[Title 17 CFR 166]
[Code of Federal Regulations (annual edition) - April 1, 2003 Edition]
[Title 17 - COMMODITY AND SECURITIES EXCHANGES]
[Chapter I - COMMODITY FUTURES TRADING COMMISSION]
[Part 166 - CUSTOMER PROTECTION RULES]
[From the U.S. Government Printing Office]


17COMMODITY AND SECURITIES EXCHANGES12003-04-012003-04-01false166PART 166COMMODITY AND SECURITIES EXCHANGESCOMMODITY FUTURES TRADING COMMISSION
PART 166--CUSTOMER PROTECTION RULES--Table of Contents




Sec.
166.1  Definitions.
166.2  Authorization to trade.
166.3  Supervision.
166.4  Branch offices.
166.5  Dispute settlement procedures.

    Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7, 12a, 
21, and 23, as amended by the Commodity Futures Modernization Act of 
2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).



Sec. 166.1  Definitions.

    (a) The term Commission registrant as used in this part means any 
person who is registered or required to be registered with the 
Commission pursuant to the Act or any rule, regulation, or order 
thereunder.
    (b) The term commodity interest as used in this part means--
    (1) Any contract for the purchase or sale of any commodity for 
future delivery, traded on or subject to the rules of a contract market 
or a foreign board of trade.
    (2) Any agreement or transaction subject to Commission regulation 
under section 4c of the Act, including any such contract or transaction 
made or to be made on or subject to the rules of a foreign board of 
trade; or
    (3) Any contract or transaction subject to Commission regulation 
under section 19 of the Act (7 U.S.C. 23).
    (c) The term customer as used in this part means any person trading, 
intending to trade, or receiving or seeking advice concerning any 
commodity interest, including any existing or prospective client or 
subscriber of a commodity trading advisor or existing or prospective 
participant in a commodity pool, but the term does not include a person 
who is acting in the capacity of a Commission registrant with respect to 
the trade.
    (d) The term commodity account as used in this part means the 
account of a customer in which any commodity interest is, or is intended 
to be, traded.

[43 FR 31886, July 24, 1978, as amended at 46 FR 54535, Nov. 3, 1981; 52 
FR 29003, Aug. 5, 1987]



Sec. 166.2  Authorization to trade.

    No futures commission merchant, introducing broker or any of their 
associated persons may directly or indirectly effect a transaction in a 
commodity interest for the account of any customer unless before the 
transaction the customer, or person designated by the customer to 
control the account:
    (a) Specifically authorized the futures commission merchant, 
introducing broker or any of their associated persons to effect the 
transaction

[[Page 571]]

(a transaction is ``specifically authorized'' if the customer or person 
designated by the customer to control the account specifies (1) the 
precise commodity interest to be purchased or sold and (2) the exact 
amount of the commodity interest to be purchased or sold); or
    (b) Authorized in writing the futures commission merchant, 
introducing broker or any of their associated persons to effect 
transactions in commodity interests for the account without the 
customer's specific authorization; Provided, however, That if such 
futures commission merchant, introducing broker or any of their 
associated persons is also authorized to effect transactions in foreign 
futures or foreign options without the customer's specific 
authorization, such authorization must be expressly documented.

[48 FR 35304, Aug. 3, 1983, as amended at 52 FR 29003, Aug. 5, 1987]



Sec. 166.3  Supervision.

    Each Commission registrant, except an associated person who has no 
supervisory duties, must diligently supervise the handling by its 
partners, officers, employees and agents (or persons occupying a similar 
status or performing a similar function) of all commodity interest 
accounts carried, operated, advised or introduced by the registrant and 
all other activities of its partners, officers, employees and agents (or 
persons occupying a similar status or performing a similar function) 
relating to its business as a Commission registrant.

[48 FR 35304, Aug. 3, 1983]



Sec. 166.4  Branch offices.

    Each branch office of each Commission registrant must use the name 
of the firm of which it is a branch for all purposes, and must hold 
itself out to the public under such name. The act, omission or failure 
of any person acting for the branch office, within the scope of his 
employment or office, shall be deemed the act, omission or failure of 
the Commission registrant as well as of such person.

[48 FR 35304, Aug. 3, 1983]



Sec. 166.5  Dispute settlement procedures.

    (a) Definitions. (1) The term claim or grievance as used in this 
section shall mean any dispute that:
    (i) Arises out of any transaction executed on or subject to the 
rules of a designated contract market,
    (ii) Is executed or effected through a member of such facility, a 
participant transacting on or through such facility or an employee of 
such facility, and
    (iii) Does not require for adjudication the presence of essential 
witnesses or third parties over whom the facility does not have 
jurisdiction and who are not otherwise available.
    (iv) The term claim or grievance does not include disputes arising 
from cash market transactions that are not a part of or directly 
connected with any transaction for the purchase or sale of any commodity 
for future delivery or commodity option.
    (2) The term customer as used in this section includes an option 
customer (as defined in Sec. 1.3(jj) of this chapter) and any person for 
or on behalf of whom a member of a designated contract market, or a 
participant transacting on or through such designated contract market, 
effects a transaction on such contract market, except another member of 
or participant in such designated contract market. Provided, however, a 
person who is an ``eligible contract participant'' as defined in section 
1a(12) of the Act shall not be deemed to be a customer within the 
meaning of this section.
    (3) The term Commission registrant as used in this section means a 
person registered under the Act as a futures commission merchant, 
introducing broker, floor broker, commodity pool operator, commodity 
trading advisor, or associated person.
    (b) Voluntariness. The use by customers of dispute settlement 
procedures shall be voluntary as provided in paragraphs (c) and (g) of 
this section.
    (c) Customers. No Commission registrant shall enter into any 
agreement or understanding with a customer in which the customer agrees, 
prior to the time a claim or grievance arises, to submit such claim or 
grievance to any settlement procedure except as follows:
    (1) Signing the agreement must not be made a condition for the 
customer

[[Page 572]]

to utilize the services offered by the Commission registrant.
    (2) If the agreement is contained as a clause or clauses of a 
broader agreement, the customer must separately endorse the clause or 
clauses containing the cautionary language and provisions specified in 
this section. A futures commission merchant or introducing broker may 
obtain such endorsement as provided in Sec. 1.55(d) of this chapter for 
the following classes of customers only:
    (i) A plan defined as a government plan or church plan in section 
3(32) or section 3(33) of title I of the Employee Retirement Income 
Security Act of 1974 or a foreign person performing a similar role or 
function subject as such to comparable foreign regulation; and
    (ii) A person who is a ``qualified eligible participant'' or a 
``qualified eligible client'' as defined in Sec. 4.7 of this chapter.
    (3) The agreement may not require any customer to waive the right to 
seek reparations under section 14 of the Act and part 12 of this 
chapter. Accordingly, such customer must be advised in writing that he 
or she may seek reparations under section 14 of the Act by an election 
made within 45 days after the Commission registrant notifies the 
customer that arbitration will be demanded under the agreement. This 
notice must be given at the time when the Commission registrant notifies 
the customer of an intention to arbitrate. The customer must also be 
advised that if he or she seeks reparations under section 14 of the Act 
and the Commission declines to institute reparations proceedings, the 
claim or grievance will be subject to the pre-existing arbitration 
agreement and must also be advised that aspects of the claim or 
grievance that are not subject to the reparations procedure (i.e., do 
not constitute a violation of the Act or rules thereunder) may be 
required to be submitted to the arbitration or other dispute settlement 
procedure set forth in the pre-existing arbitration agreement.
    (4) The agreement must advise the customer that, at such time as he 
or she may notify the Commission registrant that he or she intends to 
submit a claim to arbitration, or at such time as such person notifies 
the customer of its intent to submit a claim to arbitration, the 
customer will have the opportunity to elect a qualified forum for 
conducting the proceeding.
    (5) Election of forum. (i) Within ten business days after receipt of 
notice from the customer that he or she intends to submit a claim to 
arbitration, or at the time a Commission registrant notifies the 
customer of its intent to submit a claim to arbitration, the Commission 
registrant must provide the customer with a list of organizations whose 
procedures meet Acceptable Practices established by the Commission for 
dispute resolution, together with a copy of the rules of each forum 
listed. The list must include:
    (A) The designated contract market, if available, upon which the 
transaction giving rise to the dispute was executed or could have been 
executed;
    (B) A registered futures association; and
    (C) At least one other organization that will provide the customer 
with the opportunity to select the location of the arbitration 
proceeding from among several major cities in diverse geographic regions 
and that will provide the customer with the choice of a panel or other 
decision-maker composed of at least one or more persons, of which at 
least a majority are not members or associated with a member of the 
designated contract market or employee thereof, and that are not 
otherwise associated with the designated contract market (mixed panel): 
Provided, however, that the list of qualified organizations provided by 
a Commission registrant that is a floor broker need not include a 
registered futures association unless a registered futures association 
has been authorized to act as a decision-maker in such matters.
    (ii) The customer shall, within forty-five days after receipt of 
such list, notify the opposing party of the organization selected. A 
customer's failure to provide such notice shall give the opposing party 
the right to select an organization from the list.
    (6) Fees. The agreement must acknowledge that the Commission 
registrant will pay any incremental fees that may be assessed by a 
qualified forum for provision of a mixed panel,

[[Page 573]]

unless the arbitrators in a particular proceeding determine that the 
customer has acted in bad faith in initiating or conducting that 
proceeding.
    (7) Cautionary Language. The agreement must include the following 
language printed in large boldface type:

    Three Forums Exist for the Resolution of Commodity Disputes: Civil 
Court litigation, reparations at the Commodity Futures Trading 
Commission (CFTC) and arbitration conducted by a self-regulatory or 
other private organization.
    The CFTC recognizes that the opportunity to settle disputes by 
arbitration may in some cases provide many benefits to customers, 
including the ability to obtain an expeditious and final resolution of 
disputes without incurring substantial costs. The CFTC requires, 
however, that each customer individually examine the relative merits of 
arbitration and that your consent to this arbitration agreement be 
voluntary.
    By signing this agreement, you: (1) May be waiving your right to sue 
in a court of law; and (2) are agreeing to be bound by arbitration of 
any claims or counterclaims which you or [name] may submit to 
arbitration under this agreement. You are not, however, waiving your 
right to elect instead to petition the CFTC to institute reparations 
proceedings under Section 14 of the Commodity Exchange Act with respect 
to any dispute that may be arbitrated pursuant to this agreement. In the 
event a dispute arises, you will be notified if [name] intends to submit 
the dispute to arbitration. If you believe a violation of the Commodity 
Exchange Act is involved and if you prefer to request a section 14 
``Reparations'' proceeding before the CFTC, you will have 45 days from 
the date of such notice in which to make that election.
    You need not sign this agreement to open or maintain an account with 
[name]. See 17 CFR 166.5.

    (d) Enforceability. A dispute settlement procedure may require 
parties utilizing such procedure to agree, under applicable state law, 
submission agreement or otherwise, to be bound by an award rendered in 
the procedure, provided that the agreement to submit the claim or 
grievance to the procedure was made in accordance with paragraph (c) or 
(g) of this section or that the agreement to submit the claim or 
grievance was made after the claim or grievance arose. Any award so 
rendered shall be enforceable in accordance with applicable law.
    (e) Time limits for submission of claims. The dispute settlement 
procedure established by a designated contract market shall not include 
any unreasonably short limitation period foreclosing submission of 
customers' claims or grievances or counterclaims.
    (f) Counterclaims. A procedure established by a designated contract 
market under the Act for the settlement of customers' claims or 
grievances against a member or employee thereof may permit the 
submission of a counterclaim in the procedure by a person against whom a 
claim or grievance is brought. The designated contract market may permit 
such a counterclaim where the counterclaim 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 designated contract 
market does not have jurisdiction. Other counterclaims arising out of a 
transaction subject to the Act and rules promulgated thereunder for 
which the customer utilizes the services of the registrant may be 
permissible where the customer and the registrant have agreed in advance 
to require that all such submissions be included in the proceeding, and 
if the aggregate monetary value of the counterclaims is capable of 
calculation.
    (g) Eligible contract participants. A person who is an ``eligible 
contract participant'' as defined in section 1a(12) of the Act may 
negotiate any term of an agreement or understanding with a Commission 
registrant in which the eligible contract participant agrees, prior to 
the time a claim or grievance arises, to submit such claim or grievance 
to any settlement procedure provided for in the agreement.

[66 FR 42287, Aug. 10, 2001]