinations should be based upon:
    (A) The most recent large trader reports and clearing records 
available to the self-regulatory organization;

[[Page 115]]

    (B) Information provided by the member with respect to positions 
pursuant to paragraph (b)(2)(ii) of this section; and,
    (C) Any other source of information that is held by and reasonably 
available to the self-regulatory organization.
    (3) Participation in deliberations. (i) Under the rules required by 
this section, a self-regulatory organization governing board, 
disciplinary committee or oversight panel may permit a member to 
participate in deliberations prior to a vote on a significant action for 
which he or she otherwise would be required to abstain, pursuant to 
paragraph (b)(2) of this section, if such participation would be 
consistent with the public interest and the member recuses himself or 
herself from voting on such action.
    (ii) In making a determination as to whether to permit a member to 
participate in deliberations on a significant action for which he or she 
otherwise would be required to abstain, the deliberating body shall 
consider the following factors:
    (A) Wwhether the member's participation in deliberations is 
necessary for the deliberating body to achieve a quorum in the matter; 
and
    (B) Whether the member has unique or special expertise, knowledge or 
experience in the matter under consideration.
    (iii) Prior to any determination pursuant to paragraph (b)(3)(i) of 
this section, the deliberating body must fully consider the position 
information which is the basis for the member's direct and substantial 
financial interest in the result of a vote on a significant action 
pursuant to paragraph (b)(2) of this section.
    (4) Documentation of determination. Self-regulatory organization 
governing boards, disciplinary committees, and oversight panels must 
reflect in their minutes or otherwise document that the conflicts 
determination procedures required by this section have been followed. 
Such records also must include:
    (i) The names of all members who attended the meeting in person or 
who otherwise were present by electronic means;
    (ii) The name of any member who voluntarily recused himself or 
herself or was required to abstain from deliberations and/or voting on a 
matter and the reason for the recusal or abstention, if stated; and
    (iii) Information on the position information that was reviewed for 
each member.

[64 FR 23, Jan. 4, 1999; 64 FR 3340, Jan. 21, 1999]



Sec. 1.70  Notification of State enforcement actions brought under the 
Commodity Exchange Act.

    (a) Immediately upon instituting any proceeding in any Federal 
district court for violation of the Act or any rule, regulation or order 
thereunder against any person who is subject to suit pursuant to 
sections 6d(1)-(6) of the Act, the authorized State official of the 
State instituting the proceeding shall submit to the Commission a copy 
of the complaint filed in the proceeding, together with a written notice 
which:
    (1) Indicates the names of parties to the proceeding;
    (2) Indicates the provision of the Act or the rule, regulation or 
order thereunder which is alleged to have been violated.

The complaint and written notice must be sent by first-class U.S. mail 
or personally delivered to the Secretary, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581.
    (b) Prior to instituting any proceeding in a State court for the 
alleged violation of any antifraud provisions of the Act or any 
antifraud rule, regulation or order thereunder against any person 
registered with the Commission who is subject to suit pursuant to the 
provisions of section 6d(8) of the Act, the authorized State official of 
the State intending to institute the proceeding shall submit to the 
Commission written notice which:
    (1) Indicates the names of parties to the proposed proceeding;
    (2) Indicates the provision of the Act or the rule, regulation or 
order thereunder which will be alleged to have been violated;

[[Page 116]]

    (3) Contains a brief statement of the facts on which the proposed 
action will be based.

Except as provided in paragraph (c), this written notice must be sent by 
first-class U.S. mail or personally delivered to the Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581 not less than 5 business days prior to 
instituting the proceeding in State court.
    (c) Where it is impracticable to provide the Commission with written 
notice within the time period specified in paragraph (b) of this 
section, the authorized state official must inform the Secretary of the 
Commission by telephone as soon as practicable to institute a proceeding 
in state court and must send the written notice required in paragraph 
(b)(1) through (b)(3) of this section by facsimile or other similarly 
expeditious means of written communication to the Secretary of the 
Commission, prior to instituting the proceeding in state court.
    (d) Immediately upon instituting any proceeding in a State court 
pursuant to the provisions of section 6d(8) of the Act for alleged 
violation of any antifraud provisions of the Act or any antifraud rule, 
regulation or order thereunder, the authorized State official 
instituting the proceeding shall submit to the Commission a copy of the 
complaint filed in the proceeding. The copy of the complaint must be 
sent by first class U.S. mail or personally delivered to the Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

[48 FR 49503, Oct. 26, 1983, as amended at 60 FR 49334, Sept. 25, 1995]

                     Appendix A to Part 1 [Reserved]

Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews 
                          and Financial Reviews

    (a) Within 60 days of the effective date of a final fee schedule for 
each fiscal year, each board of trade which has been designated as a 
contract market for at least one actively trading contract shall submit 
a check or money order, made payable to the Commodity Futures Trading 
Commission, to cover the Commission's actual costs in conducting 
contract market rule enforcement reviews and financial reviews.
    (b) The Commission determines fees changed fees charged to exchanges 
based upon a formula which considers both actual costs and trading 
volume.
    (c) Checks should be sent to the attention of the Office of the 
Secretariat, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

[50 FR 930, Jan. 8, 1985, as amended at 52 FR 46072, Dec. 4, 1987; 58 FR 
42645, Aug. 11, 1993; 60 FR 49334, Sept. 25, 1995]



PART 2_OFFICIAL SEAL--Table of Contents




Sec.
2.1 Description.
2.2 Authority to affix seal.
2.3 Prohibitions against misuse of seal.

    Authority: 7 U.S.C. 4a(j), unless otherwise noted.

    Source: 41 FR 9552, Mar. 5, 1976, unless otherwise noted.



Sec. 2.1  Description.

    Pursuant to section 2(a)(10) of the Commodity Exchange Act, as 
amended, 7 U.S.C. 4(i), the Commodity Futures Trading Commission has 
adopted an official seal (the ``Seal''), the description of which is as 
follows:
    (a) An American bald eagle in black and white holding the scales of 
balanced interests over a black and white wheel of commerce and a 
farmer's plow, also in black and white. These symbols are enclosed with 
an inner red octagon and a blue outer octagon representing traditional 
futures contract trading pits. Around the outside of the octagons are 
the words ``Commodity Futures Trading Commission'' separated by two 
stars from the year ``1975,'' the first year of the Commission's 
existence.
    (b) The Seal of the Commodity Futures Trading Commission is 
illustrated as follows:

[[Page 117]]

[GRAPHIC] [TIFF OMITTED] TC05OC91.030



Sec. 2.2  Authority to affix seal.

    (a) The following officials of the Commodity Futures Trading 
Commission are authorized to affix the Seal to appropriate documents and 
other materials of the Commission for all purposes including those 
authorized by 28 U.S.C. 1733(b) (relating to authenticated copies of 
agency documents used as evidence): The Chairman and all Commissioners, 
the General Counsel, the Executive Director, the Directors of Divisions, 
and the Secretariat.
    (b) The officials named in paragraph (a) of this section, may 
redelegate, and authorize redelegation of this authority, except that 
the Secretary may redelegate this authority only to the Deputy 
Secretary.

[41 FR 9552, Mar. 5, 1976, as amended at 51 FR 37177, Oct. 20, 1986]



Sec. 2.3  Prohibitions against misuse of seal.

    (a) Fraudulently or wrongfully affixing or impressing the Seal to or 
upon any certificate, instrument, document or paper or with knowledge of 
its fraudulent character, or with wrongful or fraudulent intent, using, 
buying, procuring, selling or transferring to another any such paper is 
punishable under section 1017 of title 18, U.S. Code.
    (b) Falsely making, forging, counterfeiting, mutilating, or altering 
the Seal, or knowingly using a fraudulent or altered Seal or possessing 
any such Seal knowingly is punishable under section 506 of title 18, 
U.S. Code.



PART 3_REGISTRATION--Table of Contents




                         Subpart A_Registration

Sec.
3.1 Definitions.
3.2 Registration processing by the National Futures Association; 
          notification and duration of registration.
3.3 [Reserved]
3.4 Registration in one capacity not included in registration in any 
          other capacity.
3.5-3.9 [Reserved]
3.10 Registration of futures commission merchants, introducing brokers, 
          commodity trading advisors, commodity pool operators and 
          leverage transaction merchants.
3.11 Registration of floor brokers and floor traders.
3.12 Registration of associated persons of futures commission merchants, 
          introducing brokers, commodity trading advisors, commodity 
          pool operators and leverage transaction merchants.
3.13 Registration of agricultural trade option merchants and their 
          associated persons.
3.14-3.20 [Reserved]
3.21 Exemption from fingerprinting requirement in certain cases.
3.22 Supplemental filings.
3.23-3.29 [Reserved]
3.30 Current address for purpose of delivery of communications from the 
          Commission or the National Futures Association.
3.31 Deficiencies, inaccuracies, and changes, to be reported.
3.33 Withdrawal from registration.

                      Subpart B_Temporary Licenses

3.40 Temporary licensing of applicants for associated person, floor 
          broker or floor trader registration.
3.42 Termination.
3.43 Relationship to registration.
3.44 Temporary licensing of applicants for guaranteed introducing broker 
          registration.
3.45 Restrictions upon activities.
3.46 Termination.
3.47 Relationship to registration.

       Subpart C_Denial, Suspension or Revocation of Registration

3.50 Service.
3.51 Withdrawal of application for registration.
3.52-3.54 [Reserved]
3.55 Suspension and revocation of registration pursuant to section 8a(2) 
          of the Act.

[[Page 118]]

3.56 Suspension or modification of registration pursuant to section 
          8a(11) of the Act.
3.57 Proceedings under section 8a(2)(E) of the Act.
3.60 Procedure to deny, condition, suspend, revoke or place restrictions 
          upon registration pursuant to sections 8a(2), 8a(3) and 8a(4) 
          of the Act.
3.61 Extensions of time for proceedings brought under Sec. 3.55, Sec. 
          3.56 and Sec. 3.60 of this part.
3.62 [Reserved]
3.63 Service of order issued by an Administrative Law Judge or the 
          Commission.
3.64 Procedure to lift or modify conditions or restrictions.

             Subpart D_Notice Under Section 4k(5) of the Act

3.70 Notification of certain information regarding associated persons.

            Subpart E_Delegation and Reservation of Authority

3.75 Delegation and reservation of authority.

Appendix A to Part 3--Interpretive Statement with Respect to Section 
          8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity 
          Exchange Act
Appendix B to Part 3--Statement of Acceptable Practices With Respect to 
          Ethics Training

    Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 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, 23.

    Source: 45 FR 80491, Dec. 5, 1980, unless otherwise noted.



                         Subpart A_Registration



Sec. 3.1  Definitions.

    (a) Principal. Principal means, with respect to an applicant for 
registration, a registrant or a person required to be registered under 
the Act or these regulations:
    (1) If the entity is organized as a sole proprietorship, the 
proprietor; if a partnership, any general partner; if a corporation, any 
director, the president, chief executive officer, chief operating 
officer, chief financial officer, and any person in charge of a 
principal business unit, division or function subject to regulation by 
the Commission; if a limited liability company or limited liability 
partnership, any director, the president, chief executive officer, chief 
operating officer, chief financial officer, the manager, managing member 
or those members vested with the management authority for the entity, 
and any person in charge of a principal business unit, division or 
function subject to regulation by the Commission; and, in addition, any 
person occupying a similar status or performing similar functions, 
having the power, directly or indirectly, through agreement or 
otherwise, to exercise a controlling influence over the entity's 
activities that are subject to regulation by the Commission;
    (2)(i) Any individual who directly or indirectly, through agreement, 
holding company, nominee, trust or otherwise, is the owner of ten 
percent or more of the outstanding shares of any class of stock, is 
entitled to vote or has the power to sell or direct the sale of ten 
percent or more of any class of voting securities, or is entitled to 
receive ten percent or more of the profits; or
    (ii) Any person other than an individual that is the direct owner of 
ten percent or more of any class of securities; or
    (3) Any person who has contributed ten percent or more of the 
capital: Provided, however, That if such capital contribution consists 
of subordinated debt contributed by an unaffiliated bank insured by the 
Federal Deposit Insurance Corporation, United States branch or agency of 
an unaffiliated foreign bank that is licensed under the laws of the 
United States and regulated, supervised and examined by United States 
government authorities having regulatory responsibility for such 
financial institutions, or insurance company subject to regulation by 
any State, such bank, branch, agency or insurance company will not be 
deemed to be a principal for purposes of this section, provided such 
debt is not guaranteed by another party not listed as a principal.
    (b) Current. As used in this subpart, a Form 8-R is current if, 
subsequent to the filing of that form and continuously thereafter, the 
registrant or principal has been either registered or affiliated with a 
registrant as a principal.

[[Page 119]]

    (c) Sponsor. Sponsor means the futures commission merchant, 
introducing broker, commodity trading advisor, commodity pool operator 
or leverage transaction merchant which makes the certification required 
by Sec. 3.12 of this part for the registration of an associated person 
of such sponsor.
    (d) Beneficial owner. Any person who, without limitation, directly 
or indirectly, creates or uses a trust, proxy, power of attorney, 
pooling arrangement or any other contract, arrangement, or device with 
the purpose or effect of divesting such person of beneficial ownership 
of a security or preventing the vesting of such beneficial ownership, or 
of avoiding making a contribution of ten percent or more of the capital, 
as part of a plan or scheme to evade being deemed a principal of an 
applicant or registrant under paragraph (a) of this section shall be 
deemed for purposes of such paragraph to be the beneficial owner or the 
contributor of capital.
    (e) Foreign futures authority. Foreign futures authority means any 
foreign government, or any department, agency, governmental body, or 
regulatory organization empowered by a foreign government to administer 
or enforce a law, rule, or regulation as it relates to a futures or 
options matter, or any department or agency of a political subdivision 
of a foreign government empowered to administer or enforce a law, rule 
or regulation as it relates to a futures or options matter.
    (f) Commodity interest. Commodity interest means:
    (1) Any contract for the purchase or sale of a commodity for future 
delivery regulated under the Act and rules promulgated thereunder; and
    (2) Any contract, agreement or transaction subject to Commission 
regulation under sections 4c or 19 of the Act.

[49 FR 5521, Feb. 13, 1984, and 49 FR 8217, Mar. 5, 1984, as amended at 
49 FR 39530, Oct. 9, 1984; 57 FR 23144, June 2, 1992; 66 FR 53518, Oct. 
23, 2001]



Sec. 3.2  Registration processing by the National Futures Association; 
notification and duration of registration.

    (a) Except as otherwise provided in any rule, regulation or order of 
the Commission, the registration functions of the Commission set forth 
in subpart A, subpart B and subpart C of this part shall be performed by 
the National Futures Association, in accordance with such rules, 
consistent with the provisions of the Act and this part, applicable to 
registrations granted under the Act that the National Futures 
Association may adopt and are approved by the Commission pursuant to 
section 17(j) of the Act.
    (b) Notwithstanding any other provision of this part, the original 
of any registration form, any schedule or supplement thereto, any 
fingerprint card or other document required by this part to be filed 
with both the Commission and the National Futures Association, may be 
filed with either the Commission or the National Futures Association if:
    (1) A legible, accurate, and complete photocopy of that form, 
schedule, supplement, fingerprint card, or other document is filed 
simultaneously with the National Futures Association or the Commission, 
respectively, and
    (2) Such photocopy contains an original signature and date in each 
place where such signature and date is required on the original form, 
schedule, supplement, fingerprint card, or other document.
    (c) The National Futures Association shall notify the registrant, or 
the sponsor in the case of an applicant for registration as an 
associated person, and each designated contract market or registered 
derivatives trading execution facility that has granted the applicant 
trading privileges in the case of an applicant for registration as a 
floor broker or floor trader, if registration has been granted under the 
Act.
    (1) If an applicant for registration as an associated person 
receives a temporary license in accordance with Sec. 3.40, the National 
Futures Association shall notify the sponsor that only a temporary 
license has been granted.
    (2) If an applicant for registration as a floor broker or floor 
trader receives a temporary license in accordance with Sec. 3.40, the 
National Futures Association shall notify the designated contract market 
or registered derivatives trading execution facility that has granted 
the applicant trading privileges that

[[Page 120]]

only a temporary license has been granted.
    (d) Any registration form, any schedule or supplement thereto, any 
fingerprint card or other document required by this part or any rule of 
the National Futures Assocation to be filed with the National Futures 
Association shall be deemed for all purposes to have been filed with, 
and to be the official record of, the Commission.

[49 FR 39530, Oct. 9, 1984, as amended at 53 FR 8431, Mar. 15, 1988; 54 
FR 19558, May 8, 1989; 67 FR 38874, June 6, 2002]



Sec. 3.3  [Reserved]



Sec. 3.4  Registration in one capacity not included in registration in 
any other capacity.

    (a) Except as may be otherwise provided in the Act or in any rule, 
regulation, or order of the Commission, each futures commission 
merchant, floor broker, floor trader, associated person, commodity 
trading advisor, commodity pool operator, introducing broker, and 
leverage transaction merchant must register as such under the Act. 
Registration in one capacity under the Act shall not include 
registration in any other capacity: Provided, however, That a registered 
floor broker need not also register as a floor trader in order to engage 
in activity as a floor trader.
    (b) Except as may be provided in any rule, regulation or order of 
the Commission, registration as an associated person in one capacity 
shall not include registration as an associated person in any other 
capacity: Provided, however, That an associated person who is sponsored 
by a registrant, which itself is registered in more than one capacity, 
need register only once to act as an associated person of the 
registrant, and shall be deemed to be an associated person of such 
registrant, in each such capacity.

[49 FR 39530, Oct. 9, 1984, as amended at 58 FR 19590, Apr. 15, 1993]



Sec. Sec. 3.5-3.9  [Reserved]



Sec. 3.10  Registration of futures commission merchants, introducing 

brokers, commodity trading advisors, commodity pool operators and 
leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in 
paragraph (a)(3) of this section, application for registration as a 
futures commission merchant, introducing broker, commodity trading 
advisor, commodity pool operator or leverage transaction merchant must 
be on Form 7-R, completed and filed with the National Futures 
Association in accordance with the instructions thereto.
    (ii) Applicants for registration as a futures commission merchant or 
introducing broker must accompany their Form 7-R with a Form 1-FR-FCM or 
Form 1-FR-IB, respectively, in accordance with the provisions of Sec. 
1.10 of this chapter: Provided, however, That an applicant for 
registration as a futures commission merchant or introducing broker 
which is registered with the Securities and Exchange Commission as a 
securities broker or dealer may accompany its Form 7-R with a copy of 
its Financial and Operational Combined Uniform Single Report under the 
Securities Exchange Act of 1934, Part II or Part II A, in accordance 
with the provisions of Sec. 1.10(h) of this chapter.
    (iii) Applicants for registration as a commodity pool operator must 
accompany their Form 7-R with the financial statements described in 
Sec. 4.13(c) of this chapter.
    (iv) Applicants for registration as a leverage transaction merchant 
must accompany their Form 7-R with a Form 2-FR in accordance with the 
provisions of Sec. 31.13 of this chapter.
    (2) Each Form 7-R filed in accordance with the requirements of 
paragraph (a)(1)(i) of this section must be accompanied by a Form 8-R, 
completed in accordance with the instructions thereto and executed by 
each natural person who is a principal of the applicant, and must be 
accompanied by the fingerprints of that principal on a fingerprint

[[Page 121]]

card provided by the National Futures Association for that purpose: 
Provided, however, that if such principal is a director who qualifies 
for the exemption from the fingerprint requirement pursuant to Sec. 
3.21(c) or has a current Form 8-R on file with the Commission or the 
National Futures Association, the fingerprints of that principal do not 
need to accompany the Form 7-R.
    (3) Notice registration as a futures commission merchant or 
introducing broker for certain securities brokers or dealers. (i) Any 
broker or dealer that is registered with the Securities and Exchange 
Commission may be registered as a futures commission merchant or 
introducing broker, as applicable, by following such procedures for 
notice registration as may be specified by the National Futures 
Association, if--
    (A) The broker or dealer limits its solicitation of orders, 
acceptance of orders, or execution of orders, or placing of orders on 
behalf of others involving any contracts of sale of any commodity for 
future delivery, on or subject to the rules of any contract market or 
registered derivatives transaction execution facility, to security 
futures products as defined in section 1a(32) of the Act;
    (B) The registration of the broker or dealer is not suspended 
pursuant to an order of the Securities and Exchange Commission; and
    (C) The broker or dealer is a member of a national securities 
association registered pursuant to section 15A(a) of the Securities 
Exchange Act of 1934.
    (ii) The registration will be effective upon the filing of the 
notice prescribed by the National Futures Association in accordance with 
the instructions thereto.
    (b) Duration of registration. (1) A person registered as a futures 
commission merchant, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant in accordance 
with paragraph (a) of this section will continue to be so registered 
until the effective date of any revocation or withdrawal of such 
registration. Such person will be prohibited from engaging in activities 
requiring registration under the Act or from representing himself to be 
a registrant under the Act or the representative or agent of any 
registrant during the pendency of any suspension of such registration.
    (2) A person registered as an introducing broker who was a party to 
a guarantee agreement with a futures commission merchant in accordance 
with Sec. 1.10(j) of this chapter will have its registration cease 
thirty days after the termination of such guarantee agreement unless the 
procedures set forth in Sec. 1.10(j)(8) of this chapter are followed.
    (c) Exemption from registration for certain persons. A person 
trading solely for proprietary accounts, as defined in Sec. 1.3(y) of 
this chapter, is not required to register as a futures commission 
merchant: Provided, that such a person remains subject to all other 
provisions of the Act and of the rules, regulations and orders 
thereunder.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 49 
FR 5522, Feb. 13, 1984; 49 FR 39530, Oct. 9, 1984; 57 FR 23144, June 2, 
1992; 66 FR 43082, Aug. 17, 2001; 66 FR 53518, Oct. 23, 2001; 67 FR 
38874, June 6, 2002; 67 FR 41166, June 17, 2002]



Sec. 3.11  Registration of floor brokers and floor traders.

    (a) Application for registration. (1) Application for registration 
as a floor broker or floor trader must be on Form 8-R, completed and 
filed with the National Futures Association in accordance with the 
instructions thereto. Each Form 8-R filed in accordance with paragraph 
(a) of this section must be accompanied by the fingerprints of the 
applicant on a fingerprint card provided for that purpose by the 
National Futures Association, except that a fingerprint card need not be 
filed by any applicant who has a current Form 8-R on file with the 
Commission or the National Futures Association.
    (2) An applicant for registration as a floor broker or floor trader 
will not be registered or issued a temporary license as a floor broker 
or floor trader unless the applicant has been granted trading privileges 
by a board of trade designated as a contract market or registered as a 
derivatives transaction execution facility by the Commission.

[[Page 122]]

    (3) When the Commission or the National Futures Association 
determines that an applicant for registration as a floor broker or floor 
trader is not disqualified from such registration or temporary license, 
the National Futures Association will notify the applicant and any 
contract market or derivatives transaction execution facility that has 
granted the applicant trading privileges that the applicant's 
registration or temporary license as a floor broker or floor trader is 
granted.
    (b) Duration of registration. A person registered as a floor broker 
or floor trader in accordance with paragraph (a) of this section, and 
whose registration has neither been revoked nor withdrawn, will continue 
to be so registered unless such person's trading privileges on all 
contract markets or derivatives transaction execution facilities have 
ceased: Provided, That if a floor broker or floor trader whose trading 
privileges on all contract markets or derivatives transaction execution 
facilities have ceased for reasons unrelated to any Commission action or 
any contract market or derivatives transaction execution facility 
disciplinary proceeding and whose registration is not revoked, suspended 
or withdrawn is granted trading privileges as a floor broker or floor 
trader, respectively, by any contract market or derivatives transaction 
execution facility where he held such privileges within the preceding 
sixty days, such registration as a floor broker or floor trader, 
respectively, shall be deemed to continue and no new Form 8-R or Form 3-
R need be filed solely on the basis of the resumption of trading 
privileges. A floor broker or floor trader is prohibited from engaging 
in activities requiring registration under the Act or from representing 
himself to be a registrant under the Act or the representative or agent 
of any registrant during the pendency of any suspension of such 
registration or of all such trading privileges. In accordance with Sec. 
3.31(d), each contract market or derivatives transaction execution 
facility that has granted trading privileges to a person who is 
registered, or has applied for registration, as a floor broker or floor 
trader, must notify the National Futures Association within sixty days 
after such person's trading privileges on such contract market or 
derivatives transaction execution facility have ceased.

[58 FR 19591, Apr. 15, 1993, as amended at 64 FR 1727, Jan. 12, 1999; 67 
FR 38874, June 6, 2002]



Sec. 3.12  Registration of associated persons of futures commission 

merchants, introducing brokers, commodity trading advisors, commodity 
pool operators and leverage transaction merchants.

    (a) Registration required. It shall be unlawful for any person to be 
associated with a futures commission merchant, introducing broker, 
commodity trading advisor, commodity pool operator or leverage 
transaction merchant as an associated person unless that person shall 
have registered under the Act as an associated person of that sponsoring 
futures commission merchant, introducing broker, commodity trading 
advisor, commodity pool operator or leverage transaction merchant in 
accordance with the procedures in paragraphs (c), (d), (f), (i), or (j) 
of this section or is exempt from such registration pursuant to 
paragraph (h) of this section.
    (b) Duration of registration. A person registered in accordance with 
paragraphs (c), (d), (f), (i), or (j) of this section and whose 
registration has not been revoked will continue to be so registered 
until the revocation or withdrawal of the registration of each of the 
registrant's sponsors, or until the cessation of the association of the 
registrant with each of his sponsors. Such person will be prohibited 
from engaging in activities requiring registration under the Act or from 
representing himself to be a registrant under the Act or the 
representative or agent of any registrant during the pendency of any 
suspension of his or his sponsor's registration. In accordance with 
Sec. 3.31(c) of this part, each of the registrant's sponsors must file 
a notice with the National Futures Association on Form 8-T or on a 
Uniform Termination Notice for Securities Industry Registration 
reporting the termination of the association of the associated person 
within twenty days thereafter.
    (c) Application for registration. Except as otherwise provided in 
paragraphs

[[Page 123]]

(d), (f), (i), and (j) of this section, application for registration as 
an associated person in any capacity must be on Form 8-R, completed and 
filed in accordance with the instructions thereto.
    (1) No person will be registered as an associated person in 
accordance with this paragraph (c) unless a person duly authorized by 
the sponsor certifies that:
    (i) It is the intention of the sponsor to hire or otherwise employ 
the applicant as an associated person and that it will do so within 
thirty days after the receipt of the notification provided in accordance 
with paragraph (c)(4) of this section and that the applicant will not be 
permitted to engage in any activity requiring registration as an 
associated person until the applicant is registered as such in 
accordance with this section;
    (ii) The sponsor has verified the information supplied by the 
applicant in response to the questions on Form 8-R which relate to the 
applicant's education and employment history during the preceding three 
years.
    (iii) To the best of the sponsor's knowledge, information, and 
belief, all of the publicly available information supplied by the 
applicant on Form 8-R is accurate and complete: Provided, That it is 
unlawful for the sponsor to make the certification required by this 
paragraph (c)(1)(iii) if the sponsor knew or should have known that any 
of that information is not accurate and complete; and
    (2) The certification required by paragraph (c)(1) of this section 
must be submitted concurrently with the Form 8-R.
    (3) Each Form 8-R filed in accordance with the requirements of 
paragraph (c) of this section must be accompanied by the fingerprints of 
the applicant on a fingerprint card provided for that purpose by the 
National Futures Association.
    (4) When the Commission or the National Futures Association 
determines that an applicant for registration as an associated person is 
not unfit for such registration, it will notify the sponsor that has 
made the certifications required by paragraph (c)(1) of this section 
that the applicant's registration as an associated person is granted 
contingent upon the sponsor hiring or otherwise employing the applicant 
as such within thirty days.
    (d) Special temporary licensing and registration procedures for 
certain persons. (1) Registration terminated within the preceding 60 
days. Except as otherwise provided in paragraphs (f) and (i) of this 
section, any person whose registration as an associated person in any 
capacity has terminated within the preceding 60 days and who becomes 
associated with a new sponsor will be granted a temporary license to act 
in the capacity of an associated person of such sponsor upon filing by 
that sponsor with the National Futures Association a Form 8-R, completed 
in accordance with the instructions thereto and, if applicable, a 
Supplemental Sponsor Certification Statement filed on behalf of the new 
sponsor (who must meet the requirements set forth in Sec. 
3.60(b)(2)(i)(A) and (B)) stating that the new sponsor will supervise 
the applicant in accordance with conditions identical to those agreed to 
by the previous sponsor, which includes certifications stating:
    (i) That such person has been hired or is otherwise employed by that 
sponsor;
    (ii) That such person's registration as an associated person in any 
capacity is not suspended or revoked;
    (iii) That such person is eligible to be registered or temporarily 
licensed in accordance with this paragraph (d);
    (iv) Whether there is a pending adjudicatory proceeding under 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55, 3.56 
or 3.60 or if, within the preceding 12 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

[[Page 124]]

withdrawal of an application for registration as described in that 
paragraph.
    (2) Any temporary license granted pursuant to paragraph (d)(1) of 
this section shall be terminated immediately upon notice to the sponsor 
of the person granted the temporary license that, within 20 days 
following the date the temporary license was issued, the National 
Futures Association has not received the applicant's fingerprints.
    (3) A temporary license received in accordance with paragraph (d)(1) 
of this section shall be subject to the provisions of Sec. Sec. 3.42 
and 3.43.
    (4) The certifications permitted by paragraphs (d)(1)(i) and (v) of 
this section must be filed by a person duly authorized by the sponsor. 
The certifications permitted by paragraphs (d)(1)(ii)-(iv) must be filed 
by the applicant for registration as an associated person.
    (e) Retention of records. The sponsor must retain in accordance with 
Sec. 1.31 of this chapter such records as are necessary to support the 
certifications required by this section.
    (f) Reporting of dual and multiple associations. (1)(i) Except as 
otherwise provided in paragraph (f)(4) of this section, a person who is 
already registered as an associated person in any capacity whose 
registration is not subject to conditions or restrictions may become 
associated as an associated person with another sponsor if the new 
sponsor (who must meet the requirements set forth in Sec. 3.60(b)(2)(i) 
(A) and (B)) files with the National Futures Association a Form 8-R in 
accordance with the instructions thereto.
    (ii) NFA shall notify each sponsor of the associated person that the 
associated person has applied to become associated with another sponsor.
    (iii) Each sponsor of the associated person shall supervise that 
associated person and each sponsor is jointly and severally responsible 
for the conduct of the associated person with respect to the:
    (A) Solicitation or acceptance of customers' orders,
    (B) Solicitation of funds, securities, or property for a 
participation in a commodity pool,
    (C) Solicitation of a client's or prospective client's discretionary 
account,
    (D) Solicitation or acceptance of leverage customers' orders for 
leverage transactions, and
    (E) Associated person's supervision of any person or persons engaged 
in any of the foregoing solicitations or acceptances, with respect to 
any customers common to it and any other futures commission merchant, 
introducing broker, commodity trading advisor, commodity pool operator, 
or leverage transaction merchant with which the associated person is 
associated.
    (2) Upon receipt by the National Futures Association of a Form 8-R 
filed in accordance with paragraph (f)(1) of this section from an 
associated person, the associated person named therein shall be 
registered as an associated person of the new sponsor.
    (3) A person who is simultaneously associated with more than one 
sponsor in accordance with the provisions of paragraphs (f)(1) and 
(f)(2) of this section shall be required, upon receipt of notice from 
the National Futures Association, to file with the National Futures 
Association his fingerprints on a fingerprint card provided by the 
National Futures Association for that purpose as well as such other 
information as the National Futures Association may require. The 
National Futures Association may require such a filing every two years, 
or at such greater period of time as the National Futures Association 
may deem appropriate, after the associated person has become associated 
with a new sponsor in accordance with the requirements of paragraphs 
(f)(1) and (f)(2) of this section.
    (4) If a person is associated with a futures commission merchant or 
with an introducing broker and he directs customers seeking a managed 
account to use the services of a commodity trading advisor(s) approved 
by the futures commission merchant or introducing broker and all such 
customers' accounts solicited or accepted by the associated person are 
carried by the futures commission merchant or introduced by the 
introducing broker with which the associated person is associated, such 
a person shall be deemed to be associated solely with the futures

[[Page 125]]

commission merchant or introducing broker and may not also register as 
an associated person of the commodity trading advisor(s).
    (g) Petitions for exemption. (1) Any person adversely affected by 
the operation of this section may file a petition with the Secretary of 
the Commission, which petition must set forth with particularity the 
reasons why that person believes that an applicant should be exempted 
from the requirements of this section and why such an exemption would 
not be contrary to the public interest and the purposes of the provision 
from which exemption is sought. The petition will be granted or denied 
by the Commission on the basis of the papers filed. The Commission may 
grant such a petition if it finds that the exemption is not contrary to 
the public interest and the purposes of the provision from which 
exemption is sought. The petition may be granted subject to such terms 
and conditions as the Commission may find appropriate.
    (2)(i) Until such time as the Commission orders otherwise, the 
Commission hereby delegates to the Director of the Division of Clearing 
and Intermediary Oversight or his designee the authority to grant or 
deny petitions filed pursuant to this paragraph (g).
    (ii) The Director of the Division of Clearing and Intermediary 
Oversight may submit to the Commission for its consideration any matter 
which has been delegated to him pursuant to paragraph (g)(2)(i) of this 
section.
    (h) Exemption from registration. (1) A person is not required to 
register as an associated person in any capacity if that person is:
    (i) Registered under the Act as a futures commission merchant, floor 
broker, or as an introducing broker;
    (ii) Engaged in the solicitation of funds, securities, or property 
for a participation in a commodity pool, or the supervision of any 
person or persons so engaged, pursuant to registration with the National 
Association of Securities Dealers as a registered representative, 
registered principal, limited representative or limited principal, and 
that person does not engage in any other activity subject to regulation 
by the Commission; or
    (iii) The chief operating officer, general partner or other person 
in the supervisory chain-of-command, provided the futures commission 
merchant, introducing broker, commodity trading advisor, commodity pool 
operator, or leverage transaction merchant engages in commodity interest 
related activity for customers as no more than ten percent of its total 
revenue on an annual basis, the firm is not subject to a pending 
proceeding brought by the Commission or a self-regulatory organization 
alleging fraud or failure to supervise, and has not been found in such a 
proceeding to have committed fraud or failed to supervise, as required 
by the Act, the rules promulgated thereunder or the rules of a self-
regulatory organization, the person for whom exemption is sought and the 
person designated in accordance with paragraphs (h)(1)(iii)(C) or 
(h)(1)(iii)(D) of this section are listed as principals of the firm, the 
fitness examination conducted by the National Futures Association with 
respect to these persons discloses no derogatory information that would 
disqualify any of such persons as a principal or as an associated 
person, and the firm files with the National Futures Association 
corporate or partnership resolutions stating that:
    (A) Such supervisory person is not authorized to:
    (1) Solicit or accept customers' or leverage customers' orders,
    (2) Solicit a client's or prospective client's discretionary 
account,
    (3) Solicit funds, securities or property for a participation in a 
commodity pool, or
    (4) Exercise any line supervisory authority over those persons so 
engaged;
    (B) Such supervisory person has no authority with respect to hiring, 
firing or other personnel matters involving persons engaged in 
activities subject to regulation under the Act;
    (C) Another person (or persons) designated therein, who is 
registered as an associated person(s) or who has applied for 
registration as an associated person(s) and is not subject to a pending 
proceeding brought by the Commission or a self-regulatory organization 
alleging fraud or failure to supervise, and has not been found in such a 
proceeding to have committed fraud or

[[Page 126]]

failed to supervise, as required by the Act, the rules promulgated 
thereunder or the rules of a self-regulatory organization, holds and 
exercises full and final supervisory authority, including authority to 
hire and fire personnel, over the customer commodity interest related 
activities of the firm; and
    (D) If the person (or persons) so designated in accordance with 
paragraph (h)(1)(iii)(C) of this section ceases to have the authority 
referred to therein, the firm will notify the National Futures 
Association within twenty days of such occurrence by means of a 
subsequent resolution which resolution must also include the name of 
another associated person (or persons) who has been vested with full 
supervisory authority, including authority to hire and fire personnel, 
over the customer commodity interest related activities of the firm in 
the event that all of those previously designated in accordance with 
paragraph (h)(1)(iii)(C) of this section have been relieved of such 
authority. Subsequent changes in supervisory authority shall be reported 
in the same manner.
    (2) A person is not required to register as an associated person of 
a commodity trading advisor if that person is:
    (i) Registered as a commodity trading advisor, if that person is 
associated with a commodity trading advisor; or
    (ii) Exempt from registration as a commodity trading advisor 
pursuant to the provisions of Sec. 4.14(a)(1), Sec. 4.14(a)(2) or 
Sec. 4.14(a) (8) of this chapter or is associated with a person who is 
so exempt from registration: Provided, That the provisions of paragraph 
(h)(2)(ii) of this section shall not apply to the solicitation of a 
client's or prospective client's discretionary account, or the 
supervision of any person or persons so engaged, by, for or on behalf of 
a commodity trading advisor which is:
    (A) Not exempt from registration pursuant to the provisions of Sec. 
4.14(a)(1), Sec. 4.14(a)(2) or Sec. 4.14(a)(8) of this chapter or
    (B) Registered as a commodity trading advisor notwithstanding the 
availability of that exemption.
    (3) A person is not required to register as an associated person of 
a commodity pool operator if that person is:
    (i) Registered as a commodity pool operator, if that person is 
associated with a commodity pool operator;
    (ii) Exempt from registration as a commodity pool operator pursuant 
to the provisions of Sec. 4.13 of this chapter or is associated with a 
person who is so exempt from registration: Provided, That the provisions 
of paragraph (h)(3)(ii) of this section shall not apply to the 
solicitation of funds, securities, or property for a participation in a 
commodity pool, or the supervision of any person or persons so engaged, 
by, for, or on behalf of a commodity pool operator which is
    (A) Not exempt from registration pursuant to the provisions of Sec. 
4.13 of this chapter or
    (B) Registered as a commodity pool operator notwithstanding the 
availability of that exemption; or
    (iii) Where a commodity pool is operated or to be operated by two or 
more commodity pool operators, registered as an associated person of one 
of the pool operators of the commodity pool in accordance with the 
provisions of paragraphs (c), (d), (f), or (i) of this section: 
Provided, That each such commodity pool operator shall be jointly and 
severally liable for the conduct of that associated person in the 
solicitation of funds, securities, or property for participation in the 
commodity pool, or the supervision of any person or persons so engaged, 
regardless of whether that associated person is registered as an 
associated person of each such commodity pool operator.
    (i) Special registration or temporary licensing procedures when 
previous sponsor's registration ceases. (1) Any person whose 
registration as an associated person in any capacity was not subject to 
conditions or restrictions, and was terminated within the preceding 
sixty days because the previous sponsor's registration was revoked or 
withdrawn, and who becomes associated with a new sponsor, will be 
registered as an associated person of such new sponsor upon the mailing 
by that new sponsor to the National Futures Association of written 
certifications stating:
    (i) That such person has been hired or is otherwise employed by that 
sponsor;

[[Page 127]]

    (ii) That such person's registration as an associated person in any 
capacity is not suspended or revoked;
    (iii) That such person is eligible to be registered in accordance 
with paragraph (i) of this section;
    (iv) Whether there is a pending adjudicatory proceeding under 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec. 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;
    (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
    (vi) That the new sponsor will be responsible for supervising all 
activities of the person in connection with the sponsor's business as a 
registrant under the Act. Provided, however, That if such person's prior 
registration as an associated person was subject to conditions or 
restrictions, the new sponsor (who must meet the requirements set forth 
in Sec. 3.60(b)(2)(i) (A) and (B) of this part) must also file a signed 
Supplemental Sponsor Certification Statement that contains conditions 
identical to those agreed to by the original sponsor and, in such case, 
the person will be granted a temporary license, subject to the 
provisions of Sec. Sec. 3.41, 3.42 and 3.43 of this part.
    (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.
    (3) A person who is registered in accordance with the provisions of 
paragraph (i)(1) of this section shall be required, upon receipt of 
notice from the National Futures Association, to file with the National 
Futures Association his fingerprints on a fingerprint card provided by 
the National Futures Association for that purpose as well as such other 
information as the National Futures Association may require. The 
National Futures Association may require such a filing every two years, 
or at such greater period of time as the National Futures Association 
may deem appropriate, after the associated person has become associated 
with a new sponsor in connection with the requirements of paragraph 
(i)(1) of this section.
    (j) Special temporary licensing and registration procedures for 
associated persons of futures commission merchants and introducing 
brokers involved only with certain commodity interests. Notwithstanding 
any other provision of law, any person associated with a futures 
commission merchant or an introducing broker may be granted a temporary 
license or registration to act in the capacity of an associated person 
of such sponsor if such person restricts his activities only to those 
commodity interests listed in appendix B to this part and if such person 
and his sponsor comply with any special temporary licensing or 
registration procedures applicable to persons involved solely with such 
commodity interests that have been adopted by the National Futures 
Association and approved by the Commission.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 48 
FR 35292, Aug. 3, 1983; 49 FR 5522, Feb. 13, 1984; 49 FR 8218, Mar. 5, 
1984; 49 FR 39531, Oct. 9, 1984; 53 FR 8431, Mar. 15, 1988; 57 FR 23145, 
June 2, 1992; 58 FR 19592, Apr. 15, 1993; 64 FR 1727, Jan. 12, 1999; 67 
FR 38874, June 6, 2002; 67 FR 62351, Oct. 7, 2002; 69 FR 16792, Mar. 31, 
2004]



Sec. 3.13  Registration of agricultural trade option merchants and 
their associated persons.

    (a) Definitions. (1) Agricultural trade option merchant. 
``Agricultural trade option merchant'' means any person

[[Page 128]]

that is in the business of soliciting, offering to enter into, entering 
into, confirming the execution of, or maintaining a position in, 
transactions or agreements in interstate commerce which are not 
conducted or executed on or subject to the rules of a contract market, 
and which are or are held out to be of the character of, or are commonly 
known to the trade as, an ``option,'' ``privilege,'' ``indemnity,'' 
``bid,'' ``offer,'' ``put,'' ``call,'' ``advance guarantee,'' or 
``decline guarantee,'' involving wheat, cotton, rice, corn, oats, 
barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, solanum 
tuberosum (Irish potatoes), wool, wool tops, fats and oils (including 
lard, tallow, cottonseed oil, peanut oil, soybean oil and all other fats 
and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, 
livestock, livestock products, and frozen concentrated orange juice. 
Provided, however, that any person entering into such transactions 
solely for the purpose of managing the risk arising from the conduct of 
his or her own commercial enterprise is not considered to be in the 
business described in this paragraph.
    (2) Associated person of an agricultural trade option merchant. 
``Associated person of an agricultural trade option merchant'' means a 
partner, employee, or agent (or any person occupying a similar status or 
performing similar functions) that:
    (i) Solicits or accepts customers' orders (other than in a clerical 
capacity) or
    (ii) Supervises directly any person or persons so engaged.
    (b) Registration required. It shall be unlawful for any person in 
the business of soliciting, offering or selling the instruments listed 
in Sec. 32.2 of this chapter to solicit, to offer to enter into, or to 
enter into, to confirm the execution of, or to maintain transactions in 
such instruments or to supervise directly persons so engaged except if 
registered as an agricultural trade option merchant or as an associated 
person of such a registered agricultural trade option merchant under 
this section.
    (c) Duration of registration. (1) A person registered in accordance 
with the provisions of this section shall continue to be registered 
until the revocation or withdrawal of registration.
    (2) Agricultural trade option merchants must notify the National 
Futures Association within forty five days when an associated person has 
ceased to be so associated.
    (3) An associated person who ceases to be associated with a 
registered agricultural trade option merchant is prohibited from 
engaging in activities requiring registration under Sec. 32.13 of this 
chapter or representing himself or herself to be a registrant until:
    (i) A registered agricultural trade option merchant notifies the 
National Futures Association of the person's association; and
    (ii) The associated person certifies to the National Futures 
Association that he or she is not disqualified from registration for the 
reasons listed in section 8a (2) and (3) of the Act; provided, however, 
no such certification is required when the associated person becomes 
associated with the new agricultural trade option merchant within ninety 
days from when the associated person ceased the previous association.
    (d) Conditions for registration. (1) Applicants for registration as 
an agricultural trade option merchant must meet the following 
conditions:
    (i) The agricultural trade option merchant must have and maintain at 
all times net worth of at least $50,000 computed in accordance with 
generally accepted accounting principles;
    (ii) The agricultural trade option merchant must identify each of 
the natural persons who controls or directs the offer or sale of trade 
options or associated trading activity by the agricultural trade option 
merchant and any associated person of the agricultural trade option 
merchant and each such natural person must certify that he or she is not 
disqualified from registration for the reasons listed in sections 8a(2) 
and (3) of the Act; and
    (iii) The agricultural trade option merchant must provide access to 
any representative of the Commission or the United States Department of 
Justice for the purpose of inspecting books and records.
    (2) Applicants for registration as an associated person of an must 
meet the

[[Page 129]]

following conditions. Such persons must:
    (i) Identify the agricultural trade option merchant with whom the 
person is associated or to be associated within thirty days of the 
person's registration; and
    (ii) Certify that he or she is not disqualified from registration 
for the reasons listed in sections 8a(2) and (3) of the Act.
    (e) Applications for registration. (1) The agricultural trade option 
merchant, including its principals, and associated persons of an 
agricultural trade option merchant must apply for registration on the 
appropriate forms specified by the National Futures Association and 
approved by the Commission, in accordance with the instructions thereto, 
including the separate certifications from each natural person that he 
or she is not disqualified for any of the reasons listed in sections 
8a(2) and (3) of the Act and such other identifying background 
information as may be specified.
    (2) The agricultural trade option merchant's application must also 
include its most recent annual financial statements certified by an 
independent certified public accountant in accordance with generally 
accepted auditing standards prepared within the prior 12 months.
    (3) These applications must be supplemented to include any changes 
in the information required to be provided thereon on a form specified 
by the National Futures Association and approved by the Commission.
    (f) Withdrawal of application for registration; denial, suspension 
and revocation of registration. The provisions of Sec. Sec. 3.51, 3.55, 
3.56 and 3.60 shall apply to applicants for registration and registrants 
as agricultural trade options merchants and their associated persons 
under this part 3 as though they were an applicant or registrant in any 
capacity under the Act.
    (g) Withdrawal from registration. An agricultural trade option 
merchant that has ceased or has not commenced engaging in activities 
requiring registration may withdraw from registration 30 days after 
notifying the National Futures Association on the specified form of its 
intent to do so, unless otherwise notified by the Commission. Such a 
withdrawal notification must include information identifying the 
location of, and the custodian authorized to release, the agricultural 
trade option merchant's records, a statement of the disposition of 
customer positions, cash balances, securities or other property and a 
statement that no obligations to customers arising from agricultural 
trade options remain outstanding.
    (h) Dual registration of associated persons. An associated person of 
an agricultural trade option merchant may be associated with other 
registrants subject to the provision of Sec. 3.12(f).

[64 FR 68016, Dec. 6, 1999]



Sec. Sec. 3.14-3.20  [Reserved]



Sec. 3.21  Exemption from fingerprinting requirement in certain cases.

    (a) Any person who is required by this part to submit a fingerprint 
card may file, or cause to be filed, in lieu of such card:
    (1) A legible, accurate and complete photocopy of a fingerprint card 
which has been submitted to the Federal Bureau of Investigation for 
identification and appropriate processing and of each report, record, 
and notation made available by the Federal Bureau of Investigation with 
respect to that fingerprint card if such identification and processing 
has been completed satisfactorily by the Federal Bureau of Investigation 
not more than ninety days prior to the filing with the National Futures 
Association of the photocopy; or
    (2) A statement that such person's application for initial 
registration in any capacity was granted within the preceding ninety 
days; Provided, That the provisions of paragraph (a)(2) shall not be 
applicable to any person who, by Commission rule, regulation, or order, 
was not required to file a fingerprint card in connection with such 
application for initial registration.
    (b) Each photocopy and statement filed in accordance with the 
provisions of paragraph (a)(1) or (a)(2) of this section must be signed 
and dated. Such

[[Page 130]]

signature shall constitute a certification by that individual that the 
photocopy or statement is accurate and complete and must be made by:
    (1) With respect to the fingerprints of an associated person. An 
officer, if the sponsor is a corporation, a general partner, if a 
partnership, or the sole proprietor, if a sole proprietorship;
    (2) With respect to fingerprints of a floor broker or floor trader. 
The applicant for registration; or
    (3) With respect to the fingerprints of a principal. An officer, if 
the futures commission merchant, commodity trading advisor, commodity 
pool operator, introducing broker, or leverage transaction merchant with 
which the principal will be affiliated is a corporation, a general 
partner, if a partnership, or the sole proprietor, if a sole 
proprietorship.
    (c) Outside directors. Any futures commission merchant, introducing 
broker, commodity trading advisor, commodity pool operator or leverage 
transaction merchant that has a principal who is a director but is not 
also an officer or employee of the firm may, in lieu of submitting a 
fingerprint card in accordance with the provisions of Sec. Sec. 
3.10(a)(2) and 3.31(a)(2), file a ``Notice Pursuant to Rule 3.21(c)'' 
with the National Futures Association. Such notice shall state, if true, 
that such outside director:
    (1) Is not engaged in:
    (i) The solicitation or acceptance of customers' orders,
    (ii) The solicitation of funds, securities or property for a 
participation in a commodity pool,
    (iii) The solicitation of a client's or prospective client's 
discretionary account,
    (iv) The solicitation or acceptance of leverage customers' orders 
for leverage transactions;
    (2) Does not regularly have access to the keeping, handling or 
processing of:
    (i) Commodity interest transactions;
    (ii) Customer funds, leverage customer funds, foreign futures or 
foreign options secured amount, or adjusted net capital; or
    (iii) The original books and records relating to the items described 
in paragraphs (c)(2)(i) and (c)(2)(ii) of this section; and
    (3) Does not have direct supervisory responsibility over persons 
engaged in the activities referred to in paragraphs (c)(1) and (c)(2) of 
this section; and
    (4) The Notice Pursuant to Rule 3.21(c) shall also include:
    (i) The name of the futures commission merchant, introducing broker, 
commodity trading advisor, commodity pool operator, leverage transaction 
merchant, or applicant for registration in any of these capacities of 
which the person is an outside director;
    (ii) The nature of the duties of the outside director for whom 
exemption under paragraph (c) of this section is sought;
    (iii) The internal controls used to ensure that the outside director 
for whom exemption under paragraph (c) of this section is sought does 
not have access to the keeping, handling or processing of the items 
described in paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of this 
section; and
    (iv) The reasons why the outside director believes he should be 
exempted from the fingerprint requirement and why such an exemption 
would not be contrary to the public interest and the purposes of the 
provision from which exemption is sought.
    (d) A firm that has filed a Notice Pursuant to Rule 3.21(c) with 
respect to an outside director described therein must file with the 
National Futures Association on behalf of such outside director a Form 
8-R, completed in accordance with the instructions thereto and executed 
by the outside director. The exemption provided for in paragraph (c) of 
this section is limited solely to the outside director's fingerprint 
requirement and does not affect any other duties or responsibilities of 
the firm or the outside director under the Act or the rules set forth in 
this chapter. In appropriate cases, the Commission and the National 
Futures Association may require further information from the firm with 
respect to any outside director referred to in a Notice Pursuant to Rule 
3.21(c).

[48 FR 35297, Aug. 3, 1983, as amended at 49 FR 5525, Feb. 13, 1984; 54 
FR 19558, May 8, 1989; 57 FR 23148, June 2, 1992; 58 FR 19592, Apr. 15, 
1993; 66 FR 53518, Oct. 23, 2001]

[[Page 131]]



Sec. 3.22  Supplemental filings.

    Notwithstanding any other provision of this chapter, the Commission, 
the Directors of the Division of Clearing and Intermediary Oversight or 
Division of Enforcement or either Director's designee, or the National 
Futures Association may, at any time, give written notice to any 
registrant, applicant for registration, or person required to be 
registered:
    (a)(1) That derogatory information has come to the attention of the 
staff of the Commission or the National Futures Association which, if 
true, could constitute grounds upon which to base a determination that 
the person is unfit to become, or to remain, registered or temporarily 
licensed in accordance with the Act or the regulations thereunder and 
setting forth such information in the notice and requesting the person 
to provide evidence mitigating the seriousness of the statutory 
disqualification set forth in the notice and evidence that the person 
has undergone rehabilitation, or
    (2) That the Commission or the National Futures Association has 
undertaken a routine or periodic review of the registrant's fitness to 
remain registered or temporarily licensed; and
    (b) That the person, or any individual who, based upon his or her 
relationship with that person is required to file a Form 8-R in 
accordance with the requirements of this part, as applicable, must, 
within such period of time as the Commission or the National Futures 
Association may specify, complete and file with the Commission or the 
National Futures Association a current Form 7-R, or if appropriate, a 
Form 8-R, in accordance with the instructions thereto. A Form 8-R must 
be accompanied by that individual's fingerprints on a fingerprint card 
provided by the Commission or the National Futures Association for that 
purpose.
    (c) Failure to provide the information required under paragraph (b) 
of this section is a violation of the Commission's regulations which 
itself constitutes grounds upon which to base a determination that the 
person is unfit to become or to remain so registered.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 8049, Dec. 5, 1980, as amended by 47 FR 27551, June 25, 1982; 49 
FR 39532, Oct. 9, 1984; 53 FR 8433, Mar. 15, 1988; 57 FR 23148, June 2, 
1992; 67 FR 62351, Oct. 7, 2002]



Sec. Sec. 3.23-3.29  [Reserved]



Sec. 3.30  Current address for purpose of delivery of communications from 
the Commission or the National Futures Association.

    (a) The address of each registrant, applicant for registration and 
principal, as submitted on the application for registration (Form 7-R or 
Form 8-R) or as submitted on the biographical supplement (Form 8-R) 
shall be deemed to be the address for delivery to the registrant, 
applicant or principal for any communications from the Commission or the 
National Futures Association, including any summons, complaint, 
reparation claim, order, subpoena, special call, request for 
information, notice, and other written documents or correspondence, 
unless the registrant, applicant or principal specifies another address 
for this purpose: Provided, That the Commission or the National Futures 
Association may address any correspondence relating to a biographical 
supplement submitted for or on behalf of a principal to the futures 
commission merchant, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant with which the 
principal is affiliated and may address any correspondence relating to 
the registration of an associated person to the futures commission 
merchant, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant with which the 
associated person or the applicant for registration is or will be 
associated as an associated person.
    (b) Each registrant, while registered and for two years after 
termination of registration, and each principal, while affiliated and 
for two years after termination of affiliation, must notify in

[[Page 132]]

writing the National Futures Association of any change of the address an 
the application for registration, biographical supplement, or other 
address filed with the National Futures Association for the purpose of 
receiving communications from the Commission or the National Futures 
Association. Failure to file a required response to any communication 
sent to the latest such address filed with the National Futures 
Association which is caused by a failure to notify in writing the 
National Futures Association of an address change may result in an order 
of default and award of claimed monetary damages or other appropriate 
order in any National Futures Association or Commission proceeding, 
including a reparation proceeding brought under part 12 of this chapter.

[57 FR 23149, June 2, 1992]



Sec. 3.31  Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission 
merchant, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant shall, in 
accordance with the instructions thereto, promptly correct any 
deficiency or inaccuracy in Form 7-R or Form 8-R which no longer renders 
accurate and current the information contained therein. Each such 
correction shall be made on Form 3-R and shall be prepared and filed in 
accordance with the instructions thereto. Provided, however, that where 
a registrant is reporting a change in the form of organization from or 
to a sole proprietorship, the registrant must file a Form 7-W regarding 
the pre-existing organization and a Form 7-R regarding the newly formed 
organization.
    (2) If a registrant files a Form 3-R, pursuant to this section, to 
report a change in the form of the organization of the registrant, the 
registrant shall be liable for all obligations of the pre-existing 
organization under the Act, as it may be amended from time to time, and 
the rules, regulations, or orders which have been or may be promulgated 
thereunder.
    (3) Where the deficiency or inaccuracy is created by the addition of 
a new principal not listed on the registrant's application for 
registration (or amendment of such application prior to the granting of 
registration), and the new principal is not a natural person, the 
registrant shall file a Form 3-R filed in accordance with the 
requirements of paragraph (a)(1) of this section. Provided, however, 
that if the new principal is a natural person, the registrant shall file 
a Form 8-R, completed in accordance with the instructions thereto and 
executed by such person who is a principal of the registrant and who was 
not listed on the registrant's initial application for registration or 
any amendment thereto. The Form 8-R for each such principal shall be 
accompanied by the fingerprints of that principal on a fingerprint card 
provided by the National Futures Association for that purpose, unless 
such principal is a director who qualifies for the exemption from the 
fingerprint requirement pursuant to Sec. 3.21(c) or such principal has 
a current Form 8-R on file with the Commission or the National Futures 
Association.
    (b) Each applicant or registrant as a floor broker, floor trader or 
associated person, each person who qualifies for the temporary no-action 
position under Sec. 1.66 of this chapter, and each principal of a 
futures commission merchant, commodity trading advisor, commodity pool 
operator, introducing broker, or leverage transaction merchant must, in 
accordance with the instructions thereto, promptly correct any 
deficiency or inaccuracy in the Form 8-R or supplemental statement 
thereto which renders no longer accurate and current the information 
contained in the Form 8-R or supplemental statement. Each such 
correction must be made on Form 3-R and must be prepared and filed in 
accordance with the instructions thereto.
    (c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf 
of any person for the purpose of permitting that person to be an 
associated person of a futures commission merchant, commodity trading 
advisor, commodity pool operator, introducing broker, or a leverage 
transaction merchant, that futures commission merchant, commodity 
trading advisor, commodity pool operator, introducing

[[Page 133]]

broker or leverage transaction merchant must, within twenty days after 
the occurrence of either of the following, file a notice thereof with 
the National Futures Association indicating;
    (i) The failure of that person to become associated with the futures 
commission merchant, commodity trading advisor, commodity pool operator, 
introducing broker, or leverage transaction merchant, and the reasons 
therefor; or
    (ii) The termination of the association of the associated person 
with the futures commission merchant, commodity trading advisor, 
commodity pool operator, introducing broker, or leverage transaction 
merchant, and the reasons therefor.
    (2) Each person registered as, or applying for registration as, a 
futures commission merchant, commodity trading advisor, commodity pool 
operator, introducing broker or leverage transaction merchant must, 
within twenty days after the termination of the affiliation of a 
principal with the registrant or applicant, file a notice thereof with 
the National Futures Association.
    (3) Any notice required by paragraph (c) of this section must be 
filed on Form 8-T or on a Uniform Termination Notice for Securities 
Industry Registration.
    (d) Each contract market or derivatives transaction execution 
facility that has granted trading privileges to a person who is 
registered, has received a temporary license, or has applied for 
registration as a floor broker or floor trader, or whose name appears on 
a list of floor traders submitted in accordance with Sec. 1.66(a) of 
this chapter in order to qualify for the temporary no-action position 
thereunder, must notify the National Futures Association within sixty 
days after such person has ceased having trading privileges on such 
contract market or derivatives transaction execution facility.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 48 
FR 35297, Aug. 3, 1983; 49 FR 5525, Feb. 13, 1984; 49 FR 39533, Oct. 9, 
1984; 51 FR 34460, Sept. 29, 1986; 53 FR 8433, Mar. 15, 1988; 54 FR 
19558, May 8, 1989; 58 FR 19592, Apr. 15, 1993; 66 FR 53518, Oct. 23, 
2001; 67 FR 38875, June 6, 2002]



Sec. 3.33  Withdrawal from registration.

    (a) A futures commission merchant, introducing broker, commodity 
trading advisor, commodity pool operator, leverage transaction merchant, 
floor broker or floor trader may request that its registration be 
withdrawn in accordance with the requirements of this section if:
    (1) The registrant has ceased, or has not commenced, engaging in 
activities requiring registration in such capacity;
    (2) The registrant is exempt from registration in such capacity; or
    (3) The registrant is excluded from the persons or any class of 
persons required to be registered in such capacity: Provided, That the 
National Futures Association or the Commission, as appropriate, may 
consider separately each capacity for which withdrawal is requested in 
acting upon such a request.
    (b) A request for withdrawal from registration as a futures 
commission merchant, introducing broker, commodity trading advisor, 
commodity pool operator, or leverage transaction merchant must be made 
on Form 7-W, and a request for withdrawal from registration as a floor 
broker or floor trader must be made on Form 8-W, completed and filed 
with National Futures Association in accordance with the instructions 
thereto. The request for withdrawal must be made by a person duly 
authorized by the registrant and must specify:
    (1) The name of the registrant for which withdrawal is being 
requested;
    (2) The registration capacities for which withdrawal is being 
requested;

[[Page 134]]

    (3) The name, address, and telephone number of the person who will 
have custody of the books and records of the registrant; the address 
where such books and records will be located; and a statement that such 
person is authorized to make them available in accordance with the 
requirements of Sec. 1.31 of this chapter;
    (4) The applicable basis under paragraph (a) of this section for 
requesting withdrawal for each capacity for which withdrawal is 
requested.
    (5) If withdrawal is requested under paragraph (a)(2) or (a)(3) of 
this section, then, with respect to each capacity for which withdrawal 
is requested, the section of the Act, regulations, or other authority 
permitting the exemption or exclusion, and the circumstances which 
entitle the registrant to claim such exemption or exclusion.
    (6) If a basis for withdrawal from registration under paragraph 
(a)(1) of this section is that the registrant has ceased engaging in 
activities requiring registration, then, with respect to each capacity 
for which the registrant has ceased such activities:
    (i) That all customer or option customer agreements, if any, have 
been terminated;
    (ii) That all customer or option customer positions, if any, have 
been transferred on behalf of customers or option customers or closed;
    (iii) That all customer or option customer cash balances, 
securities, or other property, if any, have been transferred on behalf 
of customers or option customers or returned, and that there are no 
obligations to customers or option customers outstanding;
    (iv) In the case of a commodity pool operator, that all interests 
in, and assets of, any commodity pool have been redeemed, distributed, 
or transferred, on behalf of the participants therein, and that there 
are no obligations to such participants outstanding;
    (v) In the case of a leverage transaction merchant: (A) Either that 
all leverage customer agreements, if any, and all leverage contracts 
have been terminated, and that all leverage customer cash balances, 
securities or other property, if any, have been returned, or (B) 
alternatively, that pursuant to Commission approval, the leverage 
contract obligations of the leverage transaction merchant have been 
assumed by another leverage transaction merchant and all leverage 
customer cash balances, securities or other property, if any, have been 
transferred to such leverage transaction merchant on behalf of leverage 
customers or returned, and that there are no obligations to leverage 
customers outstanding;
    (vi) The nature and extent of any pending customer, option customer, 
leverage customer, or commodity pool participant claims against the 
registrant, and, to the best of the registrant's knowledge and belief, 
the nature and extent of any anticipated or threatened customer, option 
customer, leverage customer, or commodity pool participant claims 
against the registrant; and
    (vii) In the case of a futures commission merchant which is a party 
to a guarantee agreement, that all such agreements have been or will be 
terminated in accordance with the provisions of Sec. 1.10(j) of this 
chapter not more than thirty days after the filing of the request for 
withdrawal from registration.
    (c) Where a leverage transaction merchant 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 2-FR which contains the information specified in 
Sec. 31.13(f) of this chapter as of a date not more than 30 days prior 
to the date of the withdrawal request.
    (d) [Reserved]
    (e) A request for withdrawal from registration as a futures 
commission merchant, introducing broker, commodity trading advisor, 
commodity pool operator, leverage transaction merchant on Form 7-W, and 
a request for withdrawal from registration as a floor broker or floor 
trader on Form 8-W, must be filed with the National Futures Association 
and a copy of such request must be sent by the National

[[Page 135]]

Futures Association within three business days of the receipt of such 
withdrawal request to the Commodity Futures Trading Commission, Division 
of Clearing and Intermediary Oversight, Three Lafayette Centre, 1155 
21st Street, NW., Washington, DC 20581. In addition, any floor broker or 
floor trader requesting withdrawal from registration must file a copy of 
his Form 8-W with each contract market that has granted him trading 
privileges. Within three business days of any determination by the 
National Futures Association under Sec. 3.10(d) to treat the failure by 
a registrant to file an annual Form 7-R as a request for withdrawal, the 
National Futures Association shall send the Commission notice of that 
determination.
    (f) Except as otherwise provided in Sec. 3.10(d), a request for 
withdrawal from registration will become effective on the thirtieth day 
after receipt of such request by the National Futures Association, or 
earlier upon written notice from the National Futures Association (with 
the written concurrence of the Commission) of the granting of such 
request, unless prior to the effective date:
    (1) The Commission or the National Futures Association has 
instituted a proceeding to suspend or revoke such registration;
    (2) The Commission or the National Futures Association imposes, or 
gives notice by mail which notice shall be complete upon mailing, that 
it intends to impose terms or conditions upon such withdrawal from 
registration;
    (3) The Commission or the National Futures Association notifies the 
registrant by mail, which notice shall be complete upon mailing, or the 
registrant otherwise is notified that it is the subject of an 
investigation to determine, among other things, whether such registrant 
has violated, is violating, or is about to violate the Act, rules, 
regulations or orders adopted thereunder;
    (4) The Commission or the National Futures Association requests from 
the registrant further information pertaining to its request for 
withdrawal from registration; or
    (5) The Commission or National Futures Association determines that 
it would be contrary to the requirements of the Act, or of any rule, 
regulation or order thereunder, or to the public interest to permit such 
withdrawal from registration.
    (g) Withdrawal from registration in one capacity does not constitute 
withdrawal from registration in any other capacity.
    (h) Withdrawal from registration does not constitute a release from 
liability for any violation of the Act or of any rule, regulation, or 
order thereunder.

(Approved by the Office of Management and Budget under control number 
3038-0008)

[46 FR 48917, Oct. 5, 1981, as amended at 46 FR 63035, Dec. 30, 1981. 
Redesignated at 46 FR 48918, Oct. 5, 1981, and amended at 47 FR 27551, 
June 25, 1982; 47 FR 57010, Dec. 22, 1982; 48 FR 35298, Aug. 3, 1983; 49 
FR 5526, Feb. 13, 1984; 49 FR 39534, Oct. 9, 1984; 53 FR 8434, Mar. 15, 
1988; 54 FR 41078, Oct. 5, 1989; 57 FR 23150, June 2, 1992; 58 FR 19592, 
Apr. 15, 1993; 60 FR 49334, Sept. 25, 1995; 62 FR 4642, Jan. 31, 1997; 
67 FR 38875, June 6, 2002; 67 FR 62351, Oct. 7, 2002]



                      Subpart B_Temporary Licenses



Sec. 3.40  Temporary licensing of applicants for associated person, 
floor broker or floor trader registration.

    (a) Notwithstanding any other provision of these regulations and 
pursuant to the terms and conditions of this subpart:
    (1) The National Futures Association may grant a temporary license 
to any applicant for registration as an associated person upon the 
contemporaneous filing with the National Futures Association of:
    (i) A Form 8-R, properly completed in accordance with the 
instructions thereto; and
    (ii) The sponsor's certification required by Sec. 3.12(c): 
Provided, however, that the fingerprints of the applicant on a 
fingerprint card provided by the National Futures Association for that 
purpose must be filed with the National Futures Association within 20 
days following the date the temporary license is issued; and, provided 
further, that failure to file the fingerprints within this period will 
result in the termination of the temporary license

[[Page 136]]

immediately upon notice to the applicant's sponsor that the National 
Futures Association has not received the applicant's fingerprints.
    (2) The National Futures Association may grant a temporary license 
to any applicant for registration as a floor broker or floor trader upon 
the contemporaneous filing with the National Futures Association of:
    (i) A Form 8-R, properly completed in accordance with the 
instructions thereto;
    (ii) The fingerprints of the applicant on a fingerprint card 
provided by the National Futures Association for that purpose;
    (iii) A Supplemental Sponsor Certification Statement executed by a 
sponsor meeting the requirements under Sec. 3.60(b)(2)(i), if the 
applicant is subject to an order imposing conditions on the applicant's 
registration; and
    (iv) Evidence that the applicant has been granted trading privileges 
by a contract market or derivatives transaction execution facility that 
has filed with the National Futures Association a certification signed 
by its chief operating officer with respect to the review of an 
applicant's employment, credit and other history in connection with the 
granting of trading privileges.
    (b) The failure of an applicant or the applicant's sponsor to 
respond to a request by the Commission or the National Futures 
Association for clarification of any information set forth in the 
application of the applicant or for the resubmission of fingerprints in 
accordance with such request will be deemed to constitute a withdrawal 
of the applicant's registration application and shall result in the 
immediate termination of the applicant's temporary license.
    (c) Subject to the provisions of Sec. 3.42 and all of the 
obligations imposed on such registrants under the Act (in particular, 
section 14 thereof) and the rules, regulations, and orders thereunder, 
an applicant for registration as an associated person who has received 
notification that a temporary license has been granted may act in the 
capacity of an associated person, an applicant for registration as a 
floor trader who has received written notification that a temporary 
license has been granted may act in the capacity of a floor trader, and 
an applicant for registration as a floor broker who has received written 
notification that a temporary license has been granted may act in the 
capacity of a floor broker.

[67 FR 38876, June 6, 2002]



Sec. 3.42  Termination.

    (a) A temporary license shall terminate:
    (1) Five days after service upon the applicant of a notice by the 
Commission or the National Futures Association pursuant to Sec. 3.60 of 
this part that the applicant for registration may be found subject to a 
statutory disqualification from registration;
    (2) Immediately upon termination of the association of the applicant 
for registration as an associated person with the registrant which filed 
the sponsorship certification, or immediately upon loss of trading 
privileges by an applicant for registration as a floor broker or floor 
trader on all contract markets which filed the certification described 
in Sec. 3.40;
    (3) Immediately upon the withdrawal of the registration application 
pursuant to Sec. 3.40;
    (4) Immediately upon failure to comply with an order to pay a civil 
monetary penalty, restitution, or disgorgement within the time permitted 
under sections 6(e), 6b, or 6c(d) of the Act;
    (5) Immediately upon failure to pay the full amount of a reparation 
order within the time permitted under section 14(f) of the Act;
    (6) Immediately upon failure to comply with an award in an 
arbitration proceeding conducted pursuant to the rules of a designated 
contract market, registered derivatives transaction execution facility, 
or registered futures association within the time specified in section 
10(g) of the National Futures Association's Code of Arbitration or the 
comparable time period specified in the rules of a contract market, 
registered derivatives transaction execution facility, or other 
appropriate arbitration forum.
    (7) Immediately upon the revocation or withdrawal of the 
registration of the applicant's sponsor; or

[[Page 137]]

    (8) Immediately upon notice to the applicant and the applicant's 
sponsor or the contract market that has granted the applicant trading 
privileges that:
    (i) The applicant failed to disclose relevant disciplinary history 
information in response to items 14 through 18 on the applicant's Form 
8-R; or
    (ii) An event has occurred leading to an affirmative response to any 
of items 14 through 18 on the applicant's Form 8-R.
    (b) Upon termination, the applicant may not engage in any activity 
which requires registration with the Commission as an associated person, 
floor broker or floor trader.

[49 FR 8219, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 58 
FR 19594, Apr. 15, 1993; 67 FR 38876, June 6, 2002]



Sec. 3.43  Relationship to registration.

    (a) A temporary license shall not be deemed to be a registration or 
to confer any right to such registration.
    (b) Unless a temporary license has terminated pursuant to Sec. 
3.42, a temporary license shall become a registration with the 
Commission upon the earlier of:
    (1) A determination by the National Futures Association that the 
applicant is qualified for registration as an associated person, floor 
broker or floor trader; or
    (2) The expiration of six months from the date of issuance unless a 
notice has been issued under Sec. 3.60 of the initiation of a 
proceeding to deny registration under section 8a(2) or 8a(3) of the Act.

[49 FR 8219, Mar. 5, 1984, as amended at 49 FR 39534, Oct. 9, 1984; 54 
FR 19559, May 8, 1989; 58 FR 19595, Apr. 15, 1993]



Sec. 3.44  Temporary licensing of applicants for guaranteed introducing 
broker registration.

    (a) Notwithstanding any other provisions of these regulations, and 
pursuant to the terms and conditions of this subpart, the National 
Futures Association may grant a temporary license to any applicant for 
registration as an introducing broker upon the contemporaneous filing 
with the National Futures Association of:
    (1) A properly completed guarantee agreement (Form 1-FR part B) from 
a futures commission merchant which is eligible to enter into such an 
agreement pursuant to Sec. 1.10(j)(2) of this chapter;
    (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.
    (4) A certification executed by a person duly authorized by the 
futures commission merchant that has executed the guarantee agreement 
required by paragraph (a)(1) of this section, stating that:
    (i) The futures commission merchant has verified the information on 
the Forms 8-R filed pursuant to paragraph (a)(3) of this section which 
relate to education and employment history of the applicant's principals 
(including each branch office manager) thereof during the preceding 
three years; and
    (ii) To the best of the futures commission merchant's knowledge, 
information, and belief, all of the publicly available information 
supplied by the applicant and its principals and each branch office 
manager of the applicant on the Form 7-R and Forms 8-R, as appropriate, 
is accurate and complete; and
    (5) The fingerprints of the applicant, if a sole proprietor, and of 
each principal (including each branch office manager) thereof on 
fingerprint cards provided by the National Futures Association for that 
purpose: Provided, that a principal who has a current Form 8-R on file 
with the National Futures Association or the Commission is not required 
to submit a fingerprint card.
    (b) The effective date of a guarantee agreement filed in accordance 
with paragraph (a)(1) of this section is the date upon which the 
temporary license is granted by the National Futures Association.
    (c) An applicant that fails to respond in accordance with a written 
request by the Commission or the National Futures Association for 
clarification of

[[Page 138]]

any information set forth in the application of the applicant or any 
principal (including any branch office manager) thereof or for the 
resubmission of a fingerprint card will be deemed to have withdrawn its 
registration application and the temporary license issued to such 
applicant and any associated person thereof shall terminate immediately.

[51 FR 45760, Dec. 22, 1986, as amended at 53 FR 8435, Mar. 15, 1988; 57 
FR 23151, June 2, 1992; 64 FR 1728, Jan. 12, 1999; 67 FR 38876, June 6, 
2002]



Sec. 3.45  Restrictions upon activities.

    (a) Subject to the provisions of Sec. 3.46 of this subpart and all 
of the obligations imposed on such registrants under the Act (in 
particular, section 14 thereof) and the rules, regulations and orders 
thereunder, an applicant for registration as an introducing broker who 
has received written notification that a temporary license has been 
granted may act in the capacity of a guaranteed introducing broker.
    (b) An applicant for registration as an introducing broker who has 
received a temporary license may be guaranteed by a futures commission 
merchant other than the futures commission merchant which provided the 
initial guarantee agreement described in Sec. 3.44(a)(1) of this 
subpart: Provided, That, at least 10 days prior to the effective date of 
the termination of the existing guarantee agreement in accordance with 
the provisions of Sec. 1.10 (j)(4)(ii) or (j)(5) of this chapter, or 
such other period of time as the National Futures Association may allow 
for good cause shown, the applicant files with the National Futures 
Association (1) written notice of such termination and (2) a new 
guarantee agreement with another futures commission merchant effective 
the day following the last effective date of the existing guarantee 
agreement.

[51 FR 45761, Dec. 22, 1986]



Sec. 3.46  Termination.

    (a) A temporary license shall terminate:
    (1) Five days after service upon the applicant of a notice by the 
National Futures Association that the applicant for registration may be 
found subject to a statutory disqualification from registration;
    (2) Immediately upon termination of the applicant's guarantee 
agreement in accordance with Sec. 1.10(j)(4)(ii) or (j)(5) of this 
chapter, unless a new guarantee agreement is filed in accordance with 
Sec. 3.45(b);
    (3) Immediately upon the failure of an applicant to respond to a 
written request by the Commission or the National Futures Association 
for clarification of information set forth in the application of the 
applicant or any principal (including any branch office manager) thereof 
or for the resubmission of a fingerprint card pursuant to Sec. 3.44(c) 
in accordance with such request;
    (4) Immediately upon the revocation or withdrawal of the guarantor 
futures commission merchant's registration;
    (5) Immediately upon the withdrawal of the registration application 
pursuant to Sec. 3.44(c);
    (6) Immediately upon failure to comply with an order to pay a civil 
monetary penalty, restitution, or disgorgement within the time permitted 
unders sections 6(e), 6b, or 6c(d) of the Act;
    (7) Immediately upon failure to pay the full amount of a reparation 
order within the time permitted under section 14(f) of the Act;
    (8) Immediately upon failure to comply with an award in an 
arbitration proceeding conducted pursuant to the rules of a designated 
contract market, registered derivatives transaction execution facility, 
or registered futures association within the time specified in section 
10(g) of the National Futures Association's Code of Arbitration or the 
comparable time period specified in the rules of a contract market, 
registered derivatives transaction execution facility, or other 
appropriate arbitration forum.
    (9) Whenever a person not listed as a principal on the applicant's 
initial registration application becomes a principal under Sec. 3.1(a); 
or
    (10) Immediately upon notice to the applicant and the guarantor 
futures commission merchant that:
    (i) The applicant or any principal (including any branch officer 
manager)

[[Page 139]]

failed to disclose relevant disciplinary history information in response 
to items 11 through 15 on the applicant's Form 7-R or items 14 through 
18 on a principal's Form 8-R; or
    (ii) An event has occurred leading to an affirmative response to any 
of items 11 through 15 on the applicant's Form 7-R or items 14 through 
18 on a principal's Form 8-R.
    (b) Upon termination, the applicant may not engage in any activity 
which requires registration as an introducing broker.

[51 FR 45761, Dec. 22, 1986, as amended at 53 FR 8435, Mar. 15, 1988; 58 
FR 19595, Apr. 15, 1993; 67 FR 38876, June 6, 2002]



Sec. 3.47  Relationship to registration.

    (a) A temporary license shall not be deemed to be a registration or 
to confer any right to such registration.
    (b) Unless a temporary license has terminated, a temporary license 
shall become a registration upon the earlier of:
    (1) A determination by the National Futures Association that the 
applicant is qualified for registration as an introducing broker; or
    (2) The expiration of six months from the date of issuance unless a 
notice has been issued under Sec. 3.60 of the initiation of a 
proceeding to deny registration under sections 8a(2) or 8a(3) of the 
Act.

[51 FR 45761, Dec. 22, 1986, as amended at 58 FR 19595, Apr. 15, 1993]



       Subpart C_Denial, Suspension or Revocation of Registration

    Source: 49 FR 8220, Mar. 5, 1984, unless otherwise noted.



Sec. 3.50  Service.

    (a) For purposes of this subpart, service upon an applicant or 
registrant will be sufficient if mailed by registered mail or certified 
mail return receipt requested properly addressed to the applicant or 
registrant at the address shown on his application or any amendment 
thereto, and will be complete upon mailing. Where a party effects 
service by mail, the time within which the person served may respond 
thereto shall be increased by three days.
    (b) A copy of any notice served in accordance with paragraph (a) of 
this section shall also be served upon:
    (1) Any registrant sponsoring the applicant or registrant pursuant 
to the provisions of Sec. 3.12 of this part if the applicant or 
registrant is an individual registered as or applying for registration 
as an associated person; or
    (2) Any futures commission merchant which has entered into a 
guarantee agreement in accordance with Sec. 1.10(j) of this chapter, if 
the applicant or registrant is registered as or applying for 
registration as an introducing broker.
    (c) Documents served upon the Division of Clearing and Intermediary 
Oversight or upon the Division of Enforcement or filed with the 
Commission under this subpart shall be considered served or filed only 
upon actual receipt at the Commission's Washington, DC office, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
    (d) Except for the documents which may be served under Sec. 3.51, 
any documents served upon an applicant or registrant or upon the 
Division of Clearing and Intermediary Oversight or the Division of 
Enforcement or filed with the Commission under this subpart shall be 
concurrently filed with the Proceedings Clerk, together with proof of 
service, in accordance with the provisions of Sec. 10.12 (d) and (e) of 
this chapter.

[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 60 
FR 49334, Sept. 25, 1995; 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 
7, 2002]



Sec. 3.51  Withdrawal of application for registration.

    (a) Notice. Whenever information comes to the attention of the 
Commission that an applicant for initial registration in any capacity 
under the Act may be found subject to a statutory disqualification under 
sections 8a(2) or 8a(3) of the Act, the Commission may serve written 
notice upon the applicant, which notice shall specify the statutory 
disqualifications to which the applicant may be subject and advise the 
applicant that:
    (1) The information, if true, is a basis upon which the applicant's 
registration may be denied;

[[Page 140]]

    (2) Unless the applicant voluntarily withdraws the application, it 
may be necessary to institute the denial procedures described in this 
subpart; and
    (3) If the applicant does not confirm in writing that the applicant 
wishes to have the application given further consideration, the 
application of the applicant will be deemed to have been withdrawn.
    (b) The applicant must serve the written confirmation referred to in 
paragraph (a)(3) of this section upon the Secretary of the Commission on 
or before twenty days after the date the notice described in paragraph 
(a) of this section is served.

[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992]



Sec. Sec. 3.52-3.54  [Reserved]



Sec. 3.55  Suspension and revocation of registration pursuant to section 
8a(2) of the Act.

    (a) Notice. On the basis of information obtained by the Commission, 
the Commission may at any time serve notice upon a registrant in any 
capacity under the Act that:
    (1) The Commission alleges and is prepared to prove that the 
registrant is subject to one or more of the statutory disqualifications 
set forth in section 8a(2) of the Act;
    (2) An Administrative Law Judge shall make a determination, based 
upon written evidence, as to whether the registrant is subject to such 
statutory disqualification; and
    (3) If the registrant is found to be subject to a statutory 
disqualification, the registration of the registrant may be suspended 
and the registrant ordered to show cause why such registration should 
not be revoked.
    (b) Written submission. If the registrant wishes to challenge the 
accuracy of the allegations set forth in the notice, the registrant may 
submit written evidence limited to the type described in Sec. 
3.60(b)(1) of this part. Such written submission must be served upon the 
Division of Enforcement and filed with the Proceedings Clerk within 
twenty days of the date of service of notice to the registrant.
    (c) Reply. Within ten days of receipt of any written submission 
filed by the registrant, the Division of Enforcement may serve upon the 
registrant and file with the Proceedings Clerk a reply.
    (d) Determination by Administrative Law Judge. A determination by 
the Administrative Law Judge as to whether the registrant is subject to 
a statutory disqualification must be based upon the evidence of the 
statutory disqualification, notice with proof of service, the written 
submission, if any, filed by the registrant in response thereto, any 
written reply submitted by the Division of Enforcement and such other 
papers as the Administrative Law Judge may require or permit.
    (e) Suspension and order to show cause. (1) If the registrant is 
found to be subject to a statutory disqualification, the Administrative 
Law Judge, within thirty days after receipt of the registrant's written 
submission, if any, and any reply thereto, shall issue an interim order 
suspending the registration of the registrant and requiring the 
registrant to show cause within twenty days of the date of the order 
why, notwithstanding the existence of the statutory disqualification, 
the registration of the registrant should not be revoked. The 
registration of the registrant shall be suspended, effective five days 
after the order to show cause is served upon the registrant in 
accordance with Sec. 3.50(a), until a final order with respect to the 
order to show cause has been issued: Provided, That if the sole basis 
upon which the registrant is subject to statutory disqualification is 
the existence of a temporary order, judgment or decree of the type 
described in section 8a(2)(C) of the Act, the order to show cause shall 
not be issued and the registrant shall be suspended until such time as 
the temporary order, judgment or decree shall have expired: Provided, 
however, That in no event shall the registrant be suspended for a period 
to exceed six months.
    (2) If the registrant is found not to be subject to a statutory 
disqualification, the Administrative Law Judge shall issue an order to 
that effect and the Proceedings Clerk shall promptly serve a copy of 
such order on the registrant, the Division of Clearing and Intermediary 
Oversight and the Division of

[[Page 141]]

Enforcement. Such order shall be effective as a final order of the 
Commission fifteen days after the date it is served upon the registrant 
in accordance with the provisions of Sec. 3.50(a) of this part unless a 
timely application for review is filed in accordance with Sec. 10.102 
of this chapter. The appellate procedures set forth in Sec. Sec. 
10.102, 10.103, 10.104, 10.106, 10.107 and 10.109 of this chapter shall 
apply to any appeal brought under paragraph (e)(2) of this section.
    (f) Further proceedings. If an order to show cause is issued 
pursuant to paragraph (e)(1) of this section, further proceedings on 
such order shall be conducted in accordance with the provisions of Sec. 
3.60(b)-(j) of this part.

[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 58 
FR 19595, Apr. 15, 1993; 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 
7, 2002]



Sec. 3.56  Suspension or modification of registration pursuant to section 
8a(11) of the Act.

    (a) Notice. (1) On the basis of information obtained by the 
Commission, the Commission may at any time serve written notice upon a 
registrant in any capacity under the Act that:
    (i) The Commission alleges and is prepared to prove, by reference to 
an information, indictment or complaint authorized by a United States 
Attorney or an appropriate official of any State that the registrant is 
charged with the commission of or participation in a crime involving a 
violation of the Act or a violation of any other provision of Federal or 
State law that would reflect on the honesty or the fitness of the person 
to act as a fiduciary that is punishable by imprisonment for a term 
exceeding one year, and that continued registration of the person may 
pose a threat to the public interest or may threaten to impair public 
confidence in any market regulated by the Commission;
    (ii) An Administrative Law Judge shall make a determination, based 
upon written evidence and any oral hearing granted, as to whether the 
registrant is charged with the Commission of or participation in such a 
crime and whether the continued registration of the person may pose a 
threat to the public interest or may threaten to impair public 
confidence in any market regulated by the Commission; and
    (iii) If the registrant is found to be charged with the commission 
of or participation in such a crime and it is found that the continued 
registration of the person may pose a threat to the public interest or 
may threaten to impair public confidence in any market regulated by the 
Commission, the registration of the registrant shall be suspended or 
modified.
    (2) The notice referred to in paragraph (a) of this section shall 
include a short and plain statement that the continued registration of 
the registrant may pose a threat to the public interest or may threaten 
to impair public confidence in any market regulated by the Commission.
    (b) Response. (1) If the registrant wishes to challenge the accuracy 
of the allegations in the notice, the registrant may submit written 
evidence as to:
    (i) The registrant's identity;
    (ii) The existence of a clerical error in any record documenting the 
information, indictment or complaint;
    (iii) The nature of the information, indictment or complaint; or
    (iv) The statement accompanying the notice referred to in paragraph 
(a)(2) of this section and, in an effort to have his registration 
modified rather than suspended, the Supplemental Sponsor Certification 
Statement signed by a sponsor, supervising floor broker or, in the case 
of a floor trader, a supervising registrant, principal or contract 
market, as appropriate for the registrant in accordance with Sec. 
3.60(b)(2)(i) and who meets the standard set forth in Sec. 
3.60(b)(2)(i)(A) and (C).
    (2) The registrant may also request an oral hearing, which shall 
include a statement of the issues to be addressed, a list of any 
witnesses to be called, a summary of the testimony to be elicited and 
copies of any documents to be introduced. An oral hearing shall be 
granted upon request.
    (3) Such written submissions must be served upon the Division of 
Enforcement and filed with the Proceedings Clerk within twenty days of 
the date of service of notice to the registrant under paragraph (a) of 
this section.

[[Page 142]]

    (c) Reply. Within ten days of receipt of any written submission 
filed by the registrant, the Division of Enforcement may serve upon the 
registrant and file with the Proceedings Clerk a reply.
    (d) Oral hearing. An oral hearing shall be conducted pursuant to 
such sections of the Commission's Rules of Practice, 17 CFR part 10, as 
the Administrative Law Judge deems necessary and in a manner which shall 
ensure that the proceeding is resolved expeditiously.
    (e) Determination by Administrative Law Judge. (1) A determination 
by the Administrative Law Judge as to whether the Division of 
Enforcement has shown by a preponderance of the evidence that the 
registrant is charged with the commission of or participation in a crime 
as set forth in the notice and that the continued registration of the 
registrant may pose a threat to the public interest or may threaten to 
impair public confidence in any market regulated by the Commission must 
be based upon the evidence of service, the response, if any, filed by 
the registrant, any written reply submitted by the Division of 
Enforcement and such other papers as the Administrative Law Judge may 
require or permit, and the oral hearing, if any. If the Division of 
Enforcement has made the required showings, the Administrative Law 
Judge, within thirty days after the last written submission or the oral 
hearing, shall issue an order suspending or modifying the registration 
of the registrant. If the Division of Enforcement has not made the 
required showings, the Administrative Law Judge, within thirty days 
after the last written submission or the oral hearing, shall issue an 
order to that effect. The Administrative Law Judge's order shall include 
a written determination setting forth the basis for his ruling.
    (2) The Proceedings Clerk shall promptly serve a copy of such order 
on the registrant, the Division of Clearing and Intermediary Oversight 
and the Division of Enforcement. Such Order shall be effective as a 
final order of the Commission fifteen days after the date it is served 
upon the registrant in accordance with the provisions of Sec. 3.50(a) 
unless a timely application for review is filed in accordance with Sec. 
10.102 of this chapter. The appellate procedures set forth in Sec. Sec. 
10.102, 10.103, 10.104, 10.106, 10.107 and 10.109 of this chapter shall 
apply to any appeal brought under paragraph (e)(2) of this section.
    (f) Any order of suspension or modification issued under this 
section shall remain in effect until such information, indictment, or 
complaint is disposed of or until terminated by the Commission.
    (g) On disposition of such information, indictment, or complaint, 
the Commission may issue and serve on such registrant a notice under 
Sec. 3.55 or Sec. 3.60 to suspend, restrict, or revoke the 
registration of such person.
    (h) A finding of not guilty or other disposition of the charge shall 
not preclude the Commission from thereafter instituting any other 
proceedings under the Act or its rules.
    (i) A person aggrieved by an order issued under this section may 
obtain review of such order in the same manner and on the same terms and 
conditions as are provided in section 6(c) of the Act.

[58 FR 19595, Apr. 15, 1993, as amended at 60 FR 54801, Oct. 26, 1995; 
67 FR 62351, Oct. 7, 2002]



Sec. 3.57  Proceedings under section 8a(2)(E) of the Act.

    The Commission will not initiate a proceeding under section 8a(2)(E) 
of the Act, if respondeat superior is the sole basis upon which the 
registrant may be found subject to a statutory disqualification.



Sec. 3.60  Procedure to deny, condition, suspend, revoke or place restrictions 
upon registration pursuant to sections 8a(2), 8a(3) and 8a(4) of the Act.

    (a) Notice. On the basis of information obtained by the Commission, 
the Commission may at any time give written notice to any applicant for 
registration or any registrant in any capacity under the Act that:
    (1) The Commission alleges and is prepared to prove that the 
registrant or applicant is subject to one or more of the statutory 
disqualifications set forth in section 8a(2), 8a(3) or 8a(4) of the Act;
    (2) The allegations set forth in the notice, if true, constitute a 
basis upon

[[Page 143]]

which registration may be denied, granted upon conditions, suspended, 
revoked or restricted;
    (3) The applicant or registrant is entitled to file a response 
within thirty days of the date of service of the notice to challenge the 
evidentiary basis of the statutory disqualification set forth in the 
notice or show cause why, notwithstanding the accuracy of those 
allegations, registration should nevertheless be granted, or granted 
upon condition, or should not be conditioned, suspended, revoked or 
restricted; and
    (4) If the applicant or registrant does not file a timely response 
to the notice:
    (i) The applicant or registrant will be deemed to have waived his 
right to a hearing on all issues and the facts stated in the notice 
shall be deemed to be true and conclusive for the purpose of finding 
that the applicant or registrant is subject to a statutory 
disqualification under sections 8a(2), 8a(3) or 8a(4) of the Act; and
    (ii) A presiding officer may thereafter decide whether to issue an 
order of default in accordance with paragraph (g) of this section to 
deny, condition, suspend, revoke, or place restrictions upon 
registration based solely upon the facts set forth in the notice.
    (b) Response. Within thirty days after service upon the applicant or 
registrant of a notice issued in accordance with the provisions of 
paragraph (a) of this section, the applicant or registrant shall file a 
response with the Proceedings Clerk and serve a copy of the response on 
the Division of Enforcement.
    (1) In the response, the applicant or registrant shall state whether 
he challenges the evidentiary basis of the statutory disqualification 
set forth in the notice. The grounds for such a challenge shall include 
evidence as to:
    (i) The applicant's or registrant's identity,
    (ii) The existence of a clerical error in any record documenting the 
statutory disqualification,
    (iii) The nature or date of the statutory disqualification,
    (iv) The post-conviction modification of any record of conviction, 
or
    (v) The favorable disposition of any appeal.


The applicant or registrant shall state the nature of each challenge and 
submit a verified statement or affidavit to support facts material to 
each challenge raised in the response.
    (2)(i) In the response, if the person is not an associated person, a 
floor broker or a floor trader or an applicant for registration in any 
of those capacities, the applicant or registrant shall also state 
whether he intends to show that registration would not pose a 
substantial risk to the public despite the existence of the 
disqualification set forth in the notice. If the person is an associated 
person, a floor broker or a floor trader or an applicant for 
registration in any of those capacities, the applicant or registrant 
shall also state whether he intends to show that full, conditioned or 
restricted registration would not pose a substantial risk to the public 
despite the existence of the disqualification set forth in the notice. 
If the person is an associated person or an applicant for registration 
as an associated person and intends to make such a showing, he must also 
submit a letter signed by an officer or general partner authorized to 
bind the sponsor whereby the sponsor agrees to sign a Supplemental 
Sponsor Certification Statement and supervise compliance with any 
conditions or restrictions that may be imposed on the applicant or 
registrant as a result of a statutory disqualification proceeding under 
this section; if the person is a floor broker or a floor trader or an 
applicant for registration in either capacity and intends to make such a 
showing, he must, in the case of a floor broker or applicant for 
registration as a floor broker, also submit a letter signed by his 
employer or if he has no employer by another floor broker or, in the 
case of a floor trader or applicant for registration as a floor trader, 
also submit a letter signed by an officer of the floor trader's clearing 
member, if such officer is a registrant or a principal of a registrant, 
or the chief operating officer of each contract market that has granted 
trading privileges, whereby the employer or floor broker, appropriate 
registrant, principal or contract market chief operating officer (on 
behalf of the contract market) agrees to sign a Supplemental Sponsor 
Certification

[[Page 144]]

Statement and supervise compliance with any conditions or restrictions 
that may be imposed on the applicant or registrant as a result of a 
statutory disqualification proceeding under this section: Provided, 
That, with respect to such sponsor, supervising employer or floor 
broker, supervising registrant or principal:
    (A) An adjudicatory proceeding pursuant to the provisions of 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act is not pending; and
    (B) In the case of a sponsor which is a futures commission merchant 
or a leverage transaction merchant, the sponsor is not subject to the 
reporting requirements of Sec. 1.12(b) or Sec. 31.7(b) of this 
chapter, respectively; and
    (C) Such person is not barred from service on self-regulatory 
organization governing boards or committees based on disciplinary 
history in accordance with Sec. 1.63 of this chapter.
    (ii) If, in the response, the applicant or registrant states that he 
intends to make the showing referred to in paragraph (b)(2)(i) of this 
section, he shall also, within fifteen days after filing his initial 
response under paragraph (b) of this section, file with the Proceedings 
Clerk and serve a copy on the Division of Enforcement a submission which 
includes a statement of the applicant, registrant or his attorney 
identifying and summarizing the testimony of each witness whom the 
applicant or registrant intends to have testify in support of facts 
material to his showing, and copies of all documents which the applicant 
or registrant intends to introduce to support facts material to his 
showing. The factors forming the basis for a disqualified applicant's or 
registrant's showing referred to in paragraph (b)(2)(i) of this section 
may include:
    (A) Evidence mitigating the seriousness of the wrongdoing underlying 
the statutory disqualification set forth in the notice;
    (B) Evidence that the applicant or registrant has undergone 
rehabilitation since the time of the wrongdoing underlying the statutory 
disqualification; and
    (C) If the person is an associated person, floor broker or floor 
trader or an applicant for registration in any of those capacities, 
evidence that the applicant's or registrant's registration on a 
conditioned or restricted basis would be subject to supervisory controls 
likely both to detect future wrongdoing by the applicant or registrant 
and protect the public from any harm arising from the applicant's or 
registrant's future wrongdoing, including proposed conditions or 
restrictions.
    (c) Reply. Within thirty days after the latter of the date the 
applicant or registrant serves a copy of the response on the Division of 
Enforcement (if no further submission is to be made in accordance with 
paragraph (b)(2)(ii) of this section), or the date the applicant or 
registrant serves a copy of the further submission made in accordance 
with paragraph (b)(2)(ii) of this section on the Division of 
Enforcement, the Division of Enforcement shall file a reply thereto with 
the Proceedings Clerk and serve a copy of the reply on the applicant or 
registrant. The Division of Enforcement's reply shall include either:
    (1) A motion for summary disposition stating that there are no 
genuine issues of material fact to be determined and that registration 
should be denied or revoked, based upon the applicant's or registrant's 
response and further submission, if any, and any other materials which 
are attached to the reply and would be admissible under Sec. 10.91 of 
this chapter; or
    (2) A description of factual issues raised in the applicant's or 
registrant's response and further submission, if any, that the Division 
of Enforcement regards as material and disputed. Such a reply shall also 
include the identity and a summary of the expected testimony of each 
witness whom the Division intends to have testify, and copies of all 
documents which the Division intends to introduce.
    (d) Oral Presentation. Within thirty days of the date the Division 
of Enforcement files its reply in accordance with the provisions of 
paragraph (c) of this section to the applicant's or registrant's 
response and further submission, if any, the Administrative Law Judge 
shall issue an order:
    (1) If the Administrative Law Judge finds, based on the motion for 
summary disposition, that a party is entitled to judgment as a matter of 
law,

[[Page 145]]

granting, denying, suspending, or revoking the registration of an 
applicant or registrant, or dismissing the notice issued in accordance 
with paragraph (a) of this section, and such order shall be made in 
accordance with the standards set forth in paragraphs (e) and (f) of 
this section; or
    (2) Notifying the parties of a time and place of hearing. At such 
hearing, the parties shall be limited to presentation of witnesses and 
documents listed in previous filings except, for good cause shown, the 
parties may request that the witness and document lists be supplemented 
for purposes of rebuttal. Such oral hearing shall be conducted in 
accordance with Sec. Sec. 10.61-10.81 and 10.83 of this chapter. The 
Administrative Law Judge shall file an initial decision after completion 
of the oral hearing in accordance with the standards set forth in 
paragraphs (e) and (f) of this section.
    (3) Upon notice that the Administrative Law Judge has concluded that 
an oral presentation is appropriate, the parties may elect to 
participate by telephone in accordance with the terms set forth in Sec. 
12.209(b) of this chapter. To effect such an election, the party shall 
file a notice with the Proceedings Clerk and serve a copy on all 
opposing parties within fifteen days of the date the Administrative Law 
Judge's notice is served. The filing of an election to participate by 
telephone will be deemed a waiver of the party's right to a full oral 
hearing on the parties' material disputes of fact. The Administrative 
Law Judge shall schedule a telephonic hearing only if all parties to the 
proceeding elect such a procedure. The Administrative Law Judge shall 
conduct such a hearing in accordance with Sec. 12.209(b) of this 
chapter. Following the hearing, the Administrative Law Judge shall issue 
a written decision in accordance with the standards set forth in 
paragraphs (e) and (f) of this section.
    (e) Determination by Administrative Law Judge--Standards of Proof. 
The Administrative Law Judge's written determination shall specifically 
consider whether the Division of Enforcement has shown by a 
preponderance of the evidence that the applicant or registrant is 
subject to the statutory disqualification set forth in the notice issued 
by the Commission and, where appropriate:
    (1) In actions involving statutory disqualifications set forth in 
section 8a(2) of the Act, whether the applicant or registrant has made a 
clear and convincing showing that full, conditioned or restricted 
registration would not pose a substantial risk to the public despite the 
existence of the statutory disqualification; or
    (2) In actions involving statutory disqualifications set forth in 
sections 8a(3) or 8a(4) of the Act, whether the applicant or registrant 
has shown by a preponderance of the evidence that full, conditioned or 
restricted registration would not pose a substantial risk to the public 
despite the existence of the statutory disqualification.
    (f) Determination of Administrative Law Judge--Findings. In making 
his written determination, the Administrative Law Judge shall set forth 
the facts material to his conclusion and provide an explanation of his 
decision in light of the statutory disqualification set forth in the 
notice and, where appropriate, his findings regarding:
    (1) Evidence mitigating the seriousness of the wrongdoing underlying 
the applicant's or registrant's statutory disqualification;
    (2) Evidence that the applicant or registrant has undergone 
rehabilitation since the time of the wrongdoing underlying the statutory 
disqualification; and
    (3) If the person is an associated person, a floor broker or a floor 
trader or an applicant for registration in any of those capacities, 
evidence that the applicant's or registrant's registration on a 
conditioned or restricted basis would be subject to supervisory controls 
likely both to detect future wrongdoing by the applicant or registrant 
and protect the public from any harm arising from future wrongdoing by 
the applicant or registrant. Any decision providing for a conditioned or 
restricted registration shall take into consideration the applicant's or 
registrant's statutory disqualification and the time period remaining on 
such statutory disqualification, and shall fix a time period after which 
the registrant and his sponsor, supervising employer or floor broker, or 
supervising registrant, principal or

[[Page 146]]

contract market may petition to lift or modify the conditions or 
restrictions in accordance with Sec. 3.64.
    (g) Default. The procedures for obtaining a default order and the 
setting aside of a default order in a proceeding instituted under this 
section shall follow the procedures set forth in Sec. Sec. 10.93 and 
10.94 of this chapter.
    (h) Settlements. (1) When offers may be made. Parties may, at any 
time during the course of the proceeding, propose offers of settlement. 
All offers of settlement shall be in writing.
    (2) Content of offer. Each offer of settlement made by a respondent 
shall:
    (i) Acknowledge service of the notice;
    (ii) Admit the jurisdiction of the Commission with respect to the 
matters set forth in the notice;
    (iii) Include a waiver of:
    (A) A hearing,
    (B) All post-hearing procedures,
    (C) Judicial review, and
    (D) Any objection to the staff's participation in the Commission's 
consideration of the offer;
    (iv) Stipulate the record basis on which an order may be entered, 
which may consist solely of the notice and any findings contained in the 
offer of settlement; and
    (v) Consent to the entry of an order reflecting the terms of 
settlement agreed upon, including, where appropriate:
    (A) Findings that the respondent is subject to statutory 
disqualification under sections 8a(2), 8a(3), or 8a(4) of the Act, and
    (B) The revocation, suspension, denial or granting of full 
registration or imposition of conditioned or restricted registration.
    (3) Submission of offer. Offers of settlement made by a respondent 
shall be submitted in writing to the Division of Enforcement, which 
shall present them to the Commission with the Division's recommendation. 
The respondent will be informed if the recommendation will be 
unfavorable, in which event the offer shall not be presented to the 
Commission unless the respondent so requests. Any offer of settlement 
not presented to the Commission shall be null and void with respect to 
any acknowledgment, admission, waiver, stipulation or consent contained 
in the offer and shall not be used in any manner in the proceeding by 
any party thereto.
    (4) Acceptance of offer. The offer of settlement will only be deemed 
accepted upon issuance by the Commission of an opinion and order based 
on the offer. Upon issuance of the opinion and order, the proceeding 
shall be terminated as to the respondent involved and so noted on the 
docket by the Proceedings Clerk.
    (5) Rejection of offer. When an offer of settlement is rejected, the 
party making the offer shall be notified by the Division of Enforcement 
and the offer of settlement shall be deemed withdrawn. A rejected offer 
of settlement and any documents relating thereto shall not constitute a 
part of the record in the proceeding; and the offer will be null and 
void with respect to any acknowledgment, admission, waiver, stipulation 
or consent contained in the offer and shall not be used in any manner in 
the proceeding by any party thereto.
    (i) Effect of the Administrative Law Judge's Determination. The 
Administrative Law Judge's written determination shall become the final 
decision of the Commission thirty days following the date the 
Proceedings Clerk serves the determination on the parties unless:
    (1) One or more of the parties files and serves a timely notice of 
appeal in accordance with Sec. 10.102 of this chapter; or
    (2) The Commission issues an order staying the effective date of the 
determination and notifying the parties of its intention to undertake 
sua sponte review in accordance with Sec. 10.105 of this chapter.
    (j) Appeal. Following the filing of a notice of appeal, the rules of 
appellate procedure set forth in Sec. Sec. 10.102, 10.103, 10.104, 
10.106, 10.107 and 10.109 of this chapter shall apply to any proceeding 
brought under this section.
    (k) With the exception of Sec. Sec. 10.2 through 10.5, 10.7 through 
10.12(a) (1), 10.12(a) (3) through 10.12(g), 10.26(a)-(d), 10.34, 10.43, 
10.44 and 10.84 of this chapter, or unless otherwise provided in 
Sec. Sec. 3.50 through 3.64 of this part, the provisions of the 
Commission's Rules of Practice in part 10 of this chapter shall not 
apply in any proceeding brought

[[Page 147]]

under this part to deny, suspend, revoke, restrict or condition 
registration pursuant to sections 8a(2), 8a(3) or 8a(4) of the Commodity 
Exchange Act.
    (l) The failure of any sponsor, supervising employer or floor 
broker, or supervising registrant, principal or contract market to 
fulfill its obligations with respect to supervision or monitoring of a 
conditioned or restricted registrant as agreed to in the Supplemental 
Sponsor Certification Statement shall be deemed a violation of this rule 
under the Act.

[57 FR 23152, June 2, 1992, as amended at 58 FR 19596, Apr. 15, 1993; 60 
FR 54801, Oct. 26, 1995]



Sec. 3.61  Extensions of time for proceedings brought under Sec. 3.55, 
Sec. 3.56, and Sec. 3.60 of this part.

    (a) In general. Except as otherwise provided by law or by these 
rules, for good cause shown, the Commission or an Administrative Law 
Judge before whom a proceeding brought under Sec. 3.55, Sec. 3.56 or 
Sec. 3.60 is then pending, on their own motion or the motion of a 
party, may at any time extend or shorten the time limit prescribed by 
those rules for filing any document. In any instance in which a time 
limit is not prescribed for an action to be taken concerning any matter, 
the Commission or the Administrative Law Judge may set a time limit for 
that action.
    (b) Motions for extension of time. Absent extraordinary 
circumstances, in any instance in which a time limit that has been 
prescribed for an action to be taken concerning any matter exceeds seven 
days from the date of the order establishing the time limit, requests 
for extension of time shall be filed at least five (5) days prior to the 
expiration of the time limit and shall explain why an extension of time 
is necessary.

[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993]



Sec. 3.62  [Reserved]



Sec. 3.63  Service of order issued by an Administrative Law Judge or 
the Commission.

    A copy of any order issued pursuant to Sec. 3.60 of this part shall 
be served promptly upon the applicant or registrant, the Division of 
Clearing and Intermediary Oversight, the Division of Enforcement, the 
National Futures Association, and any contract markets where the 
applicant or registrant is a member or has trading privileges in 
accordance with the provisions of Sec. 3.50(a) of this part.

[57 FR 23154, June 2, 1992, as amended at 67 FR 62351, Oct. 7, 2002]



Sec. 3.64  Procedure to lift or modify conditions or restrictions.

    (a) Petition. The registrant and his sponsor or supervising floor 
broker may file a petition with the Proceedings Clerk and serve a copy 
of the petition on the Division of Enforcement to lift or modify 
conditions or restrictions on the registrant's registration.
    (1) The petition may be filed after the period specified in the 
order imposing the conditioned or restricted registration.
    (2) In the petition, the registrant and his sponsor, supervising 
employer or floor broker, or supervising registrant, principal or 
contract market shall be limited to a showing, by affidavit, that the 
conditions or restrictions have been satisfied pursuant to the order 
which imposed them. The affidavit must be sworn to by a person with 
actual knowledge of the registrant's activities on behalf of the 
sponsor, supervising employer or floor broker, or supervising 
registrant, principal or contract market.
    (b) Response. (1) Within thirty days of receipt of the petition, 
pursuant to paragraph (a) of this section, the Division of Enforcement 
shall file a response with the Proceedings Clerk. The response must 
include a recommendation by the Division of Enforcement as to whether to 
continue the conditions or restrictions, modify the conditions or 
restrictions, or to allow for a full registration.
    (2) If the Division of Enforcement agrees with the petitioner's 
request to lift or modify conditions or restrictions on the petitioner's 
registration, it shall so recommend to the Commission. Such 
recommendation will only be deemed accepted upon issuance by the 
Commission of an order lifting or modifying conditions or restrictions 
on

[[Page 148]]

the petitioner's registration. Such order shall be so noted on the 
docket by the Proceedings Clerk.
    (c) Oral presentation. If the Division of Enforcement requests a 
continuation, or a modification other than in accordance with the terms 
of the petition, of the restrictions or conditions on the registration, 
the Administrative Law Judge shall, within thirty days of the date that 
the response is filed pursuant to paragraph (b) of this section, 
determine whether an oral presentation is appropriate to the reliable 
resolution of the registrant's petition.
    (1) If the Administrative Law Judge determines that an oral 
presentation is appropriate, he shall notify the parties of his 
determination and shall schedule and conduct an oral hearing in 
accordance with Sec. Sec. 10.61 through 10.81 of this chapter. 
Following the hearing, the Administrative Law Judge shall issue a 
written decision or an order.
    (2) If the Administrative Law Judge concludes that an oral 
presentation is unnecessary, he shall notify the parties and issue a 
written decision or an order.
    (d) Effect of the Administrative Law Judge's determination. The 
Administrative Law Judge's written determination shall become the final 
decision of the Commission thirty days following the date the 
Proceedings Clerk serves the determination on the registrant, the 
registrant's sponsor, supervising employer or floor broker, or 
supervising registrant, principal or contract market, and the Division 
of Enforcement unless one or more of the parties files a timely notice 
of appeal in accordance with Sec. 10.102 of this chapter.
    (e) Appeal. Following the filing of a notice of appeal, the rules of 
appellate procedure set forth in Sec. Sec. 10.102, 10.103, 10.104, 
10.106, 10.107 and 10.109 of this chapter shall apply to any proceeding 
brought under this section.

[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993; 60 
FR 54801, Oct. 26, 1995]



             Subpart D_Notice Under Section 4k(5) of the Act



Sec. 3.70  Notification of certain information regarding associated persons.

    (a) Notice. A registrant must notify the Commission under section 
4k(5) of the Act of any facts regarding an associated person of the 
registrant or an applicant for registration as an associated person whom 
it has sponsored pursuant to the provisions of Sec. 3.12 of this part 
or whom it intends to hire or otherwise employ as an associated person 
which are set forth as statutory disqualifications in section 8a(2) of 
the Act within ten business days of the date upon which the registrant 
first knows or should have known such facts. Notice to the Commission 
shall be sufficient if the registrant gives notice to the Director of 
the Division of Clearing and Intermediary Oversight or the Director's 
designee by telephone and confirms such notice in writing by certified 
or registered mail or equivalent means to the Commission at its 
Washington, DC office (Attn: Deputy Director, Compliance and 
Registration Section, Division of Clearing and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581).
    (b) Unlawful to act as an associated person. Upon the earlier of 
notification to the Commission by the registrant pursuant to paragraph 
(a) of this section, or actual receipt of notice to the registrant 
pursuant to Sec. 3.50(b)(1) of this part, that an associated person of 
the registrant or an applicant for registration as an associated person 
may be subject to a statutory disqualification as set forth in section 
8a(2) of the Act, it shall be unlawful for the registrant to permit such 
person to act in the capacity of an associated person of the registrant 
until the Commission determines that such person should nonetheless be 
registered.
    (c) Proceedings under subpart C. Upon notification to the Commission 
by the registrant under paragraph (a) of this section, the Commission 
may promptly

[[Page 149]]

issue notice under Sec. 3.55 or Sec. 3.60 of this part, as 
appropriate, to suspend and revoke the registration of the associated 
person of the registrant or to deny the registration of the applicant 
for registration as an associated person of the registrant.

[49 FR 8223, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 60 
FR 49334, Sept. 25, 1995; 67 FR 62351, 62352, Oct. 7, 2002]



            Subpart E_Delegation and Reservation of Authority



Sec. 3.75  Delegation and reservation of authority.

    (a) The Commission hereby delegates, until such time as it orders 
otherwise, the authority to perform all functions specified in subparts 
B through D to the persons authorized to perform them thereunder.
    (b) Nothing in this subpart shall prevent the Commission from 
exercising the authority delegated therein.
    (c) The Commission reserves to itself the decision in any case to 
proceed by order, upon notice and hearing, to deny, suspend, condition 
or restrict the registration of any person pursuant to sections 8a(2), 
8a(3) and 8a(4) of the Act.
    (d) Nothing in this part shall affect the authority of the 
Commission to institute a proceeding pursuant to section 6(c) of the 
Act.
    (e) The Commission may, by order of delegation, authorize a futures 
association registered pursuant to section 17 of the Act to perform all 
or any portion of the registration functions under subparts B through D 
in accordance with rules or procedures adopted by such futures 
association and submitted to the Commission pursuant to section 17(j) of 
the Act and subject to the applicable provisions of the Act.

[49 FR 8224, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 59 
FR 5315, Feb. 4, 1994]

 Appendix A to Part 3--Interpretative Statement With Respect to Section 
8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity Exchange 
                                   Act

                        Section 8a(2) (C) and (E)

    The provisions of sections 8a(2)-8a(4) of the Commodity Exchange Act 
(``Act'') establish a system of statutory disqualifications pursuant to 
which the Commission may find an applicant or registrant unfit for 
registration and vest the Commission with wide discretion to deny, 
condition, suspend, restrict or revoke the registration of any person 
subject to one or more of the disqualifications set forth therein. The 
Commission recognizes that the full exercise of its authority under 
these provisions of the Act may have unintended results. In particular, 
the exercise of such authority may, in certain cases, impede the 
efficient enforcement of the Act and the various federal and state 
securities acts.
    At this time, the Commission cannot anticipate all of the 
circumstances under which it may elect not to exercise its authority 
under sections 8a(2)-8a(4). Until the Commission has gained experience 
with these provisions of the Act, such determinations generally must be 
made on a case-by-case basis. Nonetheless, the Commission has identified 
two paragraphs of section 8a(2) of the Act which it has determined to 
interpret more narrowly than required.
    Section 8a(2)(C). Section 8a(2) of the Act authorizes the Commission 
to deny, condition, suspend or restrict the registration of any person 
``upon notice, but without a hearing'' and to revoke the registration of 
any person ``with such hearing as may be appropriate,'' if such person 
is subject to one or more of the disqualifications described in 
paragraphs (A)-(H). Section 8a(2)(C) authorizes the Commission to affect 
the registration of any person:

    ``if such person is permanently or temporarily enjoined by order, 
judgment, or decree of any court of competent jurisdiction * * * , 
including an order entered pursuant to an agreement of settlement to 
which the Commission or any Federal or State agency or other 
governmental body is a party, from (i) acting as a futures commission 
merchant, introducing broker, floor broker, floor trader, commodity 
trading advisor, commodity pool operator, associated person of any 
registrant under the Act, securities broker, securities dealer, 
municipal securities broker, municipal securities dealer, transfer 
agent, clearing agency, securities information processor, investment 
advisor, investment company, or affiliated person or employee of any of 
the foregoing or (ii) engaging in or continuing any activity involving 
any transaction in or advice concerning contracts of sale of a commodity 
for future delivery, concerning matters subject to Commission regulation 
under section 4c or 19 of the Act, or concerning securities;''

    The Commission believes that a person enjoined from acting in a 
certain capacity as described in section 8a(2)(C)(i), even if the order 
of injunction is entered into pursuant to an agreement of settlement, 
similarly should be prohibited from acting in any

[[Page 150]]

other capacity which requires registration with the Commission. 
Therefore, the Commission does not intend to limit its authority under 
section 8a(2)(C)(i) of the Act.
    However, the Commission is also aware that it has often initiated 
proceedings in which the sole relief sought was an injunction from 
engaging in certain conduct. In such circumstances, the Commission has 
accepted offers of settlement which provide that the findings set forth 
in the settlement will not form the sole basis for the denial, 
suspension or revocation of such person's registration with the 
Commission. The Commission does not wish to impede the resolution by 
negotiated settlement of such proceedings. Therefore, the Commission has 
determined that it will not exercise its authority under section 
8a(2)(C)(ii) of the Act with respect to any person temporarily or 
permanently enjoined by agreement of settlement from engaging in any 
conduct described in that paragraph, if the agreement of settlement 
clearly restricts the use of such order of injunction or any findings 
set forth therein in subsequent or collateral proceedings.
    Thus, a provision in the agreement of settlement to the effect, 
inter alia, that the findings set forth in the agreement will not form 
the sole basis upon which the registration of such person may be 
affected will preclude a collateral proceeding under section 
8a(2)(C)(ii) where the sole basis for such proceeding is the agreement 
of settlement. Unless otherwise precluded in the agreement of 
settlement, however, the person will be collaterally estopped from 
denying the findings set forth therein, whether or not admitted, in any 
other subsequent or collateral proceeding and such findings may, in 
conjunction with the findings in such subsequent or collateral 
proceeding, form a basis for affecting the registration of that person 
or imposing such other sanctions as may be deemed appropriate.
    Section 8a(2)(E) of the Act authorizes the Commission to affect the 
registration of any person:

    If such person, within ten years preceding the filing of the 
application or at any time thereafter, has been found in a proceeding 
brought by the Commission or any Federal or State agency or other 
governmental body, or by agreement of settlement to which the Commission 
or any Federal or State agency or other governmental body is a party, 
(i) to have violated any provision of this Act, [the securities acts], 
chapter 96 of title 18 of the United States Code, or any similar statute 
of a State or foreign jurisdiction, or any rule, regulation, or order 
under any such statutes, or the rules of the Municipal Securities 
Rulemaking Board where such violation involves embezzlement, theft, 
extortion, fraud, fraudulent conversion, misappropriation of funds, 
securities or property, forgery, counterfeiting, false pretenses, 
bribery, or gambling, or (ii) to have willfully aided, abetted, 
counseled, commanded, induced, or procured such violation by any other 
person;

    As in section 8a(2)(C)(ii), the Commission will not exercise its 
authority under section 8a(2)(E) of the Act with respect to any person 
subject to a statutory disqualification thereunder, if the findings are 
part of an agreement of settlement which clearly restricts the use of 
such findings by inclusion of a provision to the effect, inter alia, 
that the findings set forth in the agreement will not form the sole 
basis upon which the registration of such person may be affected.
    Section 2(a)(1)(A) of the Act, inter alia, codifies the legal 
concept of respondant superior by providing that a futures commission 
merchant, introducing broker, commodity trading advisor, commodity pool 
operator or leverage transaction merchant may be held liable for the 
conduct of an associated person sponsored by such registrant. \*\ Thus, 
findings of the type described in paragraph (E) may be entered against a 
registrant solely because such registrant is responsible, under section 
2(a)(1)(A) of the Act, for the conduct of its associated persons. As 
prescribed in Sec. 3.57 of the Commission's regulations, however, the 
Commission will not exercise its authority under section 8a(2)(E) to 
affect the registration of such registrant, if respondant superior is 
the sole basis for finding that the registrant is subject to a statutory 
disqualification.
---------------------------------------------------------------------------

    \*\ Specifically, section 2(a)(1)(A)(iii) of the Act provides in 
part, that the ``act, omission or failure of any official, agent, or 
other person acting for any individual, association, partnership, 
corporation, or trust within the scope of his employment or office shall 
be deemed the act, omission, or failure of such individual, association, 
partnership, corporation, or trust as well as of such official, agent, 
or other person.'' 7 U.S.C. 4 (1982).
---------------------------------------------------------------------------

    The Commission notes that section 8a(3)(C) and 8a(4) authorize the 
Commission to affect the registration of a person if it is found, after 
notice and opportunity for a hearing, that such person ``failed 
reasonably to supervise another person, who is subject to such person's 
supervision, with a view to preventing violations of this Act or [the 
securities acts], or of any of the rules, regulation or orders 
thereunder, and the person subject to supervision committed such a 
violation * * *'' In this connection, the Commission believes that any 
proceeding to affect the registration of a registrant against which 
findings have been made solely pursuant to section 2(a)(1)(A) of the Act 
is more appropriately initiated under the provisions of section 8a(3)(C) 
and 8a(4).

[[Page 151]]

    Section 8a(2)(E) may also be interpreted to authorize the Commission 
to affect the registration of any person if the findings described 
therein are made in a proceeding initiated by a private party either in 
a court of law or in a reparations proceeding under section 14 of the 
Act. At the present time, however, the Commission does not intend to 
exercise its authority under section 8a(2)(E) on the basis of such 
findings. The Commission believes that such proceedings are intended 
primarily to provide restitution to the customer and are not intended to 
be punitive in nature. Therefore, it may not be appropriate to use 
findings in such proceedings to affect the registration of any person 
under section 8a(2)(E).
    At the same time, however, such findings may form the basis of a 
proceeding against a person under the provisions of section 8a(3)(M) and 
8a(4), which authorize the Commission, after notice and opportunity for 
a hearing, to deny, condition, suspend, restrict or revoke the 
registration of any person if ``there is other good cause.'' Similarly, 
such findings may form the basis for a proceeding against a registrant 
under sections 8a(3)(C) and 8a(4) for the failure of such registrant 
``reasonably to supervise another person, who is subject to such 
person's supervision, with a view to preventing violations of this Act * 
* * or of any of the rules, regulations or orders thereunder * * *'' 
Moreover, because the Commission views actions by private parties as an 
important adjunct to the Commission's own enforcement proceedings, the 
Commission intends to monitor carefully decisions in such proceedings 
and may amend this interpretation if deemed appropriate.

                        Section 8a(3) (J) and (M)

    Section 8a(3) authorizes the Commission to refuse to register an 
applicant for registration if, after notice and opportunity for a 
hearing, the applicant is found subject to one or more of the 
disqualifications described in paragraphs (A)-(M). Section 8a(4) 
authorizes the Commission, after notice and opportunity for a hearing, 
to condition, suspend, restrict, or revoke the registration of any 
person subject to a disqualification under section 8a(3).
    Section 8a(3)(J) authorizes the Commission to affect the 
registration of any person if:

    such person is subject to an outstanding order denying, suspending, 
or expelling such person from membership in a contract market, a 
registered futures association, any other self-regulatory organization 
or any foreign regulatory body that the Commission recognizes as having 
a comparable regulatory program, or barring or suspending such person 
from being associated with any member or members of such contract 
market, association, self-regulatory organization, or foreign regulatory 
body.

    The Commission interprets the term ``self-regulatory organization'' 
to include, in addition to a contract market and a registered futures 
association, any self-regulatory organization as defined in section 
3(a)(26) of the Securities Exchange Act of 1934. Thus, a self-regulatory 
organization includes any national securities exchange, any registered 
securities association, any registered clearing agency and the Municipal 
Securities Rulemaking Board.
    Section 8a(3)(M). Section 8a(3)(M) authorizes the Commission to 
affect the registration of any person if ``there is other good cause''. 
Specifically, the Commission interprets paragraph (M) to authorize the 
Commission to refuse to register such person in any new capacity, if 
such person, or any principal of such person, is the subject of an 
administrative proceeding brought by the Commission to revoke the 
existing registration of such person in any other capacity, pending a 
final decision in such administrative proceeding. The Commission 
believes it would be inconsistent to register a person in a new 
capacity, thereby determining that such person is qualified to be 
registered, while simultaneously seeking to revoke such person's 
registration in a different capacity because such person's conduct 
disqualifies him from registration.
    Similarly, the Commission interprets paragraph (M) to authorize the 
Commission to refuse to register, register conditionally or otherwise 
affect the registration of any person if such person has consented, in 
connection with an agreement of settlement with a contract market, a 
registered futures association, or any other self-regulatory 
organization, to comply with an undertaking to withdraw all forms of 
existing or pending registration and/or not to apply for registration 
with the National Futures Association or the Commission in any capacity. 
Such person's effort to violate his or her prior undertaking to withdraw 
from and/or not to apply for registration shall be considered to 
constitute ``other good cause'' under paragraph (M). The Commission 
believes that allowing such a person to be registered would be 
inappropriate and inconsistent with the intention of parties to the 
prior settlement agreement. The failure to withdraw or the attempt to 
register in the face of such an undertaking would indicate the lack of 
fair and honest dealing which the Commission believes constitutes 
``other good cause'' for denying, revoking or conditioning registration 
under the Act. The Commission also believes that allowing registration 
in such a situation would be inconsistent with both Section 8a(2)(A), 
which authorizes the Commission to refuse to register, to register 
conditionally, or to revoke, suspend or place restrictions

[[Page 152]]

upon the registration of any person if such person's prior registration 
has been suspended (and the period of such suspension has not expired) 
or has been revoked, and Section 8a(3)(J), which authorizes the 
Commission to refuse to register or to register conditionally any person 
if he or she is subject to an outstanding order denying, suspending, or 
expelling such person from membership in a contract market, a registered 
futures association, or any other self-regulatory organization.
    Good cause to affect a person's registration also exists: (1) If the 
operations of such person disrupt or would tend to disrupt orderly 
market conditions, or cause or would tend to cause sudden or 
unreasonable fluctuations or unwarranted changes in the price of 
commodities or contracts for future delivery of commodities or commodity 
options; (2) if such person has used or is using in its name a term such 
as ``board of trade'', ``clearing corporation'' or ``exchange'' in a 
misleading context, or uses any terms in its representations to the 
public which may indicate that the person is a contract market or a 
member of a contract market when such is not the case, or has used or is 
using a misleading name which would tend to suggest to the public that 
the person is affiliated with another person when that is not the case 
or that the person is engaged in a commodity-related business when the 
person is not in fact substantially so engaged, or has failed to 
disclose to the public an agency relationship with another person when 
such failure could mislead the public; (3) if such person is subject to 
an outstanding order denying, suspending or revoking the license of such 
person by a licensing authority, such as a state real estate or 
insurance commission; and (4) if such person has failed to answer the 
inquiries or requests for further information concerning an application 
for registration filed with the Commission.
    This listing, of course, is not exclusive. In general, the 
Commission interprets paragraph (M) to authorize the Commission to 
affect the registration of any person if, as a result of any act or 
pattern of conduct attributable to such person, although never the 
subject of formal action or proceeding before either a court or 
governmental agency, such person's potential disregard of or inability 
to comply with the requirements of the Act or the rules, regulations or 
order thereunder, or such person's moral turpitude, or lack of honesty 
or financial responsibility is demonstrated to the Commission.
    Any inability to deal fairly with the public and consistent with 
just and equitable principles of trade may render an applicant or 
registrant unfit for registration, given the high ethical standards 
which must prevail in the industry.
    The Commission has further addressed ``other good cause'' under 
Section 8a(3)(M) of the Act in issuing guidance letters on assessing the 
fitness of floor brokers, floor traders or applicants in either 
category:

[First guidance letter]

December 4, 1997

Robert K. Wilmouth, President, National Futures Association, 200 West 
          Madison Street, Chicago, IL 60606-3447

Re: Adverse Registration Actions with Respect to Floor Brokers, Floor 
          Traders and Applicants for Registration in Either Category

    Dear Mr. Wilmouth: As you know, the Commission on June 26, 1997, 
approved for publication in the Federal Register a Notice and Order 
concerning adverse registration actions by the National Futures 
Association (``NFA'') with respect to registered floor brokers 
(``FBs''), registered floor traders (``FTs'') and applicants for 
registration in either category. 62 Fed. Reg. 36050 (July 3, 1997). The 
Notice and Order authorized NFA to grant or to maintain, either with or 
without conditions or restrictions, FB or FT registration where NFA 
previously would have forwarded the case to the Commission for review of 
disciplinary history. The Commission has worked with its staff to 
determine which of the pending matters could efficiently be returned to 
NFA for handling, and such matters have been forwarded to NFA. The 
Commission will continue to accept or to act upon requests for 
exemption, and the Commission staff will consider requests for ``no-
action'' opinions with respect to applicable registration requirements.
    By this correspondence, the Commission is issuing guidance that 
provides NFA further direction on how it expects NFA to exercise its 
delegated power, based upon the experience of the Commission and the 
staff with the registration review process during the past three years. 
This guidance will help ensure that NFA exercises its delegated power in 
a manner consistent with Commission precedent.
    In exercising its delegated authority, NFA, of course, needs to 
apply all of the provisions of Sections 8a(2) and (3) of the Commodity 
Exchange Act (``Act'').\1\ In that regard, NFA should consider the 
matters in which the Commission has taken action in the past and 
endeavor to seek similar registration restrictions, conditions, 
suspensions, denials, or revocations under similar circumstances.
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 12a(2) and (3) (1994). The letter is intended to 
supplement, not to supersede, other guidance provided in the past to 
NFA. In this regard, the NFA should continue to follow other guidance 
provided by the Commission or its staff.
---------------------------------------------------------------------------

    One of the areas in which NFA appears to have had the most 
uncertainty is with regard to previous self-regulatory organization

[[Page 153]]

(``SRO'') disciplinary actions. Commission Rule 1.63 \2\ provides clear 
guidelines for determining whether a person's history of ``disciplinary 
offenses'' should preclude service on SRO governing boards or 
committees.\3\ In determining whether to grant or to maintain, either 
with or without conditions or restrictions, FB or FT registration, NFA 
should, as an initial matter, apply the Rule 1.63(a)(6) criteria to 
those registered FBs, registered FTs and applicants for registration in 
either category. However, NFA should be acting based upon any such 
offenses that occurred within the previous five years, rather than the 
three years provided for in Rule 1.63(c). NFA should consider 
disciplinary actions taken by an SRO as that term is defined in Section 
3(a)(26) of the Securities Exchange Act of 1934 no differently from 
disciplinary actions taken by an SRO in the futures industry as defined 
in Rule 1.3(ee).\4\ Application of the Rule 1.63 criteria, as modified, 
to these matters will aid NFA in making registration determinations that 
are reasonably consonant with Commission views.\5\ NFA should focus on 
the nature of the underlying conduct rather than the sanction imposed by 
an SRO. Thus, if a disciplinary action would not come within the 
coverage of Rule 1.63 but for the imposition of a short suspension of 
trading privileges (such as for a matter involving fighting, use of 
profane language or minor recordkeeping violations), NFA could exercise 
discretion, as has the Commission, not to institute a statutory 
disqualification case. On the other hand, conduct that falls clearly 
within the terms of Rule 1.63, such as violations of rules involving 
potential harm to customers of the exchange, should not be exempt from 
review simply because the exchange imposed a relatively minor sanction.
---------------------------------------------------------------------------

    \2\ Commission rules referred to herein are found at 17 CFR Ch. I.
    \3\ Rule 1.63(c) provides that a person is ineligible from serving 
on an SRO's disciplinary committees, arbitration panels, oversight 
panels or governing board if, as provided in Rule 1.63(b), the person, 
inter alia: (1) within the past three years has been found by a final 
decision of an SRO, an administrative law judge, a court of competent 
jurisdiction or the Commission to have committed a disciplinary offense; 
or (2) within the past three years has entered into a settlement 
agreement in which any of the findings or, in the absence of such 
findings, any of the acts charged included a disciplinary offense.
    Rule 1.63(a)(6) provides that a ``disciplinary offense'' includes: 
(i) any violation of the rules of an SRO except those rules related to 
(A) decorum or attire, (B) financial requirements, or (C) reporting or 
record-keeping unless resulting in fines aggregating more than $5,000 
within any calendar year; (ii) any rule violation described in 
subparagraphs (A) through (C) above that involves fraud, deceit or 
conversion or results in a suspension or expulsion; (iii) any violation 
of the Act or the regulations promulgated thereunder; or (iv) any 
failure to exercise supervisory responsibility with respect to an act 
described in paragraphs (i) through (iii) above when such failure is 
itself a violation of either the rules of an SRO, the Act or the 
regulations promulgated thereunder.
    \4\ Thus, for example, a disciplinary action taken by the Chicago 
Board Options Exchange or the National Association of Securities 
Dealers, Inc. should be considered in a manner similar to a disciplinary 
action of the Chicago Board of Trade or NFA.
    \5\ In reviewing these matters, the NFA should bear in mind recent 
Commission precedent which allows for reliance on settled disciplinary 
proceedings in some circumstances. See In the Matter of Michael J. 
Clark, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 27,032 
(Apr. 22, 1997) (``other good cause'' under Section 8a(3)(M) of the Act 
exists based upon a pattern of exchange disciplinary actions resulting 
in significant sanctions for serious rule violations--whether 
settlements or adjudications), aff'd sub nom., Clark v. Commodity 
Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999) 
(unpublished).
---------------------------------------------------------------------------

    The Commission has treated the registration process and the SRO 
disciplinary process as separate matters involving separate 
considerations. The fact that the Commission has not pursued its own 
enforcement case in a particular situation does not necessarily mean 
that the Commission considers the situation to be a minor matter for 
which no registration sanctions are appropriate. Further, the Commission 
believes that it and NFA, entities with industry-wide perspective and 
responsibilities, are the appropriate bodies, rather than any individual 
exchange, to decide issues relating to registration status, which can 
affect a person's ability to function in the industry well beyond the 
jurisdiction of a particular exchange. Thus, NFA's role is in no way 
related to review of exchange sanctions for particular conduct, but 
rather it is the entirely separate task of determining whether an FB's 
or FT's conduct should impact his or her registration.
    NFA also should look to Commission precedent in selecting conditions 
or restrictions to be imposed, such as a dual trading ban where a person 
has been involved in disciplinary offenses involving customer abuse. 
Where conditions or restrictions are imposed, or agreed upon, NFA also 
should follow Commission precedent, under which such conditions or 
restrictions generally have been imposed for a two-year period.

[[Page 154]]

    The Commission has required sponsorship for conditioned FBs and FTs 
when their disciplinary offenses have involved noncompetitive trading 
and fraud irrespective of the level of sanctions imposed by an SRO. 
Indeed, but for a sponsorship requirement there would be no one 
routinely watching and responsible for the activities of these 
registrants. Absent sponsorship, such FBs and FTs would only be subject 
to routine Commission and exchange surveillance. The Commission's rules 
are premised upon the judgment that requiring FTs and FBs to have 
sponsors to ensure their compliance with conditions is both appropriate 
and useful. See Rule 3.60(b)(2)(i).
    A question has arisen whether, if NFA is required to prove up the 
underlying facts of an SRO disciplinary action, the exchanges can 
provide information on exchange disciplinary proceedings directly to 
NFA. Although Section 8c(a)(2) of the Act states that an exchange shall 
not disclose the evidence for a disciplinary action except to the person 
disciplined and to the Commission, Section 8a(10) of the Act allows the 
Commission to authorize any person to perform any portion of the 
registration functions under the Act, notwithstanding any other 
provision of law. The effective discharge of the delegated registration 
function requires NFA to have access to the exchange evidence. Thus, the 
Commission believes that Section 8a(10) may reasonably be interpreted to 
allow the disclosure of information from exchange disciplinary 
proceedings directly to NFA despite the provisions of Section 8c(a)(2).
    Nothing in the Notice and Order affects the Commission's authority 
to review the granting of a registration application by NFA in the 
performance of Commission registration functions, including review of 
the sufficiency of conditions or restrictions imposed by NFA, to review 
the determination by NFA not to take action to affect an existing 
registration, or to take its own action to address a statutory 
disqualification. Moreover, the Commission Order contemplates that to 
allow for appropriate Commission oversight of NFA's exercise of this 
delegated authority, NFA will provide for the Commission's review 
quarterly schedules of all applicants cleared for registration and all 
registrants whose registrations are maintained without adverse action by 
NFA's Registration, Compliance, Legal Committee despite potential 
statutory disqualifications.
    The Commission will continue to monitor NFA activities through 
periodic rule enforcement reviews, and NFA remains subject to the 
present requirement that it monitor compliance with the conditions and 
restrictions imposed on conditioned and restricted registrants.
    Sincerely,

Jean A. Webb, Secretary of the Commission

[Second guidance letter]

April 13, 2000

Robert K. Wilmouth, President, National Futures Association, 200 West 
          Madison Street, Chicago, IL 60606-3447

Re: Use of Exchange Disciplinary Actions as ``Other Good Cause'' to 
          Affect Floor Broker/Floor Trader Registration

    Dear Mr. Wilmouth:

                     I. Introduction and Background

    In July 1997, the Commission issued a Notice and Order authorizing 
the National Futures Association (``NFA'') to grant or to maintain, 
either with or without conditions or restrictions, floor broker (``FB'') 
or floor trader (``FT'') registration where NFA previously would have 
forwarded the case to the Commission for review of disciplinary 
history.\1\ By letter dated December 4, 1997 (``Guidance Letter''), the 
Commission provided further direction on how the Commission expected NFA 
to exercise its delegated power and to ensure that NFA exercised its 
delegated power in a manner consistent with Commission precedent.
---------------------------------------------------------------------------

    \1\ Registration Actions by National Futures Association With 
Respect to Floor Brokers, Floor Traders and Applicants for Registration 
in Either Category, 62 FR 36050 (July 3, 1997).
---------------------------------------------------------------------------

    The Commission has determined to revise the Guidance Letter. 
Specifically, the Commission is revising the portion of the Guidance 
Letter that addresses the use of exchange disciplinary actions as 
``other good cause'' to affect FB and FT registrations. The Commission 
has made this determination following its own reconsideration of the 
issue and at the urging of industry members.\2\
---------------------------------------------------------------------------

    \2\ See letters submitted by James Bowe, former president of the New 
York Board of Trade (``NYBOT''), dated October 13, 1999, Christopher 
Bowen, general counsel of the New York Mercantile Exchange (``NYMEX''), 
dated October 18, 1999, and the Joint Compliance Committee (``JCC''), 
dated February 2, 2000. The JCC consists of senior compliance officials 
from all domestic futures exchanges and the NFA (i.e., the domestic 
self-regulatory organizations (``SROs'')). In addition, staff from the 
Contract Markets Section of the Commission's Division of Clearing and 
Intermediary Oversight attend the JCC meetings as observers. The JCC was 
established to aid in the development of improved compliance systems 
through joint efforts and information-sharing among the SROs. Commission 
staff have also discussed this issue with SRO staff.
---------------------------------------------------------------------------

    The Guidance Letter pointed out that, in exercising its delegated 
authority, NFA must apply all of the provisions of Sections

[[Page 155]]

8a(2) and (3) of the Commodity Exchange Act (``Act'').\3\ In particular, 
Section 8a(3)(M) of the Act authorizes the Commission to refuse to 
register or to register conditionally any person if it is found, after 
opportunity for hearing, that there is other good cause for statutory 
disqualification from registration beyond the specifically listed 
grounds in Sections 8a(2) and 8a(3) of the Act. The Commission held in 
In the Matter of Clark that statutory disqualification under the ``other 
good cause'' provision of Section 8a(3)(M) may arise on the basis of, 
among other things, a pattern of exchange disciplinary actions alleging 
serious rule violations that result in significant sanctions, and that 
it is immaterial whether the sanctions imposed resulted from a fully-
adjudicated disciplinary action or an action that was taken following a 
settlement.\4\
---------------------------------------------------------------------------

    \3\ 7 U.S.C. 12a(2) and (3) (1994).
    \4\ In the Matter of Clark, [1996-1998 Transfer Binder] Comm. Fut. 
L. Rep. (CCH) ] 27,032 (Apr. 22, 1997), aff'd sub nom., Clark v. 
Commodity Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999) 
(unpublished).
---------------------------------------------------------------------------

    The Guidance Letter recommended the application of the provisions of 
Commission Rule 1.63\5\ as criteria to aid in assessing the impact of an 
FB or FT applicant's or registrant's previous disciplinary history on 
the person's fitness to be registered, with the exception that NFA 
should be acting based on disciplinary history from the previous five 
years, rather than the three years provided for in Rule 1.63.\6\ The 
Guidance Letter also noted that NFA should consider disciplinary actions 
taken not only by futures industry SROs but also those taken by SROs as 
defined in Section 3(a)(26) of the Securities Exchange Act of 1934 
(``1934 Act''), including settled disciplinary actions.
---------------------------------------------------------------------------

    \5\ Commission rules referred to in this letter are found at 17 CFR 
Ch. 1.
    \6\ Rule 1.63 provides, among other things, that a person is 
ineligible from serving on SRO disciplinary committees, arbitration 
panels, oversight panels or governing boards if that person, inter alia, 
entered into a settlement agreement within the past three years in which 
any of the findings or, in the absence of such findings, any of the acts 
charged included a disciplinary offense.
    Rule 1.63(a)(6) defines a ``disciplinary offense'' to include:
    (i) any violation of the rules of an SRO except those rules related 
to (A) decorum or attire, (B) financial requirements, or (C) reporting 
or record-keeping unless resulting in fines aggregating more than $5,000 
within any calendar year; (ii) any rule violation described in 
subparagraphs (A) through (C) above that involves fraud, deceit or 
conversion or results in a suspension or expulsion; (iii) any violation 
of the Act or the regulations promulgated thereunder; or (iv) any 
failure to exercise supervisory responsibility with respect to an act 
described in paragraphs (i) through (iii) above when such failure is 
itself a violation of either the rules of an SRO, the Act or the 
regulations promulgated thereunder.
---------------------------------------------------------------------------

                          II. Revised Guidance

    As stated above, the Commission has determined to revise the 
Guidance Letter. From this point forward, NFA should cease using Rule 
1.63 as the basis to evaluate the impact of an FB or FT applicant's or 
registrant's disciplinary history on his or her fitness to be 
registered. Instead, as Clark stated, when reviewing disciplinary 
history to assess the fitness to be registered of an FB, FT, or 
applicant in either category, a pattern of exchange disciplinary actions 
alleging serious rule violations that result in significant sanctions 
will trigger the ``other good cause'' provision of Section 8a(3)(M). The 
``pattern'' should consist of at least two final exchange disciplinary 
actions, whether settled or adjudicated.
    NFA also should consider initiating proceedings to affect the 
registration of the FB or FT, even if there is only a single exchange 
action against the FB or FT, if the exchange action was based on 
allegations of particularly egregious misconduct or involved numerous 
instances of misconduct occurring over a long period of time. If, 
however, a proceeding is initiated based on a single exchange action 
that was disposed of by settlement, NFA may have to prove up the 
underlying misconduct. Furthermore, traditional principles of collateral 
estoppel apply to adjudicated actions, whether they are being considered 
individually or as part of a pattern.\7\
---------------------------------------------------------------------------

    \7\ Clark at 44,929.
---------------------------------------------------------------------------

    As provided by the Guidance Letter, ``exchange disciplinary 
actions'' would continue to include disciplinary actions taken by both 
futures industry SROs and SROs as defined in Section 3(a)(26) of the 
1934 Exchange Act. Furthermore, NFA should review an applicant's or 
registrant's disciplinary history for the past five years.\8\ At least 
one of the actions forming the pattern, however, must

[[Page 156]]

have become final after Clark was decided by the Commission on April 22, 
1997. Finally, ``serious rule violations'' consist of, or are 
substantially related to, charges of fraud, customer abuse, other 
illicit trading practices, or the obstruction of an exchange 
investigation.
---------------------------------------------------------------------------

    \8\ The Commission generally looked at a five-year period of 
disciplinary history. On occasion, however, the Commission examined a 
longer period of an applicant's or registrant's disciplinary history. 
For example, the Commission revoked the registration of one FB on the 
basis of exchange disciplinary cases that extended back six years, see 
Clark, 2 Comm. Fut. L. Rep. (CCH) ] 27,032, and denied an application 
for registration as an FT on the basis of exchange disciplinary cases 
that extended back seven years, see In the Matter of Castellano, [1987-
1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,360 (Nov. 23, 1988), 
summarily aff'd (May 29, 1990), reh. denied [1990-1992 Transfer Binder] 
Comm. Fut. L. Rep. ] 24,870 (June 26, 1990), aff'd sub nom. Castellano 
v. CFTC, Docket No. 90-2298 (7th Cir. Nov. 20, 1991).
---------------------------------------------------------------------------

    Congress, the courts and the Commission have indicated the 
importance of considering an applicant's history of exchange 
disciplinary actions in assessing that person's fitness to register.\9\ 
Furthermore, NFA's review of exchange disciplinary actions within the 
context of the registration process should not simply mirror the 
disciplinary actions undertaken by the exchanges. The two processes are 
separate matters that involve separate considerations. As part of their 
ongoing self-regulatory obligations, exchanges must take disciplinary 
action \10\ and such disciplinary matters necessarily focus on the 
specific misconduct that forms the allegation. In a statutory 
disqualification action, however, NFA must determine whether the 
disciplinary history of an FB, FT or applicant over the preceding five 
years should impact his or her registration. Additionally, NFA possesses 
industry-wide perspective and responsibilities. As such, NFA, rather 
than an individual exchange, should decide registration status issues, 
since those issues affect an individual's status within the industry as 
a whole, well beyond the jurisdiction of a particular exchange.
---------------------------------------------------------------------------

    \9\ Letter dated July 14, 1995, from Mary L. Schapiro to R. Patrick 
Thompson, President, New York Mercantile Exchange (unpublished). See 
also Castellano, supra note 8.
    \10\ See Rule 1.51(a)(7).
---------------------------------------------------------------------------

    The Commission also wants to clarify to the fullest extent possible 
that its power to delegate the authority to deny or condition the 
registration of an FB, FT, or an applicant for registration in either 
category permits exchanges to disclose to NFA all evidence underlying 
exchange disciplinary actions, notwithstanding the language of Section 
8c(a)(2) of the Act.\11\ The Commission's power to delegate stems from 
Section 8a(10) of the Act, which permits delegation of registration 
functions, including statutory disqualification actions, to any person 
in accordance with rules adopted by such person and submitted to the 
Commission for approval or for review under Section 17(j) of the Act, 
``notwithstanding any other provision of law.'' Certainly, Section 
8c(a)(2) qualifies as ``any other provision of law.'' Furthermore, the 
effective discharge of the delegated function requires NFA to have 
access to the exchange evidence. Thus, the exercise of the delegated 
authority pursuant to Section 8a(10) permits the exchanges to disclose 
all evidence underlying disciplinary actions to NFA.\12\
---------------------------------------------------------------------------

    \11\ Section 8c(a)(2) states, in relevant part, that ``[A]n exchange 
* * * shall not disclose the evidence therefor, except to the person who 
is suspended, expelled, disciplined, or denied access, and to the 
Commission.''
    \12\ Of course, the Commission could request records from the 
exchange and forward them to NFA. The Commission believes that this is 
an unnecessary administrative process and that NFA should obtain the 
records it needs to carry out the delegated function of conducting 
disciplinary history reviews directly from the exchanges. In this 
context and pursuant to Commission orders authorizing NFA to institute 
adverse registration actions, NFA should be viewed as standing in the 
shoes of the Commission.
---------------------------------------------------------------------------

    This letter supersedes the Guidance Letter to the extent discussed 
above. In all other aspects, the Guidance Letter and other guidance 
provided by the Commission or its staff remain in effect. Therefore, NFA 
should continue to follow Commission precedent when selecting conditions 
or restrictions to be imposed. For example, NFA should impose a dual 
trading ban where customer abuse is involved and any conditions or 
restrictions imposed should be for a two-year period. Furthermore, NFA 
should require sponsorship for conditioned FBs or FTs when their 
disciplinary offenses involve noncompetitive trading and fraud.
    Nothing in the Notice and Order or this letter affects the 
Commission's authority to review the granting of a registration 
application by NFA in the performance of Commission registration 
functions, including review of the sufficiency of conditions or 
restrictions imposed by NFA, to review the determination by NFA not to 
take action to affect an existing registration, or to take its own 
action to address a statutory disqualification. Moreover, the Commission 
Order contemplates that to allow for appropriate Commission oversight of 
NFA's exercise of this delegated authority, NFA will provide for the 
Commission's review quarterly schedules of all applicants cleared for 
registration and all registrants whose registrations are maintained 
without adverse action by NFA's Registration, Compliance, Legal 
Committee despite potential statutory disqualifications.
    The Commission will continue to monitor NFA activities through 
periodic rule enforcement reviews, and NFA remains subject to the 
present requirement that it monitor

[[Page 157]]

compliance with the conditions and restrictions imposed on conditioned 
and restricted registrants.

    Sincerely,
Jean A. Webb,
Secretary of the Commission.

[49 FR 8224, Mar. 5, 1984, as amended at 58 FR 19597, Apr. 15, 1993; 59 
FR 5315, Feb. 4, 1994; 61 FR 58628, Nov. 18, 1996; 66 FR 53518, Oct. 23, 
2001; 67 FR 62352, Oct. 7, 2002]

Appendix B to Part 3--Statement of Acceptable Practices With Respect to 
                             Ethics Training

    (a) The provisions of Section 4p(b) of the Act (7 U.S.C. 6p(b) 
(1994)) set forth requirements regarding training of registrants as to 
their responsibilities to the public. This section requires the 
Commission to issue regulations requiring new registrants to attend 
ethics training sessions within six months of registration, and all 
registrants to attend such training on a periodic basis. The awareness 
and maintenance of professional ethical standards are essential elements 
of a registrant's fitness. Further, the use of ethics training programs 
is relevant to a registrant's maintenance of adequate supervision, a 
requirement under Rule 166.3.
    (b)(1) The Commission recognizes that technology has provided new, 
faster means of sharing and distributing information. In view of the 
foregoing, the Commission has chosen to allow registrants to develop 
their own ethics training programs. Nevertheless, futures industry 
professionals may want guidance as to the role of ethics training. 
Registrants may wish to consider what ethics training should be 
retained, its format, and how it might best be implemented. Therefore, 
the Commission finds it appropriate to issue this Statement of 
Acceptable Practices regarding appropriate training for registrants, as 
interpretative guidance for intermediaries on fitness and supervision. 
Commission registrants may look to this Statement of Acceptable 
Practices as a ``safe harbor'' concerning acceptable procedures in this 
area.
    (2) The Commission believes that section 4p(b) of the Act reflects 
an intent by Congress that industry professionals be aware, and remain 
abreast, of their continuing obligations to the public under the Act and 
the regulations thereunder. The text of the Act provides guidance as to 
the nature of these responsibilities. As expressed in section 4p(b) of 
the Act, personnel in the industry have an obligation to the public to 
observe the Act, the rules of the Commission, the rules of any 
appropriate self-regulatory organizations or contract markets (which 
would also include registered derivatives transaction execution 
facilities), or other applicable federal or state laws or regulations. 
Further, section 4p(b) acknowledges that registrants have an obligation 
to the public to observe ``just and equitable principles of trade.''
    (3) Additionally, section 4p(b) reflects Congress' intent that 
registrants and their personnel retain an up-to-date knowledge of these 
requirements. The Act requires that registrants receive training on a 
periodic basis. Thus, it is the intent of Congress that Commission 
registrants remain current with regard to the ethical ramifications of 
new technology, commercial practices, regulations, or other changes.
    (c) The Commission believes that training should be focused to some 
extent on a person's registration category, although there will 
obviously be certain principles and issues common to all registrants and 
certain general subjects that should be taught. Topics to be addressed 
include:
    (1) An explanation of the applicable laws and regulations, and the 
rules of self-regulatory organizations or contract markets and 
registered derivatives transaction execution facilities;
    (2) The registrant's obligation to the public to observe just and 
equitable principles of trade;
    (3) How to act honestly and fairly and with due skill, care and 
diligence in the best interests of customers and the integrity of the 
market;
    (4) How to establish effective supervisory systems and internal 
controls;
    (5) Obtaining and assessing the financial situation and investment 
experience of customers;
    (6) Disclosure of material information to customers; and
    (7) Avoidance, proper disclosure and handling of conflicts of 
interest.
    (d) An acceptable ethics training program would apply to all of a 
firm's associated persons and its principals to the extent they are 
required to register as associated persons. Additionally, personnel of 
firms that rely on their registration with other regulators, such as the 
Securities and Exchange Commission, should be provided with ethics 
training to the extent the Act and the Commission's regulations apply to 
their business.
    (e) As to the providers of such training, the Commission believes 
that classes sponsored by independent persons, firms, or industry 
associations would be acceptable. It would also be permissible to 
conduct in-house training programs. Further, registrants should 
ascertain the credentials of any ethics training providers they retain. 
Thus, persons who provide ethics training should be required to provide 
proof of satisfactory completion of the proficiency testing requirements 
applicable to the registrant and evidence of three years of relevant 
industry or pedagogical experience in the field. This

[[Page 158]]

industry experience might include the practice of law in the fields of 
futures or securities, or employment as a trader or risk manager at a 
brokerage or end-user firm. Likewise, the Commission believes that 
registrants should employ as ethics training providers only those 
persons they reasonably believe in good faith are not subject to any 
investigations or to bars to registration or to service on a self-
regulatory organization governing board or disciplinary panel.
    (f)(1) With regard to the frequency and duration of ethics training, 
it is permissible for a firm to require training on whatever periodic 
basis and duration the registrant (and relevant self-regulatory 
organizations) deems appropriate. It may even be appropriate not to 
require any such specific requirements as, for example, where ethics 
training could be termed ongoing. For instance, a small entity, sole 
proprietorship, or even a small section in an otherwise large firm, 
might satisfy its obligation to remain current with regard to ethics 
obligations by distribution of periodicals, legal cases, or advisories. 
Use of the latest information technology, such as Internet websites, can 
be useful in this regard. In such a context, there would be no 
structured classes, but the goal should be a continuous awareness of 
changing industry standards. A corporate culture to maintain high 
ethical standards should be established on a continuing basis.
    (2) On the other hand, larger firms which transact business with a 
larger segment of the public may wish to implement a training program 
that requires periodic classwork. In such a situation, the Commission 
believes it appropriate for registrants to maintain such records as 
evidence of attendance and of the materials used for training. In the 
case of a floor broker or floor trader, the applicable contract market 
or registered derivatives transaction execution facility should maintain 
such evidence on behalf of its member. This evidence of ethics training 
could be offered to demonstrate fitness and overall compliance during 
audits by self-regulatory organizations, and during reviews of contract 
market or registered derivatives transaction execution facility 
operations.
    (g) The methodology of such training may also be flexible. Recent 
innovations in information technology have made possible new, fast, and 
cost-efficient ways for registrants to maintain their awareness of 
events and changes in the commodity interest markets. In this regard, 
the Commission recognizes that the needs of a firm will vary according 
to its size, personnel, and activities. No format of classes will be 
required. Rather, such training could be in the form of formal class 
lectures, video presentation, Internet transmission, or by simple 
distribution of written materials. These options should provide 
sufficiently flexible means for adherence to Congressional intent in 
this area.
    (h) Finally, it should be noted that self-regulatory organizations 
and industry associations will have a significant role in this area. 
Such organizations may have separate ethics and proficiency standards, 
including ethics training and testing programs, for their own members.

[66 FR 53521, Oct. 23, 2001]



PART 4_COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS--Table of Contents




        Subpart A_General Provisions, Definitions and Exemptions

Sec.
4.1 Requirements as to form.
4.2 Requirements as to filing.
4.3-4.4 [Reserved]
4.5 Exclusion for certain otherwise regulated persons from the 
          definition of the term ``commodity pool operator.''
4.6 Exclusion for certain otherwise regulated persons from the 
          definition of the term ``commodity trading advisor.''
4.7 Exemption from certain part 4 requirements for commodity pool 
          operators with respect to offerings to qualified eligible 
          persons and for commodity trading advisors with respect to 
          advising qualified eligible persons.
4.8 Exemption from certain requirements of rule 4.26 with respect to 
          pools offered or sold in certain offerings exempt from 
          registration under the Securities Act.
4.9 [Reserved]
4.10 Definitions.
4.11 Exemption from section 4n(3)(B).
4.12 Exemption from provisions of part 4.
4.13 Exemption from registration as a commodity pool operator.
4.14 Exemption from registration as a commodity trading advisor.
4.15 Continued applicability of antifraud section.
4.16 Prohibited representations.

                   Subpart B_Commodity Pool Operators

4.20 Prohibited activities.
4.21 Required delivery of pool Disclosure Document.
4.22 Reporting to pool participants.
4.23 Recordkeeping.
4.24 General disclosures required.
4.25 Performance disclosures.
4.26 Use, amendment and filing of Disclosure Document.

                  Subpart C_Commodity Trading Advisors

4.30 Prohibited activities.
4.31 Required delivery of Disclosure Document to prospective clients.

[[Page 159]]

4.32 Trading on a Registered Derivatives Transaction Execution Facility 
          for Non-Institutional Customers.
4.33 Recordkeeping.
4.34 General disclosures required.
4.35 Performance disclosures.
4.36 Use, amendment and filing of Disclosure Document.

                          Subpart D_Advertising

4.40 [Reserved]
4.41 Advertising by commodity pool operators, commodity trading 
          advisors, and the principals thereof.

Appendix A to part 4--Guidance on the Application of Rule 4.13(a)(3) in 
          the Fund-of-Funds Context
Appendix B to part 4--Adjustments for Additions and Withdrawals in the 
          Computation of Rate of Return

    Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23.

    Source: 46 FR 26013, May 8, 1981, unless otherwise noted.



        Subpart A_General Provisions, Definitions and Exemptions



Sec. 4.1  Requirements as to form.

    (a) Each document distributed pursuant to this part 4 must be:
    (1) Clear and legible;
    (2) Paginated; and
    (3) Fastened in a secure manner.
    (b) Information that is required to be ``prominently'' disclosed 
under this part 4 must be displayed in capital letters and in boldface 
type.
    (c) Where a document is distributed through an electronic medium:
    (1) The requirements of paragraphs (a) of this section shall mean 
that required information must be presented in a format that is readily 
communicated to the recipient. For purposes of this paragraph (c), 
information is readily communicated to the recipient if it is accessible 
to the ordinary user by means of commonly available hardware and 
software and if the electronically delivered document is organized in 
substantially the same manner as would be required for a paper document 
with respect to the order of presentation and the relative prominence of 
information. Where a table of contents is required, the electronic 
document must either include page numbers in the text or employ a 
substantially equivalent cross-reference or indexing method or tool;
    (2) The requirements of paragraph (b) of this section shall mean 
that such information must be presented in capital letters and boldface 
type or, as warranted in the context, another manner reasonably 
calculated to draw the recipient's attention to the information and 
accord it greater prominence than the surrounding text; and
    (3) A complete paper version of the document that complies with the 
applicable provisions of this part 4 must be provided to the recipient 
upon request.
    (d) If graphic, image or audio material is included in a document 
delivered to a prospective or existing client or pool participant, and 
such material cannot be reproduced in an electronic filing, a fair and 
accurate narrative description, tabular representation or transcript of 
the omitted material must be included in the filed version of the 
document. Inclusion of such material in a Disclosure Document shall be 
subject to the requirements of Sec. 4.24(v) in the case of pool 
Disclosure Documents, and Sec. 4.34(n) in the case of commodity trading 
advisor Disclosure Documents.

(Approved by the Office of Management and Budget under control number 
3038-0005)

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62 
FR 39115, July 22, 1997]



Sec. 4.2  Requirements as to filing.

    (a) All material filed with the Commission under this part 4 must be 
filed with the Commission at its Washington, DC office (Att: Division of 
Clearing and Intermediary Oversight, CFTC, Three Lafayette Centre, 1155 
21st Street, NW., Washington, DC 20581); Provided, however, that 
Disclosure Documents, profile documents, and amendments thereto may be 
filed at the following electronic mail address: ddoc-efile@cftc.gov.

[[Page 160]]

    (b) All such material shall be considered filed when received by the 
Commission at the address specified in paragraph (a) of this section.

(Approved by the Office of Management and Budget under control number 
3038-0005)

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 60 
FR 49334, Sept. 25, 1995; 62 FR 18268, Apr. 15, 1997; 65 FR 58649, Oct. 
2, 2000; 67 FR 62352, Oct. 7, 2002]



Sec. Sec. 4.3-4.4  [Reserved]



Sec. 4.5  Exclusion for certain otherwise regulated persons from the 
definition of the term ``commodity pool operator.''

    (a) Subject to compliance with the provisions of this section, the 
following persons, and any principal or employee thereof, shall be 
excluded from the definition of the term ``commodity pool operator'' 
with respect to the operation of a qualifying entity specified in 
paragraph (b) of this section:
    (1) An investment company registered as such under the Investment 
Company Act of 1940;
    (2) An insurance company subject to regulation by any State;
    (3) A bank, trust company or any other such financial depository 
institution subject to regulation by any State or the United States; and
    (4) A trustee of, a named fiduciary of (or a person designated or 
acting as a fiduciary pursuant to a written delegation from or other 
written agreement with the named fiduciary) or an employer maintaining a 
pension plan that is subject to title I of the Employee Retirement 
Income Security Act of 1974; Provided, however, That for purposes of 
this Sec. 4.5 the following employee benefit plans shall not be 
construed to be pools:
    (i) A noncontributory plan, whether defined benefit or defined 
contribution, covered under title I of the Employee Retirement Income 
Security Act of 1974;
    (ii) A contributory defined benefit plan covered under title IV of 
the Employee Retirement Income Security Act of 1974; Provided, however, 
That with respect to any such plan to which an employee may voluntarily 
contribute, no portion of an employee's contribution is committed as 
margin or premiums for futures or options contracts;
    (iii) A plan defined as a governmental plan in section 3(32) of 
title I of the Employee Retirement Income Security Act of 1974;
    (iv) Any employee welfare benefit plan that is subject to the 
fiduciary responsibility provisions of the Employee Retirement Income 
Security Act of 1974; and
    (v) A plan defined as a church plan in Section 3(33) of title I of 
the Employee Retirement Income Security Act of 1974 with respect to 
which no election has been made under 26 U.S.C. 410(d).
    (b) For the purposes of this section, the term ``qualifying entity'' 
means:
    (1) With respect to any person specified in paragraph (a)(1) of this 
section, an investment company registered as such under the Investment 
Company Act of 1940;
    (2) With respect to any person specified in paragraph (a)(2) of this 
section, a separate account established and maintained or offered by an 
insurance company pursuant to the laws of any State or territory of the 
United States, under which income gains and losses, whether or not 
realized, from assets allocated to such account, are, in accordance with 
the applicable contract, credited to or charged against such account, 
without regard to other income, gains, or losses of the insurance 
company;
    (3) With respect to any person specified in paragraph (a)(3) of this 
section, the assets of any trust, custodial account or other separate 
unit of investment for which it is acting as a fiduciary and for which 
it is vested with investment authority; and
    (4) With respect to any person specified in paragraph (a)(4) of this 
section, and subject to the proviso thereof, a pension plan that is 
subject to title I of the Employee Retirement Income Security Act of 
1974; Provided, however, That such entity will be operated in the manner 
specified in paragraph (c)(2) of this section.
    (c) Any person who desires to claim the exclusion provided by this 
section shall file with the National Futures Association a notice of 
eligibility; Provided, however, That a plan fiduciary who is not a named 
fiduciary but who

[[Page 161]]

has an agreement with a named fiduciary as described in paragraph (a)(4) 
of this section may claim the exclusion through the notice filed by the 
named fiduciary.
    (1) The notice of eligibility must contain the following 
information:
    (i) The name of such person;
    (ii) The applicable subparagraph of paragraph (a) of this section 
pursuant to which such person is claiming exclusion;
    (iii) The name of the qualifying entity which such person intends to 
operate pursuant to the exclusion; and
    (iv) The applicable subparagraph of paragraph (b) of this section 
pursuant to which such entity is a qualifying entity.
    (2) The notice of eligibility must contain representations that such 
person will operate the qualifying entity specified therein in a manner 
such that the qualifying entity:
    (i) Will disclose in writing to each participant, whether existing 
or prospective, that the qualifying entity is operated by a person who 
has claimed an exclusion from the definition of the term ``commodity 
pool operator'' under the Act and, therefore, who is not subject to 
registration or regulation as a pool operator under the Act; Provided, 
that such disclosure is made in accordance with the requirements of any 
other federal or state regulatory authority to which the qualifying 
entity is subject; and
    (ii) Will submit to such special calls as the Commission may make to 
require the qualifying entity to demonstrate compliance with the 
provisions of this Sec. 4.5(c);

Provided, however, That the making of such representations shall not be 
deemed a substitute for compliance with any criteria applicable to 
commodity futures or commodity options trading established by any 
regulator to which such person or qualifying entity is subject.
    (3) The notice of eligibility must be filed with the National 
Futures Association prior to the date upon which such person intends to 
operate the qualifying entity pursuant to the exclusion provided by this 
section.
    (4) The notice of eligibility shall be effective upon filing.
    (d)(1) Each person who has claimed exclusion hereunder must, in the 
event that any of the information contained or representations made in 
the notice of eligibility becomes inaccurate or incomplete, file a 
supplemental notice with the National Futures Association to that effect 
which, if applicable, includes such amendments as may be necessary to 
render the notice of eligibility accurate and complete.
    (2) The supplemental notice required by paragraph (d)(1) of this 
section shall be filed within fifteen business days after the occurrence 
of such event.
    (e) An exclusion claimed hereunder shall cease to be effective upon 
any change which would render:
    (1) A person as to whom such exclusion has been claimed ineligible 
under paragraph (a) of this section;
    (2) The entity for which such exclusion has been claimed ineligible 
under paragraph (b) of this section; or
    (3) Either the representations made pursuant to paragraph (c)(2) of 
this section inaccurate or the continuation of such representations 
false or misleading.
    (f) Any notice required to be filed hereunder must be:
    (1) In writing;
    (2) Manually signed by a representative duly authorized to bind a 
person specified in paragraph (a) of this section; and
    (3) Filed with the National Futures Association at its headquarters 
office (Attn: Director of Compliance, Compliance Department).
    (g) The filing of a notice of eligibility or the application of 
``non-pool status'' under this section will not affect the ability of a 
person to qualify for an exemption from registration as a commodity pool 
operator under Sec. 4.13 in connection with the operation of another 
trading vehicle that is not covered under this Sec. 4.5.

[50 FR 15882, Apr. 23, 1985; 50 FR 18859, May 3, 1985, as amended at 58 
FR 6374, Jan. 28, 1993; 58 FR 43793, Aug. 18, 1993; 65 FR 24128, Apr. 
25, 2000; 65 FR 25980, May 4, 2000; 67 FR 77410, Dec. 18, 2002; 68 FR 
47230, Aug. 8, 2003]

[[Page 162]]



Sec. 4.6  Exclusion for certain otherwise regulated persons from the 
definition of the term ``commodity trading advisor.''

    (a) Subject to compliance with the provisions of this section, the 
following persons, and any principal or employee thereof, shall be 
excluded from the definition of the term ``commodity trading advisor:''
    (1) An insurance company subject to regulation by any State, or any 
wholly-owned subsidiary or employee thereof; Provided, however, That its 
commodity interest advisory activities are solely incidental to the 
conduct of the insurance business of the insurance company as such; and
    (2) A person who is excluded from the definition of the term 
``commodity pool operator'' by Sec. 4.5; Provided, however, That:
    (i) Its commodity interest advisory activities are solely incidental 
to its operation of those trading vehicles for which Sec. 4.5 provides 
relief; and
    (ii) Where necessary, prior to providing any commodity interest 
trading advice to any such trading vehicle the person files a notice of 
eligibility as specified in Sec. 4.5 to claim the relief available 
under that section.
    (b) Any person who has claimed an exclusion under this Sec. 4.6 
must submit to such special calls as the Commission may make to require 
the person to demonstrate compliance with the provisions of paragraph 
(a) of this section.
    (c) An exclusion claimed under this Sec. 4.6 shall cease to be 
effective upon any change which would render the person claiming the 
exclusion ineligible under paragraph (a) of this section.

[52 FR 41984, Nov. 2, 1987]



Sec. 4.7  Exemption from certain part 4 requirements for commodity pool 

operators with respect to offerings to qualified eligible persons and 
for commodity trading advisors with respect to advising qualified eligible 
persons.

    This section is organized as follows: Paragraph (a) contains 
definitions for the purposes of Sec. 4.7; paragraph (b) contains the 
relief available to commodity pool operators under Sec. 4.7; paragraph 
(c) contains the relief available to commodity trading advisors under 
Sec. 4.7; paragraph (d) concerns the Notice of Claim for Exemption 
under Sec. 4.7; and paragraph (e) addresses the effect of an 
insignificant deviation from a term, condition or requirement of Sec. 
4.7.
    (a) Definitions. Paragraph (a)(1) of this section contains general 
definitions, paragraph (a)(2) of this section contains the definition of 
the term qualified eligible person with respect to those persons who do 
not need to satisfy the Portfolio Requirement and paragraph (a)(3) of 
this section contains the definition of the term qualified eligible 
person with respect to those persons who must satisfy the Portfolio 
Requirement. For the purposes of this section:
    (1) In general--(i) Affiliate of, or a person affiliated with, a 
specified person means a person that directly or indirectly through one 
or more persons, controls, is controlled by, or is under common control 
with the specified person.
    (ii) Exempt account means the account of a qualified eligible person 
that is directed or guided by a commodity trading advisor pursuant to an 
effective claim for exemption under Sec. 4.7.
    (iii) Exempt pool means a pool that is operated pursuant to an 
effective claim for exemption under Sec. 4.7.
    (iv) Non-United States person means:
    (A) A natural person who is not a resident of the United States;
    (B) A partnership, corporation or other entity, other than an entity 
organized principally for passive investment, organized under the laws 
of a foreign jurisdiction and which has its principal place of business 
in a foreign jurisdiction;
    (C) An estate or trust, the income of which is not subject to United 
States income tax regardless of source;
    (D) An entity organized principally for passive investment such as a 
pool, investment company or other similar entity; Provided, That units 
of participation in the entity held by persons who do not qualify as 
Non-United States persons or otherwise as qualified eligible persons 
represent in the aggregate less than 10% of the beneficial interest in 
the entity, and that such entity was not formed principally for the 
purpose of facilitating investment by persons who do not qualify as

[[Page 163]]

Non-United States persons in a pool with respect to which the operator 
is exempt from certain requirements of Part 4 of the Commission's 
regulations by virtue of its participants being Non-United States 
persons; and
    (E) A pension plan for the employees, officers or principals of an 
entity organized and with its principal place of business outside the 
United States.
    (v) Portfolio Requirement means that a person:
    (A) Owns securities (including pool participations) of issuers not 
affiliated with such person and other investments with an aggregate 
market value of at least $2,000,000;
    (B) Has had on deposit with a futures commission merchant, for its 
own account at any time during the six-month period preceding either the 
date of sale to that person of a pool participation in the exempt pool 
or the date that the person opens an exempt account with the commodity 
trading advisor, at least $200,000 in exchange-specified initial margin 
and option premiums for commodity interest transactions; or
    (C) Owns a portfolio comprised of a combination of the funds or 
property specified in paragraphs (a)(1)(v)(A) and (B) of this section in 
which the sum of the funds or property includable under paragraph 
(a)(1)(v)(A), expressed as a percentage of the minimum amount required 
thereunder, and the amount of futures margin and option premiums 
includable under paragraph (a)(1)(v)(B), expressed as a percentage of 
the minimum amount required thereunder, equals at least one hundred 
percent. An example of a composite portfolio acceptable under this 
paragraph (a)(1)(v)(C) would consist of $1,000,000 in securities and 
other property (50% of paragraph (a)(1)(v)(A)) and $100,000 in exchange-
specified initial margin and option premiums (50% of paragraph 
(a)(1)(v)(B)).
    (vi) United States means the United States, its states, territories 
or possessions, or an enclave of the United States government, its 
agencies or instrumentalities.
    (2) Persons who do not need to satisfy the Portfolio Requirement to 
be qualified eligible persons. Qualified eligible person means any 
person, acting for its own account or for the account of a qualified 
eligible person, who the commodity pool operator reasonably believes, at 
the time of the sale to that person of a pool participation in the 
exempt pool, or who the commodity trading advisor reasonably believes, 
at the time that person opens an exempt account, is:
    (i) A futures commission merchant registered pursuant to section 4d 
of the Act, or a principal thereof;
    (ii) A broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934, or a principal thereof;
    (iii) A commodity pool operator registered pursuant to section 4m of 
the Act, or a principal thereof; Provided, That the pool operator:
    (A) Has been registered and active as such for two years; or
    (B) Operates pools which, in the aggregate, have total assets in 
excess of $5,000,000;
    (iv) A commodity trading advisor registered pursuant to section 4m 
of the Act, or a principal thereof; Provided, That the trading advisor:
    (A) Has been registered and active as such for two years; or
    (B) Provides commodity interest trading advice to commodity accounts 
which, in the aggregate, have total assets in excess of $5,000,000 
deposited at one or more futures commission merchants;
    (v) An investment adviser registered pursuant to section 203 of the 
Investment Advisers Act of 1940 (``Investment Advisers Act'') or 
pursuant to the laws of any state, or a principal thereof; Provided, 
That the investment adviser:
    (A) Has been registered and active as such for two years; or
    (B) Provides securities investment advice to securities accounts 
which, in the aggregate, have total assets in excess of $5,000,000 
deposited at one or more registered securities brokers;
    (vi) A ``qualified purchaser'' as defined in section 2(a)(51)(A) of 
the Investment Company Act of 1940 (the ``Investment Company Act'');
    (vii) A ``knowledgeable employee'' as defined in Sec. 270.3c-5 of 
this title;
    (viii)(A) With respect to an exempt pool:

[[Page 164]]

    (1) The commodity pool operator, commodity trading advisor or 
investment adviser of the exempt pool offered or sold, or an affiliate 
of any of the foregoing;
    (2) A principal of the exempt pool or the commodity pool operator, 
commodity trading advisor or investment adviser of the exempt pool, or 
of an affiliate of any of the foregoing;
    (3) An employee of the exempt pool or the commodity pool operator, 
commodity trading advisor or investment adviser of the exempt pool, or 
of an affiliate of any of the foregoing (other than an employee 
performing solely clerical, secretarial or administrative functions with 
regard to such person or its investments) who, in connection with his or 
her regular functions or duties, participates in the investment 
activities of the exempt pool, other commodity pools operated by the 
pool operator of the exempt pool or other accounts advised by the 
trading advisor or the investment adviser of the exempt pool, or by the 
affiliate; Provided, That such employee has been performing such 
functions and duties for or on behalf of the exempt pool, pool operator, 
trading advisor, investment adviser or affiliate, or substantially 
similar functions or duties for or on behalf of another person engaged 
in providing commodity interest, securities or other financial services, 
for at least 12 months;
    (4) Any other employee of, or an agent engaged to perform legal, 
accounting, auditing or other financial services for, the exempt pool or 
the commodity pool operator, commodity trading advisor or investment 
adviser of the exempt pool, or any other employee of, or agent so 
engaged by, an affiliate of any of the foregoing (other than an employee 
or agent performing solely clerical, secretarial or administrative 
functions with regard to such person or its investments); Provided, That 
such employee or agent:
    (i) Is an accredited investor as defined in Sec. 230.501(a)(5) or 
(6) of this title; and
    (ii) Has been employed or engaged by the exempt pool, commodity pool 
operator, commodity trading advisor, investment adviser or affiliate, or 
by another person engaged in providing commodity interest, securities or 
other financial services, for at least 24 months;
    (5) The spouse, child, sibling or parent of a person who satisfies 
the criteria of paragraph (a)(2)(viii)(A)(1), (2), (3) or (4) of this 
section; Provided, That:
    (i) An investment in the exempt pool by any such family member is 
made with the knowledge and at the direction of the person; and
    (ii) The family member is not a qualified eligible person for the 
purposes of paragraph (a)(3)(xi) of this section;
    (6)(i) Any person who acquires a participation in the exempt pool by 
gift, bequest or pursuant to an agreement relating to a legal separation 
or divorce from a person listed in paragraph (a)(2)(viii)(A)(1), (2), 
(3), (4) or (5) of this section;
    (ii) The estate of any person listed in paragraph 
(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section; or
    (iii) A company established by any person listed in paragraph 
(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section exclusively for 
the benefit of (or owned exclusively by) that person and any person 
listed in paragraph (a)(2)(viii)(A)(6)(i) or (ii) of this section;
    (B) With respect to an exempt account:
    (1) An affiliate of the commodity trading advisor of the exempt 
account;
    (2) A principal of the commodity trading advisor of the exempt 
account or of an affiliate of the trading advisor;
    (3) An employee of the commodity trading advisor of the exempt 
account or of an affiliate of the trading advisor (other than an 
employee performing solely clerical, secretarial or administrative 
functions with regard to such person or its investments) who, in 
connection with his or her regular functions or duties, participates in 
the investment activities of the trading advisor or the affiliate; 
Provided, That such employee has been performing such functions and 
duties for or on behalf of the trading advisor or the affiliate, or 
substantially similar functions or duties for or on behalf of another 
person engaged in providing commodity interest, securities or other 
financial services, for at least 12 months;
    (4) Any other employee of, or an agent engaged to perform legal, 
accounting, auditing or other financial

[[Page 165]]

services for, the commodity trading advisor of the exempt account or any 
other employee of, or agent so engaged by, an affiliate of the trading 
advisor (other than an employee or agent performing solely clerical, 
secretarial or administrative functions with regard to such person or 
its investments); Provided, That such employee or agent:
    (i) Is an accredited investor as defined in Sec. 230.501(a)(5) or 
(a)(6) of this title; and
    (ii) Has been employed or engaged by the commodity trading advisor 
or the affiliate, or by another person engaged in providing commodity 
interest, securities or other financial services, for at least 24 
months; or
    (5) The spouse, child, sibling or parent of the commodity trading 
advisor of the exempt account or of a person who satisfies the criteria 
of paragraph (a)(2)(viii)(B)(1), (2), (3) or (4) of this section; 
Provided, That:
    (i) The establishment of an exempt account by any such family member 
is made with the knowledge and at the direction of the person; and
    (ii) The family member is not a qualified eligible person for the 
purposes of paragraph (a)(3)(xi) of this section;
    (6)(i) Any person who acquires an interest in an exempt account by 
gift, bequest or pursuant to an agreement relating to a legal separation 
or divorce from a person listed in paragraph (a)(2)(viii)(B)(1), (2), 
(3), (4) or (5) of this section;
    (ii) The estate of any person listed in paragraph 
(a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section; or
    (iii) A company established by any person listed in paragraph 
(a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section exclusively for 
the benefit of (or owned exclusively by) that person and any person 
listed in paragraph (a)(2)(viii)(B)(6)(i) or (ii) of this section;
    (ix) A trust; Provided, That:
    (A) The trust was not formed for the specific purpose of either 
participating in the exempt pool or opening an exempt account; and
    (B) The trustee or other person authorized to make investment 
decisions with respect to the trust, and each settlor or other person 
who has contributed assets to the trust, is a qualified eligible person;
    (x) An organization described in section 501(c)(3) of the Internal 
Revenue Code (the ``IRC''); Provided, That the trustee or other person 
authorized to make investment decisions with respect to the 
organization, and the person who has established the organization, is a 
qualified eligible person;
    (xi) A Non-United States person;
    (xii)(A) An entity in which all of the unit owners or participants, 
other than the commodity trading advisor claiming relief under this 
section, are qualified eligible persons;
    (B) An exempt pool; or
    (C) Notwithstanding paragraph (a)(3) of this section, an entity as 
to which a notice of eligibility has been filed pursuant to Sec. 4.5 
which is operated in accordance with such rule and in which all unit 
owners or participants, other than the commodity trading advisor 
claiming relief under this section, are qualified eligible persons.
    (3) Persons who must satisfy the Portfolio Requirement to be 
qualified eligible persons. Qualified eligible person means any person 
who the commodity pool operator reasonably believes, at the time of the 
sale to that person of a pool participation in the exempt pool, or any 
person who the commodity trading advisor reasonably believes, at the 
time that person opens an exempt account, satisfies the Portfolio 
Requirement and is:
    (i) An investment company registered under the Investment Company 
Act or a business development company as defined in section 2(a)(48) of 
such Act not formed for the specific purpose of either investing in the 
exempt pool or opening an exempt account;
    (ii) A bank as defined in section 3(a)(2) of the Securities Act of 
1933 (the ``Securities Act'') or any savings and loan association or 
other institution as defined in section 3(a)(5)(A) of the Securities Act 
acting for its own account or for the account of a qualified eligible 
person;
    (iii) An insurance company as defined in section 2(13) of the 
Securities Act acting for its own account or for the account of a 
qualified eligible person;

[[Page 166]]

    (iv) A plan established and maintained by a state, its political 
subdivisions, or any agency or instrumentality of a state or its 
political subdivisions, for the benefit of its employees, if such plan 
has total assets in excess of $5,000,000;
    (v) An employee benefit plan within the meaning of the Employee 
Retirement Income Security Act of 1974; Provided, That the investment 
decision is made by a plan fiduciary, as defined in section 3(21) of 
such Act, which is a bank, savings and loan association, insurance 
company, or registered investment adviser; or that the employee benefit 
plan has total assets in excess of $5,000,000; or, if the plan is self-
directed, that investment decisions are made solely by persons that are 
qualified eligible persons;
    (vi) A private business development company as defined in section 
202(a)(22) of the Investment Advisers Act;
    (vii) An organization described in section 501(c)(3) of the IRC, 
with total assets in excess of $5,000,000;
    (viii) A corporation, Massachusetts or similar business trust, or 
partnership, limited liability company or similar business venture, 
other than a pool, which has total assets in excess of $5,000,000, and 
is not formed for the specific purpose of either participating in the 
exempt pool or opening an exempt account;
    (ix) A natural person whose individual net worth, or joint net worth 
with that person's spouse, at the time of either his purchase in the 
exempt pool or his opening of an exempt account exceeds $1,000,000;
    (x) A natural person who had an individual income in excess of 
$200,000 in each of the two most recent years or joint income with that 
person's spouse in excess of $300,000 in each of those years and has a 
reasonable expectation of reaching the same income level in the current 
year;
    (xi) A pool, trust, insurance company separate account or bank 
collective trust, with total assets in excess of $5,000,000, not formed 
for the specific purpose of either participating in the exempt pool or 
opening an exempt account, and whose participation in the exempt pool or 
investment in the exempt account is directed by a qualified eligible 
person; or
    (xii) Except as provided for the governmental entities referenced in 
paragraph (a)(3)(iv) of this section, if otherwise authorized by law to 
engage in such transactions, a governmental entity (including the United 
States, a state, or a foreign government) or political subdivision 
thereof, or a multinational or supranational entity or an 
instrumentality, agency, or department of any of the foregoing.
    (b) Relief available to commodity pool operators. Upon filing the 
notice required by paragraph (d) of this section, and subject to 
compliance with the conditions specified in paragraph (d) of this 
section, any registered commodity pool operator who offers or sells 
participations in a pool solely to qualified eligible persons in an 
offering which qualifies for exemption from the registration 
requirements of the Securities Act pursuant to section 4(2) of that Act 
or pursuant to Regulation S, 17 CFR 230.901 et seq., and any bank 
registered as a commodity pool operator in connection with a pool that 
is a collective trust fund whose securities are exempt from registration 
under the Securities Act pursuant to section 3(a)(2) of that Act and are 
offered or sold, without marketing to the public, solely to qualified 
eligible persons, may claim any or all of the following relief with 
respect to such pool:
    (1) Disclosure relief. (i) Exemption from the specific requirements 
of Sec. Sec. 4.21, 4.24, 4.25 and 4.26 with respect to each exempt 
pool; Provided, That if an offering memorandum is distributed in 
connection with soliciting prospective participants in the exempt pool, 
such offering memorandum must include all disclosures necessary to make 
the information contained therein, in the context in which it is 
furnished, not misleading; and that the following statement is 
prominently disclosed on the cover page of the offering memorandum, or, 
if none is provided, immediately above the signature line on the 
subscription agreement or other document that the prospective 
participant must execute to become a participant in the pool:

    ``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING

[[Page 167]]

COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO 
QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT 
REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE 
COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF 
PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING 
MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS 
NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR 
THIS POOL.''

    (ii) Exemption from disclosing the past performance of exempt pools 
in the Disclosure Document of non-exempt pools except to the extent that 
such past performance is material to the non-exempt pool being offered; 
Provided, That a pool operator that has claimed exemption hereunder and 
elects not to disclose any such performance in the Disclosure Document 
of non-exempt pools shall state in a footnote to the performance 
disclosure therein that the operator is operating or has operated exempt 
pools whose performance is not disclosed in this Disclosure Document.
    (2) Periodic reporting relief. Exemption from the specific 
requirements of Sec. Sec. 4.22(a) and (b); Provided, That a statement 
signed and affirmed in accordance with Sec. 4.22(h) is prepared and 
distributed to pool participants no less frequently than quarterly 
within 30 calendar days after the end of the reporting period. This 
statement must indicate:
    (i) The net asset value of the exempt pool as of the end of the 
reporting period;
    (ii) The change in net asset value from the end of the previous 
reporting period; and
    (iii) The net asset value per outstanding unit of participation in 
the exempt pool as of the end of the reporting period.
    (3) Annual report relief. (i) Exemption from the specific 
requirements of Sec. Sec. 4.22(c) and (d); Provided, That within 90 
calendar days after the end of the exempt pool's fiscal year, the 
commodity pool operator files with with the National Futures Association 
and distributes to each participant in lieu of the financial information 
and statements specified by those sections, an annual report for the 
exempt pool, signed and affirmed in accordance with Sec. 4.22(h) which 
contains, at a minimum:
    (A) A Statement of Financial Condition as of the close of the exempt 
pool's fiscal year (elected in accordance with Sec. 4.22(g));
    (B) A Statement of Income (Loss) for that year; and
    (C) Appropriate footnote disclosure and any other material 
information.
    (ii) Such annual report must be presented and computed in accordance 
with generally accepted accounting principles consistently applied and, 
if certified by an independent public accountant, so certified in 
accordance with Sec. 1.16 as applicable.
    (iii) Legend. (A) If a claim for exemption has been made pursuant to 
this section, the commodity pool operator must make a statement to that 
effect on the cover page of each annual report.
    (B) If the annual report is not certified in accordance with Sec. 
1.16, the pool operator must make a statement to that effect on the 
cover page of each annual report and state that a certified audit will 
be provided upon the request of the holders of a majority of the units 
of participation in the pool who are unaffiliated with the commodity 
pool operator.
    (4) Recordkeeping relief. Exemption from the specific requirements 
of Sec. 4.23; Provided, That the commodity pool operator must maintain 
the reports referred to in paragraphs (b)(2) and (b)(3) of this section 
and all books and records prepared in connection with his activities as 
the pool operator of the exempt pool (including, without limitation, 
records relating to the qualifications of qualified eligible persons and 
substantiating any performance representations) at his main business 
address and must make such books and records available to any 
representative of the Commission, the National Futures Association and 
the United States Department of Justice in accordance with the 
provisions of Sec. 1.31.
    (c) Relief available to commodity trading advisors. Upon filing the 
notice required by paragraph (d) of this section, and subject to 
compliance with the conditions specified in paragraph (d) of

[[Page 168]]

this section, any registered commodity trading advisor who anticipates 
directing or guiding the commodity interest accounts of qualified 
eligible persons may claim any or all of the following relief with 
respect to the accounts of qualified eligible persons who have given due 
consent to their account being an exempt account under Sec. 4.7:
    (1) Disclosure relief. (i) Exemption from the specific requirements 
of Sec. Sec. 4.31, 4.34, 4.35 and 4.36; Provided, That if the commodity 
trading advisor delivers a brochure or other disclosure statement to 
such qualified eligible persons, such brochure or statement shall 
include all additional disclosures necessary to make the information 
contained therein, in the context in which it is furnished, not 
misleading; and that the following statement is prominently displayed on 
the cover page of the brochure or statement or, if none is provided, 
immediately above the signature line of the agreement that the client 
must execute before it opens an account with the commodity trading 
advisor:

    ``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING 
COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, 
THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT 
BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING 
COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING 
PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR 
DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS 
NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR 
ACCOUNT DOCUMENT.''

    (ii) Exemption from disclosing the past performance of exempt 
accounts in the Disclosure Document for non-exempt accounts except to 
the extent that such past performance is material to the non-exempt 
account being offered; Provided, That a commodity trading advisor that 
has claimed exemption hereunder and elects not to disclose any such 
performance in the Disclosure Document for non-exempt accounts shall 
state in a footnote to the performance disclosure therein that the 
advisor is advising or has advised exempt accounts for qualified 
eligible persons whose performance is not disclosed in this Disclosure 
Document.
    (2) Recordkeeping relief. Exemption from the specific requirements 
of Sec. 4.33; Provided, That the commodity trading advisor must 
maintain, at its main business office, all books and records prepared in 
connection with his activities as the commodity trading advisor of 
qualified eligible persons (including, without limitation, records 
relating to the qualifications of such qualified eligible persons and 
substantiating any performance representations) and must make such books 
and records available to any representative of the Commission, the 
National Futures Association and the United States Department of Justice 
in accordance with the provisions of Sec. 1.31.
    (d) Notice of claim for exemption. (1) A notice of a claim for 
exemption under this section must:
    (i) Be in writing;
    (ii) Provide the name, main business address, main business 
telephone number and the National Futures Association commodity pool 
operator or commodity trading advisor identification number of the 
person claiming the exemption;
    (iii)(A) Where the claimant is a commodity pool operator, provide 
the name(s) of the pool(s) for which the request is made; Provided, That 
a single notice representing that the pool operator anticipates 
operating single-investor pools may be filed to claim exemption for 
single-investor pools and such notice need not name each such pool;
    (B) Where the claimant is a commodity trading advisor, contain a 
representation that the trading advisor anticipates providing commodity 
interest trading advice to qualified eligible persons;
    (iv) Contain representations that:
    (A) Neither the commodity pool operator or commodity trading advisor 
nor any of its principals is subject to any statutory disqualification 
under section 8a(2) or 8a(3) of the Act unless such disqualification 
arises from a matter which was previously disclosed in connection with a 
previous application for registration if such registration was granted 
or which was disclosed more than thirty days prior to

[[Page 169]]

the filing of the notice under this paragraph (d);
    (B) The commodity pool operator or commodity trading advisor will 
comply with the applicable requirements of Sec. 4.7; and
    (C) Where the claimant is a commodity pool operator, that the exempt 
pool will be offered and operated in compliance with the applicable 
requirements of Sec. 4.7;
    (v) Specify the relief claimed under Sec. 4.7;
    (vi) Where the claimant is a commodity pool operator, state the 
closing date of the offering or that the offering will be continuous;
    (vii) Be manually signed by a representative duly authorized to bind 
the commodity pool operator or commodity trading advisor;
    (viii) Be filed with the National Futures Association at its 
headquarters office (Attn: Director of Compliance, Compliance 
Department); and
    (ix)(A)(1) Where the claimant is a commodity pool operator, except 
as provided in paragraph (d)(1)(iii)(A) of this section with respect to 
single-investor pools and in paragraph (d)(1)(ix)(A)(2) of this section, 
be received by the National Futures Association:
    (i) Before the date the pool first enters into a commodity interest 
transaction, if the relief claimed is limited to that provided under 
paragraphs (b)(2), (3) and (4) of this section; or
    (ii) Prior to any offer or sale of any participation in the exempt 
pool if the claimed relief includes that provided under paragraph (b)(1) 
of this section.
    (2) Where participations in a pool have been offered or sold in full 
compliance with Part 4, the notice of a claim for exemption may be filed 
with the National Futures Association at any time; Provided, That the 
claim for exemption is otherwise consistent with the duties of the 
commodity pool operator and the rights of pool participants and that the 
commodity pool operator notifies the pool participants of his intention, 
absent objection by the holders of a majority of the units of 
participation in the pool who are unaffiliated with the commodity pool 
operator within twenty-one days after the date of the notification, to 
file a notice of claim for exemption under Sec. 4.7 and such holders 
have not objected within such period. A commodity pool operator filing a 
notice under this paragraph (d)(1)(ix)(A)(2) shall either provide 
disclosure and reporting in accordance with the requirements of Part 4 
to those participants objecting to the filing of such notice or allow 
such participants to redeem their units of participation in the pool 
within three months of the filing of such notice.
    (B) Where the claimant is a commodity trading advisor, be received 
by the Commission before the date the trading advisor first enters into 
an agreement to direct or guide the commodity interest account of a 
qualified eligible person pursuant to Sec. 4.7.
    (2) The notice will be effective upon receipt by the National 
Futures Association with respect to each pool for which it was made 
where the claimant is a commodity pool operator and otherwise generally 
where the claimant is a commodity trading advisor; Provided, That any 
notice which does not include all the required information shall not be 
effective, and that if at the time the National Futures Association 
receives the notice an enforcement proceeding brought by the Commission 
under the Act or the regulations is pending against the pool operator or 
trading advisor or any of its principals, the exemption will not be 
effective until twenty-one calendar days after receipt of the notice by 
the National Futures Association and that in such case an exemption may 
be denied by the Commission or the National Futures Association or made 
subject to such conditions as the Commission or the National Futures 
Association may impose.
    (3) Any exemption claimed hereunder shall cease to be effective upon 
any change which would cause the commodity pool operator of an exempt 
pool to be ineligible for the relief claimed with respect to such pool 
or which would cause a commodity trading advisor to be ineligible for 
the relief claimed. The pool operator or trading advisor must promptly 
file a notice advising the National Futures Association of such change.
    (4)(i) Any exemption from the requirements of Sec. 4.21, 4.22, 
4.23, 4.24, 4.25

[[Page 170]]

or 4.26 claimed hereunder with respect to a pool shall not affect the 
obligation of the commodity pool operator to comply with all other 
applicable provisions of Part 4, the Act and the Commission's rules and 
regulations, with respect to the pool and any other pool the pool 
operator operates or intends to operate.
    (ii) Any exemption from the requirements of Sec. 4.31, 4.33, 4.34, 
4.35 or 4.36 claimed hereunder shall not affect the obligation of the 
commodity trading advisor to comply with all other applicable provisions 
of Part 4, the Act and the Commission's rules and regulations, with 
respect to any qualified eligible person and any other client to which 
the commodity trading advisor provides or intends to provide commodity 
interest trading advice.
    (e) Insignificant deviations from a term, condition or requirement 
of Sec. 4.7. (1) A failure to comply with a term or condition of Sec. 
4.7 will not result in the loss of the exemption with respect to a 
particular pool or client if the commodity pool operator or the 
commodity trading advisor relying on the exemption shows that:
    (i) The failure to comply did not pertain to a term, condition or 
requirement directly intended to protect that particular qualified 
eligible person;
    (ii) The failure to comply was insignificant with respect to the 
exempt pool as a whole or to the particular exempt account; and
    (iii) A good faith and reasonable attempt was made to comply with 
all applicable terms, conditions and requirements of Sec. 4.7.
    (2) A transaction made in reliance on Sec. 4.7 must comply with all 
applicable terms, conditions and requirements of Sec. 4.7. Where an 
exemption is established only through reliance upon paragraph (e)(1) of 
this section, the failure to comply shall nonetheless be actionable by 
the Commission.

[65 FR 47854, Aug. 4, 2000, as amended at 67 FR 77411, Dec. 18, 2002; 68 
FR 47231, Aug. 8, 2003]



Sec. 4.8  Exemption from certain requirements of rule 4.26 with respect 

to pools offered or sold in certain offerings exempt from registration 
under the Securities Act.

    (a) Notwithstanding paragraph (d) of Sec. 4.26 and subject to the 
conditions specified herein, the registered commodity pool operator of a 
pool offered or sold solely to ``accredited investors'' as defined in 17 
CFR 230.501 in an offering exempt from the registration requirements of 
the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 
17 CFR 230.505 or 230.506, may solicit, accept and receive funds, 
securities and other property from prospective participants in that pool 
upon filing with the Commission and providing to such participants the 
Disclosure Document for the pool.
    (b) Notwithstanding paragraph (d) of Sec. 4.26 and subject to the 
conditions specified herein, the registered commodity pool operator of a 
pool offered or sold in an offering exempt from the registration 
requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 
of Regulation D, 17 CFR 230.505 or 230.506, that is operated in 
compliance with, and has filed the notice required by, Sec. 4.12(b) may 
solicit, accept and receive funds, securities and other property from 
prospective participants in that pool upon filing with the Commission 
and providing to such participants the Disclosure Document for the pool.
    (c) The relief provided under Sec. 4.8 is not available if an 
enforcement proceeding brought by the Commission under the Act or the 
regulations is pending against the commodity pool operator or any of its 
principals or if the commodity pool operator or any of its principals is 
subject to any statutory disqualification under Sec. Sec. 8a(2) or 
8a(3) of the Act.

[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60 
FR 38182, July 25, 1995]



Sec. 4.9  [Reserved]



Sec. 4.10  Definitions.

    For purposes of this part:

[[Page 171]]

    (a) Commodity interest means:
    (1) Any contract for the purchase or sale of a commodity for future 
delivery; and
    (2) Any contract, agreement or transaction subject to Commission 
regulation under section 4c or 19 of the Act.
    (b) Net asset value means total assets minus total liabilities, 
determined in accord with generally accepted accounting principles, with 
each position in a commodity interest accounted for at fair market 
value.
    (c) Participant means any person that has any direct financial 
interest in a pool (e.g., a limited partner).
    (d)(1) Pool means any investment trust, syndicate or similar form of 
enterprise operated for the purpose of trading commodity interests.
    (2) Multi-advisor pool means a pool in which:
    (i) No commodity trading advisor is allocated or intended to be 
allocated more than twenty-five percent of the pool's funds available 
for commodity interest trading; and
    (ii) No investee pool is allocated or intended to be allocated more 
than twenty-five percent of the pool's net asset value.
    (3) Principal-protected pool means a pool (commonly referred to as a 
``guaranteed pool'') that is designed to limit the loss of the initial 
investment of its participants.
    (4) Investee pool means any pool in which another pool or account 
participates or invests, e.g., as a limited partner thereof.
    (5) Major investee pool means, with respect to a pool, any investee 
pool that is allocated or intended to be allocated at least ten percent 
of the net asset value of the pool.
    (e)(1) Principal, when referring to a person that is a principal of 
a particular entity, shall have the same meaning as the term 
``principal'' under Sec. 3.1(a) of this chapter.
    (2) Trading principal means:
    (i) With respect to a commodity pool operator, a principal who 
participates in making trading decisions for a pool, or who supervises, 
or has authority to allocate pool assets to, persons so engaged; and
    (ii) With respect to a commodity trading advisor, a principal who 
participates in making trading decisions for the account of a client or 
who supervises or selects persons so engaged.
    (f) Direct, as used in the context of trading commodity interest 
accounts, refers to agreements whereby a person is authorized to cause 
transactions to be effected for a client's commodity interest account 
without the client's specific authorization.
    (g) Trading program refers to the program pursuant to which a person 
(1) directs a client's commodity interest account, or (2) guides the 
client's commodity interest trading by means of a systematic program 
that recommends specific transactions.
    (h) Trading manager means, with respect to a pool, any person, other 
than the commodity pool operator of the pool, having sole or partial 
authority to allocate pool assets to commodity trading advisors or 
investee pools.
    (i) Major commodity trading advisor means, with respect to a pool, 
any commodity trading advisor that is allocated or is intended to be 
allocated at least ten percent of the pool's funds available for 
commodity interest trading. For this purpose, the percentage allocation 
shall be the amount of funds allocated to the trading advisor by 
agreement with the commodity pool operator (or trading manager) on 
behalf of the pool, expressed as a percentage of the lesser of the 
aggregate value of the assets allocated to the pool's trading advisors 
or the net assets of the pool at the time of allocation.
    (j) Break-even point--(1) Means the trading profit that a pool must 
realize in the first year of a participant's investment to equal all 
fees and expenses such that such participant will recoup its initial 
investment, as calculated pursuant to rules promulgated by a registered 
futures association pursuant to section 17(j) of the Act; and
    (2) Must be expressed both as a dollar amount and as a percentage of 
the minimum unit of initial investment and assume redemption of the 
initial investment at the end of the first year of investment.
    (k) Draw-down means losses experienced by a pool or account over a 
specified period.

[[Page 172]]

    (l) Worst peak-to-valley draw-down means the greatest cumulative 
percentage decline in month-end net asset value due to losses sustained 
by a pool, account or trading program during any period in which the 
initial month-end net asset value is not equaled or exceeded by a 
subsequent month-end net asset value. Such decline must be expressed as 
a percentage of the initial month-end net asset value, together with an 
indication of the months and year(s) of such decline from the initial 
month-end net asset value to the lowest month-end net asset value of 
such decline.\1\ For purposes of Sec. Sec. 4.25 and 4.35, a peak-to-
valley draw-down which began prior to the beginning of the most recent 
five calendar years is deemed to have occurred during such five- 
calendar-year period.
---------------------------------------------------------------------------

    \1\ For example, a worst peak-to-valley draw-down of ``4 to 8-92/
25%'' means that the peak-to-valley draw-down lasted from April to 
August of 1992 and resulted in a twenty-five percent cumulative draw-
down.
---------------------------------------------------------------------------

    (m) Partially-funded account means a client participation in the 
program of a commodity trading advisor in which the amount of funds in 
the client's commodity interest account over which such commodity 
trading advisor has trading authority is less than the account size that 
establishes the client's level of trading in a commodity trading 
advisor's program.

[46 FR 26013, May 9, 1981, as amended at 49 FR 8225, Mar. 5, 1984; 60 FR 
38182, July 25, 1995; 66 FR 53522, Oct. 23, 2001; 68 FR 42967, July 21, 
2003]



Sec. 4.11  Exemption from section 4n(3)(B).

    The provisions of section 4n(3)(B) of the Act shall not apply to any 
commodity pool operator or commodity trading advisor that is registered 
under the Act as such or that is exempt from such registration.



Sec. 4.12  Exemption from provisions of part 4.

    (a) In general. (1) The Commission may exempt any person or any 
class or classes of persons from any provision of this part 4 if it 
finds that the exemption is not contrary to the public interest and the 
purposes of the provisions from which the exemption is sought.
    (2) The Commission may grant the exemption subject to such terms and 
conditions as it may find appropriate.
    (b) Exemption from subpart B for certain commodity pool operators. 
(1) Any person who is registered as a commodity pool operator, or has 
applied for such registration, may claim any or all of the relief 
available under paragraph (b)(2) of this section if:
    (i) The pool for which it makes such claim:
    (A) Will be offered and sold pursuant to the Securities Act of 1933 
or pursuant to an exemption from said Act;
    (B) Will generally and routinely engage in the buying and selling of 
securities and securities derived instruments;
    (C) Will not enter into commodity futures and commodity options 
contracts for which the aggregate initial margin and premiums exceed 10 
percent of the fair market value of the pool's assets, after taking into 
account unrealized profits and unrealized losses on any such contracts 
it has entered into; Provided, however, That in the case of an option 
that is in-the-money at the time of purchase, the in-the-money amount as 
defined in Sec. 190.01(x) may be excluded in computing such 10 percent; 
and
    (D) Will trade such commodity interests in a manner solely 
incidental to its securities trading activities.
    (ii) Each existing participant and prospective participant in the 
pool for which it makes such request is informed in writing of the 
restrictions set forth in paragraph (b)(1)(i) (C) and (D) of this 
section prior to the date the pool commences trading commodity 
interests. The pool operator may furnish this information by way of the 
pool's Disclosure Document, Account Statement, a separate notice or 
other similar means.
    (2) The commodity pool operator of a pool which meets the criteria 
of paragraph (b)(1) of this section may claim the following relief:
    (i) In the case of Sec. 4.21, that the Commission accept in lieu 
and in satisfaction of the Disclosure Document specified by that section 
an offering memorandum for the pool which does not contain the 
information required by Sec. Sec. 4.24(a), 4.24(b), and 4.24(n); 
Provided,

[[Page 173]]

however, that the offering memorandum:
    (A) Is prepared pursuant to the requirements of the Securities Act 
of 1933, as amended, or the exemption from said Act pursuant to which 
the pool is being offered and sold;
    (B) Contains the information required by Sec. Sec. 4.24(c) through 
(m) and (o) through (u); and
    (C) Complies with the requirements of Sec. Sec. 4.24(v) and (w).
    (ii) In the case of Sec. 4.22 (a) and (b), that the Commission 
accept in lieu and in satisfaction of the Account Statement and 
prescribed frequency respectively specified by those sections a 
statement which indicates the net asset value of the pool as of the end 
of the reporting period and the change in net asset value from the end 
of the previous reporting period, to be prepared and distributed no less 
frequently than quarterly; Provided, however, That each such statement 
complies with the other requirements of Sec. 4.22 (a) and (b), 
including the references in those sections to Sec. 4.22 (g) and (h).
    (iii) In the case of Sec. 4.22 (c) through (e), that the Commission 
accept in lieu and in satisfaction of the financial information and 
statements in the Annual Report specified by those sections an annual 
report for the pool which contains, at a minimum, a Statement of 
Financial Condition as of the close of the pool's fiscal year and a 
Statement of Income (Loss) for that year; Provided, however, That:
    (A) Each such annual report complies with the other requirements of 
Sec. 4.22(c), including the reference in that section to Sec. 4.22(h) 
and the requirement in Sec. 4.22(c)(5) that the annual report must 
contain appropriate footnote disclosure and further material 
information; and
    (B) The financial statements in such annual report must be presented 
and computed in accordance with generally accepted accounting principles 
consistently applied and must be certified by an independent public 
accountant.
    (iv) In the case of Sec. 4.23(a) (10) and (11), to exempt the pool 
operator from the requirements of those sections with respect to the 
pool.
    (3) Any registered commodity pool operator who desires to claim the 
relief available under this Sec. 4.12(b) must file a claim of exemption 
with the National Futures Association. Such claim must:
    (i) Be in writing;
    (ii) Provide the name, main business address and main business 
telephone number of the registered commodity pool operator, or applicant 
for such registration, making the request;
    (iii) Provide the name of the commodity pool for which the request 
is being made;
    (iv) Contain representations that the pool will be operated in 
compliance with paragraph (b)(1)(i) of this section and the pool 
operator will comply with the requirements of paragraph (b)(1)(ii) of 
this section;
    (v) Specify the relief sought under paragraph (b)(2) of this 
section;
    (vi) Be manually signed by a representative duly authorized to bind 
the pool operator; and
    (vii) Be filed with the National Futures Association at its 
headquarters office (Attn: Director of Compliance, Compliance 
Department).
    (4)(i) The claim of exemption must be filed before the date the 
commodity pool first enters into a commodity interest transaction.
    (ii) The claim of exemption shall be effective upon filing; 
Provided, however, That any exemption claimed hereunder shall cease to 
be effective upon any change which would render the representations made 
pursuant to paragraph (b)(3)(iv) of this section inaccurate or the 
continuation of such representations false or misleading.
    (5)(i) If a claim of exemption has been made under Sec. 
4.12(b)(2)(i), the commodity pool operator must make a statement to that 
effect on the cover page of each offering memorandum, or amendment 
thereto, that it is required to file with the Commission pursuant to 
Sec. 4.26.
    (ii) If a claim of exemption has been made with respect to paragraph 
(b)(2)(iii) of this section, the pool operator must make a statement to 
that effect on the cover page of each annual report that it is required 
to file with the National Futures Association pursuant to Sec. 4.22(c).
    (6)(i) Any claim of exemption effective hereunder shall be effective 
only with respect to the pool for which it has been made.

[[Page 174]]

    (ii) The effectiveness of such claim shall not affect the 
obligations of the commodity pool operator to comply with all other 
applicable provisions of this part 4, the Act and the Commission's rules 
and regulations issued thereunder with respect to the pool and any other 
pool the pool operator operates or intends to operate.

[52 FR 41984, Nov. 2, 1987, as amended at 60 FR 38183, July 25, 1995; 67 
FR 77411, Dec. 18, 2002; 68 FR 47231, Aug. 8, 2003]



Sec. 4.13  Exemption from registration as a commodity pool operator.

    This section is organized as follows: Paragraph (a) of this section 
specifies the criteria that must be met to qualify for exemption from 
registration under this section; paragraph (b) of this section governs 
the notice that must be filed to claim exemption from registration; 
paragraph (c) of this section sets forth the continuing obligations of a 
person who has claimed exemption under this section; paragraph (d) of 
this section specifies information certain persons must provide if they 
subsequently register; paragraph (e) of this section specifies the 
effect of registration on a person who has claimed an exemption from 
registration under this section or who is eligible to claim an exemption 
from registration hereunder; and paragraph (f) of this section specifies 
the effect of this section on Sec. 4.5 of this chapter.
    (a) A person is not required to register under the Act as a 
commodity pool operator if:
    (1)(i) It does not receive any compensation or other payment, 
directly or indirectly, for operating the pool, except reimbursement for 
the ordinary administrative expenses of operating the pool;
    (ii) It operates only one commodity pool at any time;
    (iii) It is not otherwise required to register with the Commission 
and is not a business affiliate of any person required to register with 
the Commission; and
    (iv) Neither the person nor any other person involved with the pool 
does any advertising in connection with the pool (for purposes of this 
section, advertising includes the systematic solicitation of prospective 
participants by telephone or seminar presentation);
    (2)(i) None of the pools operated by it has more than 15 
participants at any time; and
    (ii) The total gross capital contributions it receives for units of 
participation in all of the pools it operates or that it intends to 
operate do not in the aggregate exceed $400,000.
    (iii) For the purpose of determining eligibility for exemption under 
paragraph (a)(2) of this section, the person may exclude the following 
participants and their contributions:
    (A) The pool's operator, commodity trading advisor, and the 
principals thereof;
    (B) A child, sibling or parent of any of these participants;
    (C) The spouse of any participant specified in paragraph 
(a)(2)(iii)(A) or (B) of this section; and
    (D) Any relative of a participant specified in paragraph 
(a)(2)(iii)(A), (B) or (C) of this section, its spouse or a relative of 
its spouse, who has the same principal residence as such participant;
    (3) For each pool for which the person claims exemption from 
registration under this paragraph (a)(3):
    (i) Interests in the pool are exempt from registration under the 
Securities Act of 1933, and such interests are offered and sold without 
marketing to the public in the United States;
    (ii) At all times, the pool meets one or the other of the following 
tests with respect to its commodity interest positions, including 
positions in security futures products, whether entered into for bona 
fide hedging purposes or otherwise:
    (A) The aggregate initial margin and premiums required to establish 
such positions, determined at the time the most recent position was 
established, will not exceed 5 percent of the liquidation value of the 
pool's portfolio, after taking into account unrealized profits and 
unrealized losses on any such positions it has entered into; Provided, 
That in the case of an option that is in-the-money at the time of 
purchase, the in-the-money amount as defined in Sec. 190.01(x) of this 
chapter may be excluded in computing such 5 percent; or
    (B) The aggregate net notional value of such positions, determined 
at the

[[Page 175]]

time the most recent position was established, does not exceed 100 
percent of the liquidation value of the pool's portfolio, after taking 
into account unrealized profits and unrealized losses on any such 
positions it has entered into. For the purpose of this paragraph:
    (1) The term ``notional value'' shall be calculated for each such 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units (taking into account any multiplier 
specified in the contract), by the current market price per unit, and 
for each such option position by multiplying the number of contracts by 
the size of the contract, adjusted by its delta, in contract units 
(taking into account any multiplier specified in the contract), by the 
strike price per unit; and
    (2) The person may net contracts with the same underlying commodity 
across designated contract markets, registered derivatives transaction 
execution facilities and foreign boards of trade; and
    (iii) The person reasonably believes, at the time of investment (or, 
in the case of an existing pool, at the time of conversion to a pool 
meeting the criteria of paragraph (a)(3) of this section), that each 
person who participates in the pool is:
    (A) An ``accredited investor,'' as that term is defined in Sec. 
230.501 of this title;
    (B) A trust that is not an accredited investor but that was formed 
by an accredited investor for the benefit of a family member;
    (C) A ``knowledgeable employee,'' as that term is defined in Sec. 
270.3c-5 of this title; or
    (D) A ``qualified eligible person,'' as that term is defined in 
Sec. 4.7(a)(2)(viii)(A) of this chapter; and
    (iv) Participations in the pool are not marketed as or in a vehicle 
for trading in the commodity futures or commodity options markets; 
Provided, That nothing in paragraph (a)(3) of this section shall 
prohibit the person from claiming an exemption under this section if it 
additionally operates one or more pools for which it meets the criteria 
of paragraph (a)(4) of this section; or
    (4) For each pool for which the person claims exemption from 
registration under this paragraph (a)(4):
    (i) Interests in the pool are exempt from registration under the 
Securities Act of 1933, and such interests are offered and sold without 
marketing to the public in the United States;
    (ii) The person reasonably believes, at the time of investment (or, 
in the case of an existing pool, at the time of conversion to a pool 
meeting the criteria of paragraph (a)(4) of this section), that:
    (A) Each natural person participant (including such person's self-
directed employee benefit plan, if any), is a ``qualified eligible 
person,'' as that term is defined in Sec. 4.7(a)(2); and
    (B) Each non-natural person participant is a ``qualified eligible 
person,'' as that term is defined in Sec. 4.7, or an ``accredited 
investor,'' as that term is defined in Sec. 230.501(a)(1)-(3), (a)(7) 
and (a)(8) of this title; Provided, That nothing in paragraph (a)(4) of 
this section will prohibit the person from claiming an exemption under 
this section if it additionally operates one or more pools that meet the 
criteria of paragraph (a)(3) of this section.
    (5)(i) Eligibility for exemption under this section is subject to 
the person furnishing in writing to each prospective participant in the 
pool:
    (A) A statement that the person is exempt from registration with the 
Commission as a commodity pool operator and that therefore, unlike a 
registered commodity pool operator, it is not required to deliver a 
Disclosure Document and a certified annual report to participants in the 
pool; and
    (B) A description of the criteria pursuant to which it qualifies for 
such exemption from registration.
    (ii) The person must make these disclosures by no later than the 
time it delivers a subscription agreement for the pool to a prospective 
participant in the pool.
    (b)(1) Any person who desires to claim the relief from registration 
provided by this section must file a notice of exemption from commodity 
pool operator registration with the National Futures Association (ATTN: 
Director of Compliance). The notice must:

[[Page 176]]

    (i) Provide the name, main business address, main business telephone 
number, main facsimile number and main email address of the person 
claiming the exemption and the name of the pool for which it is claiming 
exemption;
    (ii) Contain the section number pursuant to which the operator is 
filing the notice (i.e., Sec. 4.13(a)(1), (a)(2), (a)(3), or (a)(4), or 
both (a)(3) and (a)(4)) and represent that the pool will be operated in 
accordance with the criteria of that paragraph or paragraphs; and
    (iii) Be manually signed by a representative duly authorized to bind 
the person.
    (2) The person must file the notice by no later than the time it 
delivers a subscription agreement for the pool to a prospective 
participant in the pool; Provided, That where a person registered with 
the Commission as a commodity pool operator intends to withdraw from 
registration in order to claim exemption hereunder, the person must 
notify its pool's participants in writing that it intends to withdraw 
from registration and claim the exemption, and it must provide each such 
participant with a right to redeem its interest in the pool prior to the 
person filing a notice of exemption from registration.
    (3) The notice will be effective upon filing, provided the notice is 
materially complete.
    (4) Each person who has filed a notice of exemption from 
registration under this section must, in the event that any of the 
information contained or representations made in the notice becomes 
inaccurate or incomplete, file a supplemental notice with the National 
Futures Association to that effect which, if applicable, includes such 
amendments as may be necessary to render the notice accurate and 
complete. This supplemental notice must be filed within 15 business days 
after the pool operator becomes aware of the occurrence of such event.
    (c)(1) Each person who has filed a notice of exemption from 
registration under this section must:
    (i) Make and keep all books and records prepared in connection with 
its activities as a pool operator for a period of five years from the 
date of preparation;
    (ii) Keep such books and records readily accessible during the first 
two years of the five-year period. All such books and records must be 
available for inspection upon the request of any representative of the 
Commission, the United States Department of Justice, or any other 
appropriate regulatory agency; and
    (iii) Submit to such special calls as the Commission may make to 
demonstrate eligibility for and compliance with the applicable criteria 
for exemption under this section.
    (2) In the event the person distributes an annual report to 
participants in the pool for which it has filed the notice, the annual 
report must be presented and computed in accordance with generally 
accepted accounting principles consistently applied and, if certified by 
an independent public accountant, so certified in accordance with Sec. 
1.16 of this chapter as applicable.
    (3) Each person who has filed a notice of exemption from 
registration pursuant to paragraph (a)(1) or (a)(2) of this section 
must:
    (i) Promptly furnish to each participant in the pool a copy of each 
monthly statement for the pool that the pool operator received from a 
futures commission merchant pursuant to Sec. 1.33 of this chapter; and
    (ii) Clearly show on such statement, or on an accompanying 
supplemental statement, the net profit or loss on all commodity 
interests closed since the date of the previous statement.
    (d) Each person who applies for registration as a commodity pool 
operator subsequent to claiming relief under paragraph (a)(1) or (a)(2) 
of this section must include with its application the financial 
statements and other information required by Sec. 4.22(c)(1) through 
(5) for each pool that it has operated as an operator exempt from 
registration. That information must be presented and computed in 
accordance with generally accepted accounting principles consistently 
applied. If the person is granted registration as a commodity pool 
operator, it must comply with the provisions of this part with respect 
to each such pool.

[[Page 177]]

    (e)(1) Subject to the provisions of paragraph (e)(2) of this 
section, if a person who is eligible for exemption from registration as 
a commodity pool operator under this section nonetheless registers as a 
commodity pool operator, the person must comply with the provisions of 
this part with respect to each commodity pool identified on its 
registration application or supplement thereto.
    (2) If a person operates one or more commodity pools described in 
paragraph (a)(3) or (a)(4) of this section, and one or more commodity 
pools for which it must be, and is, registered as a commodity pool 
operator, the person is exempt from the requirements applicable to a 
registered commodity pool operator with respect to the pool or pools 
described in paragraph (a)(3) or (a)(4) of this section; Provided, That 
the person:
    (i) Furnishes in writing to each prospective participant in a pool 
described in paragraph (a)(3) or (a)(4) of this section that it 
operates:
    (A) A statement that it will operate the pool as if the person was 
exempt from registration as a commodity pool operator;
    (B) A description of the criteria pursuant to which it will so 
operate the pool;
    (ii) Complies with paragraph (c) of this section; and
    (iii) Provides to each existing participant in a pool that the 
person elects to operate as described in paragraph (a)(3) or (a)(4) of 
this section a right to redeem the participant's interest in the pool, 
and informs each such participant of that right no later than the time 
the person commences to operate the pool as described in paragraph 
(a)(3) or (a)(4) of this section.
    (f) The filing of a notice of exemption from registration under this 
section will not affect the ability of a person to qualify for exclusion 
from the definition of the term ``commodity pool operator'' under Sec. 
4.5 in connection with its operation of another trading vehicle that is 
not covered under this Sec. 4.13.

(Approved by the Office of Management and Budget under control number 
3038-0005)

(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17, 
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n, 
12a, 19 and 21; 5 U.S.C. 552 and 552b))

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57011, Dec. 22, 1982; 50 FR 15883, Apr. 23, 1985; 67 FR 77411, Dec. 
18, 2002; 68 FR 47231, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003; 68 FR 
59113, Oct. 14, 2003]



Sec. 4.14  Exemption from registration as a commodity trading advisor.

    This section is organized as follows: Paragraph (a) of this section 
specifies the criteria that must be met to qualify for exemption from 
registration under this section, including the notice of exemption from 
registration and continuing obligations of persons who have claimed 
exemption under paragraph (a)(8) of this section; paragraph (b) of this 
section concerns ``cash market transactions''; and paragraph (c) of this 
section specifies the effect of registration on a person who has claimed 
an exemption from registration under this section or who is eligible to 
claim an exemption from registration hereunder.
    (a) A person is not required to register under the Act as a 
commodity trading advisor if:
    (1) It is a dealer, processor, broker, or seller in cash market 
transactions of any commodity (or product thereof) and the person's 
commodity trading advice is solely incidental to the conduct of its cash 
market business;
    (2) It is a non-profit, voluntary membership, trade association or 
farm organization and the person's commodity trading advice is solely 
incidental to the conduct of its business as such association or 
organization;
    (3) It is registered under the Act as an associated person and the 
person's commodity trading advice is issued solely in connection with 
its employment as an associated person;

[[Page 178]]

    (4) It is registered under the Act as a commodity pool operator and 
the person's commodity trading advice is directed solely to, and for the 
sole use of, the pool or pools for which it is so registered;
    (5) It is exempt from registration as a commodity pool operator and 
the person's commodity trading advice is directed solely to, and for the 
sole use of, the pool or pools for which it is so exempt;
    (6) It is registered under the Act as an introducing broker and the 
person's trading advice is solely in connection with its business as an 
introducing broker;
    (7) It is registered under the Act as a leverage transaction 
merchant and the person's trading advice is solely in connection with 
its business as a leverage transaction merchant;
    (8) It is registered as an investment adviser under the Investment 
Advisers Act of 1940 or with the applicable securities regulatory agency 
of any State, or it is exempt from such registration, or it is excluded 
from the definition of the term ``investment adviser'' pursuant to the 
provisions of sections 202(a)(2) and 202(a)(11) of the Investment 
Advisers Act of 1940, Provided, That:
    (i) The person's commodity interest trading advice is directed 
solely to, and for the sole use of, one or more of the following:
    (A) ``Qualifying entities,'' as that term is defined in Sec. 
4.5(b), for which a notice of eligibility has been filed;
    (B) Collective investment vehicles that are excluded from the 
definition of the term commodity ``pool'' under Sec. 4.5(a)(4); and
    (C) Commodity pools that are organized and operated outside of the 
United States, its territories or possessions, where:
    (1) The commodity pool operator of each such pool has not so 
organized and is not so operating the pool for the purpose of avoiding 
commodity pool operator registration;
    (2) With the exception of the pool's operator, advisor and their 
principals, solely ``Non-United States persons,'' as that term is 
defined in Sec. 4.7(a)(1)(iv), will contribute funds or other capital 
to, and will own beneficial interests in, the pool; Provided, That units 
of participation in the pool held by persons who do not qualify as Non-
United States persons or otherwise as qualified eligible persons 
represent in the aggregate less than 10 percent of the beneficial 
interest of the pool;
    (3) No person affiliated with the pool conducts any marketing 
activity for the purpose of, or that could reasonably have the effect 
of, soliciting participation from other than Non-United States persons; 
and
    (4) No person affiliated with the pool conducts any marketing 
activity from within the United States, its territories or possessions; 
and
    (D) A commodity pool operator who has claimed an exemption from 
registration under Sec. 4.13(a)(3) or 4.13(a)(4), or, if registered as 
a commodity pool operator, who may treat each pool it operates that 
meets the criteria of Sec. 4.13(a)(3) or 4.13(a)(4) as if it were not 
so registered; and
    (ii) The person:
    (A) Provides commodity interest trading advice solely incidental to 
its business of providing securities or other investment advice to 
qualifying entities, collective investment vehicles and commodity pools 
as described in paragraph (a)(8)(i) of this section; and
    (B) Is not otherwise holding itself out as a commodity trading 
advisor.
    (iii)(A) A person who desires to claim the relief from registration 
provided by this Sec. 4.14(a)(8) must file a notice of exemption from 
commodity trading advisor registration with the National Futures 
Association (ATTN: Director of Compliance). The notice must:
    (1) Provide the name, main business address, main business telephone 
number, main facsimile number and main email address of the trading 
advisor claiming the exemption;
    (2) Contain the section number pursuant to which the advisor is 
filing the notice (i.e., under Sec. 4.14(a)(8)(i)) and represent that 
it will provide commodity interest advice to its clients in accordance 
with the criteria of that paragraph or paragraphs; and
    (3) Be manually signed by a representative duly authorized to bind 
the person.
    (B) The person must file the notice by no later than the time it 
delivers an

[[Page 179]]

advisory agreement for the trading program pursuant to which it will 
offer commodity interest advice to a client; Provided, That where the 
advisor is registered with the Commission as a commodity trading 
advisor, it must notify its clients in writing that it intends to 
withdraw from registration and claim the exemption and must provide each 
such client with a right to terminate its advisory agreement prior to 
the person filing a notice of exemption from registration.
    (C) The notice will be effective upon filing, provided the notice is 
materially complete.
    (D) Each person who has filed a notice of registration exemption 
under this section must, in the event that any of the information 
contained or representations made in the notice becomes inaccurate or 
incomplete, file a supplemental notice with the National Futures 
Association to that effect which, if applicable, includes such 
amendments as may be necessary to render the notice accurate and 
complete. This supplemental notice must be filed within 15 business days 
after the trading advisor becomes aware of the occurrence of such event.
    (iv) Each person who has filed a notice of registration exemption 
under this Sec. 4.14(a)(8) must:
    (A)(1) Make and keep all books and records prepared in connection 
with its activities as a trading advisor, including all books and 
records demonstrating eligibility for and compliance with the applicable 
criteria for exemption under this section, for a period of five years 
from the date of preparation; and
    (2) Keep such books and records readily accessible during the first 
two years of the five-year period. All such books and records must be 
available for inspection upon the request of any representative of the 
Commission, the United States Department of Justice, or any other 
appropriate regulatory agency; and
    (B) Submit to such special calls as the Commission may make to 
demonstrate eligibility for and compliance with the applicable criteria 
for exemption under this section;
    (9) It does not engage in any of the following activities:
    (i) Directing client accounts; or
    (ii) Providing commodity trading advice based on, or tailored to, 
the commodity interest or cash market positions or other circumstances 
or characteristics of particular clients; or
    (10) If, as provided for in section 4m(1) of the Act, during the 
course of the preceding 12 months, it has not furnished commodity 
trading advice to more than 15 persons and it does not hold itself out 
generally to the public as a commodity trading advisor.
    (i) For the purpose of paragraph (a)(10) of this section, the 
following are deemed a single person:
    (A) A natural person, and:
    (1) Any minor child of the natural person;
    (2) Any relative, spouse, or relative of the spouse of the natural 
person who has the same principal residence;
    (3) All accounts of which the natural person and/or the persons 
referred to in paragraph (a)(10)(i)(A) of this section are the only 
primary beneficiaries; and
    (4) All trusts of which the natural person and/or the persons 
referred to in paragraph (a)(10)(i)(A) of this section are the only 
primary beneficiaries;
    (B)(1) A corporation, general partnership, limited partnership, 
limited liability company, trust (other than a trust referred to in 
paragraph (a)(10)(i)(A)(4) of this section), or other legal organization 
(any of which are referred to hereinafter as a ``legal organization'') 
that receives commodity interest trading advice based on its investment 
objectives rather than the individual investment objectives of its 
shareholders, partners, limited partners, members, or beneficiaries (any 
of which are referred to hereinafter as an ``owner''); and
    (2) Two or more legal organizations referred to in paragraph 
(a)(10)(i)(B)(1) of this section that have identical owners.
    (ii) Special Rules. For the purpose of paragraph (a)(10) of this 
section:
    (A) An owner must be counted in its own capacity as a person if the 
commodity trading advisor provides advisory services to the owner 
separate and apart from the advisory services provided to the legal 
organization; Provided, That the determination that an

[[Page 180]]

owner is a client will not affect the applicability of paragraph (a)(10) 
of this section with regard to any other owner;
    (B)(1) A general partner of a limited partnership, or other person 
acting as a commodity trading advisor to the partnership, may count the 
limited partnership as one person; and
    (2) A manager or managing member of a limited liability company, or 
any other person acting as a commodity trading advisor to the company, 
may count the limited liability company as one person.
    (C) A commodity trading advisor that has its principal office and 
place of business outside of the United States, its territories or 
possessions must count only clients that are residents of the United 
States, its territories and possessions; a commodity trading advisor 
that has its principal office and place of business in the United States 
or in any territory or possession thereof must count all clients.
    (iii) Holding Out. Any commodity trading advisor relying on 
paragraph (a)(10) of this section shall not be deemed to be holding 
itself out generally to the public as a commodity trading advisor, 
within the meaning of section 4m(1) of the Act, solely because it 
participates in a non-public offering of interests in a collective 
investment vehicle under the Securities Act of 1933.
    (b) For purposes of this section, ``cash market transactions'' shall 
not include transactions involving contracts for the purchase or sale of 
a commodity for future delivery or transactions subject to Commission 
regulation under section 4c or 19 of the Act.
    (c)(1) Subject to the provisions of paragraph (c)(2) of this 
section, if a person who is eligible for exemption from registration as 
a commodity trading advisor under this section nonetheless registers as 
a commodity trading advisor, the person must comply with the provisions 
of this part with respect to those clients for which it could have 
claimed an exemption from registration hereunder.
    (2) If a person provides commodity interest trading advice to a 
client described in paragraph (a) of this section and to a client for 
which it must be, and is, registered as a commodity trading advisor, the 
person is exempt from the requirements applicable to a registered 
commodity trading advisor with respect to the clients so described; 
Provided, That the person furnishes in writing to each prospective 
client described in paragraph (a) of this section a statement that it 
will provide commodity interest trading advice to the client as if it 
was exempt from registration as a commodity trading advisor; Provided 
Further, That the person provides to each existing client described in 
paragraph (a) of this section a right to terminate its advisory 
agreement, and informs such client of that right no later than the time 
the person commences to provide commodity interest trading advice to the 
client as if the person was exempt from registration.

(Secs. 8a(5) and 19 of the Commodity Exchange Act, as amended, 7 U.S.C. 
12a(5) and 23 (1982); 5 U.S.C. 552 and 552b)

[46 FR 26013, May 8, 1981; 46 FR 26761, May 15, 1981; 48 FR 35298, Aug. 
3, 1983; 49 FR 5526, Feb. 13, 1984; 52 FR 41985, Nov 2, 1987; 52 FR 
43827, Nov 16, 1987; 65 FR 12943, Mar. 10, 2000; 67 FR 77411, Dec. 18, 
2002; 68 FR 47233, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003; 68 FR 
59114, Oct. 14, 2003]



Sec. 4.15  Continued applicability of antifraud section.

    The provisions of section 4o of the Act shall apply to any person 
even though such person is exempt from registration under this part 4, 
and it shall continue to be unlawful for any such person to violate 
section 4o of the Act.

[50 FR 15884, Apr. 23, 1985]



Sec. 4.16  Prohibited representations.

    It shall be unlawful for any commodity pool operator, commodity 
trading advisor, principal thereof or person who solicits therefor to 
represent or imply in any manner whatsoever that such commodity pool 
operator or commodity trading advisor has been sponsored, recommended or 
approved, or that its abilities or qualifications have in any respect 
been passed upon, by the Commission, the Federal government or any 
agency thereof.

[[Page 181]]



                   Subpart B_Commodity Pool Operators



Sec. 4.20  Prohibited activities.

    (a)(1) Except as provided in paragraph (a)(2) of this section, a 
commodity pool operator must operate its pool as an entity cognizable as 
a legal entity separate from that of the pool operator.
    (2) The Commission may exempt a corporation from the requirements of 
paragraph (a)(1) of this section if;
    (i) The corporation represents in writing to the Commission that 
each participant in its pool will be issued stock or other evidences of 
ownership in the corporation for all funds, securities or other property 
that the participant contributes for the purchase of an ownership 
interest in the pool;
    (ii) The corporation demonstrates to the satisfaction of the 
Commission that it has estabilshed procedures adequate to assure 
compliance with paragraphs (b) and (c) of this section; and
    (iii) The Commission finds that the exemption is not contrary to the 
public interest and to the purposes of the provision from which the 
exemption is sought.
    (b) All funds, securities or other property received by a commodity 
pool operator from an existing or prospective pool participant for the 
purchase of an interest or as an assessment (whether voluntary or 
involuntary) on an interest in a pool that it operates or that it 
intends to operate must be received in the pool's name.
    (c) No commodity pool operator may commingle the property of any 
pool that it operates or that it intends to operate with the property of 
any other person.

(Approved by the Office of Management and Budget under control number 
3038-0005)

[46 FR 26013, May 8, 1981, as amended at 46 FR 34311, July 1, 1981; 46 
FR 63035, Dec. 30, 1981]



Sec. 4.21  Required delivery of pool Disclosure Document.

    (a)(1) Subject to the provisions of paragraph (a)(2) of this 
section, each commodity pool operator registered or required to be 
registered under the Act must deliver or cause to be delivered to a 
prospective participant in a pool that it operates or intends to operate 
a Disclosure Document for the pool prepared in accordance with 
Sec. Sec. 4.24 and 4.25 by no later than the time it delivers to the 
prospective participant a subscription agreement for the pool; Provided, 
That any information distributed in advance of the delivery of the 
Disclosure Document to a prospective participant is consistent with or 
amended by the information contained in the Disclosure Document and with 
the obligations of the commodity pool operator under the Act, the 
Commission's regulations issued thereunder, and the laws of any other 
applicable federal or state authority; Provided, further, That in the 
event such previously distributed information is amended by the 
Disclosure Document in any material respect, the prospective participant 
must be in receipt of the Disclosure Document at least 48 hours prior to 
its subscription being accepted by the pool operator.
    (2) For the purpose of the Disclosure Document delivery requirement, 
including any offering memorandum delivered pursuant to Sec. 4.7(b)(1) 
or 4.12(b)(2)(i), the term ``prospective pool participant'' does not 
include a commodity pool operated by a pool operator that is the same 
as, or that controls, is controlled by, or is under common control with, 
the pool operator of the offered pool.
    (b) The commodity pool operator may not accept or receive funds, 
securities or other property from a prospective participant unless the 
pool operator first receives from the prospective participant an 
acknowledgment signed and dated by the prospective participant stating 
that the prospective participant received a Disclosure Document for the 
pool. Where a Disclosure Document is delivered to a prospective pool 
participant by electronic means, in lieu of a manually signed and dated 
acknowledgment, the pool operator may establish receipt by electronic 
means that use a unique identifier to confirm the identity of the 
recipient of such Disclosure Document, Provided, however, That the 
requirement of

[[Page 182]]

Sec. 4.23(a)(3) to retain the acknowledgment specified in this 
paragraph (b) applies equally to such substitute evidence of receipt, 
which must be retained either in hard copy form or in another form 
approved by the Commission.

[60 FR 38183, July 25, 1995, as amended at 62 FR 39115, July 22, 1997; 
65 FR 58649, Oct. 2, 2000; 68 FR 47234, Aug. 8, 2003]



Sec. 4.22  Reporting to pool participants.

    (a) Except as provided in paragraph (a)(4) of this section, each 
commodity pool operator registered or required to be registered under 
the Act must periodically distribute to each participant in each pool 
that it operates, within 30 calendar days after the last date of the 
reporting period prescribed in paragraph (b) of this section, an Account 
Statement, which shall be presented in the form of a Statement of Income 
(Loss) and a Statement of Changes in Net Asset Value, for the prescribed 
period. These financial statements must be presented and computed in 
accordance with generally accepted accounting principles consistently 
applied. The Account Statement must be signed in accordance with 
paragraph (h) of this section.
    (1) The portion of the Account Statement which must be presented in 
the form of a Statement of Income (Loss) must separately itemize the 
following information:
    (i) The total amount of realized net gain or loss on commodity 
interest positions liquidated during the reporting period;
    (ii) The change in unrealized net gain or loss on commodity interest 
positions during the reporting period;
    (iii) The total amount of net gain or loss from all other 
transactions in which the pool engaged during the reporting period, 
including interest and dividends earned on funds not paid as premiums or 
used to margin the pool's commodity interest positions;
    (iv) The total amount of all management fees during the reporting 
period;
    (v) The total amount of all advisory fees during the reporting 
period;
    (vi) The total amount of all brokerage commissions during the 
reporting period;
    (vii) The total amount of other fees for commodity interest and 
other investment transactions during the reporting period; and
    (viii) The total amount of all other expenses incurred or accrued by 
the pool during the reporting period.
    (2) The portion of the Account Statement that must be presented in 
the form of a Statement of Changes in Net Asset Value must separately 
itemize the following information:
    (i) The net asset value of the pool as of the beginning of the 
reporting period;
    (ii) The total amount of additions to the pool, whether voluntary or 
involuntary, made during the reporting period;
    (iii) The total amount of withdrawals from and redemption of 
participation units in the pool, whether voluntary or involuntary, for 
the reporting period;
    (iv) The total net income or loss of the pool during the reporting 
period;
    (v) The net asset value of the pool as of the end of the reporting 
period; and
    (vi)(A) The net asset value per outstanding participation unit in 
the pool as of the end of the reporting period, or
    (B) The total value of the participant's interest or share in the 
pool as of the end of the reporting period.
    (3) The Account Statement must also disclose any material business 
dealings between the pool, the pool's operator, commodity trading 
advisor, futures commission merchant, or the principals thereof that 
previously have not been disclosed in the pool's Disclosure Document or 
any amendment thereto, other Account Statements or Annual Reports.
    (4) For the purpose of the Account Statement delivery requirement, 
including any Account Statement distributed pursuant to Sec. 4.7(b)(2) 
or 4.12(b)(2)(ii), the term ``participant'' does not include a commodity 
pool operated by a pool operator that is the same as, or that controls, 
is controlled by, or is under common control with, the pool operator of 
a pool in which the commodity pool has invested.
    (b) The Account Statement must be distributed at least monthly in 
the case of pools with net assets of more than $500,000 at the beginning 
of the pool's fiscal year, and otherwise at

[[Page 183]]

least quarterly; Provided, however, That an Account Statement for the 
last reporting period of the pool's fiscal year need not be distributed 
if the Annual Report required by paragraph (c) of this section is sent 
to pool participants within 45 calendar days after the end of the fiscal 
year. The requirement to distribute an Account Statement shall commence 
as of the date the pool is formed as specified in paragraph (g)(1) of 
this section.
    (c) Except as provided in paragraph (c)(6) of this section, each 
commodity pool operator registered or required to be registered under 
the Act must distribute an Annual Report to each participant in each 
pool that it operates, and must file a copy of the Report with the 
National Futures Association, within 90 calendar days after the end of 
the pool's fiscal year or the permanent cessation of trading, whichever 
is earlier, but in no event longer than 90 days after funds are returned 
to pool participants; Provided, however, That if during any calendar 
year the commodity pool operator did not operate a commodity pool, the 
pool operator must so notify the National Futures Association within 30 
calendar days after the end of such calendar year. The Annual Report 
must be signed pursuant to paragraph (h) of this section and must 
contain the following:
    (1) The net asset value of the pool as of the end of each of the 
pool's two preceding fiscal years.
    (2)(i) The net asset value per outstanding participation unit in the 
pool as of the end of each of the pool's two preceding fiscal years, or
    (ii) The total value of the participant's interest or share in the 
pool as of the end of each of the pool's two preceding fiscal years.
    (3) A Statement of Financial Condition as of the close of the pool's 
fiscal year and preceding fiscal year.
    (4) Statements of Income (Loss), Changes in Financial Position, and 
Changes in Ownership Equity, for the period between (i) the later of: 
(A) the date of the most recent Statement of Financial Condition 
delivered to the Commission pursuant to this paragraph (c), (B) January 
1, 1979, or (C) the date of the formation of the pool, and (ii) the 
close of the pool's fiscal year, together with Statements of Income 
(Loss), Changes in Financial Position, and Changes in Ownership Equity 
for the corresponding period of the previous fiscal year.
    (5) Appropriate footnote disclosure and such further material 
information as may be necessary to make the required statements not 
misleading.
    (6) For the purpose of the Annual Report distribution requirement, 
including any annual report distributed pursuant to Sec. 4.7(b)(3) or 
4.12(b)(2)(iii), the term ``participant'' does not include a commodity 
pool operated by a pool operator that is the same as, or that controls, 
is controlled by, or is under common control with, the pool operator of 
a pool in which the commodity pool has invested; Provided, That the 
Annual Report of such investing pool contain financial statements that 
include such information as the Commission may specify concerning the 
operations of the pool in which the commodity pool has invested.
    (d) The financial statements in the Annual Report must be presented 
and computed in accordance with generally accepted accounting principles 
consistently applied and must be certified by an independent public 
accountant. The certification must be in accordance with Sec. 1.16, 
except that the following requirements of that section shall not apply:
    (1) The audit objectives of Sec. 1.16(d)(1) concerning the periodic 
computation of minimum capital and property in segregation;
    (2) All other references in Sec. 1.16 to the segregation 
requirements; and
    (3) Sections 1.16(c)(5), (d)(2), (e)(2), and (f).
    (e) The Statement of Income (Loss) required by this section must 
itemize brokerage commissions, management fees, advisory fees, incentive 
fees, interest income and expense, total realized net gain or loss from 
commodity interest trading, and change in unrealized net gain or loss on 
commodity interest positions during the pool's fiscal year. Gains and 
losses on commodity interests need not be itemized by commodity or by 
specific delivery or expiration date.

[[Page 184]]

    (f)(1)(i) In the event the commodity pool operator finds that it 
cannot distribute the Annual Report for a pool that it operates within 
the time specified in paragraph (c) of this section without substantial 
undue hardship, it may file with the National Futures Association an 
application for extension of time to a specified date not more than 90 
calendar days after the date as of which the Annual Report was to have 
been distributed. The application must be made by the pool operator and 
must:
    (A) State the name of the pool for which the application is being 
made;
    (B) State the reasons for the requested extension;
    (C) Indicate that the inability to make a timely filing is due to 
circumstances beyond the control of the pool operator, if such is the 
case, and describe briefly the nature of such circumstances;
    (D) Contain an undertaking to file the Annual Report on or before 
the date specified in the application; and
    (E) Be filed with the National Futures Association prior to the date 
on which the Annual Report is due.
    (ii) The application must be accompanied by a letter from the 
independent public accountant answering the following questions:
    (A) What specifically are the reasons for the extension request?
    (B) Do you have any indication from the part of your audit completed 
to date that would lead you to believe that the commodity pool operator 
was or is not meeting the segregation or recordkeeping requirements of 
this part 4?
    (iii) Within ten calendar days after receipt of an application for 
an extension of time, the National Futures Association shall:
    (A) Notify the commodity pool operator of the grant or denial of the 
requested extension, or
    (B) Indicate to the pool operator that additional time is required 
to analyze the request, in which case the amount of time needed will be 
specified.
    (2) In the event a commodity pool operator finds that it cannot 
obtain information necessary to prepare certified financial statements 
for a pool that it operates within the time specified in either 
paragraph (c) of this section or Sec. 4.7(b)(3)(i), as a result of the 
pool investing in another collective investment vehicle, it may claim an 
extension of time under the following conditions:
    (i) The commodity pool operator must, within 90 calendar days of the 
end of the pool's fiscal year, file a notice with National Futures 
Association, except as provided in paragraph (f)(2)(v) of this section.
    (ii) The notice must contain the name, main business address, main 
telephone number and the National Futures Association registration 
identification number of the commodity pool operator, and name and the 
identification number of the commodity pool.
    (iii) The notice must state the date by which the Annual Report will 
be distributed and filed (the ``Extended Date''), which must be no more 
than 150 calendar days after the end of the pool's fiscal year. The 
Annual Report must be distributed and filed by the Extended Date.
    (iv) The notice must include representations by the commodity pool 
operator that:
    (A) The pool for which the Annual Report is being prepared has 
investments in one or more collective investment vehicles (the 
``Investments'');
    (B) The commodity pool operator has been informed by the certified 
public accountant selected to audit the commodity pool's financial 
statements that specified information establishing the value of the 
Investments is necessary in order for the accountant to render an 
opinion on the commodity pool's financial statements. The notice must 
include the name of the accountant; and
    (C) The information specified by the accountant cannot be obtained 
in sufficient time for the Annual Report to be prepared, audited, and 
distributed before the Extended Date.
    (v) For each fiscal year following the filing of the notice 
described in paragraph (f)(2)(i) of this section, the commodity pool 
operator may claim the extension of time by filing a statement 
containing the representations specified in paragraph (f)(2)(iv) of this 
section, at the same time as the pool's Annual Report.

[[Page 185]]

    (vi) Any notice or statement filed pursuant to paragraph (f)(2) of 
this section must be signed by the commodity pool operator in accordance 
with paragraph (h) of this section.
    (g)(1) A commodity pool operator may initially elect any fiscal year 
for a pool, but the first fiscal year may not end more than one year 
after the pool's formation. For purposes of this section, a pool shall 
be deemed to be formed as of the date the pool operator first receives 
funds, securities or other property for the purchase of an interest in 
the pool.
    (2) If a commodity pool operator elects a fiscal year other than the 
calendar year, it must give written notice of the election to all 
participants and must file the notice with the Commission within 90 
calendar days after the date of the pool's formation. If this notice is 
not given, the pool operator will be deemed to have elected the calendar 
year as the pool's fiscal year.
    (3) The commodity pool operator must continue to use the elected 
fiscal year for the pool unless it provides written notice of any 
proposed change to all participants and files such notice with the 
Commission at least 90 days before the change and the Commission does 
not disapprove the change within 30 days after the filing of the notice.
    (h)(1) Each Account Statement and Annual Report, including an 
Account Statement or Annual Report provided pursuant to Sec. 4.7(b) or 
4.12(b), must contain an oath or affirmation that, to the best of the 
knowledge and belief of the individual making the oath or affirmation, 
the information contained in the document is accurate and complete; 
Provided, however, That it shall be unlawful for the individual to make 
such oath or affirmation if the individual knows or should know that any 
of the information in the document is not accurate and complete.
    (2) There must be typed beneath the signed oath or affirmation:
    (i) The name of the individual signing the document;
    (ii) The capacity in which he is signing;
    (iii) The name of the commodity pool operator for whom he is 
signing; and
    (iv) The name of the commodity pool for which the document is being 
distributed.
    (3) Subject to the provisions of paragraph (j) of this section, the 
oath or affirmation must be manually signed by a representative duly 
authorized to bind the pool operator.
    (i) The Account Statement or Annual Report may be distributed to a 
pool participant by means of electronic media if the participant so 
consents; Provided, That prior to the transmission of any Account 
Statement or Annual Report by means of electronic media, a commodity 
pool operator must disclose to the participant that it intends to 
distribute electronically the Account Statement or Annual Report or both 
documents, as the case may be, absent objection from the participant, 
which objection, if any, the participant must make no later than 10 
business days following its receipt of the disclosure.
    (j)(1) An Account Statement or Annual Report may contain a facsimile 
signature, Provided, That:
    (i) The CPO maintains in accordance with Sec. 4.23 the Account 
Statement or Annual Report containing the manual signature from which 
the facsimile signature was made; and
    (ii) The Annual Report the CPO files with a registered futures 
association is manually signed.
    (2) For each pool for which the CPO distributes an Account Statement 
or Annual Report by means of electronic media, the CPO must make and 
keep in accordance with Sec. 4.23 a manually signed copy of the 
Statement.

(Approved by the Office of Management and Budget under control number 
3038-0005)

(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17, 
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n, 
12a, 19 and 21; 5 U.S.C. 552 and 552b))

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57011, Dec. 22, 1982; 52 FR 41986, Nov. 2, 1987; 65 FR 81334, Dec. 
26, 2000; 67 FR 77411, Dec. 18, 2002; 68 FR 47234, Aug. 8, 2003; 68 FR 
52837, Sept. 8, 2003]



Sec. 4.23  Recordkeeping.

    Each commodity pool operator registered or required to be registered 
under the Act must make and keep the

[[Page 186]]

following books and records in an accurate, current and orderly manner 
at its main business office and in accordance with Sec. 1.31. All books 
and records required by this section except those required by paragraphs 
(a)(3), (a)(4), (b)(1), (b)(2) and (b)(3) must be made available to 
participants for inspection and copying during normal business hours at 
the main business office of the pool operator. Upon request, copies must 
be sent by mail to any participant within five business days if 
reasonable reproduction and distribution costs are paid by the pool 
participant. If the commodity pool operator's main business office is 
outside of the United States, its territories or possessions, then upon 
the request of a Commission representative, the pool operator must 
provide such books and records as requested at the place in the United 
States, its territories or possessions designated by the representative 
within 72 hours after the pool operator receives the request.
    (a) Concerning the commodity pool:
    (1) An itemized daily record of each commodity interest transaction 
of the pool, showing the transaction date, quantity, commodity interest, 
and, as applicable, price or premium, delivery month or expiration date, 
whether a put or a call, strike price, underlying contract for future 
delivery or underlying physical, the futures commission merchant 
carrying the account and the introducing broker, if any, whether the 
commodity interest was purchased, sold, exercised, or expired, and the 
gain or loss realized.
    (2) A journal of original entry or other equivalent record showing 
all receipts and disbursements of money, securities and other property.
    (3) The acknowledgement specified by Sec. 4.21(b) for each 
participant in the pool.
    (4) A subsidiary ledger or other equivalent record for each 
participant in the pool showing the participant's name and address and 
all funds, securities and other property that the pool received from or 
distributed to the participant.
    (5) Adjusting entries and any other records of original entry or 
their equivalent forming the basis of entries in any ledger.
    (6) A general ledger or other equivalent record containing details 
of all asset, liability, capital, income and expense accounts.
    (7) Copies of each confirmation of a commodity interest transaction 
of the pool, each purchase and sale statement and each monthly statement 
for the pool received from a futures commission merchant.
    (8) Cancelled checks, bank statements, journals, ledgers, invoices, 
computer generated records, and all other records, data and memoranda 
prepared or received in connection with the operation of the pool.
    (9) The original or a copy of each report, letter, circular, 
memorandum, publication, writing, advertisement or other literature or 
advice (including the texts of standardized oral presentations and of 
radio, television, seminar or similar mass media presentations) 
distributed or caused to be distributed by the commodity pool operator 
to any existing or prospective pool participant or received by the pool 
operator from any commodity trading advisor of the pool, showing the 
first date of distribution or receipt if not otherwise shown on the 
document.
    (10) A Statement of Financial Condition as of the close of (i) each 
regular monthly period if the pool had net assets of $500,000 or more at 
the beginning of the pool's fiscal year, or (ii) each regular quarterly 
period for all other pools. The Statement must be completed within 30 
days after the end of that period.
    (11) A Statement of Income (Loss) for the period between (i) the 
later of: (A) the date of the most recent Statement of Financial 
Condition furnished to the Commission pursuant to Sec. 4.22(c), (B) 
April 1, 1979 or (C) the formation of the pool, and (ii) the date of the 
Statement of Financial Condition required by paragraph (a)(10) of this 
section. The Statement must be completed within 30 days after the end of 
that period.
    (b) Concerning the commodity pool operator:
    (1) An itemized daily record of each commodity interest transaction 
of the commodity pool operator and each

[[Page 187]]

principal thereof, showing the transaction date, quantity, commodity 
interest, and, as applicable, price or premium, delivery month or 
expiration date, whether a put or a call, strike price, underlying 
contract for future delivery or underlying physical, the futures 
commission merchant carrying the account and the introducing broker, if 
any whether the commodity interest was purchased, sold, exercised, or 
expired, and the gain or loss realized.
    (2) Each confirmation of a commodity interest transaction, each 
purchase and sale statement and each monthly statement furnished by a 
futures commission merchant to (i) the commodity pool operator relating 
to a personal account of the pool operator, and (ii) each principal of 
the pool operator relating to a personal account of such principal.
    (3) Books and records of all other transactions in all other 
activities in which the pool operator engages. Those books and records 
must include cancelled checks, bank statements, journals, ledgers, 
invoices, computer generated records and all other records, data and 
memoranda which have been prepared in the course of engaging in those 
activities.

(Approved by the Office of Management and Budget under control number 
3038-0005)

(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17, 
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n, 
12a, 19 and 21; 5 U.S.C. 552 and 552b))

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57011, Dec. 22, 1982; 48 FR 35299, Aug. 3, 1983; 60 FR 38183, July 
25, 1995]



Sec. 4.24  General disclosures required.

    Except as otherwise provided herein, a Disclosure Document must 
include the following information.
    (a) Cautionary Statement. The following Cautionary Statement must be 
prominently displayed on the cover page of the Disclosure Document.

    THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE 
MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON 
THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

    (b) Risk Disclosure Statement. (1) The following Risk Disclosure 
Statement must be prominently displayed immediately following any 
disclosures required to appear on the cover page of the Disclosure 
Document as provided by the Commission, by any applicable federal or 
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions.

                        RISK DISCLOSURE STATEMENT

    YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION 
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD 
BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE 
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET 
ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN 
THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR 
ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
    FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR 
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR 
THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL 
TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS 
DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO 
BE CHARGED THIS POOL AT PAGE (insert page number) AND A STATEMENT OF THE 
PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE 
AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE (insert page number).
    THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS 
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. 
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU 
SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION 
OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page 
number).

    (2) If the pool may trade foreign futures or options contracts, the 
Risk Disclosure Statement must further state:

    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN 
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE 
THE UNITED STATES,

[[Page 188]]

INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE 
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO 
THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY 
AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF 
REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS 
WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.

    (3) If the potential liability of a participant in the pool is 
greater than the amount of the participant's contribution for the 
purchase of an interest in the pool and the profits earned thereon, 
whether distributed or not, the commodity pool operator must make the 
following additional statement in the Risk Disclosure Statement, to be 
prominently disclosed as the last paragraph thereof:

    ALSO, BEFORE YOU DECIDE TO PARTICIPATE IN THIS POOL, YOU SHOULD NOTE 
THAT YOUR POTENTIAL LIABILITY AS A PARTICIPANT IN THIS POOL FOR TRADING 
LOSSES AND OTHER EXPENSES OF THE POOL IS NOT LIMITED TO THE AMOUNT OF 
YOUR CONTRIBUTION FOR THE PURCHASE OF AN INTEREST IN THE POOL AND ANY 
PROFITS EARNED THEREON. A COMPLETE DESCRIPTION OF THE LIABILITY OF A 
PARTICIPANT IN THIS POOL IS EXPLAINED MORE FULLY IN THIS DISCLOSURE 
DOCUMENT.

    (c) Table of contents. A table of contents showing, by subject 
matter, the location of the disclosures made in the Disclosure Document 
must appear immediately following the Risk Disclosure Statement.
    (d) Information required in the forepart of the Disclosure Document. 
(1) The name, address of the main business office, main business 
telephone number and form of organization of the pool. If the mailing 
address of the main business office is a post office box number or is 
not within the United States, its territories or possessions, the pool 
operator must state where the pool's books and records will be kept and 
made available for inspection;
    (2) The name, address of the main business office, main business 
telephone number and form of organization of the commodity pool 
operator. If the mailing address of the main business office is a post 
office box number or is not within the United States, its territories or 
possessions, the pool operator must state where its books and records 
will be kept and made available for inspection;
    (3) As applicable, a statement that the pool is:
    (i) Privately offered pursuant to section 4(2) of the Securities Act 
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D 
thereunder (17 CFR 230.501 et seq.);
    (ii) A multi-advisor pool as defined in Sec. 4.10(d)(2);
    (iii) A principal-protected pool as defined in Sec. 4.10(d)(3); or
    (iv) Continuously offered. If the pool is not continuously offered, 
the closing date of the offering must be disclosed.
    (4) The date when the commodity pool operator first intends to use 
the Disclosure Document; and
    (5) The break-even point per unit of initial investment, as 
specified in Sec. 4.10(j).
    (e) Persons to be identified. The names of the following persons:
    (1) Each principal of the pool operator;
    (2) The pool's trading manager, if any, and each principal thereof;
    (3) Each major investee pool, the operator of such investee pool, 
and each principal of the operator thereof;
    (4) Each major commodity trading advisor and each principal thereof;
    (5) Which of the foregoing persons will make trading decisions for 
the pool; and
    (6) If known, the futures commission merchant through which the pool 
will execute its trades, and, if applicable, the introducing broker 
through which the pool will introduce its trades to the futures 
commission merchant.
    (f) Business background. (1) The business background, for the five 
years preceding the date of the Disclosure Document, of:
    (i) The commodity pool operator;
    (ii) The pool's trading manager, if any;
    (iii) Each major commodity trading advisor;
    (iv) The operator of each major investee pool; and
    (v) Each principal of the persons referred to in this paragraph 
(f)(1) who

[[Page 189]]

participates in making trading or operational decisions for the pool or 
who supervises persons so engaged.
    (2) The pool operator must include in the description of the 
business background of each person identified in Sec. 4.24(f)(1) the 
name and main business of that person's employers, business associations 
or business ventures and the nature of the duties performed by such 
person for such employers or in connection with such business 
associations or business ventures. The location in the Disclosure 
Document of any required past performance disclosure for such person 
must be indicated.
    (g) Principal risk factors. A discussion of the principal risk 
factors of participation in the offered pool. This discussion must 
include, without limitation, risks relating to volatility, leverage, 
liquidity, and counterparty creditworthiness, as applicable to the types 
of trading programs to be followed, trading structures to be employed 
and investment activity expected to be engaged in by the offered pool.
    (h) Investment program and use of proceeds. The pool operator must 
disclose the following:
    (1) The types of commodity interests and other interests which the 
pool will trade, including:
    (i) The approximate percentage of the pool's assets that will be 
used to trade commodity interests, securities and other types of 
interests, categorized by type of commodity or market sector, type of 
security (debt, equity, preferred equity), whether traded or listed on a 
regulated exchange market, maturity ranges and investment rating, as 
applicable;
    (ii) The extent to which such interests are subject to state or 
federal regulation, regulation by a non-United States jurisdiction or 
rules of a self-regulatory organization;
    (iii)(A) The custodian or other entity (e.g., bank or broker-dealer) 
which will hold such interests; and
    (B) If such interests will be held or if pool assets will be 
invested in a non-United States jurisdiction, the jurisdiction in which 
such interests or assets will be held or invested.
    (2) A description of the trading and investment programs and 
policies that will be followed by the offered pool, including the method 
chosen by the pool operator concerning how futures commission merchants 
carrying the pool's accounts shall treat offsetting positions pursuant 
to Sec. 1.46 of this chapter, if the method is other than to close out 
all offsetting positions or to close out offsetting positions on other 
than a first-in, first-out basis, and any material restrictions or 
limitations on trading required by the pool's organizational documents 
or otherwise. This description must include, if applicable, an 
explanation of the systems used to select commodity trading advisors, 
investee pools and types of investment activity to which pool assets 
will be committed;
    (3)(i) A summary description of the pool's major commodity trading 
advisors, including their respective percentage allocations of pool 
assets, a description of the nature and operation of the trading 
programs such advisors will follow, including the types of interests 
traded pursuant to such programs, and each advisor's historical 
experience trading such program including material information as to 
volatility, leverage and rates of return and the length of time during 
which the advisor has traded such program;
    (ii) A summary description of the pool's major investee pools or 
funds, including their respective percentage allocations of pool assets 
and a description of the nature and operation of such investee pools and 
funds, including for each investee pool or fund the types of interests 
traded, material information as to volatility, leverage and rates of 
return for such investee pool or fund and the period of its operation; 
and
    (4)(i) The manner in which the pool will fulfill its margin 
requirements and the approximate percentage of the pool's assets that 
will be held in segregation pursuant to the Act and the Commission's 
regulations thereunder;
    (ii) If the pool will fulfill its margin requirements with other 
than cash deposits, the nature of such deposits; and
    (iii) If assets deposited by the pool as margin generate income, to 
whom that income will be paid.

[[Page 190]]

    (i) Fees and expenses. (1) The Disclosure Document must include a 
complete description of each fee, commission and other expense which the 
commodity pool operator knows or should know has been incurred by the 
pool for its preceding fiscal year and is expected to be incurred by the 
pool in its current fiscal year, including fees or other expenses 
incurred in connection with the pool's participation in investee pools 
and funds.
    (2) This description must include, without limitation:
    (i) Management fees;
    (ii) Brokerage fees and commissions, including interest income paid 
to futures commission merchants;
    (iii) Fees and commissions paid in connection with trading advice 
provided to the pool;
    (iv) Fees and expenses incurred within investments in investee 
pools, investee funds and other collective investment vehicles, which 
fees and expenses must be disclosed separately for each investment tier;
    (v) Incentive fees;
    (vi) Any allocation to the commodity pool operator, or any agreement 
or understanding which provides the commodity pool operator with the 
right to receive a distribution, where such allocation or distribution 
is greater than a pro rata share of the pool's profits based on the 
percentage of capital contributions made by the commodity pool operator;
    (vii) Commissions or other benefits, including trailing commissions 
paid or that may be paid or accrue, directly or indirectly, to any 
person in connection with the solicitation of participations in the 
pool;
    (viii) Professional and general administrative fees and expenses, 
including legal and accounting fees and office supplies expenses;
    (ix) Organizational and offering expenses;
    (x) Clearance fees and fees paid to national exchanges and self-
regulatory organizations;
    (xi) For principal-protected pools, any direct or indirect costs to 
the pool associated with providing the protection feature, as referred 
to in paragraph (o)(3) of this section; and
    (xii) Any other direct or indirect cost.
    (3) Where any fee, commission or other expense is determined by 
reference to a base amount including, but not limited to, ``net 
assets,'' ``allocation of assets,'' ``gross profits,'' ``net profits,'' 
or ``net gains,'' the pool operator must explain how such base amount 
will be calculated, in a manner consistent with calculation of the 
break-even point.
    (4) Where any fee, commission or other expense is based on an 
increase in the value of the pool, the pool operator must specify how 
the increase is calculated, the period of time during which the increase 
is calculated, the fee, commission or other expense to be charged at the 
end of that period and the value of the pool at which payment of the 
fee, commission or other expense commences.
    (5) Where any fee, commission or other expense of the pool has been 
paid or is to be paid by a person other than the pool, the pool operator 
must disclose the nature and amount thereof and the person who paid or 
who is expected to pay it.
    (6) The pool operator must provide, in a tabular format, an analysis 
setting forth how the break-even point for the pool was calculated. The 
analysis must include all fees, commissions and other expenses of the 
pool, as set forth in Sec. 4.24(i)(2).
    (j) Conflicts of interest. (1) A full description of any actual or 
potential conflicts of interest regarding any aspect of the pool on the 
part of:
    (i) The commodity pool operator;
    (ii) The pool's trading manager, if any;
    (iii) Any major commodity trading advisor;
    (iv) The commodity pool operator of any major investee pool;
    (v) Any principal of the persons described in paragraphs (j)(1) (i), 
(ii), (iii) and (iv) of this section; and
    (vi) Any other person providing services to the pool or soliciting 
participants for the pool.
    (2) Any other material conflict involving the pool.
    (3) Included in the description of such conflicts must be any 
arrangement whereby a person may benefit, directly

[[Page 191]]

or indirectly, from the maintenance of the pool's account with the 
futures commission merchant or from the introduction of the pool's 
account to a futures commission merchant by an introducing broker (such 
as payment for order flow or soft dollar arrangements) or from an 
investment of pool assets in investee pools or funds or other 
investments.
    (k) Related party transactions. A full description, including a 
discussion of the costs thereof to the pool, of any material 
transactions or arrangements for which there is no publicly disseminated 
price between the pool and any person affiliated with a person providing 
services to the pool.
    (l) Litigation. (1) Subject to the provisions of Sec. 4.24(l)(2), 
any material administrative, civil or criminal action, whether pending 
or concluded, within five years preceding the date of the Document, 
against any of the following persons; Provided, however, that a 
concluded action that resulted in an adjudication on the merits in favor 
of such person need not be disclosed:
    (i) The commodity pool operator, the pool's trading manager, if any, 
the pool's major commodity trading advisors, and the operators of the 
pool's major investee pools;
    (ii) Any principal of the foregoing; and
    (iii) The pool's futures commission merchants and introducing 
brokers, if any.
    (2) With respect to a futures commission merchant or an introducing 
broker, an action will be considered material if:
    (i) The action would be required to be disclosed in the notes to the 
futures commission merchant's or introducing broker's financial 
statements prepared pursuant to generally accepted accounting 
principles;
    (ii) The action was brought by the Commission; Provided, however, 
that a concluded action that did not result in civil monetary penalties 
exceeding $50,000 need not be disclosed unless it involved allegations 
of fraud or other willful misconduct; or
    (iii) The action was brought by any other federal or state 
regulatory agency, a non-United States regulatory agency or a self-
regulatory organization and involved allegations of fraud or other 
willful misconduct.
    (m) Trading for own account. If the commodity pool operator, the 
pool's trading manager, any of the pool's commodity trading advisors or 
any principal thereof trades or intends to trade commodity interests for 
its own account, the pool operator must disclose whether participants 
will be permitted to inspect the records of such person's trades and any 
written policies related to such trading.
    (n) Performance disclosures. Past performance must be disclosed as 
set forth in Sec. 4.25.
    (o) Principal-protected pools. If the pool is a principal-protected 
pool as defined in Sec. 4.10(d)(3), the commodity pool operator must:
    (1) Describe the nature of the principal protection feature intended 
to be provided, the manner by which such protection will be achieved, 
including sources of funding, and what conditions must be satisfied for 
participants to receive the benefits of such protection;
    (2) Specify when the protection feature becomes operative; and
    (3) Disclose, in the break-even analysis required by Sec. 
4.24(i)(6), the costs of purchasing and carrying the assets to fund the 
principal protection feature or other limitation on risk, expressed as a 
percentage of the price of a unit of participation.
    (p) Transferability and redemption. (1) A complete description of 
any restrictions upon the transferability of a participant's interest in 
the pool; and
    (2) A complete description of the frequency, timing and manner in 
which a participant may redeem interests in the pool. Such description 
must specify:
    (i) How the redemption value of a participant's interest will be 
calculated;
    (ii) The conditions under which a participant may redeem its 
interest, including the cost associated therewith, the terms of any 
notification required and the time between the request for redemption 
and payment;
    (iii) Any restrictions on the redemption of a participant's 
interest, including any restrictions associated with the pool's 
investments; and

[[Page 192]]

    (iv) Any liquidity risks relative to the pool's redemption 
capabilities.
    (q) Liability of pool participants. The extent to which a 
participant may be held liable for obligations of the pool in excess of 
the funds contributed by the participant for the purchase of an interest 
in the pool.
    (r) Distribution of profits and taxation. (1) The pool's policies 
with respect to the payment of distributions from profits or capital and 
the frequency of such payments;
    (2) The federal income tax effects of such payments for a 
participant, including a discussion of the federal income tax laws 
applicable to the form of organization of the pool and to such payments 
therefrom; and
    (3) If a pool is specifically structured to accomplish certain 
federal income tax objectives, the commodity pool operator must explain 
those objectives, the manner in which they will be achieved and any 
risks relative thereto.
    (s) Inception of trading and other information. (1) The minimum 
aggregate subscriptions that will be necessary for the pool to commence 
trading commodity interests;
    (2) The minimum and maximum aggregate subscriptions that may be 
contributed to the pool;
    (3) The maximum period of time the pool will hold funds prior to the 
commencement of trading commodity interests;
    (4) The disposition of funds received if the pool does not receive 
the necessary amount to commence trading, including the period of time 
within which the disposition will be made; and
    (5) Where the pool operator will deposit funds received prior to the 
commencement of trading by the pool, and a statement specifying to whom 
any income from such deposits will be paid.
    (t) Ownership in pool. The extent of any ownership or beneficial 
interest in the pool held by the following:
    (1) The commodity pool operator;
    (2) The pool's trading manager, if any;
    (3) The pool's major commodity trading advisors;
    (4) The operators of the pool's major investee pools; and
    (5) Any principal of the foregoing.
    (u) Reporting to pool participants. A statement that the commodity 
pool operator is required to provide all participants with monthly or 
quarterly (whichever applies) statements of account and with an annual 
report containing financial statements certified by an independent 
public accountant.
    (v) Supplemental information. If any information, other than that 
required by Commission rules, the antifraud provisions of the Act, other 
federal or state laws or regulations, rules of a self-regulatory agency 
or laws of a non-United States jurisdiction, is provided, such 
information:
    (1) May not be misleading in content or presentation or inconsistent 
with required disclosures;
    (2) Is subject to the antifraud provisions of the Act and Commission 
rules and to rules regarding the use of promotional material promulgated 
by a registered futures association pursuant to section 17(j) of the 
Act; and
    (3) Must be placed as follows, unless otherwise specified by 
Commission rules, provided that where a two-part document is used 
pursuant to rules promulgated by a registered futures association 
pursuant to Section 17(j) of the Act, all supplemental information must 
be provided in the second part of the two-part document:
    (i) Supplemental performance information (not including proprietary 
trading results as defined in Sec. 4.25(a)(8), or hypothetical, 
extracted, pro forma or simulated trading results) must be placed after 
all specifically required performance information; Provided, however, 
that required volatility disclosure may be included with the related 
required performance disclosure;
    (ii) Supplemental non-performance information relating to a required 
disclosure may be included with the related required disclosure; and
    (iii) Other supplemental information may be included after all 
required disclosures; Provided, however, that any proprietary trading 
results as defined in Sec. 4.25(a)(8), and any hypothetical, extracted, 
pro forma or simulated trading results included in the Disclosure 
Document must appear as the last disclosure therein following all 
required and non-required disclosures.

[[Page 193]]

    (w) Material information. Nothing set forth in Sec. Sec. 4.21, 
4.24, 4.25 or Sec. 4.26 shall relieve a commodity pool operator from 
any obligation under the Act or the regulations thereunder, including 
the obligation to disclose all material information to existing or 
prospective pool participants even if the information is not 
specifically required by such sections.

[60 FR 38183, July 25, 1995, as amended at 63 FR 58303, Oct. 30, 1998; 
66 FR 53522, Oct. 23, 2001]



Sec. 4.25  Performance disclosures.

    (a) General principles--(1) Capsule performance information--(i) For 
pools. Unless otherwise specified, disclosure of the past performance of 
a pool must include the following information. Amounts shown must be net 
of any fees, expenses or allocations to the commodity pool operator.
    (A) The name of the pool;
    (B) A statement as to whether the pool is:
    (1) Privately offered pursuant to section 4(2) of the Securities Act 
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D 
thereunder (17 CFR 230.501 et seq.);
    (2) A multi-advisor pool as defined in Sec. 4.10(d)(2); and
    (3) A principal-protected pool as defined in Sec. 4.10(d)(3);
    (C) The date of inception of trading;
    (D) The aggregate gross capital subscriptions to the pool;
    (E) The pool's current net asset value;
    (F) The largest monthly draw-down during the most recent five 
calendar years and year-to-date, expressed as a percentage of the pool's 
net asset value and indicating the month and year of the draw-down (the 
capsule must include a definition of ``draw-down'' that is consistent 
with Sec. 4.10(k));
    (G) The worst peak-to-valley draw-down during the most recent five 
calendar years and year-to-date, expressed as a percentage of the pool's 
net asset value and indicating the months and year of the draw-down; and
    (H) Subject to Sec. 4.25(a)(2) for the offered pool, the annual and 
year-to-date rate of return for the pool for the most recent five 
calendar years and year-to-date, computed on a compounded monthly basis;
    (ii) For accounts. Disclosure of the past performance of an account 
required under this Sec. 4.25 must include the following capsule 
performance information:
    (A) The name of the commodity trading advisor or other person 
trading the account and the name of the trading program;
    (B) The date on which the commodity trading advisor or other person 
trading the account began trading client accounts and the date when 
client funds began being traded pursuant to the trading program;
    (C) The number of accounts directed by the commodity trading advisor 
or other person trading the account pursuant to the trading program 
specified, as of the date of the Disclosure Document;
    (D)(1) The total assets under the management of the commodity 
trading advisor or other person trading the account, as of the date of 
the Disclosure Document; and
    (2) The total assets traded pursuant to the trading program 
specified, as of the date of the Disclosure Document;
    (E) The largest monthly draw-down for the trading program specified 
during the most recent five calendar years and year-to-date expressed as 
a percentage of client funds, and indicating the month and year of the 
draw-down;
    (F) The worst peak-to-valley draw-down for the trading program 
specified during the most recent five calendar years and year-to-date, 
expressed as a percentage of net asset value and indicating the months 
and year of the draw-down; and
    (G) The annual and year-to-date rate-of-return for the program 
specified, computed on a compounded monthly basis.
    (H) Partially-funded accounts directed by a commodity trading 
advisor may be presented in accordance with Sec. 4.35(a)(7).
    (2) Additional requirements with respect to the offered pool. (i) 
The performance of the offered pool must be identified as such and 
separately presented first;
    (ii) The rate of return of the offered pool must be presented on a 
monthly basis for the period specified in

[[Page 194]]

Sec. 4.25(a)(5), either in a numerical table or in a bar graph;
    (iii) A bar graph used to present monthly rates of return for the 
offered pool:
    (A) Must show percentage rate of return on the vertical axis and 
one-month increments on the horizontal axis;
    (B) Must be scaled in such a way as to clearly show month-to-month 
differences in rates of return; and
    (C) Must separately display numerical percentage annual rates of 
return for the period covered by the bar graph; and
    (iv) The pool operator must make available upon request to 
prospective and existing participants all supporting data necessary to 
calculate monthly rates of return for the offered pool as specified in 
Sec. 4.25(a)(7), for the period specified in Sec. 4.25(a)(5).
    (3) Additional requirements with respect to pools other than the 
offered pool. With respect to pools other than the offered pool for 
which past performance is required to be presented under this section:
    (i) Performance data for pools of the same class as the offered pool 
must be presented following the performance of the offered pool, on a 
pool-by-pool basis.
    (ii) Pools of a different class than the offered pool must be 
presented less prominently and, unless such presentation would be 
misleading, may be presented in composite form; Provided, however, that:
    (A) The Disclosure Document must disclose how the composite was 
developed;
    (B) Pools of different classes or pools with materially different 
rates of return may not be presented in the same composite.
    (iii) For the purpose of Sec. 4.25(a)(3)(ii), the following, 
without limitation, shall be considered pools of different classes: 
Pools privately offered pursuant to section 4(2) of the Securities Act 
of 1933, as amended (15 U.S.C. 77d(2)), or pursuant to Regulation D 
thereunder (17 CFR 230.501 et seq.), and public offerings; and 
principal-protected and non-principal-protected pools. Multi-advisor 
pools as defined in Sec. 4.10(d)(2) will be presumed to have materially 
different rates of return from those of non-multi-advisor pools absent 
evidence sufficient to demonstrate otherwise.
    (iv) Material differences among the pools for which past performance 
is disclosed, including, without limitation, differences in leverage and 
use of different trading programs, must be described.
    (4) Additional requirements with respect to accounts. (i) Unless 
such presentation would be misleading, past performance of accounts 
required to be presented under this section may be presented in 
composite form on a program-by-program basis using the format set forth 
in Sec. 4.25(a)(1)(ii).
    (ii) Accounts that differ materially with respect to rates of return 
may not be presented in the same composite.
    (iii) The commodity pool operator must disclose all material 
differences among accounts included in a composite.
    (5) Time period for required performance. All required performance 
information must be presented for the most recent five calendar years 
and year-to-date or for the life of the pool, account or trading 
program, if less than five years.
    (6) Trading programs. If the offered pool will use any of the 
trading programs for which past performance is required to be presented, 
the Disclosure Document must so indicate.
    (7) Calculation of, and recordkeeping concerning, performance 
information. (i) All performance information presented in a Disclosure 
Document, including performance information contained in any capsule and 
performance information not specifically required by Commission rules, 
must be current as of a date not more than three months preceding the 
date of the Document, and must be supported by the following amounts, 
calculated on an accrual basis of accounting in accordance with 
generally accepted accounting principles, as specified below or by a 
method otherwise approved by the Commission.
    (A) The beginning net asset value for the period, which shall be the 
same as the previous period's ending net asset value;

[[Page 195]]

    (B) All additions, whether voluntary or involuntary, during the 
period;
    (C) All withdrawals and redemptions, whether voluntary or 
involuntary, during the period;
    (D) The net performance for the period, which shall represent the 
change in the net asset value net of additions, withdrawals, and 
redemptions;
    (E) The ending net asset value for the period, which shall represent 
the beginning net asset value plus or minus additions, withdrawals, 
redemptions and net performance;
    (F) The rate of return for the period, which shall be calculated by 
dividing the net performance by the beginning net asset value or by a 
method otherwise approved by the Commission; and
    (G) The number of units outstanding at the end of the period, if 
applicable.
    (ii) All supporting documents necessary to substantiate the 
computation of such amounts must be maintained in accordance with Sec. 
1.31.
    (8) Proprietary trading results. (i) Proprietary trading results may 
not be included in a Disclosure Document unless such performance is 
prominently labeled as proprietary and is set forth separately after all 
disclosures in accordance with Sec. 4.24(v), together with a discussion 
of any differences between such performance and the performance of the 
offered pool, including, but not limited to, differences in costs, 
leverage and trading methodology.
    (ii) For the purposes of Sec. 4.24(v) and this Sec. 4.25(a), 
proprietary trading results means the performance of any pool or account 
in which fifty percent or more of the beneficial interest is owned or 
controlled by:
    (A) The commodity pool operator, trading manager (if any), commodity 
trading advisor or any principal thereof
    (B) An affiliate or family member of the commodity pool operator, 
trading manager (if any) or commodity trading advisor; or
    (C) Any person providing services to the pool.
    (9) Required legend. Any past performance presentation, whether or 
not required by Commission rules, must be preceded by the following 
statement, prominently displayed:

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

    (b) Performance disclosure when the offered pool has at least a 
three-year operating history. The commodity pool operator must disclose 
the performance of the offered pool, in accordance with paragraphs 
(a)(1)(i) (A) through (H) and (a)(2) of this Sec. 4.25, where:
    (1) The offered pool has traded commodity interests for three years 
or more; and
    (2) For at least such three-year period, seventy-five percent or 
more of the contributions to the pool were made by persons unaffiliated 
with the commodity pool operator, the trading manager (if any), the 
pool's commodity trading advisors, or the principals of any of the 
foregoing.
    (c) Performance disclosure when the offered pool has less than a 
three-year operating history--(1) Offered pool performance. (i) The 
commodity pool operator must disclose the performance of the offered 
pool, in accordance with paragraphs (a)(1)(i)(A) through (H) and (a)(2) 
of this Sec. 4.25; or
    (ii) If the offered pool has no operating history, the pool operator 
must prominently display the following statement:

THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE 
HISTORY.

    (2) Other performance of commodity pool operator. (i)(A) Except as 
provided in Sec. 4.25(a)(8), the commodity pool operator must disclose, 
for the period specified by Sec. 4.25(a)(5), the performance of each 
other pool operated by the pool operator (and by the trading manager if 
the offered pool has a trading manager) in accordance with paragraphs 
(a)(1)(i) (C) through (H) and (a)(3) of this Sec. 4.25, and the 
performance of each other account traded by the pool operator (and by 
the trading manager if the offered pool has a trading manager) in 
accordance with paragraphs (a)(1)(ii) (C) through (G) of this Sec. 
4.25. If the trading manager has been delegated complete authority for 
the offered pool's trading, and the trading manager's performance is not 
materially different from that of the pool operator, the performance of 
the other

[[Page 196]]

pools operated by and accounts traded by the pool operator is not 
required to be disclosed.
    (B) In addition, if the pool operator, or if applicable, the trading 
manager, has not operated for at least three years any commodity pool in 
which seventy-five percent or more of the contributions to the pool were 
made by persons unaffiliated with the commodity pool operator, the 
trading manager, the pool's commodity trading advisors or their 
respective principals, the pool operator must also disclose the 
performance of each other pool operated by and account traded by the 
trading principals of the pool operator (and of the trading manager, as 
applicable) unless such performance does not differ in any material 
respect from the performance of the offered pool and the pool operator 
(and trading manager, if any) disclosed in the Disclosure Document.
    (ii) If neither the pool operator or trading manager (if any), nor 
any of its trading principals has operated any other pools or traded any 
other accounts, the pool operator must prominently display the following 
statement: NEITHER THIS POOL OPERATOR (TRADING MANAGER, IF APPLICABLE) 
NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED ANY OTHER 
POOLS OR TRADED ANY OTHER ACCOUNTS. If the commodity pool operator or 
trading manager, if applicable, is a sole proprietorship, reference to 
its trading principals may be deleted from the prescribed statement.
    (3) Major commodity trading advisor performance. (i) The commodity 
pool operator must disclose the perfor- mance of any accounts (including 
pools) directed by a major commodity trading advisor in accordance with 
paragraphs (a)(1)(ii) (C) through (G) of this Sec. 4.25.
    (ii) If a major commodity trading advisor has not previously traded 
accounts, the pool operator must prominently display the following 
statement:

(name of the major commodity trading advisor), A COMMODITY TRADING 
ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of the 
pool's funds available for commodity interest trading allocated to that 
trading advisor) PERCENT OF THE POOL'S FUTURES AND COMMODITY OPTION 
TRADING HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.

    (4) Major investee pool performance. (i) The commodity pool operator 
must disclose the performance of any major investee pool.
    (ii) If a major investee pool has not commenced trading, the pool 
operator must prominently display the following statement:

(name of the major investee pool), AN INVESTEE POOL THAT IS ALLOCATED 
(percentage of the pool assets allocated to that investee pool) PERCENT 
OF THE POOL'S ASSETS HAS NOT COMMENCED TRADING.

    (5) With respect to commodity trading advisors and investee pools 
for which performance is not required to be disclosed pursuant to Sec. 
4.25(c) (3) and (4), the pool operator must provide a summary 
description of the performance history of each of such advisors and 
pools including the following information, provided that where the pool 
operator uses a two-part document pursuant to the rules promulgated by a 
registered futures association pursuant to Section 17(j) of the Act, 
such summary description may be provided in the second part of the two-
part document:
    (i) Monthly return parameters (highs and lows);
    (ii) Historical volatility and degree of leverage; and
    (iii) Any material differences between the performance of such 
advisors and pools as compared to that of the offered pool's major 
trading advisors and major investee pools.

[60 FR 38186, July 25, 1995, as amended at 63 FR 58303, Oct. 30, 1998; 
68 FR 42967, July 21, 2003]



Sec. 4.26  Use, amendment and filing of Disclosure Document.

    (a)(1) Subject to paragraph (c) of this section, all information 
contained in the Disclosure Document and, where used, profile document, 
must be current as of the date of the Document; Provided, however, that 
performance information may be current as of a date not more than three 
months prior to the date of the Document.
    (2) No commodity pool operator may use a Disclosure Document or 
profile

[[Page 197]]

document dated more than nine months prior to the date of its use.
    (b) The commodity pool operator must attach to the Disclosure 
Document the most current Account Statement and Annual Report for the 
pool required to be distributed in accordance with Sec. 4.22; provided, 
however, that in lieu of the most current Account Statement the 
commodity pool operator may provide performance information for the pool 
current as of a date not more than sixty days prior to the date on which 
the Disclosure Document is distributed and covering the period since the 
most recent performance information contained in the Disclosure 
Document.
    (c)(1) If the commodity pool operator knows or should know that the 
Disclosure Document or profile document is materially inaccurate or 
incomplete in any respect, it must correct that defect and must 
distribute the correction to:
    (i) All existing pool participants within 21 calendar days of the 
date upon which the pool operator first knows or has reason to know of 
the defect; and
    (ii) Each previously solicited prospective pool participant prior to 
accepting or receiving funds, securities or other property from any such 
prospective participant.
    (2) The pool operator may furnish the correction by any of the 
following means:
    (i) An amended Disclosure Document or profile document;
    (ii) With respect to a hard copy of the Disclosure Document, a 
sticker affixed to the Disclosure Document; or
    (iii) Other similar means.
    (3) The pool operator may not use the Disclosure Document or profile 
document until such correction has been made.
    (d) Except as provided by Sec. 4.8:
    (1) The commodity pool operator must file with the National Futures 
Association one copy of the Disclosure Document and, where used, profile 
document for each pool that it operates or that it intends to operate 
not less than 21 calendar days prior to the date the pool operator first 
intends to deliver such Document or documents to a prospective 
participant in the pool; and
    (2) The commodity pool operator must file with the National Futures 
Association one copy of the subsequent amendments to the Disclosure 
Document and, where used, profile document for each pool that it 
operates or that it intends to operate within 21 calendar days of the 
date upon which the pool operator first knows or has reason to know of 
the defect requiring the amendment.

[60 FR 38188, July 25, 1995, as amended at 62 FR 18268, Apr. 15, 1997; 
65 FR 58649, Oct. 2, 2000; 67 FR 42710, June 25, 2002; 67 FR 77411, Dec. 
18, 2002; 68 FR 12584, Mar. 17, 2003]



                  Subpart C_Commodity Trading Advisors



Sec. 4.30  Prohibited activities.

    No commodity trading advisor may solicit, accept or receive from an 
existing or prospective client funds, securities or other property in 
the trading advisor's name (or extend credit in lieu thereof) to 
purchase, margin, guarantee or secure any commodity interest of the 
client; Provided, however, That this section shall not apply to a future 
commission merchant that is registered as such under the Act or to a 
leverage transaction merchant that is registered as a commodity trading 
advisor under the Act.

(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17, 
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n, 
12a, 19 and 21; 5 U.S.C. 552 and 552b))

[47 FR 57011, Dec. 22, 1982]



Sec. 4.31  Required delivery of Disclosure Document to prospective clients.

    (a) Each commodity trading advisor registered or required to be 
registered under the Act must deliver or cause to be delivered to a 
prospective client a Disclosure Document containing the information set 
forth in Sec. Sec. 4.34 and 4.35 for the trading program pursuant to 
which the trading advisor seeks to direct the client's commodity 
interest account or to guide the client's commodity interest trading by 
means of a systematic program that recommends specific transactions by 
no later than the time the trading advisor delivers to the prospective 
client an advisory

[[Page 198]]

agreement to direct or guide the client's account; Provided, That any 
information distributed in advance of the delivery of the Disclosure 
Document to a prospective client is consistent with or amended by the 
information contained in the Disclosure Document and with the 
obligations of the commodity trading advisor under the Act, the 
Commission's regulations issued thereunder, and the laws of any other 
applicable federal or state authority; Provided further, That in the 
event such previously distributed information is amended by the 
Disclosure Document in any material respect, the prospective participant 
must be in receipt of the Disclosure Document at least 48 hours prior to 
the advisory agreement being accepted by the trading advisor.
    (b) The commodity trading advisor may not enter into an agreement 
with a prospective client to direct the client's commodity interest 
account or to guide the client's commodity interest trading unless the 
trading advisor first receives from the prospective client an 
acknowledgment signed and dated by the prospective client stating that 
the client received a Disclosure Document for the trading program 
pursuant to which the trading advisor will direct his account or will 
guide his trading. Where a Disclosure Document is delivered to a 
prospective client by electronic means, in lieu of a manually signed and 
dated acknowledgment the trading advisor may establish receipt by 
electronic means that use a unique identifier to confirm the identity of 
the recipient of such Disclosure Document, Provided, however, That the 
requirement of Sec. 4.33(a)(2) to retain the acknowledgment specified 
in this paragraph (b) applies equally to such substitute evidence of 
receipt, which must be retained either in hard copy form or in another 
form approved by the Commission.

[60 FR 38189, July 25, 1995, as amended at 62 FR 39115, July 22, 1997; 
68 FR 47235, Aug. 8, 2003; 68 FR 59114, Oct. 14, 2003]



Sec. 4.32  Trading on a Registered Derivatives Transaction Execution 
Facility for Non-Institutional Customers.

    (a) A registered commodity trading advisor may enter trades on or 
subject to the rules of a registered derivatives transaction execution 
facility on behalf of a client who does not qualify as an 
``institutional customer'' as defined in Sec. 1.3(g) of this chapter, 
provided that the trading advisor:
    (1) Directs the client's commodity interest account;
    (2) Directs accounts containing total assets of not less than 
$25,000,000 at the time the trade is entered; and
    (3) Discloses to the client that the trading advisor may enter 
trades on or subject to the rules of a registered derivatives 
transaction execution facility on the client's behalf.
    (b) The commodity interest account of a client described in 
paragraph (a) of this section must be carried by a registered futures 
commission merchant.

[66 FR 53522, Oct. 23, 2001]



Sec. 4.33  Recordkeeping.

    Each commodity trading advisor registered or required to be 
registered under the Act must make and keep the following books and 
records in an accurate, current and orderly manner at its main business 
office and in accordance with Sec. 1.31. If the commodity trading 
advisor's main business office is located outside the United States, its 
territories or possessions, then upon the request of a Commission 
representative the trading advisor must provide such books and records 
as requested at the place designated by the representative in the United 
States, its territories or possessions within 72 hours after receipt of 
the request.
    (a) Concerning the clients and subscribers of the commodity trading 
advisor:
    (1) The name and address of each client and each subscriber.
    (2) The acknowledgement specified in Sec. 4.31(b).
    (3) All powers of attorney and other documents, or copies thereof, 
authorizing the commodity trading advisor to direct the commodity 
interest account of a client or subscriber.
    (4) All other written agreements, or copies thereof, entered into by 
the commodity trading advisor with any client or subscriber.

[[Page 199]]

    (5) A list or other record of all commodity interest accounts of 
clients directed by the commodity trading advisor and of all 
transactions effected therefor.
    (6) Copies of each confirmation of a commodity interest transaction, 
each purchase and sale statement and each monthly statement received 
from a futures commission merchant.
    (7) The original or a copy of each report, letter, circular, 
memorandum, publication, writing, advertisement or other literature or 
advice (including the texts of standardized oral presentations and of 
radio, television, seminar or similar mass media presentations) 
distributed or caused to be distributed by the commodity trading advisor 
to any existing or prospective client or subscriber, showing the first 
date of distribution if not otherwise shown on the document.
    (b) Concerning the commodity trading advisor:
    (1) An itemized daily record of each commodity interest transaction 
of the commodity trading advisor, showing the transaction date, 
quantity, commodity interest, and, as applicable, price or premium, 
delivery month or expiration date, whether a put or a call, strike 
price, underlying contract for future delivery or underlying physical, 
the futures commission merchant carrying the account and the introducing 
broker, if any, whether the commodity interest was purchased, sold, 
exercised, or expired, and the gain or loss realized.
    (2) Each confirmation of a commodity interest transaction, each 
purchase and sale statement and each monthly statement furnished by a 
futures commission merchant to (i) the commodity trading advisor 
relating to a personal account of the trading advisor, and (ii) each 
principal of the trading advisor relating to a personal account of such 
principal.
    (3) Books and records of all other transactions in all other 
business dealings in trading commodity interests and of all cash market 
transactions in which the commodity trading advisor and each principal 
thereof engages. Those books and records must include, as applicable, 
books and records of the type specified in paragraphs (a)(1) through 
(a)(7) of this section and in paragraphs (a)(1) through (a)(8) of Sec. 
4.23.

(Approved by the Office of Management and Budget under control number 
3038-0005)

(Secs. 2(a)(1), 4c(a)-(d), 4d, 4f, 4g, 4k, 4m, 4n, 8a, 15 and 17, 
Commodity Exchange Act (7 U.S.C. 2, 4, 6c(a)-(d), 6f, 6g, 6k, 6m, 6n, 
12a, 19 and 21; 5 U.S.C. 552 and 552b))

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 
FR 57012, Dec. 22, 1982; 48 FR 35299, Aug. 3, 1983. Redesignated and 
amended at 60 FR 38189, July 25, 1995]



Sec. 4.34  General disclosures required.

    Except as otherwise provided herein, a Disclosure Document must 
include the following information.
    (a) Cautionary Statement. The following Cautionary Statement must be 
prominently displayed on the cover page of the Disclosure Document:

THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS 
OF PARTICIPATING IN THIS TRADING PROGRAM NOR HAS THE COMMISSION PASSED 
ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

    (b) Risk Disclosure Statement. (1) The following Risk Disclosure 
Statement must be prominently displayed immediately following any 
disclosures required to appear on the cover page of the Disclosure 
Document as provided by the Commission, by any applicable federal or 
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions:

                        Risk Disclosure Statement

    THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU 
SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR 
YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO 
TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE 
OF THE FOLLOWING:
    IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF 
THE PREMIUM AND OF ALL TRANSACTION COSTS.
    IF YOU PURCHASE OR SELL A COMMODITY FUTURE OR SELL A COMMODITY 
OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS AND ANY 
ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR 
MAINTAIN YOUR POSITION. IF

[[Page 200]]

THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR 
BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON 
SHORT NOTICE, IN ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE 
THE REQUESTED FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE 
LIQUIDATED AT A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT 
IN YOUR ACCOUNT.
    UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR 
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN 
THE MARKET MAKES A ``LIMIT MOVE.''
    THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, 
SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY 
LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY 
MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
    A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG'' 
OR ``SHORT'' POSITION.
    THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY 
TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN 
LEAD TO LARGE LOSSES AS WELL AS GAINS.
    IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL 
CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE 
ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING 
PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS 
DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page number), A COMPLETE 
DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY 
TRADING ADVISOR.
    THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER 
SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. YOU SHOULD THEREFORE 
CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY TRADING BEFORE 
YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF 
THIS INVESTMENT, AT PAGE (insert page number).

    (2) If the commodity trading advisor may trade foreign futures or 
options contracts pursuant to the offered trading program, the Risk 
Disclosure Statement must further state the following:

    YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY 
ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON 
MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY 
LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH 
OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES 
REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE 
RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES 
JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE 
YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR 
CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO 
TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR 
LOCAL AND OTHER RELEVANT JURISDICTIONS.

    (3) If the commodity trading advisor is not also a registered 
futures commission merchant, the trading advisor must make the 
additional following statement in the Risk Disclosure Statement, to be 
included as the last paragraph thereof:

    THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING 
FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY 
INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM 
DIRECTLY WITH A FUTURES COMMISSION MERCHANT.

    (c) Table of contents. A table of contents showing, by subject 
matter, the location of the disclosures made in the Disclosure Document, 
must appear immediately following the Risk Disclosure Statement.
    (d) Information required in the forepart of the Disclosure Document. 
(1) The name, address of the main business office, main business 
telephone number and form of organization of the commodity trading 
advisor. If the mailing address of the main business office is a post 
office box number or is not within the United States, its territories or 
possessions, the trading advisor must state where its books and records 
will be kept and made available for inspection; and

[[Page 201]]

    (2) The date when the commodity trading advisor first intends to use 
the Disclosure Document.
    (e) Persons to be identified. The names of the following persons:
    (1) Each principal of the trading advisor;
    (2) The futures commission merchant with which the commodity trading 
advisor will require the client to maintain its account or, if the 
client is free to choose the futures commission merchant with which it 
will maintain its account, the trading advisor must make a statement to 
that effect; and
    (3) The introducing broker through which the commodity trading 
advisor will require the client to introduce its account or, if the 
client is free to choose the introducing broker through which it will 
introduce its account, the trading advisor must make a statement to that 
effect.
    (f) Business background. (1) The business background, for the five 
years preceding the date of the Disclosure Document, of:
    (i) The commodity trading advisor; and
    (ii) Each principal of the trading advisor who participates in 
making trading or operational decisions for the trading advisor or 
supervises persons so engaged.
    (2) The trading advisor must include in the description of the 
business background of each person identified in Sec. 4.34(f)(1) the 
name and main business of that person's employers, business associations 
or business ventures and the nature of the duties performed by such 
person for such employers or in connection with such business 
associations or business ventures. The location in the Disclosure 
Document of any required past performance disclosure for such person 
must be indicated.
    (g) Principal risk factors. A discussion of the principal risk 
factors of this trading program. This discussion must include, without 
limitation, risks due to volatility, leverage, liquidity, and 
counterparty creditworthiness, as applicable to the trading program and 
the types of transactions and investment activity expected to be engaged 
in pursuant to such program.
    (h) Trading program. A description of the trading program, which 
must include the method chosen by the commodity trading advisor 
concerning how futures commission merchants carrying accounts it manages 
shall treat offsetting positions pursuant to Sec. 1.46 of this chapter, 
if the method is other than to close out all offsetting positions or to 
close out offsetting positions on other than a first-in, first-out 
basis, and the types of commodity interests and other interests the 
commodity trading advisor intends to trade, with a description of any 
restrictions or limitations on such trading established by the trading 
advisor or otherwise.
    (i) Fees. A complete description of each fee which the commodity 
trading advisor will charge the client.
    (1) Wherever possible, the trading advisor must specify the dollar 
amount of each such fee.
    (2) Where any fee is determined by reference to a base amount 
including, but not limited to, ``net assets,'' ``gross profits,'' ``net 
profits'' or ``net gains,'' the trading advisor must explain how such 
base amount will be calculated.
    (3) Where any fee is based on an increase in the value of the 
client's commodity interest account, the trading advisor must specify 
how that increase is calculated, the period of time during which the 
increase is calculated, the fee to be charged at the end of that period 
and the value of the account at which payment of the fee commences.
    (j) Conflicts of interest. (1) A full description of any actual or 
potential conflicts of interest regarding any aspect of the trading 
program on the part of:
    (i) The commodity trading advisor;
    (ii) Any futures commission merchant with which the client will be 
required to maintain its commodity interest account;
    (iii) Any introducing broker through which the client will be 
required to introduce its account to a futures commission merchant; and
    (iv) Any principal of the foregoing.
    (2) Any other material conflict involving any aspect of the offered 
trading program.
    (3) Included in the description of any such conflict must be any 
arrangement whereby the trading advisor or any principal thereof may 
benefit, directly

[[Page 202]]

or indirectly, from the maintenance of the client's commodity interest 
account with a futures commission merchant or the introduction of such 
account through an introducing broker (such as payment for order flow or 
soft dollar arrangements).
    (k) Litigation. (1) Subject to the provisions of Sec. 4.34(k)(2), 
any material administrative, civil or criminal action, whether pending 
or concluded, within five years preceding the date of the Document, 
against any of the following persons; Provided, however, that a 
concluded action that resulted in an adjudication on the merits in favor 
of such person need not be disclosed:
    (i) The commodity trading advisor and any principal thereof:
    (ii) Any futures commission merchant with which the client will be 
required to maintain its commodity interest account; and
    (iii) Any introducing broker through which the client will be 
required to introduce its account to the futures commission merchant.
    (2) With respect to a futures commission merchant or an introducing 
broker, an action will be considered material if:
    (i) The action would be required to be disclosed in the notes to the 
futures commission merchant's or introducing broker's financial 
statements prepared pursuant to generally accepted accounting 
principles;
    (ii) The action was brought by the Commission; Provided, however, 
that a concluded action that did not result in civil monetary penalties 
exceeding $50,000 need not be disclosed unless it involved allegations 
of fraud or other willful misconduct; or
    (iii) The action was brought by any other federal or state 
regulatory agency, a non-United States regulatory agency or a self-
regulatory organization and involved allegations of fraud or other 
willful misconduct.
    (l) Trading for own account. If the commodity trading advisor or any 
principal thereof trades or intends to trade commodity interests for its 
own account, the trading advisor must disclose whether clients will be 
permitted to inspect the records of such person's trading and any 
written policies related to such trading.
    (m) Performance disclosures. Past performance must be disclosed as 
set forth in Sec. 4.35.
    (n) Supplemental information. If any information, other than that 
required by Commission rules, the antifraud provisions of the Act, other 
federal or state laws and regulations, any rules of a self-regulatory 
agency or laws of a non-United States jurisdiction, is provided, such 
information:
    (1) May not be misleading in content or presentation or inconsistent 
with the required disclosures;
    (2) Is subject to the antifraud provisions of the Act and Commission 
rules, and to rules regarding the use of promotional material 
promulgated by a registered futures association pursuant to section 
17(j) of the Act; and
    (3) Must be placed as follows, unless otherwise specified by 
Commission rules:
    (i) Supplemental performance information (not including proprietary 
trading results as defined in Sec. 4.35(a)(7), or hypothetical, 
extracted, pro forma or simulated trading results) must be placed after 
all required performance information;
    (ii) Supplemental non-performance information relating to a required 
disclosure may be included with the related required disclosure; and
    (iii) Other supplemental information may be included after all 
required disclosures; Provided, however, That any proprietary trading 
results as defined in Sec. 4.35(a)(7), and any hypothetical, extracted, 
pro forma or simulated trading results included in the Disclosure 
Document must appear as the last disclosure therein following all 
required and non-required disclosures.
    (o) Material information. Nothing set forth in Sec. Sec. 4.31, 
4.34, 4.35 or Sec. 4.36 shall relieve a commodity trading advisor from 
any obligation under the Act or the regulations thereunder, including 
the obligation to disclose all material information to existing or 
prospective clients even if the information is not specifically required 
by such sections.

[60 FR 38189, July 25, 1995, as amended at 66 FR 53522, Oct. 23, 2001]



Sec. 4.35  Performance disclosures.

    (a) General principles--(1) Capsule performance information. Unless 
otherwise

[[Page 203]]

specified, disclosure of the past performance of an account or trading 
program required under this Sec. 4.35 must include the following 
information:
    (i) The name of the commodity trading advisor or other person 
trading the account and the name of the trading program;
    (ii) The date on which the commodity trading advisor or other person 
trading the account began trading client accounts and the date when 
client funds began being traded pursuant to the trading program;
    (iii) The number of accounts directed by the trading advisor or 
other person trading the account pursuant to the trading program 
specified, as of the date of the Disclosure Document;
    (iv)(A) The total assets under the management of the trading advisor 
or other person trading the account, as of the date of the Disclosure 
Document; and
    (B) The total assets traded pursuant to the trading program 
specified, as of the date of the Disclosure Document;
    (v) The largest monthly draw-down for the account or trading program 
specified during the most recent five calendar year and year-to-date 
expressed as a percentage of client funds and indicating the month and 
year of the draw-down (the capsule must include a definition of ``draw-
down'' that is consistent with Sec. 4.10(k));
    (vi) The worst peak-to-valley draw-down for the trading program 
specified during the most recent five calendar year and year-to-date, 
expressed as a percentage of net asset value and indicating the months 
and year of the draw-down;
    (vii) Subject to Sec. 4.35(a)(2) for the offered trading program, 
the annual and year-to-date rate-of-return for the program specified for 
the five most recent calendar years and year-to-date, computed on a 
compounded monthly basis; Provided, however, That performance of the 
offered trading program must include monthly rates of return for such 
period; and
    (viii) In the case of the offered trading program:
    (A)(1) The number of accounts traded pursuant to the offered trading 
program that were opened and closed during the period specified in Sec. 
4.35(a)(5) with a positive net lifetime rate of return as of the date 
the account was closed; and
    (2) A measure of the variability of returns for accounts that were 
both opened and closed during the period specified in Sec. 4.35(a)(5) 
and closed with positive net lifetime rates of return; and
    (B)(1) The number of accounts traded pursuant to the offered trading 
program that were opened and closed during the period specified in Sec. 
4.35(a)(5) with negative net lifetime rates of return as of the date the 
account was closed; and
    (2) A measure of the variability of returns for accounts that were 
both opened and closed during the period specified in Sec. 4.35(a)(5) 
and closed with negative net lifetime rates of return.
    (C) The measure of variability required by Sec. Sec. 
4.35(a)(1)(viii)(A)(2) and (B)(2) may be provided as a range of both 
positive and negative net lifetime returns, or by any other form of 
disclosure that meets the objective of disclosure of the variability of 
returns experienced by clients in the trading program whose accounts 
were opened and closed during the period specified in Sec. 4.35(a)(5). 
The net lifetime rate of return shall be calculated as the compounded 
product of the monthly rates of return for each month the account is 
open.
    (2) Additional requirements with respect to the offered trading 
program. (i) The performance of the offered trading program must be 
identified as such and separately presented first;
    (ii) The rate of return of the offered trading program must be 
presented on a monthly basis for the period specified in Sec. 
4.35(a)(5), either in a numerical table or in a bar graph;
    (iii) A bar graph used to present monthly rates of return for the 
offered trading program:
    (A) Must show percentage rate of return on the vertical axis and 
one-month increments on the horizontal axis;
    (B) Must be scaled in such a way as to clearly show month-to-month 
differences in rates of return; and
    (C) Must separately display numerical percentage annual rates of 
return

[[Page 204]]

for the period covered by the bar graph; and
    (iv) The commodity trading advisor must make available to 
prospective and existing clients upon request a table showing at least 
quarterly the information required to be calculated pursuant to Sec. 
4.35(a)(6).
    (3) Composite presentation. (i) Unless such presentation would be 
misleading, the performance of accounts traded pursuant to the same 
trading program may be presented in composite form on a program-by-
program basis, using the format set forth in Sec. 4.35(a)(1).
    (ii) Accounts that differ materially with respect to rates of return 
may not be presented in the same composite.
    (iii) The commodity trading advisor must discuss all material 
differences among the accounts included in a composite.
    (4) Current information. All performance information presented in 
the Disclosure Document must be current as of a date not more than three 
months preceding the date of the Document.
    (5) Time period for required performance. All required performance 
information must be presented for the most recent five calendar years 
and year-to-date or for the life of the trading program or account, if 
less than five years.
    (6) Calculation of, and recordkeeping concerning, performance 
information. (i) All performance information presented in a Disclosure 
Document, including performance information contained in any capsule and 
performance information not specifically required by Commission rules, 
must be current as of a date not more than three months preceding the 
date of the Document, and must be supported by the following amounts, 
calculated on an accrual basis of accounting in accordance with 
generally accepted accounting principles, as specified below or by a 
method otherwise approved by the Commission.
    (A) The beginning net asset value for the period, which shall 
represent the previous period's ending net asset value;
    (B) All additions, whether voluntary or involuntary, during the 
period;
    (C) All withdrawals and redemptions, whether voluntary or 
involuntary, during the period;
    (D) The net performance for the period, which shall represent the 
change in the net asset value net of additions, withdrawals, 
redemptions, fees and expenses;
    (E) The ending net asset value for the period, which shall represent 
the beginning net asset value plus or minus additions, withdrawals and 
redemptions, and net performance; and
    (F) The rate of return for the period, computed on a compounded 
monthly basis, which shall be calculated by dividing the net performance 
by the beginning net asset value.
    (ii) All supporting documents necessary to substantiate the 
computation of such amounts must be maintained in accordance with Sec. 
1.31.
    (7) Performance of partially-funded accounts. Notwithstanding the 
foregoing, a commodity trading advisor will be deemed in compliance with 
this Sec. 4.35(a) concerning the performance of partially-funded 
accounts if the commodity trading advisor presents the performance of 
such accounts in a manner that is balanced and is not in violation of 
the antifraud provisions of the Commodity Exchange Act or the 
Commission's regulations thereunder.
    (8) Proprietary trading results. (i) Proprietary trading results 
shall not be included in a Disclosure Document unless such performance 
is prominently labeled as proprietary and is set forth separately after 
all disclosures in accordance with Sec. 4.34(n), together with a 
discussion of any differences between such performance and the 
performance of the offered trading program, including, but not limited 
to, differences in costs, leverage and trading.
    (ii) For the purposes of Sec. 4.34(n) and this Sec. 4.35(a), 
proprietary trading results means the performance of any account in 
which fifty percent or more of the beneficial interest is owned or 
controlled by:
    (A) The commodity trading advisor or any of its principals;
    (B) An affiliate or family member of the commodity trading advisor; 
or
    (C) Any person providing services to the account.

[[Page 205]]

    (9) Required legend. Any past performance presentation, whether or 
not required by Commission rules, must be preceded with the following 
statement, prominently displayed:

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

    (b) Performance to be disclosed. Except as provided in Sec. 
4.35(a)(7), the commodity trading advisor must disclose the actual 
performance of all accounts directed by the commodity trading advisor 
and by each of its trading principals; Provided, however, that if the 
trading advisor or its trading principals previously have not directed 
any accounts, the trading advisor must prominently disclose this fact 
with one of the following statements, as applicable:
    (1) THIS TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS; 
or
    (2) NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS 
PREVIOUSLY DIRECTED ANY ACCOUNTS; or
    (3) NEITHER THIS TRADING ADVISOR NOR ANY OF ITS TRADING PRINCIPALS 
HAVE PREVIOUSLY DIRECTED ANY ACCOUNTS.


If the commodity trading advisor is a sole proprietorship, reference to 
its trading principals need not be included in the prescribed statement.

[60 FR 38191, July 25, 1995, as amended at 68 FR 42967, July 21, 2003; 
68 FR 47235, Aug. 8, 2003]



Sec. 4.36  Use, amendment and filing of Disclosure Document.

    (a) Subject to paragraph (c) of this section, all information 
contained in the Disclosure Document must be current as of the date of 
the Document; Provided, however, that performance information must be 
current as of a date not more than three months preceding the date of 
the Document.
    (b) No commodity trading advisor may use a Disclosure Document dated 
more than nine months prior to the date of its use.
    (c)(1) If the commodity trading advisor knows or should know that 
the Disclosure Document is materially inaccurate or incomplete in any 
respect, it must correct that defect and must distribute the correction 
to:
    (i) All existing clients in the trading program within 21 calendar 
days of the date upon which the trading advisor first knows or has 
reason to know of the defect; and
    (ii) Each previously solicited prospective client for the trading 
program prior to entering into an agreement to direct or to guide such 
prospective client's commodity interest account pursuant to the program. 
The trading advisor may furnish the correction by way of an amended 
Disclosure Document, a sticker on the Document, or other similar means.
    (2) The trading advisor may not use the Disclosure Document until 
such correction is made.
    (d)(1) The commodity trading advisor must file with the National 
Futures Association one copy of the Disclosure Document for trading 
program that it offers or that it intends to offer not less than 21 
calendar days prior to the date the trading advisor first intends to 
deliver the Document to a prospective client in the trading program; and
    (2) The commodity trading advisor must file with the National 
Futures Association one copy of the subsequent amendments to the 
Disclosure Document for each trading program that it offers or that it 
intends to offer within 21 calendar days of the date upon which the 
trading advisor first knows or has reason to know of the defect 
requiring the amendment.

[60 FR 38192, July 25, 1995, as amended at 62 FR 18268, Apr. 15, 1997; 
65 FR 58650, Oct. 2, 2000; 67 FR 77411, Dec. 18, 2002]



                          Subpart D_Advertising



Sec. 4.40  [Reserved]



Sec. 4.41  Advertising by commodity pool operators, commodity trading 
advisors, and the principals thereof.

    (a) No commodity pool operator, commodity trading advisor, or any 
principal thereof, may advertise in a manner which:
    (1) Employs any device, scheme or artifice to defraud any 
participant or client or prospective participant or client; or

[[Page 206]]

    (2) Involves any transaction, practice or course of business which 
operates as a fraud or deceit upon any participant or client or any 
prospective participant or client.
    (b)(1) No person may present the performance of any simulated or 
hypothetical commodity interest account, transaction in a commodity 
interest or series of transactions in a commodity interest of a 
commodity pool operator, commodity trading advisor, or any principal 
thereof, unless such performance is accompanied by one of the following:
    (i) The following statement: ``Hypothetical or simulated performance 
results have certain inherent limitations. Unlike an actual performance 
record, simulated results do not represent actual trading. Also, since 
the trades have not actually been executed, the results may have under- 
or over-compensated for the impact, if any, of certain market factors, 
such as lack of liquidity. Simulated trading programs in general are 
also subject to the fact that they are designed with the benefit of 
hindsight. No representation is being made that any account will or is 
likely to achieve profits or losses similar to those shown;'' or
    (ii) A statement prescribed pursuant to rules promulgated by a 
registered futures association pursuant to section 17(j) of the Act.
    (2) If the presentation of such simulated or hypothetical 
performance is other than oral, the prescribed statement must be 
prominently disclosed.
    (c) The provisions of this section shall apply:
    (1) To any publication, distribution or broadcast of any report, 
letter, circular, memorandum, publication, writing, advertisement or 
other literature or advice, including the texts of standardized oral 
presentations and of radio, television, seminar or similar mass media 
presentations, and
    (2) Regardless of whether the commodity pool operator or commodity 
trading advisor is exempt from registration under the Act.

(Approved by the Office of Management and Budget under control number 
3038-0005)

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 60 
FR 38192, July 25, 1995]

Appendix A to Part 4--Guidance on the Application of Rule 4.13(a)(3) in 
                        the Fund-of-Funds Context

    The following provides guidance on the application of the trading 
limits of Rule 4.13(a)(3)(ii) to commodity pool operators (CPOs) who 
operate ``fund-of-funds.'' For the purpose of this Appendix A, it is 
presumed that the CPO can comply with all of the other requirements of 
Rule 4.13(a)(3). It also is presumed that where the investor fund CPO is 
relying on its own computations, the investor fund is participating in 
each investee fund that trades commodity interests as a passive 
investor, with limited liability (e.g., as a limited partner of a 
limited partnership or a non-managing member of a limited liability 
company). Fund-of-funds CPOs who seek to claim exemption from 
registration under Rule 4.13(a)(1), (a)(2) or (a)(4) may do so without 
regard to the trading engaged in by an investee fund, because none of 
the registration exemptions set forth in those rules concerns limits on 
or levels of commodity interest trading. Persons whose fact situations 
do not fit any of the scenarios below should contact Commission staff to 
discuss the applicability of the registration exemption in Rule 
4.13(a)(3) to their particular situations.
    1. Situation: An investor fund CPO allocates the fund's assets to 
one or more investee funds, none of which meets the trading limits of 
Rule 4.13(a)(3) and each of which is operated by a registered CPO. It 
does not allocate any of the investor fund's assets directly to 
commodity interest trading.
    Application: The investor fund CPO may claim relief under Rule 
4.13(a)(3) provided the investor fund itself meets the trading limits of 
Rule 4.13(a)(3)(ii)(A).
    2. Situation: An investor fund CPO allocates the fund's assets to 
one or more investee funds, each having a CPO who is either: (1) itself 
claiming exemption from CPO registration under Rule 4.13(a)(3); or (2) a 
registered CPO that is complying with the trading restrictions of Rule 
4.13(a)(3). It does not allocate any of the investor fund's assets 
directly to commodity interest trading.
    Application: The investor fund CPO fund may rely upon the 
representations of the investee fund CPOs that they are complying with 
the trading limits of Rule 4.13(a)(3).
    3. Situation: An investor fund CPO allocates the fund's assets to 
investee funds, each of which operates under a percentage restriction on 
the amount of margin or option premiums that may be used to establish 
its commodity interest positions (whether pursuant to Rule 4.12(b), Rule 
4.13(a)(3)(ii)(A) or otherwise), by, e.g., contractual agreement. It 
does not allocate any of the investor fund's assets directly to 
commodity interest trading.

[[Page 207]]

    Application: The CPO of the investor fund may multiply the 
percentage restriction applicable to each investee fund by the 
percentage of the investor fund's allocation of assets to that investee 
fund to determine whether the CPO is operating the investor fund in 
compliance with Rule 4.13(a)(3)(ii)(A).
    4. Situation: An investor fund CPO allocates the fund's assets to 
one or more investee funds, and it has actual knowledge of the trading 
limits and commodity interest positions of the investee funds, e.g., 
where the CPO or one or more affiliates of the CPO operate the investee 
funds. (For this purpose, an ``affiliate'' is a person who controls, who 
is controlled by, or who is under common control with, the CPO.) It does 
not allocate any of the investor fund's assets directly to commodity 
interest trading.
    Application: The investor fund CPO may aggregate commodity interest 
positions across investee funds to determine compliance with the trading 
restrictions of Rule 4.13(a)(3). For this purpose, the aggregate assets 
of the investee funds would be compared to the aggregate of their 
commodity interest positions (as to margin or as to net notional value). 
The investor fund CPO should use the results of this computation to 
determine its compliance with the trading limits of Rule 4.13(a)(3).
    5. Situation: An investor fund CPO allocates no more than 50 percent 
of the fund's assets to investee funds that trade commodity interests 
(without regard to the level of commodity interest trading engaged in by 
those investee pools). It does not allocate any of the investor fund's 
assets directly to commodity interest trading.
    Application: The investor fund CPO may claim relief under Rule 
4.13(a)(3).
    6. Situation: An investor fund CPO allocates the fund's assets to 
both investee funds and direct trading of commodity interests.
    Application: The investor fund CPO must treat the amount of investor 
fund assets committed to such direct trading as a separate pool for 
purposes of determining compliance with Rule 4.13(a)(3)(ii), such that 
the commodity interest trading of that pool must meet the criteria of 
Rule 4.13(a)(3)(ii) independently of the portion of investor fund assets 
allocated to investee funds.

[68 FR 47236, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003]

 Appendix B to Part 4--Adjustments for Additions and Withdrawals in the 
                      Computation of Rate of Return

    This appendix provides guidance concerning alternate methods by 
which commodity pool operators and commodity trading advisors may 
calculate the rate of return information required by Rules 
4.25(a)(7)(i)(F) and 4.35(a)(6)(i)(F). The methods described herein are 
illustrative of calculation methods the Commission has reviewed and 
determined may be appropriate to address potential material distortions 
in the computation of rate of return due to additions and withdrawals 
that occur during a performance reporting period. A commodity pool 
operator or commodity trading advisor may present to the Commission 
proposals regarding any alternative method of addressing the effect of 
additions and withdrawals on the rate of return computation, including 
documentation supporting the rationale for use of that alternate method.

                   1. Compounded Rate of Return Method

    Rate of return for a period may be calculated by computing the net 
performance divided by the beginning net asset value for each trading 
day in the period and compounding each daily rate of return to determine 
the rate of return for the period. If daily compounding is not 
practicable, the rate of return may be compounded on the basis of each 
sub-period within which an addition or withdrawal occurs during a month. 
For example:

----------------------------------------------------------------------------------------------------------------
                                                    Account value                  Change in value
----------------------------------------------------------------------------------------------------------------
Start of month..................................           $10,000  +10% ($1,000 profit).
End of 1st acct. period.........................            11,000  $4,000 addition.
Start of 2nd acct. period.......................            15,000  -20% ($3,000 loss).
End of 2nd acct. period.........................            12,000  $2,000 withdrawal.
Start of 3rd acct. period.......................            10,000  +25% ($2,500 profit).
End of month....................................           12,500
----------------------------------------------------------------------------------------------------------------
Compounded ROR = [(1 + .1)(1 - .2)(1 + .25)] - 1 = 10%.

                         2. Time-weighted method

    Time-weighting allows for adjustment to the denominator of the rate 
of return calculation for additions and withdrawals, weighted for the 
amount of time such funds were available during the period. Several 
methods exist for time-weighting, all of which will have the same 
arithmetic result. These methods include: dividing the net performance 
by the average weighted account sizes for the month; dividing the net 
performance by the arithmetic mean of the account sizes for each trading 
day during the period; and taking the number of days funds

[[Page 208]]

were available for trading divided by the total number of days in the 
period.

[68 FR 47236, Aug. 8, 2003; 68 FR 53430, Sept. 10, 2003]

                            PART 5 [RESERVED]



PART 7_CONTRACT MARKET RULES ALTERED OR SUPPLEMENTED BY THE COMMISSION--Table of Contents




                      Subpart A_General Provisions

Sec.
7.1 Scope of rules.

Subpart B [Reserved]

7.100-7.101 [Reserved]

          Subpart C_Board of Trade of the City of Chicago Rules

7.200 [Reserved]
7.201 Regulation 620.01(B).

    Authority: 7 U.S.C. 7a(a)(12)(A) and 12a(7).

    Source: 45 FR 51526, Aug. 1, 1980, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 7.1  Scope of rules.

    This part sets forth contract market rules altered or supplemented 
by the Commission pursuant to section 8a(7) of the Act.

Subpart B [Reserved]



Sec. Sec. 7.100-7.101  [Reserved]



          Subpart C_Board of Trade of the City of Chicago Rules



Sec. 7.200  [Reserved]



Sec. 7.201  Regulation 620.01(B).

    Customers' claims and grievances. The Arbitration Committee and 
Mixed Panels constituted pursuant to Regulation 620.02 have jurisdiction 
to arbitrate all customers' claims and grievances against any member or 
employee thereof which have arisen prior to the date the customer's 
claim is asserted. If the customer elects to initiate an arbitration 
proceeding of any customer claim or grievance, the member shall submit 
to arbitration in accordance with these Arbitration Rules and 
Regulations. The Arbitration shall be initiated by delivery to the 
Administrator of (a) a Statement of Claim and a ``Chicago Board of Trade 
Arbitration Submission Agreement for Customer's Claims and Grievances'' 
signed by the customer or (b) a Statement of Claim and another 
arbitration agreement between the parties, which agreement conforms in 
all respects with any applicable requirements prescribed by the 
Commodity Futures Trading Commission. The refusal of any member or 
employee to sign the ``Chicago Board of Trade Arbitration Submission 
Agreement for Customer's Claims and Grievances'' shall not deprive the 
Arbitration Committee or a Mixed Panel constituted pursuant to 
Regulation 620.02 of jurisdiction to arbitrate customers' claims under 
these Arbitration Rules and Regulations. The Committee and Mixed Panels 
have jurisdiction to arbitrate a counterclaim asserted in such an 
arbitration, but only if it arises out of the transaction or occurrence 
that is the subject of the customer's claim or grievance and does not 
require for adjudication the presence of essential witnesses, parties or 
third persons over whom the Association does not have jurisdiction. 
Other counterclaims are subject to arbitration by the Committee, or a 
Mixed Panel, only if the customer agrees to the submission after the 
counterclaim has arisen.

[49 FR 10660, Mar. 22, 1984]



PART 8_EXCHANGE PROCEDURES FOR DISCIPLINARY, SUMMARY, AND MEMBERSHIP 
DENIAL ACTIONS--Table of Contents




                      Subpart A_General Provisions

Sec.
8.01 Scope of rules.
8.02 Implementing exchange rules.
8.03 Definitions.

                    Subpart B_Disciplinary Procedure

8.05 Enforcement staff.
8.06 Investigations.
8.07 Investigation reports.
8.08 Disciplinary committee.
8.09 Review of investigation report.
8.10 Predetermined penalties.
8.11 Notice of charges.
8.12 Right to representation.

[[Page 209]]

8.13 Answer to charges.
8.14 Admission or failure to deny charges.
8.15 Denial of charges and right to hearing.
8.16 Settlement offers.
8.17 Hearing.
8.18 Decision.
8.19 Appeal.
8.20 Final decision.

                        Subpart C_Summary Actions

8.25 Member responsibility actions.
8.26 Procedure for member responsibility actions.
8.27 Violations of rules regarding decorum, submission of records or 
          other similar activities.
8.28 Final decision.

    Authority: 7 U.S.C. 6c, 7a, 12a and 12c, unless otherwise noted.

    Source: 43 FR 41950, Sept. 19, 1978, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 8.01  Scope of rules.

    This part sets forth the standards to be followed by an exchange in 
establishing procedures for investigating and adjudicating possible rule 
violations within the disciplinary jurisdiction of the exchange, for 
taking summary action in member responsibility cases and in cases 
involving violations of rules regarding decorum, submission of records 
or other similar activities, and for adjudicating membership denial 
determinations. Nothing in this part shall be construed to prohibit an 
exchange from adopting additional rules and practices not inconsistent 
with those set forth herein.



Sec. 8.02  Implementing exchange rules.

    (a) Each exchange shall submit to the Commission for its approval 
rules implementing the following regulations: Sec. Sec. 8.11, 8.13, 
8.15, 8.17, 8.18 and 8.20 of subpart B and Sec. Sec. 8.26 and 8.28 of 
subpart C. Any such rule not previously submitted to the Commission 
shall not be put into effect prior to Commission approval.
    (b) An exchange may adopt rules implementing any or all of the 
following regulations: Sec. Sec. 8.10, 8.16 and 8.19 of subpart B and 
Sec. 8.27 of subpart C. Each rule so adopted and not previously 
submitted to the Commission shall be submitted to the Commission for its 
approval and shall not be put into effect prior to Commission approval.



Sec. 8.03  Definitions.

    For purposes of this part:
    (a) Board of appeals means that body provided for in Sec. 8.19.
    (b) Charge or charges means any charge or charges contained in the 
notice of charges.
    (c) Disciplinary committee means that body or bodies provided for in 
Sec. 8.08.
    (d) Disciplinary procedure means the rules of an exchange governing 
the investigation and adjudication of possible rule violations and the 
imposition of appropriate penalties under subpart B of this part.
    (e) Enforcement staff means that body provided for in Sec. 8.05.
    (f) Exchange means any board of trade which has been designated as a 
contract market for one or more commodities pursuant to section 5 of the 
Act or to trade commodity options pursuant to part 33 of this chapter.
    (g) Investigation report means the report required by Sec. 8.07.
    (h) Notice of charges means the notice required by Sec. 8.11.
    (i) Penalty means any restriction, limitation, censure, fine, 
expulsion, suspension, revocation, reprimand, cease and desist order, 
sanction or any other disciplinary action for any amount or of any 
definite or indefinite period imposed upon any person within the 
disciplinary jurisdiction of an exchange upon a finding by the 
disciplinary committee that a violation has been committed or pursuant 
to the terms of a settlement agreement.
    (j) Person(s) within the jurisdiction of an exchange means any 
exchange employee, staff member or official, any member or person with 
membership privileges or any person employed by or affiliated with a 
member or person with membership privileges, including any agent or 
associated person, and any other person under the supervision or control 
of the exchange or of any member.
    (k) Record of the proceeding means all testimony, exhibits, papers 
and records produced at or filed in a disciplinary or summary proceeding 
or served on a respondent or an exchange.

[[Page 210]]

    (l) Respondent means any person named in a notice of charges who has 
been served with such notice or who is the subject of a summary action.
    (m) Rule(s) of an exchange means any constitutional provision, 
article of incorporation, bylaw, rule, regulation, resolution, 
interpretation, stated policy or instrument corresponding thereto.
    (n) Violation means any violation within the disciplinary 
jurisdiction of the exchange.

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 54525, Nov. 3, 1981]



                    Subpart B_Disciplinary Procedure



Sec. 8.05  Enforcement staff.

    (a) Each exchange shall establish an adequate enforcement staff 
which shall be authorized by the exchange to initiate and conduct 
investigations, to prepare reports incident to such investigations and 
to prosecute possible rule violations within the disciplinary 
jurisdiction of the exchange. The enforcement staff shall consist of 
employees of the exchange and/or persons hired on a contract basis. It 
may not include either members of the exchange or persons whose 
interests conflict with enforcement duties. When carrying out any 
responsibility under this part 8 or any rule adopted pursuant thereto, a 
member of the enforcement staff may not operate under the direction or 
control of any person or persons with trading privileges.
    (b) Each exchange is responsible for assuring the effective and 
diligent enforcement of all rules within its disciplinary jurisdiction, 
regardless of whether its enforcement staff consists of employees or 
persons hired on a contract basis.



Sec. 8.06  Investigations.

    (a) Each exchange shall establish and maintain a disciplinary 
procedure which requires the enforcement staff of the exchange to 
conduct investigations of possible rule violations within the 
disciplinary jurisdiction of the exchange. Such an investigation shall 
be commenced:
    (1) Upon the receipt of a request from the Commission, its Executive 
Director or his delegee, or
    (2) Upon the discovery or receipt of information by the exchange 
which, in the judgment of the enforcement staff, indicates a possible 
basis for finding that a violation has occurred or will occur.
    (b) Each enforcement staff investigation shall be completed within 
four months, unless there exists significant reason to extend it beyond 
such period. If for any reason the enforcement staff closes an 
investigation before determining whether a reasonable basis exists for 
finding that a violation has occurred, the staff shall fully set forth 
the reasons for so closing the investigation in its report.



Sec. 8.07  Investigation reports.

    (a) The enforcement staff shall submit a written investigation 
report to the disciplinary committee of the exchange in every instance 
in which the enforcement staff has determined from surveillance or from 
an investigation that a reasonable basis exists for finding a violation. 
The investigation report shall include the reason the investigation was 
initiated, a summary of the complaint, if any, the relevant facts, the 
enforcement staff's conclusions and a recommendation as to whether the 
disciplinary committee should proceed with the matter.
    (b) If after conducting an investigation the enforcement staff has 
determined that no reasonable basis exists for finding a violation, it 
shall prepare a written report including the reason the investigation 
was initiated, a summary of the complaint, if any, the relevant facts, 
the enforcement staff's conclusions and, if applicable, any 
recommendation that the disciplinary committee issue a warning letter in 
accordance with paragraph (c) of this section. The report shall become 
part of the investigation file which thereafter may be closed.
    (c) In addition to the action required to be taken under either 
paragraph (a) or (b) of this section, the rules of an exchange may 
authorize the enforcement

[[Page 211]]

staff to issue a warning letter to a person under investigation or to 
recommend that the disciplinary committee issue such a letter. A warning 
letter issued in accordance with this section is not a penalty or an 
indication that a finding of a violation has been made. A copy of such 
warning letter issued by the enforcement staff shall be included in the 
investigation report required by paragraph (a) or (b) of this section.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.08  Disciplinary committee.

    Each exchange shall establish one or more disciplinary committees 
which shall be authorized by the exchange to determine whether 
violations have been committed, to accept offers of settlement and to 
set and impose appropriate penalties. Each such disciplinary committee 
shall consist of one or more members of the exchange or persons on the 
staff of the exchange; however, persons on the enforcement staff may not 
serve on a disciplinary committee.



Sec. 8.09  Review of investigation report.

    The disciplinary committee shall promptly review each investigation 
report. In the event the disciplinary committee determines that 
additional investigation or evidence is needed, it shall promptly direct 
the enforcement staff to conduct its investigation further. Within a 
reasonable period of time not to exceed 30 days after the receipt of a 
completed investigation report, the disciplinary committee shall take 
one of the following actions:
    (a) If the disciplinary committee determines that no reasonable 
basis exists for finding a violation or that prosecution is otherwise 
unwarranted, it may direct that no further action be taken. Such 
determination must be in writing and contain a brief statement setting 
forth the reasons therefor.
    (b) If the disciplinary committee determines that a reasonable basis 
exists for finding a violation which should be adjudicated, it shall 
direct that the person alleged to have committed the violation be served 
with a notice of charges and shall proceed in accordance with the rules 
of this subpart.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.10  Predetermined penalties.

    An exchange may adopt rules which set specific maximum penalties for 
particular violations. If the rules of an exchange establish 
predetermined penalties, the disciplinary committee shall have 
discretion in each case whether to employ the predetermined penalty. If 
the predetermined penalty is employed, it shall be stated in the notice 
of charges. In such case, after a hearing on a denied charge where a 
respondent is found to have committed the violation charged, the 
disciplinary committee shall impose the predetermined penalty or an 
appropriate lesser penalty.



Sec. 8.11  Notice of charges.

    The notice of charges shall:
    (a) State the acts, practices, or conduct in which the person is 
alleged to have engaged;
    (b) State the rule alleged to have been violated (or about to be 
violated);
    (c) State the predetermined penalty, if any;
    (d) Prescribe the period within which a hearing on the charges may 
be requested;
    (e) Advise the person charged that:
    (1) He is entitled, upon request, to a hearing on the charges;
    (2) If the rules of the exchange so provide, failure to request a 
hearing within the period prescribed in the notice, except for good 
cause, shall be deemed a waiver of the right to a hearing; and
    (3) If the rules of the exchange so provide, failure in an answer to 
deny expressly a charge shall be deemed to be an admission of such 
charge.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.12  Right to representation.

    Upon being served with a notice of charges the respondent shall have 
the right to be represented by legal counsel

[[Page 212]]

or any other representative of his choosing in all succeeding stages of 
the disciplinary proceeding.



Sec. 8.13  Answer to charges.

    The respondent shall be given a reasonable period of time to file an 
answer to the charges. The rules of an exchange may provide that:
    (a) The answer must be in writing and include a statement that the 
respondent admits, denies or does not have and is unable to obtain 
sufficient information to admit or deny each allegation. A statement of 
a lack of sufficient information shall have the effect of a denial of an 
allegation.
    (b) Failure to file an answer on a timely basis shall be deemed an 
admission of all allegations contained in the notice of charges.
    (c) Failure in an answer to deny expressly a charge shall be deemed 
to be an admission of such charge.



Sec. 8.14  Admission or failure to deny charges.

    (a) The rules of an exchange may provide that if the respondent 
admits or fails to deny any of the charges the disciplinary committee 
may find that the rule violation alleged in the notice of charges for 
which the respondent admitted or failed to deny any of the charges has 
been committed. If the exchange rules so provide, then:
    (1) The disciplinary committee shall impose a penalty no greater 
than the predetermined penalty, if any, stated in the notice of charges 
for the corresponding violation found to have been committed.
    (2) If no predetermined penalty was stated, the disciplinary 
committee shall impose a penalty for each violation found to have been 
committed.
    (b) The disciplinary committee shall promptly notify the respondent 
in writing of any penalty to be imposed pursuant to paragraph (a) of 
this section and shall advise him that he may request a hearing on such 
penalty within a reasonable period of time, which shall be stated in the 
notice, but that except for good cause shown no hearing shall be 
permitted on a penalty imposed pursuant to subparagraph (a)(1) of this 
section.
    (c) The rules of an exchange may provide that if a respondent fails 
to request a hearing within the period of time stated in the notice he 
shall be deemed to have accepted the penalty.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.15  Denial of charges and right to hearing.

    In every instance where the respondent has requested a hearing on a 
charge which is denied, or on a penalty set by the disciplinary 
committee under Sec. 8.14(a)(2), he shall be given an opportunity for a 
hearing in accordance with the requirements of Sec. 8.17. The exchange 
rules may provide that, except for good cause, the hearing shall be 
concerned only with those charges denied and/or penalties set by the 
disciplinary committee under Sec. 8.14(a)(2) for which a hearing has 
been requested.



Sec. 8.16  Settlement offers.

    (a) The rules of an exchange may permit a respondent to submit a 
written offer of settlement to the disciplinary committee at any time 
after the investigation report is completed. The disciplinary committee 
may accept the offer of settlement, but may not alter its terms unless 
the respondent agrees.
    (b) The rules of an exchange may provide that the disciplinary 
committee, in its discretion, may permit the respondent to accept a 
penalty without either admitting or denying the rule violations upon 
which the penalty is based.
    (c) If an offer of setlement is accepted by the disciplinary 
committee, it shall issue a written decision specifying the rule 
violations it has reason to believe were committed and any penalty to be 
imposed. Where applicable, the decision shall also include a statement 
that the respondent has accepted the penalties imposed without either 
admitting or denying the rule violations.
    (d) The respondent may withdraw his offer of settlement at any time 
before final acceptance by the disciplinary committee. If an offer is 
withdrawn after submission, or is rejected by the disciplinary 
committee, the respondent

[[Page 213]]

shall not be deemed to have made any admissions by reason of the offer 
of settlement and shall not be otherwise prejudiced by having submitted 
the offer of settlement.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.17  Hearing.

    (a) The following minimum requirements shall apply to any hearing 
required by this subpart:
    (1) The hearing shall be fair and shall be conducted before members 
of the disciplinary committee. The hearing may be conducted before all 
of the members of the disciplinary committee or a panel thereof, but no 
member of the disciplinary committee may serve on the committee or panel 
if he or any person or firm with which he is affiliated has a financial, 
personal, or other direct interest in the matter under consideration.
    (2) The respondent shall be entitled in advance of the hearing to 
examine all books, documents, or other tangible evidence in the 
possession or under the control of the exchange which are to be relied 
upon by the enforcement staff in presenting the charges contained in the 
notice of charges or which are relevant to those charges.
    (3) The hearing shall be promptly convened after reasonable notice 
to the respondent.
    (4) The formal rules of evidence need not apply; nevertheless, the 
procedures for the hearing may not be so informal as to deny a fair 
hearing.
    (5) The enforcement staff shall be a party to the hearing and shall 
present its case on those charges and penalties which are the subject of 
the hearing.
    (6) The respondent shall be entitled to appear personally at the 
hearing.
    (7) The respondent shall be entitled to cross-examine any persons 
appearing as witnesses at the hearing.
    (8) The respondent shall be entitled to call witnesses and to 
present such evidence as may be relevant to the charges.
    (9) The exchange shall require persons within its jurisdiction who 
are called as witnesses to appear at the hearing and to produce 
evidence. It shall make reasonable efforts to secure the presence of all 
other persons called as witnesses whose testimony would be relevant.
    (10) If the respondent has requested a hearing, a substantially 
verbatim record of the hearing shall be made and shall become a part of 
the record of the proceeding. The record must be one that is capable of 
being accurately transcribed; however, it need not be transcribed unless 
the transcript is requested by Commission staff or the respondent, the 
decision is appealed under Sec. 8.19, or is reviewed by the Commission 
pursuant to section 8c of the Act or part 9 of this chapter. In all 
other instances a summary record of a hearing is permitted.
    (i) The rules of an exchange may provide that the cost of 
transcribing the record of the hearing shall be borne by a respondent 
who requests the transcript, appeals the decision pursuant to Sec. 
8.19, or whose application for Commission review of the disciplinary 
action has been granted under part 9 of this chapter. In all other 
instances, the cost of transcribing the record shall be borne by the 
exchange.
    (b) The rules of an exchange may provide that a penalty may be 
summarily imposed upon any person within its jurisdiction whose actions 
impede the progress of a hearing.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.18  Decision.

    Promptly following a hearing conducted in accordance with Sec. 
8.17, the disciplinary committee shall render a written decision based 
upon the weight of the evidence contained in the record of the 
proceeding and shall provide a copy to the respondent. The decision 
shall include:
    (a) The notice of charges or a summary of the charges;
    (b) The answer, if any, or a summary of the answer;
    (c) A brief summary of the evidence produced at the hearing or, 
where appropriate, incorporation by reference of the investigation 
report;
    (d) A statement of findings and conclusions with respect to each 
charge,

[[Page 214]]

including the specific rules which the respondent is found to have 
violated; and
    (e) A declaration of any penalty imposed and the effective date of 
such penalty.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.19  Appeal.

    The rules of an exchange may permit a respondent to appeal promptly 
an adverse decision of a disciplinary committee in all or in certain 
classes of cases. Such rules may require a respondent's notice of appeal 
to be in writing and to specify the findings, conclusions, and/or 
penalty to which objection is taken. If the rules of an exchange permit 
appeal, they shall provide for the following:
    (a) The exchange shall establish a board of appeals which shall be 
authorized to hear appeals of respondents. In addition, the rules of an 
exchange may provide that the board of appeals may, on its own 
initiative, order review of a decision by the disciplinary committee 
within a reasonable period of time after the decision has been rendered.
    (b) No member of the board of appeals shall serve on an appeal or 
review panel if such member participated in any prior stage of the 
disciplinary proceeding or if he or any person or firm with which he is 
affiliated has a financial, personal, or other direct interest in the 
matter. The rules of an exchange may provide that the appeal or review 
proceeding may be conducted before all of the members of the board of 
appeals or a panel thereof. Except for good cause shown, the appeal or 
review shall be conducted solely on the record before the disciplinary 
committee, the written exceptions filed by the parties, and the oral or 
written arguments of the parties.
    (c) Promptly following the appeal or review proceeding, the board of 
appeals shall issue a written decision and shall provide a copy to the 
respondent. The decision shall include a statement of findings and 
conclusions with respect to each charge or penalty reviewed, including 
the specific rules which the respondent was found to have violated by 
the disciplinary committee, and a declaration of any penalty imposed and 
the effective date of such penalty.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.20  Final decision.

    Each exchange shall establish rules setting forth when a decision 
rendered pursuant to this subpart B shall become the final decision of 
such exchange.



                        Subpart C_Summary Actions



Sec. 8.25  Member responsibility actions.

    An exchange may suspend at any time, or take other summary action 
against, a person subject to its jurisdiction upon a reasonable belief 
that such immediate action is necessary to protect the best interest of 
the marketplace.



Sec. 8.26  Procedure for member responsibility actions.

    An action pursuant to Sec. 8.25 shall be taken in accordance with 
an exchange procedure which provides for the following:
    (a) The respondent shall, whenever practicable, be served with a 
notice before the action is taken. If prior notice is not practicable, 
the respondent shall be served with a notice at the earliest possible 
opportunity. The notice shall:
    (1) State the action,
    (2) Briefly state the reasons for the action, and
    (3) State the effective time and date and the duration of the 
action.
    (b) The respondent shall have the right to be represented by legal 
counsel or any other representative of his choosing in all proceedings 
subsequent to the summary action taken pursuant to Sec. 8.25.
    (c) The respondent shall promptly be given opportunity for a 
subsequent hearing. The hearing shall be fair and shall be held before 
one or more persons authorized by the exchange to conduct hearings 
pursuant to this section. The hearing shall be conducted in accordance 
with the requirements set forth in Sec. Sec. 8.17(a)(4)-(9) and (b).

[[Page 215]]

    (d) Promptly following the hearing provided for in paragraph (c) of 
this section, the exchange shall render a written decision based upon 
the weight of the evidence contained in the record of the proceeding and 
shall provide a copy to the respondent. The decision shall include:
    (1) A description of the summary action taken,
    (2) The reasons for the summary action,
    (3) A brief summary of the evidence produced at the hearing,
    (4) Findings and conclusions,
    (5) A determination that the summary action should be affirmed, 
modified or reversed, and
    (6) A declaration of any action to be taken pursuant to the 
determination specified in paragraph (d)(5) of this section and the 
effective date and duration of such action.
    (e) The rules of an exchange may permit the respondent to appeal 
promptly an adverse decision. Such rules shall be established in 
accordance with the requirements set forth in Sec. 8.19.

(Approved by the Office of Management and Budget under control number 
3038-0022)

[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]



Sec. 8.27  Violations of rules regarding decorum, submission of records 
or other similar activities.

    An exchange may adopt rules which permit the enforcement staff or a 
designated committee of officials to summarily impose minor penalties 
against persons within its jurisdiction for violating rules regarding 
decorum, attire, the timely submission of accurate records required for 
clearing or verifying each day's transactions or other similar 
activities.



Sec. 8.28  Final decision.

    Each exchange shall establish rules setting forth when a decision 
rendered pursuant to this subpart C shall become the final decision of 
such exchange.



PART 9_RULES RELATING TO REVIEW OF EXCHANGE DISCIPLINARY, ACCESS DENIAL 
OR OTHER ADVERSE ACTIONS--Table of Contents




                      Subpart A_General Provisions

Sec.
9.1 Scope of rules.
9.2 Definitions.
9.3 Provisions referenced.
9.4 Filing and service; official docket.
9.5 Motions.
9.6 Sanctions for noncompliance.
9.7 Settlement.
9.8 Practice before the Commission.
9.9 Waiver of rules; delegation of authority.

  Subpart B_Notice and Effective Date of Disciplinary Action or Access 
                              Denial Action

9.10 [Reserved]
9.11 Form, contents and delivery of notice of disciplinary or access 
          denial action.
9.12 Effective date of disciplinary or access denial action.
9.13 Publication of notice.
9.14-9.19 [Reserved]

           Subpart C_Initial Procedure With Respect to Appeals

9.20 Notice of appeal.
9.21 Record of exchange proceeding.
9.22 Appeal brief.
9.23 Answering brief.
9.24 Petition for stay pending review.
9.25 Limited participation of interested persons.
9.26 Participation of Commission staff.
9.27-9.29 [Reserved]

  Subpart D_Commission Review of Disciplinary, Access Denial or Other 
                             Adverse Action

9.30 Scope of review.
9.31 Commission review of disciplinary or access denial action on its 
          own motion.
9.32 Oral argument.
9.33 Final decision by the Commission.

    Authority: 7 U.S.C. 4a, 6c, 7a, 12a, 12c, 16a, unless otherwise 
noted.

    Source: 52 FR 25366, July 7, 1987, unless otherwise noted.

[[Page 216]]



                      Subpart A_General Provisions



Sec. 9.1  Scope of rules.

    (a) Matters included. This part governs the review by the 
Commission, pursuant to section 8c of the Act, as amended, of any 
suspension, expulsion, disciplinary or access denial action, or other 
adverse action by an exchange.
    (b) Matters excluded. This part does not apply to and the Commission 
will not accept notices of appeal, or petitions for stay pending review, 
of:
    (1) Any arbitration proceeding, regardless of whether the proceeding 
was conducted pursuant to the provisions of section 5a(a)(11) of the Act 
or involved a controversy between members of an exchange;
    (2) Except as provided in Sec. Sec. 9.11(a), 9.11(b)(1)-(5), 
9.11(c), 9.12(a) and 9.13 (concerning the notice, effective date and 
publication of a disciplinary or access denial action), any summary 
action authorized under the provisions of Sec. 8.27 of this chapter 
imposing a minor penalty for the violation of exchange rules relating to 
decorum or attire, or relating to the timely submission of accurate 
records required for clearing or verifying each day's transactions or 
other similar activities; and
    (3) Any exchange action arising from a claim, grievance, or dispute 
involving cash market transactions which are not a part of, or directly 
connected with, any transaction for the purchase, sale, delivery or 
exercise of a commodity for future delivery or a commodity option.

The Commission will, upon its own motion or upon motion filed pursuant 
to Sec. 9.21(b), promptly notify the appellant and the exchange that it 
will not accept the notice of appeal or petition for stay of matters 
specified in this paragraph. The determination to decline to accept a 
notice of appeal will be without prejudice to the appellant's right to 
seek alternate forms of relief that may be available in any other forum.
    (c) Applicability of these part 9 rules. Unless otherwise ordered, 
these rules will apply in their entirety to all appeals, and matters 
relating thereto filed on or after August 6, 1987. Any part 9 proceeding 
pending before the Commission on August 6, 1987, will continue to be 
governed by the Commission's former part 9 rules, 17 CFR part 9 (1987), 
except that the parties to any part 9 proceeding pending on August 6, 
1987, may, within 30 days after August 6, 1987, by written stipulation 
executed by all parties, and filed with the Proceedings Clerk before the 
Commission's final decision is rendered, elect to have the matter 
governed by the provisions of this part 9, as amended.

[52 FR 25366, July 7, 1987, as amended at 59 FR 5701, Feb. 8, 1994]



Sec. 9.2  Definitions.

    For purposes of this part:
    (a) Access denial action means any proceeding other than a 
disciplinary action by an exchange that denies or limits the privileges 
of membership, but excludes any exchange action that solely limits the 
ability of a member of an exchange to participate in the internal 
corporate affairs of the exchange.
    (b) Disciplinary action means any suspension, expulsion or other 
penalty (as defined in Sec. 8.03(i) of this chapter) imposed on a 
member of an exchange by that exchange for violations of rules of the 
exchange, including summary actions.
    (c) Exchange means any board of trade which has been designated as a 
contract market.
    (d) Exchange proceeding means any formal or informal proceeding by 
an exchange which results in a disciplinary action, access denial action 
or other adverse action.
    (e) Mail means properly addressed and postpaid first class mail, and 
includes overnight delivery service.
    (f) Member of an exchange means any person who is admitted to 
membership or has been granted membership privileges on an exchange, any 
employee, officer, partner, director or affiliate of such member or 
person with membership privileges including any associated person, and 
any other person under the supervision or control of such member or 
person with membership privileges.
    (g) Other adverse action and adverse action include any exchange 
action, other than an access denial action or disciplinary action, that 
adversely affects any person, whether or not a member of the exchange, 
but exclude

[[Page 217]]

any exchange action that solely involves the internal corporate affairs 
of the exchange.
    (h) Party includes the person filing a notice of appeal or petition 
for stay who has been the subject of a disciplinary, access denial or 
other adverse action by an exchange; that exchange; any person 
participating in a proceeding under this part pursuant to Sec. 9.25; 
and the Division of Market Oversight and/or the Division of Clearing and 
Intermediary Oversight when participating in a proceeding under this 
part pursuant to Sec. 9.26.
    (i) Record of the exchange proceeding means all testimony, exhibits, 
papers and records produced at or filed in an exchange disciplinary or 
access denial proceeding or served on a party to that proceeding; all 
documents, minutes or other exchange records serving as a basis for or 
reflecting the findings, rationale and conclusions concerning the 
adverse action taken by an exchange; a transcript of any proceeding 
before any body of the exchange in connection with the exchange 
proceeding; and a copy of all exchange rules which form the basis for 
the exchange proceeding.
    (j) Rules of the exchange means any constitutional provision, 
article of incorporation, bylaw, rule, regulation, resolution, or 
written and publicly available interpretation or stated policy of the 
exchange, or instrument corresponding thereto.
    (k) Summary action means a disciplinary action resulting in the 
imposition of a penalty on a member of an exchange for violation of 
rules of the exchange authorized under the provisions of Sec. 8.17(b) 
(penalty for impeding progress of hearing), Sec. 8.25 (member 
responsibility action) or Sec. 8.27 (penalty for violation of rules 
relating to decorum, attire, submission of records or similar 
activities) of this chapter.

[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987, as amended at 67 
FR 62352, Oct. 7, 2002]



Sec. 9.3  Provisions referenced.

    Except as otherwise provided in this part, the following provisions 
of the Commission's rules relating to reparations contained in part 12 
of this chapter apply to this part: Sec. 12.3 (Business address; 
hours); Sec. 12.5 (Computation of time); Sec. 12.6 (Extensions of 
time; adjournments; postponements); Sec. 12.7 (Ex parte 
communications); and Sec. 12.12 (Signature).



Sec. 9.4  Filing and service; official docket.

    (a) Filing with the Proceedings Clerk; proof of filing; proof of 
service. Any document that is required by this part to be filed with the 
Proceedings Clerk must be filed by delivering it in person or by mail 
to: Proceedings Clerk, Office of Proceedings, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. To be timely filed under this part, a document must be 
delivered or mailed to the Proceedings Clerk within the time prescribed 
for filing. A party must use a means of filing which is at least as 
expeditious as that used in serving that document upon the other 
parties. Proof of filing must be made by attaching to the document for 
filing an affidavit of filing executed by any person 18 years of age or 
older or a proof of filing executed by an attorney-at-law qualified to 
practice before the Commission. The proof of filing must certify that 
the attached document was deposited in the mail, with first-class 
postage prepaid, addressed to the Proceedings Clerk, Office of 
Proceedings, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581, on the date specified in the affidavit. Proof of service of a 
document must be made by filing with the Proceedings Clerk, 
simultaneously with the filing of the required document, an affidavit of 
service executed by any person 18 years of age or older or a 
certification of service executed by an attorney-at-law qualified to 
practice before the Commission. The proof of service must identify the 
persons served, state that service has been made, set forth the date of 
service, and recite the manner of service.
    (b) Formalities of filing--(1) Number of copies. Unless otherwise 
specifically provided, an original and two conformed copies of all 
documents filed with the Commission in accordance with the provisions of 
this part must be filed with the Proceedings Clerk.
    (2) Title page. All documents filed with the Proceedings Clerk must 
include at the head thereof, or on a title page, the name of the 
Commission, the

[[Page 218]]

title of the proceeding, the docket number (if one has been assigned by 
the Proceedings Clerk), the subject of the particular document and the 
name of the person on whose behalf the document is being filed.
    (3) Paper, spacing, type. All documents filed with the Proceedings 
Clerk must be typewritten, must be on one grade of good white paper no 
less than 8 or more than 8\1/2\ inches wide and no less than 10\1/2\ or 
more than 11\1/2\ inches long, and must be bound on the top only. They 
must be double-spaced, except for long quotations (3 or more lines) and 
footnotes which should be single-spaced.
    (4) Signature. The original copy of all papers must be signed in ink 
by the person filing the same or by his duly authorized agent or 
attorney.
    (c) Service--(1) General requirements. All documents filed with the 
Proceedings Clerk must, at or before the time of filing, be served upon 
all parties. A party must use a means of service which is at least as 
expeditious as that used in filing that document with the Proceedings 
Clerk. One copy of all motions, petitions or applications made in the 
course of the proceeding, all notices of appeal, all briefs, and letters 
to the Commission or an employee thereof must be served by a party upon 
all other parties.
    (2) Manner of service. Service may be either personal or by mail. 
Service by mail is complete upon deposit of the document in the mail. 
Where service is effected by mail, the time within which the person 
served may respond thereto will be increased by three days.
    (3) Designation of person to receive service. The first document 
filed in a proceeding by or on behalf of any party must state on the 
first page the name and postal address of the person who is authorized 
to receive service for the party of all documents filed in the 
proceeding. Thereafter, service of documents must be made upon the 
person authorized unless service on a different authorized person or on 
the party himself is ordered by the Commission, or unless pursuant to 
Sec. 9.8 the person authorized is changed by the party upon due notice 
to all other parties. Parties must file and serve notification of any 
changes in the information provided pursuant to this subparagraph as 
soon as practicable after the change occurs.
    (4) Service of orders and decisions. A copy of all notices, rulings, 
opinions and orders of the Commission will be served on each of the 
parties and will be deemed served upon deposit in the mail.
    (d) Official docket. Upon receipt of a notice of appeal filed in 
accordance with Sec. 9.20, or a petition for stay pending review filed 
in accordance with Sec. 9.24, the Proceedings Clerk will establish and 
thereafter maintain the official docket of that proceeding and will 
assign a docket number to the proceeding.

[52 FR 25366, July 7, 1987, as amended at 60 FR 49334, Sept. 25, 1995]



Sec. 9.5  Motions.

    (a) In general. An application for a form of relief not otherwise 
specifically provided for in this part must be made by a written motion, 
filed with the Proceedings Clerk. The motion must state the relief 
sought and the basis for the relief and may set forth the authority 
relied upon.
    (b) Answer to motions. Any party may serve and file a written 
response to a motion within ten days after service of the motion, or 
within such longer or shorter period as established by these rules, or 
as the Commission may direct.
    (c) Motions for procedural orders. Motions for procedural orders, 
including motions for extensions of time, may be acted on at any time, 
without awaiting a response thereto. Any party adversely affected by 
such action may request reconsideration, vacation or modification of the 
action.
    (d) Dilatory motions. Frivolous or repetitive motions dealing with 
the same subject matter will not be permitted and such motions will 
summarily be denied.



Sec. 9.6  Sanctions for noncompliance.

    In the event that any party fails to file any document or make any 
appearance which is required under this part, the Commission may, in its 
discretion, and upon its own motion or upon the motion of any party to 
the proceeding, dismiss the proceeding before it, or, based on the 
record before it, affirm,

[[Page 219]]

modify, set aside, or remand for further proceedings, in whole or in 
part, the decision of the exchange.



Sec. 9.7  Settlement.

    At any time before there has been a final determination by the 
Commission with respect to any notice of appeal filed in accordance with 
Sec. 9.20, the parties may file a stipulation for dismissal based on a 
settlement agreement. Thereupon, the Commission may issue an order 
terminating the proceeding before the Commission as to the parties to 
the settlement agreement. The entry of such an order does not affect the 
Commission's authority under the Act.



Sec. 9.8  Practice before the Commission.

    (a) Practice--(1) By non-attorneys. An individual may appear pro se 
(on his own behalf); a general partner may represent the partnership; a 
bona fide officer of a corporation, trust or association may represent 
the corporation, trust or association.
    (2) By attorneys. An attorney-at-law who is admitted to practice 
before the highest Court in any State or territory, or of the District 
of Columbia, who has not been suspended or disbarred from appearance and 
practice before the Commission in accordance with provisions of part 14 
of this chapter may represent parties as an attorney in proceedings 
before the Commission.
    (b) Debarment of counsel or representative during the course of a 
proceeding. Whenever, while a proceeding is pending before the 
Commission, the Commission finds that a person acting as counsel or 
representative for any party to the proceeding is guilty of contemptuous 
conduct, the Commission may order that such person be precluded from 
further acting as counsel or representative in the proceeding. The 
proceeding will not be delayed or suspended pending disposition of the 
appeal; Provided, That the Commission may suspend the proceedings for a 
reasonable time for the purpose of enabling the party to obtain other 
counsel or representative.
    (c) Withdrawal of representation. Withdrawal from representation of 
a party will be only by leave of the Commission. Such leave to withdraw 
may be conditioned on the attorney's (or representative's) submission of 
an affidavit averring that the party represented has actual knowledge of 
the withdrawal, and such affidavit must include the name and address of 
a successor counsel (or representative) or a statement that the 
represented party has determined to proceed pro se, in which case, the 
statement must include the address where that party can thereafter be 
served.



Sec. 9.9  Waiver of rules; delegation of authority.

    (a) Standards for waiver; notice to parties. To prevent undue 
hardship on any party or for other good cause shown the Commission may 
waive any rule in this part in a particular case and may order 
proceedings in accordance with its direction upon a determination that 
no party will be prejudiced thereby and that the ends of justice will be 
served. Reasonable notice will be given to all parties of any action 
taken pursuant to this paragraph.
    (b) Delegation of authority. (1) The Commission hereby delegates, 
until the Commission orders otherwise, to the General Counsel, or the 
General Counsel's designee, the authority:
    (i) To waive or modify any of the requirements of Sec. Sec. 9.20--
9.25 and to waive or modify the requirements of the Commission's rules 
relating to reparations incorporated by Sec. 9.3 insofar as such 
requirements pertain to changes in time permitted for filing, and to the 
form, execution, service and filing of documents;
    (ii) To enter orders under Sec. Sec. 9.5, 9.6 and 9.7;
    (iii) To decline to accept any notice of appeal, or petition for 
stay pending review, of matters excluded from this part by Sec. Sec. 
9.1(b), 9.2(a) and 9.2(b), and to so notify the appellant and the 
exchange;
    (iv) To stay the effective date of a disciplinary action for a 
period of time, not to exceed four days, to enable the Commission to 
rule on a petition for stay filed under Sec. 9.24;
    (v) To decline to accept any document which has not been timely 
filed or perfected, as specified in these rules;

[[Page 220]]

    (vi) To order the filing of the record of the exchange proceeding 
notwithstanding the submission of a motion under Sec. 9.21(b) that the 
Commission not accept a notice of appeal; and
    (vii) To enter any order which will facilitate or expedite 
Commission review.
    (2) Within seven days after service of a ruling issued pursuant to 
paragraph (b)(1) of this section, a party may file with the Proceedings 
Clerk a petition for Commission reconsideration of the ruling. Unless 
the Commission orders otherwise, the filing of a petition for 
reconsideration will not operate to stay the effective date of such 
ruling.
    (3) The General Counsel or the General Counsel's designee may submit 
to the Commission for its consideration any matter which has been 
delegated pursuant to paragraph (b)(1) of this section.
    (4) Nothing in this section will be deemed to prohibit the 
Commission, at its election, from exercising the authority delegated to 
the General Counsel under this section.

[52 FR 25366, July 7, 1987, as amended at 60 FR 54801, Oct. 26, 1995; 64 
FR 46270, Aug. 25, 1999]



  Subpart B_Notice and Effective Date of Disciplinary Action or Access 
                              Denial Action



Sec. 9.10  [Reserved]



Sec. 9.11  Form, contents and delivery of notice of disciplinary or 
access denial action.

    (a) When required. Whenever an exchange decision pursuant to which a 
disciplinary action or access denial action is to be imposed has become 
final, the exchange must, within thirty days thereafter, provide written 
notice of such action to the person against whom the action was taken 
and to the Commission: Provided, That the exchange is not required to 
notify the Commission of any summary action, as authorized under the 
provisions of Sec. 8.27 of this chapter, which results in the 
imposition of minor penalties for the violation of exchange rules 
relating to decorum or attire. No final disciplinary or access denial 
action may be made effective by the exchange except as provided in Sec. 
9.12.
    (b) Contents of notice. For purposes of this part, the written 
notice of a disciplinary action or access denial action may be either a 
copy of a written decision which accords with Sec. 8.16, Sec. 8.18, or 
Sec. 8.19(c) of this chapter (including copies of any materials 
incorporated by reference) or other written notice which must include:
    (1) The name of the person against whom the disciplinary action or 
access denial action was taken;
    (2) A statement of the reasons for the disciplinary action or access 
denial action together with a listing of any rules which the person who 
was the subject of the disciplinary action or access denial action was 
charged with having violated or which otherwise serve as the basis of 
the exchange action;
    (3) A statement of the conclusions and findings made by the exchange 
with regard to each rule violation charged or, in the event of 
settlement, a statement specifying those rule violations which the 
exchange has reason to believe were committed;
    (4) The terms of the disciplinary action or access denial action;
    (5) The date on which the action was taken and the date the exchange 
intends to make the disciplinary or access denial action effective; and
    (6) Except as otherwise provided in Sec. 9.1(b), a statement 
informing the party subject to the disciplinary action or access denial 
action of the availability of Commission review of the exchange action 
pursuant to section 8c of the Act and this part.
    (c) Delivery and filing of the notice. Delivery of the notice must 
be made either personally to the person who was the subject of the 
disciplinary action or access denial action or by mail to such person at 
that person's last known address. A copy of the notice must be filed on 
the same date with the Commission, either in person during normal 
business hours or by mail to: Division of Market Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581. The notice filed with the Commission must 
additionally include the date on which

[[Page 221]]

the notice was delivered to the person disciplined or denied access and 
state whether delivery was personal or by mail.
    (d) Effect of delivery and filing by mail. Filing by mail to the 
Commission and delivery by mail to the person disciplined or denied 
access will be complete upon deposit in the mail of a properly addressed 
and postpaid document. Where delivery to the person disciplined or 
denied access is effected by such mail, the time within which a notice 
of appeal or petition for stay may be filed will be increased by three 
days.
    (e) Certification. Copies of the notice and the submission of any 
additional information provided pursuant to this section must be 
certified as true and correct by a duly authorized officer, agent or 
employee of the exchange.

[52 FR 25366, July 7, 1987, as amended at 60 FR 49334, Sept. 25, 1995; 
67 FR 62352, Oct. 7, 2002]



Sec. 9.12  Effective date of disciplinary or access denial action.

    (a) Effective date. Any disciplinary or access denial action taken 
by an exchange will not become effective until at least fifteen days 
after the written notice prescribed by Sec. 9.11 is delivered to the 
person disciplined or denied access; Provided, however, That the 
exchange may cause a disciplinary action to become effective prior to 
that time if:
    (1) As authorized by Sec. 8.25 of this chapter, the exchange 
reasonably believes, and so states in its written decision, that 
immediate action is necessary to protect the best interests of the 
marketplace; or
    (2) As authorized by Sec. 8.17(b) of this chapter, the exchange 
determines, and so states in its written decision, that the actions of a 
person who is within the exchange's jurisdiction have impeded the 
progress of a disciplinary hearing; or
    (3) As authorized by Sec. 8.27 of this chapter, the exchange 
determines that a person has violated exchange rules relating to decorum 
or attire, or timely submission of accurate records required for 
clearing or verifying each day's transactions or other similar 
activities; or
    (4) The person against whom the action is taken has consented to the 
penalty to be imposed and to the timing of its effectiveness.
    (b) Notice of early effective date. If the exchange determines in 
accordance with paragraph (a)(1) of this section that a disciplinary 
action will become effective prior to the expiration of fifteen days 
after written notice thereof, it must notify the person disciplined in 
writing, either personally or by telegram or other means of written 
telecommunication to the person's last known address, stating the 
reasons for the determination. The exchange must also by telegram or 
other means of written telecommunication immediately notify the 
Commission (Attention: Contracts Markets Section, Division of Market 
Oversight). Where notice is delivered by telegram or other means of 
written telecommunication, the time within which the person so notified 
may file a petition for stay pursuant to Sec. 9.24(a)(2) will be 
increased by one day.

[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987, as amended at 67 
FR 62352, Oct. 7, 2002]



Sec. 9.13  Publication of notice.

    Whenever an exchange suspends, expels or otherwise disciplines, or 
denies any person access to the exchange, it must make public its 
findings by disclosing at least the information contained in the notice 
required by Sec. 9.11(b). An exchange must make such findings public as 
soon as the disciplinary action or access denial action becomes 
effective in accordance with the provisions of Sec. 9.12 by posting a 
notice in a conspicuous place on its premises to which its members and 
the public regularly have access for a period of five consecutive 
business days. Thereafter, the exchange must maintain and make available 
for public inspection a record of the information contained in the 
disciplinary or access denial notice.

[[Page 222]]



Sec. Sec. 9.14-9.19  [Reserved]



           Subpart C_Initial Procedure With Respect to Appeals



Sec. 9.20  Notice of appeal.

    (a) Time to file. Except as provided in Sec. 9.1(b), any person who 
is the subject of disciplinary or access denial action by an exchange or 
any person who is otherwise adversely affected by any other action of an 
exchange may, at any time within thirty days after notice of the 
disciplinary or access denial action has been delivered to the person 
disciplined or denied access in accordance with Sec. 9.11, or within 
thirty days after notice of another adverse action, file a notice of 
appeal of such disciplinary, access denial or other adverse action. The 
Commission may dismiss any appeal for which a notice of appeal is not 
timely filed.
    (b) Contents. The notice of appeal need consist only of a brief 
statement indicating that the party is requesting Commission review of 
the exchange action, and must include:
    (1) The name and address of the appellant, and any duly authorized 
agent or officer of the appellant;
    (2) The name and docket number of the exchange proceeding;
    (3) The date on which the disciplinary, access denial or other 
adverse action was imposed by the exchange or the date on which the 
final exchange decision was rendered, and the dates upon which the 
exchange action has or will become final and effective;
    (4) A copy of the notice provided to the appellant by the exchange 
in accordance with the provisions of Sec. 9.11, in the case of a 
disciplinary or access denial action, or otherwise, in the case of any 
other adverse exchange action;
    (5) The relief sought from the action of the exchange;
    (6) The appellant's request for a copy of the record of the exchange 
proceeding, or portions of the record not in the appellant's possession, 
and a representation that the appellant agrees to pay the exchange 
reasonable fees, as provided in the rules of the exchange, for printing 
that copy; and
    (7) A nonrefundable filing fee of $100 remitted by check, bank draft 
or money order, payable to the Commodity Futures Trading Commission.

[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987]



Sec. 9.21  Record of exchange proceeding.

    (a) Filing of record. Within thirty days after service of the notice 
of appeal, the exchange must file two copies of the record of the 
exchange proceeding (as defined in Sec. 9.2(i)) with the Proceedings 
Clerk, and serve a copy on the appellant and any other party to the 
proceeding, provided that such person has agreed to pay the exchange 
reasonable fees, as provided in the rules of the exchange, for printing 
the copy. The record must be bound as a unit, must be chronologically 
indexed and tabbed, must be certified as correct by a duly authorized 
official, agent or employee of the exchange, and must contain a 
certificate of service on the appellant or any other party to the 
proceeding (or waiver of service for failure to pay costs pursuant to 
this rule).
    (b) Motion that the Commission not accept notice of appeal. Within 
fifteen days after service of the notice of appeal, the exchange may 
file a motion that the Commission not accept a notice of appeal of any 
matter that the exchange contends is excluded from this part by 
Sec. Sec. 9.1(b), 9.2(a) and 9.2(g). Such motion must be accompanied by 
an affidavit averring facts in support of the motion. The filing of such 
motion will operate to stay the filing of the record and subsequent 
submissions pending the Commission's ruling on such motion. The 
appellant may serve and file a written response to such motion within 
ten days after service of the motion.



Sec. 9.22  Appeal brief.

    (a) Time to file. Any person who has filed a notice of appeal in 
accordance with the provisions of Sec. 9.20 must perfect the appeal by 
filing an appeal brief with the Proceedings Clerk within thirty days 
after service of the record of the exchange proceeding. The Commission 
may dismiss any appeal for which an appeal brief is not timely filed.
    (b) Contents. Each appeal brief submitted to the Commission pursuant 
to this section must include, in the order indicated:

[[Page 223]]

    (1) A statement of the issues presented for review;
    (2) A statement of the case. The statement must first indicate 
briefly the nature of the case and include a full description of the 
disciplinary, access denial or other adverse action. There must follow a 
clear and concise statement of all facts relevant to the consideration 
of the appeal, including, if known, each alleged act or omission forming 
the basis of the exchange action, with appropriate references to the 
record of the exchange proceeding;
    (3) An argument. The argument may be preceded by a summary. The 
argument must contain the contentions of the appellant with respect to 
the issues presented, and the reasons therefor, and citations to 
relevant authorities and to parts of the record of the exchange 
proceeding; and
    (4) A conclusion stating the precise relief sought.
    (c) Length of appeal brief. Without prior leave of the Commission, 
the appeal brief may not exceed thirty-five pages, exclusive of any 
table of contents, table of cases, index and appendix containing 
transcripts of testimony, exhibits, statutes, rules, regulations or 
similar materials.



Sec. 9.23  Answering brief.

    (a) Time for filing answering brief. Within thirty days after 
service of the appeal brief, the exchange must file with the Commission 
an answering brief.
    (b) Contents of answering brief. The answering brief generally must 
follow the same style as prescribed for the appeal brief but may omit a 
statement of the issues or of the case if the exchange does not dispute 
the issues or the statement of the case contained in the appeal brief.
    (c) Length of answering brief. Without prior leave of the 
Commission, the answering brief may not exceed thirty-five pages, 
exclusive of any table of contents, table of cases, index and appendix 
containing transcripts of testimony, exhibits, statutes, rules, 
regulations or similar materials.



Sec. 9.24  Petition for stay pending review.

    (a) Time to file. (1) Within ten days after the notice of the 
disciplinary or access denial action has been delivered in accordance 
with Sec. 9.11 to a person disciplined or denied access, that person 
may petition the Commission to stay the disciplinary or access denial 
action pending consideration by the Commission of the notice of appeal 
and, if granted, the appeal underlying the notice of appeal. The 
petition for stay must be accompanied by the notice of appeal.
    (2) Within ten days after a notice of summary action has been 
delivered in accordance with Sec. 9.12(b) to a person who is the 
subject of a summary action authorized by Sec. 8.25 of this chapter, 
that person may petition the Commission to stay the effectiveness of the 
summary action pending completion of the exchange proceeding conducted 
as authorized by Sec. 8.26 of this chapter.
    (3) The Commission may deny any petition for stay which is not 
timely filed or which is not otherwise in accord with these rules.
    (b) Contents of petition for stay. A petition filed under this 
section must state the reasons that the stay is requested and the facts 
relied upon, as specified in Sec. 9.20. Averments of the petition must 
be supported by affidavits, other sworn statements or copies thereof, or 
a stipulation as to those facts which are not in dispute. Based upon the 
petition, the Commission, in its discretion, may order a stay of the 
disciplinary action or access denial action.
    (c) Response to petition. The exchange may serve and file a written 
response to any petition for a stay within five days after service of 
the petition.
    (d) Standards for granting petition for stay. The Commission will 
promptly determine whether to grant or deny a petition for stay and may 
act upon a petition at any time, without waiting for a response thereto. 
In determining whether to grant or deny the petition for stay, the 
Commission will consider, among other things, whether the petitioner has 
established:
    (1) Petitioner's likelihood of success on the merits; and
    (2) That denial of the stay would cause irreparable harm to the 
petitioner; and
    (3) That granting the stay would not endanger orderly trading or 
otherwise

[[Page 224]]

cause substantial harm to the exchange or market participants; and
    (4) That granting the stay would not be contrary to the Act, and the 
rules, regulations and orders of the Commission thereunder or otherwise 
contrary to the public interest.
    (e) Ex parte stays. The Commission may act upon a petition for stay, 
without waiting for the exchange's response thereto only where 
petitioner:
    (1) Expressly requests an ex parte stay;
    (2) Files a proof of service; and
    (3) Clearly establishes by affidavit that immediate and irreparable 
injury, loss or damage will result to the petitioner before the exchange 
can be heard in opposition.

Any order granting a stay prior to the filing of the exchange's reply 
will expire by its terms within such time after service of the 
Commission's ruling on the petition, not to exceed ten days, as the 
Commission fixes, unless within the time so fixed the order, for good 
cause shown, is extended for a like period or unless the exchange 
consents that it may be extended for a longer period. In any case, the 
exchange may move for dissolution or modification of the stay, and the 
Commission will proceed to determine such motion as expeditiously as the 
ends of justice require.

[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987]



Sec. 9.25  Limited participation of interested persons.

    On its own motion or upon motion of any person asserting a direct 
and substantial interest in the outcome of a proceeding conducted under 
this part, the Commission, in its discretion, may permit the limited 
participation by such interested person in the proceeding. A motion for 
leave to participate in the proceeding must identify the interest of 
that person and must state the reasons why participation in the 
proceeding by that person is desirable, and must state whether that 
person requests a copy of the record of the exchange proceeding to the 
extent permitted by section 8c(a)(2) of the Act and that such person 
agrees to pay the exchange reasonable fees, as provided in the rules of 
the exchange, for printing the copy.

[52 FR 25366, July 7, 1987, as amended at 59 FR 5701, Feb. 8, 1994]



Sec. 9.26  Participation of Commission staff.

    Within twenty days after receipt of the answering brief, the 
Division of Market Oversight and/or the Division of Clearing and 
Intermediary Oversight may file with the Proceedings Clerk a notice of 
intention to participate in the proceedings as amicus curiae. Within 
thirty days after filing the notice of intention to participate, the 
Division may file a brief as amicus curiae. Without prior leave of the 
Commission, the brief may not exceed thirty-five pages. The brief must 
be filed and served on the appellant, exchange and any other parties to 
the proceeding in the manner specified by these rules. Within ten days 
after service of the Division's brief, any party may file a reply to the 
Division's brief. After the filing of the notice of intent to 
participate, no employee of the Division(s) filing the notice may 
thereafter make any communication relating to the proceeding, other than 
on the record of the proceeding before the Commission, to any 
Commissioner or Commission decisional employee.

[52 FR 25366, July 7, 1987, as amended at 67 FR 62352, Oct. 7, 2002]



Sec. Sec. 9.27-9.29  [Reserved]



  Subpart D_Commission Review of Disciplinary, Access Denial or Other 
                             Adverse Action



Sec. 9.30  Scope of review.

    On review, the Commission may, in its discretion, consider sua 
sponte any issues arising from the record before it and may base its 
determination thereon, or limit the issues to those presented in the 
statement of issues in the briefs, treating those issues not raised as 
waived. If the Commission determines to consider any issue not raised by 
the parties, it may issue an order that notifies the parties of such 
determination and provides an opportunity for the parties to address any 
issue

[[Page 225]]

considered sua sponte by the Commission.



Sec. 9.31  Commission review of disciplinary or access denial action on 
its own motion.

    (a) Request for additional information. Where a person disciplined 
or denied access has not appealed the exchange decision to the 
Commission, upon review of the notice specified in Sec. 9.11, the 
Division of Market Oversight or the Division Clearing and Intermediary 
Oversight may request that the exchange file with the Division the 
record of the exchange proceeding, or designated portions of the record, 
a brief statement of the evidence and testimony adduced to support the 
exchange's findings that a rule or rules of the exchange were violated 
and such recordings, transcripts and other documents applicable to the 
particular exchange proceeding as the Division may specify. The exchange 
must promptly advise the person who is the subject of the disciplinary 
or access denial action of the Division's request. Within thirty days 
after service of the Division's request, the exchange must file the 
information requested with the Division and, upon request, deliver that 
information to the person who is the subject of the disciplinary or 
access denial action. Delivery and filing must be in the manner 
prescribed by Sec. 9.11(c). A person subject to the disciplinary action 
or access denial action requesting a copy of the information furnished 
to the Division must, if the exchange rules so provide, agree to pay the 
exchange reasonable fees for printing the copy.
    (b) Review on motion of the Commission. The Commission may institute 
review of an exchange disciplinary or access denial action on its own 
motion. Other than in extraordinary circumstances, such review will be 
initiated within 180 days after the Commission has received the notice 
of exchange action provided for in Sec. 9.11. If the Commission should 
institute review on its own motion, it will issue an order permitting 
the person who is the subject of the disciplinary or access denial 
action an opportunity to file an appropriate submission, and the 
exchange an opportunity to file a reply thereto.

[52 FR 25366, July 7, 1987, as amended at 67 FR 62352, Oct. 7, 2002]



Sec. 9.32  Oral argument.

    (a) On motion of Commission. On its own motion, the Commission may, 
in its discretion, hear oral argument by the parties any time before the 
decision of the Commission is filed with the Proceedings Clerk.
    (b) On request of party. Any party may file with the Proceedings 
Clerk a request in writing for the opportunity to present oral argument 
before the Commission, which the Commission may, in its discretion, 
grant or deny. A request under this paragraph must be filed concurrently 
with the party's brief.
    (c) Reporting and transcription. Oral argument before the Commission 
will be recorded and transcribed unless the Commission directs 
otherwise. In the event the Commission affords the parties the 
opportunity to present oral argument before the Commission, the oral 
argument will proceed in accordance with the provisions of Sec. 10.103 
(b) and (d) of this chapter.



Sec. 9.33  Final decision by the Commission.

    (a) Opinion and order. Upon review, the Commission may affirm, 
modify, set aside, or remand for further proceedings, in whole or in 
part, the decision of the exchange. The Commission's decision will be 
contained in its opinion and order which will be based upon the record 
before it, including the record of the exchange proceeding, and any oral 
argument made in accordance with Sec. 9.32. Except as provided in 
paragraph (b) of this section, the opinion and order will constitute the 
final decision of the Commission, effective upon service on the parties. 
In the event the Commission is equally divided as to its decision, the 
Commission will affirm without opinion the decision of the exchange, 
which will constitute the Commission's final decision.
    (b) Order of summary affirmance. If the Commission finds that the 
result reached in the decision of the exchange is substantially correct 
and that none of the arguments on appeal made by

[[Page 226]]

the appellant raise important questions of law or policy, the Commission 
may, by appropriate order, summarily affirm the decision of the exchange 
without opinion, which will constitute the Commission's final decision. 
Unless the Commission expressly indicates otherwise in its order, an 
order of summary affirmance does not reflect a Commission determination 
to adopt the exchange final decision, including any rationale contained 
therein, as its opinion and order, and neither the exchange's final 
decision nor the Commission's order of summary affirmance will serve as 
a Commission precedent in other proceedings.
    (c) Standards of review. In reviewing an exchange disciplinary, 
access denial or other adverse action, the Commission will consider 
whether:
    (1) The exchange disciplinary, access denial or other adverse action 
was taken in accordance with the rules of the exchange;
    (2) Fundamental fairness was observed in the conduct of the 
proceeding resulting in the disciplinary, access denial or other adverse 
action;
    (3)(i) In the case of a disciplinary action, the record contains 
substantial evidence of a violation of the rules of the exchange, or 
(ii) in the case of an access denial or other adverse action, the record 
contains substantial evidence supporting the exchange action; and
    (4) The disciplinary, access denial or other adverse action 
otherwise accords with the Act and the rules, regulations and orders of 
the Commission thereunder.



PART 10_RULES OF PRACTICE--Table of Contents




                      Subpart A_General Provisions

Sec.
10.1 Scope and applicability of rules of practice.
10.2 Definitions.
10.3 Suspension, amendment, revocation and waiver of rules.
10.4 Business address; hours.
10.5 Computation of time.
10.6 Changes in time permitted for filing.
10.7 Date of entry of orders.
10.8 Presiding officers.
10.9 Separation of functions.
10.10 Ex parte communications.
10.11 Appearance in adjudicatory proceedings.
10.12 Service and filing of documents; form and execution.

  Subpart B_Institution of Adjudicatory Proceedings; Pleadings; Motions

10.21 Commencement of the proceeding.
10.22 Complaint and notice of hearing.
10.23 Answer.
10.24 Amendments and supplemental pleadings.
10.25 Form of pleadings.
10.26 Motions and other papers.

               Subpart C_Parties and Limited Participation

10.31 Parties.
10.32 Substitution of parties.
10.33 Intervention as a party.
10.34 Limited participation.
10.35 Permission to state views.
10.36 Commission review of rulings.

   Subpart D_Prehearing Procedures; Prehearing Conferences; Discovery 
                               Depositions

10.41 Prehearing conferences; procedural matters.
10.42 Discovery.
10.43 Stipulations.
10.44 Depositions and interrogatories.

                           Subpart E_Hearings

10.61 Time and place of hearing.
10.62 Appearances.
10.63 Consolidation; separate hearings.
10.64 Public hearings.
10.65 Record of hearing.
10.66 Conduct of the hearing.
10.67 Evidence.
10.68 Subpoenas.
10.69 Reopening hearings.

          Subpart F_Post Hearing Procedures; Initial Decisions

10.81 Filing the transcript of evidence.
10.82 Proposed findings and conclusions; briefs.
10.83 Oral arguments.
10.84 Initial decision.

               Subpart G_Disposition Without Full Hearing

10.91 Summary disposition.
10.92 Shortened procedure.
10.93 Obtaining default order.
10.94 Setting aside of default.

            Subpart H_Appeals to the Commission; Settlements

10.101 Interlocutory appeals.

[[Page 227]]

10.102 Review of initial decisions.
10.103 Oral argument before the Commission.
10.104 Scope of review; Commission decision.
10.105 Review by Commission on its own initiative.
10.106 Reconsideration; stay pending judicial review.
10.107 Leave to adduce additional evidence.
10.108 Settlements.
10.109 Delegation of authority to Chief of the Opinions Section.

                      Subpart I_Restitution Orders

10.110 Basis for issuance of restitution orders.
10.111 Recommendation of procedure for implementing restitution.
10.112 Administraton of restitution.
10.113 Right to challenge distribution of funds to customers.
10.114 Acceleration of establishment of restitution procedure.

Appendix A to Part 10--Commission Policy Relating to the Acceptance of 
          Settlements in Administrative and Civil Proceedings

    Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391, 7 U.S.C. 
4a(j), unless otherwise noted.

    Source: 41 FR 2511, Jan. 16, 1976, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 10.1  Scope and applicability of rules of practice.

    These rules of practice are generally applicable to adjudicatory 
proceedings before the Commodity Futures Trading Commission under the 
Commodity Exchange Act. These include proceedings for:
    (a) Denial, suspension, revocation, conditioning, restricting or 
modifying of registration as a futures commission merchant, introducing 
broker, or associated person, floor broker, floor trader, commodity pool 
operator, commodity trading advisor or leverage transaction merchant 
pursuant to sections 6(c), 8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 
U.S.C. 9 and 15, 12a(2), 12a(3), 12a(4) and 12(a)(11), or denial, 
suspension, or revocation of designation as a contract market pursuant 
to sections 6(a) and 6(b) of the Act, 7 U.S.C. 8;
    (b) The issuance of cease and desist orders pursuant to sections 6b 
and 6(d) of the Act, 7 U.S.C. 13a and 13b;
    (c) Denial of trading privileges pursuant to section 6(c) of the 
Act, 7 U.S.C. 9 and 15;
    (d) The assessment of civil penalties pursuant to sections 6(c) and 
6b of the Act, 7 U.S.C. 9 and 15 and 13a;
    (e) The issuance of restitution orders pursuant to section 6(c) of 
the Act, 7 U.S.C. 9; and
    (f) Any other proceedings where the Commission declares them to be 
applicable.

These rules do not apply to:
    (g) Investigations conducted pursuant to sections 8 and 16(a) of the 
Act, 7 U.S.C. 12 and 20(a), except as specifically made applicable by 
the Rules Relating to Investigations set forth in part 11 of this 
chapter;
    (h) Reparation proceedings under section 14 of the Act, 7 U.S.C. 18, 
except as specifically made applicable by the Rules Relating to 
Reparation Proceedings set forth in part 12 of this chapter;
    (i) Public rulemaking, except as specifically made applicable by the 
Rules Relating to Public Rulemaking Procedures sets forth in part 13 of 
this title.

The rules shall be construed to secure the just, speedy and inexpensive 
determination of every proceeding with full protection for the rights of 
all parties therein.

[41 FR 2511, Jan. 16, 1976, as amended at 49 FR 8225, Mar. 5, 1984; 57 
FR 19597, Apr. 15, 1993; 59 FR 5701, Feb. 8, 1994; 63 FR 55791, Oct. 19, 
1998; 64 FR 30903, June 9, 1999]



Sec. 10.2  Definitions.

    For purposes of this part:
    (a) Act means the Commodity Exchange Act, as amended, 7 U.S.C. 1, et 
seq.;
    (b) Adjudicatory proceeding means a judicial-type proceeding leading 
to the formulation of a final order;
    (c) Administrative Law Judge means an administrative law judge 
appointed pursuant to the provisions of 5 U.S.C. 3105 (provisions of the 
rules in this part which refer to Administrative Law Judges may be 
applicable to other Presiding Officers as well, as set forth in Sec. 
10.8);
    (d) Administrative Procedure Act means those provisions of the 
Administrative Procedure Act, as codified, which are contained in 5 
U.S.C. 551 through 559;

[[Page 228]]

    (e) Commission means the Commodity Futures Trading Commission;
    (f) Complaint means any document initiating an adjudicatory 
proceeding, whether designated a complaint or an order for proceeding or 
otherwise;
    (g) Division of Enforcement means that office in the Commission that 
prosecutes a complaint issued by the Commission;
    (h) Hearing means that part of a proceeding which involves the 
submission of evidence, either by oral presentation or written 
submission;
    (i) Proceedings Clerk means that member of the Commission's staff 
designated as such in the Commission's Office of Proceedings.
    (j) Order means the whole or any part of a final procedural or 
substantive disposition of a matter by the Commission or by the 
Presiding Officer in a matter other than rulemaking;
    (k) Party includes a person or agency named or admitted as a party 
to a proceeding;
    (l) Person includes an individual, partnership, corporation, 
association, exchange or other entity or organization;
    (m) Pleading means the complaint, the answer to the complaint, any 
supplement or amendment thereto, and any reply that may be permitted to 
any answer, supplement or amendment;
    (n) Presiding Officer means a member of the Commission, and 
Administrative Law Judge, or a hearing officer designated by the 
Commission to conduct a hearing on a specific matter, or the Commission 
itself, if it is to preside at or accept the introduction of evidence in 
a particular proceeding (provisions of the rules in this part which 
refer to Administrative Law Judges may be applicable to other Presiding 
Officers as well, as set forth in Sec. 10.8);
    (o) Respondent means a party to an adjudicatory proceeding against 
whom findings may be made or relief or remedial action may be taken.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54801, Oct. 26, 1995]



Sec. 10.3  Suspension, amendment, revocation and waiver of rules.

    (a) These rules may, from time to time, be suspended, amended or 
revoked in whole or in part. Notice of such action will be published in 
the Federal Register.
    (b) In the interest of expediting decision or to prevent undue 
hardship on any party or for other good cause the Commission may order 
the adoption of expedited procedures and may waive any rule in subparts 
A through H of this part in a particular case and may order proceedings 
in accordance with its direction upon a determination that no party will 
be prejudiced and that the ends of justice will be served. Reasonable 
notice shall be given to all parties of any action taken pursuant to 
this provision.
    (c) The Presiding Officer, to expedite decision or to prevent undue 
hardship on any party, may waive any rule in subparts A through G of 
this part when neither party is prejudiced thereby. Reasonable notice 
shall be given to all parties of any action taken pursuant to this 
provision.
    (d) Notwithstanding any provision of this part, the Commission may 
in any proceeding commenced pursuant to section 6(c) of the Act require 
a respondent to show cause why an order should not be entered against 
the respondent and may specify a day and place for the hearing not less 
than three days after service upon the respondent of the Commission's 
complaint and notice of hearing in such proceeding.

(Secs. 2(a), 6(b) and 8a, 42 Stat. 1001, as amended, 49 Stat. 1498, 
1499, as amended 88 Stat.; 49 Stat. 1500, as amended, 88 Stat. 1392; 88 
Stat. 1389, 1391; 7 U.S.C. 4a, 9 and 12a)

[41 FR 2511, Jan. 16, 1976, as amended at 44 FR 61327, Oct. 25, 1979; 59 
FR 5701, Feb. 8, 1994]



Sec. 10.4  Business address; hours.

    The Office of Proceedings is located at Three Lafayette Centre, 1155 
21st Street NW., Washington, DC 20581. It is open each day, except 
Saturdays, Sundays and legal public holidays from 8:15 a.m. to 4:45 
p.m., eastern standard time or eastern daylight savings time, whichever 
is currently in effect in Washington, DC. If Commission personnel are 
present in the offices after 4:45 p.m., they may, at their discretion, 
accept documents for filing and serve the public in other matters within 
the

[[Page 229]]

scope of this part. Legal holidays include New Year's Day, Washington's 
Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, 
Veterans Day, Thanksgiving Day, Christmas Day, and any other legal 
holidays recognized by the Federal Government.

[41 FR 2511, Jan. 16, 1976, as amended at 41 FR 28260, July 9, 1976; 60 
FR 54801, Oct. 26, 1995]



Sec. 10.5  Computation of time.

    In computing any period of time prescribed by these rules or allowed 
by the Commission or the Presiding Officer, the day of the act, event, 
or default from which the designated period of time begins to run shall 
not be included. The last day of the period so computed is to be 
included unless it is a Saturday, a Sunday, or a legal holiday; in which 
event the period runs until the end of the next day which is not a 
Saturday, a Sunday or a legal holiday. Intermediate Saturdays, Sundays, 
and legal holidays shall be excluded from the computation only when the 
period of time prescribed or allowed is less than seven days.



Sec. 10.6  Changes in time permitted for filing.

    Except as otherwise provided by law or by these rules, for good 
cause shown the Commission or the Presiding Officer before whom a matter 
is then pending, on their own motion or the motion of a party, at any 
time may extend or shorten the time limit prescribed by the rules for 
filing any document. In any instance in which a time limit is not 
prescribed for an action to be taken in a proceeding, the Commission or 
the Presiding Officer may set a time limit for that action.



Sec. 10.7  Date of entry of orders.

    In computing any period of time involving the date of the entry of 
an order the date of entry shall be the date the order is served by the 
Proceedings Clerk.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54801, Oct. 26, 1995]



Sec. 10.8  Presiding officers.

    Unless otherwise determined by the Commission, all proceedings 
within the scope of this part shall be assigned to an Administrative Law 
Judge for hearing. If the Commission determines that a proceeding within 
the scope of this subpart shall be conducted before a Presiding Officer 
who is not an Administrative Law Judge, all provisions of this part that 
refer to and grant authority to or impose obligations upon an 
Administrative Law Judge shall be read as referring to and granting 
authority to and imposing obligations upon the designated Presiding 
Officer.
    (a) Functions and responsibilities of Administrative Law Judge. The 
Administrative Law Judge shall be responsible for the fair and orderly 
conduct of the proceeding and shall have the authority to:
    (1) Administer oaths and affirmations;
    (2) Issue subpoenas;
    (3) Rule on offers of proof;
    (4) Receive relevant evidence;
    (5) Examine witnesses;
    (6) Regulate the course of the hearing;
    (7) Hold prehearing conferences;
    (8) Consider and rule upon all motions;
    (9) Make decisions in accordance with Sec. 10.84 of these rules;
    (10) Certify interlocutory matters to the Commission for its 
determination in accordance with Sec. 10.101 of these rules;
    (11) Take such action as is just or appropriate, if a party or agent 
of a party fails to comply with an order issued by the Administrative 
Law Judge;
    (12) Take any other action required to give effect to these Rules of 
Practice, including but not limited to requesting the parties to file 
briefs and statements of position with respect to any issue in the 
proceeding.
    (b) Disqualification of Administrative Law Judge--(1) At his own 
request. An Administrative Law Judge may withdraw from any proceeding 
when he considers himself to be disqualified. In such event he 
immediately shall notify the Commission and each of the parties of his 
withdrawal and of his reason for such action.
    (2) Upon the request of a party. Any party or person who has been 
granted leave to be heard pursuant to these rules may request an 
Administrative

[[Page 230]]

Law Judge to disqualify himself on the grounds of personal bias, 
conflict or similar bases. Interlocutory review of an adverse ruling by 
the Administrative Law Judge may be sought without certification of the 
matter by the Administrative Law Judge, in accordance with the 
procedures set forth in Sec. 10.101.



Sec. 10.9  Separation of functions.

    (a) An Administrative Law Judge will not be responsible to or 
subject to the supervision or direction of any officer, employee, or 
agent of the Commission engaged in the performance of investigative or 
prosecutorial functions for the Commission.
    (b) No officer, employee or agent of the Commission who is engaged 
in the performance of investigative or prosecuting functions in 
connection with any proceeding shall, in that proceeding or any 
factually related proceeding, participate or advise in the decision of 
the Administrative Law Judge or the Commission except as witness or 
counsel in the proceeding, without the express written consent of the 
respondents in the proceeding. This provision shall not apply to the 
members of the Commission.

[41 FR 2511, Jan. 16, 1976, as amended at 63 FR 55791, Oct. 19, 1998]



Sec. 10.10  Ex parte communications.

    (a) Definitions. For purposes of this section:
    (1) Commission decisional employee means employees of the Commission 
who are or may reasonably be expected to be involved in the 
decisionmaking process in any proceeding, including, but not limited to:
    (i) Members of the personal staffs of the Commissioners;
    (ii) Members of the staffs of the Administrative Law Judges;
    (iii) The Deputy General Counsel for Opinions and Review and staff 
of the Office of General Counsel.
    (iv) Members of the staff of the Office of Proceedings; and
    (v) Other Commission employees who may be assigned to hear or to 
participate in the decision of a particular matter;
    (2) Ex parte communication means an oral or written communication 
not on the public record with respect to which reasonable prior notice 
to all parties is not given, but does not include requests for status 
reports on any matter or proceeding covered by this part;
    (3) Interested person includes parties and other persons who might 
be adversely affected or aggrieved by the outcome of a proceeding; their 
officers, agents, employees, associates, affiliates, attorneys, 
accountants or other representatives; and any other person having a 
direct or indirect pecuniary or other interest in the outcome of a 
proceeding;
    (4) Party includes a person or agency named or admitted as a party, 
or properly seeking and entitled as of right to be admitted as a party, 
to a proceeding, and a person or agency permitted limited participation 
or to state views in a proceeding by the Commission.
    (b) Prohibitions against ex parte communications. (1) No interested 
person outside the Commission shall make or knowingly cause to be made 
to any Commissioner, Administrative Law Judge or Commission decisional 
employee an ex parte communication relevant to the merits of a 
proceeding.
    (2) No Commissioner, Administrative Law Judge or Commission 
decisional employee shall make or knowingly cause to be made to any 
interested person outside the Commission an ex parte communication 
relevant to the merits of a proceeding.
    (c) Procedures for handling ex parte communications. A Commissioner, 
Administrative Law Judge or Commission decisional employee who receives, 
or who makes or knowingly causes to be made, an ex parte communication 
prohibited by paragraph (b) of this section shall:
    (1) Place on the public record of the proceeding:
    (i) All such written communications;
    (ii) Memoranda stating the substance of all such oral 
communications; and
    (iii) All written responses, and memoranda stating the substance of 
all oral responses, to the materials described in paragraphs (c) (1)(i) 
and (1)(ii) of this section; and
    (2) Promptly give written notice of such communication and responses

[[Page 231]]

thereto to all parties to the proceedings to which the communication or 
responses relate.
    (d) Sanctions. (1) Upon receipt of an ex parte communication 
knowingly made or knowingly caused to be made by a party in violation of 
the prohibition contained in paragraph (b)(1) of this section, the 
Commission, Administrative Law Judge or other Commission employee 
presiding at the hearing may, to the extent consistent with the 
interests of justice and the policy of the Act, require the party to 
show cause why his claim or interest in the proceeding should not be 
dismissed, denied, disregarded, or otherwise adversely affected on 
account of such violation.
    (2) Any attorney or accountant who knowingly makes or knowingly 
causes to be made, or who knowingly solicits or knowingly causes the 
solicitation of, an ex parte communication which violates the 
prohibitions contained in paragraph (b) of this section may, on that 
basis alone, be deemed to have engaged in unprofessional conduct of the 
type proscribed by 17 CFR 14.8(c).
    (3) Any Commissioner, Administrative Law Judge or Commission 
decisional employee who knowingly makes or knowingly cause to be made, 
or who knowingly solicits or knowingly causes the solicitation of, an ex 
parte communication which violates the prohibitions contained in 
paragraph (b) of this section may, on that basis alone, be deemed to 
have engaged in conduct of the type proscribed by 17 CFR 140.735-
3(b)(3).
    (e) Applicability of prohibitions and sanctions against ex parte 
communications. (1) The prohibitions of this section against ex parte 
communications shall apply:
    (i) To any person who has actual knowledge that a proceeding has 
been or will be commenced by order of the Commission; and
    (ii) To all persons after public notice has been given that a 
proceeding has been or will be commenced by order of the Commission.
    (2) The prohibitions of this section shall remain in effect until a 
final order has been entered in the proceeding which is no longer 
subject to review or reconsideration by the Commission or to review by 
any court.
    (3) Nothing in this section shall constitute authority to withhold 
information from Congress.

(Sec. 4, Pub. L. 94-409, 90 Stat. 1246, 1247 (5 U.S.C. 551(14), 556(d) 
and 557(d)); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C. 
4a(j) (Supp. V, 1975))

[42 FR 13700, Mar. 11, 1977, as amended at 60 FR 54801, Oct. 26, 1995]



Sec. 10.11  Appearance in adjudicatory proceedings.

    (a) Appearance--(1) By non-attorneys. An individual may appear pro 
se (in his own behalf), a member of a partnership may represent the 
partnership, a bona fide officer of a corporation, trust or association 
may represent the corporation, trust or association, an officer or 
employee of a State Commission or of a department or political 
subdivision of a State may represent the State Commission or the 
department or political subdivision of the State in any proceeding.
    (2) By attorneys. An attorney-at-law who is admitted to practice 
before the highest Court in any State or territory, or of the District 
of Columbia, who has not been suspended or disbarred from appearance and 
practice before the Commission in accordance with the provisions of part 
14 of this title, may represent parties in proceedings before the 
Commission.
    (b) Debarment of counsel or representative by administrative law 
judge during the course of a proceeding. (1) Whenever, while a 
proceeding is pending before him, the Administrative Law Judge finds 
that a person acting as counsel or representative for any party to the 
proceeding is guilty of contemptuous conduct, the Administrative Law 
Judge may order that such person be precluded from further acting as 
counsel or representative in such proceeding. An immediate appeal to the 
Commission may be sought from any such order, pursuant to the terms of 
Sec. 10.101, but the proceeding shall not be delayed or suspended 
pending disposition of the appeal: Provided, That the Administrative Law 
Judge may suspend the proceedings for a reasonable time for the purpose 
of enabling the party to obtain other counsel or representative.

[[Page 232]]

    (2) Whenever the Administrative Law Judge has issued an order 
precluding a person from further acting as counsel for representative in 
the proceeding, the Administrative Law Judge within a reasonable time 
thereafter, shall submit to the Commission a report of the facts and 
circumstances surrounding the issuance of the order and shall recommend 
what action the Commission should take respecting the appearance of such 
person as counsel or representative in other proceedings before the 
Commission.



Sec. 10.12  Service and filing of documents; form and execution.

    (a) Service by a party or other participant in a proceeding--(1) 
Number of copies; when required. Two copies of all pleadings subsequent 
to the complaint, all motions, petitions or applications made in the 
course of a proceeding (unless made orally during a hearing), all 
proposed findings and conclusions, all petitions for review of any 
initial decision, and all briefs shall be served by the party or other 
participant upon all parties to the proceeding.
    (2) How service is made. Service shall be made by personal service, 
delivering the documents by first-class United States mail or a similar 
commercial package delivery service, or transmitting the documents via 
facsimile machine. Service shall be complete at the time of personal 
service or upon deposit in the mails or with a similar commercial 
package delivery service of a properly addressed document for which all 
postage or fees have been paid to the mail or delivery service. Where a 
party effects service by mail or similar package delivery service, the 
time within which the party being served may respond shall be extended 
by three days. Service by facsimile machine shall be permitted only if 
all parties to the proceeding have agreed to such an arrangement in 
writing and a copy of the written agreement, signed by each party, has 
been filed with the Proceedings Clerk. The agreement must specify the 
facsimile machine telephone numbers to be used, the hours during which 
the facsimile machine is in operation and when service will be deemed 
complete.
    (3) Proof of Service. Proof of service of a document shall be made 
by filing with the Proceedings Clerk, simultaneously with the filing of 
the required number of copies of the document, an affidavit of service 
executed by any person 18 years of age or older or a certificate of 
service executed by an attorney-at-law qualified to practice before the 
Commission. The proof of service shall identify the persons served, 
state that service has been made, set forth the date of service, and 
recite the manner of service.
    (b) Service of decisions and orders. A copy of all rulings, opinions 
and orders of the Administrative Law Judge and the Commissions shall be 
served by the Proceedings Clerk on each of the parties.
    (c) Designation of person to receive service. The first document 
filed in a proceeding by or on behalf of any party or participant 
(including the complaint and notice of hearing, the answer, and an 
application for intervention) shall state on the first page thereof the 
name and post office address of the person who is authorized to receive 
service for him of all documents filed in the proceeding. Thereafter 
service of documents shall be made upon the person authorized unless 
service on the party himself is ordered by the Administrative Law Judge 
or the Commission, or unless no person authorized to receive service can 
be found, or unless the person authorized is changed by the party upon 
due notice to all other parties.
    (d) Filing of documents with the Proceedings Clerk. (1) All 
documents which are required to be served upon a party shall be filed 
concurrently with the Proceedings Clerk. A document shall be filed by 
delivering it in person or by certified or registered mail with return 
receipt requested to:

Proceedings Clerk, Office of Proceedings, Three Lafayette Centre, 1155 
21st Street, NW., Washington, DC 20581.

    (2) To be timely filed, a document must be received by the 
Proceedings Clerk within the time prescribed for filing.
    (e) Formalities of filing--(1) Number of copies. Unless otherwise 
specifically provided, an original and five conformed copies of all 
documents shall be filed with the Proceedings Clerk.

[[Page 233]]

    (2) Title page. All documents filed with the Proceedings Clerk must 
include at the head thereof, or on a title page, the name of the 
Commission, the docket number and title of the proceeding, the subject 
of the particular document and the name of the person in whose behalf 
the document is being filed. In the complaint the title of the action 
shall include the names of all the respondents, but in documents 
subsequently filed it is sufficient to state the name of the first 
respondent named in the complaint with an appropriate indication of 
other parties.
    (3) Paper, spacing, type. All documents filed under this part shall 
be typewritten, mimeographed, printed, or otherwise reproduced by a 
process that produces permanent and plainly legible copies, shall be on 
one grade of good unglazed white paper no less than 8 or more than 8\1/
2\ inches wide and no less than 10\1/2\ or more than 14 inches long, 
with a left-hand margin 1\1/2\ inches wide, and shall be bound on the 
top only. They shall be double spaced, except for long quotations (3 or 
more lines) and footnotes, which should be single-spaced. If printed, 
the documents shall be in either 10- or 12-point type with double-leaded 
text and single-leaded quotations and footnotes.
    (4) Signatures. The original copy of all papers must be signed in 
ink by the person filing the same or by his duly authorized agent or 
attorney.
    (5) Length and form of briefs. All briefs filed with the Proceedings 
Clerk containing more than ten pages shall include an index and a table 
of cases and other authorities cited. The date of each brief must appear 
on its front cover or title page and on its signature page. No brief 
shall exceed 60 pages in length, except with the permission of the 
Administrative Law Judge or, by the Commission, to whomever the brief is 
directed.
    (6) Documents improperly tendered for filing. No document will be 
accepted unless it complies with the requirements of this paragraph 
concerning form, filing, subscription, service and other similar 
matters. A document tendered but not accepted for filing shall not be 
entered on the Proceedings Clerk's docket, but a motion may be made to 
the Administrative Law Judge for leave to file an otherwise unauthorized 
document.
    (f) Subscriptions--(1) By whom. Pleadings, petitions, motions and 
answers thereto, briefs and other documents filed with the Commission 
shall be subscribed:
    (i) By the person or persons on whose behalf they are tendered for 
filing;
    (ii) By a partner, officer or director of a partnership, 
corporation, association, or other legal entity; or
    (iii) By an attorney-at-law having authority with respect thereto.

The Proceedings Clerk may require appropriate evidence of the authority 
of a person subscribing a document on behalf of another person.
    (2) Effect. The signature on a document of any person acting either 
for himself or as attorney or agent for another constitutes a 
certification by him that:
    (i) He has read the document subscribed and knows the contents 
thereof;
    (ii) If executed in any representative capacity, it was done with 
full power and authority to do so;
    (iii) To the best of his knowledge, information and belief, every 
statement contained in the document is true and not misleading; and
    (iv) The document is not being interposed for delay.
    (3) Sham documents. If a document is not signed or is signed with an 
intent to defeat the purpose of this rule, it may be stricken as sham 
and false. For a willful violation of this rule an attorney may be 
subjected to appropriate disciplinary action pursuant to Sec. 10.11(b). 
Similar action may be taken if scandalous matter is inserted.
    (g) Official docket. The Proceedings Clerk will maintain the 
official docket for each proceeding. The official docket is available 
for public inspection in the Commission's Office of Proceedings.

[41 FR 2511, Jan. 16, 1976, as amended at 41 FR 28260, July 9, 1976; 60 
FR 54802, Oct. 26, 1995; 63 FR 55791, Oct. 19, 1998]

[[Page 234]]



 Subpart B_Institution of Adjudica- tory Proceedings; Pleadings; Motions



Sec. 10.21  Commencement of the proceeding.

    An adjudicatory proceeding is commenced when a complaint and notice 
of hearing is filed with the Office of Proceedings.

[63 FR 55791, Oct. 19, 1998; 63 FR 68829, Dec. 14, 1998]



Sec. 10.22  Complaint and notice of hearing.

    (a) Content. The complaint and notice of hearing shall include:
    (1) The legal authority and jurisdiction under which the hearing is 
held;
    (2) The matters of fact and law to be considered and determined.

The complaint shall set forth the matters of fact alleged therein in 
such manner as will permit a specific response to each allegation. The 
notice shall notify the respondent of his right to a hearing and shall 
specify the time required by Sec. 10.23 of these rules for the filing 
of an answer and the consequence of failure to file an answer.
    (b) Service. The Proceedings Clerk shall give appropriate notice to 
each respondent by serving them with a copy of the complaint and notice 
of hearing. Service may be made in person, by confirmed telegraphic 
notice, or by registered mail or certified mail, addressed to the last 
known business or residence address of the person to be served or the 
address of his duly authorized agent for service. If a respondent is not 
found at his last known business or residence address and no forwarding 
address is available, additional service may be made, at the discretion 
of the Commission, as follows:
    (1) By publishing a notice of the filing of the proceeding and a 
summary of the complaint, approved by the Commission or the 
Administrative Law Judge, once a week for three consecutive weeks in one 
or more newspapers having a general circulation where the respondent's 
last known business or residence address was located and, if 
ascertainable, where the respondent is believed to reside or be doing 
business currently; and
    (2) By continuously displaying the complaint on the Commission's 
Internet web site during the period referred to in paragraph (b)(1) of 
this section.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995; 63 
FR 55791, Oct. 19, 1998]



Sec. 10.23  Answer.

    (a) When required. Following service of a complaint and notice of 
hearing as set forth in Sec. 10.22 of these rules, unless otherwise 
specified in the notice of hearing, each respondent shall file an answer 
with the Proceedings Clerk within 20 days.
    (b) Content of answer. The answer shall include:
    (1) A statement that the respondent admits, denies, or does not have 
and is unable to obtain sufficient information to admit or deny each 
allegation; a statement of a lack of information shall have the effect 
of a denial; any allegation not expressly denied shall be deemed to be 
admitted;
    (2) A statement of the facts supporting each affirmative defense.
    (c) Effect of failure to file answer. A party who fails to file an 
answer within 20 days shall be in default and, pursuant to procedures 
set forth in Sec. 10.93 of these rules, the proceeding may be 
determined against him by the Administrative Law Judge upon his 
consideration of the complaint, the allegations of which shall then be 
deemed to be true.
    (d) Admission of all allegations of fact. If a respondent's answer 
admits the truth of all the material allegations of fact contained in 
the complaint, it shall constitute a waiver of hearing on those 
allegations. However, the Administrative Law Judge may conduct a 
hearing, if so requested, by any of the parties. Following waiver, the 
parties may submit proposed findings and conclusions and briefs, as 
provided in Sec. 10.82 and may appeal any initial decision to the 
Commission as provided in Sec. 10.102 of these rules.
    (e) Motion for more definite statement. Where a reasonable showing 
is made by a respondent that he cannot frame a responsive answer based 
on the allegations in the complaint, he may move for a more definite 
statement of the charges against him before filing an

[[Page 235]]

answer. A motion for a more definite statement shall be filed within ten 
days after service of the complaint and shall specify the defects 
complained of and the particular allegation as to which a more definite 
statement is sought.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995]



Sec. 10.24  Amendments and supplemental pleadings.

    (a) Complaint and notice of hearing. The Commission may, at any 
time, amend the complaint and notice of hearing in any proceeding. If 
the Commission so amends the complaint and notice of hearing, the 
Administrative Law Judge shall adjust the scheduling of the proceeding 
to the extent necessary to avoid any prejudice to any of the parties to 
the proceeding. Upon motion to the Administrative Law Judge and with 
notice to all other parties and the Commission, the Division of 
Enforcement may amend a complaint to correct typographical and clerical 
errors or to make other technical, non-substantive revisions within the 
scope of the original complaint.
    (b) Other pleadings. Except for the complaint and notice of hearing, 
a party may amend any pleading once as a matter of course at any time 
before a responsive pleading is served or, if the pleading is one to 
which no responsive pleading is permitted, he may amend it within 20 
days after it is served. Otherwise a party may amend a pleading only by 
leave of the Administrative Law Judge, which shall be freely given when 
justice so requires.
    (c) Response to amended pleadings. Any party may file a response to 
any amendment to any pleading, including the complaint, within ten days 
after the date of service upon him of the amendment or within the time 
provided to respond to the original pleading, whichever is later.
    (d) Pleadings to conform to the evidence. When issues not raised by 
the pleadings but reasonably within the scope of a proceeding initiated 
by the complaint are tried with the express or implied consent of the 
parties, they shall be treated in all respects as if they had been 
raised in the pleadings.

[41 FR 2511, Jan. 16, 1976, as amended at 63 FR 55791, Oct. 19, 1998]



Sec. 10.25  Form of pleadings.

    All averments of claim and defense shall be made in consecutively 
numbered paragraphs. The contents of each paragraph shall be limited as 
far as practicable to a single set of circumstances.



Sec. 10.26  Motions and other papers.

    (a) Presentation. An application for a form of relief not otherwise 
specifically provided for in these rules shall be made by motion, filed 
with the Proceedings Clerk, which shall be in writing unless made on the 
record during a hearing. The motion shall state: (1) The relief sought; 
(2) the basis for relief; and (3) the authority relied upon. If a motion 
is supported by briefs, affidavits or other papers, they shall be served 
and filed with the motion. All motions and applications, unless 
otherwise provided in these rules, shall be directed to the 
Administrative Law Judge prior to the filing of an initial decision in a 
proceeding, and to the Commission after the initial decision has been 
filed.
    (b) Answers to motions. Any party may serve and file a written 
response to a motion within ten days after service of the motion upon 
him or within such longer or shorter period as established by these 
rules or as the Administrative Law Judge or the Commission may direct. 
The absence of a response to a motion may be considered by the 
Administrative Law Judge or the Commission in deciding whether to grant 
the requested relief.
    (c) Motions for procedural orders. Motions for procedural orders, 
including motions for extension of time, may be acted on at any time, 
without awaiting a response thereto. Any party adversely affected by 
such order may request reconsideration, vacation or modification of the 
order.
    (d) Dilatory motions. Repetitive or numerous motions dealing with 
the same subject matter shall not be permitted.
    (e) Review by the Commission. Interloctory review by the Commission

[[Page 236]]

of a ruling on a motion by an Administrative Law Judge may be sought in 
accordance with the procedures and under the circumstances set forth in 
Sec. 10.101 of these rules.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995; 63 
FR 55791, Oct. 19, 1998]



               Subpart C_Parties and Limited Participation



Sec. 10.31  Parties.

    The parties to an adjudicatory proceeding shall include the Division 
of Enforcement, each respondent named in the complaint and each person 
permitted to intervene pursuant to Sec. 10.33 of these rules. A 
respondent shall cease to be a party or purposes of a pending proceeding 
when (a) a default order is entered against him pursuant to Sec. 10.93; 
or (b) the Commission accepts an offer of settlement pursuant to Sec. 
10.108 of these rules.



Sec. 10.32  Substitution of parties.

    Upon motion and for good cause shown the Administrative Law Judge 
may order a substitution of parties.



Sec. 10.33  Intervention as a party.

    (a) Petition for Leave to Intervene. Any person whose interests may 
be affected substantially by the matters to be considered in a 
proceeding may petition the Administrative Law Judge for leave to 
intervene as a party in the proceeding any time after the institution of 
a proceeding and before such proceeding has been submitted for final 
consideration. Petitions for leave to intervene shall be in writing and 
shall set forth with specificity the nature of the petitioner's interest 
in the proceeding and the manner in which his interests may be affected 
substantially. The Administrative Law Judge may direct a petitioner 
requesting intervention to submit himself for examination as to his 
interest in the proceeding.
    (b) Response to petition. A petition for leave to intervene shall be 
served by the petitioner upon all parties to the proceeding, who may 
support or oppose the petition in a document filed within ten days after 
service of the petition upon them or within such other period as the 
Administrative Law Judge may direct in a particular case.
    (c) Leave to intervene--when granted. No person shall be admitted as 
a party to a proceeding by intervention unless the Administrative Law 
Judge is satisfied that (1) a substantial interest of the person seeking 
to intervene may be adversely affected by the matter to be considered in 
the proceeding; (2) that his intervention will not materially prejudice 
the rights of any party, through delay or otherwise; (3) that his 
participation as a party will otherwise be consistent with the public 
interest; and (4) that leave to be heard pursuant to Sec. 10.34 would 
be inadequate for the protection of his interests. The burden shall be 
upon the petitioner to satisfy the Administrative Law Judge on these 
issues.
    (d) Rights of intervenor. A person who has been granted leave to 
intervene shall from that time forward have all the rights and 
responsibilities of a party to the proceeding.



Sec. 10.34  Limited participation.

    (a) Petitions for leave to be heard. Any person may, in the 
discretion of the Administrative Law Judge, be given leave to be heard 
in any proceeding as to any matter affecting his interests. Petitions 
for leave to be heard shall be in writing, shall set forth (1) the 
nature and extent of the applicant's interest in the proceeding; (2) the 
issues on which he wishes to participate; and (3) in what manner he 
wishes to participate. The Administrative Law Judge may direct any 
person requesting leave to be heard to submit himself to examination as 
to his interest in the proceeding.
    (b) Rights of a participant. Leave to be heard pursuant to Sec. 
10.34(a) may include such rights of a party as the Administrative Law 
Judge may deem appropriate, except that oral argument before the 
Commission may be permitted only by the Commission.



Sec. 10.35  Permission to state views.

    Any person may, in the discretion of the Administrative Law Judge be 
permitted to file a memorandum or make an oral statement of his views, 
and the Administrative Law Judge may, in his

[[Page 237]]

discretion, accept for the record written communications received from 
any person.



Sec. 10.36  Commission review of rulings.

    Interlocutory review by the Commission of a ruling as to matters 
within the scope of Sec. 10.33, Sec. 10.34 or Sec. 10.35 may be 
sought in accordance with the procedures set forth in Sec. 10.101 of 
these rules without certification by the Administrative Law Judge.



  Subpart D_Prehearing Procedures; Prehearing Conferences; Discovery; 
                               Depositions



Sec. 10.41  Prehearing conferences; procedural matters.

    In any proceeding the Administrative Law Judge may direct that one 
or more conferences be held for the purpose of:
    (a) Clarifying issues;
    (b) Examining the possibility of obtaining stipulations, admissions 
of fact and of authenticity or contents of documents;
    (c) Determining matters of which official notice may be taken;
    (d) Discussing amendments to pleadings;
    (e) Limiting the number of witnesses;
    (f) Considering objections to the introduction of documentary 
evidence and the testimony of witnesses identified in prehearing 
materials filed or otherwise furnished by the parties pursuant to Sec. 
10.42;
    (g) Discussing adoption of shortened procedures pursuant to Sec. 
10.92;
    (h) Promoting a fair and expeditious hearing.

At or following the conclusion of a prehearing conference, the 
Administrative Law Judge shall serve a prehearing memorandum containing 
agreements reached and any procedural determinations made by him, unless 
the conference shall have been recorded and transcribed in written form 
and a copy of the transcript has been made available to each party.

[41 FR 2511, Jan. 16, 1976, as amended at 63 FR 55791, Oct. 19, 1998]



Sec. 10.42  Discovery.

    (a) Prehearing materials--(1) In general. Unless otherwise ordered 
by an Administrative Law Judge, the parties to a proceeding shall 
furnish to all other parties to the proceeding on or before a date set 
by the Administrative Law Judge in the form of a prehearing memorandum 
or otherwise:
    (i) An outline of its case or defense;
    (ii) The legal theories upon which it will rely;
    (iii) The identity, and the city and state of residence, of each 
witness, other than an expert witness, who is expected to testify on its 
behalf, along with a brief summary of the matters to be covered by the 
witness's expected testimony;
    (iv) A list of documents which it intends to introduce at the 
hearing, along with copies of any such documents which the other parties 
do not already have in their possession and to which they do not have 
reasonably ready access.
    (2) Expert witnesses. Unless otherwise ordered by the Administrative 
Law Judge, in addition to the information described in paragraph (a)(1) 
of this section, any party who intends to call an expert witness shall 
also furnish to all other parties to the proceeding on or before a date 
set by the Administrative Law Judge:
    (i) A statement identifying the witness and setting forth his or her 
qualifications;
    (ii) A list of any publications authored by the witness within the 
preceding ten years;
    (iii) A list of all cases in which the witness has testified as an 
expert, at trial or in deposition, within the preceding four years;
    (iv) A complete statement of all opinions to be expressed by the 
witness and the basis or reasons for those opinions; and
    (v) A list of any documents, data or other written information which 
were considered by the witness in forming his or her opinions, along 
with copies of any such documents, data or information which the other 
parties do not already have in their possession and to which they do not 
have reasonably ready access.

[[Page 238]]

    (3) The foregoing procedures shall not be deemed applicable to 
rebuttal evidence submitted by any party at the hearing.
    (4) In any action where a party fails to comply with the 
requirements of this paragraph (a), the Administrative Law Judge may 
make such orders in regard to the failure as are just, taking into 
account all of the relevant facts and circumstances of the failure to 
comply.
    (b) Investigatory materials--(1) In general. Unless otherwise 
ordered by the Commission or the Administrative Law Judge, the Division 
of Enforcement shall make available for inspection and copying by the 
respondents, prior to the scheduled hearing date, any of the following 
documents that were obtained by the Division prior to the institution of 
proceedings in connection with the investigation that led to the 
complaint and notice of hearing:
    (i) All documents that were produced pursuant to subpoenas issued by 
the Division or otherwise obtained from persons not employed by the 
Commission, together with each subpoena or written request, or relevant 
portion thereof, that resulted in the furnishing of such documents to 
the Division; and
    (ii) All transcripts of investigative testimony and all exhibits to 
those transcripts.
    (2) Documents that may be withheld. The Division of Enforcement may 
withhold any document that would disclose:
    (i) The identity of a confidential source;
    (ii) Confidential investigatory techniques or procedures;
    (iii) Separately the market positions, business transactions, trade 
secrets or names of customers of any persons other than the respondents, 
unless such information is relevant to the resolution of the proceeding;
    (iv) Information relating to, or obtained with regard to, another 
matter of continuing investigatory interest to the Commission or another 
domestic or foreign governmental entity, unless such information is 
relevant to the resolution of the proceeding; or
    (v) Information obtained from a domestic or foreign governmental 
entity or from a foreign futures authority that either is not relevant 
to the resolution of the proceeding or was provided on condition that 
the information not be disclosed or that it only be disclosed by the 
Commission or a representative of the Commission as evidence in an 
enforcement or other proceeding.
    (3) Nothing in paragraphs (b)(1) and (b)(2) of this section shall 
limit the ability of the Division of Enforcement to withhold documents 
or other information on the grounds of privilege, the work product 
doctrine or other protection from disclosure under applicable law. When 
the investigation by the Division of Enforcement that led to the pending 
proceeding encompasses transactions, conduct or persons other than those 
involved in the proceeding, the requirements of (b)(1) of this section 
shall apply only to the particular transaction, conduct and persons 
involved in the proceeding.
    (4) Index of withheld documents. When documents are made available 
for inspection and copying pursuant to paragraph (b)(1) of this section, 
the Division of Enforcement shall furnish the respondents with an index 
of all documents that are withheld pursuant to paragraphs (b)(2) or 
(b)(3) of this section, except for any documents that are being withheld 
because they disclose information obtained from a domestic or foreign 
governmental entity or from a foreign futures authority on condition 
that the information not be disclosed or that it only be disclosed by 
the Commission or a representative of the Commission as evidence in an 
enforcement or other proceeding, in which case the Division shall inform 
the other parties of the fact that such documents are being withheld at 
the time it furnishes its index under this paragraph, but no further 
disclosures regarding those documents shall be required. This index 
shall describe the nature of the withheld documents in a manner that, to 
the extent practicable without revealing any information that itself is 
privileged or protected from disclosure by law or these rules, will 
enable the other parties to assess the applicability of the privilege or 
protection claimed.

[[Page 239]]

    (5) Arrangements for inspection and copying. Upon request by the 
respondents, all documents subject to inspection and copying pursuant to 
this paragraph (b) shall be made available to the respondents at the 
Commission office nearest the location where the respondents or their 
counsel live or work. Otherwise, the documents shall be made available 
at the Commission office where they are ordinarily maintained or at any 
other location agreed upon by the parties in writing. Upon payment of 
the appropriate fees set forth in appendix B to part 145 of this 
chapter, any respondent may obtain a photocopy of any document made 
available for inspection. Without the prior written consent of the 
Division of Enforcement, no respondent shall have the right to take 
custody of any documents that are made available for inspection and 
copying, or to remove them from Commission premises.
    (6) Failure to make documents available. In the event that the 
Division of Enforcement fails to make available documents subject to 
inspection and copying pursuant to this paragraph (b), no rehearing or 
reconsideration of a matter already heard or decided shall be required, 
unless the respondent demonstrates prejudice caused by the failure to 
make the documents available.
    (7) Requests for confidential treatment; protective orders. If a 
person has requested confidential treatment of information submitted by 
him or her, either pursuant to rules adopted by the Commission under the 
Freedom of Information Act (part 145 of this chapter) or under the 
Commission's Rules Relating To Investigations (part 11 of this chapter), 
the Division of Enforcement shall notify him or her, if possible, that 
the information is to be disclosed to parties to the proceeding and he 
or she may apply to the Administrative Law Judge for an order protecting 
the information from disclosure, consideration of which shall be 
governed by Sec. 10.68(c)(2).
    (c) Witness statements--(1) In general. Each party to an 
adjudicatory proceeding shall make available to the other parties any 
statement of any person whom the party calls, or expects to call, as a 
witness that relates to the anticipated testimony of the witness and is 
in the party's possession. Such statements shall include the following:
    (i) Transcripts of investigative, deposition, trial or similar 
testimony given by the witness,
    (ii) Written statements signed by the witness, and
    (iii) Substantially verbatim notes of interviews with the witness, 
and all exhibits to such transcripts, statements and notes. For purposes 
of this paragraph (c), ``substantially verbatim notes'' means notes that 
fairly record the exact words of the witness, subject to minor, 
inconsequential deviations. Such statements shall include memoranda and 
other writings authored by the witness that contain information relating 
to his anticipated testimony. The Division of Enforcement shall produce 
witness statements pursuant to this paragraph prior to the scheduled 
hearing date, at a time to be designated by the Administrative Law 
Judge. Respondents shall produce witness statements pursuant to this 
paragraph at the close of the Division's case in chief during the 
hearing. If necessary, the Administrative Law Judge shall, upon request, 
grant the Division a continuance of the hearing in order to review and 
analyze any witness statements produced by the respondents.
    (2) Nothing in paragraph (c)(1) of this section shall limit the 
ability of a party to withhold documents or other information on the 
grounds of privilege, the work product doctrine or other protection from 
disclosure under applicable law.
    (3) Index of withheld documents. When a party makes witness 
statements available pursuant to paragraph (c)(1) of this section, he or 
she shall furnish each of the other parties with an index of all 
documents that the party is withholding on the grounds of privilege or 
work product. This index shall describe the nature of the withheld 
documents in a manner that, to the extent practicable without revealing 
information that itself is privileged or protected from disclosure by 
law or these rules, will enable the other parties to assess the 
applicability of the privilege or protection claimed.
    (4) Failure to produce witness statements. In the event that a party 
fails to

[[Page 240]]

make available witness statements subject to production pursuant to this 
section, no rehearing or reconsideration of a matter already heard or 
decided shall be required, unless another party demonstrates prejudice 
caused by the failure to make the witness statements available.
    (d) Modification of production requirements. The Administrative Law 
Judge shall modify any of the requirements of paragraphs (a) through (c) 
of this section that any party can show is unduly burdensome or is 
otherwise inappropriate under all the circumstances.
    (e) Admissions--(1) Request for admissions. Any party may serve upon 
any other party, with a copy to the Proceedings Clerk, a written request 
for admission of the truth of any facts relevant to the pending 
proceeding set forth in the request. Each matter of which an admission 
is requested shall be separately set forth. Unless prior written 
approval is obtained from the Administrative Law Judge, the number of 
requests shall not exceed 50 in number including all discrete parts and 
subparts.
    (2) Response. A matter shall be considered to be admitted unless, 
within 15 days after service of the request, or within such other time 
as the Administrative Law Judge may allow, the party upon whom the 
request is directed serves upon the requesting party a sworn written 
answer or objection to the matter. If objection is made, the reasons 
therefor shall be stated. The response shall specifically deny the 
matter or set forth in detail the reasons why the answering party cannot 
truthfully admit or deny the matter. A denial shall fairly meet the 
substance of the requested admission and when good faith requires that a 
party qualify his answer and deny only a part of the matter, he shall 
specify so much of it as is true and qualify or deny the remainder. An 
answering party may not give a lack of information or knowledge as a 
reason for failure to admit or deny unless he states that he has made 
reasonable inquiry and that the information known or reasonably 
available to him is insufficient to enable him to admit or deny. A party 
who considers that a matter of which an admission has been requested 
presents a genuine issue for trial may not, on that ground alone, object 
to the request; he may deny the matter or set forth reasons why he 
cannot admit or deny it.
    (3) Determining sufficiency of answers or objections. The party who 
has requested the admissions may move to determine the sufficiency of 
the answers or objections. Unless the objecting party sustains his 
burden of showing that the objection is justified, the Administrative 
Law Judge shall order that an answer be served. If the Administrative 
Law Judge determines that an answer does not comply with the 
requirements of this rule, he may order either that the matter is 
admitted or that an amended answer be served.
    (4) Effect of admission. Any matter admitted under this rule is 
conclusively established and may be used at a hearing as against the 
party who made the admission. However, the Administrative Law Judge may 
permit withdrawal or amendment when the presentation on the merits of 
the proceeding will be served thereby and the party who obtains the 
admission fails to satisfy the Administrative Law Judge that withdrawal 
or amendment will prejudice him in maintaining his action or defense on 
the merits.
    (f) Objections to authenticity or admissibility of documents--(1) 
Identification of documents. The Administrative Law Judge, acting on his 
or her own initiative or upon motion by any party, may direct each party 
to serve upon the other parties, with a copy to the Proceedings Clerk, a 
list identifying the documents that it intends to introduce at the 
hearing and requesting the other parties to file and serve a response 
disclosing any objection, together with the factual or legal grounds 
therefor, to the authenticity or admissibility of each document 
identified on the list. A copy of each document identified on the list 
shall be served with the request, unless the party being served already 
has the document in his possession or has reasonably ready access to it.
    (2) Objections to authenticity or admissibility. Within 20 days 
after service or at such other time as may be designated by the 
Administrative Law Judge, each party upon whom the list

[[Page 241]]

described in paragraph (f)(1) of this section was served shall file a 
response disclosing any objection, together with the factual or legal 
grounds therefor, to the authenticity or admissibility of each document 
identified on the list. Except for relevance, waste of time or needless 
presentation of cumulative evidence, all objections not raised may be 
deemed waived.
    (3) Rulings on objections. In his or her discretion, the 
Administrative Law Judge may treat as a motion in limine any list served 
by a party pursuant to paragraph (f)(1) of this section, where any other 
party has filed a response objecting to the authenticity or the 
admissibility on any item listed. In that event, after affording the 
parties an opportunity to file briefs containing arguments on the motion 
to the degree necessary for a decision, the ALJ may rule on any 
objection to the authenticity or admissibility of any document 
identified on the list in advance of trial, to the extent appropriate.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995; 63 
FR 55792, Oct. 19, 1998; 63 FR 68829, Dec. 14, 1998]



Sec. 10.43  Stipulations.

    The parties may by stipulation in writing at any stage of the 
proceeding, or orally made at hearing, agree upon any pertinent facts in 
the proceeding. It is desirable that the facts be thus agreed upon so 
far as and whenever practicable. Stipulations may be received in 
evidence at a hearing and when received in evidence shall be binding on 
the parties thereto.



Sec. 10.44  Depositions and interrogatories.

    (a) When permitted. If it appears that:
    (1) A prospective witness will be unable to attend or testify at a 
hearing on the basis of age, illness, infirmity, imprisonment or on the 
basis that he is or will be outside of the United States at the time of 
the hearing (unless it appears that the absence of the witness was 
procured by the party seeking to take the deposition),
    (2) His testimony is material,
    (3) It is necessary to take his deposition in the interest of 
Justice, the Administrative Law Judge may by order direct that his 
deposition be taken either orally or in the form of written 
interrogatories, and may issue a subpoena to compel the attendance of 
the witness for deposition.
    (b) Application for deposition. Any party desiring to take the 
deposition of a witness shall make application in writing to the 
Administrative Law Judge for an order to take deposition. In addition to 
the showing required in Sec. 10.44(a), the application shall include:
    (1) The name and post office address of the witness;
    (2) The specific matters concerning which the witness is expected to 
testify and their relevance;
    (3) The reasons why the deposition should be taken, supported by 
affidavits and a physician's certificate, where appropriate;
    (4) The time when, the place where, and the name and address of the 
person before whom the deposition is to be taken;
    (5) A specification of the documents and materials which the 
deponent is requested to produce;
    (6) Application for any subpoenas.
    (c) Service and reply. A copy of the application to take deposition 
shall be served upon every other party to the proceeding and upon the 
person sought to be deposed. Any party or the deponent may serve and 
file an opposition to the application within seven days after the 
application is filed.
    (d) Time when, place where, and officer before whom deposition is 
taken--(1) Where the deposition is taken. Unless otherwise ordered or 
agreed to by stipulation, depositions shall be taken in the city or 
municipality where the deponent is located.
    (2) Officer before whom taken. (i) Within the United States or a 
territory of the United States, depositions shall be taken before an 
officer authorized to administer oaths by the laws of the United States 
or of the place where the examination is held.
    (ii) Within a foreign country, depositions may be taken before an 
officer or person designated by the Administrative Law Judge or agreed 
upon by the parties by a stipulation in writing to be filed with the 
Proceedings Clerk.
    (e) Procedures for taking oral depositions. (1) Oral examination and 
crossexamination of witnesses shall be

[[Page 242]]

conducted in a manner similar to that permitted at a formal hearing. All 
questions and testimony shall be recorded verbatim, except to the extent 
that all parties present or represented may agree that a matter shall be 
off the record.
    (2) All objections made at the time of the examination to the 
qualifications of the officer taking the deposition, or to the manner of 
taking it, or to the evidence presented, or to the conduct of any party, 
or any other objection to the proceeding shall be noted by the officer 
upon the deposition, and shall subsequently be determined by the 
Administrative Law Judge. Evidence objected to shall be taken subject to 
the objections. However, the parties may stipulate that, except as to 
objections to the form of questions, all objections to the matters 
testified to in a deposition are preserved for the hearing, whether or 
not raised at the time of deposition.
    (3) During the taking of a deposition a party or deponent may 
request and obtain an adjournment to permit an application to be made to 
the Administrative Law Judge for an order suspending the deposition on 
grounds of bad faith in the conduct of the examination, annoyance, 
embarrassment, oppression of a deponent or party, or improper questions. 
An attorney who requests and obtains an adjournment for this purpose but 
fails, without good cause, promptly to apply for relief to the 
Administrative Law Judge may be found guilty of contemptuous conduct in 
accordance with Sec. 10.11(b) of these rules.
    (f) Procedures for use of interrogatories. (1) If depositions are to 
be taken and submitted on written interrogatories, the interrogatories 
shall be filed in triplicate with the application for deposition and 
served on the parties. Within ten days after service, any party may 
file, in triplicate, with the Proceedings Clerk, his objections, if any, 
to such interrogatories and may file such cross-interrogatories as he 
desires to submit. Other parties shall have ten days to file their 
objections to cross-interrogatories. Objections shall be settled by the 
Administrative Law Judge.
    (2) When a deposition is taken upon written interrogatories and 
cross-interrogatories, no party shall be present or represented and no 
person other than the witness, a stenographic reporter, and the officer 
shall be present. The officer shall propound the interrogatories and 
cross-interrogatories to the witness, and the interrogatories and 
responses thereto shall be transcribed and reduced to writing.
    (g) Use of depositions at hearing. (1) Any part or all of a 
deposition, to the extent admissible under rules of evidence applied as 
though the witness were then present and testifying at the hearing, may 
be used against any party who had reasonable notice of the taking of the 
deposition, if the Administrative Law Judge finds that:
    (i) The witness is dead;
    (ii) The witness is unable to attend or testify because of age, 
illness, infirmity, or imprisonment;
    (iii) The witness is out of the United States at the time of the 
hearing, unless it appears that the absence of the witness was procured 
by the party offering the deposition.
    (2) If only part of a deposition is offered in evidence by a party, 
an adverse party may require him to introduce any other part which ought 
in fairness to be considered with the part introduced, and any party may 
introduce any other parts.
    (3) Objection may be made at a hearing to receiving in evidence any 
deposition or part thereof for any reason which would require the 
exclusion of the evidence if the witness were then present and 
testifying.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995]



                           Subpart E_Hearings



Sec. 10.61  Time and place of hearing.

    (a) Notice. All parties shall be notified of the time and place of 
hearing, which shall be fixed with due regard for the public interest 
and the convenience and necessity of the parties and their 
representatives.
    (b) Requests for change. A request for postponement of a hearing or 
for a change in the place assigned for hearing will be granted by the 
Administrative Law Judge only for good cause shown.

[[Page 243]]



Sec. 10.62  Appearances.

    (a) Who may appear. The parties may appear in person, by counsel or 
by other representatives of their choosing, subject to the provisions of 
Sec. 10.11 of these rules and part 14 of this chapter, dealing with 
appearance and practice before the Commission.
    (b) Effect of failure to appear. (1) If any party to the proceeding, 
after filing an answer fails to appear at the hearing or any part 
thereof, he shall to that extent be deemed to have waived the right to 
an oral hearing in the proceeding. In the event that a party appears at 
the hearing and no party appears for the opposing side, the party who is 
present may present his evidence, in whole or in part, in the form of 
affidavits or by oral testimony, before the Administrative Law Judge.
    (2) A failure to appear at a hearing shall not constitute a waiver 
of a party's right to propose findings of fact based on the record in 
the proceeding, to propose conclusions of law or to submit briefs, in 
the manner provided in Sec. 10.82, if the non-appearing party submits 
prior to the scheduled hearing or within three days thereafter, a notice 
of appearance indicating his intent to continue to participate in the 
proceeding. Otherwise, his failure to appear will constitute a default, 
and a default order may be sought in accordance with procedures set 
forth in Sec. 10.93 of these rules.



Sec. 10.63  Consolidation; separate hearings.

    (a) Consolidation. Two or more proceedings involving a common 
question of law or fact may be joined for hearing of any or all the 
matters in issue or may be consolidated by order of the Administrative 
Law Judge. The Administrative Law Judge may make such rulings concerning 
the conduct of such proceedings as may tend to avoid unnecessary costs 
or delay.
    (b) Separate Hearings. The Administrative Law Judge, for the 
convenience of the parties, to avoid prejudice, or to expedite final 
resolution of the issues, may order a separate hearing of any claim or 
issue, or grant a separate hearing to any respondent.



Sec. 10.64  Public hearings.

    All hearings shall be public, except that upon application of a 
respondent or affected witness the Administrative Law Judge may direct 
that specific documents or testimony be received and retained non-
publicly in order to prevent unwarranted disclosure of trade secrets or 
sensitive commercial or financial information or an unwarranted invasion 
of personal privacy.



Sec. 10.65  Record of hearing.

    (a) Reporting and transcription. Hearings for the purpose of taking 
evidence shall be recorded and transcribed in written form under the 
supervision of the Administrative Law Judge by a reporter employed by 
the Commission for that purpose. The original transcript shall be a part 
of the record and shall be the sole official transcript. Copies of 
transcripts, except those portions granted non-public treatment, shall 
be available from the reporter at rates not to exceed the maximum rates 
fixed by the contract between the Commission and the reporter.
    (b) Corrections. Any party may submit a timely request to the 
Administrative Law Judge to correct the transcript. Corrections may be 
submitted to the Administrative Law Judge by stipulation of the parties, 
or by motion by any party, and upon notice to all parties to the 
proceeding, the Administrative Law Judge may specify corrections of the 
transcript. A copy of such specification shall be furnished to all 
parties and made a part of the record. Corrections shall be made by the 
official reporter, who shall furnish substitute pages of the transcript, 
under the usual certificate of the reporter, for insertion in the 
official record. The original uncorrected pages shall be retained in the 
files of the Proceedings Clerk.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995]



Sec. 10.66  Conduct of the hearing.

    (a) Expedition. Hearings shall proceed expeditiously and insofar as 
practicable hearings shall be held at one place and shall continue, 
without suspension, until concluded.

[[Page 244]]

    (b) Rights of parties. Every party shall be entitled to due notice 
of hearings, the right to be represented by counsel, and the right to 
cross-examine witnesses, present oral and documentary evidence, submit 
rebuttal evidence, raise objections, make arguments and move for 
appropriate relief. Nothing in this paragraph limits the authority of 
the Commission or the Administrative Law Judge to exercise authority 
under other provisions of the Commission's rules, to enforce the 
requirement that evidence presented be relevant to the proceeding or to 
limit cross-examination to the subject matter of the direct examination 
and matters affecting the credibility of the witness.
    (c) Examination of witnesses. All witnesses at a hearing for the 
purpose of taking evidence shall testify under oath or affirmation, 
which shall be administered by the Administrative Law Judge. A witness 
may be cross-examined by each adverse party and, in the discretion of 
the Administrative Law Judge, may be cross-examined, without regard to 
the scope of direct examination, as to any matter which is relevant to 
the issues in the proceeding.
    (d) Expert witnesses. The Administrative Law Judge, at his 
discretion, may order that direct testimony of expert witnesses be made 
by verified written statement rather than presented orally at the 
hearing. Any expert witness whose testimony is presented in this manner 
shall be available for oral cross-examination, and may be examined 
orally upon re-direct following cross-examination.
    (e) Exhibits. The original of each exhibit introduced in evidence or 
marked for identification shall be filed and retained in the docket of 
the proceeding, unless the Administrative Law Judge permits the 
substitution of copies for the original documents. A copy of each 
exhibit introduced by a party or marked for identification at his 
request shall be supplied by him to the Administrative Law Judge and to 
each other party to the proceeding.

[41 FR 2511, Jan. 16, 1976, as amended at 63 FR 55793, Oct. 19, 1998; 63 
FR 68829, Dec. 14, 1998]



Sec. 10.67  Evidence.

    (a) Admissibility. Relevant, material and reliable evidence shall be 
admitted. Irrelevant, immaterial, unreliable and unduly repetitious 
evidence shall be excluded.
    (b) Official notice. (1) Official notice may be taken of
    (i) Any material fact which might be judicially noticed by a 
district court of the United States; or
    (ii) Any matter in the public official records of the Commission.
    (2) If official notice is requested or taken of a material fact, any 
party, upon timely request, shall be afforded an opportunity to 
establish the contrary.
    (c) Objections. A party shall timely and briefly state the grounds 
relied upon for any objection made to the introduction of evidence. If a 
party has had no opportunity to object to a ruling at the time it is 
made, he shall not thereafter be prejudiced by the absence of an 
objection.
    (d) Exceptions. Formal exception to an adverse ruling is not 
required. It shall be sufficient that a party, at the time the ruling is 
sought or entered, makes known to the Administrative Law Judge the 
action he wishes the Administrative Law Judge to take or his objection 
to the action being taken and his grounds therefor.
    (e) Excluded evidence. When an objection to a question propounded to 
a witness is sustained, the examining attorney may make a specific offer 
of what he expects to prove by the answer of the witness, or the 
Administrative Law Judge may, in his discretion, receive the evidence in 
full. Rejected exhibits, adequately marked for identification, shall be 
retained in the record so as to be available for consideration by any 
reviewing authority.
    (f) Affidavits. Affidavits may be admitted by the Administrative Law 
Judge only if the evidence is otherwise admissible and the parties agree 
that affidavits may be used.
    (g) Official government records. An official government record or 
any entry therein, when admissible for any purpose, may be evidenced by 
an official

[[Page 245]]

publication thereof or by a copy attested by the officer having legal 
custody of the record or by his deputy, accompanied by a certificate 
that such officer has custody. If the office in which the record is kept 
is within the United States the certificate may be made by a judge of a 
court of record in the district or political subdivision in which the 
record is kept, authenticated by the seal of his office. If the office 
in which the record is kept is in a foreign state or country, the 
certificate may be made by any officer in the Foreign Service of the 
United States stationed in the foreign state or country in which the 
record is kept and authenticated by the seal of his office. A written 
statement signed by an officer having custody of an official record or 
by his deputy, that after diligent search, no record or entry dealing 
with a specific matter is found to exist, accompanied by a certificate 
as provided above, is admissible as evidence that the records of his 
office contain no such record or entry.
    (h) Entries in the regular course of business. Any writing or 
record, whether in the form of an entry in a book or otherwise, made as 
a memorandum or record of any act, transaction, occurrence, or event, 
will be admissible as evidence thereof if it shall appear that it was 
made in the regular course of business by a person who had a duty to 
report or record it.



Sec. 10.68  Subpoenas.

    (a) Application for and issuance of subpoenas--(1) Application for 
and issuance of subpoena ad testificandum. Any party may apply to the 
Administrative Law Judge for the issuance of a subpoena requiring a 
person to appear and testify (subpoena ad testificandum) at the hearing. 
All requests for the issuance of a subpoena ad testificandum shall be 
submitted in duplicate and in writing and shall be served upon all other 
parties to the proceeding, unless the request is made on the record at 
the hearing or the requesting party can demonstrate why, in the interest 
of fairness or justice, the requirement of a written submission or 
service on one or more of the other parties is not appropriate. A 
subpoena ad testificandum shall be issued upon a showing by the 
requesting party of the general relevance of the testimony being sought 
and the tender of an original and two copies of the subpoena being 
requested, except in those situations described in paragraph (b) of this 
section, where additional requirements are set forth.
    (2) Application for subpoena duces tecum. An application for a 
subpoena requiring a person to produce specified documentary or tangible 
evidence (subpoena duces tecum) at any designated time or place may be 
made by any party to the Administrative Law Judge. All requests for the 
issuance of a subpoena duces tecum shall be submitted in duplicate and 
in writing and shall be served upon all other parties to the proceeding, 
unless the request is made on the record at the hearing or the 
requesting party can demonstrate why, in the interest of fairness or 
justice, the requirement of a written submission or service on one or 
more of the other parties is not appropriate. Except in those situations 
described in paragraph (b) of this section, where additional 
requirements are set forth, each application for the issuance of a 
subpoena duces tecum shall contain a statement or showing of general 
relevance and reasonable scope of the evidence being sought and be 
accompanied by an original and two copies of the subpoena being 
requested, which shall describe the documentary or tangible evidence to 
be subpoenaed with as much particularity as is feasible.
    (3) Standards for issuance of subpoena duces tecum. The 
Administrative Law Judge considering any application for a subpoena 
duces tecum shall issue the subpoena requested if he is satisfied the 
application complies with this section and the request is not 
unreasonable, oppressive, excessive in scope or unduly burdensome. No 
attempt shall be made to determine the admissibility of evidence in 
passing upon an application for a subpoena duces tecum and no detailed 
or burdensome showing shall be required as a condition to the issuance 
of any subpoena.
    (4) Denial of application. In the event the Administrative Law Judge 
determines that a requested subpoena or any of its terms are 
unreasonable, oppressive, excessive in scope, or unduly

[[Page 246]]

burdensome, he may refuse to issue the subpoena, or may issue it only 
upon such conditions as he determines fairness requires.
    (b) Special requirements relating to application for and issuance of 
subpoenas for commission records and for the appearance of commission 
employees or employees of other agencies--(1) Form. An application for 
the issuance of subpoena shall be made in the form of a written motion 
served upon all other parties, if the subpoena would require
    (i) The production of documents, papers, books, physical exhibits, 
or other material in the records of the Commission;
    (ii) The appearance of a Commissioner or an official or employee of 
the Commission;
    (iii) The appearance of a Commissioner or an official or employee of 
any other state or federal agency in his official capacity.
    (2) Content. The motion shall specifically describe the material to 
be produced, the information to be disclosed, or the testimony to be 
elicited from the witness, and shall show
    (i) The relevance of the material, information, or testimony to the 
matters at issue in the proceeding;
    (ii) The reasonableness of the scope of the proposed subpoena; and
    (iii) That such material, information, or testimony is not available 
from other sources.
    (3) Rulings. The motion shall be decided by the Administrative Law 
Judge and shall provide such terms or conditions for the production of 
the material, the disclosure of the information or the appearance of the 
witness as may appear necessary and appropriate for the protection of 
the public interest.
    (4) Commission review of rulings. Interlocutory review by the 
Commission of a ruling made under this section may be sought in 
accordance with the procedures set forth in Sec. 10.101 without 
certification by the Administrative Law Judge.
    (c) Motions to quash subpoenas; protective orders--(1) Application. 
Within 10 days after a subpoena has been served or at any time prior to 
the return date thereof, a motion to quash or modify the subpoena or for 
a protective order limiting the use or disclosure of any information, 
documents or testimony covered by the subpoena may be filed with the 
Administrative Law Judge who issued it. At the same time, a copy of the 
motion shall be served on the party who requested the subpoena and all 
other parties to the proceeding. The motion shall include a brief 
statement setting forth the basis for the requested relief. If the 
Administrative Law Judge to whom the motion has been directed has not 
acted upon the motion by the return date, the subpoena shall be stayed 
pending his or her final action.
    (2) Disposition. After due notice to the person upon whose request 
the subpoena was issued, and after opportunity for response by that 
person, the Administrative Law Judge may (i) quash or modify the 
subpoena, or (ii) condition denial of the application to quash or modify 
the subpoena upon just and reasonable terms, including, in the case of a 
subpoena duces tecum, a requirement that the person in whose behalf the 
subpoena was issued shall advance the reasonable cost of producing 
documentary or other tangible evidence. The Administrative Law Judge may 
issue a protective order sought under paragraph (c)(1) of this section 
or under any other section of these rules upon a showing of good cause. 
In considering whether good cause exists to issue a protective order, 
the Administrative Law Judge shall weigh the harm resulting from 
disclosure against the benefits of disclosure. Good cause shall only be 
established upon a showing that the person seeking the protective order 
will suffer a clearly defined and serious injury if the order is not 
issued, provided, however, that any such injury shall be balanced 
against the public's right of access to judicial records. No protective 
order shall be granted that will prevent the Division of Enforcement or 
any respondent from adequate presenting its case.
    (d) Attendance and mileage fees. Persons summoned to testify either 
by deposition or at a hearing under requirement of subpoena are entitled 
to the same fees and mileage as are paid to witnesses in the courts of 
the United States. Fees and mileage are paid by

[[Page 247]]

the party at whose instance the persons are called.
    (e) Service of subpoenas--(1) How effected. Service of a subpoena 
upon a party shall be made in accordance with Sec. 10.12(a) of these 
rules except that only one copy of a subpoena need be served. Service of 
a subpoena upon any other person shall be made by delivering a copy of 
the subpoena to him as provided in paragraphs (e)(2) or (e)(3) of this 
section, as applicable, and by tendering to him or her the fees for one 
day's attendance and mileage as specified in paragraph (d) of this 
section. When the subpoena is issued at the instance of the Commission, 
fees and mileage need not be tendered at the time of service.
    (2) Service upon a natural person. Delivery of a copy of a subpoena 
and tender of the fees to a natural person may be effected by
    (i) Handing them to the person;
    (ii) Leaving them at his office with the person in charge thereof 
or, if there is no one in charge, by leaving them in a conspicuous place 
therein;
    (iii) Leaving them at his dwelling place or usual place of abode 
with some person of suitable age and discretion then residing therein;
    (iv) Mailing them by registered or certified mail to him at his last 
known address; or
    (v) Any other method whereby actual notice is given to him and the 
fees and mileage are timely made available.
    (3) Service upon other persons. When the person to be served is not 
a natural person, delivery of a copy of the subpoena and tender of the 
fees and mileage may be effected by
    (i) Handing them to a registered agent for service, or to any 
officer, director, or agent in charge of any office of such person;
    (ii) Mailing them by registered or certified mail to any such 
representative at his last known address; or
    (iii) Any other method whereby actual notice is given to any such 
representative and the fees and mileage are timely made available.
    (f) Enforcement of subpoenas. Upon failure of any person to comply 
with a subpoena issued at the request of a party, that party may 
petition the Commission in its discretion to institute an action in an 
appropriate U.S. District Court for enforcement of that subpoena. When 
instituting an action to enforce a subpoena requested by the Division of 
Enforcement, the Commission, in its discretion, may delegate to the 
Director of the Division or any Commission employee designated by the 
Director and acting under his or her direction, or to any other employee 
of the Commission, authority to serve as the Commission's counsel in 
such subpoena enforcement action.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995; 63 
FR 55794, Oct. 19, 1998; 63 FR 68829, Dec. 14, 1998; 64 FR 30903, June 
9, 1999]



Sec. 10.69  Reopening hearings.

    Any party may petition the Administrative Law Judge to reopen a 
hearing to adduce additional evidence at any time prior to issuance of 
the initial decision. The petition shall show that the evidence sought 
to be adduced is relevant and material and that there were reasonable 
grounds for failure to adduce such evidence at the time of the original 
hearing.



          Subpart F_Post Hearing Procedures; Initial Decisions



Sec. 10.81  Filing the transcript of evidence.

    As soon as practicable after the close of the hearing, the reporter 
shall transmit to the Proceedings Clerk the transcript of the testimony 
and the exhibits introduced in evidence at the hearing, except such 
portions of the transcript and exhibits as shall have been delivered to 
the Administrative Law Judge.

[41 FR 2511, Jan. 16, 1976, as amended at 60 FR 54802, Oct. 26, 1995]



Sec. 10.82  Proposed findings and conclusions; briefs.

    In any proceeding involving a hearing or an opportunity for hearing, 
the parties may file written proposed findings of fact and conclusions 
of law. Briefs may be filed in support of proposed findings and 
conclusions either as part of the same document or in a

[[Page 248]]

separate document. Any proposed finding or conclusion not briefed may be 
regarded as waived.
    (a) Proposed findings and briefs; time for filing. Where the parties 
file proposed findings and briefs, the following schedule shall apply, 
unless otherwise determined by the Administrative Law Judge:
    (1) Initial submission. Proposed findings, conclusions and an 
initial brief shall be served and filed by the Division of Enforcement 
and intervenors on the side of the Division of Enforcement within 45 
days of the close of the hearing;
    (2) Answering submission. Proposed findings, conclusions, and an 
answering brief