Self-Regulatory Organization; National Futures Association; Notice of Filing and Immediate Effectiveness of a Proposed Amendment to NFA Compliance Rule 2-10 Regarding Recordkeeping, 6119-6122 [E6-1540]
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Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
one business day—to NASD staff
providing the necessary trade data and/
or current float data to support the
member’s position limit calculation.
Thus, in the example above, a
conventional equity option on DEF
would be subject to a position limit of
75,000 contracts rather than 13,500
contracts because the underlying
securities’ characteristics meet the
volume and float thresholds established
by the options exchanges necessary to
raise the position limits from 13,500
contracts to 75,000 contracts, provided
the member makes the necessary filing
within the prescribed time.
Under the proposed rule change,
NASD staff would review the member’s
notice filing, and, if the staff determined
that a member incorrectly assigned a
position limit, it would notify the firm
and instruct the firm to reduce its
position promptly to fall below the
appropriate limits determined by the
NASD staff.
NASD would announce the effective
date of the proposed rule change in a
Notice to Members to be published no
later than 60 days following
Commission approval, if the
Commission approves this proposal.
The effective date would be 30 days
following publication of the Notice to
Members announcing any Commission
approval.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of section 15A(b)(6) of the Exchange
Act,16 which requires, among other
things, that NASD’s rules must be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. NASD
believes that amending the definition of
‘‘underlying index’’ would ensure more
complete reporting of options positions.
NASD also believes that permitting
members to calculate position limits for
certain foreign securities would enable
members to effect options transaction in
such securities without unnecessary
delay.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD does not believe that the
proposed rule change would result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
16 15
U.S.C. 78o–3(b)(6).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding, or
(ii) as to which the NASD consents, the
Commission will:
A. By order approve such proposed
rule change; or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods.
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulescomments@sec.gov. Please include File
No. SR–NASD–2006–007 on the subject
line.
6119
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing will also be
available for inspection and copying at
the principal office of the NASD. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–NASD–2006–007 and should be
submitted on or before February 27,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Nancy M. Morris,
Secretary.
[FR Doc. E6–1541 Filed 2–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53190; File No. SR–NFA–
2005–02]
Self-Regulatory Organization; National
Futures Association; Notice of Filing
and Immediate Effectiveness of a
Proposed Amendment to NFA
Compliance Rule 2–10 Regarding
Recordkeeping
January 30, 2006.
Pursuant to section 19(b)(7) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–7 under the
Act,2 notice is hereby given that on
December 6, 2005, National Futures
Paper Comments
Association (‘‘NFA’’) filed with the
• Send paper comments in triplicate
Securities and Exchange Commission
to Nancy M. Morris, Secretary,
(‘‘SEC’’ or ‘‘Commission’’) the proposed
Securities and Exchange Commission,
rule change described in Items I, II, and
100 F Street, NE., Washington, DC
III below, which Items have been
20549–1090.
prepared by NFA. The Commission is
All submissions should refer to File
publishing this notice to solicit
No. SR–NASD–2006–007. This file
comments on the proposed rule change
number should be included on the
from interested persons. NFA also has
subject line if e-mail is used. To help the
filed the proposed rule change with the
Commission process and review your
Commodity Futures Trading
comments more efficiently, please use
Commission (‘‘CFTC’’).
only one method. The Commission will
NFA, on December 6, 2005, submitted
post all comments on the Commission’s the proposed rule change to the CFTC
Internet Web site (https://www.sec.gov/
for approval. The CFTC approved the
rules/sro.shtml). Copies of the
proposed rule change on January 5,
submission, all subsequent
2006.3
amendments, all written statements
with respect to the proposed rule
17 17 CFR 200.30–3(a)(12).
change that are filed with the
1 15 U.S.C. 78s(b)(7).
2 17 CFR 240.19b–7.
Commission, and all written
3 See Letter from Thomas W. Sexton, Vice
communications relating to the
President and General Counsel, NFA, to Elizabeth
proposed rule change between the
Commission and any person, other than King, Associate Director, Division of Market2006
Regulation, Commission, dated January 26,
those that may be withheld from the
(enclosing letter from Jean A. Webb, Secretary,
Continued
public in accordance with the
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Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
I. Self-Regulatory Organization’s
Description of the Proposed Rule
Change
The proposed rule change amends
NFA Compliance Rule 2–10 to ensure
that NFA has effective access to books
and records maintained by foreign firms
or in a foreign language. Section 15A(k)
of the Act 4 makes NFA a national
securities association for the limited
purpose of regulating the activities of
Members who are registered as brokers
or dealers in security futures products
under section 15(b)(11) of the Act.5 This
rule change will apply to all NFA
Members, including Members registered
under section 15(b)(11).
The text of the proposed rule change
is below. Proposed new language is
italicized.
Text of Proposed Rule Changes
COMPLIANCE RULES
*
*
*
*
*
RULE 2–10. RECORDKEEPING
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(a) Each member shall maintain
adequate books and records necessary
and appropriate to conduct its business
including, without limitation, the
records required to be kept under CFTC
Regulations 1.18 and 1.32 through 1.37
for the period required under CFTC
Regulation 1.31.
(b) Each FCM Member must either:
(1) Maintain an office in the
continental United States, Alaska,
Hawaii, or Puerto Rico responsible for
preparing and maintaining financial
and other records and reports required
by CFTC and/or NFA rules; or
(2) Maintain an office in a jurisdiction
that the CFTC has found to have a
comparable regulatory scheme for
purposes of Part 30 of the CFTC’s rules
and be subject to that regulatory
scheme. This foreign office must be
responsible for preparing and
maintaining financial and other records
and reports required by CFTC and/or
NFA rules, and the Member must agree
to reimburse NFA for any travel,
translation, telephone, and similar
expenses incurred in connection with
inquiries, examinations and
investigations of the Member that
exceed the normal expenses incurred by
NFA in examining an FCM Member
located at the closest point in the
continental United States, Alaska,
Hawaii, or Puerto Rico.
CFTC, to Thomas W. Sexton, Vice President and
General Counsel, NFA, dated January 5, 2006,
confirming approval of the proposal)
(‘‘Confirmation of CFTC Approval’’).
4 4 15 U.S.C. 78o–3(k).
5 5 15 U.S.C. 78o(b)(11).
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(c) Each Member subject to minimum
capital requirements must:
(1) Prepare financial reports required
to be filed with the CFTC and/or NFA
in English, using U.S. dollars, and
according to U.S. accounting standards;
and
(2) Maintain a general ledger in
English using U.S. dollars.
(d) Each Member must:
(1) File reports, requests for
extensions, and other documents
required to be filed with the CFTC and/
or NFA in English;
(2) Maintain English translations of
all foreign-language promotional
material, including disclosure
documents and Web sites, distributed to
or intended for viewing by customers
located in the United States, its
territories, or possessions;
(3) Maintain written procedures
required by CFTC or NFA rules in
English (as well as in any other
language if necessary for them to be
understood by the Member’s employees
and agents);
(4) Provide English translations of
other foreign-language documents and
records and file financial information in
U.S. dollars when requested by NFA;
and
(5) Make available to NFA (during an
examination or to respond to other
inquiries) an individual who is
authorized to act on the Member’s
behalf, is fluent in English, and is
knowledgeable about the Member’s
business and about financial matters.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NFA has prepared statements
concerning the purpose of, and basis for,
the proposed rule change, burdens on
competition, and comments received
from members, participants, and others.
The text of these statements may be
examined at the places specified in Item
IV below. NFA has prepared summaries,
set forth in sections A, B, and C below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
NFA has seen a marked increase in
the number of foreign firms applying for
Futures Commission Merchant
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(‘‘FCM’’) 6 registration and NFA
membership. NFA Compliance Rule 2–
10 requires all Members to maintain
books and records necessary to conduct
their business, but that requirement is
useless if NFA staff cannot audit or
understand those books and records.
NFA is concerned about its ability to
audit and obtain information from
foreign FCMs located in countries
without regulatory systems comparable
to that in the U.S. Furthermore, there
have been instances where promotional
materials and other documents prepared
by U.S. Members were in a foreign
language and it fell on NFA to get them
translated. Amending NFA Compliance
Rule 2–10 ensures that NFA has
effective access to books and records
maintained by foreign firms or in a
foreign language.
Although NFA has had foreign firms
as Members since its inception, they
have been concentrated in the
Commodity Pool Operator (‘‘CPO’’) 7
and Commodity Trading Advisor
(‘‘CTA’’) 8 categories, with a few
Introducing Brokers (‘‘IBs’’) 9 sprinkled
in. Applications from foreign FCMs
were rare, and those firms all had a U.S.
office by the time they became
Members. This has changed recently,
primarily due to membership
applications from foreign firms that
want to offer retail forex to U.S.
customers.
As of October 3, 2005, NFA had six
foreign FCM Members. Four of the
foreign FCMs are located in London and
the other two are located in Ontario,
Canada, so they are all subject to
established regulatory schemes in their
home countries. As of that same date,
there were three firms with pending
applications for FCM registration and
NFA membership and one firm with a
pending application for registration
only. The four pending firms are located
in Columbia (two firms), Cyprus, and
Israel. Within the past few years, NFA
has also received applications from
firms located in Argentina, Jordan,
Pakistan, Romania, Russia, and
Singapore, although those firms
6 ‘‘Futures Commission Merchant’’ means a
person who is required to register or is registered
as a futures commission merchant under the
Commodities Exchange Act (‘‘CEA’’) and CFTC
rules. NFA Compliance Rule 1–1(o).
7 ‘‘Commodity Pool Operator’’ means a person
who is required to register or is registered as a
commodity pool operator under the CEA and CFTC
rules. NFA Compliance Rule 1–1(g).
8 ‘‘Commodity Trading Advisor’’ means a person
who is required to register or is registered as a
commodity trading advisor under the CEA and
CFTC rules. NFA Compliance Rule 1–1(h).
9 ‘‘Introducing Broker’’ means a person who is
required to register or is registered as an
introducing broker under the CEA and CFTC rules.
NFA Compliance Rule 1–1(q).
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Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
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withdrew their applications before they
completed the registration process.
Since December 1987, NFA has
required foreign firms to certify that
they can and will produce their books
and records in the U.S. within 72 hours
and that they are not subject to any
blocking, privacy, or secrecy laws that
would interfere with this inspection.
NFA shortened the response time for
FCMs to 24 hours in 2003, after more
foreign firms started applying for FCM
registration.
NFA audits most foreign firms by
asking them to provide copies of their
books and records, and this procedure
has proven workable for auditing CPOs,
CTAs, and IBs. For the foreign FCMs,
NFA sent auditors to Canada, and each
of the London firms either maintains a
U.S. office to prepare and maintain the
books relating to its U.S.-regulated
business or provides those books and
records through a U.S. agent. As the
number of foreign FCM applicants
grows, however, concerns about NFA’s
ability to conduct efficient and effective
audits of these firms increase.
Finally, U.S. firms occasionally
provide NFA with documents written in
foreign languages without also
providing a translation. NFA has taken
at least two disciplinary actions
involving foreign-language solicitations
made to a targeted group within the U.S.
In the most recent case, a Forex Dealer
Member located in California solicited
Chinese-speaking individuals to trade
OTC forex. In the other case, a CTA
Member located in New York solicited
Chinese-speaking individuals to trade
products on U.S. exchanges. In both
cases, NFA bore the onus of translating
the materials into English. We believe
this onus should be on the Member
rather than on NFA, although NFA
would check the accuracy of the
translations in appropriate
circumstances.
The amendments to NFA Compliance
Rule 2–10 add three new sections, with
the current text becoming section (a).10
Section (b) requires FCMs to maintain
their books and records in an office
located in the U.S. or a part 30
jurisdiction (e.g., Great Britain,
Canada).11 Section (b) also requires
FCMs that do not maintain their books
and records in the U.S. to reimburse
NFA for travel and related expenses if
10 Many of these requirements are taken from
NASD Rule 1090 or CBOE Rule 3.4 regarding
foreign members.
11 See CFTC Rule 30.10 (17 CFR 30.10) and
Appendix C to that rule. A list of the Part 30
jurisdictions can be found on the CFTC’s Web site
at https://www.cftc.gov.
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14:55 Feb 03, 2006
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travel to a foreign jurisdiction is
necessary.
Section (c) applies to all Members
subject to minimum capital
requirements (i.e., FCMs and
independent IBs). It requires them to
prepare financial and other required
reports in English, using U.S. dollars
and U.S. accounting standards, and to
maintain a general ledger in English
using U.S. dollars. Section (d) applies to
all Members. That section requires them
to:
• File documents with NFA in
English;
• Maintain English translations of
foreign-language promotional material;
• Maintain required procedures in
English;
• Provide English translations of
other documents when requested by
NFA; and
• Ensure that an English-speaking
individual who is knowledgeable about
the firm’s business is available to assist
NFA during an audit.
2. Statutory Basis
The rule change is authorized by, and
consistent with, section 15A(k) of the
Act.12
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The rule change will not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act and the
CEA.13
C. Self-Regulatory Organization’s
Statement of Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
NFA did not publish the rule change
to the membership for comment. NFA
did not receive comment letters
concerning the rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The proposed rule change became
effective on January 5, 2006, upon
approval by the CFTC.14 Within 60 days
of the date of effectiveness of the
proposed rule change, the Commission,
after consultation with the CFTC, may
summarily abrogate the proposed rule
change and require that the proposed
rule change be refiled in accordance
with the provisions of section 19(b)(1) of
the Act.15
12 15
U.S.C. 78o–3(k).
U.S.C. 1.
14 See Confirmation of CFTC Approval, supra
note 3.
15 15 U.S.C. 78s(b)(1).
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–NFA–2005–02 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
No. SR–NFA–2005–02. This file number
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing will also be
available for inspection and copying at
the principal office of the NFA. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–NFA–2005–02 and should be
submitted on or before February 27,
2006.
13 7
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6121
16 17
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CFR 200.30–3(a)(73).
06FEN1
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Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Nancy M. Morris,
Secretary.
[FR Doc. E6–1540 Filed 2–3–06; 8:45 am]
exchange-traded option issued by the
Options Clearing Corporation and is
immediately reported to the Exchange.
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53188; File No. SR–Phlx–
2005–70]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule
Change Relating to the Deletion of
Phlx Rule 454, ‘‘Limitations on
Members’’ Trading Because of
Options, etc.’’
January 30, 2006.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
9, 2005, the Philadelphia Stock
Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Phlx. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
rmajette on PROD1PC67 with NOTICES1
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Phlx proposes to delete Phlx Rule
454, ‘‘Limitations on Members’’ Trading
Because of Options, etc.’’ The text of
Phlx Rule 454 is set forth below, with
[brackets] indicating its proposed
deletion.
[Rule 454. Limitations on Members’
Trading Because of Options, etc.
No member, while on the floor, shall
initiate the purchase or sale on the
Exchange for his own account or for any
account in which he, or the organization
of which he is a partner or officer, or
any partner or officer of such
organization, is directly or indirectly
interested, of any security in which he
holds or has granted any put, call,
straddle or option, or in which he has
knowledge that the organization of
which he is a partner or officer, or any
partner or officer of such organization
holds or has granted any put, call,
straddle or option, unless such put, call,
straddle or option position is in an
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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* * * Supplementary Material: * * *
.01 A member who issues a
commitment to trade from the Exchange
through ITS or any other Application of
the System shall, as a consequence
thereof, be deemed to be initiating a
purchase or a sale of a security on the
Exchange as referred to in this Rule.]
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Phlx included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The Phlx has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Phlx Rule 454 prohibits a member on
the floor from initiating the purchase or
sale of stock on the Exchange for his
own or a related account if he or a
related account holds or has granted an
option on it. According to a 1976
Commission approval order, Phlx Rule
454 was originally adopted at the urging
of the Commission in 1935 for the
purpose of deterring options-related
manipulation of underlying stocks by
specialists, odd-lot dealers, and floor
traders.3 The rule change approved by
this 1976 approval order carved out
Options Clearing Corporation (‘‘OCC’’)issued options from the coverage of the
rule. The approval order stated that
because the Phlx’s share of the total
market volume in securities for which
options trading would be permitted by
the proposed rule change averaged less
than 1.7 percent, the manipulative
potential inherent in changing the
restrictions appeared insignificant.4
The Exchange is now proposing to
delete Phlx Rule 454 in its entirety
because the Phlx believes that the
likelihood that any options-related
manipulation of an underlying stock
3 See Securities Exchange Act Release No. 13016
(November 29, 1976), 41 FR 53383 (December 6,
1976) (order approving File No. SR–Phlx–76–15).
4 Id.
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could occur through an equities trade
initiated on the Phlx floor is extremely
remote. The Exchange believes that the
costs of manipulating the price of a
security to produce a gain in a preestablished options position would
outweigh the benefits due to the capital
that would be required to manipulate
the price of a security in the National
Market System today. The Exchange
notes that it is required to take into
account the consolidated national best
bid and offer quotations of the National
Market System. As such, any attempt to
manipulate the price of a security would
involve moving the price not only on
the Phlx but on other exchanges as well.
The Phlx believes that even in less
liquid securities this seems unlikely,
and there are other rules and
mechanisms to capture such activity. As
with the 1976 proposed rule change, the
Phlx believes that the manipulative
potential inherent in eliminating Phlx
Rule 454’s restrictions appears
insignificant. The Exchange notes that it
has found no comparable rule for
Nasdaq market makers, who can have
over-the-counter or ‘‘OTC’’ (non-OCCissued, non-exchange traded) options on
either Nasdaq or listed stocks.
Furthermore, Phlx Rule 454 does not in
any event prohibit the Phlx member
from buying stock first, prior to
obtaining an OTC option on it. Thus, the
Exchange believes that the rule is of
little real usefulness and therefore
unnecessarily restricts its floor members
from engaging in productive business on
the floor of the Exchange.5
2. Statutory Basis
The Exchange believes that its
proposal is consistent with section 6(b)
of the Act,6 in general, and furthers the
objectives of section 6(b)(5) of the Act,7
in particular, in that it eliminates an
outdated prohibition which imposes an
unnecessary burden on floor members
and serves no real useful purpose. The
Phlx believes that lifting the prohibition
should result in enhanced market depth
and liquidity, which should benefit
investors.
5 Note that Phlx Rule 213, ‘‘Puts and Calls,’’ will
continue to apply to Phlx specialists. Phlx Rule 213
provides that ‘‘[n]o specialist, no organization of
which he is a partner or officer and no partner or
officer of such organization shall acquire, hold or
grant, directly or indirectly, any interest in any put,
call, straddle, or option in any security in which
such specialist is registered by the Exchange, unless
such put, call, straddle or option position is in any
exchange-traded option issued by the Options
Clearing Corporation and is immediately reported
to the Exchange.’’
6 15 U.S.C. 78f(b).
7 15 U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 71, Number 24 (Monday, February 6, 2006)]
[Notices]
[Pages 6119-6122]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-1540]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53190; File No. SR-NFA-2005-02]
Self-Regulatory Organization; National Futures Association;
Notice of Filing and Immediate Effectiveness of a Proposed Amendment to
NFA Compliance Rule 2-10 Regarding Recordkeeping
January 30, 2006.
Pursuant to section 19(b)(7) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given
that on December 6, 2005, National Futures Association (``NFA'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change described in Items I, II, and III below, which
Items have been prepared by NFA. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons. NFA also has filed the proposed rule change with the Commodity
Futures Trading Commission (``CFTC'').
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\1\ 15 U.S.C. 78s(b)(7).
\2\ 17 CFR 240.19b-7.
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NFA, on December 6, 2005, submitted the proposed rule change to the
CFTC for approval. The CFTC approved the proposed rule change on
January 5, 2006.\3\
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\3\ See Letter from Thomas W. Sexton, Vice President and General
Counsel, NFA, to Elizabeth King, Associate Director, Division of
Market Regulation, Commission, dated January 26, 2006 (enclosing
letter from Jean A. Webb, Secretary, CFTC, to Thomas W. Sexton, Vice
President and General Counsel, NFA, dated January 5, 2006,
confirming approval of the proposal) (``Confirmation of CFTC
Approval'').
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[[Page 6120]]
I. Self-Regulatory Organization's Description of the Proposed Rule
Change
The proposed rule change amends NFA Compliance Rule 2-10 to ensure
that NFA has effective access to books and records maintained by
foreign firms or in a foreign language. Section 15A(k) of the Act \4\
makes NFA a national securities association for the limited purpose of
regulating the activities of Members who are registered as brokers or
dealers in security futures products under section 15(b)(11) of the
Act.\5\ This rule change will apply to all NFA Members, including
Members registered under section 15(b)(11).
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\4\ 4 15 U.S.C. 78o-3(k).
\5\ 5 15 U.S.C. 78o(b)(11).
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The text of the proposed rule change is below. Proposed new
language is italicized.
Text of Proposed Rule Changes
COMPLIANCE RULES
* * * * *
RULE 2-10. RECORDKEEPING
(a) Each member shall maintain adequate books and records necessary
and appropriate to conduct its business including, without limitation,
the records required to be kept under CFTC Regulations 1.18 and 1.32
through 1.37 for the period required under CFTC Regulation 1.31.
(b) Each FCM Member must either:
(1) Maintain an office in the continental United States, Alaska,
Hawaii, or Puerto Rico responsible for preparing and maintaining
financial and other records and reports required by CFTC and/or NFA
rules; or
(2) Maintain an office in a jurisdiction that the CFTC has found to
have a comparable regulatory scheme for purposes of Part 30 of the
CFTC's rules and be subject to that regulatory scheme. This foreign
office must be responsible for preparing and maintaining financial and
other records and reports required by CFTC and/or NFA rules, and the
Member must agree to reimburse NFA for any travel, translation,
telephone, and similar expenses incurred in connection with inquiries,
examinations and investigations of the Member that exceed the normal
expenses incurred by NFA in examining an FCM Member located at the
closest point in the continental United States, Alaska, Hawaii, or
Puerto Rico.
(c) Each Member subject to minimum capital requirements must:
(1) Prepare financial reports required to be filed with the CFTC
and/or NFA in English, using U.S. dollars, and according to U.S.
accounting standards; and
(2) Maintain a general ledger in English using U.S. dollars.
(d) Each Member must:
(1) File reports, requests for extensions, and other documents
required to be filed with the CFTC and/or NFA in English;
(2) Maintain English translations of all foreign-language
promotional material, including disclosure documents and Web sites,
distributed to or intended for viewing by customers located in the
United States, its territories, or possessions;
(3) Maintain written procedures required by CFTC or NFA rules in
English (as well as in any other language if necessary for them to be
understood by the Member's employees and agents);
(4) Provide English translations of other foreign-language
documents and records and file financial information in U.S. dollars
when requested by NFA; and
(5) Make available to NFA (during an examination or to respond to
other inquiries) an individual who is authorized to act on the Member's
behalf, is fluent in English, and is knowledgeable about the Member's
business and about financial matters.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NFA has prepared statements
concerning the purpose of, and basis for, the proposed rule change,
burdens on competition, and comments received from members,
participants, and others. The text of these statements may be examined
at the places specified in Item IV below. NFA has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NFA has seen a marked increase in the number of foreign firms
applying for Futures Commission Merchant (``FCM'') \6\ registration and
NFA membership. NFA Compliance Rule 2-10 requires all Members to
maintain books and records necessary to conduct their business, but
that requirement is useless if NFA staff cannot audit or understand
those books and records.
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\6\ ``Futures Commission Merchant'' means a person who is
required to register or is registered as a futures commission
merchant under the Commodities Exchange Act (``CEA'') and CFTC
rules. NFA Compliance Rule 1-1(o).
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NFA is concerned about its ability to audit and obtain information
from foreign FCMs located in countries without regulatory systems
comparable to that in the U.S. Furthermore, there have been instances
where promotional materials and other documents prepared by U.S.
Members were in a foreign language and it fell on NFA to get them
translated. Amending NFA Compliance Rule 2-10 ensures that NFA has
effective access to books and records maintained by foreign firms or in
a foreign language.
Although NFA has had foreign firms as Members since its inception,
they have been concentrated in the Commodity Pool Operator (``CPO'')
\7\ and Commodity Trading Advisor (``CTA'') \8\ categories, with a few
Introducing Brokers (``IBs'') \9\ sprinkled in. Applications from
foreign FCMs were rare, and those firms all had a U.S. office by the
time they became Members. This has changed recently, primarily due to
membership applications from foreign firms that want to offer retail
forex to U.S. customers.
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\7\ ``Commodity Pool Operator'' means a person who is required
to register or is registered as a commodity pool operator under the
CEA and CFTC rules. NFA Compliance Rule 1-1(g).
\8\ ``Commodity Trading Advisor'' means a person who is required
to register or is registered as a commodity trading advisor under
the CEA and CFTC rules. NFA Compliance Rule 1-1(h).
\9\ ``Introducing Broker'' means a person who is required to
register or is registered as an introducing broker under the CEA and
CFTC rules. NFA Compliance Rule 1-1(q).
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As of October 3, 2005, NFA had six foreign FCM Members. Four of the
foreign FCMs are located in London and the other two are located in
Ontario, Canada, so they are all subject to established regulatory
schemes in their home countries. As of that same date, there were three
firms with pending applications for FCM registration and NFA membership
and one firm with a pending application for registration only. The four
pending firms are located in Columbia (two firms), Cyprus, and Israel.
Within the past few years, NFA has also received applications from
firms located in Argentina, Jordan, Pakistan, Romania, Russia, and
Singapore, although those firms
[[Page 6121]]
withdrew their applications before they completed the registration
process.
Since December 1987, NFA has required foreign firms to certify that
they can and will produce their books and records in the U.S. within 72
hours and that they are not subject to any blocking, privacy, or
secrecy laws that would interfere with this inspection. NFA shortened
the response time for FCMs to 24 hours in 2003, after more foreign
firms started applying for FCM registration.
NFA audits most foreign firms by asking them to provide copies of
their books and records, and this procedure has proven workable for
auditing CPOs, CTAs, and IBs. For the foreign FCMs, NFA sent auditors
to Canada, and each of the London firms either maintains a U.S. office
to prepare and maintain the books relating to its U.S.-regulated
business or provides those books and records through a U.S. agent. As
the number of foreign FCM applicants grows, however, concerns about
NFA's ability to conduct efficient and effective audits of these firms
increase.
Finally, U.S. firms occasionally provide NFA with documents written
in foreign languages without also providing a translation. NFA has
taken at least two disciplinary actions involving foreign-language
solicitations made to a targeted group within the U.S. In the most
recent case, a Forex Dealer Member located in California solicited
Chinese-speaking individuals to trade OTC forex. In the other case, a
CTA Member located in New York solicited Chinese-speaking individuals
to trade products on U.S. exchanges. In both cases, NFA bore the onus
of translating the materials into English. We believe this onus should
be on the Member rather than on NFA, although NFA would check the
accuracy of the translations in appropriate circumstances.
The amendments to NFA Compliance Rule 2-10 add three new sections,
with the current text becoming section (a).\10\ Section (b) requires
FCMs to maintain their books and records in an office located in the
U.S. or a part 30 jurisdiction (e.g., Great Britain, Canada).\11\
Section (b) also requires FCMs that do not maintain their books and
records in the U.S. to reimburse NFA for travel and related expenses if
travel to a foreign jurisdiction is necessary.
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\10\ Many of these requirements are taken from NASD Rule 1090 or
CBOE Rule 3.4 regarding foreign members.
\11\ See CFTC Rule 30.10 (17 CFR 30.10) and Appendix C to that
rule. A list of the Part 30 jurisdictions can be found on the CFTC's
Web site at https://www.cftc.gov.
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Section (c) applies to all Members subject to minimum capital
requirements (i.e., FCMs and independent IBs). It requires them to
prepare financial and other required reports in English, using U.S.
dollars and U.S. accounting standards, and to maintain a general ledger
in English using U.S. dollars. Section (d) applies to all Members. That
section requires them to:
File documents with NFA in English;
Maintain English translations of foreign-language
promotional material;
Maintain required procedures in English;
Provide English translations of other documents when
requested by NFA; and
Ensure that an English-speaking individual who is
knowledgeable about the firm's business is available to assist NFA
during an audit.
2. Statutory Basis
The rule change is authorized by, and consistent with, section
15A(k) of the Act.\12\
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\12\ 15 U.S.C. 78o-3(k).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The rule change will not impose any burden on competition that is
not necessary or appropriate in furtherance of the purposes of the Act
and the CEA.\13\
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\13\ 7 U.S.C. 1.
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C. Self-Regulatory Organization's Statement of Comments on the Proposed
Rule Change Received from Members, Participants, or Others
NFA did not publish the rule change to the membership for comment.
NFA did not receive comment letters concerning the rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change became effective on January 5, 2006, upon
approval by the CFTC.\14\ Within 60 days of the date of effectiveness
of the proposed rule change, the Commission, after consultation with
the CFTC, may summarily abrogate the proposed rule change and require
that the proposed rule change be refiled in accordance with the
provisions of section 19(b)(1) of the Act.\15\
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\14\ See Confirmation of CFTC Approval, supra note 3.
\15\ 15 U.S.C. 78s(b)(1).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-NFA-2005-02 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-NFA-2005-02. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NFA. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File No. SR-NFA-2005-02 and should be submitted on or before February
27, 2006.
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\16\ 17 CFR 200.30-3(a)(73).
[[Page 6122]]
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
Nancy M. Morris,
Secretary.
[FR Doc. E6-1540 Filed 2-3-06; 8:45 am]
BILLING CODE 8010-01-P
