April 1, 2004 CODE OF FEDERAL REGULATIONS 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

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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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 Raymond A. Mosley, Director, Office of the Federal Register. April 1, 2004. 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 § 200.800 of chapter II. For the convenience of the user, § 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.

CFRORDR.FRM <LRH>17 CFR Ch. I (4-1-04 Edition)</LRH> <RRH>Commodity Futures Trading Commission</RRH> <CFRTITLE> <TITLEHD> <PRTPAGE P="1"/> <HD SOURCE="HED">Title 17—Commodity and Securities Exchanges</HD> <P>(This book contains parts 1 to 199)</P> </TITLEHD> <CFRTOC> <PTHD>Part</PTHD> <CHAPTI> <SUBJECT> <E T="04">chapter i</E>—Commodity Futures Trading Commission</SUBJECT> <PG>1</PG> </CHAPTI> </CFRTOC> </CFRTITLE> <CHAPTER> <TOC> <TOCHD> <PRTPAGE P="3"/> <HD SOURCE="HED">CHAPTER I—COMMODITY FUTURES TRADING COMMISSION</HD> </TOCHD> <PTHD>Part</PTHD> <PGHD>Page</PGHD> <CHAPTI> <PT>1</PT> <SUBJECT>General regulations under the Commodity Exchange Act</SUBJECT> <PG>5</PG> <PT>2</PT> <SUBJECT>Official seal</SUBJECT> <PG>116</PG> <PT>3</PT> <SUBJECT>Registration</SUBJECT> <PG>117</PG> <PT>4</PT> <SUBJECT>Commodity pool operators and commodity trading advisors</SUBJECT> <PG>158</PG> <PT>5</PT> <RESERVED>[Reserved]</RESERVED> <PT>7</PT> <SUBJECT>Contract market rules altered or supplemented by the Commission</SUBJECT> <PG>208</PG> <PT>8</PT> <SUBJECT>Exchange procedures for disciplinary, summary, and membership denial actions</SUBJECT> <PG>208</PG> <PT>9</PT> <SUBJECT>Rules relating to review of exchange disciplinary, access denial or other adverse actions</SUBJECT> <PG>215</PG> <PT>10</PT> <SUBJECT>Rules of practice</SUBJECT> <PG>226</PG> <PT>11</PT> <SUBJECT>Rules relating to investigations</SUBJECT> <PG>258</PG> <PT>12</PT> <SUBJECT>Rules relating to reparations</SUBJECT> <PG>263</PG> <PT>13</PT> <SUBJECT>Public rulemaking procedures</SUBJECT> <PG>302</PG> <PT>14</PT> <SUBJECT>Rules relating to suspension or disbarment from appearance and practice</SUBJECT> <PG>303</PG> <PT>15</PT> <SUBJECT>Reports—general provisions</SUBJECT> <PG>306</PG> <PT>16</PT> <SUBJECT>Reports by contract markets</SUBJECT> <PG>311</PG> <PT>17</PT> <SUBJECT>Reports by futures commission merchants, members of contract markets and foreign brokers</SUBJECT> <PG>314</PG> <PT>18</PT> <SUBJECT>Reports by traders</SUBJECT> <PG>319</PG> <PT>19</PT> <SUBJECT>Reports by persons holding bona fide hedge positions pursuant to § 1.3(z) of this chapter and by merchants and dealers in cotton</SUBJECT> <PG>322</PG> <PT>20</PT> <RESERVED>[Reserved]</RESERVED> <PT>21</PT> <SUBJECT>Special calls</SUBJECT> <PG>324</PG> <PT>30</PT> <SUBJECT>Foreign futures and foreign options transactions</SUBJECT> <PG>328</PG> <PT>31</PT> <SUBJECT>Leverage transactions</SUBJECT> <PG>344</PG> <PT>32</PT> <SUBJECT>Regulation of commodity option transactions</SUBJECT> <PG>377</PG> <PT>33</PT> <SUBJECT>Regulation of domestic exchange-traded commodity option transactions</SUBJECT> <PG>391</PG> <PT>34</PT> <SUBJECT>Regulation of hybrid instruments</SUBJECT> <PG>401<PRTPAGE P="4"/> </PG> <PT>35</PT> <SUBJECT>Exemption of swap agreements</SUBJECT> <PG>402</PG> <PT>36</PT> <SUBJECT>Exempt markets</SUBJECT> <PG>404</PG> <PT>37</PT> <SUBJECT>Derivatives transaction execution facilities</SUBJECT> <PG>406</PG> <PT>38</PT> <SUBJECT>Designated contract markets</SUBJECT> <PG>416</PG> <PT>39</PT> <SUBJECT>Derivatives clearing organizations</SUBJECT> <PG>428</PG> <PT>40</PT> <SUBJECT>Provisions common to contract markets, derivatives transaction execution facilities and derivatives clearing organizations</SUBJECT> <PG>435</PG> <PT>41</PT> <SUBJECT>Security futures products</SUBJECT> <PG>446</PG> <PT>42</PT> <SUBJECT>Anti-money laundering, terrorist financing</SUBJECT> <PG>470</PG> <PT>100</PT> <SUBJECT>Delivery period required</SUBJECT> <PG>470</PG> <PT>140</PT> <SUBJECT>Organization, functions, and procedures of the Commission</SUBJECT> <PG>470</PG> <PT>141</PT> <SUBJECT>Salary offset</SUBJECT> <PG>496</PG> <PT>142</PT> <SUBJECT>Indemnification of CFTC employees</SUBJECT> <PG>500</PG> <PT>143</PT> <SUBJECT>Collection of claims owed the United States arising from activities under the Commission's jurisdiction</SUBJECT> <PG>501</PG> <PT>144</PT> <SUBJECT>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</SUBJECT> <PG>503</PG> <PT>145</PT> <SUBJECT>Commission records and information</SUBJECT> <PG>505</PG> <PT>146</PT> <SUBJECT>Records maintained on individuals</SUBJECT> <PG>520</PG> <PT>147</PT> <SUBJECT>Open Commission meetings</SUBJECT> <PG>529</PG> <PT>148</PT> <SUBJECT>Implementation of the Equal Access to Justice Act in covered adjudicatory proceedings before the Commission</SUBJECT> <PG>537</PG> <PT>149</PT> <SUBJECT>Enforcement of nondiscrimination on the basis of handicap in programs or activities conducted by the Commodity Futures Trading Commission</SUBJECT> <PG>543</PG> <PT>150</PT> <SUBJECT>Limits on positions</SUBJECT> <PG>549</PG> <PT>155</PT> <SUBJECT>Trading standards</SUBJECT> <PG>555</PG> <PT>156</PT> <SUBJECT>Broker Associations</SUBJECT> <PG>558</PG> <PT>160</PT> <SUBJECT>Privacy of consumer financial information</SUBJECT> <PG>560</PG> <PT>166</PT> <SUBJECT>Customer protection rules</SUBJECT> <PG>578</PG> <PT>170</PT> <SUBJECT>Registered futures associations</SUBJECT> <PG>581</PG> <PT>171</PT> <SUBJECT>Rules relating to review of National Futures Association decisions in disciplinary, membership denial, registration and member responsibility actions</SUBJECT> <PG>585</PG> <PT>190</PT> <SUBJECT>Bankruptcy</SUBJECT> <PG>599</PG> <PT>191-199</PT> <RESERVED>[Reserved]</RESERVED> </CHAPTI> </TOC> <PART> <PRTPAGE P="5"/> <EAR>Pt. 1</EAR> <HD SOURCE="HED">PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT</HD> <CONTENTS> <SUBJGRP> <HD SOURCE="HED">Definitions</HD> <SECHD>Sec.</SECHD> <SECTNO>1.1</SECTNO> <SUBJECT>Fraud in or in connection with transactions in foreign currency subject to the Commodity Exchange Act.</SUBJECT> <SECTNO>1.2</SECTNO> <SUBJECT>Liability of principal for act of agent.</SUBJECT> <SECTNO>1.3</SECTNO> <SUBJECT>Definitions.</SUBJECT> <SECTNO>1.4</SECTNO> <SUBJECT>Use of electronic signatures.</SUBJECT> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Minimum Financial and Related Reporting Requirements</HD> <SECTNO>1.10</SECTNO> <SUBJECT>Financial reports of futures commission merchants and introducing brokers.</SUBJECT> <SECTNO>1.11</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.12</SECTNO> <SUBJECT>Maintenance of minimum financial requirements by futures commission merchants and introducing brokers.</SUBJECT> <SECTNO>1.13</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.14</SECTNO> <SUBJECT>Risk assessment recordkeeping requirements for futures commission merchants.</SUBJECT> <SECTNO>1.15</SECTNO> <SUBJECT>Risk assessment reporting requirements for futures commission merchants.</SUBJECT> <SECTNO>1.16</SECTNO> <SUBJECT>Qualifications and reports of accountants.</SUBJECT> <SECTNO>1.17</SECTNO> <SUBJECT>Minimum financial requirements for futures commission merchants and introducing brokers.</SUBJECT> <SECTNO>1.18</SECTNO> <SUBJECT>Records for and relating to financial reporting and monthly computation by futures commission merchants and introducing brokers.</SUBJECT> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Prohibited Trading in Commodity Options</HD> <SECTNO>1.19</SECTNO> <SUBJECT>Prohibited trading in certain “puts” and “calls”.</SUBJECT> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Customers' Money, Securities, and Property</HD> <SECTNO>1.20</SECTNO> <SUBJECT>Customer funds to be segregated and separately accounted for.</SUBJECT> <SECTNO>1.21</SECTNO> <SUBJECT>Care of money and equities accruing to customers.</SUBJECT> <SECTNO>1.22</SECTNO> <SUBJECT>Use of customer funds restricted.</SUBJECT> <SECTNO>1.23</SECTNO> <SUBJECT>Interest of futures commission merchant in segregated funds; additions and withdrawals.</SUBJECT> <SECTNO>1.24</SECTNO> <SUBJECT>Segregated funds; exclusions therefrom.</SUBJECT> <SECTNO>1.25</SECTNO> <SUBJECT>Investment of customer funds.</SUBJECT> <SECTNO>1.26</SECTNO> <SUBJECT>Deposit of instruments purchased with customer funds.</SUBJECT> <SECTNO>1.27</SECTNO> <SUBJECT>Record of investments.</SUBJECT> <SECTNO>1.28</SECTNO> <SUBJECT>Appraisal of instruments purchased with customer funds.</SUBJECT> <SECTNO>1.29</SECTNO> <SUBJECT>Increment or interest resulting from investment of customer funds.</SUBJECT> <SECTNO>1.30</SECTNO> <SUBJECT>Loans by futures commission merchants; treatment of proceeds.</SUBJECT> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Recordkeeping</HD> <SECTNO>1.31</SECTNO> <SUBJECT>Books and records; keeping and inspection.</SUBJECT> <SECTNO>1.32</SECTNO> <SUBJECT>Segregated account; daily computation and record.</SUBJECT> <SECTNO>1.33</SECTNO> <SUBJECT>Monthly and confirmation statements.</SUBJECT> <SECTNO>1.34</SECTNO> <SUBJECT>Monthly record, “point balance”.</SUBJECT> <SECTNO>1.35</SECTNO> <SUBJECT>Records of cash commodity, futures, and option transactions.</SUBJECT> <SECTNO>1.36</SECTNO> <SUBJECT>Record of securities and property received from customers and option customers.</SUBJECT> <SECTNO>1.37</SECTNO> <SUBJECT>Customer's or option customer's name, address, and occupation recorded; record of guarantor or controller of account.</SUBJECT> <SECTNO>1.38</SECTNO> <SUBJECT>Execution of transactions.</SUBJECT> <SECTNO>1.39</SECTNO> <SUBJECT>Simultaneous buying and selling orders of different principals; execution of, for and between principals.</SUBJECT> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Miscellaneous</HD> <SECTNO>1.40</SECTNO> <SUBJECT>Crop, market information letters, reports; copies required.</SUBJECT> <SECTNO>1.41</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.41a-1.41c</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.42-1.43</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.44</SECTNO> <SUBJECT>Records and reports of warehouses, depositories, and other similar entities; visitation of premises.</SUBJECT> <SECTNO>1.45</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.46</SECTNO> <SUBJECT>Application and closing out of offsetting long and short positions.</SUBJECT> <SECTNO>1.47</SECTNO> <SUBJECT>Requirements for classification of purchases or sales of contracts for future delivery as bona fide hedging under § 1.3(z)(3) of the regulations.</SUBJECT> <SECTNO>1.48</SECTNO> <SUBJECT>Requirements for classification of sales or purchases for future delivery as bona fide hedging of unsold anticipated production or unfilled anticipated requirements under § 1.3(z)(2) (i)(B) or (ii)(C) of the regulations.</SUBJECT> <SECTNO>1.49</SECTNO> <SUBJECT>Denomination of customer funds and location of depositories.</SUBJECT> <SECTNO>1.50-1.51</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.52</SECTNO> <SUBJECT>Self-regulatory organization adoption and surveillance of minimum financial requirements.</SUBJECT> <SECTNO>1.53</SECTNO> <SUBJECT>Enforcement of contract market bylaws, rules, regulations, and resolutions.</SUBJECT> <SECTNO>1.54</SECTNO> <SUBJECT>Contract market rules submitted to and approved or not disapproved by the Secretary of Agriculture.</SUBJECT> <SECTNO>1.55</SECTNO> <SUBJECT>Distribution of “Risk Disclosure Statement” by futures commission merchants and introducing brokers.</SUBJECT> <SECTNO>1.56</SECTNO> <SUBJECT>Prohibition of guarantees against loss.</SUBJECT> <SECTNO>1.57</SECTNO> <SUBJECT>Operations and activities of introducing brokers.</SUBJECT> <SECTNO>1.58</SECTNO> <SUBJECT>Gross collection of exchange-set margins.</SUBJECT> <SECTNO>1.59</SECTNO> <SUBJECT>Activities of self-regulatory organization employees, governing board members, committee members, and consultants.</SUBJECT> <SECTNO>1.60</SECTNO> <SUBJECT>Pending legal proceedings.<PRTPAGE P="6"/> </SUBJECT> <SECTNO>1.61</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>1.62</SECTNO> <SUBJECT>Contract market requirement for floor broker and floor trader registration.</SUBJECT> <SECTNO>1.63</SECTNO> <SUBJECT>Service on self-regulatory organization governing boards or committees by persons with disciplinary histories.</SUBJECT> <SECTNO>1.64</SECTNO> <SUBJECT>Composition of various self-regulatory organization governing boards and major disciplinary committees.</SUBJECT> <SECTNO>1.65</SECTNO> <SUBJECT>Notice of bulk transfers and disclosure obligations to customers.</SUBJECT> <SECTNO>1.66</SECTNO> <SUBJECT>No-action positions with respect to floor traders.</SUBJECT> <SECTNO>1.67</SECTNO> <SUBJECT>Notification of final disciplinary action involving financial harm to a customer.</SUBJECT> <SECTNO>1.68</SECTNO> <SUBJECT>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.</SUBJECT> <SECTNO>1.69</SECTNO> <SUBJECT>Voting by interested members of self-regulatory organization governing boards and various committees.</SUBJECT> <SECTNO>1.70</SECTNO> <SUBJECT>Notification of State enforcement actions brought under the Commodity Exchange Act.</SUBJECT> <APP>Appendix A to Part 1 [Reserved]</APP> <APP>Appendix B to Part 1—Fees for Contract Market Rule Enforcement Reviews and Financial Reviews</APP> </SUBJGRP> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>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).</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>41 FR 3194, Jan. 21, 1976, unless otherwise noted.</P> </SOURCE> <SUBJGRP> <HD SOURCE="HED">Definitions</HD> <SECTION> <SECTNO>§ 1.1</SECTNO> <SUBJECT>Fraud in or in connection with transactions in foreign currency subject to the Commodity Exchange Act.</SUBJECT> <P>(a) <E T="03">Scope.</E> 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).</P> <P>(b) <E T="03">Fraudulent conduct prohibited.</E> 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:</P> <P>(1) To cheat or defraud or attempt to cheat or defraud any person;</P> <P>(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</P> <P>(3) Willfully to deceive or attempt to deceive any person by any means whatsoever.</P> <CITA>[66 FR 42269, Aug. 10, 2001]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.2</SECTNO> <SUBJECT>Liability of principal for act of agent.</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 1.3</SECTNO> <SUBJECT>Definitions.</SUBJECT> <P>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:</P> <P>(a) <E T="03">Board of Trade.</E> 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.</P> <P>(b) <E T="03">Business day.</E> 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.</P> <P>(c) <E T="03">Clearing member.</E> 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.</P> <P>(d) <E T="03">Clearing organization.</E> This term means the person or organization <PRTPAGE P="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.</P> <P>(e) <E T="03">Commodity.</E> 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.</P> <PARAUTH>(Sec. 2(a)(1), 88 Stat. 1395; 7 U.S.C. 2(1))</PARAUTH> <P>(f) <E T="03">Commodity Exchange Act; the Act.</E> These terms mean the Commodity Exchange Act, as amended, 7 U.S.C. 1 et seq.</P> <P>(g) <E T="03">Institutional customer.</E> This term has the same meaning as “eligible contract participant” as defined in section 1a(12) of the Act.</P> <P>(h) <E T="03">Contract market.</E> 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.</P> <P>(i) <E T="03">Contract of sale.</E> This term includes sales, purchases, agreements of sale or purchase and agreements to sell or purchase.</P> <P>(j) <E T="03">Controlled account.</E> 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.</P> <P>(k) <E T="03">Customer; commodity customer.</E> These terms have the same meaning and refer to a customer trading in any commodity named in the definition of commodity herein: <E T="03">Provided, however,</E> 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 § 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 §§ 1.37 and 1.46 and all other sections of these rules, regulations and orders which do not implement sections 4d and 4f.</P> <P>(l) <E T="03">Delivery month.</E> This term means the month of delivery specified in a contract of sale of any commodity for future delivery.</P> <P>(m) [Reserved]</P> <P>(n) <E T="03">Floor broker.</E> 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.</P> <P>(o) <E T="03">Future delivery.</E> This term does not include any sale of a cash commodity for deferred shipment or delivery.</P> <P>(p) <E T="03">Futures commission merchant.</E> This term means:</P> <P>(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</P> <P>(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.</P> <P>(q) <E T="03">Member of a contract market.</E> 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.</P> <P>(r) <E T="03">Net equity.</E> This term means the credit balance which would be obtained <PRTPAGE P="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.</P> <P>(s) <E T="03">Net deficit.</E> 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.</P> <P>(t) <E T="03">Open contracts.</E> 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.</P> <P>(u) <E T="03">Person.</E> This term includes individuals, associations, partnerships, corporations, and trusts.</P> <P>(v) [Reserved]</P> <P>(w) <E T="03">Secretary of Agriculture.</E> 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.</P> <P>(x) <E T="03">Floor trader.</E> 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.</P> <P>(y) <E T="03">Proprietary account.</E> 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:</P> <P>(i) Such individual himself, or such partnership, corporation or association itself;</P> <P>(ii) In the case of a partnership, a general partner in such partnership;</P> <P>(iii) In the case of a limited partnership, a limited or special partner in such partnership whose duties include:</P> <P>(A) The management of the partnership business or any part thereof,</P> <P>(B) The handling of the trades or customer funds of customers or option customers of such partnership,</P> <P>(C) The keeping of records pertaining to the trades or customer funds of customers or option customers of such partnership, or</P> <P>(D) The signing or co-signing of checks or drafts on behalf of such partnership;</P> <P>(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;</P> <P>(v) An employee of such individual, partnership, corporation or association whose duties include:</P> <P>(A) The management of the business of such individual, partnership, corporation or association or any part thereof,</P> <P>(B) The handling of the trades or customer funds of customers or option customers of such individual, partnership, corporation or association,</P> <P>(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</P> <P>(D) The signing or co-signing of checks or drafts on behalf of such individual, partnership, corporation or association;</P> <P>(vi) A spouse or minor dependent living in the same household of any of the foregoing persons;</P> <P>(vii) A business affiliate that directly or indirectly controls such individual, partnership, corporation or association.</P> <P>(viii) A business affiliate that, directly or indirectly is controlled by or is under common control with, such individual, partnership, corporation or association. <E T="03">Provided, however,</E> That an account owned by any shareholder or <PRTPAGE P="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.</P> <P>(z) <E T="03">Bona fide hedging transactions and positions</E>—(1) <E T="03">General definition.</E> 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:</P> <P>(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,</P> <P>(ii) The potential change in the value of liabilities which a person owns or anticipates incurring, or</P> <P>(iii) The potential change in the value of services which a person provides, purchases, or anticipates providing or purchasing.</P> <FP>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 §§ 1.47 and 1.48 of the regulations have been satisfied.</FP> <P>(2) <E T="03">Enumerated hedging transactions.</E> 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:</P> <P>(i) <E T="03">Sales</E> of any commodity for future delivery on a contract market which do not exceed in quantity:</P> <P>(A) Ownership or fixed-price purchase of the same cash commodity by the same person; and</P> <P>(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.</P> <P>(ii) <E T="03">Purchases</E> of any commodity for future delivery on a contract market which do not exceed in quantity.</P> <P>(A) The fixed-price sale of the same cash commodity by the same person.</P> <P>(B) The quantity equivalent of fixed-price sales of the cash products and by-products of such commodity by the same person; and</P> <P>(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.</P> <P>(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.</P> <P>(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.<PRTPAGE P="10"/> </P> <P>(3) <E T="03">Non-enumerated cases.</E> Upon specific request made in accordance with § 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 § 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, <E T="03">provided</E> That the person is responsible for the merchandising of the cash position which is being offset.</P> <P>(aa) <E T="03">Associated person.</E> This term means any natural person who is associated in any of the following capacities with:</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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</P> <P>(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 § 31.4(x) of this chapter, or (ii) the supervision of any person or persons so engaged.</P> <P>(bb)(1) <E T="03">Commodity trading advisor.</E> 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: <E T="03">Provided,</E> That the furnishing of such services by the foregoing persons is solely incidental to the conduct of their business or profession: <E T="03">Provided further,</E> That the Commission, by rule <PRTPAGE P="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.</P> <P>(cc) <E T="03">Commodity pool operator.</E> 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.</P> <P>(dd) <E T="03">Commission.</E> This term means the Commodity Futures Trading Commission.</P> <P>(ee) <E T="03">Self-regulatory organization.</E> This term means a contract market (as defined in § 1.3(h)), or a registered futures association under section 17 of the Act.</P> <P>(ff) <E T="03">Designated self-regulatory organization.</E> This term means:</P> <P>(1) Self-regulatory organization of which a futures commission merchant, an introducing broker or a leverage transaction merchant is a member; or</P> <P>(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 § 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</P> <P>(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 § 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.</P> <P>(gg) <E T="03">Customer funds.</E> 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:</P> <P>(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</P> <P>(2) In the case of option customers, in connection with a commodity option transaction on or subject to the rules of a contract market:</P> <P>(i) To be used as a premium for the purchase of a commodity option for an option customer;</P> <P>(ii) As a premium payable to an option customer;</P> <P>(iii) To guarantee or secure performance of a commodity option by an option customer; or</P> <P>(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.</P> <P>(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 <PRTPAGE P="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 § 37.7 of this chapter.</P> <P>(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.</P> <P>(hh) <E T="03">Commodity option transaction; commodity option.</E> 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.</P> <P>(ii) <E T="03">Premium.</E> 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.</P> <P>(jj) <E T="03">Option customer.</E> 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 §§ 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.</P> <P>(kk) <E T="03">Strike price.</E> 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: <E T="03">Provided</E>, That for purposes of § 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 <E T="03">(i.e.</E>, price per unit times the number of units).</P> <P>(ll) <E T="03">Physical</E>. 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.</P> <P>(mm) <E T="03">Introducing broker.</E> This term means:</P> <P>(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</P> <P>(2) Includes any person required to register as an introducing broker by virtue of part 33 of this chapter: <E T="03">Provided,</E> That the term “introducing broker” shall not include:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(nn) <E T="03">Guarantee agreement.</E> 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 <PRTPAGE P="13"/>broker in satisfaction of the alternative adjusted net capital requirement set forth in § 1.17(a)(2)(ii).</P> <P>(oo) <E T="03">Leverage transaction merchant.</E> 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.</P> <P>(pp) <E T="03">Leverage customer funds.</E> 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.</P> <P>(qq) <E T="03">Leverage contract.</E> Shall have the same meaning as that set forth in § 31.4(w) of this chapter.</P> <P>(rr) <E T="03">Foreign futures or foreign options secured amount.</E> 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 § 30.1 of this chapter:</P> <P>(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</P> <P>(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.</P> <P>(ss) <E T="03">Foreign board of trade.</E> 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.</P> <P>(tt) <E T="03">Electronic signature</E> 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.</P> <P>(uu) <E T="03">Opt-out customer.</E> 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 § 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 §§ 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 § 1.3(k).</P> <P>(vv) <E T="03">Futures account.</E> 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.</P> <P>(ww) <E T="03">Securities account.</E> This term means an account that is maintained in accordance with the requirements of <PRTPAGE P="14"/>section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-3 thereunder.</P> <CITA>[41 FR 3194, Jan. 21, 1976]</CITA> <EDNOTE> <HD SOURCE="HED">Editorial Note:</HD> <P>For <E T="04">Federal Register</E> citations affecting § 1.3, see the List of CFR Sections Affected, which appears in the Finding Aids sections of the printed volume and on GPO Access.</P> </EDNOTE> </SECTION> <SECTION> <SECTNO>§ 1.4</SECTNO> <SUBJECT> Use of electronic signatures.</SUBJECT> <P>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; <E T="03">Provided, however,</E> That the electronic signature must comply with applicable Federal laws and other Commission rules; And, <E T="03">Provided further,</E> 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.</P> <CITA>[65 FR 12469, Mar. 9, 2000]</CITA> </SECTION> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Minimum Financial and Related Reporting Requirements</HD> <SECTION> <SECTNO>§ 1.10</SECTNO> <SUBJECT>Financial reports of futures commission merchants and introducing brokers.</SUBJECT> <P>(a) <E T="03">Application for registration.</E> (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.</P> <P>(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:</P> <P>(<E T="03">1</E>) A Form 1-FR-FCM certified by an independent public accountant in accordance with § 1.16 as of a date not more than 45 days prior to the date on which such report is filed; or</P> <P>(<E T="03">2</E>) 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 § 1.16 as of a date not more than one year prior to the date on which such report is filed.</P> <P>(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.</P> <P>(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:</P> <P>(<E T="03">1</E>) A Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than 45 days prior to the date on which such report is filed;</P> <P>(<E T="03">2</E>) 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 § 1.16 as of a date not more <PRTPAGE P="15"/>than one year prior to the date on which such report is filed;</P> <P>(<E T="03">3</E>) 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, <E T="03">Provided, however,</E> that such applicant shall be subject to a review by the applicant's designated self-regulatory organization within six months of registration; or</P> <P>(<E T="03">4</E>) A guarantee agreement.</P> <P>(B) Each person filing in accordance with paragraphs (a)(2)(ii)(A) (<E T="03">1</E>), (<E T="03">2</E>) or (<E T="03">3</E>) 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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(b) <E T="03">Filing of financial reports.</E> (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: <E T="03">Provided, however,</E> 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.</P> <P>(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 <PRTPAGE P="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 § 1.16 no later than 90 days after the close of each futures commission merchant's fiscal year: <E T="03">Provided, however,</E> 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 § 240.17a-5(d)(5) of this title.</P> <P>(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: <E T="03">Provided, however,</E> 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.</P> <P>(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 § 1.16 no later than 90 days after the close of each introducing broker's fiscal year: <E T="03">Provided, however,</E> 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 § 240.17a-5(d)(5) of this title.</P> <P>(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 § 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 § 1.16 of this part.</P> <P>(iii) A Form 1-FR required to be certified by an independent public accountant in accordance with § 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.</P> <P>(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 § 1.52: <E T="03">Provided, however,</E> 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.</P> <P>(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 <PRTPAGE P="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.</P> <P>(c) <E T="03">Where to file reports.</E> 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): <E T="03">Provided, however,</E> That any report filed pursuant to paragraphs (b)(1), (b)(2), or (b)(4) of this section or § 1.12 (a) or (b) which need not be certified in accordance with § 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: <E T="03">And, provided further,</E> 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.</P> <P>(d) <E T="03">Contents of financial reports.</E> (1) Each Form 1-FR filed pursuant to this § 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:</P> <P>(i) A statement of financial condition as of the date for which the report is made;</P> <P>(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;</P> <P>(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;</P> <P>(iv) A statement of the computation of the minimum capital requirements pursuant to § 1.17 as of the date for which the report is made;</P> <P>(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 § 30.7 of this chapter as of the date for which the report is made; and</P> <P>(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.</P> <P>(2) Each Form 1-FR filed pursuant to this § 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:</P> <P>(i) A statement of financial condition as of the date for which the report is made;</P> <P>(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 <PRTPAGE P="18"/>condition filed with the Commission and the date for which the report is made: <E T="03">Provided,</E> 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;</P> <P>(iii) A statement of the computation of the minimum capital requirements pursuant to § 1.17 as of the date for which the report is made;</P> <P>(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 § 30.7 of this chapter as of the date for which the report is made;</P> <P>(v) Appropriate footnote disclosures;</P> <P>(vi) A reconciliation, including appropriate explanations, of the statement of the computation of the minimum capital requirements pursuant to § 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 § 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</P> <P>(vii) In addition to the information expressly required, such further material information as may be necessary to make the required statements not misleading.</P> <P>(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: <E T="03">Provided,</E> 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 § 1.17. Such reconciliation must be certified by an independent public accountant in accordance with § 1.16.</P> <P>(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.</P> <P>(e) <E T="03">Election of fiscal year.</E> (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 <PRTPAGE P="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.</P> <P>(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.</P> <P>(f) <E T="03">Extension of time for filing uncertified reports.</E> (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 § 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 § 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 § 1.16(f) for extension of the time for filing certified financial statements.)</P> <P>(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 § 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 § 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:</P> <P>(i) Notify the applicant of the grant or denial of the requested extension; or</P> <P>(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.<PRTPAGE P="20"/> </P> <P>(g) <E T="03">Nonpublic treatment of reports.</E> (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 § 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.</P> <P>(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 § 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.</P> <P>(3) [Reserved]</P> <P>(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.</P> <P>(5) The independent accountant's opinion and a guarantee agreement filed pursuant to this section will be deemed public information.</P> <P>(h) <E T="03">Filing option available to a futures commission merchant or an introducing broker which is also a securities broker or dealer.</E> 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: <E T="03">Provided, however,</E> That all information which is required to be furnished on and submitted with Form 1-FR is provided with such Report.</P> <P>(i) <E T="03">Filing option available to an introducing broker or applicant for registration as an introducing broker which is also a country elevator.</E> 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 <PRTPAGE P="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 § 1.16(b)(2) with respect to the registrant or applicant: <E T="03">Provided, however,</E> 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 § 1.17: <E T="03">And, provided further,</E> 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 § 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.</P> <P>(j) <E T="03">Requirements for guarantee agreement.</E> (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.</P> <P>(2) No futures commission merchant may enter into a guarantee agreement if:</P> <P>(i) It knows or should have known that its adjusted net capital is less than the amount set forth in § 1.12(b); or</P> <P>(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 §§ 3.55, 3.56 or 3.60 of this chapter.</P> <P>(3) A guarantee agreement filed in connection with an application for initial registration as an introducing broker in accordance with the provisions of § 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.</P> <P>(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.</P> <P>(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.</P> <P>(5) A guarantee agreement may be terminated at any time during the term thereof:</P> <P>(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;</P> <P>(ii) For good cause shown, by either party giving written notice of its intention to terminate the agreement, <PRTPAGE P="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</P> <P>(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.</P> <P>(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.</P> <P>(7) An introducing broker may not simultaneously be a party to more than one guarantee agreement: <E T="03">Provided, however,</E> 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: <E T="03">And, provided further,</E> 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.</P> <P>(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:</P> <P>(<E T="03">1</E>) A Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than 45 days prior to the date on which the report is filed; or</P> <P>(<E T="03">2</E>) 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 § 1.16 as of a date not more than one year prior to the date on which the report is filed.</P> <P>(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.</P> <P>(ii) (A) Notwithstanding the provisions of paragraph (j)(8)(i) of this section or of § 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 § 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 <PRTPAGE P="23"/>doing business as an introducing broker unless and until it files a new agreement or either:</P> <P>(<E T="03">1</E>) A Form 1-FR-IB certified by an independent public accountant in accordance with § 1.16 as of a date not more than 45 days prior to the date on which the report is filed; or</P> <P>(<E T="03">2</E>) 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 § 1.16 as of a date not more than one year prior to the date on which the report is filed.</P> <P>(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.</P> <P>(k) <E T="03">Filing option available to an introducing broker.</E> (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.</P> <P>(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 § 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 § 1.18 of this part, in a manner consistent with Form 1-FR-IB.</P> <APPRO>(The information collection requirements contained in § 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.)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.11</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.12</SECTNO> <SUBJECT>Maintenance of minimum financial requirements by futures commission merchants and introducing brokers.</SUBJECT> <P>(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 § 1.17 or by the capital rule of any self-regulatory organization to which such person is subject, if any, must:</P> <P>(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 § 1.17 or by other capital rule, identifying the applicable capital rule. The notice must be given <PRTPAGE P="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</P> <P>(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 § 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 § 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</P> <P>(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 § 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.</P> <P>(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:</P> <P>(1) 150 percent of the appropriate minimum dollar amount required by § 1.17(a)(1)(i);</P> <P>(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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(3) 150 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(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 § 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: <E T="03">Provided, however,</E> 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.<PRTPAGE P="25"/> </P> <P>(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.</P> <P>(d) Whenever any applicant or registrant discovers or is notified by an independent public accountant, pursuant to § 1.16(e)(2) of these regulations, of the existence of any material inadequacy, as specified in § 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.</P> <P>(e) Whenever any self-regulatory organization learns that a member registrant has failed to file a notice or written report as required by § 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.</P> <P>(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.</P> <P>(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.</P> <P>(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 § 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.</P> <P>(4) A futures commission merchant shall report immediately by telephone, confirmed in writing immediately by <PRTPAGE P="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 § 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.</P> <P>(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:</P> <P>(A) A futures commission merchant, or</P> <P>(B) The Securities and Exchange Commission for a securities broker and dealer.</P> <P>(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.</P> <P>(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 § 1.10. This notice shall be provided as follows:</P> <P>(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 § 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</P> <P>(2) If equity capital of the futures commission merchant or a subsidiary or affiliate of the futures commission merchant consolidated pursuant to § 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 § 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: <E T="03">Provided, however,</E> 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.</P> <P>(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 § 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 <PRTPAGE P="27"/>upon market conditions, reports provided by the futures commission merchant, or other available information.</P> <P>(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.</P> <P>(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 § 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 § 1.10(d) of this part unless otherwise indicated.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0024)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.13</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.14</SECTNO> <SUBJECT>Risk assessment recordkeeping requirements for futures commission merchants.</SUBJECT> <P>(a) <E T="03">Requirement to maintain and preserve information.</E> (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:</P> <P>(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 <PRTPAGE P="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;</P> <P>(ii) Written policies, procedures, or systems concerning the futures commission merchant's:</P> <P>(A) Method(s) for monitoring and controlling financial and operational risks to it resulting from the activities of any of its affiliated persons;</P> <P>(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;</P> <P>(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: <E T="03">Provided, however,</E> that if the futures commission merchant has no such written policies, procedures or systems, it must so state in writing;</P> <P>(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 § 1.15(a)(2)(iii) shall also be maintained and preserved; and</P> <P>(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 § 1.15(a)(2)(iii) shall also be maintained and preserved.</P> <P>(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:</P> <P>(i) The legal relationship between the futures commission merchant and the affiliated person;</P> <P>(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;<PRTPAGE P="29"/> </P> <P>(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;</P> <P>(iv) The level of market, credit or other risk present in the activities of the affiliated person; and</P> <P>(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.</P> <P>(3) For purposes of this section and § 1.15, the term Material Affiliated Person does not include a natural person.</P> <P>(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 § 1.31.</P> <P>(b) <E T="03">Special provisions with respect to Material Affiliated Persons subject to the supervision of certain domestic regulators.</E> 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:</P> <P>(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 § 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 §§ 240.17h-1T and 240.17h-2T of this title, or such other risk assessment regulations as the Securities and Exchange Commission may adopt;</P> <P>(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</P> <P>(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.</P> <P>(c) <E T="03">Special provisions with respect to Material Affiliated Persons subject to the supervision of a Foreign Regulatory Authority.</E> 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 <PRTPAGE P="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.</P> <P>(d) <E T="03">Exemptions.</E> (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.</P> <P>(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 § 1.10 unless another futures commission merchant is acting as the Reporting Broker or Dealer under § 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 § 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.</P> <P>(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.</P> <P>(e) <E T="03">Location of records.</E> 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 § 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 <PRTPAGE P="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 § 1.15.</P> <P>(f) <E T="03">Confidentiality.</E> 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.</P> <P>(g) <E T="03">Implementation schedule.</E> (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.</P> <P>(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.</P> <CITA>[59 FR 66688, Dec. 28, 1994]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.15</SECTNO> <SUBJECT>Risk assessment reporting requirements for futures commission merchants.</SUBJECT> <P>(a) <E T="03">Reporting requirements with respect to information required to be maintained by § 1.14.</E> (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:</P> <P>(i) A copy of the organizational chart maintained by the futures commission merchant pursuant to paragraph (a)(l)(i) of § 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</P> <P>(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 § 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.</P> <P>(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:</P> <P>(i) Fiscal year-end consolidated and consolidating balance sheets for the <PRTPAGE P="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;</P> <P>(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</P> <P>(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.</P> <P>(3) For the purposes of this section, the term Material Affiliated Person shall have the meaning used in § 1.14.</P> <P>(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 § 1.10.</P> <P>(b) [Reserved]</P> <P>(c) <E T="03">Exemptions.</E> (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.</P> <P>(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 § 1.10 unless another futures commission merchant is acting as the Reporting Broker or Dealer under § 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 § 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 <PRTPAGE P="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.</P> <P>(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.</P> <P>(d) <E T="03">Special provisions with respect to Material Affiliated Persons subject to the supervision of certain domestic regulators.</E> (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 § 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 § 1.14 which are not designated as Material Associated Persons for purposes of the Form 17-H filed pursuant to §§ 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.</P> <P>(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 § 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.</P> <P>(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:</P> <P>(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 § 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</P> <P>(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 § 1.14, copies of the filings made <PRTPAGE P="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.</P> <P>(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.</P> <P>(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.</P> <P>(e) <E T="03">Special provisions with respect to Material Affiliated Persons subject to the supervision of a Foreign Regulatory Authority.</E> 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:</P> <P>(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</P> <P>(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.</P> <P>(f) <E T="03">Confidentiality.</E> 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.</P> <P>(g) <E T="03">Implementation schedule.</E> 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.</P> <CITA>[59 FR 66690, Dec. 28, 1994; 60 FR 13901, Mar. 15, 1995]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.16</SECTNO> <SUBJECT>Qualifications and reports of accountants.</SUBJECT> <P>(a) <E T="03">Definitions—</E>(1) <E T="03">Accountant's report.</E> 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 <PRTPAGE P="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.</P> <P>(2) <E T="03">Audit or examination.</E> 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.</P> <P>(3) <E T="03">Certified.</E> 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.</P> <P>(4) <E T="03">Customer.</E> The term “customer” means customer (as defined in § 1.3(k)) and option customer (as defined in § 1.3(jj) of this part and in § 32.1(c) of this chapter) and includes a foreign futures and foreign options customer (as defined in § 30.1(c) of this chapter).</P> <P>(b) <E T="03">Qualifications of accountants.</E> (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.</P> <P>(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 § 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.</P> <P>(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.</P> <P>(c) <E T="03">Accountant's reports—</E>(1) <E T="03">Technical requirements.</E> 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 <PRTPAGE P="36"/>the financial statements covered by the report.</P> <P>(2) <E T="03">Representations as to the audit.</E> 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.</P> <P>(3) <E T="03">Opinion to be expressed.</E> 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.</P> <P>(4) <E T="03">Exceptions.</E> 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.</P> <P>(5) <E T="03">Accountant's report on material inadequacies.</E> 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: <E T="03">Provided, however,</E> That if such applicant is registered with the Securities and Exchange Commission as a securities broker or dealer, and it files (in accordance with § 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.</P> <P>(d) <E T="03">Audit objectives.</E> (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 § 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.</P> <P>(2) A material inadequacy in the accounting system, the internal accounting controls, the procedures for safeguarding customer and firm assets, and <PRTPAGE P="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:</P> <P>(i) Inhibit an applicant or registrant from promptly completing transactions or promptly discharging his responsibilities to customers or other creditors;</P> <P>(ii) Result in material financial loss;</P> <P>(iii) Result in material misstatement of the applicant's or registrant's financial statements and schedules; or</P> <P>(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.</P> <P>(e) <E T="03">Extent and timing of audit procedures.</E> (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.</P> <P>(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 § 1.12: <E T="03">Provided, however,</E> 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.</P> <P>(f) <E T="03">Extension of time for filing audited reports.</E> (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 § 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 <PRTPAGE P="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:</P> <P>(i) State the reasons for the requested extension;</P> <P>(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;</P> <P>(iii) Be accompanied by the latest available formal computation of the registrant's adjusted net capital and minimum financial requirements computed in accordance with § 1.17;</P> <P>(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 § 30.7 of this chapter, as of the date of the latest available computation;</P> <P>(v) Contain an agreement to file the report on or before the date specified by the registrant in the application;</P> <P>(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</P> <P>(vii) Be accompanied by a letter from the independent public accountant answering the following questions:</P> <P>(A) What specifically are the reasons for the extension request?</P> <P>(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?</P> <P>(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 § 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?</P> <P>(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.</P> <P>(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.</P> <P>(g) <E T="03">Replacement of accountant.</E> (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.</P> <P>(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 <PRTPAGE P="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, <E T="03">i.e.,</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.</P> <P>(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.</P> <P>(h) <E T="03">Exemption for introducing broker or applicant therefor.</E> 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 <PRTPAGE P="40"/>broker or applicant therefor is not also a securities broker or dealer.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007, 3038-0024)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.17</SECTNO> <SUBJECT>Minimum financial requirements for futures commission merchants and introducing brokers.</SUBJECT> <P>(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:</P> <P>(A) $250,000;</P> <P>(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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(C) The amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(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)).</P> <P>(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 § 1.3(g) must:</P> <P>(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</P> <P>(B) Receive orders on behalf of the customer from a commodity trading advisor acting in accordance with § 4.32 of this chapter.</P> <P>(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:</P> <P>(A) $30,000;</P> <P>(B) The amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(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)).</P> <P>(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 § 1.52.</P> <P>(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 § 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)).</P> <P>(3) No person applying for registration as a futures commission merchant or as an introducing broker shall be so <PRTPAGE P="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.</P> <P>(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: <E T="03">Provided, however,</E> The registrant may trade for liquidation purposes only unless otherwise directed by the Commission and/or the designated self-regulatory organization: <E T="03">And, Provided further,</E> 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.</P> <P>(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: <E T="03">Provided, however,</E> 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.</P> <P>(b) For the purposes of this section:</P> <P>(1) Where the applicant or registrant has an asset or liability which is defined in Securities Exchange Act Rule 15c3-1 (§ 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 § 240.15c3-1 of this title, unless specifically stated otherwise in this section.</P> <P>(2) <E T="03">Customer</E> means customer (as defined in § 1.3(k)), option customer (as defined in § 1.3(jj) of this part and in § 32.1(c) of this chapter) and includes a foreign futures and foreign options customer (as defined in § 30.1(c) of this chapter).</P> <P>(3) <E T="03">Proprietary account</E> 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.</P> <P>(4) <E T="03">Noncustomer account</E> 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).</P> <P>(5) <E T="03">Clearing organization</E> means clearing organization (as defined in § 1.3(d)) and includes a clearing organization of any board of trade.</P> <P>(6) <E T="03">Business day</E> means any day other than a Sunday, Saturday, or holiday.</P> <P>(c) Definitions: For the purposes of this section:<PRTPAGE P="42"/> </P> <P>(1) <E T="03">Net capital</E> means the amount by which current assets exceed liabilities. In determining “net capital”:</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(2) The term <E T="03">current assets</E> 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:</P> <P>(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: <E T="03">Provided, however,</E> 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.</P> <P>(ii) Exclude all unsecured receivables, advances and loans except for:</P> <P>(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: <E T="03">Provided,</E> Such receivables or advances are outstanding no longer than 3 calendar months from the date that they are accrued;</P> <P>(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: <E T="03">Provided,</E> 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;</P> <P>(C) Receivables from clearing organizations and securities clearing organizations;</P> <P>(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;</P> <P>(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 <PRTPAGE P="43"/>are not outstanding more than 3 calendar months after the date they are recorded as a receivable;</P> <P>(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: <E T="03">Provided,</E> Such claims are not outstanding longer than twenty (20) business days from the date they are so acknowledged by the carrier;</P> <P>(iii) Exclude all prepaid expenses and deferred charges;</P> <P>(iv) Exclude all inventories except for:</P> <P>(A) Readily marketable spot commodities; or spot commodities which “adequately collateralize” indebtedness under paragraph (c)(7) of this section;</P> <P>(B) Securities which are considered “readily marketable” (as defined in § 240.15c3-1(c)(11) of this title) or which “adequately collateralize” indebtedness under paragraph (c)(7) of this section;</P> <P>(C) Work in process and finished goods which result from the processing of commodities at market value;</P> <P>(D) Raw materials at market value which will be combined with spot commodities to produce a finished proc- essed commodity; and</P> <P>(E) Inventories held for resale commonly associated with the business activities of the applicant or registrant;</P> <P>(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: <E T="03">Provided,</E> Such liabilities are not excluded from liabilities in the computation of net capital under paragraph (c)(4)(vi) of this section;</P> <P>(vi) Exclude all assets doubtful of collection or realization less any reserves established therefor;</P> <P>(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;</P> <P>(viii) Include guaranteee deposits with clearing organizations and stock in clearing organizations to the extent of its margin value;</P> <P>(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</P> <P>(x) Exclude exchange memberships.</P> <P>(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:</P> <P>(i) The receivable is secured by readily marketable collateral which is otherwise unencumbered and which can be readily converted into cash: <E T="03">Provided, however,</E> 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</P> <P>(ii)(A) The readily marketable collateral is in the possession or control of the applicant or registrant; or</P> <P>(B) The applicant or registrant has a legally enforceable, written security agreement, signed by the debtor, and <PRTPAGE P="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.</P> <P>(4) The term <E T="03">liabilities</E> 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”:</P> <P>(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;</P> <P>(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: <E T="03">Provided, however,</E> 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;</P> <P>(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;</P> <P>(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:</P> <P>(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;</P> <P>(B) Any deferred tax liability related to income accrued which is directly related to an asset otherwise deducted pursuant to this section;</P> <P>(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;</P> <P>(v) Excludes any current tax liability related to income accrued which is directly related to an asset otherwise deducted pursuant to this section; and</P> <P>(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: <E T="03">Provided,</E> That such plant, property and equipment is not included in current assets pursuant to paragraph (c)(2)(v) of this section.</P> <P>(5) The term <E T="03">adjusted net capital</E> means net capital less:</P> <P>(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;</P> <P>(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:</P> <P>(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.<PRTPAGE P="45"/> </P> <P>(B) Inventory which is covered by an open futures contract or commodity option.—5 percent of the market value.</P> <P>(C) Inventory which is not covered.—20 percent of the market value.</P> <P>(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.</P> <P>(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.</P> <P>(iii)-(iv) [Reserved]</P> <P>(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));</P> <P>(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 § 240.15c3-1 appendix A of this title, the treatment specified in, or under, § 240.15c3-1 appendix A, after effecting certain adjustments to net capital for listed and unlisted options as set forth in such appendix;</P> <P>(vii) In the case of an applicant or registrant who has open contractual commitments, as hereinafter defined, the deductions specified in § 240.15c3-1(c)(2)(viii) of this title;</P> <P>(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: <E T="03">Provided,</E> 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);</P> <P>(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: <E T="03">Provided,</E> 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 <PRTPAGE P="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);</P> <P>(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:</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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: <E T="03">Provided</E>, 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;</P> <P>(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;</P> <P>(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;</P> <P>(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:</P> <P>(A) A registered futures commission merchant;</P> <P>(B) A broker or dealer that is registered as such with the Securities and Exchange Commission; or</P> <P>(C) A foreign broker that has been granted comparability relief pursuant to §30.10 of this chapter, <E T="03">Provided, however,</E> 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 <E T="03">Provided, that,</E> in the case of customer funds, such account is treated in accordance with the special requirements of the applicable Commission order issued under §30.10 of this chapter.</P> <P>(xiv) For securities brokers and dealers, all other deductions specified in § 240.15c3-1 of this title.</P> <P>(6) [Reserved]</P> <P>(7) <E T="03">Liabilities</E> 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.</P> <P>(8) The term <E T="03">contractual commitments</E> shall include underwriting, when issued, when distributed, and delayed delivery contracts; and the writing or <PRTPAGE P="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.</P> <P>(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):</P> <P>(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:</P> <P>(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</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <P>(C) In the case of a sole proprietorship, the sum of its capital accounts of the sole proprietorship and unrealized profit and loss.</P> <P>(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.</P> <P>(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:</P> <P>(1) Either adjusted net capital of any of the consolidated entities would be less than the greatest of:</P> <P>(i) 120 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(ii) For a futures commission merchant or applicant therefor, 6 percent of the following amount: The customer <PRTPAGE P="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 § 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;</P> <P>(iii) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(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</P> <P>(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.</P> <FP> <E T="03">Provided</E>, 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.</FP> <P>(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.</P> <P>(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.</P> <P>(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 <PRTPAGE P="49"/>audit pursuant to § 1.10 or upon any material change in circumstances.</P> <P>(3) In preparing a consolidated computation of adjusted net capital pursuant to this section, the following minimum and non-exclusive requirements shall be observed;</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(g) [Reserved]</P> <P>(h) The term <E T="03">satisfactory subordination agreement</E> (“subordination agreement”) means an agreement which contains the minimum and nonexclusive requirements set forth below.</P> <P>(1) Certain definitions for purposes of this section:</P> <P>(i) A subordination agreement may be either a subordinated loan agreement or a secured demand note agreement.</P> <P>(ii) The term <E T="03">subordinated loan agreement</E> means the agreement or agreements evidencing or governing a subordinated borrowing of cash.</P> <P>(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)).</P> <P>(iv) The term <E T="03">payment obligation</E> means the obligation of an applicant or registrant in respect to any subordination agreement:</P> <P>(A) To repay cash loaned to the applicant or registrant pursuant to a subordinated loan agreement; or</P> <P>(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.</P> <P>(v)(A) The term <E T="03">secured demand note agreement</E> 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.</P> <P>(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: <E T="03">Provided, however,</E> 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.</P> <P>(C) If such note is not paid upon presentment and demand as provided for <PRTPAGE P="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.</P> <P>(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: <E T="03">Provided,</E> 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: <E T="03">And provided further,</E> 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.</P> <P>(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.</P> <P>(F) The term <E T="03">lender</E> 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.</P> <P>(2) Minimum requirements for subordination agreements:</P> <P>(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:</P> <P>(A) Has a minimum term of 1 year, except for temporary subordination agreements provided for in paragraph (h)(3)(v) of this section, and</P> <P>(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.</P> <P>(ii) <E T="03">Specific amount.</E> 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.</P> <P>(iii) <E T="03">Effective subordination.</E> 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 <PRTPAGE P="51"/>of the lender under such subordination agreements.</P> <P>(iv) <E T="03">Proceeds of subordinated loan agreements.</E> 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.</P> <P>(v) <E T="03">Certain rights of the borrower.</E> The subordination agreement shall provide that the applicant or registrant shall have the right to:</P> <P>(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;</P> <P>(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</P> <P>(C) Lend to itself or others any or all of the securities and cash pledged as collateral to secure a secured demand note.</P> <P>(vi) <E T="03">Collateral for secured demand notes.</E> 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:</P> <P>(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</P> <P>(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: <E T="03">Provided, however,</E> 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</P> <P>(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: <E T="03">Provided,</E> That after giving effect to such reduction the adjusted net capital of the applicant or <PRTPAGE P="52"/>registrant would not be less than the greatest of:</P> <P>(<E T="03">1</E>) 120 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(<E T="03">2</E>) 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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(<E T="03">3</E>) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(<E T="03">4</E>) 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)): <E T="03">Provided, further,</E> 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.</P> <P>(vii) <E T="03">Permissive prepayments and special prepayments.</E> (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: <E T="03">Provided, however,</E> 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:</P> <P>(<E T="03">1</E>) 120 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(<E T="03">2</E>) 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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(<E T="03">3</E>) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(<E T="03">4</E>) 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)).<PRTPAGE P="53"/> </P> <P>(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:</P> <P>(<E T="03">1</E>) 200 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(<E T="03">3</E>) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(<E T="03">4</E>) 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)): <E T="03">Provided, however,</E> 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.</P> <P>(C)(<E T="03">1</E>) 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.</P> <P>(<E T="03">2</E>) 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 <PRTPAGE P="54"/>notifies the registrant that the designated examining authority's approval shall not constitute designated self-regulatory organization approval.</P> <P>(<E T="03">3</E>) 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.</P> <P>(viii) <E T="03">Suspended repayment.</E> (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:</P> <P>(<E T="03">1</E>) 120 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(<E T="03">2</E>) 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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(<E T="03">3</E>) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(<E T="03">4</E>) 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)): <E T="03">Provided,</E> 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.</P> <P>(B) [Reserved]</P> <P>(ix) <E T="03">Accelerated maturity.</E> Obligation to repay to remain subordinate:</P> <P>(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.</P> <P>(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 <PRTPAGE P="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.</P> <P>(x) <E T="03">Accelerated maturity of subordination agreements on event of default and event of acceleration.</E> Obligation to repay to remain subordinate:</P> <P>(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:</P> <P>(<E T="03">1</E>) Failure to pay interest or any installment of principal on a subordination agreement as scheduled;</P> <P>(<E T="03">2</E>) Failure to pay when due other money obligations of a specified material amount;</P> <P>(<E T="03">3</E>) 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;</P> <P>(<E T="03">4</E>) 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;</P> <P>(<E T="03">5</E>) 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</P> <P>(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 <PRTPAGE P="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:</P> <P>(<E T="03">1</E>) 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;</P> <P>(<E T="03">2</E>) 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;</P> <P>(<E T="03">3</E>) The Commission shall revoke the registration of the applicant or registrant;</P> <P>(<E T="03">4</E>) The self-regulatory organization shall suspend (and not reinstate within 10 days) or revoke the applicant or registrant's status as a member thereof;</P> <P>(<E T="03">5</E>) 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.</P> <P>(3) <E T="03">Miscellaneous provisions—</E>(i) <E T="03">Prohibited cancellation.</E> 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.</P> <P>(ii) <E T="03">Notice of maturity or accelerated maturity.</E> 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:</P> <P>(A) 120 percent of the minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(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 § 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 <PRTPAGE P="57"/>trade for which the full premiums have been paid: <E T="03">Provided, however,</E> 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;</P> <P>(C) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member; or</P> <P>(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)).</P> <P>(iii) <E T="03">Certain legends.</E> 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.</P> <P>(iv) <E T="03">Legal title to securities.</E> 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.</P> <P>(v) <E T="03">Temporary subordinations.</E> 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: <E T="03">Provided,</E> 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:</P> <P>(A) 120 percent of the appropriate minimum dollar amount required by paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;</P> <P>(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 § 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: <E T="03">Provided, however,</E> 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;</P> <P>(C) 120 percent of the amount of adjusted net capital required by a registered futures association of which it is a member;</P> <P>(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</P> <P>(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.</P> <P>(vi) <E T="03">Filing.</E> 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 <PRTPAGE P="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.</P> <P>(vii) <E T="03">Subordination agreements in effect prior to adoption.</E> 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. <E T="03">Provided,</E> 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. <E T="03">Provided further,</E> That all subordination agreements must meet the requirements of this rule within 5 years of the effective date of this section.<PRTPAGE P="59"/> </P> <P>(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): <E T="03">Provided,</E> (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;</P> <P>(ii) That such debt did not exist prior to its use under this paragraph (h)(4);</P> <P>(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;</P> <P>(iv) Such exemption shall not be allowed more than once in any 12 month period; and</P> <P>(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).</P> <P>(i) [Reserved]</P> <P>(j) For the purposes of this section <E T="03">cover</E> is defined as follows:</P> <P>(1) <E T="03">General definition.</E> 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:</P> <P>(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.</P> <P>(ii) The potential change in the value of liabilities which a person owes or anticipates incurring, or</P> <P>(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.</P> <P>(2) <E T="03">Enumerated cover transactions.</E> 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:</P> <P>(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: <E T="03">Provided,</E> 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;</P> <P>(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: <E T="03">Provided,</E> <PRTPAGE P="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</P> <P>(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.</P> <P>(3) <E T="03">Nonenumerated cases.</E> 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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0024)</APPRO> <CITA>[43 FR 39972, Sept. 8, 1978]</CITA> <EDNOTE> <HD SOURCE="HED">Editorial Note:</HD> <P>For <E T="04">Federal Register</E> citations affecting § 1.17, see the List of Sections Affected, which appears in the Finding Aids section of the printed volume and on GPO Access.</P> </EDNOTE> </SECTION> <SECTION> <SECTNO>§ 1.18</SECTNO> <SUBJECT>Records for and relating to financial reporting and monthly computation by futures commission merchants and introducing brokers.</SUBJECT> <P>(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 § 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.</P> <P>(b) Each applicant or registrant must make and keep as a record in accordance with § 1.31 formal computations of its adjusted net capital and of its minimum financial requirements pursuant to § 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: <E T="03">Provided, however,</E> 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.</P> <P>(c) The provisions of this section do not apply to an introducing broker <PRTPAGE P="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.</P> <CITA>[48 FR 35288, Aug. 3, 1983, as amended at 49 FR 39530, Oct. 9, 1984; 62 FR 4641, Jan. 31, 1997]</CITA> </SECTION> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Prohibited Trading in Commodity Options</HD> <SECTION> <SECTNO>§ 1.19</SECTNO> <SUBJECT>Prohibited trading in certain “puts” and “calls”.</SUBJECT> <P>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:</P> <P>(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;</P> <P>(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</P> <P>(c) For futures commission merchants, any option permitted under § 32.4 of this chapter, <E T="03">provided however,</E> that a capital treatment for such options is referenced in § 1.17(c)(5)(vi).</P> <CITA>[52 FR 28997, Aug. 5, 1987, as amended at 58 FR 68520, Dec. 28, 1993]</CITA> </SECTION> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Customers' Money, Securities, and Property</HD> <SECTION> <SECTNO>§ 1.20</SECTNO> <SUBJECT>Customer funds to be segregated and separately accounted for.</SUBJECT> <P>(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 § 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: <E T="03">Provided, however,</E> 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.</P> <P>(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 <PRTPAGE P="62"/>these regulations. The clearing organization shall obtain and retain in its files for the period provided by § 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.</P> <P>(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: <E T="03">Provided, however,</E> 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: <E T="03">Provided, further,</E> That customer funds may be invested in instruments described in § 1.25.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007, and 3038-0024)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.21</SECTNO> <SUBJECT>Care of money and equities accruing to customers.</SUBJECT> <P>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.</P> <CITA>[46 FR 54519, Nov. 3, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.22</SECTNO> <SUBJECT>Use of customer funds restricted.</SUBJECT> <P>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 <PRTPAGE P="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.</P> <CITA>[47 FR 57007, Dec. 22, 1982]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.23</SECTNO> <SUBJECT>Interest of futures commission merchant in segregated funds; additions and withdrawals.</SUBJECT> <P>The provision in section 4d(2) of the Act and the provision in § 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 § 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.</P> <CITA>[62 FR 42400, Aug. 7, 1997]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.24</SECTNO> <SUBJECT>Segregated funds; exclusions therefrom.</SUBJECT> <P>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.</P> <CITA>[46 FR 54519, Nov. 3, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.25</SECTNO> <SUBJECT>Investment of customer funds.</SUBJECT> <P>(a) <E T="03">Permitted investments.</E> (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):</P> <P>(i) Obligations of the United States and obligations fully guaranteed as to principal and interest by the United States (U.S. government securities);</P> <P>(ii) General obligations of any State or of any political subdivision thereof (municipal securities);</P> <P>(iii) General obligations issued by any agency sponsored by the United States (government sponsored agency securities);</P> <P>(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;</P> <P>(v) Commercial paper;</P> <P>(vi) Corporate notes;</P> <P>(vii) General obligations of a sovereign nation; and</P> <P>(viii) Interests in money market mutual funds.</P> <P>(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.</P> <P>(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:<PRTPAGE P="64"/> </P> <P>(A) Securities subject to such repurchase agreements must meet the marketability requirement of paragraph (b)(1) of this section.</P> <P>(B) Securities subject to such repurchase agreements must not be “specifically identifiable property” as defined in § 190.01(kk) of this chapter.</P> <P>(C) The terms and conditions of such an agreement to repurchase must be in accordance with the provisions of paragraph (d) of this section.</P> <P>(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.</P> <P>(b) <E T="03">General terms and conditions.</E> 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.</P> <P>(1) <E T="03">Marketability.</E> Except for interests in money market mutual funds, investments must be “readily marketable” as defined in § 240.15c3-1 of this title.</P> <P>(2) <E T="03">Ratings.</E> (i) <E T="03">Initial requirement.</E> 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:</P> <P>(A) U.S. government securities need not be rated;</P> <P>(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;</P> <P>(C) Corporate notes that are asset-backed must have the highest ratings of an NRSRO;</P> <P>(D) Sovereign debt must be rated in the highest category by at least one NRSRO; and</P> <P>(E) Money market mutual funds that are rated by an NRSRO must be rated at the highest rating of the NRSRO.</P> <P>(ii) <E T="03">Effect of downgrade.</E> 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:</P> <P>(A) The current market value of the instrument; or</P> <P>(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.</P> <P>(3) <E T="03">Restrictions on instrument features.</E> (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.</P> <P>(ii) No instrument may contain interest-only payment features.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(4) <E T="03">Concentration.</E> (i) <E T="03">Direct investments.</E> (A) U.S. government securities and money market mutual funds shall not be subject to a concentration limit or other limitation.</P> <P>(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.</P> <P>(C) Securities of any single issuer of municipal securities, certificates of deposit, commercial paper, or corporate notes held by a futures commission <PRTPAGE P="65"/>merchant or clearing organization may not exceed 5 percent of total assets held in segregation by the futures commission merchant or clearing organization.</P> <P>(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.</P> <P>(ii) <E T="03">Repurchase agreements.</E> 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.</P> <P>(iii) <E T="03">Reverse repurchase agreements.</E> 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:</P> <P>(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:</P> <P>(<E T="03">1</E>) 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</P> <P>(<E T="03">2</E>) 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</P> <P>(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:</P> <P>(<E T="03">1</E>) 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</P> <P>(<E T="03">2</E>) 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.</P> <P>(iv) <E T="03">Treatment of securities issued by affiliates.</E> 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.</P> <P>(v) <E T="03">Treatment of customer-owned securities.</E> 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.</P> <P>(5) <E T="03">Time-to-maturity</E>. (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 § 270.2a-7 of this title, may not exceed 24 months.</P> <P>(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:</P> <P>(A) The instrument is deposited solely on an overnight basis with a derivatives clearing organization pursuant to <PRTPAGE P="66"/>the terms and conditions of a collateral management program that has become effective in accordance with § 39.4 of this chapter;</P> <P>(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;</P> <P>(C) The derivatives clearing organization prices the instrument each day based on the current mark-to-market value; and</P> <P>(D) The derivatives clearing organization reduces the assigned value of the instrument each day by a haircut of at least 2 percent.</P> <P>(6) <E T="03">Investments in instruments issued by affiliates.</E> (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.</P> <P>(ii) A futures commission merchant or clearing organization may invest customer funds in a fund affiliated with that futures commission merchant or clearing organization.</P> <P>(7) <E T="03">Recordkeeping.</E> 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:</P> <P>(i) The type of instruments in which customer funds have been invested;</P> <P>(ii) The original cost of the instruments; and</P> <P>(iii) The current market value of the instruments.</P> <P>(c) <E T="03">Money market mutual funds.</E> The following provisions will apply to the investment of customer funds in money market mutual funds (the fund).</P> <P>(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 § 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 § 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.</P> <P>(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.</P> <P>(3) A futures commission merchant or clearing organization shall maintain the confirmation relating to the purchase in its records in accordance with § 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 § 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 § 1.26.</P> <P>(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.</P> <P>(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 <PRTPAGE P="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.</P> <P>(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.</P> <P>(d) <E T="03">Repurchase and reverse repurchase agreements.</E> 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:</P> <P>(1) The securities are specifically identified by coupon rate, par amount, market value, maturity date, and CUSIP or ISIN number.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(5) The term of the agreement is no more than one business day, or reversal of the transaction is possible on demand.</P> <P>(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 § 1.26.</P> <P>(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, <E T="03">provided, however,</E> that:</P> <P>(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;</P> <P>(ii) Substitution is made on a “delivery versus delivery” basis; and</P> <P>(iii) The market value of the substituted securities is at least equal to that of the original securities.</P> <P>(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.<PRTPAGE P="68"/> </P> <P>(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.</P> <P>(10) The transactions effecting the agreement are recorded in the record required to be maintained under § 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.</P> <P>(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.”</P> <P>(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.</P> <P>(e) <E T="03">Deposit of firm-owned securities into segregation.</E> 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 § 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 §§ 1.25, 1.26, 1.27, 1.28 and 1.29, investments permitted by § 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.</P> <CITA>[65 FR 78010, Dec. 13, 2000, as amended at 65 FR 82271, Dec. 28, 2000; 69 FR 6145, Feb. 10, 2004]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.26</SECTNO> <SUBJECT>Deposit of instruments purchased with customer funds.</SUBJECT> <P>(a) Each futures commission merchant who invests customer funds in instruments described in § 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. <E T="03">Provided, however,</E> 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 § 1.31. Such bank, trust company, clearing organization or other futures commission <PRTPAGE P="69"/>merchant shall allow inspection of such obligations at any reasonable time by representatives of the Commission.</P> <P>(b) Each clearing organization which invests money belonging or accruing to commodity or option customers of its clearing members in instruments described in § 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 § 1.31. Such bank or trust company shall allow inspection of such instruments at any reasonable time by representatives of the Commission.</P> <CITA>[65 FR 78012, Dec. 13, 2000]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.27</SECTNO> <SUBJECT>Record of investments.</SUBJECT> <P>(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:</P> <P>(1) The date on which such investments were made;</P> <P>(2) The name of the person through whom such investments were made;</P> <P>(3) The amount of money so invested;</P> <P>(4) A description of the instruments in which such investments were made, including the CUSIP or ISIN numbers;</P> <P>(5) The identity of the depositories or other places where such instruments are segregated;</P> <P>(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</P> <P>(7) The name of the person to or through whom such investments were disposed of.</P> <P>(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:</P> <P>(1) The date on which such documents were received from the clearing member;</P> <P>(2) A description of such documents, including the CUSIP or ISIN numbers; and</P> <P>(3) The date on which such documents were returned to the clearing member or the details of disposition by other means.</P> <P>(c) Such records shall be retained in accordance with § 1.31. No such investments shall be made except in instruments described in § 1.25.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0024)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.28</SECTNO> <SUBJECT>Appraisal of instruments purchased with customer funds.</SUBJECT> <P>Futures commission merchants who invest customer funds in instruments described in § 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.</P> <CITA>[58 FR 10953, Feb. 23, 1993, as amended at 65 FR 78013, Dec. 13, 2000]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.29</SECTNO> <SUBJECT>Increment or interest resulting from investment of customer funds.</SUBJECT> <P>The investment of customer funds in instruments described in § 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.</P> <CITA>[46 FR 54520, Nov. 3, 1981, as amended at 65 FR 78013, Dec. 13, 2000]</CITA> </SECTION> <SECTION> <PRTPAGE P="70"/> <SECTNO>§ 1.30</SECTNO> <SUBJECT>Loans by futures commission merchants; treatment of proceeds.</SUBJECT> <P>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.</P> <CITA>[46 FR 54520, Nov. 3, 1981]</CITA> </SECTION> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Recordkeeping</HD> <SECTION> <SECTNO>§ 1.31</SECTNO> <SUBJECT>Books and records; keeping and inspection.</SUBJECT> <P>(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.</P> <P>(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.</P> <P>(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).</P> <P>(1) For purposes of this section:</P> <P>(i) The term “micrographic media” means microfilm or microfiche or any similar medium.</P> <P>(ii) The term “electronic storage media” means any digital storage medium or system that:</P> <P>(A) Preserves the records exclusively in a non-rewritable, non-erasable format;</P> <P>(B) Verifies automatically the quality and accuracy of the storage media recording process;</P> <P>(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</P> <P>(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.</P> <P>(2) Persons who use either micrographic media or electronic storage media to maintain records in accordance with this section must:</P> <P>(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;</P> <P>(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;<PRTPAGE P="71"/> </P> <P>(iii) Keep only Commission-require records on the individual medium employed (e.g., a disk or sheets of microfiche);</P> <P>(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</P> <P>(v) Organize and maintain an accurate index of all information maintained on both the original and duplicate storage media such that:</P> <P>(A) The location of any particular record stored on the media may be immediately ascertained;</P> <P>(B) The index is available at all times for immediate examination by representatives of the Commission or the Department of Justice;</P> <P>(C) A duplicate of the index is stored at a location separate from the original index; and</P> <P>(D) Both the original index and the duplicate index are preserved for the time period required for the records included in the index.</P> <P>(3) In addition to the foregoing conditions, persons using electronic storage media must:</P> <P>(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 § 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.</P> <P>(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:</P> <P>(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;</P> <P>(B) The results of such audit system are preserved for the time period required for the records maintained on the electronic storage media; and</P> <P>(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.</P> <P>(iii) Either</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <P>(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: </P> <EXTRACT> <P>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 <PRTPAGE P="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.</P> </EXTRACT> <P>(ii) [Reserved]</P> <P>(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 § 1.10(d)(4).</P> <P>(d) Trading cards, documents on which trade information is originally recorded in writing, and written orders required to be kept pursuant to § 1.35(a), (a-1)(1), (a-1)(2) and (d) must be retained in hard-copy for the required time period.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0022)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.32</SECTNO> <SUBJECT>Segregated account; daily computation and record.</SUBJECT> <P>(a) Each futures commission merchant must compute as of the close of each business day, on a currency-by-currency basis:</P> <P>(1) The total amount of customer funds on deposit in segregated accounts on behalf of commodity and option customers;</P> <P>(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</P> <P>(3) the amount of the futures commission merchant's residual interest in such customer funds.</P> <P>(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 (<E T="03">i.e.,</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)).</P> <P>(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 § 1.31.</P> <CITA>[66 FR 41133, Aug. 7, 2001, as amended at 68 FR 5551, Feb. 4, 2003]</CITA> </SECTION> <SECTION> <PRTPAGE P="73"/> <SECTNO>§ 1.33</SECTNO> <SUBJECT>Monthly and confirmation statements.</SUBJECT> <P>(a) <E T="03">Monthly statements.</E> 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:</P> <P>(1) For each commodity customer and foreign futures customer—</P> <P>(i) The open contracts with prices at which acquired;</P> <P>(ii) The net unrealized profits or losses in all open contracts marked to the market; and</P> <P>(iii) Any customer funds carried with the futures commission merchant; and</P> <P>(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 § 30.7 of this chapter received from or disbursed to such customer and realized profits and losses; and</P> <P>(2) For each option customer and foreign options customer—</P> <P>(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;</P> <P>(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;</P> <P>(iii) All open commodity option and foreign option positions marked to the market and the amount each position is in the money, if any;</P> <P>(iv) Any customer funds carried in such customer's account(s); and</P> <P>(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.</P> <P>(b) <E T="03">Confirmation statement.</E> 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:</P> <P>(1) To each commodity customer, a written confirmation of each commodity futures transaction caused to be executed by it for the customer.</P> <P>(2) To each option customer, a written confirmation of each commodity option transaction, containing at least the following information:</P> <P>(i) The option customer's account identification number;</P> <P>(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;</P> <P>(iii) The strike price;</P> <P>(iv) The underlying futures contract or underlying physical;</P> <P>(v) The final exercise date of the commodity option purchased or sold; and</P> <P>(vi) The date the commodity option transaction was executed.</P> <P>(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.</P> <P>(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 <PRTPAGE P="74"/>pool need be confirmed only to the operator of the commodity pool.</P> <P>(c) <E T="03">Exemptions.</E> The requirements of paragraphs (a)(1)(i), (a)(1)(ii), and (b)(1) of this section shall not apply to the following:</P> <P>(1) Any account carried for a person who is a member of any contract market;</P> <P>(2) Any omnibus account carried for another futures commission merchant; and</P> <P>(3) Any account containing only bona fide hedge positions, except that confirmations must be furnished to accounts containing only bona fide hedge positions.</P> <P>(d) <E T="03">Controlled accounts.</E> 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:</P> <P>(1) Promptly furnish in writing to such other person the information required by paragraphs (a) and (b) of this section;</P> <P>(2) [Reserved]</P> <P>(3) Promptly furnish in writing to such other person a copy of the statement required by § 1.46: <E T="03">Provided, however,</E> 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.</P> <P>(e) <E T="03">Recordkeeping.</E> Each futures commission merchant shall retain, in accordance with § 1.31, a copy of each monthly statement and confirmation required by this section.</P> <P>(f) <E T="03">Introduced accounts.</E> 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.</P> <P>(g) <E T="03">Electronic transmission of statements.</E> (1) The statements required by this section, and by § 1.46, may be furnished to any customer by means of electronic media if the customer so consents, <E T="03">Provided, however,</E> 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.</P> <P>(2) In the case of a customer who does not qualify as an “institutional customer” as defined in § 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.</P> <P>(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.</P> <P>(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 § 1.31.</P> <APPRO>(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)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.34</SECTNO> <SUBJECT>Monthly record, “point balance”.</SUBJECT> <P>(a) Each futures commission merchant shall prepare, and retain in accordance with the requirements of § 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: <E T="03">Provided, however,</E> That a futures commission merchant who carries part or all of customers' open contracts with other futures commission <PRTPAGE P="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 § 1.31.</P> <P>(b) Each futures commission merchant shall prepare, and retain in accordance with the requirements of § 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.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0024)</APPRO> <CITA>[46 FR 54521, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47 FR 57008, Dec. 22, 1982]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.35</SECTNO> <SUBJECT>Records of cash commodity, futures, and option transactions.</SUBJECT> <P>(a) <E T="03">Futures commission merchants, introducing brokers, and members of contract markets.</E> 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 § 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.”</P> <P>(a-1) <E T="03">Futures commission merchants, introducing brokers, and members of contract markets: Recording of customers' and option customers' orders.</E> (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.</P> <P>(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.<PRTPAGE P="76"/> </P> <P>(ii) Except as provided in paragraph (a-1)(3) of this section:</P> <P>(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</P> <P>(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:</P> <P>(<E T="03">1</E>) 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;</P> <P>(<E T="03">2</E>) 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</P> <P>(<E T="03">3</E>) 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.</P> <P>(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:</P> <P>(A) Contain the terms of the order;</P> <P>(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</P> <P>(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.</P> <P>(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:</P> <P>(A) A contract market member places with another member of such contract market an order that is part of a spread transaction;</P> <P>(B) The member placing the order personally executes one or more legs of the spread; and</P> <P>(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.</P> <P>(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.</P> <P>(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 <PRTPAGE P="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.</P> <P>(5) <E T="03">Post-execution allocation of bunched orders.</E> 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.</P> <P>(i) <E T="03">Eligible account managers.</E> 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:</P> <P>(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 § 4.14(a)(3) or § 4.14(a)(6) of this chapter;</P> <P>(B) An investment adviser registered with the Securities and Exchange</P> <P>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;</P> <P>(C) A bank, insurance company, trust company, or savings and loan association subject to federal or state regulation; or</P> <P>(D) A foreign adviser that exercises discretionary trading authority solely over the accounts of non-U.S. persons, as defined in § 4.7(a)(1)(iv) of this chapter.</P> <P>(ii) <E T="03">Information.</E> Eligible account managers shall make the following information available to customers upon request:</P> <P>(A) The general nature of the allocation methodology the account manager will use;</P> <P>(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</P> <P>(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.</P> <P>(iii) <E T="03">Allocation.</E> Orders eligible for post-execution allocation must be allocated by an eligible account manager in accordance with the following:</P> <P>(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.</P> <P>(B) Allocations must be fair and equitable. No account or group of accounts may receive consistently favorable or unfavorable treatment.</P> <P>(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.</P> <P>(iv) <E T="03">Records.</E> (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.</P> <P>(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 <PRTPAGE P="78"/>from the time of placement by the account manager to the allocation to individual accounts.</P> <P>(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.</P> <P>(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.</P> <P>(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 § 21.03(g) of this chapter.</P> <P>(a-2)(1) <E T="03">Futures commission merchants, introducing brokers, and members of contract markets.</E> 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.</P> <P>(2) <E T="03">Customers.</E> 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.</P> <P>(3) <E T="03">Contract markets.</E> 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.</P> <P>(4) <E T="03">Documentation.</E> 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.</P> <P>(b) <E T="03">Futures commission merchants, introducing brokers, and clearing members of contract markets.</E> 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:</P> <P>(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;</P> <P>(2) A record of transactions which will show separately for each account (including proprietary accounts):</P> <P>(i) All commodity futures transactions executed for such account, including the date, price, quantity, market, commodity and future; and<PRTPAGE P="79"/> </P> <P>(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</P> <P>(3) A record or journal which will separately show for each business day complete details of:</P> <P>(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;</P> <P>(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</P> <P>(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. <E T="03">Provided, however,</E> that where reproductions on microfilm, microfiche or optical disk are substituted for hard copy in accordance with the provisions of § 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.</P> <P>(c) <E T="03">Clearing members of contract markets.</E> 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.</P> <P>(d) <E T="03">Members of contract markets.</E> (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).</P> <P>(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.</P> <P>(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.</P> <P>(4) Trading cards prepared by a member of a contract market pursuant to contract market rules must contain:<PRTPAGE P="80"/> </P> <P>(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;</P> <P>(ii) Pre-printed sequence numbers to permit the intra-day sequencing of the cards; and</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(7) Trading records prepared by a member of a contract market pursuant to contract market rules must:</P> <P>(i) Be submitted in accordance with contract market rules adopted pursuant to paragraph (j)(1) of this section; and</P> <P>(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.</P> <P>(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.</P> <P>(e) <E T="03">Contract markets.</E> 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:</P> <P>(1) Was trading for his own account, or an account for which he has discretion;</P> <P>(2) Was trading for his clearing member's house account;</P> <P>(3) Was trading for another member present on the exchange floor, or an account controlled by such other member; or</P> <P>(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 § 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 § 1.31 and (ii) for 60 days in computer-readable form on compatible magnetic tapes or discs.<PRTPAGE P="81"/> </P> <P>(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.</P> <P>(g) <E T="03">Time of trade execution.</E> 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 § 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 § 1.41.</P> <P>(h) <E T="03">Contract market price change register.</E> 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.</P> <P>(i) <E T="03">Contract markets.</E> 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 § 1.51, shall, at a minimum:</P> <P>(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</P> <P>(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.</P> <P>(j) <E T="03">Contract markets.</E> Each contract market must maintain in effect rules which require that:</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(4) A member of the contract market must record trades in the manner prescribed by paragraph (d)(2) of this section.<PRTPAGE P="82"/> </P> <P>(5) Trading cards prepared by a member of the contract market must contain the identifying information prescribed by paragraph (d)(4) of this section.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(k) <E T="03">Collection of trading cards in intervals not to exceed 15 minutes.</E> The Commission, in its discretion, may publish a schedule in the <E T="04">Federal Register</E> 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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0022)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.36</SECTNO> <SUBJECT>Record of securities and property received from customers and option customers.</SUBJECT> <P>(a) Each futures commission merchant shall maintain, as provided in § 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 <PRTPAGE P="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 § 1.31.</P> <P>(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 § 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.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0024)</APPRO> <CITA>[46 FR 54522, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48 FR 8435, Mar. 1, 1983]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.37</SECTNO> <SUBJECT>Customer's or option customer's name, address, and occupation recorded; record of guarantor or controller of account.</SUBJECT> <P>(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.</P> <P>(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 § 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.</P> <P>(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 § 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.</P> <P>(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.</P> <P>(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 <PRTPAGE P="84"/>broker subject to the provisions of paragraph (a) of this section.</P> <APPRO>(The information collection requirements contained in § 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)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.38</SECTNO> <SUBJECT>Execution of transactions.</SUBJECT> <P>(a) <E T="03">Competitive execution required; exceptions.</E> 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: <E T="03">Provided, however,</E> 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.</P> <P>(b) <E T="03">Noncompetitive trades; exchange of futures, etc.; requirements.</E> 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.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0022)</APPRO> <CITA>[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.39</SECTNO> <SUBJECT>Simultaneous buying and selling orders of different principals; execution of, for and between principals.</SUBJECT> <P>(a) <E T="03">Conditions and requirements.</E> 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:</P> <P>(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</P> <P>(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;</P> <P>(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 <PRTPAGE P="85"/>promptly presents said record to such official representative for verification and initialing;</P> <P>(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</P> <P>(4) Neither the futures commission merchant receiving nor the member executing such orders has any interest therein, directly or indirectly, except as a fiduciary.</P> <P>(b) <E T="03">Large Order Execution Procedures.</E> 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: <E T="03">Provided,</E> 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:</P> <P>(1) An explanation of why the proposed large order execution rules do not comply with paragraph (a) of this section; and</P> <P>(2) A description of a special surveillance program that would be followed by the contract market in monitoring the large order execution procedures.</P> <FP>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.</FP> <P>(c) <E T="03">Not deemed filling orders by offset nor cross trades.</E> 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.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0022)</APPRO> <CITA>[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]</CITA> </SECTION> </SUBJGRP> <SUBJGRP> <HD SOURCE="HED">Miscellaneous</HD> <SECTION> <SECTNO>§ 1.40</SECTNO> <SUBJECT>Crop, market information letters, reports; copies required.</SUBJECT> <P>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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0015)</APPRO> <CITA>[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.41</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.41a-1.41c</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§§ 1.42-1.43</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.44</SECTNO> <SUBJECT>Records and reports of warehouses, depositories, and other similar entities; visitation of premises.</SUBJECT> <P>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:</P> <P>(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, <PRTPAGE P="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;</P> <P>(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</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0019)</APPRO> <SECAUTH>(Sec. 5a, 49 Stat. 1497; 7 U.S.C. 7a)</SECAUTH> <CITA>[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22, 1982]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.45</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.46</SECTNO> <SUBJECT>Application and closing out of offsetting long and short positions.</SUBJECT> <P>(a) <E T="03">Application of purchases and sales.</E> 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:</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(b) <E T="03">Close-out against oldest open position.</E> 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: <E T="03">Provided,</E> 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 <PRTPAGE P="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, <E T="03">i.e.,</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.</P> <P>(c) <E T="03">In-and-out trades; day trades.</E> 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.</P> <P>(d) <E T="03">Exceptions.</E> The provisions of this section shall not apply to:</P> <P>(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 § 1.61(b) and approved by the Commission pursuant to; section 5a(a)(12)(A) of the Act <E T="03">Provided,</E> 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.</P> <P>(2) Purchases or sales constituting “bona fide hedging transactions” as defined in § 1.3(z); nor</P> <P>(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.</P> <P>(4)-(7) [Reserved]</P> <P>(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:</P> <P>(i) Each error trade does not offset another error trade held in the same account;</P> <P>(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</P> <P>(iii) No error trade is closed out by transferring such an open position to another account also controlled by that same trader.</P> <P>(e) The statements required by paragraph (a) of this section may be furnished to the customer or the person <PRTPAGE P="88"/>described in § 1.33(d) by means of electronic transmission, in accordance with § 1.33(g).</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0007)</APPRO> <SECAUTH>(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)</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.47</SECTNO> <SUBJECT>Requirements for classification of purchases or sales of contracts for future delivery as bona fide hedging under § 1.3(z)(3) of the regulations.</SUBJECT> <P>(a) Any person who wishes to avail himself of the provisions of § 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:</P> <P>(1) Within 30 days after the Commission is furnished the information required under paragraph (b) of this section, or</P> <P>(2) Within 10 days after the Commission is furnished with the information required under paragraph (c) of this section.</P> <FP>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.</FP> <P>(b) <E T="03">Initial statement.</E> Initial statements concerning the classification of transactions and positions as bona fide hedging pursuant to § 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:</P> <P>(1) Describe the transactions and positions for future delivery and the offsetting cash positions;</P> <P>(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;</P> <P>(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;</P> <P>(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.</P> <P>(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;</P> <P>(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 § 1.48 of the regulations.</P> <P>(c) <E T="03">Supplemental reports.</E> Whenever the purchases or sales which a person wishes to classify as bona fide hedging shall <PRTPAGE P="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.</P> <P>(d) <E T="03">Maximum purchases and sales.</E> Purchases and sales for future delivery considered bona fide hedging pursuant to § 1.3(z)(3) of the regulations shall at no time exceed the lesser of:</P> <P>(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</P> <P>(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.</P> <P>(e) <E T="03">Updated reports.</E> Reports updating the information required pursuant to this section also shall be filed with the Commission upon specific request.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0013)</APPRO> <CITA>[42 FR 42751, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.48</SECTNO> <SUBJECT>Requirements for classification of sales or purchases for future delivery as bona fide hedging of unsold anticipated production or unfilled anticipated requirements under § 1.3(z)(2) (i)(B) or (ii)(C) of the regulations.</SUBJECT> <P>(a) Any person who wishes to avail himself of the provisions of § 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.</P> <P>(b) <E T="03">Initial statement.</E> Initial statements concerning the classification of transactions and positions as bona fide hedging pursuant to § 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:</P> <P>(1) For unsold anticipated production:</P> <P>(i) Annual production of such commodity for the three complete fiscal years preceding the current fiscal year;</P> <P>(ii) Anticipated production of such commodity for a specified period not in excess of one year;</P> <P>(iii) Fixed-price forward sales of such commodity;<PRTPAGE P="90"/> </P> <P>(iv) Unsold anticipated production of such commodity for a specified period not in excess of one year.</P> <P>(2) For unfilled anticipated requirements:</P> <P>(i) Annual requirements of such commodity for processing or manufacturing or feeding for the three complete fiscal years preceding the current fiscal year;</P> <P>(ii) Anticipated requirements of such commodity for processing or manufacturing or feeding for a specified operating period not in excess of one year;</P> <P>(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);</P> <P>(iv) Unfilled anticipated requirements of such commodity for processing or manufacturing or feedings for a specified operating period not in excess of one year.</P> <P>(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.</P> <P>(c) <E T="03">Supplemental reports.</E> 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.</P> <P>(d) <E T="03">Maximum sales and purchases.</E> Sales or purchases for future delivery considered as bona fide hedges pursuant to § 1.3(z)(2) (i)(B) or (ii)(C) shall at no time exceed the lesser of:</P> <P>(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</P> <P>(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.</P> <P>(e) <E T="03">Updated reports.</E> Reports updating the information required pursuant to this section shall also be filed with the Commission upon specific request.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0013)</APPRO> <CITA>[42 FR 42752, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.49</SECTNO> <SUBJECT>Denomination of customer funds and location of depositories.</SUBJECT> <P>(a) <E T="03">Definitions.</E> For purposes of this section:</P> <P>(1) <E T="03">Money center country.</E> This term means Canada, France, Italy, Germany, Japan, and the United Kingdom.</P> <P>(2) <E T="03">Money center currency.</E> This term means the currency of any money center country and the Euro.</P> <P>(b) <E T="03">Permissible denominations of obligations.</E> (1) Subject to the terms and conditions set forth in this section, a futures commission merchant's obligations to a customer shall be denominated:<PRTPAGE P="91"/> </P> <P>(i) In the United States dollar;</P> <P>(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</P> <P>(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.</P> <P>(2)(i) A futures commission merchant shall prepare and maintain a written record of each transaction converting customer funds from one currency to another.</P> <P>(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.</P> <P>(iii) The information required under paragraph (b)(2)(ii) of this section must be provided to the customer upon the customer's request.</P> <P>(c) <E T="03">Permissible locations of depositories.</E> (1) Unless a customer provides instructions to the contrary, a futures commission merchant or a derivatives clearing organization may hold customer funds:</P> <P>(i) In the United States;</P> <P>(ii) In a money center country; or</P> <P>(iii) In the country of origin of the currency.</P> <P>(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, <E T="03">provided,</E> 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.</P> <P>(d) <E T="03">Qualifications for depositories.</E> (1) To hold customer funds required to be segregated pursuant to the Act and §§ 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 §§ 1.20 and 1.26.</P> <P>(2) A depository, if located in the United States, must be:</P> <P>(i) A bank or trust company;</P> <P>(ii) A futures commission merchant registered as such with the Commission; or</P> <P>(iii) A derivatives clearing organization.</P> <P>(3) A depository, if located outside the United States, must be:</P> <P>(i) A bank or trust company:</P> <P>(A) That has in excess of $1 billion of regulatory capital; or</P> <P>(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;</P> <P>(ii) A futures commission merchant that is registered as such with the Commission; or</P> <P>(iii) A derivatives clearing organization.</P> <P>(e) <E T="03">Segregation requirements.</E> (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:</P> <P>(i) Sufficient United States dollars, held in the United States, to meet all United States dollar obligations; and</P> <P>(ii) Sufficient funds in each other currency to meet obligations in such currency.</P> <P>(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:</P> <P>(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</P> <P>(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.<PRTPAGE P="92"/> </P> <P>(3) Each futures commission merchant and each derivatives clearing organization shall make and maintain records sufficient to demonstrate compliance with this paragraph (e).</P> <CITA>[68 FR 5551, Feb. 4, 2003]</CITA> </SECTION> <SECTION> <SECTNO>§§ 1.50-1.51</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.52</SECTNO> <SUBJECT>Self-regulatory organization adoption and surveillance of minimum financial requirements.</SUBJECT> <P>(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 §§ 1.10 and 1.17 and the definition of adjusted net capital must be the same as that prescribed in § 1.17(c): <E T="03">Provided, however,</E> 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 § 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, <E T="03">provided further,</E> 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.</P> <P>(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.</P> <P>(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:</P> <P>(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</P> <P>(2) Receiving the financial reports necessitated by such minimum financial and related reporting requirements.</P> <FP>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 § 1.51(a)(3) and/or part 33 of this chapter.</FP> <P>(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.</P> <P>(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.</P> <P>(f) The self-regulatory organizations may, among themselves, establish programs to provide access to any necessary financial or related information.</P> <P>(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:</P> <P>(1) Is necessary or appropriate to serve the public interest;<PRTPAGE P="93"/> </P> <P>(2) Is for the protection and in the interest of customers or option customers;</P> <P>(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;</P> <P>(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;</P> <P>(5) Fosters cooperation and coordination among the contract markets; and</P> <P>(6) Does not hinder the development of a registered futures association under section 17 of the Act.</P> <P>(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 § 1.51 to the extent that such responsibilities have been delegated to a designated self-regulatory organization.</P> <P>(2) After the Commission has approved a plan or part of one under § 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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control numbers 3038-0007 and 3038-0022)</APPRO> <SECAUTH>(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 <E T="03">et seq.</E>)</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.53</SECTNO> <SUBJECT>Enforcement of contract market bylaws, rules, regulations, and resolutions.</SUBJECT> <P>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 <PRTPAGE P="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.</P> <SECAUTH>(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)</SECAUTH> <CITA>[41 FR 3194, Jan. 21, 1976, as amended at 59 FR 5526, Feb. 7, 1994]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.54</SECTNO> <SUBJECT>Contract market rules submitted to and approved or not disapproved by the Secretary of Agriculture.</SUBJECT> <P>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 § 1.38(a) or § 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.</P> <SECAUTH>(Sec. 411, Pub. L. 93-463, 88 Stat. 1414; 7 U.S.C. 4a note)</SECAUTH> <CITA>[45 FR 2314, Jan. 11, 1980]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.55</SECTNO> <SUBJECT>Distribution of “Risk Disclosure Statement” by futures commission merchants and introducing brokers.</SUBJECT> <P>(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:</P> <P>(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; <E T="03">Provided, however,</E> 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</P> <P>(ii) Receives from the customer an acknowledgment signed and dated by the customer that he received and understood the disclosure statement.</P> <P>(b) The language set forth in the written disclosure document required by paragraph (a) of this section shall be as follows:</P> <EXTRACT> <HD SOURCE="HD1">Risk Disclosure Statement</HD> <P>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:</P> <P>(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.</P> <P>(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”).</P> <P>(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.</P> <P>(4) All futures positions involve risk, and a “spread” position may not be less risky than an outright “long” or “short” position.</P> <P>(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.</P> <P>(6) You should consult your broker concerning the nature of the protections available to safeguard funds or property deposited for your account. </P> <FP>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:</FP> <PRTPAGE P="95"/> <P>(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.</P> <P>(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. </P> <FP>THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS</FP> <P>I hereby acknowledge that I have received and understood this risk disclosure statement. </P> <FP SOURCE="FP-DASH"/> <FP>Date</FP> <FP SOURCE="FP-DASH"/> <FP>Signature of Customer</FP> </EXTRACT> <P>(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.</P> <P>(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 § 1.33(g), and by §§ 33.7 and 190.06 of this chapter, provided that:</P> <P>(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 § 1.33(g), and in §§ 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</P> <P>(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 § 1.33(g), and by §§ 33.7 and 190.06 of this chapter.</P> <P>(e) The acknowledgment required by paragraph (a) of this section must be retained by the futures commission merchant or introducing broker in accordance with § 1.31.</P> <P>(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 § 1.3(g) without furnishing such institutional customer the disclosure statements or obtaining the acknowledgments required under paragraph (a) of this section, §§ 1.33(g) and 1.65(a)(3), and §§ 30.6(a), 33.7(a) and 190.10(c) of this chapter.<PRTPAGE P="96"/> </P> <P>(g) This section does not relieve a futures commission merchant or introducing broker from any other disclosure obligation it may have under applicable law.</P> <P>(h) Notwithstanding any other provision of this section or § 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 § 41.41(b)(1) of this chapter.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <SECAUTH>(Secs. 4b, 4c(b), 4g(1), 4<E T="03">l</E>, 4<E T="03">o</E>, and 8a(5), Commodity Exchange Act, 7 U.S.C. 6b, 6c(b), 6g(1), 6<E T="03">l</E>, 6<E T="03">o</E>, 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))</SECAUTH> <GPH DEEP="470" SPAN="2"> <PRTPAGE P="97"/> <GID>EC05OC91.028</GID> </GPH> <GPH DEEP="470" SPAN="2"> <PRTPAGE P="98"/> <GID>EC05OC91.029</GID> </GPH> <STARS/> <EXTRACT> <FP>[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]</FP> <P>This disclosure document meets the risk disclosure requirements in the jurisdictions <PRTPAGE P="99"/>identified below ONLY for those instruments which are specified. </P> <FP SOURCE="FP-1">United States: Commodity futures, options on commodity futures and options on commodities subject to the Commodity Exchange Act.</FP> <FP SOURCE="FP-1">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.</FP> <FP SOURCE="FP-1">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.</FP> </EXTRACT> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.56</SECTNO> <SUBJECT>Prohibition of guarantees against loss.</SUBJECT> <P>(a) For purposes of this section <E T="03">commodity interest</E> means</P> <P>(1) Any contract for the purchase or sale of a commodity for future delivery; and</P> <P>(2) Any contract, agreement or transaction subject to Commission regulation under sections 4c or 19 of the Act.</P> <P>(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:</P> <P>(1) Guarantee such person against loss;</P> <P>(2) Limit the loss of such person; or</P> <P>(3) Not call for or attempt to collect initial and maintenance margin as established by the rules of the applicable board of trade.</P> <P>(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.</P> <P>(d) This section shall not be construed to prevent a futures commission merchant or introducing broker from:</P> <P>(1) Assuming or sharing in the losses resulting from an error or mishandling of an order; or</P> <P>(2) Participating as a general partner in a commodity pool which is a limited partnership.</P> <P>(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.</P> <CITA>[46 FR 62844, Dec. 29, 1981, as amended at 48 FR 35291, Aug. 3, 1983]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.57</SECTNO> <SUBJECT>Operations and activities of introducing brokers.</SUBJECT> <P>(a) Each introducing broker must:</P> <P>(1) Open and carry each customer's and option customer's account with a carrying futures commission merchant on a fully-disclosed basis: <E T="03">Provided, however,</E> That an introducing broker which has entered into a guarantee agreement with a futures commission merchant in accordance with the provisions of § 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</P> <P>(2) Transmit promptly for execution all customer and option customer orders to:</P> <P>(i) A carrying futures commission merchant; or</P> <P>(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.</P> <P>(b) An introducing broker may not carry proprietary accounts, nor may an introducing broker carry accounts in foreign futures.</P> <P>(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: <E T="03">Provided, however,</E> That an introducing broker may deposit a check in a qualifying account or forward a check drawn by a customer or option customer if:<PRTPAGE P="100"/> </P> <P>(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 § 1.31;</P> <P>(2) The check is payable to the futures commission merchant carrying the customer's or option customer's account;</P> <P>(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;</P> <P>(4) For purposes of this paragraph (c), a qualifying account shall be deemed to be an account:</P> <P>(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;</P> <P>(ii) For which the bank or trust company restricts withdrawals to withdrawals by the carrying futures commission merchant;</P> <P>(iii) For which the bank or trust company prohibits the introducing broker or anyone acting upon its behalf from withdrawing funds; and</P> <P>(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 § 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.</P> <CITA>[48 FR 35291, Aug. 3, 1983, as amended at 57 FR 23143, June 2, 1992]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.58</SECTNO> <SUBJECT>Gross collection of exchange-set margins.</SUBJECT> <P>(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 § 17.04 of this chapter at a level no less than that established for customer accounts by the rules of the applicable contract market.</P> <P>(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.</P> <CITA>[61 FR 19187, May 1, 1996]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.59</SECTNO> <SUBJECT>Activities of self-regulatory organization employees, governing board members, committee members, and consultants.</SUBJECT> <P>(a) <E T="03">Definitions.</E> For purposes of this section:</P> <P>(1) <E T="03">Self-regulatory organization</E> 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).</P> <P>(2) <E T="03">Governing board member</E> means a member, or functional equivalent thereof, of the board of governors of a self-regulatory organization.</P> <P>(3) <E T="03">Committee member</E> means a member, or functional equivalent thereof, of any committee of a self-regulatory organization.</P> <P>(4) <E T="03">Employee</E> means any person hired or otherwise employed on a salaried or contract basis by a self-regulatory organization, but does not include:</P> <P>(i) Any governing board member compensated by a self-regulatory organization solely for governing board activities; or<PRTPAGE P="101"/> </P> <P>(ii) Any committee member compensated by a self-regulatory organization solely for committee activities; or</P> <P>(iii) Any consultant hired by a self-regulatory organization.</P> <P>(5) <E T="03">Material information</E> 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.</P> <P>(6) <E T="03">Non-public information</E> means information which has not been disseminated in a manner which makes it generally available to the trading public.</P> <P>(7) <E T="03">Linked exchange</E> 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.</P> <P>(8) <E T="03">Commodity interest</E> 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.</P> <P>(9) <E T="03">Related commodity interest</E> 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:</P> <P>(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</P> <P>(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.</P> <P>(10) <E T="03">Pooled investment vehicle</E> 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, <E T="03">i.e.,</E> registered investment companies, insurance company separate accounts, bank trust funds, and certain pension plans.</P> <P>(b) <E T="03">Employees of self-regulatory organizations; Self-regulatory organization rules.</E> (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 § 1.41 (or, pursuant to section 17(j) of the Act in the case of a registered futures association) that, at a minimum, prohibit:</P> <P>(i) Employees of the self-regulatory organization from:</P> <P>(A) Trading, directly or indirectly, in any commodity interest traded on or cleared by the employing contract market or clearing organization;</P> <P>(B) Trading, directly or indirectly, in any related commodity interest;</P> <P>(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 <PRTPAGE P="102"/>the employee has access to material, non-public information concerning such commodity interest;</P> <P>(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</P> <P>(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; <E T="03">Provided, however,</E> 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.</P> <P>(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:</P> <P>(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</P> <P>(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.</P> <P>(c) <E T="03">Governing board members, committee members, and consultants; Self-regulatory organization rules.</E> 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 § 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.</P> <P>(d) <E T="03">Prohibited conduct.</E> (1) No employee, governing board member, committee member, or consultant shall:</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <CITA>[58 FR 54973, Oct. 25, 1993, as amended at 65 FR 47847, Aug. 4, 2000]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.60</SECTNO> <SUBJECT>Pending legal proceedings.</SUBJECT> <P>(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 <PRTPAGE P="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.</P> <P>(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.</P> <P>(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:</P> <P>(1) The act or any rule, regulation, or order thereunder;</P> <P>(2) the constitution, bylaws or rules of the contract market; or</P> <P>(3) the applicable provisions of state law relating to the duties of officers, directors, or other officials of business organizations.</P> <P>(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 § 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.</P> <P>(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.</P> <CITA>[49 FR 17750, Apr. 25, 1984]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.61</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 1.62</SECTNO> <SUBJECT>Contract market requirement for floor broker and floor trader registration.</SUBJECT> <P>(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 § 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:</P> <P>(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, <PRTPAGE P="104"/>unless such person is registered or has been granted a temporary license as a floor broker; or</P> <P>(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 § 3.11 or § 3.40 of this chapter, and such temporary license or registration has not been terminated, revoked or withdrawn: <E T="03">Provided, however,</E> 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.</P> <P>(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 § 1.41 which provide for requests for withdrawal of floor broker or floor trader registration using Form 8-W in accordance with § 3.33 of this chapter, which require training of floor brokers and floor traders in accordance with § 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 § 3.11(d) of this chapter.</P> <P>(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 § 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 § 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).</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.63</SECTNO> <SUBJECT>Service on self-regulatory organization governing boards or committees by persons with disciplinary histories.</SUBJECT> <P>(a) <E T="03">Definitions.</E> For purposes of this section:</P> <P>(1) <E T="03">Self-regulatory organization</E> means a “self-regulatory organization” as defined in Commission regulation 1.3(ee) (§ 1.3(ee)), and includes a “clearing organization” as defined in Commission regulation 1.3(d) (§ 1.3(d)), except as defined in paragraph (b)(6) of this section.</P> <P>(2) <E T="03">Disciplinary committee</E> 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.</P> <P>(3) <E T="03">Arbitration panel</E> means any person or panel empowered by a self-regulatory organization to arbitrate disputes involving such organization's members or their customers.</P> <P>(4) <E T="03">Oversight panel</E> means any panel authorized by a self-regulatory organization to review, recommend or establish policies or procedures with respect <PRTPAGE P="105"/>to the self-regulatory organization's surveillance, compliance, rule enforcement or disciplinary responsibilities.</P> <P>(5) <E T="03">Final decision</E> means:</P> <P>(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,</P> <P>(ii) Any decision by an administrative law judge, a court of competent jurisdiction or the Commission which has not been stayed or reversed.</P> <P>(6) <E T="03">Disciplinary offense</E> means:</P> <P>(i) Any violation of the rules of a self-regulatory organization except those rules related to</P> <P>(A) Decorum or attire,</P> <P>(B) Financial requirements, or</P> <P>(C) Reporting or recordkeeping unless resulting in fines aggregating more than $5,000 within any calendar year;</P> <P>(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;</P> <P>(iii) Any violation of the Act or the regulations promulgated thereunder; or,</P> <P>(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.</P> <P>(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.</P> <P>(7) <E T="03">Settlement agreement</E> means any agreement consenting to the imposition of sanctions by a self-regulatory organization, a court of competent jurisdiction or the Commission.</P> <P>(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 § 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:</P> <P>(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;</P> <P>(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;</P> <P>(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:</P> <P>(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,</P> <P>(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.</P> <P>(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;</P> <P>(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;</P> <P>(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.</P> <P>(c) No person may serve on a disciplinary committee, arbitration panel, oversight panel or governing board of a self-regulatory organization if such <PRTPAGE P="106"/>person is subject to any of the conditions listed in paragraphs (b) (1) through (6) of this section.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <CITA>[55 FR 7890, Mar. 6, 1990, as amended at 58 FR 37653, July 13, 1993; 64 FR 23, Jan. 4, 1999]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.64</SECTNO> <SUBJECT>Composition of various self-regulatory organization governing boards and major disciplinary committees.</SUBJECT> <P>(a) <E T="03">Definitions.</E> For purposes of this section:</P> <P>(1) <E T="03">Self-regulatory organization</E> means “self-regulatory organization” as defined in § 1.3(ee), not including a “clearing organization” as defined in § 1.3(d).</P> <P>(2) <E T="03">Major disciplinary committee</E> 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:</P> <P>(i) Are related to:</P> <P>(A) Decorum or attire,</P> <P>(B) Financial requirements, or</P> <P>(C) Reporting or recordkeeping; and,</P> <P>(ii) Do not involve fraud, deceit or conversion.</P> <P>(3) <E T="03">Regular voting member of a governing board</E> 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.</P> <P>(4) <E T="03">Membership interest</E> (i) In the case of a contract market, each of the following will be considered a different membership interest:</P> <P>(A) Floor brokers,</P> <P>(B) Floor traders,</P> <P>(C) Futures commission merchants,</P> <P>(D) Producers, consumers, processors, distributors, and merchandisers of commodities traded on the particular contract market,</P> <P>(E) Participants in a variety of pits or principal groups of commodities traded on the particular contract market; and,</P> <P>(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.</P> <P>(ii) In the case of a registered futures association, each of the following will be considered a different membership interest:</P> <P>(A) Futures commission merchants,</P> <P>(B) Introducing brokers,</P> <P>(C) Commodity pool operators,</P> <P>(D) Commodity trading advisors; and,</P> <P>(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.</P> <P>(b) Each self-regulatory organization must maintain in effect standards and <PRTPAGE P="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 § 1.41 or, when applicable to a registered futures association, pursuant to section 17(j) of the Act, that ensure:</P> <P>(1) That twenty percent or more of the regular voting members of the board are persons who:</P> <P>(i) Are knowledgeable of futures trading or financial regulation or are otherwise capable of contributing to governing board deliberations; and,</P> <P>(ii) (A) Are not members of the self-regulatory organization,</P> <P>(B) Are not currently salaried employees of the self-regulatory organization,</P> <P>(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</P> <P>(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;</P> <P>(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</P> <P>(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;</P> <P>(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 § 1.41 or, when applicable to a registered futures association, pursuant to section 17(j) of the Act, that ensure:</P> <P>(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:</P> <P>(i) The subject of the action is a member of the self-regulatory organization's:</P> <P>(A) Governing board, or</P> <P>(B) Major disciplinary committee; or,</P> <P>(ii) Any of the charged, alleged or adjudicated contract market rule violations involve:</P> <P>(A) Manipulation or attempted manipulation of the price of a commodity, a futures contract or an option on a futures contract, or</P> <P>(B) Conduct which directly results in financial harm to a non-member of the contract market;</P> <P>(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;</P> <P>(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,</P> <P>(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.</P> <P>(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 § 1.64(b) and the self-regulatory organization's implementing standards and procedures.</P> <CITA>[58 FR 37654, July 13, 1993; 59 FR 5082, Feb. 3, 1994]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.65</SECTNO> <SUBJECT>Notice of bulk transfers and disclosure obligations to customers.</SUBJECT> <P>(a) <E T="03">Notice and Disclosure to Customers.</E> (1) Prior to transferring a customer account to another futures commission merchant or introducing broker other <PRTPAGE P="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.</P> <P>(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:</P> <P>(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;</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(v) A clear statement as to the means by which the customer may object to or otherwise respond to the notice of proposed transfer.</P> <P>(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 § 1.55 (domestic futures and foreign futures and options trading), and §§ 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:</P> <P>(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</P> <P>(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 § 1.55(f); or</P> <P>(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 § 1.10(j) and such futures commission merchant maintains the relevant acknowledgments required by § 1.55(a)(1)(ii) and § 33.7(a)(1)(ii) of this chapter and can establish compliance with § 190.10(c) of this chapter.</P> <P>(b) <E T="03">Notice to the Commission.</E> 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:</P> <P>(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</P> <P>(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.<PRTPAGE P="109"/> </P> <P>(c) The notice required by paragraph (b) of this section shall include:</P> <P>(1) The name, principal business address and telephone number of the transferor futures commission merchant or introducing broker;</P> <P>(2) The name, principal business address and telephone number of each transferee futures commission merchant or introducing broker;</P> <P>(3) The designated self-regulatory organization for the transferor and transferee firms;</P> <P>(4) A brief statement as to the reasons for the transfer;</P> <P>(5) A copy of the notice to customers informing them of the proposed transfer and providing an opportunity to object to such transfer; and</P> <P>(6) A statement of the number of accounts to be transferred and the estimated liquidating equity of the accounts to be transferred.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.66</SECTNO> <SUBJECT>No-action positions with respect to floor traders.</SUBJECT> <P>(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 § 3.11 of this chapter, nor will the Commission commence an enforcement proceeding against the contract market under § 1.62 for failing to bar such floor trader from operating as such: <E T="03">Provided, however,</E> 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: <E T="03">Provided, however,</E> That if the floor trader files <PRTPAGE P="110"/>an application for registration in accordance with § 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.</P> <P>(b) <E T="03">Suspension of no-action position under paragraph (a) of this section pursuant to section 8a(2) of the Act</E>—(1) <E T="03">Notice.</E> 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:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(2) <E T="03">Written submission.</E> 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 § 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.</P> <P>(3) <E T="03">Reply.</E> 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.</P> <P>(4) <E T="03">Determination by Administrative Law Judge.</E> 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.</P> <P>(5) <E T="03">Suspension and order to show cause.</E> (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 § 3.50(a) of this chapter, until a final order with respect to the order to show cause has been issued: <E T="03">Provided, That</E> 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: <E T="03">Provided, however,</E> That in no event shall the floor trader's no-action status be suspended for a period to exceed six months.</P> <P>(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 <PRTPAGE P="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 § 3.50(a) of this chapter unless a timely application for review is filed in accordance with § 10.102 of this chapter. The appellate procedures set forth in §§ 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.</P> <P>(6) <E T="03">Further proceedings.</E> 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 § 3.60(b) through (j) of this chapter.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.67</SECTNO> <SUBJECT>Notification of final disciplinary action involving financial harm to a customer.</SUBJECT> <P>(a) <E T="03">Definitions.</E> For purposes of this section:</P> <P>(1) <E T="03">Final disciplinary action</E> 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.</P> <P>(2) [Reserved]</P> <P>(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:</P> <P>(1)(i) the contract market shall promptly provide written notice of the disciplinary action to the futures commission merchant that cleared the transaction; and,</P> <P>(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.</P> <P>(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 § 9.11(b) shall be deemed to include the principal facts of the disciplinary action thereof.</P> <CITA>[58 FR 37655, July 13, 1993]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.68</SECTNO> <SUBJECT>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.</SUBJECT> <P>(a) A futures commission merchant shall not separately account for and segregate, in accordance with the provisions of section 4d of the Act and §§ 1.20-1.30, 1.32 and 1.36, funds received from a customer if:</P> <P>(1) The customer is an eligible contract participant as defined in section 1a(12) of the Act;</P> <P>(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;</P> <P>(3) The registered derivatives transaction execution facility has authorized, in accordance with § 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</P> <P>(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:<PRTPAGE P="112"/> </P> <P>(i) Represents and warrants that the customer is an eligible contract participant as defined in section 1a(12) of the Act;</P> <P>(ii) Elects not to have its funds separately accounted for and segregated in accordance with the provisions of section 4d of the Act and §§ 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 § 37.7 of this chapter;</P> <P>(iii) Acknowledges that it has been informed, and by making this election agrees that:</P> <P>(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 §§ 1.20-1.30, 1.32 and 1.36;</P> <P>(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;</P> <P>(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 §§ 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;</P> <P>(D) The customer may not retain a security interest in assets excluded from segregation in accordance with this section;</P> <P>(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</P> <P>(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.</P> <P>(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 §§ 1.20-1.30, 1.32 and 1.36.</P> <P>(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.</P> <P>(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:</P> <P>(i) All trades or positions of the customer with respect to which the customer had previously elected to opt out of segregation; and</P> <P>(ii) All money, securities, or property held in such account to margin, guarantee or secure such trades or positions.<PRTPAGE P="113"/> </P> <P>(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 § 1.31.</P> <CITA>[66 FR 20744, Apr. 25, 2001]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.69</SECTNO> <SUBJECT>Voting by interested members of self-regulatory organization governing boards and various committees.</SUBJECT> <P>(a) <E T="03">Definitions.</E> For purposes of this section:</P> <P>(1) <E T="03">Disciplinary committee</E> 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.</P> <P>(2) <E T="03">Family relationship</E> 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.</P> <P>(3) <E T="03">Governing board</E> 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.</P> <P>(4) <E T="03">Oversight panel</E> 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.</P> <P>(5) <E T="03">Member's affiliated firm</E> is a firm in which the member is a “principal,” as defined in § 3.1(a), or an employee.</P> <P>(6) <E T="03">Named party in interest</E> 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.</P> <P>(7) <E T="03">Self-regulatory organization</E> means a “self-regulatory organization” as defined in § 1.3(ee) and includes a “clearing organization” as defined in § 1.3(d), but excludes registered futures associations for the purposes of paragraph (b)(2) of this section.</P> <P>8) <E T="03">Significant action</E> includes any of the following types of self-regulatory organization actions or rule changes that can be implemented without the Commission's prior approval:</P> <P>(i) Any actions or rule changes which address an “emergency” as defined in § 1.41(a)(4)(i) through (iv) and (vi) through (viii); and,</P> <P>(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.</P> <P>(b) <E T="03">Self-regulatory organization rules.</E> 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 § 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:</P> <P>(1) <E T="03">Relationship with named party in interest—</E>(i) <E T="03">Nature of relationship.</E> A member of a self-regulatory organization's governing board, disciplinary committee or oversight panel must abstain from such body's deliberations <PRTPAGE P="114"/>and voting on any matter involving a named party in interest where such member:</P> <P>(A) Is a named party in interest;</P> <P>(B) Is an employer, employee, or fellow employee of a named party in interest;</P> <P>(C) Is associated with a named party in interest through a “broker association” as defined in § 156.1;</P> <P>(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,</P> <P>(E) Has a family relationship with a named party in interest.</P> <P>(ii) <E T="03">Disclosure of relationship.</E> 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.</P> <P>(iii) <E T="03">Procedure for determination.</E> 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:</P> <P>(A) Information provided by the member pursuant to paragraph (b)(1)(ii) of this section; and</P> <P>(B) Any other source of information that is held by and reasonably available to the self-regulatory organization.</P> <P>(2) <E T="03">Financial interest in a significant action—</E>(i) <E T="03">Nature of interest.</E> 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.</P> <P>(ii) <E T="03">Disclosure of interest.</E> 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.</P> <P>(iii) <E T="03">Procedure for determination.</E> 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:</P> <P>(A) Gross positions held at that self-regulatory organization in the member's personal accounts or “controlled accounts,” as defined in § 1.3(j);</P> <P>(B) Gross positions held at that self-regulatory organization in proprietary accounts, as defined in § 1.17(b)(3), at the member's affiliated firm;</P> <P>(C) Gross positions held at that self-regulatory organization in accounts in which the member is a principal, as defined in § 3.1(a);</P> <P>(D) Net positions held at that self-regulatory organization in “customer” accounts, as defined in § 1.17(b)(2), at the member's affiliated firm; and,</P> <P>(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.</P> <P>(iv) <E T="03">Bases for determination.</E> Taking into consideration the exigency of the significant action, such determinations should be based upon:</P> <P>(A) The most recent large trader reports and clearing records available to the self-regulatory organization;<PRTPAGE P="115"/> </P> <P>(B) Information provided by the member with respect to positions pursuant to paragraph (b)(2)(ii) of this section; and,</P> <P>(C) Any other source of information that is held by and reasonably available to the self-regulatory organization.</P> <P>(3) <E T="03">Participation in deliberations.</E> (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.</P> <P>(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:</P> <P>(A) Wwhether the member's participation in deliberations is necessary for the deliberating body to achieve a quorum in the matter; and</P> <P>(B) Whether the member has unique or special expertise, knowledge or experience in the matter under consideration.</P> <P>(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.</P> <P>(4) <E T="03">Documentation of determination.</E> 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:</P> <P>(i) The names of all members who attended the meeting in person or who otherwise were present by electronic means;</P> <P>(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</P> <P>(iii) Information on the position information that was reviewed for each member.</P> <CITA>[64 FR 23, Jan. 4, 1999; 64 FR 3340, Jan. 21, 1999]</CITA> </SECTION> <SECTION> <SECTNO>§ 1.70</SECTNO> <SUBJECT>Notification of State enforcement actions brought under the Commodity Exchange Act.</SUBJECT> <P>(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:</P> <P>(1) Indicates the names of parties to the proceeding;</P> <P>(2) Indicates the provision of the Act or the rule, regulation or order thereunder which is alleged to have been violated.</P> <FP>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.</FP> <P>(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:</P> <P>(1) Indicates the names of parties to the proposed proceeding;</P> <P>(2) Indicates the provision of the Act or the rule, regulation or order thereunder which will be alleged to have been violated;<PRTPAGE P="116"/> </P> <P>(3) Contains a brief statement of the facts on which the proposed action will be based.</P> <FP>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.</FP> <P>(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.</P> <P>(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.</P> <CITA>[48 FR 49503, Oct. 26, 1983, as amended at 60 FR 49334, Sept. 25, 1995]</CITA> </SECTION> </SUBJGRP> <APPENDIX> <RESERVED>Appendix A to Part 1 [Reserved]</RESERVED> </APPENDIX> <APPENDIX> <EAR>Pt. 1, App. B</EAR> <HD SOURCE="HED">Appendix B to Part 1—Fees for Contract Market Rule Enforcement Reviews and Financial Reviews</HD> <P>(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.</P> <P>(b) The Commission determines fees changed fees charged to exchanges based upon a formula which considers both actual costs and trading volume.</P> <P>(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.</P> <CITA>[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]</CITA> </APPENDIX> </PART> <PART> <EAR>Pt. 2</EAR> <HD SOURCE="HED">PART 2—OFFICIAL SEAL</HD> <CONTENTS> <SECHD>Sec.</SECHD> <SECTNO>2.1</SECTNO> <SUBJECT>Description.</SUBJECT> <SECTNO>2.2</SECTNO> <SUBJECT>Authority to affix seal.</SUBJECT> <SECTNO>2.3</SECTNO> <SUBJECT>Prohibitions against misuse of seal.</SUBJECT> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>7 U.S.C. 4a(j), unless otherwise noted.</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>41 FR 9552, Mar. 5, 1976, unless otherwise noted.</P> </SOURCE> <SECTION> <SECTNO>§ 2.1</SECTNO> <SUBJECT>Description.</SUBJECT> <P>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:</P> <P>(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.</P> <P>(b) The Seal of the Commodity Futures Trading Commission is illustrated as follows:</P> <GPH DEEP="167" SPAN="1"> <PRTPAGE P="117"/> <GID>EC05OC91.030</GID> </GPH> </SECTION> <SECTION> <SECTNO>§ 2.2</SECTNO> <SUBJECT>Authority to affix seal.</SUBJECT> <P>(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.</P> <P>(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.</P> <CITA>[41 FR 9552, Mar. 5, 1976, as amended at 51 FR 37177, Oct. 20, 1986]</CITA> </SECTION> <SECTION> <SECTNO>§ 2.3</SECTNO> <SUBJECT>Prohibitions against misuse of seal.</SUBJECT> <P>(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.</P> <P>(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.</P> </SECTION> </PART> <PART> <EAR>Pt. 3</EAR> <HD SOURCE="HED">PART 3—REGISTRATION</HD> <CONTENTS> <SUBPART> <HD SOURCE="HED">Subpart A—Registration</HD> <SECHD>Sec.</SECHD> <SECTNO>3.1</SECTNO> <SUBJECT>Definitions.</SUBJECT> <SECTNO>3.2</SECTNO> <SUBJECT>Registration processing by the National Futures Association; notification and duration of registration.</SUBJECT> <SECTNO>3.3</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>3.4</SECTNO> <SUBJECT>Registration in one capacity not included in registration in any other capacity.</SUBJECT> <SECTNO>3.5-3.9</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>3.10</SECTNO> <SUBJECT>Registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.</SUBJECT> <SECTNO>3.11</SECTNO> <SUBJECT>Registration of floor brokers and floor traders.</SUBJECT> <SECTNO>3.12</SECTNO> <SUBJECT>Registration of associated persons of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.</SUBJECT> <SECTNO>3.13</SECTNO> <SUBJECT>Registration of agricultural trade option merchants and their associated persons.</SUBJECT> <SECTNO>3.14-3.20</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>3.21</SECTNO> <SUBJECT>Exemption from fingerprinting requirement in certain cases.</SUBJECT> <SECTNO>3.22</SECTNO> <SUBJECT>Supplemental filings.</SUBJECT> <SECTNO>3.23-3.29</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>3.30</SECTNO> <SUBJECT>Current address for purpose of delivery of communications from the Commission or the National Futures Association.</SUBJECT> <SECTNO>3.31</SECTNO> <SUBJECT>Deficiencies, inaccuracies, and changes, to be reported.</SUBJECT> <SECTNO>3.33</SECTNO> <SUBJECT>Withdrawal from registration.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Temporary Licenses</HD> <SECTNO>3.40</SECTNO> <SUBJECT>Temporary licensing of applicants for associated person, floor broker or floor trader registration.</SUBJECT> <SECTNO>3.42</SECTNO> <SUBJECT>Termination.</SUBJECT> <SECTNO>3.43</SECTNO> <SUBJECT>Relationship to registration.</SUBJECT> <SECTNO>3.44</SECTNO> <SUBJECT>Temporary licensing of applicants for guaranteed introducing broker registration.</SUBJECT> <SECTNO>3.45</SECTNO> <SUBJECT>Restrictions upon activities.</SUBJECT> <SECTNO>3.46</SECTNO> <SUBJECT>Termination.</SUBJECT> <SECTNO>3.47</SECTNO> <SUBJECT>Relationship to registration.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Denial, Suspension or Revocation of Registration</HD> <SECTNO>3.50</SECTNO> <SUBJECT>Service.</SUBJECT> <SECTNO>3.51</SECTNO> <SUBJECT>Withdrawal of application for registration.</SUBJECT> <SECTNO>3.52-3.54</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>3.55</SECTNO> <SUBJECT>Suspension and revocation of registration pursuant to section 8a(2) of the Act.<PRTPAGE P="118"/> </SUBJECT> <SECTNO>3.56</SECTNO> <SUBJECT>Suspension or modification of registration pursuant to section 8a(11) of the Act.</SUBJECT> <SECTNO>3.57</SECTNO> <SUBJECT>Proceedings under section 8a(2)(E) of the Act.</SUBJECT> <SECTNO>3.60</SECTNO> <SUBJECT>Procedure to deny, condition, suspend, revoke or place restrictions upon registration pursuant to sections 8a(2), 8a(3) and 8a(4) of the Act.</SUBJECT> <SECTNO>3.61</SECTNO> <SUBJECT>Extensions of time for proceedings brought under § 3.55, § 3.56 and § 3.60 of this part.</SUBJECT> <SECTNO>3.62</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>3.63</SECTNO> <SUBJECT>Service of order issued by an Administrative Law Judge or the Commission.</SUBJECT> <SECTNO>3.64</SECTNO> <SUBJECT>Procedure to lift or modify conditions or restrictions.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart D—Notice Under Section 4k(5) of the Act</HD> <SECTNO>3.70</SECTNO> <SUBJECT>Notification of certain information regarding associated persons.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart E—Delegation and Reservation of Authority</HD> <SECTNO>3.75</SECTNO> <SUBJECT>Delegation and reservation of authority.</SUBJECT> <APP>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</APP> <APP>Appendix B to Part 3—Statement of Acceptable Practices With Respect to Ethics Training</APP> </SUBPART> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>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.</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>45 FR 80491, Dec. 5, 1980, unless otherwise noted.</P> </SOURCE> <SUBPART> <HD SOURCE="HED">Subpart A—Registration</HD> <SECTION> <SECTNO>§ 3.1</SECTNO> <SUBJECT>Definitions.</SUBJECT> <P>(a) <E T="03">Principal.</E> Principal means, with respect to an applicant for registration, a registrant or a person required to be registered under the Act or these regulations:</P> <P>(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;</P> <P>(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</P> <P>(ii) Any person other than an individual that is the direct owner of ten percent or more of any class of securities; or</P> <P>(3) Any person who has contributed ten percent or more of the capital: <E T="03">Provided, however,</E> 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.</P> <P>(b) <E T="03">Current.</E> 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.<PRTPAGE P="119"/> </P> <P>(c) <E T="03">Sponsor.</E> Sponsor means the futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator or leverage transaction merchant which makes the certification required by § 3.12 of this part for the registration of an associated person of such sponsor.</P> <P>(d) <E T="03">Beneficial owner.</E> 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.</P> <P>(e) <E T="03">Foreign futures authority.</E> 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.</P> <P>(f) <E T="03">Commodity interest.</E> Commodity interest means:</P> <P>(1) Any contract for the purchase or sale of a commodity for future delivery regulated under the Act and rules promulgated thereunder; and</P> <P>(2) Any contract, agreement or transaction subject to Commission regulation under sections 4c or 19 of the Act.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.2</SECTNO> <SUBJECT>Registration processing by the National Futures Association; notification and duration of registration.</SUBJECT> <P>(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.</P> <P>(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:</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <P>(1) If an applicant for registration as an associated person receives a temporary license in accordance with § 3.40, the National Futures Association shall notify the sponsor that only a temporary license has been granted.</P> <P>(2) If an applicant for registration as a floor broker or floor trader receives a temporary license in accordance with § 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 <PRTPAGE P="120"/>only a temporary license has been granted.</P> <P>(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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.3</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 3.4</SECTNO> <SUBJECT>Registration in one capacity not included in registration in any other capacity.</SUBJECT> <P>(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: <E T="03">Provided, however,</E> That a registered floor broker need not also register as a floor trader in order to engage in activity as a floor trader.</P> <P>(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: <E T="03">Provided, however,</E> 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.</P> <CITA>[49 FR 39530, Oct. 9, 1984, as amended at 58 FR 19590, Apr. 15, 1993]</CITA> </SECTION> <SECTION> <SECTNO>§§ 3.5-3.9</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 3.10</SECTNO> <SUBJECT>Registration of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.</SUBJECT> <P>(a) <E T="03">Application for registration</E>. (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.</P> <P>(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 § 1.10 of this chapter: <E T="03">Provided, however,</E> 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 § 1.10(h) of this chapter.</P> <P>(iii) Applicants for registration as a commodity pool operator must accompany their Form 7-R with the financial statements described in § 4.13(c) of this chapter.</P> <P>(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 § 31.13 of this chapter.</P> <P>(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 <PRTPAGE P="121"/>card provided by the National Futures Association for that purpose: <E T="03">Provided, however,</E> that if such principal is a director who qualifies for the exemption from the fingerprint requirement pursuant to § 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.</P> <P>(3) <E T="03">Notice registration as a futures commission merchant or introducing broker for certain securities brokers or dealers.</E> (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—</P> <P>(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;</P> <P>(B) The registration of the broker or dealer is not suspended pursuant to an order of the Securities and Exchange Commission; and</P> <P>(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.</P> <P>(ii) The registration will be effective upon the filing of the notice prescribed by the National Futures Association in accordance with the instructions thereto.</P> <P>(b) <E T="03">Duration of registration.</E> (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.</P> <P>(2) A person registered as an introducing broker who was a party to a guarantee agreement with a futures commission merchant in accordance with § 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 § 1.10(j)(8) of this chapter are followed.</P> <P>(c) <E T="03">Exemption from registration for certain persons.</E> A person trading solely for proprietary accounts, as defined in § 1.3(y) of this chapter, is not required to register as a futures commission merchant: <E T="03">Provided,</E> that such a person remains subject to all other provisions of the Act and of the rules, regulations and orders thereunder.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0023)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.11</SECTNO> <SUBJECT>Registration of floor brokers and floor traders.</SUBJECT> <P>(a) <E T="03">Application for registration.</E> (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.</P> <P>(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.<PRTPAGE P="122"/> </P> <P>(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.</P> <P>(b) <E T="03">Duration of registration.</E> 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 § 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.</P> <CITA>[58 FR 19591, Apr. 15, 1993, as amended at 64 FR 1727, Jan. 12, 1999; 67 FR 38874, June 6, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.12</SECTNO> <SUBJECT>Registration of associated persons of futures commission merchants, introducing brokers, commodity trading advisors, commodity pool operators and leverage transaction merchants.</SUBJECT> <P>(a) <E T="03">Registration required.</E> 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.</P> <P>(b) <E T="03">Duration of registration.</E> 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 § 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.</P> <P>(c) <E T="03">Application for registration.</E> Except as otherwise provided in paragraphs <PRTPAGE P="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.</P> <P>(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:</P> <P>(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;</P> <P>(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.</P> <P>(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: <E T="03">Provided,</E> 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</P> <P>(2) The certification required by paragraph (c)(1) of this section must be submitted concurrently with the Form 8-R.</P> <P>(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.</P> <P>(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.</P> <P>(d) <E T="03">Special temporary licensing and registration procedures for certain persons.</E> (1) <E T="03">Registration terminated within the preceding 60 days.</E> 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 § 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:</P> <P>(i) That such person has been hired or is otherwise employed by that sponsor;</P> <P>(ii) That such person's registration as an associated person in any capacity is not suspended or revoked;</P> <P>(iii) That such person is eligible to be registered or temporarily licensed in accordance with this paragraph (d);</P> <P>(iv) Whether there is a pending adjudicatory proceeding under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or §§ 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 § 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</P> <P>(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 <PRTPAGE P="124"/>withdrawal of an application for registration as described in that paragraph.</P> <P>(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.</P> <P>(3) A temporary license received in accordance with paragraph (d)(1) of this section shall be subject to the provisions of §§ 3.42 and 3.43.</P> <P>(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.</P> <P>(e) <E T="03">Retention of records.</E> The sponsor must retain in accordance with § 1.31 of this chapter such records as are necessary to support the certifications required by this section.</P> <P>(f) <E T="03">Reporting of dual and multiple associations.</E> (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 § 3.60(b)(2)(i) (A) and (B)) files with the National Futures Association a Form 8-R in accordance with the instructions thereto.</P> <P>(ii) NFA shall notify each sponsor of the associated person that the associated person has applied to become associated with another sponsor.</P> <P>(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:</P> <P>(A) Solicitation or acceptance of customers' orders,</P> <P>(B) Solicitation of funds, securities, or property for a participation in a commodity pool,</P> <P>(C) Solicitation of a client's or prospective client's discretionary account,</P> <P>(D) Solicitation or acceptance of leverage customers' orders for leverage transactions, and</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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 <PRTPAGE P="125"/>commission merchant or introducing broker and may not also register as an associated person of the commodity trading advisor(s).</P> <P>(g) <E T="03">Petitions for exemption.</E> (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.</P> <P>(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).</P> <P>(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.</P> <P>(h) <E T="03">Exemption from registration.</E> (1) A person is not required to register as an associated person in any capacity if that person is:</P> <P>(i) Registered under the Act as a futures commission merchant, floor broker, or as an introducing broker;</P> <P>(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</P> <P>(iii) The chief operating officer, general partner or other person in the supervisory chain-of-command, <E T="03">provided</E> 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:</P> <P>(A) Such supervisory person is not authorized to:</P> <P>(<E T="03">1</E>) Solicit or accept customers' or leverage customers' orders,</P> <P>(<E T="03">2</E>) Solicit a client's or prospective client's discretionary account,</P> <P>(<E T="03">3</E>) Solicit funds, securities or property for a participation in a commodity pool, or</P> <P>(<E T="03">4</E>) Exercise any line supervisory authority over those persons so engaged;</P> <P>(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;</P> <P>(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 <PRTPAGE P="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</P> <P>(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.</P> <P>(2) A person is not required to register as an associated person of a commodity trading advisor if that person is:</P> <P>(i) Registered as a commodity trading advisor, if that person is associated with a commodity trading advisor; or</P> <P>(ii) Exempt from registration as a commodity trading advisor pursuant to the provisions of § 4.14(a)(1), § 4.14(a)(2) or § 4.14(a) (8) of this chapter or is associated with a person who is so exempt from registration: <E T="03">Provided,</E> 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:</P> <P>(A) Not exempt from registration pursuant to the provisions of § 4.14(a)(1), § 4.14(a)(2) or § 4.14(a)(8) of this chapter or</P> <P>(B) Registered as a commodity trading advisor notwithstanding the availability of that exemption.</P> <P>(3) A person is not required to register as an associated person of a commodity pool operator if that person is:</P> <P>(i) Registered as a commodity pool operator, if that person is associated with a commodity pool operator;</P> <P>(ii) Exempt from registration as a commodity pool operator pursuant to the provisions of § 4.13 of this chapter or is associated with a person who is so exempt from registration: <E T="03">Provided,</E> 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</P> <P>(A) Not exempt from registration pursuant to the provisions of § 4.13 of this chapter or</P> <P>(B) Registered as a commodity pool operator notwithstanding the availability of that exemption; or</P> <P>(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: <E T="03">Provided,</E> 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.</P> <P>(i) <E T="03">Special registration or temporary licensing procedures when previous sponsor's registration ceases.</E> (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:</P> <P>(i) That such person has been hired or is otherwise employed by that sponsor;<PRTPAGE P="127"/> </P> <P>(ii) That such person's registration as an associated person in any capacity is not suspended or revoked;</P> <P>(iii) That such person is eligible to be registered in accordance with paragraph (i) of this section;</P> <P>(iv) Whether there is a pending adjudicatory proceeding under sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or § 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 § 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;</P> <P>(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</P> <P>(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. <E T="03">Provided, however,</E> 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 § 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 §§ 3.41, 3.42 and 3.43 of this part.</P> <P>(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.</P> <P>(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.</P> <P>(j) <E T="03">Special temporary licensing and registration procedures for associated persons of futures commission merchants and introducing brokers involved only with certain commodity interests.</E> 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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0023)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.13</SECTNO> <SUBJECT>Registration of agricultural trade option merchants and their associated persons.</SUBJECT> <P>(a) <E T="03">Definitions.</E> (1) <E T="03">Agricultural trade option merchant.</E> “Agricultural trade option merchant” means any person <PRTPAGE P="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.</P> <P>(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:</P> <P>(i) Solicits or accepts customers' orders (other than in a clerical capacity) or</P> <P>(ii) Supervises directly any person or persons so engaged.</P> <P>(b) <E T="03">Registration required.</E> It shall be unlawful for any person in the business of soliciting, offering or selling the instruments listed in § 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.</P> <P>(c) <E T="03">Duration of registration.</E> (1) A person registered in accordance with the provisions of this section shall continue to be registered until the revocation or withdrawal of registration.</P> <P>(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.</P> <P>(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 § 32.13 of this chapter or representing himself or herself to be a registrant until:</P> <P>(i) A registered agricultural trade option merchant notifies the National Futures Association of the person's association; and</P> <P>(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.</P> <P>(d) <E T="03">Conditions for registration.</E> (1) Applicants for registration as an agricultural trade option merchant must meet the following conditions:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(2) Applicants for registration as an associated person of an must meet the <PRTPAGE P="129"/>following conditions. Such persons must:</P> <P>(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</P> <P>(ii) Certify that he or she is not disqualified from registration for the reasons listed in sections 8a(2) and (3) of the Act.</P> <P>(e) <E T="03">Applications for registration.</E> (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.</P> <P>(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.</P> <P>(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.</P> <P>(f) <E T="03">Withdrawal of application for registration; denial, suspension and revocation of registration.</E> The provisions of §§ 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.</P> <P>(g) <E T="03">Withdrawal from registration.</E> 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.</P> <P>(h) <E T="03">Dual registration of associated persons.</E> An associated person of an agricultural trade option merchant may be associated with other registrants subject to the provision of § 3.12(f).</P> <CITA>[64 FR 68016, Dec. 6, 1999]</CITA> </SECTION> <SECTION> <SECTNO>§§ 3.14-3.20</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 3.21</SECTNO> <SUBJECT>Exemption from fingerprinting requirement in certain cases.</SUBJECT> <P>(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:</P> <P>(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</P> <P>(2) A statement that such person's application for initial registration in any capacity was granted within the preceding ninety days; <E T="03">Provided,</E> 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.</P> <P>(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 <PRTPAGE P="130"/>signature shall constitute a certification by that individual that the photocopy or statement is accurate and complete and must be made by:</P> <P>(1) <E T="03">With respect to the fingerprints of an associated person.</E> An officer, if the sponsor is a corporation, a general partner, if a partnership, or the sole proprietor, if a sole proprietorship;</P> <P>(2) <E T="03">With respect to fingerprints of a floor broker or floor trader.</E> The applicant for registration; or</P> <P>(3) <E T="03">With respect to the fingerprints of a principal.</E> 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.</P> <P>(c) <E T="03">Outside directors.</E> 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 §§ 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:</P> <P>(1) Is not engaged in:</P> <P>(i) The solicitation or acceptance of customers' orders,</P> <P>(ii) The solicitation of funds, securities or property for a participation in a commodity pool,</P> <P>(iii) The solicitation of a client's or prospective client's discretionary account,</P> <P>(iv) The solicitation or acceptance of leverage customers' orders for leverage transactions;</P> <P>(2) Does not regularly have access to the keeping, handling or processing of:</P> <P>(i) Commodity interest transactions;</P> <P>(ii) Customer funds, leverage customer funds, foreign futures or foreign options secured amount, or adjusted net capital; or</P> <P>(iii) The original books and records relating to the items described in paragraphs (c)(2)(i) and (c)(2)(ii) of this section; and</P> <P>(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</P> <P>(4) The Notice Pursuant to Rule 3.21(c) shall also include:</P> <P>(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;</P> <P>(ii) The nature of the duties of the outside director for whom exemption under paragraph (c) of this section is sought;</P> <P>(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</P> <P>(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.</P> <P>(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).</P> <CITA>[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]</CITA> </SECTION> <SECTION> <PRTPAGE P="131"/> <SECTNO>§ 3.22</SECTNO> <SUBJECT>Supplemental filings.</SUBJECT> <P>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:</P> <P>(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</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0023)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§§ 3.23-3.29</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 3.30</SECTNO> <SUBJECT>Current address for purpose of delivery of communications from the Commission or the National Futures Association.</SUBJECT> <P>(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: <E T="03">Provided,</E> 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.</P> <P>(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 <PRTPAGE P="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.</P> <CITA>[57 FR 23149, June 2, 1992]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.31</SECTNO> <SUBJECT>Deficiencies, inaccuracies, and changes, to be reported.</SUBJECT> <P>(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. <E T="03">Provided, however,</E> 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.</P> <P>(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.</P> <P>(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. <E T="03">Provided, however,</E> 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 § 3.21(c) or such principal has a current Form 8-R on file with the Commission or the National Futures Association.</P> <P>(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 § 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.</P> <P>(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 <PRTPAGE P="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;</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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 § 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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0023)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.33</SECTNO> <SUBJECT>Withdrawal from registration.</SUBJECT> <P>(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:</P> <P>(1) The registrant has ceased, or has not commenced, engaging in activities requiring registration in such capacity;</P> <P>(2) The registrant is exempt from registration in such capacity; or</P> <P>(3) The registrant is excluded from the persons or any class of persons required to be registered in such capacity: <E T="03">Provided,</E> 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.</P> <P>(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:</P> <P>(1) The name of the registrant for which withdrawal is being requested;</P> <P>(2) The registration capacities for which withdrawal is being requested;<PRTPAGE P="134"/> </P> <P>(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 § 1.31 of this chapter;</P> <P>(4) The applicable basis under paragraph (a) of this section for requesting withdrawal for each capacity for which withdrawal is requested.</P> <P>(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.</P> <P>(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:</P> <P>(i) That all customer or option customer agreements, if any, have been terminated;</P> <P>(ii) That all customer or option customer positions, if any, have been transferred on behalf of customers or option customers or closed;</P> <P>(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;</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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 § 1.10(j) of this chapter not more than thirty days after the filing of the request for withdrawal from registration.</P> <P>(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 § 31.13(f) of this chapter as of a date not more than 30 days prior to the date of the withdrawal request.</P> <P>(d) [Reserved]</P> <P>(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 <PRTPAGE P="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 § 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.</P> <P>(f) Except as otherwise provided in § 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:</P> <P>(1) The Commission or the National Futures Association has instituted a proceeding to suspend or revoke such registration;</P> <P>(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;</P> <P>(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;</P> <P>(4) The Commission or the National Futures Association requests from the registrant further information pertaining to its request for withdrawal from registration; or</P> <P>(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.</P> <P>(g) Withdrawal from registration in one capacity does not constitute withdrawal from registration in any other capacity.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0008)</APPRO> <CITA>[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]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Temporary Licenses</HD> <SECTION> <SECTNO>§ 3.40</SECTNO> <SUBJECT>Temporary licensing of applicants for associated person, floor broker or floor trader registration.</SUBJECT> <P>(a) Notwithstanding any other provision of these regulations and pursuant to the terms and conditions of this subpart:</P> <P>(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:</P> <P>(i) A Form 8-R, properly completed in accordance with the instructions thereto; and</P> <P>(ii) The sponsor's certification required by § 3.12(c): <E T="03">Provided, however,</E> 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; <E T="03">and, provided further,</E> that failure to file the fingerprints within this period will result in the termination of the temporary license <PRTPAGE P="136"/>immediately upon notice to the applicant's sponsor that the National Futures Association has not received the applicant's fingerprints.</P> <P>(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:</P> <P>(i) A Form 8-R, properly completed in accordance with the instructions thereto;</P> <P>(ii) The fingerprints of the applicant on a fingerprint card provided by the National Futures Association for that purpose;</P> <P>(iii) A Supplemental Sponsor Certification Statement executed by a sponsor meeting the requirements under § 3.60(b)(2)(i), if the applicant is subject to an order imposing conditions on the applicant's registration; and</P> <P>(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.</P> <P>(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.</P> <P>(c) Subject to the provisions of § 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.</P> <CITA>[67 FR 38876, June 6, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.42</SECTNO> <SUBJECT>Termination.</SUBJECT> <P>(a) A temporary license shall terminate:</P> <P>(1) Five days after service upon the applicant of a notice by the Commission or the National Futures Association pursuant to § 3.60 of this part that the applicant for registration may be found subject to a statutory disqualification from registration;</P> <P>(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 § 3.40;</P> <P>(3) Immediately upon the withdrawal of the registration application pursuant to § 3.40;</P> <P>(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;</P> <P>(5) Immediately upon failure to pay the full amount of a reparation order within the time permitted under section 14(f) of the Act;</P> <P>(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.</P> <P>(7) Immediately upon the revocation or withdrawal of the registration of the applicant's sponsor; or<PRTPAGE P="137"/> </P> <P>(8) Immediately upon notice to the applicant and the applicant's sponsor or the contract market that has granted the applicant trading privileges that:</P> <P>(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</P> <P>(ii) An event has occurred leading to an affirmative response to any of items 14 through 18 on the applicant's Form 8-R.</P> <P>(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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.43</SECTNO> <SUBJECT>Relationship to registration.</SUBJECT> <P>(a) A temporary license shall not be deemed to be a registration or to confer any right to such registration.</P> <P>(b) Unless a temporary license has terminated pursuant to § 3.42, a temporary license shall become a registration with the Commission upon the earlier of:</P> <P>(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</P> <P>(2) The expiration of six months from the date of issuance unless a notice has been issued under § 3.60 of the initiation of a proceeding to deny registration under section 8a(2) or 8a(3) of the Act.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.44</SECTNO> <SUBJECT>Temporary licensing of applicants for guaranteed introducing broker registration.</SUBJECT> <P>(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:</P> <P>(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 § 1.10(j)(2) of this chapter;</P> <P>(2) A Form 7-R properly completed in accordance with the instructions thereto;</P> <P>(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.</P> <P>(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:</P> <P>(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</P> <P>(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</P> <P>(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: <E T="03">Provided,</E> 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.</P> <P>(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.</P> <P>(c) An applicant that fails to respond in accordance with a written request by the Commission or the National Futures Association for clarification of <PRTPAGE P="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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.45</SECTNO> <SUBJECT>Restrictions upon activities.</SUBJECT> <P>(a) Subject to the provisions of § 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.</P> <P>(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 § 3.44(a)(1) of this subpart: <E T="03">Provided,</E> That, at least 10 days prior to the effective date of the termination of the existing guarantee agreement in accordance with the provisions of § 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.</P> <CITA>[51 FR 45761, Dec. 22, 1986]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.46</SECTNO> <SUBJECT>Termination.</SUBJECT> <P>(a) A temporary license shall terminate:</P> <P>(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;</P> <P>(2) Immediately upon termination of the applicant's guarantee agreement in accordance with § 1.10(j)(4)(ii) or (j)(5) of this chapter, unless a new guarantee agreement is filed in accordance with § 3.45(b);</P> <P>(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 § 3.44(c) in accordance with such request;</P> <P>(4) Immediately upon the revocation or withdrawal of the guarantor futures commission merchant's registration;</P> <P>(5) Immediately upon the withdrawal of the registration application pursuant to § 3.44(c);</P> <P>(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;</P> <P>(7) Immediately upon failure to pay the full amount of a reparation order within the time permitted under section 14(f) of the Act;</P> <P>(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.</P> <P>(9) Whenever a person not listed as a principal on the applicant's initial registration application becomes a principal under § 3.1(a); or</P> <P>(10) Immediately upon notice to the applicant and the guarantor futures commission merchant that:</P> <P>(i) The applicant or any principal (including any branch officer manager) <PRTPAGE P="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</P> <P>(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.</P> <P>(b) Upon termination, the applicant may not engage in any activity which requires registration as an introducing broker.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.47</SECTNO> <SUBJECT>Relationship to registration.</SUBJECT> <P>(a) A temporary license shall not be deemed to be a registration or to confer any right to such registration.</P> <P>(b) Unless a temporary license has terminated, a temporary license shall become a registration upon the earlier of:</P> <P>(1) A determination by the National Futures Association that the applicant is qualified for registration as an introducing broker; or</P> <P>(2) The expiration of six months from the date of issuance unless a notice has been issued under § 3.60 of the initiation of a proceeding to deny registration under sections 8a(2) or 8a(3) of the Act.</P> <CITA>[51 FR 45761, Dec. 22, 1986, as amended at 58 FR 19595, Apr. 15, 1993]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Denial, Suspension or Revocation of Registration</HD> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>49 FR 8220, Mar. 5, 1984, unless otherwise noted.</P> </SOURCE> <SECTION> <SECTNO>§ 3.50</SECTNO> <SUBJECT>Service.</SUBJECT> <P>(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.</P> <P>(b) A copy of any notice served in accordance with paragraph (a) of this section shall also be served upon:</P> <P>(1) Any registrant sponsoring the applicant or registrant pursuant to the provisions of § 3.12 of this part if the applicant or registrant is an individual registered as or applying for registration as an associated person; or</P> <P>(2) Any futures commission merchant which has entered into a guarantee agreement in accordance with § 1.10(j) of this chapter, if the applicant or registrant is registered as or applying for registration as an introducing broker.</P> <P>(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.</P> <P>(d) Except for the documents which may be served under § 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 § 10.12 (d) and (e) of this chapter.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.51</SECTNO> <SUBJECT>Withdrawal of application for registration.</SUBJECT> <P>(a) <E T="03">Notice.</E> 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:</P> <P>(1) The information, if true, is a basis upon which the applicant's registration may be denied;<PRTPAGE P="140"/> </P> <P>(2) Unless the applicant voluntarily withdraws the application, it may be necessary to institute the denial procedures described in this subpart; and</P> <P>(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.</P> <P>(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.</P> <CITA>[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992]</CITA> </SECTION> <SECTION> <SECTNO>§§ 3.52-3.54</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 3.55</SECTNO> <SUBJECT>Suspension and revocation of registration pursuant to section 8a(2) of the Act.</SUBJECT> <P>(a) <E T="03">Notice.</E> 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:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(b) <E T="03">Written submission.</E> 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 § 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.</P> <P>(c) <E T="03">Reply.</E> 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.</P> <P>(d) <E T="03">Determination by Administrative Law Judge.</E> 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.</P> <P>(e) <E T="03">Suspension and order to show cause.</E> (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 § 3.50(a), until a final order with respect to the order to show cause has been issued: <E T="03">Provided, That</E> 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: <E T="03">Provided, however,</E> That in no event shall the registrant be suspended for a period to exceed six months.</P> <P>(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 <PRTPAGE P="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 § 3.50(a) of this part unless a timely application for review is filed in accordance with § 10.102 of this chapter. The appellate procedures set forth in §§ 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.</P> <P>(f) <E T="03">Further proceedings.</E> 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 § 3.60(b)-(j) of this part.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.56</SECTNO> <SUBJECT>Suspension or modification of registration pursuant to section 8a(11) of the Act.</SUBJECT> <P>(a) <E T="03">Notice.</E> (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:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <P>(b) <E T="03">Response.</E> (1) If the registrant wishes to challenge the accuracy of the allegations in the notice, the registrant may submit written evidence as to:</P> <P>(i) The registrant's identity;</P> <P>(ii) The existence of a clerical error in any record documenting the information, indictment or complaint;</P> <P>(iii) The nature of the information, indictment or complaint; or</P> <P>(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 § 3.60(b)(2)(i) and who meets the standard set forth in § 3.60(b)(2)(i)(A) and (C).</P> <P>(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.</P> <P>(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.<PRTPAGE P="142"/> </P> <P>(c) <E T="03">Reply.</E> 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.</P> <P>(d) <E T="03">Oral hearing.</E> 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.</P> <P>(e) <E T="03">Determination by Administrative Law Judge.</E> (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.</P> <P>(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 § 3.50(a) unless a timely application for review is filed in accordance with § 10.102 of this chapter. The appellate procedures set forth in §§ 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.</P> <P>(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.</P> <P>(g) On disposition of such information, indictment, or complaint, the Commission may issue and serve on such registrant a notice under § 3.55 or § 3.60 to suspend, restrict, or revoke the registration of such person.</P> <P>(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.</P> <P>(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.</P> <CITA>[58 FR 19595, Apr. 15, 1993, as amended at 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.57</SECTNO> <SUBJECT>Proceedings under section 8a(2)(E) of the Act.</SUBJECT> <P>The Commission will not initiate a proceeding under section 8a(2)(E) of the Act, if <E T="03">respondeat superior</E> is the sole basis upon which the registrant may be found subject to a statutory disqualification.</P> </SECTION> <SECTION> <SECTNO>§ 3.60</SECTNO> <SUBJECT>Procedure to deny, condition, suspend, revoke or place restrictions upon registration pursuant to sections 8a(2), 8a(3) and 8a(4) of the Act.</SUBJECT> <P>(a) <E T="03">Notice.</E> 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:</P> <P>(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;</P> <P>(2) The allegations set forth in the notice, if true, constitute a basis upon <PRTPAGE P="143"/>which registration may be denied, granted upon conditions, suspended, revoked or restricted;</P> <P>(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</P> <P>(4) If the applicant or registrant does not file a timely response to the notice:</P> <P>(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</P> <P>(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.</P> <P>(b) <E T="03">Response.</E> 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.</P> <P>(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:</P> <P>(i) The applicant's or registrant's identity,</P> <P>(ii) The existence of a clerical error in any record documenting the statutory disqualification,</P> <P>(iii) The nature or date of the statutory disqualification,</P> <P>(iv) The post-conviction modification of any record of conviction, or</P> <P>(v) The favorable disposition of any appeal. </P> <FP>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.</FP> <P>(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 <PRTPAGE P="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: <E T="03">Provided, That,</E> with respect to such sponsor, supervising employer or floor broker, supervising registrant or principal:</P> <P>(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</P> <P>(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 § 1.12(b) or § 31.7(b) of this chapter, respectively; and</P> <P>(C) Such person is not barred from service on self-regulatory organization governing boards or committees based on disciplinary history in accordance with § 1.63 of this chapter.</P> <P>(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:</P> <P>(A) Evidence mitigating the seriousness of the wrongdoing underlying the statutory disqualification set forth in the notice;</P> <P>(B) Evidence that the applicant or registrant has undergone rehabilitation since the time of the wrongdoing underlying the statutory disqualification; and</P> <P>(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.</P> <P>(c) <E T="03">Reply.</E> 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:</P> <P>(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 § 10.91 of this chapter; or</P> <P>(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.</P> <P>(d) <E T="03">Oral Presentation.</E> 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:</P> <P>(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, <PRTPAGE P="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</P> <P>(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 §§ 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.</P> <P>(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 § 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 § 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.</P> <P>(e) <E T="03">Determination by Administrative Law Judge—Standards of Proof.</E> 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:</P> <P>(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</P> <P>(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.</P> <P>(f) <E T="03">Determination of Administrative Law Judge—Findings.</E> 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:</P> <P>(1) Evidence mitigating the seriousness of the wrongdoing underlying the applicant's or registrant's statutory disqualification;</P> <P>(2) Evidence that the applicant or registrant has undergone rehabilitation since the time of the wrongdoing underlying the statutory disqualification; and</P> <P>(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 <PRTPAGE P="146"/>contract market may petition to lift or modify the conditions or restrictions in accordance with § 3.64.</P> <P>(g) <E T="03">Default.</E> 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 §§ 10.93 and 10.94 of this chapter.</P> <P>(h) <E T="03">Settlements.</E> (1) <E T="03">When offers may be made.</E> Parties may, at any time during the course of the proceeding, propose offers of settlement. All offers of settlement shall be in writing.</P> <P>(2) <E T="03">Content of offer.</E> Each offer of settlement made by a respondent shall:</P> <P>(i) Acknowledge service of the notice;</P> <P>(ii) Admit the jurisdiction of the Commission with respect to the matters set forth in the notice;</P> <P>(iii) Include a waiver of:</P> <P>(A) A hearing,</P> <P>(B) All post-hearing procedures,</P> <P>(C) Judicial review, and</P> <P>(D) Any objection to the staff's participation in the Commission's consideration of the offer;</P> <P>(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</P> <P>(v) Consent to the entry of an order reflecting the terms of settlement agreed upon, including, where appropriate:</P> <P>(A) Findings that the respondent is subject to statutory disqualification under sections 8a(2), 8a(3), or 8a(4) of the Act, and</P> <P>(B) The revocation, suspension, denial or granting of full registration or imposition of conditioned or restricted registration.</P> <P>(3) <E T="03">Submission of offer.</E> 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.</P> <P>(4) <E T="03">Acceptance of offer.</E> 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.</P> <P>(5) <E T="03">Rejection of offer.</E> 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.</P> <P>(i) <E T="03">Effect of the Administrative Law Judge's Determination.</E> 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:</P> <P>(1) One or more of the parties files and serves a timely notice of appeal in accordance with § 10.102 of this chapter; or</P> <P>(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 § 10.105 of this chapter.</P> <P>(j) <E T="03">Appeal.</E> Following the filing of a notice of appeal, the rules of appellate procedure set forth in §§ 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.</P> <P>(k) With the exception of §§ 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 §§ 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 <PRTPAGE P="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.</P> <P>(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.</P> <CITA>[57 FR 23152, June 2, 1992, as amended at 58 FR 19596, Apr. 15, 1993; 60 FR 54801, Oct. 26, 1995]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.61</SECTNO> <SUBJECT>Extensions of time for proceedings brought under § 3.55, § 3.56, and § 3.60 of this part.</SUBJECT> <P>(a) <E T="03">In general.</E> 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 § 3.55, § 3.56 or § 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.</P> <P>(b) <E T="03">Motions for extension of time.</E> 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.</P> <CITA>[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.62</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 3.63</SECTNO> <SUBJECT>Service of order issued by an Administrative Law Judge or the Commission.</SUBJECT> <P>A copy of any order issued pursuant to § 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 § 3.50(a) of this part.</P> <CITA>[57 FR 23154, June 2, 1992, as amended at 67 FR 62351, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 3.64</SECTNO> <SUBJECT>Procedure to lift or modify conditions or restrictions.</SUBJECT> <P>(a) <E T="03">Petition.</E> 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.</P> <P>(1) The petition may be filed after the period specified in the order imposing the conditioned or restricted registration.</P> <P>(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.</P> <P>(b) <E T="03">Response.</E> (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.</P> <P>(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 <PRTPAGE P="148"/>the petitioner's registration. Such order shall be so noted on the docket by the Proceedings Clerk.</P> <P>(c) <E T="03">Oral presentation.</E> 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.</P> <P>(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 §§ 10.61 through 10.81 of this chapter. Following the hearing, the Administrative Law Judge shall issue a written decision or an order.</P> <P>(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.</P> <P>(d) <E T="03">Effect of the Administrative Law Judge's determination.</E> 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 § 10.102 of this chapter.</P> <P>(e) <E T="03">Appeal.</E> Following the filing of a notice of appeal, the rules of appellate procedure set forth in §§ 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.</P> <CITA>[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993; 60 FR 54801, Oct. 26, 1995]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart D—Notice Under Section 4k(5) of the Act</HD> <SECTION> <SECTNO>§ 3.70</SECTNO> <SUBJECT>Notification of certain information regarding associated persons.</SUBJECT> <P>(a) <E T="03">Notice.</E> 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 § 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).</P> <P>(b) <E T="03">Unlawful to act as an associated person.</E> 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 § 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.</P> <P>(c) <E T="03">Proceedings under subpart C.</E> Upon notification to the Commission by the registrant under paragraph (a) of this section, the Commission may promptly <PRTPAGE P="149"/>issue notice under § 3.55 or § 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.</P> <CITA>[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]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart E—Delegation and Reservation of Authority</HD> <SECTION> <SECTNO>§ 3.75</SECTNO> <SUBJECT>Delegation and reservation of authority.</SUBJECT> <P>(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.</P> <P>(b) Nothing in this subpart shall prevent the Commission from exercising the authority delegated therein.</P> <P>(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.</P> <P>(d) Nothing in this part shall affect the authority of the Commission to institute a proceeding pursuant to section 6(c) of the Act.</P> <P>(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.</P> <CITA>[49 FR 8224, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 59 FR 5315, Feb. 4, 1994]</CITA> </SECTION> <APPENDIX> <EAR>Pt. 3, App. A</EAR> <HD SOURCE="HED">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</HD> <HD SOURCE="HD2">Section 8a(2) (C) and (E)</HD> <P>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.</P> <P>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.</P> <P> <E T="03">Section 8a(2)(C).</E> 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: </P> <P>“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;” </P> <P>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 <PRTPAGE P="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.</P> <P>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.</P> <P>Thus, a provision in the agreement of settlement to the effect, <E T="03">inter alia,</E> that the findings set forth in the agreement will not form the <E T="03">sole basis</E> 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.</P> <P>Section 8a(2)(E) of the Act authorizes the Commission to affect the registration of any person: </P> <P>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; </P> <P>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, <E T="03">inter alia,</E> that the findings set forth in the agreement will not form the <E T="03">sole basis</E> upon which the registration of such person may be affected.</P> <P>Section 2(a)(1)(A) of the Act, <E T="03">inter alia,</E> codifies the legal concept of <E T="03">respondant superior</E> 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. <SU>*</SU> <FTREF/> 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 § 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 <E T="03">respondant superior</E> is the sole basis for finding that the registrant is subject to a statutory disqualification.</P> <FTNT> <P> <SU>*</SU> 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).</P> </FTNT> <P>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).<PRTPAGE P="151"/> </P> <P>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).</P> <P>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.</P> <HD SOURCE="HD2">Section 8a(3) (J) and (M)</HD> <P>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).</P> <P>Section 8a(3)(J) authorizes the Commission to affect the registration of any person if: </P> <P>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. </P> <P>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.</P> <P> <E T="03">Section 8a(3)(M).</E> 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.</P> <P>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 <PRTPAGE P="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.</P> <P>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.</P> <P>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.</P> <P>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.</P> <P>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: </P> <FP>[First guidance letter]</FP> <FP SOURCE="FP-2">December 4, 1997</FP> <FP SOURCE="FP-2">Robert K. Wilmouth, President, National Futures Association, 200 West Madison Street, Chicago, IL 60606-3447</FP> <FP SOURCE="FP-2">Re: Adverse Registration Actions with Respect to Floor Brokers, Floor Traders and Applicants for Registration in Either Category</FP> <P>Dear Mr. Wilmouth: As you know, the Commission on June 26, 1997, approved for publication in the <E T="04">Federal Register</E> 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.</P> <P>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.</P> <P>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”).<SU>1</SU> <FTREF/> 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.</P> <FTNT> <P> <SU>1</SU> 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.</P> </FTNT> <P>One of the areas in which NFA appears to have had the most uncertainty is with regard to previous self-regulatory organization <PRTPAGE P="153"/>(“SRO”) disciplinary actions. Commission Rule 1.63 <SU>2</SU> <FTREF/> provides clear guidelines for determining whether a person's history of “disciplinary offenses” should preclude service on SRO governing boards or committees.<SU>3</SU> <FTREF/> 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).<SU>4</SU> <FTREF/> 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.<SU>5</SU> <FTREF/> 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.</P> <FTNT> <P> <SU>2</SU> Commission rules referred to herein are found at 17 CFR Ch. I.</P> </FTNT> <FTNT> <P> <SU>3</SU> 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.</P> <P>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.</P> </FTNT> <FTNT> <P> <SU>4</SU> 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.</P> </FTNT> <FTNT> <P> <SU>5</SU> In reviewing these matters, the NFA should bear in mind recent Commission precedent which allows for reliance on settled disciplinary proceedings in some circumstances. <E T="03">See In the Matter of Michael J. Clark,</E> [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),<E T="03"> aff'd sub nom., Clark</E> v.<E T="03"> Commodity Futures Trading Commission,</E> No. 97-4228 (2d Cir. June 4, 1999) (unpublished).</P> </FTNT> <P>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.</P> <P>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.<PRTPAGE P="154"/> </P> <P>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).</P> <P>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).</P> <P>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.</P> <P>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.</P> <P>Sincerely, </P> <FP SOURCE="FP-2">Jean A. Webb, Secretary of the Commission</FP> <FP SOURCE="FP-2">[Second guidance letter]</FP> <FP SOURCE="FP-2">April 13, 2000</FP> <FP SOURCE="FP-2">Robert K. Wilmouth, President, National Futures Association, 200 West Madison Street, Chicago, IL 60606-3447</FP> <FP SOURCE="FP-2">Re: Use of Exchange Disciplinary Actions as “Other Good <E T="03">Cause” to Affect Floor Broker/Floor Trader Registration</E> </FP> <P>Dear Mr. Wilmouth:</P> <HD SOURCE="HD2">I. Introduction and Background</HD> <P>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.<SU>1</SU> <FTREF/> 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.</P> <FTNT> <P> <SU>1</SU> 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).</P> </FTNT> <P>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.<SU>2</SU> <FTREF/> </P> <FTNT> <P> <SU>2</SU> <E T="03">See</E> 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 (<E T="03">i.e.,</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.</P> </FTNT> <P>The Guidance Letter pointed out that, in exercising its delegated authority, NFA must apply all of the provisions of Sections <PRTPAGE P="155"/>8a(2) and (3) of the Commodity Exchange Act (“Act”).<SU>3</SU> <FTREF/> 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 <E T="03">In the Matter of Clark</E> 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.<SU>4</SU> <FTREF/> </P> <FTNT> <P> <SU>3</SU> 7 U.S.C. 12a(2) and (3) (1994).</P> </FTNT> <FTNT> <P> <SU>4</SU> <E T="03">In the Matter of Clark,</E> [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,032 (Apr. 22, 1997), <E T="03">aff'd sub nom., Clark</E> v. <E T="03">Commodity Futures Trading Commission,</E> No. 97-4228 (2d Cir. June 4, 1999) (unpublished).</P> </FTNT> <P>The Guidance Letter recommended the application of the provisions of Commission Rule 1.63<SU>5</SU> <FTREF/> 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.<SU>6</SU> <FTREF/> 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.</P> <FTNT> <P> <SU>5</SU> Commission rules referred to in this letter are found at 17 CFR Ch. 1.</P> </FTNT> <FTNT> <P> <SU>6</SU> 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, <E T="03">inter alia,</E> 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.</P> <P>Rule 1.63(a)(6) defines a “disciplinary offense” to include:</P> <P>(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.</P> </FTNT> <HD SOURCE="HD1">II. Revised Guidance</HD> <P>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 <E T="03">Clark</E> 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.</P> <P>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.<SU>7</SU> <FTREF/> </P> <FTNT> <P> <SU>7</SU> <E T="03">Clark</E> at 44,929.</P> </FTNT> <P>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.<SU>8</SU> <FTREF/> At least one of the actions forming the pattern, however, must <PRTPAGE P="156"/>have become final after <E T="03">Clark</E> 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.</P> <FTNT> <P> <SU>8</SU> 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, <E T="03">see Clark,</E> 2 Comm. Fut. L. Rep. (CCH) ¶ 27,032, and denied an application for registration as an FT on the basis of exchange disciplinary cases <PRTPAGE/>that extended back seven years, <E T="03">see In the Matter of Castellano,</E> [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,360 (Nov. 23, 1988), <E T="03">summarily aff'd</E> (May 29, 1990), <E T="03">reh. denied</E> [1990-1992 Transfer Binder] Comm. Fut. L. Rep. ¶ 24,870 (June 26, 1990), <E T="03">aff'd sub nom. Castellano v. CFTC,</E> Docket No. 90-2298 (7th Cir. Nov. 20, 1991).</P> </FTNT> <P>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.<SU>9</SU> <FTREF/> 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 <SU>10</SU> <FTREF/> 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.</P> <FTNT> <P> <SU>9</SU> Letter dated July 14, 1995, from Mary L. Schapiro to R. Patrick Thompson, President, New York Mercantile Exchange (unpublished). <E T="03">See also Castellano, supra</E> note 8.</P> </FTNT> <FTNT> <P> <SU>10</SU> <E T="03">See</E> Rule 1.51(a)(7).</P> </FTNT> <P>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.<SU>11</SU> <FTREF/> 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.<SU>12</SU> <FTREF/> </P> <FTNT> <P> <SU>11</SU> 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.”</P> </FTNT> <FTNT> <P> <SU>12</SU> 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.</P> </FTNT> <P>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.</P> <P>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.</P> <P>The Commission will continue to monitor NFA activities through periodic rule enforcement reviews, and NFA remains subject to the present requirement that it monitor <PRTPAGE P="157"/>compliance with the conditions and restrictions imposed on conditioned and restricted registrants. </P> <P>Sincerely,</P> <FP>Jean A. Webb,</FP> <FP> <E T="03">Secretary of the Commission.</E> </FP> <CITA>[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]</CITA> </APPENDIX> <APPENDIX> <EAR>Pt. 3, App. B</EAR> <HD SOURCE="HED">Appendix B to Part 3—Statement of Acceptable Practices With Respect to Ethics Training</HD> <P>(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.</P> <P>(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.</P> <P>(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.”</P> <P>(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.</P> <P>(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:</P> <P>(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;</P> <P>(2) The registrant's obligation to the public to observe just and equitable principles of trade;</P> <P>(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;</P> <P>(4) How to establish effective supervisory systems and internal controls;</P> <P>(5) Obtaining and assessing the financial situation and investment experience of customers;</P> <P>(6) Disclosure of material information to customers; and</P> <P>(7) Avoidance, proper disclosure and handling of conflicts of interest.</P> <P>(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.</P> <P>(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 <PRTPAGE P="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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <CITA>[66 FR 53521, Oct. 23, 2001]</CITA> </APPENDIX> </SUBPART> </PART> <PART> <EAR>Pt. 4</EAR> <HD SOURCE="HED">PART 4—COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS</HD> <CONTENTS> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions, Definitions and Exemptions</HD> <SECHD>Sec.</SECHD> <SECTNO>4.1</SECTNO> <SUBJECT>Requirements as to form.</SUBJECT> <SECTNO>4.2</SECTNO> <SUBJECT>Requirements as to filing.</SUBJECT> <SECTNO>4.3-4.4</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>4.5</SECTNO> <SUBJECT>Exclusion for certain otherwise regulated persons from the definition of the term “commodity pool operator.”</SUBJECT> <SECTNO>4.6</SECTNO> <SUBJECT>Exclusion for certain otherwise regulated persons from the definition of the term “commodity trading advisor.”</SUBJECT> <SECTNO>4.7</SECTNO> <SUBJECT> 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.</SUBJECT> <SECTNO>4.8</SECTNO> <SUBJECT>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.</SUBJECT> <SECTNO>4.9</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>4.10</SECTNO> <SUBJECT>Definitions.</SUBJECT> <SECTNO>4.11</SECTNO> <SUBJECT>Exemption from section 4n(3)(B).</SUBJECT> <SECTNO>4.12</SECTNO> <SUBJECT>Exemption from provisions of part 4.</SUBJECT> <SECTNO>4.13</SECTNO> <SUBJECT>Exemption from registration as a commodity pool operator.</SUBJECT> <SECTNO>4.14</SECTNO> <SUBJECT>Exemption from registration as a commodity trading advisor.</SUBJECT> <SECTNO>4.15</SECTNO> <SUBJECT>Continued applicability of antifraud section.</SUBJECT> <SECTNO>4.16</SECTNO> <SUBJECT>Prohibited representations.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Commodity Pool Operators</HD> <SECTNO>4.20</SECTNO> <SUBJECT>Prohibited activities.</SUBJECT> <SECTNO>4.21</SECTNO> <SUBJECT>Required delivery of pool Disclosure Document.</SUBJECT> <SECTNO>4.22</SECTNO> <SUBJECT>Reporting to pool participants.</SUBJECT> <SECTNO>4.23</SECTNO> <SUBJECT>Recordkeeping.</SUBJECT> <SECTNO>4.24</SECTNO> <SUBJECT>General disclosures required.</SUBJECT> <SECTNO>4.25</SECTNO> <SUBJECT>Performance disclosures.</SUBJECT> <SECTNO>4.26</SECTNO> <SUBJECT>Use, amendment and filing of Disclosure Document.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Commodity Trading Advisors</HD> <SECTNO>4.30</SECTNO> <SUBJECT>Prohibited activities.</SUBJECT> <SECTNO>4.31</SECTNO> <SUBJECT>Required delivery of Disclosure Document to prospective clients.<PRTPAGE P="159"/> </SUBJECT> <SECTNO>4.32</SECTNO> <SUBJECT>Trading on a Registered Derivatives Transaction Execution Facility for Non-Institutional Customers.</SUBJECT> <SECTNO>4.33</SECTNO> <SUBJECT>Recordkeeping.</SUBJECT> <SECTNO>4.34</SECTNO> <SUBJECT>General disclosures required.</SUBJECT> <SECTNO>4.35</SECTNO> <SUBJECT>Performance disclosures.</SUBJECT> <SECTNO>4.36</SECTNO> <SUBJECT>Use, amendment and filing of Disclosure Document.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart D—Advertising</HD> <SECTNO>4.40</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>4.41</SECTNO> <SUBJECT>Advertising by commodity pool operators, commodity trading advisors, and the principals thereof.</SUBJECT> <APP>Appendix A to part 4—Guidance on the Application of Rule 4.13(<E T="01">a</E>)(3) in the Fund-of-Funds Context</APP> <APP>Appendix B to part 4—Adjustments for Additions and Withdrawals in the Computation of Rate of Return</APP> </SUBPART> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 23.</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>46 FR 26013, May 8, 1981, unless otherwise noted.</P> </SOURCE> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions, Definitions and Exemptions</HD> <SECTION> <SECTNO>§ 4.1</SECTNO> <SUBJECT>Requirements as to form.</SUBJECT> <P>(a) Each document distributed pursuant to this part 4 must be:</P> <P>(1) Clear and legible;</P> <P>(2) Paginated; and</P> <P>(3) Fastened in a secure manner.</P> <P>(b) Information that is required to be “prominently” disclosed under this part 4 must be displayed in capital letters and in boldface type.</P> <P>(c) Where a document is distributed through an electronic medium:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(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 § 4.24(v) in the case of pool Disclosure Documents, and § 4.34(n) in the case of commodity trading advisor Disclosure Documents.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <CITA>[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62 FR 39115, July 22, 1997]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.2</SECTNO> <SUBJECT>Requirements as to filing.</SUBJECT> <P>(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: <E T="03">ddoc-efile@cftc.gov.</E> <PRTPAGE P="160"/> </P> <P>(b) All such material shall be considered filed when received by the Commission at the address specified in paragraph (a) of this section.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§§ 4.3-4.4</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 4.5</SECTNO> <SUBJECT>Exclusion for certain otherwise regulated persons from the definition of the term “commodity pool operator.”</SUBJECT> <P>(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:</P> <P>(1) An investment company registered as such under the Investment Company Act of 1940;</P> <P>(2) An insurance company subject to regulation by any State;</P> <P>(3) A bank, trust company or any other such financial depository institution subject to regulation by any State or the United States; and</P> <P>(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; <E T="03">Provided, however,</E> That for purposes of this § 4.5 the following employee benefit plans shall not be construed to be pools:</P> <P>(i) A noncontributory plan, whether defined benefit or defined contribution, covered under title I of the Employee Retirement Income Security Act of 1974;</P> <P>(ii) A contributory defined benefit plan covered under title IV of the Employee Retirement Income Security Act of 1974; <E T="03">Provided, however,</E> 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;</P> <P>(iii) A plan defined as a governmental plan in section 3(32) of title I of the Employee Retirement Income Security Act of 1974;</P> <P>(iv) Any employee welfare benefit plan that is subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974; and</P> <P>(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).</P> <P>(b) For the purposes of this section, the term “qualifying entity” means:</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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; <E T="03">Provided, however,</E> That such entity will be operated in the manner specified in paragraph (c)(2) of this section.</P> <P>(c) Any person who desires to claim the exclusion provided by this section shall file with the National Futures Association a notice of eligibility; <E T="03">Provided, however,</E> That a plan fiduciary who is not a named fiduciary but who <PRTPAGE P="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.</P> <P>(1) The notice of eligibility must contain the following information:</P> <P>(i) The name of such person;</P> <P>(ii) The applicable subparagraph of paragraph (a) of this section pursuant to which such person is claiming exclusion;</P> <P>(iii) The name of the qualifying entity which such person intends to operate pursuant to the exclusion; and</P> <P>(iv) The applicable subparagraph of paragraph (b) of this section pursuant to which such entity is a qualifying entity.</P> <P>(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:</P> <P>(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; <E T="03">Provided,</E> 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</P> <P>(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 § 4.5(c);</P> <FP> <E T="03">Provided, however,</E> 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.</FP> <P>(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.</P> <P>(4) The notice of eligibility shall be effective upon filing.</P> <P>(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.</P> <P>(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.</P> <P>(e) An exclusion claimed hereunder shall cease to be effective upon any change which would render:</P> <P>(1) A person as to whom such exclusion has been claimed ineligible under paragraph (a) of this section;</P> <P>(2) The entity for which such exclusion has been claimed ineligible under paragraph (b) of this section; or</P> <P>(3) Either the representations made pursuant to paragraph (c)(2) of this section inaccurate or the continuation of such representations false or misleading.</P> <P>(f) Any notice required to be filed hereunder must be:</P> <P>(1) In writing;</P> <P>(2) Manually signed by a representative duly authorized to bind a person specified in paragraph (a) of this section; and</P> <P>(3) Filed with the National Futures Association at its headquarters office (Attn: Director of Compliance, Compliance Department).</P> <P>(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 § 4.13 in connection with the operation of another trading vehicle that is not covered under this § 4.5.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <PRTPAGE P="162"/> <SECTNO>§ 4.6</SECTNO> <SUBJECT>Exclusion for certain otherwise regulated persons from the definition of the term “commodity trading advisor.”</SUBJECT> <P>(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:”</P> <P>(1) An insurance company subject to regulation by any State, or any wholly-owned subsidiary or employee thereof; <E T="03">Provided, however,</E> That its commodity interest advisory activities are solely incidental to the conduct of the insurance business of the insurance company as such; and</P> <P>(2) A person who is excluded from the definition of the term “commodity pool operator” by § 4.5; <E T="03">Provided, however,</E> That:</P> <P>(i) Its commodity interest advisory activities are solely incidental to its operation of those trading vehicles for which § 4.5 provides relief; and</P> <P>(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 § 4.5 to claim the relief available under that section.</P> <P>(b) Any person who has claimed an exclusion under this § 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.</P> <P>(c) An exclusion claimed under this § 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.</P> <CITA>[52 FR 41984, Nov. 2, 1987]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.7</SECTNO> <SUBJECT>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.</SUBJECT> <P>This section is organized as follows: Paragraph (a) contains definitions for the purposes of § 4.7; paragraph (b) contains the relief available to commodity pool operators under § 4.7; paragraph (c) contains the relief available to commodity trading advisors under § 4.7; paragraph (d) concerns the Notice of Claim for Exemption under § 4.7; and paragraph (e) addresses the effect of an insignificant deviation from a term, condition or requirement of § 4.7.</P> <P>(a) <E T="03">Definitions.</E> Paragraph (a)(1) of this section contains general definitions, paragraph (a)(2) of this section contains the definition of the term <E T="03">qualified eligible person</E> 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 <E T="03">qualified eligible person</E> with respect to those persons who must satisfy the Portfolio Requirement. For the purposes of this section:</P> <P>(1) <E T="03">In general</E>—(i) <E T="03">Affiliate</E> of, or a person <E T="03">affiliated</E> 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.</P> <P>(ii) <E T="03">Exempt account</E> 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 § 4.7.</P> <P>(iii) <E T="03">Exempt pool</E> means a pool that is operated pursuant to an effective claim for exemption under § 4.7.</P> <P>(iv) <E T="03">Non-United States person</E> means:</P> <P>(A) A natural person who is not a resident of the United States;</P> <P>(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;</P> <P>(C) An estate or trust, the income of which is not subject to United States income tax regardless of source;</P> <P>(D) An entity organized principally for passive investment such as a pool, investment company or other similar entity; <E T="03">Provided,</E> 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 <PRTPAGE P="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</P> <P>(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.</P> <P>(v) <E T="03">Portfolio Requirement</E> means that a person:</P> <P>(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;</P> <P>(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</P> <P>(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)).</P> <P>(vi) <E T="03">United States</E> means the United States, its states, territories or possessions, or an enclave of the United States government, its agencies or instrumentalities.</P> <P>(2) <E T="03">Persons who do not need to satisfy the Portfolio Requirement to be qualified eligible persons. Qualified eligible person</E> 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:</P> <P>(i) A futures commission merchant registered pursuant to section 4d of the Act, or a principal thereof;</P> <P>(ii) A broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934, or a principal thereof;</P> <P>(iii) A commodity pool operator registered pursuant to section 4m of the Act, or a principal thereof; <E T="03">Provided,</E> That the pool operator:</P> <P>(A) Has been registered and active as such for two years; or</P> <P>(B) Operates pools which, in the aggregate, have total assets in excess of $5,000,000;</P> <P>(iv) A commodity trading advisor registered pursuant to section 4m of the Act, or a principal thereof; <E T="03">Provided,</E> That the trading advisor:</P> <P>(A) Has been registered and active as such for two years; or</P> <P>(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;</P> <P>(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; <E T="03">Provided,</E> That the investment adviser:</P> <P>(A) Has been registered and active as such for two years; or</P> <P>(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;</P> <P>(vi) A “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 (the “Investment Company Act”);</P> <P>(vii) A “knowledgeable employee” as defined in § 270.3c-5 of this title;</P> <P>(viii)(A) With respect to an exempt pool:<PRTPAGE P="164"/> </P> <P>(<E T="03">1</E>) 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;</P> <P>(<E T="03">2</E>) 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;</P> <P>(<E T="03">3</E>) 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; <E T="03">Provided,</E> 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;</P> <P>(<E T="03">4</E>) 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); <E T="03">Provided,</E> That such employee or agent:</P> <P>(<E T="03">i</E>) Is an accredited investor as defined in § 230.501(a)(5) or (6) of this title; and</P> <P>(<E T="03">ii</E>) 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;</P> <P>(<E T="03">5</E>) The spouse, child, sibling or parent of a person who satisfies the criteria of paragraph (a)(2)(viii)(A)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>) or (<E T="03">4</E>) of this section; <E T="03">Provided,</E> That:</P> <P>(<E T="03">i</E>) An investment in the exempt pool by any such family member is made with the knowledge and at the direction of the person; and</P> <P>(<E T="03">ii</E>) The family member is not a qualified eligible person for the purposes of paragraph (a)(3)(xi) of this section;</P> <P>(<E T="03">6</E>)(<E T="03">i</E>) 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)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>), (<E T="03">4</E>) or (<E T="03">5</E>) of this section;</P> <P>(<E T="03">ii</E>) The estate of any person listed in paragraph (a)(2)(viii)(A)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>), (<E T="03">4</E>) or (<E T="03">5</E>) of this section; or</P> <P>(<E T="03">iii</E>) A company established by any person listed in paragraph (a)(2)(viii)(A)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>), (<E T="03">4</E>) 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)(<E T="03">6</E>)(<E T="03">i</E>) or (<E T="03">ii</E>) of this section;</P> <P>(B) With respect to an exempt account:</P> <P>(<E T="03">1</E>) An affiliate of the commodity trading advisor of the exempt account;</P> <P>(<E T="03">2</E>) A principal of the commodity trading advisor of the exempt account or of an affiliate of the trading advisor;</P> <P>(<E T="03">3</E>) 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; <E T="03">Provided</E>, 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;</P> <P>(<E T="03">4</E>) Any other employee of, or an agent engaged to perform legal, accounting, auditing or other financial <PRTPAGE P="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); <E T="03">Provided</E>, That such employee or agent:</P> <P>(<E T="03">i</E>) Is an accredited investor as defined in § 230.501(a)(5) or (a)(6) of this title; and</P> <P>(<E T="03">ii</E>) 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</P> <P>(<E T="03">5</E>) 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)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>) or (<E T="03">4</E>) of this section; <E T="03">Provided</E>, That:</P> <P>(<E T="03">i</E>) The establishment of an exempt account by any such family member is made with the knowledge and at the direction of the person; and</P> <P>(<E T="03">ii</E>) The family member is not a qualified eligible person for the purposes of paragraph (a)(3)(xi) of this section;</P> <P>(<E T="03">6</E>)(<E T="03">i</E>) 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)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>), (<E T="03">4</E>) or (<E T="03">5</E>) of this section;</P> <P>(<E T="03">ii</E>) The estate of any person listed in paragraph (a)(2)(viii)(B)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>), (<E T="03">4</E>) or (<E T="03">5</E>) of this section; or</P> <P>(<E T="03">iii</E>) A company established by any person listed in paragraph (a)(2)(viii)(B)(<E T="03">1</E>), (<E T="03">2</E>), (<E T="03">3</E>), (<E T="03">4</E>) or (<E T="03">5</E>) of this section exclusively for the benefit of (or owned exclusively by) that person and any person listed in paragraph (a)(2)(viii)(B)(<E T="03">6</E>)(<E T="03">i</E>) or (<E T="03">ii</E>) of this section;</P> <P>(ix) A trust; <E T="03">Provided</E>, That:</P> <P>(A) The trust was not formed for the specific purpose of either participating in the exempt pool or opening an exempt account; and</P> <P>(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;</P> <P>(x) An organization described in section 501(c)(3) of the Internal Revenue Code (the “IRC”); <E T="03">Provided</E>, 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;</P> <P>(xi) A Non-United States person;</P> <P>(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;</P> <P>(B) An exempt pool; or</P> <P>(C) Notwithstanding paragraph (a)(3) of this section, an entity as to which a notice of eligibility has been filed pursuant to § 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.</P> <P>(3) <E T="03">Persons who must satisfy the Portfolio Requirement to be qualified eligible persons. Qualified eligible person</E> 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:</P> <P>(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;</P> <P>(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;</P> <P>(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;<PRTPAGE P="166"/> </P> <P>(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;</P> <P>(v) An employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974; <E T="03">Provided</E>, 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;</P> <P>(vi) A private business development company as defined in section 202(a)(22) of the Investment Advisers Act;</P> <P>(vii) An organization described in section 501(c)(3) of the IRC, with total assets in excess of $5,000,000;</P> <P>(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;</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(b) <E T="03">Relief available to commodity pool operators.</E> 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 <E T="03">et seq.</E>, 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:</P> <P>(1) <E T="03">Disclosure relief.</E> (i) Exemption from the specific requirements of §§ 4.21, 4.24, 4.25 and 4.26 with respect to each exempt pool; <E T="03">Provided</E>, 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: </P> <EXTRACT> <P>“PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING <PRTPAGE P="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.”</P> </EXTRACT> <P>(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; <E T="03">Provided</E>, 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.</P> <P>(2) <E T="03">Periodic reporting relief.</E> Exemption from the specific requirements of §§ 4.22(a) and (b); <E T="03">Provided</E>, That a statement signed and affirmed in accordance with § 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:</P> <P>(i) The net asset value of the exempt pool as of the end of the reporting period;</P> <P>(ii) The change in net asset value from the end of the previous reporting period; and</P> <P>(iii) The net asset value per outstanding unit of participation in the exempt pool as of the end of the reporting period.</P> <P>(3) <E T="03">Annual report relief.</E> (i) Exemption from the specific requirements of §§ 4.22(c) and (d); <E T="03">Provided</E>, 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 § 4.22(h) which contains, at a minimum:</P> <P>(A) A Statement of Financial Condition as of the close of the exempt pool's fiscal year (elected in accordance with § 4.22(g));</P> <P>(B) A Statement of Income (Loss) for that year; and</P> <P>(C) Appropriate footnote disclosure and any other material information.</P> <P>(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 § 1.16 as applicable.</P> <P>(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.</P> <P>(B) If the annual report is not certified in accordance with § 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.</P> <P>(4) <E T="03">Recordkeeping relief.</E> Exemption from the specific requirements of § 4.23; <E T="03">Provided</E>, 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 § 1.31.</P> <P>(c) <E T="03">Relief available to commodity trading advisors.</E> Upon filing the notice required by paragraph (d) of this section, and subject to compliance with the conditions specified in paragraph (d) of <PRTPAGE P="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 § 4.7:</P> <P>(1) <E T="03">Disclosure relief.</E> (i) Exemption from the specific requirements of §§ 4.31, 4.34, 4.35 and 4.36; <E T="03">Provided</E>, 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: </P> <EXTRACT> <P>“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.”</P> </EXTRACT> <P>(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; <E T="03">Provided</E>, 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.</P> <P>(2) <E T="03">Recordkeeping relief.</E> Exemption from the specific requirements of § 4.33; <E T="03">Provided</E>, 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 § 1.31.</P> <P>(d) <E T="03">Notice of claim for exemption.</E> (1) A notice of a claim for exemption under this section must:</P> <P>(i) Be in writing;</P> <P>(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;</P> <P>(iii)(A) Where the claimant is a commodity pool operator, provide the name(s) of the pool(s) for which the request is made; <E T="03">Provided</E>, 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;</P> <P>(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;</P> <P>(iv) Contain representations that:</P> <P>(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 <PRTPAGE P="169"/>the filing of the notice under this paragraph (d);</P> <P>(B) The commodity pool operator or commodity trading advisor will comply with the applicable requirements of § 4.7; and</P> <P>(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 § 4.7;</P> <P>(v) Specify the relief claimed under § 4.7;</P> <P>(vi) Where the claimant is a commodity pool operator, state the closing date of the offering or that the offering will be continuous;</P> <P>(vii) Be manually signed by a representative duly authorized to bind the commodity pool operator or commodity trading advisor;</P> <P>(viii) Be filed with the National Futures Association at its headquarters office (Attn: Director of Compliance, Compliance Department); and</P> <P>(ix)(A)(<E T="03">1</E>) 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)(<E T="03">2</E>) of this section, be received by the National Futures Association:</P> <P>(<E T="03">i</E>) 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</P> <P>(<E T="03">ii</E>) 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.</P> <P>(<E T="03">2</E>) 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; <E T="03">Provided</E>, 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 § 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)(<E T="03">2</E>) 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.</P> <P>(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 § 4.7.</P> <P>(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; <E T="03">Provided,</E> 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.</P> <P>(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.</P> <P>(4)(i) Any exemption from the requirements of § 4.21, 4.22, 4.23, 4.24, 4.25 <PRTPAGE P="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.</P> <P>(ii) Any exemption from the requirements of § 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.</P> <P>(e) <E T="03">Insignificant deviations from a term, condition or requirement of § 4.7.</E> (1) A failure to comply with a term or condition of § 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:</P> <P>(i) The failure to comply did not pertain to a term, condition or requirement directly intended to protect that particular qualified eligible person;</P> <P>(ii) The failure to comply was insignificant with respect to the exempt pool as a whole or to the particular exempt account; and</P> <P>(iii) A good faith and reasonable attempt was made to comply with all applicable terms, conditions and requirements of § 4.7.</P> <P>(2) A transaction made in reliance on § 4.7 must comply with all applicable terms, conditions and requirements of § 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.</P> <CITA>[65 FR 47854, Aug. 4, 2000, as amended at 67 FR 77411, Dec. 18, 2002; 68 FR 47231, Aug. 8, 2003]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.8</SECTNO> <SUBJECT>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.</SUBJECT> <P>(a) Notwithstanding paragraph (d) of § 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.</P> <P>(b) Notwithstanding paragraph (d) of § 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, § 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.</P> <P>(c) The relief provided under § 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 §§ 8a(2) or 8a(3) of the Act.</P> <CITA>[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60 FR 38182, July 25, 1995]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.9</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 4.10</SECTNO> <SUBJECT>Definitions.</SUBJECT> <P>For purposes of this part:<PRTPAGE P="171"/> </P> <P>(a) <E T="03">Commodity interest</E> means:</P> <P>(1) Any contract for the purchase or sale of a commodity for future delivery; and</P> <P>(2) Any contract, agreement or transaction subject to Commission regulation under section 4c or 19 of the Act.</P> <P>(b) <E T="03">Net asset value</E> 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.</P> <P>(c) <E T="03">Participant</E> means any person that has any direct financial interest in a pool (<E T="03">e.g.,</E> a limited partner).</P> <P>(d)(1) <E T="03">Pool</E> means any investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests.</P> <P>(2) <E T="03">Multi-advisor pool</E> means a pool in which:</P> <P>(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</P> <P>(ii) No investee pool is allocated or intended to be allocated more than twenty-five percent of the pool's net asset value.</P> <P>(3) <E T="03">Principal-protected pool</E> means a pool (commonly referred to as a “guaranteed pool”) that is designed to limit the loss of the initial investment of its participants.</P> <P>(4) <E T="03">Investee pool</E> means any pool in which another pool or account participates or invests, <E T="03">e.g.</E>, as a limited partner thereof.</P> <P>(5) <E T="03">Major investee pool</E> 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.</P> <P>(e)(1) <E T="03">Principal,</E> when referring to a person that is a principal of a particular entity, shall have the same meaning as the term “principal” under § 3.1(a) of this chapter.</P> <P>(2) <E T="03">Trading principal</E> means:</P> <P>(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</P> <P>(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.</P> <P>(f) <E T="03">Direct,</E> 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.</P> <P>(g) <E T="03">Trading program</E> 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.</P> <P>(h) <E T="03">Trading manager</E> 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.</P> <P>(i) <E T="03">Major commodity trading advisor</E> 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.</P> <P>(j) <E T="03">Break-even point</E>—(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</P> <P>(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.</P> <P>(k) <E T="03">Draw-down</E> means losses experienced by a pool or account over a specified period.<PRTPAGE P="172"/> </P> <P>(l) <E T="03">Worst peak-to-valley draw-down</E> 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.<SU>1</SU> <FTREF/> For purposes of §§ 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.</P> <FTNT> <P> <SU>1</SU> 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.</P> </FTNT> <P>(m) <E T="03">Partially-funded account</E> 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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.11</SECTNO> <SUBJECT>Exemption from section 4n(3)(B).</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 4.12</SECTNO> <SUBJECT>Exemption from provisions of part 4.</SUBJECT> <P>(a) <E T="03">In general.</E> (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.</P> <P>(2) The Commission may grant the exemption subject to such terms and conditions as it may find appropriate.</P> <P>(b) <E T="03">Exemption from subpart B for certain commodity pool operators.</E> (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:</P> <P>(i) The pool for which it makes such claim:</P> <P>(A) Will be offered and sold pursuant to the Securities Act of 1933 or pursuant to an exemption from said Act;</P> <P>(B) Will generally and routinely engage in the buying and selling of securities and securities derived instruments;</P> <P>(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; <E T="03">Provided, however,</E> 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 § 190.01(x) may be excluded in computing such 10 percent; and</P> <P>(D) Will trade such commodity interests in a manner solely incidental to its securities trading activities.</P> <P>(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.</P> <P>(2) The commodity pool operator of a pool which meets the criteria of paragraph (b)(1) of this section may claim the following relief:</P> <P>(i) In the case of § 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 §§ 4.24(a), 4.24(b), and 4.24(n); <E T="03">Provided, <PRTPAGE P="173"/>however</E>, that the offering memorandum:</P> <P>(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;</P> <P>(B) Contains the information required by §§ 4.24(c) through (m) and (o) through (u); and</P> <P>(C) Complies with the requirements of §§ 4.24(v) and (w).</P> <P>(ii) In the case of § 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; <E T="03">Provided, however,</E> That each such statement complies with the other requirements of § 4.22 (a) and (b), including the references in those sections to § 4.22 (g) and (h).</P> <P>(iii) In the case of § 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; <E T="03">Provided, however,</E> That:</P> <P>(A) Each such annual report complies with the other requirements of § 4.22(c), including the reference in that section to § 4.22(h) and the requirement in § 4.22(c)(5) that the annual report must contain appropriate footnote disclosure and further material information; and</P> <P>(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.</P> <P>(iv) In the case of § 4.23(a) (10) and (11), to exempt the pool operator from the requirements of those sections with respect to the pool.</P> <P>(3) Any registered commodity pool operator who desires to claim the relief available under this § 4.12(b) must file a claim of exemption with the National Futures Association. Such claim must:</P> <P>(i) Be in writing;</P> <P>(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;</P> <P>(iii) Provide the name of the commodity pool for which the request is being made;</P> <P>(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;</P> <P>(v) Specify the relief sought under paragraph (b)(2) of this section;</P> <P>(vi) Be manually signed by a representative duly authorized to bind the pool operator; and</P> <P>(vii) Be filed with the National Futures Association at its headquarters office (Attn: Director of Compliance, Compliance Department).</P> <P>(4)(i) The claim of exemption must be filed before the date the commodity pool first enters into a commodity interest transaction.</P> <P>(ii) The claim of exemption shall be effective upon filing; <E T="03">Provided, however,</E> 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.</P> <P>(5)(i) If a claim of exemption has been made under § 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 § 4.26.</P> <P>(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 § 4.22(c).</P> <P>(6)(i) Any claim of exemption effective hereunder shall be effective only with respect to the pool for which it has been made.<PRTPAGE P="174"/> </P> <P>(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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.13</SECTNO> <SUBJECT>Exemption from registration as a commodity pool operator.</SUBJECT> <P>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 § 4.5 of this chapter.</P> <P>(a) A person is not required to register under the Act as a commodity pool operator if:</P> <P>(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;</P> <P>(ii) It operates only one commodity pool at any time;</P> <P>(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</P> <P>(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);</P> <P>(2)(i) None of the pools operated by it has more than 15 participants at any time; and</P> <P>(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.</P> <P>(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:</P> <P>(A) The pool's operator, commodity trading advisor, and the principals thereof;</P> <P>(B) A child, sibling or parent of any of these participants;</P> <P>(C) The spouse of any participant specified in paragraph (a)(2)(iii)(A) or (B) of this section; and</P> <P>(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;</P> <P>(3) For each pool for which the person claims exemption from registration under this paragraph (a)(3):</P> <P>(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;</P> <P>(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 <E T="03">bona fide</E> hedging purposes or otherwise:</P> <P>(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; <E T="03">Provided,</E> 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 § 190.01(x) of this chapter may be excluded in computing such 5 percent; or</P> <P>(B) The aggregate net notional value of such positions, determined at the <PRTPAGE P="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:</P> <P>(<E T="03">1</E>) 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</P> <P>(<E T="03">2</E>) 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</P> <P>(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:</P> <P>(A) An “accredited investor,” as that term is defined in § 230.501 of this title;</P> <P>(B) A trust that is not an accredited investor but that was formed by an accredited investor for the benefit of a family member;</P> <P>(C) A “knowledgeable employee,” as that term is defined in § 270.3c-5 of this title; or</P> <P>(D) A “qualified eligible person,” as that term is defined in § 4.7(a)(2)(viii)(A) of this chapter; and</P> <P>(iv) Participations in the pool are not marketed as or in a vehicle for trading in the commodity futures or commodity options markets; <E T="03">Provided,</E> 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</P> <P>(4) For each pool for which the person claims exemption from registration under this paragraph (a)(4):</P> <P>(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;</P> <P>(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:</P> <P>(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 § 4.7(a)(2); and</P> <P>(B) Each non-natural person participant is a “qualified eligible person,” as that term is defined in § 4.7, or an “accredited investor,” as that term is defined in § 230.501(a)(1)-(3), (a)(7) and (a)(8) of this title; <E T="03">Provided,</E> 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.</P> <P>(5)(i) Eligibility for exemption under this section is subject to the person furnishing in writing to each prospective participant in the pool:</P> <P>(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</P> <P>(B) A description of the criteria pursuant to which it qualifies for such exemption from registration.</P> <P>(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.</P> <P>(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:<PRTPAGE P="176"/> </P> <P>(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;</P> <P>(ii) Contain the section number pursuant to which the operator is filing the notice (<E T="03">i.e.</E>, § 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</P> <P>(iii) Be manually signed by a representative duly authorized to bind the person.</P> <P>(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; <E T="03">Provided</E>, 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.</P> <P>(3) The notice will be effective upon filing, provided the notice is materially complete.</P> <P>(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.</P> <P>(c)(1) Each person who has filed a notice of exemption from registration under this section must:</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(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 § 1.16 of this chapter as applicable.</P> <P>(3) Each person who has filed a notice of exemption from registration pursuant to paragraph (a)(1) or (a)(2) of this section must:</P> <P>(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 § 1.33 of this chapter; and</P> <P>(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.</P> <P>(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 § 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.<PRTPAGE P="177"/> </P> <P>(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.</P> <P>(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; <E T="03">Provided</E>, That the person:</P> <P>(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:</P> <P>(A) A statement that it will operate the pool as if the person was exempt from registration as a commodity pool operator;</P> <P>(B) A description of the criteria pursuant to which it will so operate the pool;</P> <P>(ii) Complies with paragraph (c) of this section; and</P> <P>(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.</P> <P>(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 § 4.5 in connection with its operation of another trading vehicle that is not covered under this § 4.13.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <SECAUTH>(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))</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.14</SECTNO> <SUBJECT>Exemption from registration as a commodity trading advisor.</SUBJECT> <P>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.</P> <P>(a) A person is not required to register under the Act as a commodity trading advisor if:</P> <P>(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;</P> <P>(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;</P> <P>(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;<PRTPAGE P="178"/> </P> <P>(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;</P> <P>(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;</P> <P>(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;</P> <P>(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;</P> <P>(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, <E T="03">Provided</E>, That:</P> <P>(i) The person's commodity interest trading advice is directed solely to, and for the sole use of, one or more of the following:</P> <P>(A) “Qualifying entities,” as that term is defined in § 4.5(b), for which a notice of eligibility has been filed;</P> <P>(B) Collective investment vehicles that are excluded from the definition of the term commodity “pool” under § 4.5(a)(4); and</P> <P>(C) Commodity pools that are organized and operated outside of the United States, its territories or possessions, where:</P> <P>(<E T="03">1</E>) 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;</P> <P>(<E T="03">2</E>) With the exception of the pool's operator, advisor and their principals, solely “Non-United States persons,” as that term is defined in § 4.7(a)(1)(iv), will contribute funds or other capital to, and will own beneficial interests in, the pool; <E T="03">Provided</E>, 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;</P> <P>(<E T="03">3</E>) 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</P> <P>(<E T="03">4</E>) No person affiliated with the pool conducts any marketing activity from within the United States, its territories or possessions; and</P> <P>(D) A commodity pool operator who has claimed an exemption from registration under § 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 § 4.13(a)(3) or 4.13(a)(4) as if it were not so registered; and</P> <P>(ii) The person:</P> <P>(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</P> <P>(B) Is not otherwise holding itself out as a commodity trading advisor.</P> <P>(iii)(A) A person who desires to claim the relief from registration provided by this § 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:</P> <P>(<E T="03">1</E>) Provide the name, main business address, main business telephone number, main facsimile number and main email address of the trading advisor claiming the exemption;</P> <P>(<E T="03">2</E>) Contain the section number pursuant to which the advisor is filing the notice (<E T="03">i.e.</E>, under § 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</P> <P>(<E T="03">3</E>) Be manually signed by a representative duly authorized to bind the person.</P> <P>(B) The person must file the notice by no later than the time it delivers an <PRTPAGE P="179"/>advisory agreement for the trading program pursuant to which it will offer commodity interest advice to a client; <E T="03">Provided</E>, 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.</P> <P>(C) The notice will be effective upon filing, provided the notice is materially complete.</P> <P>(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.</P> <P>(iv) Each person who has filed a notice of registration exemption under this § 4.14(a)(8) must:</P> <P>(A)(<E T="03">1</E>) 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</P> <P>(<E T="03">2</E>) 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</P> <P>(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;</P> <P>(9) It does not engage in any of the following activities:</P> <P>(i) Directing client accounts; or</P> <P>(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</P> <P>(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.</P> <P>(i) For the purpose of paragraph (a)(10) of this section, the following are deemed a single person:</P> <P>(A) A natural person, and:</P> <P>(<E T="03">1</E>) Any minor child of the natural person;</P> <P>(<E T="03">2</E>) Any relative, spouse, or relative of the spouse of the natural person who has the same principal residence;</P> <P>(<E T="03">3</E>) 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</P> <P>(<E T="03">4</E>) 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;</P> <P>(B)(<E T="03">1</E>) A corporation, general partnership, limited partnership, limited liability company, trust (other than a trust referred to in paragraph (a)(10)(i)(A)(<E T="03">4</E>) 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</P> <P>(<E T="03">2</E>) Two or more legal organizations referred to in paragraph (a)(10)(i)(B)(<E T="03">1</E>) of this section that have identical owners.</P> <P>(ii) <E T="03">Special Rules.</E> For the purpose of paragraph (a)(10) of this section:</P> <P>(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; <E T="03">Provided,</E> That the determination that an <PRTPAGE P="180"/>owner is a client will not affect the applicability of paragraph (a)(10) of this section with regard to any other owner;</P> <P>(B)(<E T="03">1</E>) 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</P> <P>(<E T="03">2</E>) 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.</P> <P>(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.</P> <P>(iii) <E T="03">Holding Out.</E> 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.</P> <P>(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.</P> <P>(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.</P> <P>(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; <E T="03">Provided,</E> 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; <E T="03">Provided Further</E>, 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.</P> <SECAUTH>(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)</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.15</SECTNO> <SUBJECT>Continued applicability of antifraud section.</SUBJECT> <P>The provisions of section 4<E T="03">o</E> 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 4<E T="03">o</E> of the Act.</P> <CITA>[50 FR 15884, Apr. 23, 1985]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.16</SECTNO> <SUBJECT>Prohibited representations.</SUBJECT> <P>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.</P> </SECTION> </SUBPART> <SUBPART> <PRTPAGE P="181"/> <HD SOURCE="HED">Subpart B—Commodity Pool Operators</HD> <SECTION> <SECTNO>§ 4.20</SECTNO> <SUBJECT>Prohibited activities.</SUBJECT> <P>(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.</P> <P>(2) The Commission may exempt a corporation from the requirements of paragraph (a)(1) of this section if;</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <CITA>[46 FR 26013, May 8, 1981, as amended at 46 FR 34311, July 1, 1981; 46 FR 63035, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.21</SECTNO> <SUBJECT>Required delivery of pool Disclosure Document.</SUBJECT> <P>(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 §§ 4.24 and 4.25 by no later than the time it delivers to the prospective participant a subscription agreement for the pool; <E T="03">Provided,</E> 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; <E T="03">Provided, further</E>, 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.</P> <P>(2) For the purpose of the Disclosure Document delivery requirement, including any offering memorandum delivered pursuant to § 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.</P> <P>(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, <E T="03">Provided, however,</E> That the requirement of <PRTPAGE P="182"/>§ 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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.22</SECTNO> <SUBJECT>Reporting to pool participants.</SUBJECT> <P>(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.</P> <P>(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:</P> <P>(i) The total amount of realized net gain or loss on commodity interest positions liquidated during the reporting period;</P> <P>(ii) The change in unrealized net gain or loss on commodity interest positions during the reporting period;</P> <P>(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;</P> <P>(iv) The total amount of all management fees during the reporting period;</P> <P>(v) The total amount of all advisory fees during the reporting period;</P> <P>(vi) The total amount of all brokerage commissions during the reporting period;</P> <P>(vii) The total amount of other fees for commodity interest and other investment transactions during the reporting period; and</P> <P>(viii) The total amount of all other expenses incurred or accrued by the pool during the reporting period.</P> <P>(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:</P> <P>(i) The net asset value of the pool as of the beginning of the reporting period;</P> <P>(ii) The total amount of additions to the pool, whether voluntary or involuntary, made during the reporting period;</P> <P>(iii) The total amount of withdrawals from and redemption of participation units in the pool, whether voluntary or involuntary, for the reporting period;</P> <P>(iv) The total net income or loss of the pool during the reporting period;</P> <P>(v) The net asset value of the pool as of the end of the reporting period; and</P> <P>(vi)(A) The net asset value per outstanding participation unit in the pool as of the end of the reporting period, or</P> <P>(B) The total value of the participant's interest or share in the pool as of the end of the reporting period.</P> <P>(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.</P> <P>(4) For the purpose of the Account Statement delivery requirement, including any Account Statement distributed pursuant to § 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.</P> <P>(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 <PRTPAGE P="183"/>least quarterly; <E T="03">Provided, however,</E> 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.</P> <P>(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; <E T="03">Provided, however</E>, 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:</P> <P>(1) The net asset value of the pool as of the end of each of the pool's two preceding fiscal years.</P> <P>(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</P> <P>(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.</P> <P>(3) A Statement of Financial Condition as of the close of the pool's fiscal year and preceding fiscal year.</P> <P>(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.</P> <P>(5) Appropriate footnote disclosure and such further material information as may be necessary to make the required statements not misleading.</P> <P>(6) For the purpose of the Annual Report distribution requirement, including any annual report distributed pursuant to § 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; <E T="03">Provided,</E> 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.</P> <P>(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 § 1.16, except that the following requirements of that section shall not apply:</P> <P>(1) The audit objectives of § 1.16(d)(1) concerning the periodic computation of minimum capital and property in segregation;</P> <P>(2) All other references in § 1.16 to the segregation requirements; and</P> <P>(3) Sections 1.16(c)(5), (d)(2), (e)(2), and (f).</P> <P>(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.<PRTPAGE P="184"/> </P> <P>(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:</P> <P>(A) State the name of the pool for which the application is being made;</P> <P>(B) State the reasons for the requested extension;</P> <P>(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;</P> <P>(D) Contain an undertaking to file the Annual Report on or before the date specified in the application; and</P> <P>(E) Be filed with the National Futures Association prior to the date on which the Annual Report is due.</P> <P>(ii) The application must be accompanied by a letter from the independent public accountant answering the following questions:</P> <P>(A) What specifically are the reasons for the extension request?</P> <P>(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?</P> <P>(iii) Within ten calendar days after receipt of an application for an extension of time, the National Futures Association shall:</P> <P>(A) Notify the commodity pool operator of the grant or denial of the requested extension, or</P> <P>(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.</P> <P>(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 § 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:</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(iv) The notice must include representations by the commodity pool operator that:</P> <P>(A) The pool for which the Annual Report is being prepared has investments in one or more collective investment vehicles (the “Investments”);</P> <P>(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</P> <P>(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.</P> <P>(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.<PRTPAGE P="185"/> </P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(h)(1) Each Account Statement and Annual Report, including an Account Statement or Annual Report provided pursuant to § 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; <E T="03">Provided, however,</E> 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.</P> <P>(2) There must be typed beneath the signed oath or affirmation:</P> <P>(i) The name of the individual signing the document;</P> <P>(ii) The capacity in which he is signing;</P> <P>(iii) The name of the commodity pool operator for whom he is signing; and</P> <P>(iv) The name of the commodity pool for which the document is being distributed.</P> <P>(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.</P> <P>(i) The Account Statement or Annual Report may be distributed to a pool participant by means of electronic media if the participant so consents; <E T="03">Provided,</E> 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.</P> <P>(j)(1) An Account Statement or Annual Report may contain a facsimile signature, <E T="03">Provided,</E> That:</P> <P>(i) The CPO maintains in accordance with § 4.23 the Account Statement or Annual Report containing the manual signature from which the facsimile signature was made; and</P> <P>(ii) The Annual Report the CPO files with a registered futures association is manually signed.</P> <P>(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 § 4.23 a manually signed copy of the Statement.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <SECAUTH>(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))</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.23</SECTNO> <SUBJECT>Recordkeeping.</SUBJECT> <P>Each commodity pool operator registered or required to be registered under the Act must make and keep the <PRTPAGE P="186"/>following books and records in an accurate, current and orderly manner at its main business office and in accordance with § 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.</P> <P>(a) <E T="03">Concerning the commodity pool:</E> </P> <P>(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.</P> <P>(2) A journal of original entry or other equivalent record showing all receipts and disbursements of money, securities and other property.</P> <P>(3) The acknowledgement specified by § 4.21(b) for each participant in the pool.</P> <P>(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.</P> <P>(5) Adjusting entries and any other records of original entry or their equivalent forming the basis of entries in any ledger.</P> <P>(6) A general ledger or other equivalent record containing details of all asset, liability, capital, income and expense accounts.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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 § 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.</P> <P>(b) <E T="03">Concerning the commodity pool operator:</E> </P> <P>(1) An itemized daily record of each commodity interest transaction of the commodity pool operator and each <PRTPAGE P="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.</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <SECAUTH>(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))</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.24</SECTNO> <SUBJECT>General disclosures required.</SUBJECT> <P>Except as otherwise provided herein, a Disclosure Document must include the following information.</P> <P>(a) <E T="03">Cautionary Statement.</E> The following Cautionary Statement must be prominently displayed on the cover page of the Disclosure Document. </P> <EXTRACT> <P>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.</P> </EXTRACT> <P>(b) <E T="03">Risk Disclosure Statement.</E> (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.</P> <EXTRACT> <HD SOURCE="HD1">RISK DISCLOSURE STATEMENT</HD> <P>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.</P> <P>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).</P> <P>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).</P> </EXTRACT> <P>(2) If the pool may trade foreign futures or options contracts, the Risk Disclosure Statement must further state: </P> <EXTRACT> <P>YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, <PRTPAGE P="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.</P> </EXTRACT> <P>(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: </P> <EXTRACT> <P>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.</P> </EXTRACT> <P>(c) <E T="03">Table of contents.</E> 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.</P> <P>(d) <E T="03">Information required in the forepart of the Disclosure Document.</E> (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;</P> <P>(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;</P> <P>(3) As applicable, a statement that the pool is:</P> <P>(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 <E T="03">et seq.</E>);</P> <P>(ii) A multi-advisor pool as defined in § 4.10(d)(2);</P> <P>(iii) A principal-protected pool as defined in § 4.10(d)(3); or</P> <P>(iv) Continuously offered. If the pool is not continuously offered, the closing date of the offering must be disclosed.</P> <P>(4) The date when the commodity pool operator first intends to use the Disclosure Document; and</P> <P>(5) The break-even point per unit of initial investment, as specified in § 4.10(j).</P> <P>(e) <E T="03">Persons to be identified.</E> The names of the following persons:</P> <P>(1) Each principal of the pool operator;</P> <P>(2) The pool's trading manager, if any, and each principal thereof;</P> <P>(3) Each major investee pool, the operator of such investee pool, and each principal of the operator thereof;</P> <P>(4) Each major commodity trading advisor and each principal thereof;</P> <P>(5) Which of the foregoing persons will make trading decisions for the pool; and</P> <P>(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.</P> <P>(f) <E T="03">Business background.</E> (1) The business background, for the five years preceding the date of the Disclosure Document, of:</P> <P>(i) The commodity pool operator;</P> <P>(ii) The pool's trading manager, if any;</P> <P>(iii) Each major commodity trading advisor;</P> <P>(iv) The operator of each major investee pool; and</P> <P>(v) Each principal of the persons referred to in this paragraph (f)(1) who <PRTPAGE P="189"/>participates in making trading or operational decisions for the pool or who supervises persons so engaged.</P> <P>(2) The pool operator must include in the description of the business background of each person identified in § 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.</P> <P>(g) <E T="03">Principal risk factors.</E> 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.</P> <P>(h) <E T="03">Investment program and use of proceeds.</E> The pool operator must disclose the following:</P> <P>(1) The types of commodity interests and other interests which the pool will trade, including:</P> <P>(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;</P> <P>(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;</P> <P>(iii)(A) The custodian or other entity (<E T="03">e.g.</E>, bank or broker-dealer) which will hold such interests; and</P> <P>(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.</P> <P>(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 § 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;</P> <P>(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;</P> <P>(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</P> <P>(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;</P> <P>(ii) If the pool will fulfill its margin requirements with other than cash deposits, the nature of such deposits; and</P> <P>(iii) If assets deposited by the pool as margin generate income, to whom that income will be paid.<PRTPAGE P="190"/> </P> <P>(i) <E T="03">Fees and expenses.</E> (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.</P> <P>(2) This description must include, without limitation:</P> <P>(i) Management fees;</P> <P>(ii) Brokerage fees and commissions, including interest income paid to futures commission merchants;</P> <P>(iii) Fees and commissions paid in connection with trading advice provided to the pool;</P> <P>(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;</P> <P>(v) Incentive fees;</P> <P>(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;</P> <P>(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;</P> <P>(viii) Professional and general administrative fees and expenses, including legal and accounting fees and office supplies expenses;</P> <P>(ix) Organizational and offering expenses;</P> <P>(x) Clearance fees and fees paid to national exchanges and self-regulatory organizations;</P> <P>(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</P> <P>(xii) Any other direct or indirect cost.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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 § 4.24(i)(2).</P> <P>(j) <E T="03">Conflicts of interest.</E> (1) A full description of any actual or potential conflicts of interest regarding any aspect of the pool on the part of:</P> <P>(i) The commodity pool operator;</P> <P>(ii) The pool's trading manager, if any;</P> <P>(iii) Any major commodity trading advisor;</P> <P>(iv) The commodity pool operator of any major investee pool;</P> <P>(v) Any principal of the persons described in paragraphs (j)(1) (i), (ii), (iii) and (iv) of this section; and</P> <P>(vi) Any other person providing services to the pool or soliciting participants for the pool.</P> <P>(2) Any other material conflict involving the pool.</P> <P>(3) Included in the description of such conflicts must be any arrangement whereby a person may benefit, directly <PRTPAGE P="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.</P> <P>(k) <E T="03">Related party transactions.</E> 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.</P> <P>(l) <E T="03">Litigation.</E> (1) Subject to the provisions of § 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; <E T="03">Provided, however,</E> that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:</P> <P>(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;</P> <P>(ii) Any principal of the foregoing; and</P> <P>(iii) The pool's futures commission merchants and introducing brokers, if any.</P> <P>(2) With respect to a futures commission merchant or an introducing broker, an action will be considered material if:</P> <P>(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;</P> <P>(ii) The action was brought by the Commission; <E T="03">Provided, however,</E> 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</P> <P>(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.</P> <P>(m) <E T="03">Trading for own account.</E> 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.</P> <P>(n) <E T="03">Performance disclosures.</E> Past performance must be disclosed as set forth in § 4.25.</P> <P>(o) <E T="03">Principal-protected pools.</E> If the pool is a principal-protected pool as defined in § 4.10(d)(3), the commodity pool operator must:</P> <P>(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;</P> <P>(2) Specify when the protection feature becomes operative; and</P> <P>(3) Disclose, in the break-even analysis required by § 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> <P>(p) <E T="03">Transferability and redemption.</E> (1) A complete description of any restrictions upon the transferability of a participant's interest in the pool; and</P> <P>(2) A complete description of the frequency, timing and manner in which a participant may redeem interests in the pool. Such description must specify:</P> <P>(i) How the redemption value of a participant's interest will be calculated;</P> <P>(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;</P> <P>(iii) Any restrictions on the redemption of a participant's interest, including any restrictions associated with the pool's investments; and<PRTPAGE P="192"/> </P> <P>(iv) Any liquidity risks relative to the pool's redemption capabilities.</P> <P>(q) <E T="03">Liability of pool participants.</E> 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.</P> <P>(r) <E T="03">Distribution of profits and taxation.</E> (1) The pool's policies with respect to the payment of distributions from profits or capital and the frequency of such payments;</P> <P>(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</P> <P>(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.</P> <P>(s) <E T="03">Inception of trading and other information.</E> (1) The minimum aggregate subscriptions that will be necessary for the pool to commence trading commodity interests;</P> <P>(2) The minimum and maximum aggregate subscriptions that may be contributed to the pool;</P> <P>(3) The maximum period of time the pool will hold funds prior to the commencement of trading commodity interests;</P> <P>(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</P> <P>(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.</P> <P>(t) <E T="03">Ownership in pool.</E> The extent of any ownership or beneficial interest in the pool held by the following:</P> <P>(1) The commodity pool operator;</P> <P>(2) The pool's trading manager, if any;</P> <P>(3) The pool's major commodity trading advisors;</P> <P>(4) The operators of the pool's major investee pools; and</P> <P>(5) Any principal of the foregoing.</P> <P>(u) <E T="03">Reporting to pool participants.</E> 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.</P> <P>(v) <E T="03">Supplemental information.</E> 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:</P> <P>(1) May not be misleading in content or presentation or inconsistent with required disclosures;</P> <P>(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</P> <P>(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:</P> <P>(i) Supplemental performance information (not including proprietary trading results as defined in § 4.25(a)(8), or hypothetical, extracted, pro forma or simulated trading results) must be placed after all specifically required performance information; <E T="03">Provided, however,</E> that required volatility disclosure may be included with the related required performance disclosure;</P> <P>(ii) Supplemental non-performance information relating to a required disclosure may be included with the related required disclosure; and</P> <P>(iii) Other supplemental information may be included after all required disclosures; <E T="03">Provided, however,</E> that any proprietary trading results as defined in § 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.<PRTPAGE P="193"/> </P> <P>(w) <E T="03">Material information.</E> Nothing set forth in §§ 4.21, 4.24, 4.25 or § 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.</P> <CITA>[60 FR 38183, July 25, 1995, as amended at 63 FR 58303, Oct. 30, 1998; 66 FR 53522, Oct. 23, 2001]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.25</SECTNO> <SUBJECT>Performance disclosures.</SUBJECT> <P>(a) <E T="03">General principles</E>—(1) <E T="03">Capsule performance information</E>—(i) <E T="03">For pools.</E> 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.</P> <P>(A) The name of the pool;</P> <P>(B) A statement as to whether the pool is:</P> <P>(<E T="03">1</E>) 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 <E T="03">et seq.</E>);</P> <P>(<E T="03">2</E>) A multi-advisor pool as defined in § 4.10(d)(2); and</P> <P>(<E T="03">3</E>) A principal-protected pool as defined in § 4.10(d)(3);</P> <P>(C) The date of inception of trading;</P> <P>(D) The aggregate gross capital subscriptions to the pool;</P> <P>(E) The pool's current net asset value;</P> <P>(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 § 4.10(k));</P> <P>(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</P> <P>(H) Subject to § 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;</P> <P>(ii) <E T="03">For accounts.</E> Disclosure of the past performance of an account required under this § 4.25 must include the following capsule performance information:</P> <P>(A) The name of the commodity trading advisor or other person trading the account and the name of the trading program;</P> <P>(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;</P> <P>(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;</P> <P>(D)(<E T="03">1</E>) 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</P> <P>(<E T="03">2</E>) The total assets traded pursuant to the trading program specified, as of the date of the Disclosure Document;</P> <P>(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;</P> <P>(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</P> <P>(G) The annual and year-to-date rate-of-return for the program specified, computed on a compounded monthly basis.</P> <P>(H) Partially-funded accounts directed by a commodity trading advisor may be presented in accordance with § 4.35(a)(7).</P> <P>(2) <E T="03">Additional requirements with respect to the offered pool.</E> (i) The performance of the offered pool must be identified as such and separately presented first;</P> <P>(ii) The rate of return of the offered pool must be presented on a monthly basis for the period specified in <PRTPAGE P="194"/>§ 4.25(a)(5), either in a numerical table or in a bar graph;</P> <P>(iii) A bar graph used to present monthly rates of return for the offered pool:</P> <P>(A) Must show percentage rate of return on the vertical axis and one-month increments on the horizontal axis;</P> <P>(B) Must be scaled in such a way as to clearly show month-to-month differences in rates of return; and</P> <P>(C) Must separately display numerical percentage annual rates of return for the period covered by the bar graph; and</P> <P>(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 § 4.25(a)(7), for the period specified in § 4.25(a)(5).</P> <P>(3) <E T="03">Additional requirements with respect to pools other than the offered pool.</E> With respect to pools other than the offered pool for which past performance is required to be presented under this section:</P> <P>(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.</P> <P>(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; <E T="03">Provided, however,</E> that:</P> <P>(A) The Disclosure Document must disclose how the composite was developed;</P> <P>(B) Pools of different classes or pools with materially different rates of return may not be presented in the same composite.</P> <P>(iii) For the purpose of § 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 <E T="03">et seq.</E>), and public offerings; and principal-protected and non-principal-protected pools. Multi-advisor pools as defined in § 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.</P> <P>(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.</P> <P>(4) <E T="03">Additional requirements with respect to accounts.</E> (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 § 4.25(a)(1)(ii).</P> <P>(ii) Accounts that differ materially with respect to rates of return may not be presented in the same composite.</P> <P>(iii) The commodity pool operator must disclose all material differences among accounts included in a composite.</P> <P>(5) <E T="03">Time period for required performance.</E> 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.</P> <P>(6) <E T="03">Trading programs.</E> 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.</P> <P>(7) <E T="03">Calculation of, and recordkeeping concerning, performance information.</E> (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.</P> <P>(A) The beginning net asset value for the period, which shall be the same as the previous period's ending net asset value;<PRTPAGE P="195"/> </P> <P>(B) All additions, whether voluntary or involuntary, during the period;</P> <P>(C) All withdrawals and redemptions, whether voluntary or involuntary, during the period;</P> <P>(D) The net performance for the period, which shall represent the change in the net asset value net of additions, withdrawals, and redemptions;</P> <P>(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;</P> <P>(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</P> <P>(G) The number of units outstanding at the end of the period, if applicable.</P> <P>(ii) All supporting documents necessary to substantiate the computation of such amounts must be maintained in accordance with § 1.31.</P> <P>(8) <E T="03">Proprietary trading results.</E> (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 § 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.</P> <P>(ii) For the purposes of § 4.24(v) and this § 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:</P> <P>(A) The commodity pool operator, trading manager (if any), commodity trading advisor or any principal thereof</P> <P>(B) An affiliate or family member of the commodity pool operator, trading manager (if any) or commodity trading advisor; or</P> <P>(C) Any person providing services to the pool.</P> <P>(9) <E T="03">Required legend.</E> Any past performance presentation, whether or not required by Commission rules, must be preceded by the following statement, prominently displayed: </P> <EXTRACT> <FP>PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.</FP> </EXTRACT> <P>(b) <E T="03">Performance disclosure when the offered pool has at least a three-year operating history.</E> 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 § 4.25, where:</P> <P>(1) The offered pool has traded commodity interests for three years or more; and</P> <P>(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.</P> <P>(c) <E T="03">Performance disclosure when the offered pool has less than a three-year operating history—</E>(1) <E T="03">Offered pool performance.</E> (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 § 4.25; or</P> <P>(ii) If the offered pool has no operating history, the pool operator must prominently display the following statement: </P> <EXTRACT> <FP>THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.</FP> </EXTRACT> <P>(2) <E T="03">Other performance of commodity pool operator.</E> (i)(A) Except as provided in § 4.25(a)(8), the commodity pool operator must disclose, for the period specified by § 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 § 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 § 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 <PRTPAGE P="196"/>pools operated by and accounts traded by the pool operator is not required to be disclosed.</P> <P>(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.</P> <P>(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.</P> <P>(3) <E T="03">Major commodity trading advisor performance.</E> (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 § 4.25.</P> <P>(ii) If a major commodity trading advisor has not previously traded accounts, the pool operator must prominently display the following statement: </P> <EXTRACT> <FP>(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.</FP> </EXTRACT> <P>(4) <E T="03">Major investee pool performance.</E> (i) The commodity pool operator must disclose the performance of any major investee pool.</P> <P>(ii) If a major investee pool has not commenced trading, the pool operator must prominently display the following statement: </P> <EXTRACT> <FP>(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.</FP> </EXTRACT> <P>(5) With respect to commodity trading advisors and investee pools for which performance is not required to be disclosed pursuant to § 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:</P> <P>(i) Monthly return parameters (highs and lows);</P> <P>(ii) Historical volatility and degree of leverage; and</P> <P>(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.</P> <CITA>[60 FR 38186, July 25, 1995, as amended at 63 FR 58303, Oct. 30, 1998; 68 FR 42967, July 21, 2003]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.26</SECTNO> <SUBJECT>Use, amendment and filing of Disclosure Document.</SUBJECT> <P>(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.</P> <P>(2) No commodity pool operator may use a Disclosure Document or profile <PRTPAGE P="197"/>document dated more than nine months prior to the date of its use.</P> <P>(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 § 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.</P> <P>(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:</P> <P>(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</P> <P>(ii) Each previously solicited prospective pool participant prior to accepting or receiving funds, securities or other property from any such prospective participant.</P> <P>(2) The pool operator may furnish the correction by any of the following means:</P> <P>(i) An amended Disclosure Document or profile document;</P> <P>(ii) With respect to a hard copy of the Disclosure Document, a sticker affixed to the Disclosure Document; or</P> <P>(iii) Other similar means.</P> <P>(3) The pool operator may not use the Disclosure Document or profile document until such correction has been made.</P> <P>(d) Except as provided by § 4.8:</P> <P>(1) The commodity pool operator must file with the National FuturesAssociation 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</P> <P>(2) The commodity pool operator must file with the National FuturesAssociation one copy of the subsequent amendments to the DisclosureDocument 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.</P> <CITA>[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]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Commodity Trading Advisors</HD> <SECTION> <SECTNO>§ 4.30</SECTNO> <SUBJECT>Prohibited activities.</SUBJECT> <P>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; <E T="03">Provided, however,</E> 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.</P> <SECAUTH>(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))</SECAUTH> <CITA>[47 FR 57011, Dec. 22, 1982]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.31</SECTNO> <SUBJECT>Required delivery of Disclosure Document to prospective clients.</SUBJECT> <P>(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 §§ 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 <PRTPAGE P="198"/>agreement to direct or guide the client's account; <E T="03">Provided,</E> 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; <E T="03">Provided further,</E> 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.</P> <P>(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, <E T="03">Provided, however,</E> That the requirement of § 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.</P> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.32</SECTNO> <SUBJECT>Trading on a Registered Derivatives Transaction Execution Facility for Non-Institutional Customers.</SUBJECT> <P>(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 § 1.3(g) of this chapter, provided that the trading advisor:</P> <P>(1) Directs the client's commodity interest account;</P> <P>(2) Directs accounts containing total assets of not less than $25,000,000 at the time the trade is entered; and</P> <P>(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.</P> <P>(b) The commodity interest account of a client described in paragraph (a) of this section must be carried by a registered futures commission merchant.</P> <CITA>[66 FR 53522, Oct. 23, 2001]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.33</SECTNO> <SUBJECT>Recordkeeping.</SUBJECT> <P>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 § 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.</P> <P>(a) Concerning the clients and subscribers of the commodity trading advisor:</P> <P>(1) The name and address of each client and each subscriber.</P> <P>(2) The acknowledgement specified in § 4.31(b).</P> <P>(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.</P> <P>(4) All other written agreements, or copies thereof, entered into by the commodity trading advisor with any client or subscriber.<PRTPAGE P="199"/> </P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(b) Concerning the commodity trading advisor:</P> <P>(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.</P> <P>(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.</P> <P>(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 § 4.23.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <SECAUTH>(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))</SECAUTH> <CITA>[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]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.34</SECTNO> <SUBJECT>General disclosures required.</SUBJECT> <P>Except as otherwise provided herein, a Disclosure Document must include the following information.</P> <P>(a) <E T="03">Cautionary Statement.</E> The following Cautionary Statement must be prominently displayed on the cover page of the Disclosure Document: </P> <EXTRACT> <FP>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.</FP> </EXTRACT> <P>(b) <E T="03">Risk Disclosure Statement.</E> (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:</P> <EXTRACT> <HD SOURCE="HD3">Risk Disclosure Statement</HD> <P>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:</P> <P>IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND OF ALL TRANSACTION COSTS.</P> <P>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 <PRTPAGE P="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.</P> <P>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.”</P> <P>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.</P> <P>A “SPREAD” POSITION MAY NOT BE LESS RISKY THAN A SIMPLE “LONG” OR “SHORT” POSITION.</P> <P>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.</P> <P>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.</P> <P>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).</P> </EXTRACT> <P>(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: </P> <EXTRACT> <P>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.</P> </EXTRACT> <P>(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: </P> <EXTRACT> <P>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.</P> </EXTRACT> <P>(c) <E T="03">Table of contents.</E> 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.</P> <P>(d) <E T="03">Information required in the forepart of the Disclosure Document.</E> (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<PRTPAGE P="201"/> </P> <P>(2) The date when the commodity trading advisor first intends to use the Disclosure Document.</P> <P>(e) <E T="03">Persons to be identified.</E> The names of the following persons:</P> <P>(1) Each principal of the trading advisor;</P> <P>(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</P> <P>(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.</P> <P>(f) <E T="03">Business background.</E> (1) The business background, for the five years preceding the date of the Disclosure Document, of:</P> <P>(i) The commodity trading advisor; and</P> <P>(ii) Each principal of the trading advisor who participates in making trading or operational decisions for the trading advisor or supervises persons so engaged.</P> <P>(2) The trading advisor must include in the description of the business background of each person identified in § 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.</P> <P>(g) <E T="03">Principal risk factors.</E> 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.</P> <P>(h) <E T="03">Trading program.</E> 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 § 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.</P> <P>(i) <E T="03">Fees.</E> A complete description of each fee which the commodity trading advisor will charge the client.</P> <P>(1) Wherever possible, the trading advisor must specify the dollar amount of each such fee.</P> <P>(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.</P> <P>(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.</P> <P>(j) <E T="03">Conflicts of interest.</E> (1) A full description of any actual or potential conflicts of interest regarding any aspect of the trading program on the part of:</P> <P>(i) The commodity trading advisor;</P> <P>(ii) Any futures commission merchant with which the client will be required to maintain its commodity interest account;</P> <P>(iii) Any introducing broker through which the client will be required to introduce its account to a futures commission merchant; and</P> <P>(iv) Any principal of the foregoing.</P> <P>(2) Any other material conflict involving any aspect of the offered trading program.</P> <P>(3) Included in the description of any such conflict must be any arrangement whereby the trading advisor or any principal thereof may benefit, directly <PRTPAGE P="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).</P> <P>(k) <E T="03">Litigation.</E> (1) Subject to the provisions of § 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; <E T="03">Provided, however,</E> that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:</P> <P>(i) The commodity trading advisor and any principal thereof:</P> <P>(ii) Any futures commission merchant with which the client will be required to maintain its commodity interest account; and</P> <P>(iii) Any introducing broker through which the client will be required to introduce its account to the futures commission merchant.</P> <P>(2) With respect to a futures commission merchant or an introducing broker, an action will be considered material if:</P> <P>(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;</P> <P>(ii) The action was brought by the Commission; <E T="03">Provided, however,</E> 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</P> <P>(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.</P> <P>(l) <E T="03">Trading for own account.</E> 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.</P> <P>(m) <E T="03">Performance disclosures.</E> Past performance must be disclosed as set forth in § 4.35.</P> <P>(n) <E T="03">Supplemental information.</E> 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:</P> <P>(1) May not be misleading in content or presentation or inconsistent with the required disclosures;</P> <P>(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</P> <P>(3) Must be placed as follows, unless otherwise specified by Commission rules:</P> <P>(i) Supplemental performance information (not including proprietary trading results as defined in § 4.35(a)(7), or hypothetical, extracted, pro forma or simulated trading results) must be placed after all required performance information;</P> <P>(ii) Supplemental non-performance information relating to a required disclosure may be included with the related required disclosure; and</P> <P>(iii) Other supplemental information may be included after all required disclosures; <E T="03">Provided, however,</E> That any proprietary trading results as defined in § 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.</P> <P>(o) <E T="03">Material information.</E> Nothing set forth in §§ 4.31, 4.34, 4.35 or § 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.</P> <CITA>[60 FR 38189, July 25, 1995, as amended at 66 FR 53522, Oct. 23, 2001]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.35</SECTNO> <SUBJECT>Performance disclosures.</SUBJECT> <P>(a) <E T="03">General principles</E>—(1) <E T="03">Capsule performance information.</E> Unless otherwise <PRTPAGE P="203"/>specified, disclosure of the past performance of an account or trading program required under this § 4.35 must include the following information:</P> <P>(i) The name of the commodity trading advisor or other person trading the account and the name of the trading program;</P> <P>(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;</P> <P>(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;</P> <P>(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</P> <P>(B) The total assets traded pursuant to the trading program specified, as of the date of the Disclosure Document;</P> <P>(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 § 4.10(k));</P> <P>(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;</P> <P>(vii) Subject to § 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; <E T="03">Provided, however,</E> That performance of the offered trading program must include monthly rates of return for such period; and</P> <P>(viii) In the case of the offered trading program:</P> <P>(A)(<E T="03">1</E>) The number of accounts traded pursuant to the offered trading program that were opened and closed during the period specified in § 4.35(a)(5) with a positive net lifetime rate of return as of the date the account was closed; and</P> <P>(<E T="03">2</E>) A measure of the variability of returns for accounts that were both opened and closed during the period specified in § 4.35(a)(5) and closed with positive net lifetime rates of return; and</P> <P>(B)(<E T="03">1</E>) The number of accounts traded pursuant to the offered trading program that were opened and closed during the period specified in § 4.35(a)(5) with negative net lifetime rates of return as of the date the account was closed; and</P> <P>(<E T="03">2</E>) A measure of the variability of returns for accounts that were both opened and closed during the period specified in § 4.35(a)(5) and closed with negative net lifetime rates of return.</P> <P>(C) The measure of variability required by §§ 4.35(a)(1)(viii)(A)(<E T="03">2</E>) and (B)(<E T="03">2</E>) 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 § 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.</P> <P>(2) <E T="03">Additional requirements with respect to the offered trading program.</E> (i) The performance of the offered trading program must be identified as such and separately presented first;</P> <P>(ii) The rate of return of the offered trading program must be presented on a monthly basis for the period specified in § 4.35(a)(5), either in a numerical table or in a bar graph;</P> <P>(iii) A bar graph used to present monthly rates of return for the offered trading program:</P> <P>(A) Must show percentage rate of return on the vertical axis and one-month increments on the horizontal axis;</P> <P>(B) Must be scaled in such a way as to clearly show month-to-month differences in rates of return; and</P> <P>(C) Must separately display numerical percentage annual rates of return <PRTPAGE P="204"/>for the period covered by the bar graph; and</P> <P>(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 § 4.35(a)(6).</P> <P>(3) <E T="03">Composite presentation.</E> (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 § 4.35(a)(1).</P> <P>(ii) Accounts that differ materially with respect to rates of return may not be presented in the same composite.</P> <P>(iii) The commodity trading advisor must discuss all material differences among the accounts included in a composite.</P> <P>(4) <E T="03">Current information.</E> 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.</P> <P>(5) <E T="03">Time period for required performance.</E> 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.</P> <P>(6) <E T="03">Calculation of, and recordkeeping concerning, performance information.</E> (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.</P> <P>(A) The beginning net asset value for the period, which shall represent the previous period's ending net asset value;</P> <P>(B) All additions, whether voluntary or involuntary, during the period;</P> <P>(C) All withdrawals and redemptions, whether voluntary or involuntary, during the period;</P> <P>(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;</P> <P>(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</P> <P>(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.</P> <P>(ii) All supporting documents necessary to substantiate the computation of such amounts must be maintained in accordance with § 1.31.</P> <P>(7) <E T="03">Performance of partially-funded accounts.</E> Notwithstanding the foregoing, a commodity trading advisor will be deemed in compliance with this § 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.</P> <P>(8) <E T="03">Proprietary trading results.</E> (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 § 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.</P> <P>(ii) For the purposes of § 4.34(n) and this § 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:</P> <P>(A) The commodity trading advisor or any of its principals;</P> <P>(B) An affiliate or family member of the commodity trading advisor; or</P> <P>(C) Any person providing services to the account.<PRTPAGE P="205"/> </P> <P>(9) <E T="03">Required legend.</E> Any past performance presentation, whether or not required by Commission rules, must be preceded with the following statement, prominently displayed: </P> <EXTRACT> <FP>PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.</FP> </EXTRACT> <P>(b) <E T="03">Performance to be disclosed.</E> Except as provided in § 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; <E T="03">Provided, however,</E> 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:</P> <P>(1) THIS TRADING ADVISOR PREVIOUSLY HAS NOT DIRECTED ANY ACCOUNTS; or</P> <P>(2) NONE OF THE TRADING PRINCIPALS OF THIS TRADING ADVISOR HAS PREVIOUSLY DIRECTED ANY ACCOUNTS; or</P> <P>(3) NEITHER THIS TRADING ADVISOR NOR ANY OF ITS TRADING PRINCIPALS HAVE PREVIOUSLY DIRECTED ANY ACCOUNTS. </P> <FP>If the commodity trading advisor is a sole proprietorship, reference to its trading principals need not be included in the prescribed statement.</FP> <CITA>[60 FR 38191, July 25, 1995, as amended at 68 FR 42967, July 21, 2003; 68 FR 47235, Aug. 8, 2003]</CITA> </SECTION> <SECTION> <SECTNO>§ 4.36</SECTNO> <SUBJECT>Use, amendment and filing of Disclosure Document.</SUBJECT> <P>(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; <E T="03">Provided, however,</E> that performance information must be current as of a date not more than three months preceding the date of the Document.</P> <P>(b) No commodity trading advisor may use a Disclosure Document dated more than nine months prior to the date of its use.</P> <P>(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:</P> <P>(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</P> <P>(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.</P> <P>(2) The trading advisor may not use the Disclosure Document until such correction is made.</P> <P>(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</P> <P>(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.</P> <CITA>[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]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart D—Advertising</HD> <SECTION> <SECTNO>§ 4.40</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 4.41</SECTNO> <SUBJECT>Advertising by commodity pool operators, commodity trading advisors, and the principals thereof.</SUBJECT> <P>(a) No commodity pool operator, commodity trading advisor, or any principal thereof, may advertise in a manner which:</P> <P>(1) Employs any device, scheme or artifice to defraud any participant or client or prospective participant or client; or<PRTPAGE P="206"/> </P> <P>(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.</P> <P>(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:</P> <P>(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</P> <P>(ii) A statement prescribed pursuant to rules promulgated by a registered futures association pursuant to section 17(j) of the Act.</P> <P>(2) If the presentation of such simulated or hypothetical performance is other than oral, the prescribed statement must be prominently disclosed.</P> <P>(c) The provisions of this section shall apply:</P> <P>(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</P> <P>(2) Regardless of whether the commodity pool operator or commodity trading advisor is exempt from registration under the Act.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0005)</APPRO> <CITA>[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 60 FR 38192, July 25, 1995]</CITA> </SECTION> <APPENDIX> <EAR>Pt. 4, App. A</EAR> <HD SOURCE="HED">Appendix A to Part 4—Guidance on the Application of Rule 4.13(a)(3) in the Fund-of-Funds Context</HD> <P>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 T="03">e.g.</E>, 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.</P> <P>1. <E T="03">Situation:</E> 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.</P> <P> <E T="03">Application:</E> 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).</P> <P>2. <E T="03">Situation:</E> 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.</P> <P> <E T="03">Application:</E> 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).</P> <P>3. <E T="03">Situation:</E> 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 T="03">e.g.</E>, contractual agreement. It does not allocate any of the investor fund's assets directly to commodity interest trading.<PRTPAGE P="207"/> </P> <P> <E T="03">Application:</E> 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).</P> <P>4. <E T="03">Situation:</E> 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 T="03">e.g.</E>, 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.</P> <P> <E T="03">Application:</E> 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).</P> <P>5. <E T="03">Situation:</E> 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.</P> <P> <E T="03">Application:</E> The investor fund CPO may claim relief under Rule 4.13(a)(3).</P> <P>6. <E T="03">Situation:</E> An investor fund CPO allocates the fund's assets to both investee funds and direct trading of commodity interests.</P> <P> <E T="03">Application:</E> 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.</P> <CITA>[68 FR 47236, Aug. 8, 2003; 68 FR 52837, Sept. 8, 2003]</CITA> </APPENDIX> <APPENDIX> <EAR>Pt. 4, App. B</EAR> <HD SOURCE="HED">Appendix B to Part 4—Adjustments for Additions and Withdrawals in the Computation of Rate of Return</HD> <P>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.</P> <HD SOURCE="HD2">1. Compounded Rate of Return Method</HD> <P>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:</P> <GPOTABLE CDEF="s80,14,xs75" COLS="3" OPTS="L2,tp0,i1"> <BOXHD> <CHED H="1"/> <CHED H="1">Account value</CHED> <CHED H="1">Change in value</CHED> </BOXHD> <ROW> <ENT I="01">Start of month</ENT> <ENT>$10,000</ENT> <ENT>+10% ($1,000 profit).</ENT> </ROW> <ROW> <ENT I="01">End of 1st acct. period</ENT> <ENT>11,000</ENT> <ENT>$4,000 addition.</ENT> </ROW> <ROW> <ENT I="01">Start of 2nd acct. period</ENT> <ENT>15,000</ENT> <ENT>−20% ($3,000 loss).</ENT> </ROW> <ROW> <ENT I="01">End of 2nd acct. period</ENT> <ENT>12,000</ENT> <ENT>$2,000 withdrawal.</ENT> </ROW> <ROW> <ENT I="01">Start of 3rd acct. period</ENT> <ENT>10,000</ENT> <ENT>+25% ($2,500 profit).</ENT> </ROW> <ROW> <ENT I="01">End of month</ENT> <ENT>12,500</ENT> </ROW> <TNOTE>Compounded ROR = [(1 + .1)(1 − .2)(1 + .25)] − 1 = 10%.</TNOTE> </GPOTABLE> <HD SOURCE="HD2">2. Time-weighted method</HD> <P>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 <PRTPAGE P="208"/>were available for trading divided by the total number of days in the period.</P> <CITA>[68 FR 47236, Aug. 8, 2003; 68 FR 53430, Sept. 10, 2003]</CITA> </APPENDIX> </SUBPART> </PART> <PART> <RESERVED>PART 5 [RESERVED]</RESERVED> </PART> <PART> <EAR>Pt. 7</EAR> <HD SOURCE="HED">PART 7—CONTRACT MARKET RULES ALTERED OR SUPPLEMENTED BY THE COMMISSION</HD> <CONTENTS> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECHD>Sec.</SECHD> <SECTNO>7.1</SECTNO> <SUBJECT>Scope of rules.</SUBJECT> </SUBPART> <SUBPART> <RESERVED>Subpart B [Reserved]</RESERVED> <SECTNO>7.100-7.101</SECTNO> <SUBJECT>[Reserved]</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Board of Trade of the City of Chicago Rules</HD> <SECTNO>7.200</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>7.201</SECTNO> <SUBJECT>Regulation 620.01(B).</SUBJECT> </SUBPART> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>7 U.S.C. 7a(a)(12)(A) and 12a(7).</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>45 FR 51526, Aug. 1, 1980, unless otherwise noted.</P> </SOURCE> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECTION> <SECTNO>§ 7.1</SECTNO> <SUBJECT>Scope of rules.</SUBJECT> <P>This part sets forth contract market rules altered or supplemented by the Commission pursuant to section 8a(7) of the Act.</P> </SECTION> </SUBPART> <SUBPART> <RESERVED>Subpart B [Reserved]</RESERVED> <SECTION> <SECTNO>§§ 7.100-7.101</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Board of Trade of the City of Chicago Rules</HD> <SECTION> <SECTNO>§ 7.200</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 7.201</SECTNO> <SUBJECT>Regulation 620.01(B).</SUBJECT> <P> <E T="03">Customers' claims and grievances.</E> 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.</P> <CITA>[49 FR 10660, Mar. 22, 1984]</CITA> </SECTION> </SUBPART> </PART> <PART> <EAR>Pt. 8</EAR> <HD SOURCE="HED">PART 8—EXCHANGE PROCEDURES FOR DISCIPLINARY, SUMMARY, AND MEMBERSHIP DENIAL ACTIONS</HD> <CONTENTS> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECHD>Sec.</SECHD> <SECTNO>8.01</SECTNO> <SUBJECT>Scope of rules.</SUBJECT> <SECTNO>8.02</SECTNO> <SUBJECT>Implementing exchange rules.</SUBJECT> <SECTNO>8.03</SECTNO> <SUBJECT>Definitions.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Disciplinary Procedure</HD> <SECTNO>8.05</SECTNO> <SUBJECT>Enforcement staff.</SUBJECT> <SECTNO>8.06</SECTNO> <SUBJECT>Investigations.</SUBJECT> <SECTNO>8.07</SECTNO> <SUBJECT>Investigation reports.</SUBJECT> <SECTNO>8.08</SECTNO> <SUBJECT>Disciplinary committee.</SUBJECT> <SECTNO>8.09</SECTNO> <SUBJECT>Review of investigation report.</SUBJECT> <SECTNO>8.10</SECTNO> <SUBJECT>Predetermined penalties.</SUBJECT> <SECTNO>8.11</SECTNO> <SUBJECT>Notice of charges.</SUBJECT> <SECTNO>8.12</SECTNO> <SUBJECT>Right to representation.<PRTPAGE P="209"/> </SUBJECT> <SECTNO>8.13</SECTNO> <SUBJECT>Answer to charges.</SUBJECT> <SECTNO>8.14</SECTNO> <SUBJECT>Admission or failure to deny charges.</SUBJECT> <SECTNO>8.15</SECTNO> <SUBJECT>Denial of charges and right to hearing.</SUBJECT> <SECTNO>8.16</SECTNO> <SUBJECT>Settlement offers.</SUBJECT> <SECTNO>8.17</SECTNO> <SUBJECT>Hearing.</SUBJECT> <SECTNO>8.18</SECTNO> <SUBJECT>Decision.</SUBJECT> <SECTNO>8.19</SECTNO> <SUBJECT>Appeal.</SUBJECT> <SECTNO>8.20</SECTNO> <SUBJECT>Final decision.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Summary Actions</HD> <SECTNO>8.25</SECTNO> <SUBJECT>Member responsibility actions.</SUBJECT> <SECTNO>8.26</SECTNO> <SUBJECT>Procedure for member responsibility actions.</SUBJECT> <SECTNO>8.27</SECTNO> <SUBJECT>Violations of rules regarding decorum, submission of records or other similar activities.</SUBJECT> <SECTNO>8.28</SECTNO> <SUBJECT>Final decision.</SUBJECT> </SUBPART> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>7 U.S.C. 6c, 7a, 12a and 12c, unless otherwise noted.</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>43 FR 41950, Sept. 19, 1978, unless otherwise noted.</P> </SOURCE> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECTION> <SECTNO>§ 8.01</SECTNO> <SUBJECT>Scope of rules.</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 8.02</SECTNO> <SUBJECT>Implementing exchange rules.</SUBJECT> <P>(a) Each exchange shall submit to the Commission for its approval rules implementing the following regulations: §§ 8.11, 8.13, 8.15, 8.17, 8.18 and 8.20 of subpart B and §§ 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.</P> <P>(b) An exchange may adopt rules implementing any or all of the following regulations: §§ 8.10, 8.16 and 8.19 of subpart B and § 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.</P> </SECTION> <SECTION> <SECTNO>§ 8.03</SECTNO> <SUBJECT>Definitions.</SUBJECT> <P>For purposes of this part:</P> <P>(a) <E T="03">Board of appeals</E> means that body provided for in § 8.19.</P> <P>(b) <E T="03">Charge</E> or <E T="03">charges</E> means any charge or charges contained in the notice of charges.</P> <P>(c) <E T="03">Disciplinary committee</E> means that body or bodies provided for in § 8.08.</P> <P>(d) <E T="03">Disciplinary procedure</E> 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.</P> <P>(e) <E T="03">Enforcement staff</E> means that body provided for in § 8.05.</P> <P>(f) <E T="03">Exchange</E> 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.</P> <P>(g) <E T="03">Investigation report</E> means the report required by § 8.07.</P> <P>(h) <E T="03">Notice of charges</E> means the notice required by § 8.11.</P> <P>(i) <E T="03">Penalty</E> 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.</P> <P>(j) <E T="03">Person(s) within the jurisdiction of an exchange</E> 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.</P> <P>(k) <E T="03">Record of the proceeding</E> 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.<PRTPAGE P="210"/> </P> <P>(l) <E T="03">Respondent</E> 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.</P> <P>(m) <E T="03">Rule(s) of an exchange</E> means any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy or instrument corresponding thereto.</P> <P>(n) <E T="03">Violation</E> means any violation within the disciplinary jurisdiction of the exchange.</P> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 54525, Nov. 3, 1981]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Disciplinary Procedure</HD> <SECTION> <SECTNO>§ 8.05</SECTNO> <SUBJECT>Enforcement staff.</SUBJECT> <P>(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.</P> <P>(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.</P> </SECTION> <SECTION> <SECTNO>§ 8.06</SECTNO> <SUBJECT>Investigations.</SUBJECT> <P>(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:</P> <P>(1) Upon the receipt of a request from the Commission, its Executive Director or his delegee, or</P> <P>(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.</P> <P>(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.</P> </SECTION> <SECTION> <SECTNO>§ 8.07</SECTNO> <SUBJECT>Investigation reports.</SUBJECT> <P>(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.</P> <P>(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.</P> <P>(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 <PRTPAGE P="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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.08</SECTNO> <SUBJECT>Disciplinary committee.</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 8.09</SECTNO> <SUBJECT>Review of investigation report.</SUBJECT> <P>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:</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.10</SECTNO> <SUBJECT>Predetermined penalties.</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 8.11</SECTNO> <SUBJECT>Notice of charges.</SUBJECT> <P>The notice of charges shall:</P> <P>(a) State the acts, practices, or conduct in which the person is alleged to have engaged;</P> <P>(b) State the rule alleged to have been violated (or about to be violated);</P> <P>(c) State the predetermined penalty, if any;</P> <P>(d) Prescribe the period within which a hearing on the charges may be requested;</P> <P>(e) Advise the person charged that:</P> <P>(1) He is entitled, upon request, to a hearing on the charges;</P> <P>(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</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.12</SECTNO> <SUBJECT>Right to representation.</SUBJECT> <P>Upon being served with a notice of charges the respondent shall have the right to be represented by legal counsel <PRTPAGE P="212"/>or any other representative of his choosing in all succeeding stages of the disciplinary proceeding.</P> </SECTION> <SECTION> <SECTNO>§ 8.13</SECTNO> <SUBJECT>Answer to charges.</SUBJECT> <P>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:</P> <P>(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.</P> <P>(b) Failure to file an answer on a timely basis shall be deemed an admission of all allegations contained in the notice of charges.</P> <P>(c) Failure in an answer to deny expressly a charge shall be deemed to be an admission of such charge.</P> </SECTION> <SECTION> <SECTNO>§ 8.14</SECTNO> <SUBJECT>Admission or failure to deny charges.</SUBJECT> <P>(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:</P> <P>(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.</P> <P>(2) If no predetermined penalty was stated, the disciplinary committee shall impose a penalty for each violation found to have been committed.</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.15</SECTNO> <SUBJECT>Denial of charges and right to hearing.</SUBJECT> <P>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 § 8.14(a)(2), he shall be given an opportunity for a hearing in accordance with the requirements of § 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 § 8.14(a)(2) for which a hearing has been requested.</P> </SECTION> <SECTION> <SECTNO>§ 8.16</SECTNO> <SUBJECT>Settlement offers.</SUBJECT> <P>(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.</P> <P>(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.</P> <P>(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.</P> <P>(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 <PRTPAGE P="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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.17</SECTNO> <SUBJECT>Hearing.</SUBJECT> <P>(a) The following minimum requirements shall apply to any hearing required by this subpart:</P> <P>(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.</P> <P>(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.</P> <P>(3) The hearing shall be promptly convened after reasonable notice to the respondent.</P> <P>(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.</P> <P>(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.</P> <P>(6) The respondent shall be entitled to appear personally at the hearing.</P> <P>(7) The respondent shall be entitled to cross-examine any persons appearing as witnesses at the hearing.</P> <P>(8) The respondent shall be entitled to call witnesses and to present such evidence as may be relevant to the charges.</P> <P>(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.</P> <P>(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 § 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.</P> <P>(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 § 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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.18</SECTNO> <SUBJECT>Decision.</SUBJECT> <P>Promptly following a hearing conducted in accordance with § 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:</P> <P>(a) The notice of charges or a summary of the charges;</P> <P>(b) The answer, if any, or a summary of the answer;</P> <P>(c) A brief summary of the evidence produced at the hearing or, where appropriate, incorporation by reference of the investigation report;</P> <P>(d) A statement of findings and conclusions with respect to each charge, <PRTPAGE P="214"/>including the specific rules which the respondent is found to have violated; and</P> <P>(e) A declaration of any penalty imposed and the effective date of such penalty.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.19</SECTNO> <SUBJECT>Appeal.</SUBJECT> <P>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:</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.20</SECTNO> <SUBJECT>Final decision.</SUBJECT> <P>Each exchange shall establish rules setting forth when a decision rendered pursuant to this subpart B shall become the final decision of such exchange.</P> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Summary Actions</HD> <SECTION> <SECTNO>§ 8.25</SECTNO> <SUBJECT>Member responsibility actions.</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 8.26</SECTNO> <SUBJECT>Procedure for member responsibility actions.</SUBJECT> <P>An action pursuant to § 8.25 shall be taken in accordance with an exchange procedure which provides for the following:</P> <P>(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:</P> <P>(1) State the action,</P> <P>(2) Briefly state the reasons for the action, and</P> <P>(3) State the effective time and date and the duration of the action.</P> <P>(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 § 8.25.</P> <P>(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 §§ 8.17(a)(4)-(9) and (b).<PRTPAGE P="215"/> </P> <P>(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:</P> <P>(1) A description of the summary action taken,</P> <P>(2) The reasons for the summary action,</P> <P>(3) A brief summary of the evidence produced at the hearing,</P> <P>(4) Findings and conclusions,</P> <P>(5) A determination that the summary action should be affirmed, modified or reversed, and</P> <P>(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.</P> <P>(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 § 8.19.</P> <APPRO>(Approved by the Office of Management and Budget under control number 3038-0022)</APPRO> <CITA>[43 FR 41950, Sept. 19, 1978, as amended at 46 FR 63036, Dec. 30, 1981]</CITA> </SECTION> <SECTION> <SECTNO>§ 8.27</SECTNO> <SUBJECT>Violations of rules regarding decorum, submission of records or other similar activities.</SUBJECT> <P>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.</P> </SECTION> <SECTION> <SECTNO>§ 8.28</SECTNO> <SUBJECT>Final decision.</SUBJECT> <P>Each exchange shall establish rules setting forth when a decision rendered pursuant to this subpart C shall become the final decision of such exchange.</P> </SECTION> </SUBPART> </PART> <PART> <EAR>Pt. 9</EAR> <HD SOURCE="HED">PART 9—RULES RELATING TO REVIEW OF EXCHANGE DISCIPLINARY, ACCESS DENIAL OR OTHER ADVERSE ACTIONS</HD> <CONTENTS> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECHD>Sec.</SECHD> <SECTNO>9.1</SECTNO> <SUBJECT>Scope of rules.</SUBJECT> <SECTNO>9.2</SECTNO> <SUBJECT>Definitions.</SUBJECT> <SECTNO>9.3</SECTNO> <SUBJECT>Provisions referenced.</SUBJECT> <SECTNO>9.4</SECTNO> <SUBJECT>Filing and service; official docket.</SUBJECT> <SECTNO>9.5</SECTNO> <SUBJECT>Motions.</SUBJECT> <SECTNO>9.6</SECTNO> <SUBJECT>Sanctions for noncompliance.</SUBJECT> <SECTNO>9.7</SECTNO> <SUBJECT>Settlement.</SUBJECT> <SECTNO>9.8</SECTNO> <SUBJECT>Practice before the Commission.</SUBJECT> <SECTNO>9.9</SECTNO> <SUBJECT>Waiver of rules; delegation of authority.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Notice and Effective Date of Disciplinary Action or Access Denial Action</HD> <SECTNO>9.10</SECTNO> <SUBJECT>[Reserved]</SUBJECT> <SECTNO>9.11</SECTNO> <SUBJECT>Form, contents and delivery of notice of disciplinary or access denial action.</SUBJECT> <SECTNO>9.12</SECTNO> <SUBJECT>Effective date of disciplinary or access denial action.</SUBJECT> <SECTNO>9.13</SECTNO> <SUBJECT>Publication of notice.</SUBJECT> <SECTNO>9.14-9.19</SECTNO> <SUBJECT>[Reserved]</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Initial Procedure With Respect to Appeals</HD> <SECTNO>9.20</SECTNO> <SUBJECT>Notice of appeal.</SUBJECT> <SECTNO>9.21</SECTNO> <SUBJECT>Record of exchange proceeding.</SUBJECT> <SECTNO>9.22</SECTNO> <SUBJECT>Appeal brief.</SUBJECT> <SECTNO>9.23</SECTNO> <SUBJECT>Answering brief.</SUBJECT> <SECTNO>9.24</SECTNO> <SUBJECT>Petition for stay pending review.</SUBJECT> <SECTNO>9.25</SECTNO> <SUBJECT>Limited participation of interested persons.</SUBJECT> <SECTNO>9.26</SECTNO> <SUBJECT>Participation of Commission staff.</SUBJECT> <SECTNO>9.27-9.29</SECTNO> <SUBJECT>[Reserved]</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart D—Commission Review of Disciplinary, Access Denial or Other Adverse Action</HD> <SECTNO>9.30</SECTNO> <SUBJECT>Scope of review.</SUBJECT> <SECTNO>9.31</SECTNO> <SUBJECT>Commission review of disciplinary or access denial action on its own motion.</SUBJECT> <SECTNO>9.32</SECTNO> <SUBJECT>Oral argument.</SUBJECT> <SECTNO>9.33</SECTNO> <SUBJECT>Final decision by the Commission.</SUBJECT> </SUBPART> </CONTENTS> <AUTH> <HD SOURCE="HED">Authority:</HD> <P>7 U.S.C. 4a, 6c, 7a, 12a, 12c, 16a, unless otherwise noted.</P> </AUTH> <SOURCE> <HD SOURCE="HED">Source:</HD> <P>52 FR 25366, July 7, 1987, unless otherwise noted.</P> </SOURCE> <SUBPART> <PRTPAGE P="216"/> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECTION> <SECTNO>§ 9.1</SECTNO> <SUBJECT>Scope of rules.</SUBJECT> <P>(a) <E T="03">Matters included</E>. 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.</P> <P>(b) <E T="03">Matters excluded</E>. This part does not apply to and the Commission will not accept notices of appeal, or petitions for stay pending review, of:</P> <P>(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;</P> <P>(2) Except as provided in §§ 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 § 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</P> <P>(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.</P> <FP>The Commission will, upon its own motion or upon motion filed pursuant to § 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.</FP> <P>(c) <E T="03">Applicability of these part 9 rules</E>. 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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 59 FR 5701, Feb. 8, 1994]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.2</SECTNO> <SUBJECT>Definitions.</SUBJECT> <P>For purposes of this part:</P> <P>(a) <E T="03">Access denial action</E> 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.</P> <P>(b) <E T="03">Disciplinary action</E> means any suspension, expulsion or other penalty (as defined in § 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.</P> <P>(c) <E T="03">Exchange</E> means any board of trade which has been designated as a contract market.</P> <P>(d) <E T="03">Exchange proceeding</E> means any formal or informal proceeding by an exchange which results in a disciplinary action, access denial action or other adverse action.</P> <P>(e) <E T="03">Mail</E> means properly addressed and postpaid first class mail, and includes overnight delivery service.</P> <P>(f) <E T="03">Member of an exchange</E> 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.</P> <P>(g) <E T="03">Other adverse action</E> and <E T="03">adverse action</E> 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 <PRTPAGE P="217"/>any exchange action that solely involves the internal corporate affairs of the exchange.</P> <P>(h) <E T="03">Party</E> 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 § 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 § 9.26.</P> <P>(i) <E T="03">Record of the exchange proceeding</E> 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.</P> <P>(j) <E T="03">Rules of the exchange</E> 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.</P> <P>(k) <E T="03">Summary action</E> 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 § 8.17(b) (penalty for impeding progress of hearing), § 8.25 (member responsibility action) or § 8.27 (penalty for violation of rules relating to decorum, attire, submission of records or similar activities) of this chapter.</P> <CITA>[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987, as amended at 67 FR 62352, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.3</SECTNO> <SUBJECT>Provisions referenced.</SUBJECT> <P>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: § 12.3 (Business address; hours); § 12.5 (Computation of time); § 12.6 (Extensions of time; adjournments; postponements); § 12.7 (Ex parte communications); and § 12.12 (Signature).</P> </SECTION> <SECTION> <SECTNO>§ 9.4</SECTNO> <SUBJECT>Filing and service; official docket.</SUBJECT> <P>(a) <E T="03">Filing with the Proceedings Clerk; proof of filing; proof of service.</E> 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.</P> <P>(b) <E T="03">Formalities of filing—</E>(1) <E T="03">Number of copies.</E> 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.</P> <P>(2) <E T="03">Title page.</E> All documents filed with the Proceedings Clerk must include at the head thereof, or on a title page, the name of the Commission, the <PRTPAGE P="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.</P> <P>(3) <E T="03">Paper, spacing, type.</E> 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<FR>1/2</FR> inches wide and no less than 10<FR>1/2</FR> or more than 11<FR>1/2</FR> 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.</P> <P>(4) <E T="03">Signature.</E> 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.</P> <P>(c) <E T="03">Service—</E>(1) <E T="03">General requirements.</E> 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.</P> <P>(2) <E T="03">Manner of service.</E> 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.</P> <P>(3) <E T="03">Designation of person to receive service.</E> 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 § 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.</P> <P>(4) <E T="03">Service of orders and decisions.</E> 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.</P> <P>(d) <E T="03">Official docket.</E> Upon receipt of a notice of appeal filed in accordance with § 9.20, or a petition for stay pending review filed in accordance with § 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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 60 FR 49334, Sept. 25, 1995]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.5</SECTNO> <SUBJECT>Motions.</SUBJECT> <P>(a) <E T="03">In general.</E> 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.</P> <P>(b) <E T="03">Answer to motions.</E> 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.</P> <P>(c) <E T="03">Motions for procedural orders.</E> 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.</P> <P>(d) <E T="03">Dilatory motions.</E> Frivolous or repetitive motions dealing with the same subject matter will not be permitted and such motions will summarily be denied.</P> </SECTION> <SECTION> <SECTNO>§ 9.6</SECTNO> <SUBJECT>Sanctions for noncompliance.</SUBJECT> <P>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, <PRTPAGE P="219"/>modify, set aside, or remand for further proceedings, in whole or in part, the decision of the exchange.</P> </SECTION> <SECTION> <SECTNO>§ 9.7</SECTNO> <SUBJECT>Settlement.</SUBJECT> <P>At any time before there has been a final determination by the Commission with respect to any notice of appeal filed in accordance with § 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.</P> </SECTION> <SECTION> <SECTNO>§ 9.8</SECTNO> <SUBJECT>Practice before the Commission.</SUBJECT> <P>(a) <E T="03">Practice</E>—(1) <E T="03">By non-attorneys.</E> An individual may appear <E T="03">pro se</E> (on his own behalf); a general partner may represent the partnership; a <E T="03">bona fide</E> officer of a corporation, trust or association may represent the corporation, trust or association.</P> <P>(2) <E T="03">By attorneys.</E> 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.</P> <P>(b) <E T="03">Debarment of counsel or representative during the course of a proceeding.</E> 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; <E T="03">Provided</E>, That the Commission may suspend the proceedings for a reasonable time for the purpose of enabling the party to obtain other counsel or representative.</P> <P>(c) <E T="03">Withdrawal of representation.</E> 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 <E T="03">pro se,</E> in which case, the statement must include the address where that party can thereafter be served.</P> </SECTION> <SECTION> <SECTNO>§ 9.9</SECTNO> <SUBJECT>Waiver of rules; delegation of authority.</SUBJECT> <P>(a) <E T="03">Standards for waiver; notice to parties.</E> 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.</P> <P>(b) <E T="03">Delegation of authority.</E> (1) The Commission hereby delegates, until the Commission orders otherwise, to the General Counsel, or the General Counsel's designee, the authority:</P> <P>(i) To waive or modify any of the requirements of §§ 9.20—9.25 and to waive or modify the requirements of the Commission's rules relating to reparations incorporated by § 9.3 insofar as such requirements pertain to changes in time permitted for filing, and to the form, execution, service and filing of documents;</P> <P>(ii) To enter orders under §§ 9.5, 9.6 and 9.7;</P> <P>(iii) To decline to accept any notice of appeal, or petition for stay pending review, of matters excluded from this part by §§ 9.1(b), 9.2(a) and 9.2(b), and to so notify the appellant and the exchange;</P> <P>(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 § 9.24;</P> <P>(v) To decline to accept any document which has not been timely filed or perfected, as specified in these rules;<PRTPAGE P="220"/> </P> <P>(vi) To order the filing of the record of the exchange proceeding notwithstanding the submission of a motion under § 9.21(b) that the Commission not accept a notice of appeal; and</P> <P>(vii) To enter any order which will facilitate or expedite Commission review.</P> <P>(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.</P> <P>(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.</P> <P>(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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 60 FR 54801, Oct. 26, 1995; 64 FR 46270, Aug. 25, 1999]</CITA> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Notice and Effective Date of Disciplinary Action or Access Denial Action</HD> <SECTION> <SECTNO>§ 9.10</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> <SECTION> <SECTNO>§ 9.11</SECTNO> <SUBJECT>Form, contents and delivery of notice of disciplinary or access denial action.</SUBJECT> <P>(a) <E T="03">When required.</E> 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: <E T="03">Provided,</E> That the exchange is not required to notify the Commission of any summary action, as authorized under the provisions of § 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 § 9.12.</P> <P>(b) <E T="03">Contents of notice.</E> 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 § 8.16, § 8.18, or § 8.19(c) of this chapter (including copies of any materials incorporated by reference) or other written notice which must include:</P> <P>(1) The name of the person against whom the disciplinary action or access denial action was taken;</P> <P>(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;</P> <P>(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;</P> <P>(4) The terms of the disciplinary action or access denial action;</P> <P>(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</P> <P>(6) Except as otherwise provided in §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.</P> <P>(c) <E T="03">Delivery and filing of the notice.</E> 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 <PRTPAGE P="221"/>the notice was delivered to the person disciplined or denied access and state whether delivery was personal or by mail.</P> <P>(d) <E T="03">Effect of delivery and filing by mail.</E> 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.</P> <P>(e) <E T="03">Certification.</E> 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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 60 FR 49334, Sept. 25, 1995; 67 FR 62352, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.12</SECTNO> <SUBJECT>Effective date of disciplinary or access denial action.</SUBJECT> <P>(a) <E T="03">Effective date.</E> 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 § 9.11 is delivered to the person disciplined or denied access; <E T="03">Provided, however,</E> That the exchange may cause a disciplinary action to become effective prior to that time if:</P> <P>(1) As authorized by § 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</P> <P>(2) As authorized by § 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</P> <P>(3) As authorized by § 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</P> <P>(4) The person against whom the action is taken has consented to the penalty to be imposed and to the timing of its effectiveness.</P> <P>(b) <E T="03">Notice of early effective date.</E> 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 § 9.24(a)(2) will be increased by one day.</P> <CITA>[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987, as amended at 67 FR 62352, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.13</SECTNO> <SUBJECT>Publication of notice.</SUBJECT> <P>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 § 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 § 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.</P> </SECTION> <SECTION> <PRTPAGE P="222"/> <SECTNO>§§ 9.14-9.19</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart C—Initial Procedure With Respect to Appeals</HD> <SECTION> <SECTNO>§ 9.20</SECTNO> <SUBJECT>Notice of appeal.</SUBJECT> <P>(a) <E T="03">Time to file.</E> Except as provided in § 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 § 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.</P> <P>(b) <E T="03">Contents.</E> 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:</P> <P>(1) The name and address of the appellant, and any duly authorized agent or officer of the appellant;</P> <P>(2) The name and docket number of the exchange proceeding;</P> <P>(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;</P> <P>(4) A copy of the notice provided to the appellant by the exchange in accordance with the provisions of § 9.11, in the case of a disciplinary or access denial action, or otherwise, in the case of any other adverse exchange action;</P> <P>(5) The relief sought from the action of the exchange;</P> <P>(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</P> <P>(7) A nonrefundable filing fee of $100 remitted by check, bank draft or money order, payable to the Commodity Futures Trading Commission.</P> <CITA>[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.21</SECTNO> <SUBJECT>Record of exchange proceeding.</SUBJECT> <P>(a) <E T="03">Filing of record.</E> 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 § 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).</P> <P>(b) <E T="03">Motion that the Commission not accept notice of appeal.</E> 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 §§ 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.</P> </SECTION> <SECTION> <SECTNO>§ 9.22</SECTNO> <SUBJECT>Appeal brief.</SUBJECT> <P>(a) <E T="03">Time to file.</E> Any person who has filed a notice of appeal in accordance with the provisions of § 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.</P> <P>(b) <E T="03">Contents.</E> Each appeal brief submitted to the Commission pursuant to this section must include, in the order indicated:<PRTPAGE P="223"/> </P> <P>(1) A statement of the issues presented for review;</P> <P>(2) <E T="03">A statement of the case.</E> 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;</P> <P>(3) <E T="03">An argument.</E> 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</P> <P>(4) A conclusion stating the precise relief sought.</P> <P>(c) <E T="03">Length of appeal brief.</E> 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.</P> </SECTION> <SECTION> <SECTNO>§ 9.23</SECTNO> <SUBJECT>Answering brief.</SUBJECT> <P>(a) <E T="03">Time for filing answering brief.</E> Within thirty days after service of the appeal brief, the exchange must file with the Commission an answering brief.</P> <P>(b) <E T="03">Contents of answering brief.</E> 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.</P> <P>(c) <E T="03">Length of answering brief.</E> 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.</P> </SECTION> <SECTION> <SECTNO>§ 9.24</SECTNO> <SUBJECT>Petition for stay pending review.</SUBJECT> <P>(a) <E T="03">Time to file.</E> (1) Within ten days after the notice of the disciplinary or access denial action has been delivered in accordance with § 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.</P> <P>(2) Within ten days after a notice of summary action has been delivered in accordance with § 9.12(b) to a person who is the subject of a summary action authorized by § 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 § 8.26 of this chapter.</P> <P>(3) The Commission may deny any petition for stay which is not timely filed or which is not otherwise in accord with these rules.</P> <P>(b) <E T="03">Contents of petition for stay.</E> A petition filed under this section must state the reasons that the stay is requested and the facts relied upon, as specified in § 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.</P> <P>(c) <E T="03">Response to petition.</E> The exchange may serve and file a written response to any petition for a stay within five days after service of the petition.</P> <P>(d) <E T="03">Standards for granting petition for stay.</E> 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:</P> <P>(1) Petitioner's likelihood of success on the merits; and</P> <P>(2) That denial of the stay would cause irreparable harm to the petitioner; and</P> <P>(3) That granting the stay would not endanger orderly trading or otherwise <PRTPAGE P="224"/>cause substantial harm to the exchange or market participants; and</P> <P>(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.</P> <P>(e) <E T="03">Ex parte stays.</E> The Commission may act upon a petition for stay, without waiting for the exchange's response thereto only where petitioner:</P> <P>(1) Expressly requests an <E T="03">ex parte</E> stay;</P> <P>(2) Files a proof of service; and</P> <P>(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.</P> <FP>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.</FP> <CITA>[52 FR 25366, July 7, 1987; 52 FR 27286, July 20, 1987]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.25</SECTNO> <SUBJECT>Limited participation of interested persons.</SUBJECT> <P>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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 59 FR 5701, Feb. 8, 1994]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.26</SECTNO> <SUBJECT>Participation of Commission staff.</SUBJECT> <P>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 <E T="03">amicus curiae.</E> Within thirty days after filing the notice of intention to participate, the Division may file a brief as <E T="03">amicus curiae.</E> 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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 67 FR 62352, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§§ 9.27-9.29</SECTNO> <RESERVED>[Reserved]</RESERVED> </SECTION> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart D—Commission Review of Disciplinary, Access Denial or Other Adverse Action</HD> <SECTION> <SECTNO>§ 9.30</SECTNO> <SUBJECT>Scope of review.</SUBJECT> <P>On review, the Commission may, in its discretion, consider <E T="03">sua sponte</E> 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 <PRTPAGE P="225"/>considered <E T="03">sua sponte</E> by the Commission.</P> </SECTION> <SECTION> <SECTNO>§ 9.31</SECTNO> <SUBJECT>Commission review of disciplinary or access denial action on its own motion.</SUBJECT> <P>(a) <E T="03">Request for additional information.</E> Where a person disciplined or denied access has not appealed the exchange decision to the Commission, upon review of the notice specified in § 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 § 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.</P> <P>(b) <E T="03">Review on motion of the Commission.</E> 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 § 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.</P> <CITA>[52 FR 25366, July 7, 1987, as amended at 67 FR 62352, Oct. 7, 2002]</CITA> </SECTION> <SECTION> <SECTNO>§ 9.32</SECTNO> <SUBJECT>Oral argument.</SUBJECT> <P>(a) <E T="03">On motion of Commission.</E> 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.</P> <P>(b) <E T="03">On request of party.</E> 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.</P> <P>(c) <E T="03">Reporting and transcription.</E> 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 § 10.103 (b) and (d) of this chapter.</P> </SECTION> <SECTION> <SECTNO>§ 9.33</SECTNO> <SUBJECT>Final decision by the Commission.</SUBJECT> <P>(a) <E T="03">Opinion and order.</E> 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 § 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.</P> <P>(b) <E T="03">Order of summary affirmance.</E> 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 <PRTPAGE P="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.</P> <P>(c) <E T="03">Standards of review.</E> In reviewing an exchange disciplinary, access denial or other adverse action, the Commission will consider whether:</P> <P>(1) The exchange disciplinary, access denial or other adverse action was taken in accordance with the rules of the exchange;</P> <P>(2) Fundamental fairness was observed in the conduct of the proceeding resulting in the disciplinary, access denial or other adverse action;</P> <P>(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</P> <P>(4) The disciplinary, access denial or other adverse action otherwise accords with the Act and the rules, regulations and orders of the Commission thereunder.</P> </SECTION> </SUBPART> </PART> <PART> <EAR>Pt. 10</EAR> <HD SOURCE="HED">PART 10—RULES OF PRACTICE</HD> <CONTENTS> <SUBPART> <HD SOURCE="HED">Subpart A—General Provisions</HD> <SECHD>Sec.</SECHD> <SECTNO>10.1</SECTNO> <SUBJECT>Scope and applicability of rules of practice.</SUBJECT> <SECTNO>10.2</SECTNO> <SUBJECT>Definitions.</SUBJECT> <SECTNO>10.3</SECTNO> <SUBJECT>Suspension, amendment, revocation and waiver of rules.</SUBJECT> <SECTNO>10.4</SECTNO> <SUBJECT>Business address; hours.</SUBJECT> <SECTNO>10.5</SECTNO> <SUBJECT>Computation of time.</SUBJECT> <SECTNO>10.6</SECTNO> <SUBJECT>Changes in time permitted for filing.</SUBJECT> <SECTNO>10.7</SECTNO> <SUBJECT>Date of entry of orders.</SUBJECT> <SECTNO>10.8</SECTNO> <SUBJECT>Presiding officers.</SUBJECT> <SECTNO>10.9</SECTNO> <SUBJECT>Separation of functions.</SUBJECT> <SECTNO>10.10</SECTNO> <SUBJECT>Ex parte communications.</SUBJECT> <SECTNO>10.11</SECTNO> <SUBJECT>Appearance in adjudicatory proceedings.</SUBJECT> <SECTNO>10.12</SECTNO> <SUBJECT>Service and filing of documents; form and execution.</SUBJECT> </SUBPART> <SUBPART> <HD SOURCE="HED">Subpart B—Institution of Adjudicatory Proceedings; Pleadings; Moti