Daily Rules, Proposed Rules, and Notices of the Federal Government
On July 21, 2010, President Obama signed the Dodd-Frank Act.
As discussed below, the regulations the Commission is adopting today concern conforming and technical amendments to part 3 governing the registration of intermediaries. These final regulations are based in large part on the Commission's proposed regulations regarding part 3 (Proposal).
In response to the Proposal, the Commission received four comments from the Futures Industry Association (FIA), the National Futures Association (NFA), and two individuals, Chris Barnard and Bill Nolan. In addition, the Commission also received comments relevant to the Proposal in a global comment letter submitted by a U.S. investor and a petition for exemption submitted pursuant to Section 4(c) of the CEA
Section 3.1 proposed alterations to the scope of persons who, by reason of their ownership of securities of a registrant, must be listed as a principal. The Commission proposed to narrow the current category of persons in § 3.1(a)(2)(i) to only those individuals who are the owners or are entitled to vote or have the power to sell or direct the sale of 10 percent or more of the outstanding shares of any class of equity securities, other than non-voting securities. The Commission intended to narrow the scope of the provision because the existing provision was over-inclusive, in that it captured individuals without the ability to influence a company's actions, such as owners of 10% of a class of preferred stock. However, upon further reflection, the Commission is concerned that the Proposal might, in other ways, be under-inclusive, in that it would fail to capture an owner who might indirectly have the power—such as through a membership agreement—to dictate upfront the entity's activities that are subject to regulation by the Commission. Consequently, in order to strike the right balance between the over-inclusive existing provision and the under-inclusive proposed language, the Commission is modifying § 3.1(a)(2)(i) to include individuals who have the power to exercise a controlling influence over the entity's activities that are subject to regulation by the Commission.
Section 3.10 generally sets forth the registration requirements for various Commission registrants. Section 3.11 generally sets forth the registration requirements for floor brokers and floor traders. Section 3.12 generally sets forth the registration requirements for natural persons associated with a Commission registrant in certain capacities, referred to as associated persons (APs).
With respect to APs, the Commission proposed to amend § 3.10 to add a new paragraph (c)(5) to clarify that a person employed by either an SD or a MSP and acting as its AP is not required to separately register as an SD or MSP, respectively, solely arising out of the person's activities as an AP. The Commission sought public comment as to whether this exemption is necessary to clarify the registration responsibilities of employees, in light of the current absence of a registration requirement as an AP of an SD or an MSP, and in light of the definition requiring persons who engage in certain swap activities to register as an SD or an MSP.
With respect to intermediaries, current § 3.10(c)(2) and (3) provides exemptions from registration as a futures commission merchant (FCM) for foreign brokers and other foreign intermediaries conducting activities in commodity interest transactions on designated contract markets (DCMs) solely on behalf of customers located outside the U.S. The Commission proposed to amend this section to expand these registration exemptions to foreign brokers and foreign intermediaries engaged in commodity interest transactions solely on behalf of non-U.S. customers executed on a SEF and cleared on a designated clearing organization through the customer omnibus account maintained with a registered FCM. FIA supported the Commission's proposal to align registration exemptions for foreign intermediaries across DCMs and SEFs. The Commission also sought comment as to whether it should expand such exemption to swap transactions executed bilaterally, and FIA supported this suggestion as well. Finally, the Commission sought comment as to whether any expansion should distinguish between bilateral swap transactions that occur within the U.S. and those that occur abroad. The Commission did not receive any comments regarding such a distinction. Therefore, the Commission is amending § 3.10(c)(2) and (3) to extend the registration exemption to commodity interest transactions executed bilaterally, on or subject to the rules of a DCM, or on or subject to the rules of a SEF, that are submitted for clearing on an omnibus basis through a registered FCM.
As proposed, § 3.11 pertaining to registration of floor brokers and floor traders contained a series of technical changes, such as consolidating an exemption found in § 3.4 and removing references to DTEFs. Subsequently, the Commission has promulgated the further definition of the term “swap dealer”
Given that legal entities, in addition to natural persons, may seek to avail themselves of the exclusion set forth above, the Commission therefore is adding a reference to Form 7-R in § 3.11. Form 7-R, as the application for registration as an intermediary, is the appropriate form for NFA to process an entity's application for registration as a floor trader engaged in swaps activities. Additionally, references to SEFs are being added throughout § 3.11 as one of the two categories of facilities for which floor traders in swaps will be granted trading privileges. Although these additions were omitted in the Proposal, the Commission believes that insertion of the appropriate reference to the type of registration form, and the type of facility, that would allow the NFA to properly process applications for registration of floor traders engaged in swaps activities are conforming changes to the registration rule that are necessary to implement the SD definition.
Consequently, the Commission is adopting additional technical modifications in § 3.21 to address the processing of fingerprints for principals of a floor trader that is a non-natural person, as well as in § 3.33 to reflect the use of Form 7-W for a request for withdrawal from a floor trader that is a non-natural person. The Commission is also adopting other technical modifications in §§ 3.30 and 3.40 to reflect the registration of legal entities as floor traders,
The Commission proposed to amend § 3.12(h)(1) to provide that a person is not required to register as an AP in any capacity if such person is registered in one of the other enumerated categories, including an SD or MSP. FIA agreed with the Commission that it is highly improbable that an individual, rather than an entity, would register as an SD and MSP, but supported the Commission's proposal in light of the regulatory certainty that it provides. Accordingly, the Commission is adopting § 3.12(h)(1) as proposed.
Section 3.31 sets forth procedural requirements for a registrant to update and/or correct information previously provided to the Commission and the NFA. The NFA is a registered futures association (RFA) to which the Commission has delegated certain registration functions.
Among other changes set forth in the Proposal, the Commission proposed: (1) To adopt § 3.31(a)(5) to require re-registration in the event of a change in name or form of organization and a change in principal, while preserving the existing safe harbor in § 3.31(a)(3) in the event that there is no change in principal and the registrant will be liable for its predecessor organization. The Commission specifically requested comment on whether the additional transparency under the new provisions of § 3.31 is beneficial and necessary to fulfill the Commission's mandate to protect customers, and whether the existing safe harbors from re-registration should be maintained. In response to the Commission's request, NFA and FIA opposed the proposed re-registration requirements as unnecessary, while Bill Nolan supported the proposed re-registration requirements as necessary to ensure that the existing process is not abused by registrants to the detriment of customers.
In particular, the NFA challenged the proposed amendments to § 3.31 on the following grounds: (1) It will be more difficult for members of the public to uncover a “new” firm's true disciplinary information; (2) the change in the legal name or form of a business organization and the addition of a principal does not necessarily trigger a regulatory need for re-registration; and (3) the proposed changes do not adequately address the timing of events sufficient to require re-registration. FIA similarly opposed the proposed changes on the grounds that re-registration should not be required for concurrent changes to the name or form of an organization, or the addition of a principal because re-registration is not required separately for each of these occurrences. FIA also stated that, upon implementation of the Dodd-Frank Act, the prospective mergers of affiliated companies will be negatively impacted by the proposed requirements.
After carefully considering the foregoing comments, the Commission has determined not to adopt the amendment in § 3.31(a)(3) and (5) as proposed.
In its comment letter, the NFA also suggested a few technical edits to the language in proposed § 3.31 to clarify that: (1) It is not the electronic update reporting a change on a Form 7-R that creates any deficiency or inaccuracy; and (2) an applicant or registrant no longer lists its principals who are individuals on its application for registration, as only holding companies are listed. The Commission believes that these comments improve upon the proposed language and is adopting these suggested changes in the final regulation. Finally, as previously mentioned, the Commission is also adopting additional technical modifications in § 3.31 to reflect the use of Form 7-R for floor traders that are non-natural persons.
In the Proposal, the Commission noted that it would be necessary to harmonize any distinctions between the Proposal and other rulemakings as they become final. On January 19, 2012, the Commission published in the
The Regulatory Flexibility Act (Reg Flex Act) requires that agencies consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis respecting the impact.
As set forth in the Proposal,
Since there could be some small entities that register as IBs, commodity trading advisors, or floor traders, the Commission considered whether this rulemaking would have a significant economic impact on these registrants. The final rules would clarify the mechanics of registration by updating cross-references, consolidating exemptions, and deleting obsolete forms. The Commission does not expect registrants to incur additional expenses as a result of these clarifications. Consequently, the Commission finds that there is no significant economic impact on IBs or commodity trading advisors resulting from this rulemaking. The final rules also provide clarity to floor traders regarding existing registration requirements (for example, the revisions to § 3.11 clarify that an entity that wishes to register as a floor trader shall do so by filing Form 7-R), rather than imposing any new registration requirement. Consequently, the Commission finds that there is no significant economic impact on floor traders resulting from this rulemaking.
Accordingly, for the reasons stated in the Proposal and the additional rationale provided above, the Commission believes that the conforming and other technical amendments in this rulemaking will not have a significant economic impact on a substantial number of small entities. Therefore, the Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the regulations being published today by this
Under the Paperwork Reduction Act of 1995 (PRA), an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number.
The currently approved rule collection covering the regulatory filings discussed in this final rule (3038-0023, which covers Forms 3-R, 7-R, 8-R and 8-T) has a burden of 78,109 respondents and 7,030 annual hours.
Therefore, the Commission has determined to revise the burden for this information collection as follows. The burden associated with the use of Form 7-R for the registration of entities as floor traders is estimated to be 60 hours, assuming 60 respondents,
The respondent burden for this collection is estimated to average 1 hour per response for the Form 7-R; 0.8 hours per response for the Form 8-R; and 0.2 hours per response for the Form 8-T.
Section 15(a) of the CEA
The regulations being adopted today conform, modernize, and make technical amendments to part 3 governing the regulation of intermediaries. Their purpose is to
The Commission received few specific comments concerning the Proposal's consideration of costs and benefits beyond general comments that the costs associated with particular rule amendments would outweigh the benefits. Those it did receive are addressed in the discussion below. None of the comments received provided a basis to quantify estimated costs or benefits.
The Commission's baseline for consideration of the costs and benefits of this rulemaking are the costs and benefits that the public and market participants would experience in the absence of this proposed regulatory action. In other words, the proposed baseline is an alternative situation in which the Commission takes no action to conform, modernize, and make technical adjustments to its existing rules as described above in light of the Dodd-Frank Act amendments to the CEA.
As set forth in the Proposal, the regulations the Commission is adopting concern conforming and technical amendments to part 3 governing the registration of intermediaries. Although the conforming amendments do not involve substantive changes to existing regulations, and hence no significant changes to the costs or benefits of the same, the final rules do benefit market participants by adding specificity to the mechanics of registration, which also benefits customers in the form of increased transparency. For example, the conforming amendments will add references to SEFs in § 3.42 to clarify that a temporary license would immediately terminate upon failure to comply with an award in an arbitration proceeding conducted pursuant to the rules of a SEF.
Current § 3.1(a) sets forth the definition of “principal,” and § 3.1(a)(3) carves out from that definition certain persons that have made capital contributions in the form of subordinated debt to a registrant, including unaffiliated banks operating in the U.S. and U.S. branches of foreign banks. The Commission is adopting amendments to expand the carve-out to accommodate the likelihood that persons with capital contributions from foreign banks might register as SDs and thus be included within the definition of principal. This expanded definitional carve-out makes the foreign bank registration process consistent with that for domestic banks. This consistency promotes market efficiency by avoiding additional costs that foreign banks would otherwise incur to comply with listing and qualification requirements.
No comments were received with respect to any cost or benefit implications of this definitional amendment, notwithstanding that the Commission specifically sought comments concerning it.
Section 3.10 generally sets forth the registration requirements for various Commission registrants. The Commission has decided to implement the expansion of the existing exemption in § 3.10(c)(2) and (3), which will introduce parity between registration obligations of foreign brokers and foreign intermediaries conducting commodity interest transactions bilaterally, on DCMs, and on SEFs. The Commission expects such expansion of the exemption to reduce compliance costs without affecting customer protection. The Commission has also decided to implement the proposed new paragraph § 3.10(c)(5), which will provide regulatory certainty that the activities engaged in solely as an associated person of an SD would not require such person to register as an SD. The Commission believes that this amendment is beneficial by reducing the costs to market participants of approaching the Commission for clarifications.
Section 3.11 is being amended to reflect the further definition of the term “swap dealer” which, among, other things, excludes certain swaps entered into by registered floor traders from the SD determination. Traditionally, natural persons have registered as floor traders. However, following promulgation of rules further defining the term “swap dealer,” the Commission foresees that firms will register as floor traders, making the previous rule requiring fingerprinting for all floor traders impractical without clarification. The new rules clarify that principals of a firm registering as a floor trader, and each individual responsible for entry of orders from that floor trader's own account, will be subject to the fingerprinting requirement. The Commission believes that this amendment is beneficial by obviating the need for potentially impacted market participants to incur costs to approach the Commission for clarifications. The other amendments extending the scope of § 3.11 to SEFs, while mainly technical in nature, will improve operational efficiency by allowing NFA to properly process applications for registration for floor traders engaged in swap activities.
Section 3.12 generally sets forth the registration requirement for APs. The Commission is adopting an amendment to § 3.12(h)(1)(i) to provide that a person is not required to register as an AP in any capacity if he or she is registered in one of the other enumerated categories, including an SD or MSP. FIA agreed with the Commission that it is highly improbable that an individual, rather than an entity, would register as an SD and MSP, but supported the Commission's proposal in light of the clarity it provides. As the change clarifies and extends the exemptions to activities of an SD or MSP, it will not create additional costs, and will benefit the markets by promoting efficiency by eliminating the need for multiple registrations by a single individual.
The rules amendments adopted today delete the term DTEF from §§ 3.2(c), 3.2(c)(2), 3.10(a)(3)(i)(A), 3.10(c)(2)(i),
As this change is mandated by statute, it will not create costs and benefits relative to the baseline. No comments were received on the costs and benefits of this aspect of the Proposal.
Section 3.1(a)(2) defines a principal to include persons who exceed a threshold for equity ownership. As a technical matter, the Commission is adopting amendments to harmonize the references to outstanding classes of securities in § 3.1(a)(2)(i) and (ii) by referring throughout to “outstanding shares of any class of equity securities, other than non-voting securities.” The primary benefit from these amended regulations is that they provide specificity for calculations involving authorized but unissued securities, or debt securities.
Also, the Commission is amending its regulations to move the concept of indirect owners found in the definition of beneficial ownership in § 3.1(d) to § 3.1(a)(4) to serve as a backstop to the requirement to list indirect owners in § 3.1(a)(2). The Commission received no comments with respect to the costs and benefits of this amendment. The Commission does not believe that this amendment will have a material impact on costs and benefits relative to the baseline.
The rules incorporate revised language further defining the definition of principal to include any person who has the power to exercise a controlling influence over an entity's activities that are subject to regulation by the Commission. As described earlier, the proposed amendments were designed to reduce the scope of persons who might potentially be covered by the definition. Under certain circumstances, the revised § 3.1(a)(2)(i) language referencing those with power to exercise a controlling influence could potentially increase the scope of persons covered by the definition. But, given that this amendment is similar to an existing requirement in Form BD covering broker-dealers, the Commission believes that any additional costs will be limited to the subset of firms that are not already registered with the SEC and within this subset, those firms which have individuals who are not subject to the existing equity ownership threshold, or the existing director or officer function threshold, but nonetheless who possess the power to exercise control. Given the nature of the control structure being addressed, while it is not feasible for the Commission to estimate the number of firms likely to be impacted by this rule, it believes that costs of complying with the rule are likely to be minimal because information on which owners of an entity exercise control is generally known to officers of that entity. Furthermore, the minimal costs are justified by the benefits to the market and market participants from ensuring that individuals cannot circumvent the fitness qualifications presently in place for principals by structuring their holdings into non-voting securities, and then exercising control through a separate agreement.
Current § 3.31 sets forth procedural requirements for a registrant to update and/or correct information previously provided to the Commission and the NFA. Section 3.33 addresses the procedural requirements for the withdrawal of registration. The Commission is adopting amendments to § 3.31(a) to reference the requirement in amended § 3.33 to withdraw registration upon certain events of dissolution, and in § 3.31(b), (c) and (d) to make technical corrections.
The adopted amendments in § 3.31 are technical and are not expected to involve costs, but will provide greater clarity by correcting references to outdated forms and by deleting duplicate instructions. The amendments to § 3.33 clarify the requirement to withdraw under certain circumstances involving dissolution of a company, and would improve the predictability of withdrawal requirements to the benefit of market participants. There were no comments on the costs and benefits of the proposed withdrawal requirements under § 3.33.
The Commission is adopting amendments to the regulations addressing the forms used during the registration process. These changes are technical in nature—for example, the changes would delete references to an obsolete form and obsolete cross-references. The Commission does not believe that increased costs to market participants or the public will result from these changes. That said, the Commission believes they do provide a benefit by addressing gaps in the current information collected through the various forms, particularly those forms cross-referencing other data.
There were no comments on the costs and benefits of the proposed technical amendments to the forms.
The Commission believes that the amendments to § 3.33 will improve the protection of market participants and the public by requiring withdrawal of registration in the event of dissolution of a registrant, thus improving the protection of the public.
The amendments to § 3.1 clarify the calculations used to determine who meets the definition of principal, reducing uncertainty surrounding compliance by intermediaries. The amendments to the regulations addressing the forms used during the registration process will update the description of information collection and make it more accurate, which improves the overall efficiency of our markets.
Administrative practice and procedure, Brokers, Commodity futures, Major swap participants, Reporting and recordkeeping requirements, Swap dealers.
For the reasons stated in the preamble, the Commission amends 17 CFR part 3 as follows:
5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, 23.
(2)(i) Any individual who directly or indirectly, through agreement, holding company, nominee, trust or otherwise, is either the owner of ten percent or more of the outstanding shares of any class of equity securities, other than non-voting securities, is entitled to vote or has the power to sell or direct the sale of ten percent or more of the outstanding shares of any class of equity securities, other than non-voting securities, is entitled to receive ten percent or more of the profits of the entity, or has the power to exercise a controlling influence over the entity's activities that are subject to regulation by the Commission; or
(ii) Any person other than an individual that is the direct owner of ten percent or more of the outstanding shares of any class of equity securities, other than non-voting securities; or
(3) Any person that has contributed ten percent or more of the capital of the entity, provided, however, that if such capital contribution consists of subordinated debt contributed by either:
(i) An unaffiliated bank insured by the Federal Deposit Insurance Corporation,
(ii) An unaffiliated “foreign bank,” as defined in 12 CFR 211.21(n) that currently operates an “office of a foreign bank,” as defined in 12 CFR 211.21(t), which is licensed under 12 CFR 211.24(a),
(iii) Such unaffiliated office of a foreign bank that is licensed, or
(iv) An insurance company subject to regulation by any State, such bank, foreign bank, office of a foreign bank, 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.
(4) Any individual who, 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 direct or indirect ownership of an equity security of the entity, other than a non-voting security, or preventing the vesting of such ownership, or of avoiding making a contribution of ten percent or more of the capital of the entity, as part of a plan or scheme to evade being deemed a principal of the entity, shall be deemed to be a principal of the entity.
(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 and swap 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.
(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 swap execution facility that has granted the applicant trading privileges that only a temporary license has been granted.
(a) Except as may be otherwise provided in the Act or in any rule, regulation, or order of the Commission, each futures commission merchant, retail foreign exchange dealer, swap dealer, major swap participant, floor broker, floor trader of any commodity for future delivery, commodity trading advisor, commodity pool operator, introducing broker, leverage transaction merchant, and associated person (other than an associated person of a swap dealer or major swap participant) must register as such under the Act. Except as may be otherwise provided in the Act or in any rule, regulation, or order of the Commission, registration in one capacity under the Act shall not include registration in any other capacity.
(a) * * *
(3) * * *
(i) * * *
(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, to security futures products as defined in section 1a(44) of the Act;
(c) * * *
(2)(i) A foreign broker, as defined in § 1.3(xx) of this chapter, is not required to register as a futures commission merchant if it submits any commodity interest transactions executed bilaterally, on or subject to the rules of a designated contract market, or on or subject to the rules of a swap execution facility, for clearing on an omnibus basis through a futures commission merchant registered in accordance with section 4d of the Act.
(3)(i) A person located outside the United States, its territories or possessions engaged in the activity of: An introducing broker, as defined in § 1.3(mm) of this chapter; a commodity trading advisor, as defined in § 1.3(bb) of this chapter; or a commodity pool operator, as defined in § 1.3(nn) of this chapter, in connection with any commodity interest transaction executed bilaterally or made on or subject to the rules of any designated contract market or swap execution facility only on behalf of persons located outside the United States, its territories or possessions, is not required to register in such capacity provided that any such commodity interest transaction is submitted for clearing through a futures commission merchant registered in accordance with section 4d of the Act.
(4) * * *
(ii) Such a person introduces, on a fully-disclosed basis in accordance with § 1.57 of this chapter, any institutional customer, as defined in § 1.3(g) of this chapter, to a registered futures commission merchant for the purpose of trading on a designated contract market;
(iii) Such person's affiliated futures commission merchant has filed with the National Futures Association (Attn: Vice President, Compliance) an acknowledgement that the affiliated futures commission merchant will be jointly and severally liable for any violations of the Act or the Commission's regulations committed by such person in connection with those introducing activities, whether or not
(iv) Such person does not solicit any person located in the United States, its territories or possessions for trading on a designated contract market, nor does such person handle the customer funds of any person located in the United States, its territories or possessions for the purpose of trading on any designated contract market.
(5) In determining whether a person is a swap dealer, the activities of a registered swap dealer with respect to which such person is an associated person shall not be considered.
(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 swap execution facility by the Commission.
(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 swap 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.
(i) Registered under the Act as a futures commission merchant, retail foreign exchange dealer, swap dealer, major swap participant, floor broker, or as an introducing broker;
(ii) Engaged in the solicitation of funds, securities, or property for a participation in a commodity pool, or the supervision of any person or persons so engaged, pursuant to registration
The revisions and addition read as follows: