Definition of “Client” of a Commodity Trading Advisor, 56608-56611 [05-19323]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 70, Number 187 (Wednesday, September 28, 2005)]
[Proposed Rules]
[Pages 56608-56611]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-19323]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038--AC20


Definition of ``Client'' of a Commodity Trading Advisor

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing to amend Rule 1.3(bb) by adding to that rule a definition 
of the term ``client,'' as it relates to commodity trading advisors 
(CTAs) (Proposal). This would clarify inconsistencies in the 
Commission's regulations concerning the advisees of CTAs. The Proposal 
would also reflect the Commission's longstanding view that its 
antifraud authority extends to all CTAs, irrespective of whether they 
provide advice on a personalized or nonpersonalized basis.

DATES: Comments must be received on or before November 28, 2005.

ADDRESSES: Comments on the Proposal should be sent to Jean A. Webb, 
Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Comments may be 
sent by facsimile transmission to (202) 418-5528, or by e-mail to 
secretary@cftc.gov. Reference should be made to ``Proposed Rule 
Regarding the Definition of `Client' of a Commodity Trading Advisor.'' 
Comments may also be submitted by connecting to the Federal eRulemaking 
Portal at https://www.regulations.gov and following the comment 
submission instructions.

FOR FURTHER INFORMATION CONTACT: Barbara S. Gold, Associate Director, 
or R. Stephen Painter, Jr., Staff Attorney, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, 
telephone number: (202) 418-5450 or (202) 418-5416, respectively; 
facsimile number: (202) 418-5528; and electronic mail: bgold@cftc.gov 
or spainter@cftc.gov, respectively.

SUPPLEMENTARY INFORMATION: 

I. The Proposal

A. Background

    Section 1a(6)(A) of the Commodity Exchange Act (Act) \1\ defines 
the term ``commodity trading advisor'' to mean any person who:
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    \1\ 7 U.S.C. 1a(6) (2000). The Act and the Commission's 
regulations issued thereunder can be accessed at https://
www.access.gpo.gov/uscode/title7/chapter1--.html and https://
www.gpoaccess.gov/ecfr, respectively.

    (i) 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--
    (I) 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 or 
derivatives transaction execution facility;
    (II) Any commodity option authorized under section 4c; or
    (III) Any leverage transaction authorized under section 19; or
    (ii) For compensation or profit, and as part of a regular 
business, issues or promulgates analyses or reports concerning any 
of the activities referred to in clause (i).

    Under the language of Section 1a(6)(A) of the Act, the term 
``commodity trading advisor'' can include advisors who provide 
nonpersonalized advice, such as publishers of advisory newsletters or 
Web sites, as well as advisors who provide advice tailored to the needs 
of particular persons and advisors who direct other persons' trading 
pursuant to a power of attorney or other written

[[Page 56609]]

authorization. Section 1a(6)(B) of the Act excludes certain persons 
from the CTA definition where, as provided for in Section 1a(6)(C) of 
the Act, their furnishing of advice with respect to trading in 
commodity futures and options is solely incidental to the conduct of 
their business or profession.\2\
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    \2\ These excluded persons include, among others, teachers and 
publishers. In this regard, the Commission notes that, for a teacher 
or publisher to claim the exclusion from the CTA definition in 
Section 1a(6)(B) of the Act, the trading advice activity may not be 
the sole teaching or publishing activity, but instead must be solely 
incidental to the teacher's or publisher's other teaching and 
publishing activities. See e.g., In the Matter of Armstrong, et al., 
[1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 25,657 (CFTC 
Feb. 8, 1993) (holding that publishers of standardized advice are 
not excluded from the definition of CTA where publication is 
``largely devoted to advice about trading commodity futures or 
options contracts'').
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    Rule 1.3(bb) \3\ contains essentially the same definition of the 
term ``commodity trading advisor'' as that contained in section 1a(6) 
of the Act.\4\ However, neither the Act nor the Commission's 
regulations issued thereunder define who the ``others'' are that are 
advised by CTAs. Moreover, neither the Act nor the regulations are 
consistent when referring to these advisees. Although most of the 
relevant provisions refer solely to ``clients,'' \5\ a few of the 
provisions refer to ``clients and subscribers.'' \6\ The Proposal is 
intended to clarify these inconsistencies.\7\ Specifically, the 
Proposal is intended to clarify that, as used in provisions of the Act 
and the regulations relating to CTAs, the term ``client'' refers to all 
customers of a CTA, including persons who receive advice by subscribing 
to a newsletter or other information service. A ``subscriber,'' then, 
as used in these statutory provisions and rules, is one type of 
``client.'' \8\
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    \3\ Commission rules cited to herein are found at 17 CFR Ch. I 
(2005).
    \4\ The Commodity Futures Modernization Act of 2000 (CFMA) 
amended the statutory definition of ``commodity trading advisor'' to 
take account of the new type of trading facility known as a 
``derivatives transaction execution facility.'' See Commodity 
Futures Modernization Act of 2000, Pub. L. 106-554, Appendix E, 114 
Stat. 2763, Section 123(a)(1)(A). The Commission intends to make a 
conforming change to its rules in connection with final action on 
the Proposal. The CFMA can be accessed through the Commission's Web 
site: https://www.cftc.gov/files/ogc/ogchr5660.pdf.
    \5\ The Act refers solely to ``clients'' of CTAs in, for 
example, Section 4k(3)(i), 7 U.S.C. 6k(3)(i) (registration of 
persons associated with CTAs), and 4o(1)(A) and (B), 7 U.S.C. 
6o(1)(A) and (B) (antifraud provisions applicable to CTAs). The 
regulations refer solely to ``clients'' of CTAs in, for example, 
Rules 4.30 (prohibited activities of CTAs) and 4.41(a) (advertising 
by CTAs).
    \6\ For example, Section 4n(3)(A) of the Act, 7 U.S.C. 6n(3)(A), 
and Rule 4.33 (recordkeeping requirements for CTAs) refer to 
``clients'' and ``subscribers'' of CTAs.
    The Act also refers to ``subscribers'' other than advisees of 
CTAs, but these provisions are not relevant for the purposes of the 
Proposal. See, e.g., Section 1a(1)(C) of the Act, 7 U.S.C. 1a(1)(C) 
(definition of alternative trading system) and Section 5f(b) of the 
Act, 7 U.S.C. 7b-1(b) (designation of securities exchanges and 
associations as contract markets).
    \7\ When Congress originally defined the term ``commodity 
trading advisor'' in 1974, the definition included any person 
providing trading advice ``either directly or through publications 
or writings.'' With the advent of various electronic media, Congress 
expanded the CTA definition in 1982 to include ``publications, 
writings or electronic media.'' Pub. L. 97-444, 96 Stat. 2294, Sec. 
201 (Jan. 11, 1983) (emphasis added). Since 1982, these electronic 
media have proliferated, now including the Internet, email, and any 
number of software programs developed by CTAs. By defining 
``client'' of a CTA using the terms of the statutory CTA definition, 
the Commission intends to update the scope of that term to include 
subscribers to, and other advisees of, the various electronic or 
print media now available.
    \8\ The usual presumption that different terms in a statute have 
separate meanings is rebutted as to the terms ``client'' and 
``subscriber'' in the provisions of the Act regulating CTAs, by the 
language of the introductory provision, Section 4l(1), which lists 
``subscriptions'' as one of the ``arrangements with clients'' 
entered into by CTAs. This language implies that, in connection with 
CTAs, a person who arranges for a subscription, in other words a 
``subscriber,'' is a type of ``client.'' Moreover, a definition of 
``client'' that excludes ``subscribers'' would not make sense in 
light of the language of Section 1a(6)(A)(i) of the Act defining a 
``commodity trading advisor'' to include a person who provides 
advice ``through publications, writings, or electronic media.'' The 
customers of such CTAs could reasonably be described as 
``subscribers,'' but there is no logical reason for such customers 
to receive less protection under the statute than other customers of 
CTAs.
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    In addition, the Commission believes that defining the term 
``client'' of a CTA is necessary as a result of several court cases in 
which various CTAs have argued that, because the antifraud provisions 
of Section 4o of the Act \9\ refer to ``client'' rather than ``client 
or subscriber,'' those provisions apply only to CTAs who provide advice 
on a personalized basis.\10\ As explained more fully below, the 
proposed definition would clarify that Section 4o applies to all CTAs, 
and not just to those who provide advice on a personalized basis. In 
this regard, the Commission notes that the only federal appeals court 
to have reached the merits of the meaning of the term ``client'' in 
Section 4o, the Seventh Circuit in Commodity Trend Service,\11\ 
deferred to the Commission's interpretation of Section 4o, finding that 
the Commission's position was a reasonable interpretation of the 
statutory language and that it appeared to effectuate Congressional 
intent. The court held that the use of the term ``client'' in Section 
4o does not connote only a personalized relationship. Instead, 
according to the court, the term ``client'' ``can refer to * * * those 
who receive tailored advice from professionals or those who receive any 
kind of service regardless of whether it is personalized.'' \12\
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    \9\ 7 U.S.C. 6o.
    \10\ Commodity Trend Serv., Inc. v. CFTC, 233 F.3d 981 (7th Cir. 
2000); R & W Technical Servs. Ltd. v. CFTC, 205 F.3d 165 (5th Cir. 
2000); CFTC v. Vartuli, 228 F.3d 94 (2d Cir. 2000).
    \11\ Commodity Trend Serv., 233 F.3d at 981.
    \12\ Id. at 991.
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B. Proposed Rule 1.3(bb)(2)

    The Commission is proposing to add paragraph (bb)(2) to Rule 1.3, 
which would define the term ``client,'' as it relates to a CTA, as 
including:

    Any person (i) to whom a commodity trading advisor provides 
advice, for compensation or profit, 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 or derivatives transaction execution facility, any 
commodity option authorized under section 4c of the Act, or any 
leverage transaction authorized under section 19 of the Act; or (ii) 
to whom, for compensation or profit, and as part of a regular 
business, the commodity trading advisor issues or promulgates 
analyses or reports concerning any of the activities referred to 
[above]. The term `client' includes, without limitation, any 
subscriber of a commodity trading advisor.

    The proposed definition, then, would include clients to whom a CTA 
provides personalized trading advice as well as clients to whom a CTA 
provides nonpersonalized trading advice. Such nonpersonalized advice 
would include, among other things, standardized advice provided by 
newsletters, seminars, tutorials, periodicals, computer software, 
Internet Web sites, voicemail recordings, e-mails, and facsimiles. The 
definition also would cover advice provided over a period of time 
pursuant to a subscription arrangement or on a one-time basis.
    Because the proposed definition of ``client'' of a CTA would 
include a person to whom the CTA provides advice on either a 
personalized or nonpersonalized basis, it would make clear that the 
antifraud provisions of Section 4o of the Act apply to all persons who 
come within the statutory definition of the term ``commodity trading 
advisor,'' and not, for example, just to those who provide personalized 
trading advice or who direct their clients' trading--i.e., CTAs who 
must register as such with the Commission pursuant to Section 4m(1) of 
the Act.\13\ This view is consistent with the Commission's longstanding 
interpretation of the provisions of Section 4o of the Act. 
Specifically, more than 25 years ago, in explaining why it

[[Page 56610]]

adopted certain exemptions from CTA registration--as opposed to 
exclusions from the CTA definition--the Commission rejected the notion 
that Section 4o applies solely to CTAs who have a personalized 
relationship with their advisees, stating:
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    \13\ 7 U.S.C. 6m(1).

    Section 4o should remain applicable to the persons covered by 
the rule because * * * their clients and subscribers are entitled to 
the protections of the antifraud provisions whether or not these 
persons remain obligated to be registered[.] \14\
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    \14\ 43 FR 32291, 32292 (July 26, 1978) (emphasis added).
    The Commission additionally explained that ``Section 4o 
basically makes it unlawful, among other things, for any CTA to 
defraud an existing or prospective client or subscriber.'' Id. at 
n.2 (emphasis added).

    More recently, in connection with its adoption of Rule 4.14(a)(9), 
the Commission expressly noted that a CTA exempt from registration by 
virtue of its offering nonpersonalized advice and its not directing 
client accounts nevertheless remains subject to the provisions of the 
Act that apply to all CTAs, including the antifraud provisions of 
Section 4o.\15\
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    \15\ 65 FR 12938, 12941 (March 10, 2000); see also 68 FR 47221, 
47222 (Aug. 8, 2003) (providing for additional CTA registration 
exemptions, but noting that ``regardless of registration status, all 
persons who come within the * * * CTA definition are subject to * * 
* provisions of the Act and the Commission's rules prohibiting fraud 
that apply to * * * CTAs''; see also 68 FR 34790, 34791 (June 11, 
2003) (expanding the class of account managers permitted to bunch 
orders to include, among others, CTAs who are exempt from the 
registration requirement, but noting that ``the Commission will 
retain antifraud and antimanipulation authority over account 
managers who are exempt from registration.'')
    The Commission has consistently enforced the antifraud 
provisions of Section 4o against both registered CTAs and CTAs not 
required to register under the Act. E.g., In the Matter of Stephen 
Alan Pierce, CFTC Docket No. 02-15 (January 21, 2003) (``Section 4o 
of the Act prohibits both registered and unregistered CTAs from 
defrauding their clients.''); In the Matter of Michael Radcliffe, 
CFTC Docket No. 02-04 (June 10, 2002); In the Matter of CTS Fin. 
Publ'g, Inc., et al., CFTC Docket No. 00-34 (July 5, 2001).
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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \16\ requires that agencies, 
in proposing rules, consider the impact of those rules on small 
businesses. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\17\
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    \16\ 5 U.S.C. 601 et seq.
    \17\ 47 FR 18618 (April 30, 1982).
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    With respect to CTAs, the Commission has previously stated that it 
would evaluate within the context of a particular rule proposal whether 
all or some affected CTAs would be considered to be small entities and, 
if so, the economic impact on them of the proposal.\18\ The Commission 
does not believe that proposed Rule 1.3(bb)(2) would have a significant 
impact on affected CTAs. This is because the only burden imposed by the 
proposed amendment would be the obligation to comply with the antifraud 
provisions of Section 4o of the Act. Assuming arguendo, however, that 
compliance with Section 4o would constitute a significant burden, the 
burden is neither new nor additional, because proposed Rule 1.3(bb)(2) 
is consistent with the Commission's longstanding interpretation of 
Section 4o as applicable to all CTAs.
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    \18\ Id. at 18620.
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    Accordingly, the Chairman, on behalf of the Commission, certifies 
pursuant to Section 605(b) of the RFA \19\ that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. However, the Commission invites the public to comment on this 
finding.
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    \19\ 5 U.S.C. 605(b).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. The proposed rule amendment does not 
require a new collection of information on the part of any entities. 
Accordingly, for purposes of the PRA, the Commission certifies that the 
proposed rule amendment, if promulgated in final form, would not impose 
any new reporting or recordkeeping requirements.

C. Cost-Benefit Analysis

    Section 15(a) of the Act \20\ requires the Commission to consider 
the costs and benefits of its action before issuing a new regulation 
under the Act. By its terms, Section 15(a) does not require the 
Commission to quantify the costs and benefits of a new regulation or to 
determine whether the benefits of the proposed regulation outweigh its 
costs. Rather, Section 15(a) simply requires the Commission to 
``consider the costs and benefits'' of its action.
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    \20\ 7 U.S.C. 19(a).
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    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The Proposal is intended to define the term ``client'' of a CTA and 
to clarify that all CTAs are within the purview of the antifraud 
provisions of Section 4o of the Act. The Commission is considering the 
costs and benefits of this rule in light of the specific provisions of 
Section 15(a) of the Act as follows:
1. Protection of Market Participants and the Public
    Because the Proposal expressly brings all CTAs within the purview 
of the antifraud provision of Section 4o of the Act, the Proposal 
should enhance the Commission's ability to protect market participants 
and the public.
2. Efficiency and Competition
    The Proposal should have no effect, from the standpoint of imposing 
costs or creating benefits, on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
    The Proposal should have no effect, from the standpoint of imposing 
costs or creating benefits, on the financial integrity or price 
discovery function of the commodity futures and option markets.
4. Sound Risk Management Practices
    The Proposal should have no effect, from the standpoint of imposing 
costs or creating benefits, on the available range of sound risk 
management alternatives.
5. Other Public Interest Considerations
    The Proposal should have no effect, from the standpoint of imposing 
costs or creating benefits, on any other public interest 
considerations.
    After considering these factors, the Commission has determined to 
propose the amendment discussed above. The Commission invites public 
comment on its application of the cost-benefit provision. Commenters 
also are invited to submit any data that they may have quantifying the 
costs and benefits of the Proposal with their comment letters.

[[Page 56611]]

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    For the reasons presented above, the Commission proposes to amend 
17 CFR part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a-1, 16, 16a, 19, 21, 23 and 24, as amended by the Commodity 
Futures Modernization Act of 2000, appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).

    2. Section 1.3 is proposed to be amended by adding new paragraph 
(bb)(2) to read as follows:


Sec.  1.3  Definitions.

* * * * *
    (bb)(1) * * *
    (2) Client. This term, as it relates to a commodity trading 
advisor, means any person (i) to whom a commodity trading advisor 
provides advice, for compensation or profit, 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 or derivatives transaction execution facility, any 
commodity option authorized under section 4c of the Act, or any 
leverage transaction authorized under section 19 of the Act; or (ii) to 
whom, for compensation or profit, and as part of a regular business, 
the commodity trading advisor issues or promulgates analyses or reports 
concerning any of the activities referred to in paragraph (bb)(2)(i) of 
this section. The term ``client'' includes, without limitation, any 
subscriber of a commodity trading advisor.
* * * * *

    Issued in Washington, DC, on September 22, 2005 by the 
Commission.
Catherine D. Daniels,
Assistant Secretary of the Commission.
[FR Doc. 05-19323 Filed 9-27-05; 8:45 am]
BILLING CODE 6351-01-M