Definition of “Client” of a Commodity Trading Advisor, 9442-9446 [06-1745]
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Federal Register / Vol. 71, No. 37 / Friday, February 24, 2006 / Rules and Regulations
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Rulemaking Requirements
15 CFR Part 746
1. This rule has been determined to be
not significant for purposes of E.O.
12866.
2. Notwithstanding any other
provision of law, no person is required
to respond to, nor shall any person be
subject to a penalty for failure to comply
with a collection of information, subject
to the requirements of the Paperwork
Reduction Act, unless that collection of
information displays a currently valid
Office of Management and Budget
Control Number. This rule involves
collections of information subject to the
Paperwork Reduction Act of 1980 (44
U.S.C. 3501 et seq.). These collections
have been approved by Office of
Management and Budget under control
number 0694–0088, ‘‘Multi-Purpose
Application,’’ which carries a burden
hour estimate of 58 minutes for a
manual or electronic submission. BIS
believes that this rule will not
materially affect the burden imposed by
this collections.
3. This rule does not contain policies
with Federalism implications as that
term is defined under E.O. 13132.
4. The Department finds that there is
good cause under 5 U.S.C. 553(b)(B) to
waive the provisions of the
Administrative Procedure Act requiring
prior notice and the opportunity for
public comment because it is
unnecessary. The changes made by this
rule merely provide greater clarity by
including cross-references to
interrelated provisions of existing
regulations. In particular, the Syria
General Order, published in May of
2004, modified the regulatory treatment
of exports and reexports to Syria. This
rule inserts references to the General
Order into existing Syria specific
provisions of the EAR to ensure that the
public is aware of the existence of the
Syria General Order. Therefore because
the changes made by this rule are not
substantive, it is unnecessary to provide
notice and opportunity for public
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in effectiveness required by 5 U.S.C.
553(d) is not applicable because this
rule is not a substantive rule.
Because notice of proposed
rulemaking and opportunity for public
comment are not required to be given
for this rule under the Administrative
Procedure Act or by any other law, the
analytical requirements of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.) are not applicable.
Exports, Foreign trade.
I Accordingly, parts 742 and 746 of the
Export Administration Regulations (15
CFR parts 730—799) are amended as
follows:
List of Subjects
15 CFR Part 742
Exports, Terrorism.
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17 CFR Part 1
RIN 3038–AC20
PART 742—[AMENDED]
Definition of ‘‘Client’’ of a Commodity
Trading Advisor
I
1. The authority citation for part 742
continues to read as follows:
AGENCY:
Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; 18 U.S.C. 2510 et seq.;
22 U.S.C. 3201 et seq.; 42 U.S.C. 2139a; Sec.
901–911, Pub. L. 106–387; Sec. 221, Pub. L.
107–56; Sec 1503, Pub. L. 108–11,117 Stat.
559; E.O. 12058, 43 FR 20947, 3 CFR, 1978
Comp., p. 179; E.O. 12851, 58 FR 33181, 3
CFR, 1993 Comp., p. 608; E.O. 12938, 59 FR
59099, 3 CFR, 1994 Comp., p. 950; E.O.
13026, 61 FR 58767, 3 CFR, 1996 Comp., p.
228; E.O. 13222, 66 FR 44025, 3 CFR, 2001
Comp., p. 783; Presidential Determination
2003–23 of May 7, 2003, 68 FR 26459, May
16, 2003; Notice of August 2, 2005, 70 FR
45273 (August 5, 2005); Notice of October 25,
2005, 70 FR 62027 (October 27, 2005).
ACTION:
2. Section 742.9 is amended to add a
new paragraph (e) as follows:
I
§ 742.9
Anti-terrorism: Syria.
*
*
*
*
*
(e) General Order No. 2, Supplement
No. 1 to part 736 of the EAR, sets forth
special controls for exports and
reexports to Syria. General Order No. 2
supersedes the provisions of paragraphs
(a) through (d) of this section.
PART 746—[AMENDED]
3. The authority citation for part 746
continues to read as follows:
I
Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; 22 U.S.C. 287c; Sec 1503,
Pub. L. 108–11,117 Stat. 559; 22 U.S.C. 6004;
Sec. 901–911, Pub. L. 106–387; Sec. 221, Pub.
L. 107–56; E.O. 12854, 58 FR 36587, 3 CFR
1993 Comp., p. 614; E.O. 12918, 59 FR 28205,
3 CFR, 1994 Comp., p. 899; E.O. 13222, 3
CFR, 2001 Comp., p. 783; Presidential
Determination 2003–23 of May 7, 2003, 68
FR 26459, May 16, 2003; Notice of August 2,
2005, 70 FR 45273 (August 5, 2005).
4. New section 746.9 is added to read
as follows:
I
§ 746.9
Syria.
General Order No. 2, Supplement No.
1 to part 736 of the EAR, sets forth
special controls for exports and
reexports to Syria.
Dated: February 14, 2006.
Matthew S. Borman,
Deputy Assistant Secretary for Export
Administration.
[FR Doc.06–1709 Filed 2–23–06; 8:45 am]
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Commodity Futures Trading
Commission.
Final regulations.
SUMMARY: The Commodity Futures
Trading Commission (Commission) is
amending Regulation 1.3(bb) by adding
to that regulation a definition of the
term ‘‘client,’’ as it relates to commodity
trading advisors (CTAs). This
amendment clarifies inconsistencies in
the Commission’s regulations
concerning the advisees of CTAs, and it
reflects 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. The Commission
is also amending Regulation 1.3(bb) by
adding the term ‘‘derivatives transaction
execution facility’’ to the CTA definition
set forth in that regulation.
DATES:
Effective Date: March 27, 2006.
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
On September 28, 2005, the
Commission published for public
comment a proposed amendment to
Regulation 1.3(bb) (Proposal).1 That
amendment, which the Commission is
1 70 FR 56608. This Federal Register release
announcing the Proposal (Proposing Release) may
be accessed through the Commission’s Web site:
https://www.cftc.gov/files/foia/fedreg05/
foi050928a.pdf. In the Proposing Release, the
Commission provided a detailed explanation of the
proposed amendment to Regulation 1.3(bb).
Accordingly, the Commission encourages interested
persons to read the Proposing Release for a fuller
discussion of the purpose of the amendment to
Regulation 1.3(bb).
The Commission’s regulations are found at 17
CFR Ch. I (2005) and may be accessed at https://
www.gpoaccess.gov/ecfr.
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Federal Register / Vol. 71, No. 37 / Friday, February 24, 2006 / Rules and Regulations
adopting as proposed, defines the term
‘‘client’’ of a CTA.
Section 1a(6)(A) of the Commodity
Exchange Act (Act or CEA) 2 defines the
term ‘‘commodity trading advisor’’ to
mean any person who:
(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).
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Under the language of Section 1a(6)(A)
of the Act, the term ‘‘commodity trading
advisor’’ includes 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
authorization.3
Regulation 1.3(bb) contains
essentially the same definition of the
term ‘‘commodity trading advisor’’ as
that contained in Section 1a(6) of the
Act. However, neither the Act nor the
Commission’s regulations issued
thereunder define who the ‘‘others’’ are
that CTAs advise. Moreover, neither the
Act nor the regulations are consistent
when referring to these advisees. As
explained in more detail in the
Proposing Release,4 although most of
the relevant provisions refer solely to
‘‘clients,’’ a few provisions of the Act
and regulations refer to ‘‘clients and
subscribers.’’
The definition of the term ‘‘client’’ of
a CTA being adopted today clarifies
these inconsistencies. Specifically, the
amendment to Regulation 1.3(bb)
clarifies that, as used in the provisions
of the Act and the regulations relating
to CTAs, the term ‘‘client’’ refers to all
advisees of a CTA, including persons
who receive advice by subscribing to a
2 7 U.S.C. 1a(6) (2000). The Act may be accessed
at https://www.access.gpo.gov/uscode/title7/
chapter1_.html.
3 As noted in more detail in the Proposing
Release, 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. 70 FR
56608, 56609.
4 70 FR 56608, 56609 nn.5–6.
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newsletter or other information service.
A ‘‘subscriber,’’ as used in these
statutory provisions and regulations, is
one type of ‘‘client.’’ 5 In this regard, the
Commission notes that, as it stated in
the Proposing Release,6 the amendment
to Regulation 1.3(bb) clarifies that the
antifraud provisions of Section 4o of the
Act apply to all CTAs, and not just to
those who provide advice on a
personalized basis.
B. New Regulation 1.3(bb)(2)
As proposed and as adopted, new
Regulation 1.3(bb)(2) defines 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.
This new definition of ‘‘client’’ includes
clients to whom a CTA provides
personalized trading advice as well as
clients to whom a CTA provides
nonpersonalized trading advice. Such
nonpersonalized advice includes,
among other things, standardized advice
provided by newsletters, seminars,
tutorials, periodicals, computer
software, Internet websites, voicemail
recordings, emails, and facsimiles. The
definition also covers advice provided
over a period of time pursuant to a
subscription arrangement or on a onetime basis.
As the Commission noted in the
Proposing Release,7 because the
definition of the term ‘‘client’’ of a CTA
includes within its scope persons to
whom the CTA provides advice on
either a personalized or
nonpersonalized basis, new Regulation
1.3(bb)(2) makes clear that the antifraud
provisions of Section 4o of the Act
5 As noted in the Proposing Release, 70 FR 56608,
56609 n.8, and as discussed in more detail below,
the usual presumption that different terms in a
statute have separate meanings is rebutted as to the
terms ‘‘client’’ and ‘‘subscriber’’ in Section 4l(1) of
the Act. Consequently, the phrase ‘‘clients and
subscribers,’’ as used in the Act and in the
regulations, does not imply that ‘‘clients’’ and
‘‘subscribers’’ are two separate classes of advisees.
6 Id. at 56609.
7 Id. at 56609.
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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.8
C. Comments on the Proposal
The Commission received five
comment letters on the Proposal: 9 One
from the Association of the Bar of the
City of New York (Bar Association), one
from an attorney who represents certain
CTAs that provide commodity trading
advice on a nonpersonalized basis, and
three from CTAs. The Bar Association
wrote in support of the Proposal,
agreeing that the Commission should
eliminate inconsistencies in the
regulations concerning the advisees of
CTAs. It further agreed that the term
‘‘client’’ as used in the Act was not
intended to abridge the Commission’s
jurisdiction to proceed against fraud by
CTAs that provide advice on a
nonpersonalized basis.
The other commenters wrote in
opposition to the Proposal, with each
suggesting that the proposed definition
of ‘‘client’’ of a CTA might raise issues
under the First Amendment of the
United States Constitution.10 The
Commission disagrees, because the
definition of ‘‘client’’ does no more than
clarify that the manner in which advice
is provided, whether on a personalized
or nonpersonalized basis, does not affect
whether a person comes within the CTA
definition of Section 1a(6)(A) of the Act.
As proposed and as adopted, new
Regulation 1.3(bb)(2) does not impose
any registration obligation on those
CTAs that are currently eligible to claim
the registration exemption of Regulation
4.14(a)(9).11 Consequently, because this
87
U.S.C. 6m(1).
comment letters may be accessed through
the Commission’s Web site: https://www.cftc.gov/
foia/comment05/foi05-005_1.htm.
10 The First Amendment prohibits Congress from,
among other things, making any law abridging the
freedom of speech. U.S. Const. amend. I.
11 Regulation 4.14(a)(9) provides a registration
exemption for CTAs that do not engage in either of
the following activities: (1) Directing client
accounts; or (2) providing commodity trading
advice based on, or tailored to, the commodity
interest or cash market positions or other
circumstances or characteristics of particular
clients. The Commission adopted Regulation
4.14(a)(9) in response to several Federal district
court cases holding that the CTA registration
requirement, as applied to certain ‘‘publisher’’
CTAs, constitutes an unconstitutional prior
restraint on speech. Specifically, the Commission
adopted Regulation 4.14(a)(9) because of its belief
that ‘‘minimizing impact on speech, other than
false, deceptive or misleading speech, is a relevant
9 The
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new regulation does not require CTAs
that provide advice on a
nonpersonalized basis to register if they
are otherwise eligible to claim the
registration exemption of Regulation
4.14(a)(9), the Commission believes that
the regulation does not implicate the
First Amendment. By defining the term
‘‘client’’ of a CTA, the Commission is
merely clarifying its longstanding view
that all CTAs, regardless of whether
they provide personalized or
nonpersonalized advice, are subject to
the Commission’s antifraud authority.
The Commission does not believe that
the regulation of false, deceptive, or
misleading speech of CTAs—even of
those CTAs that provide advice on a
nonpersonalized basis—runs afoul of
the protections of the First
Amendment.12
In addition to raising First
Amendment concerns, one commenter
also suggested that the Commission
lacks authority to adopt the Proposal
because the amendment to Regulation
1.3(bb) would eliminate a substantive
distinction between the terms ‘‘client’’
and ‘‘subscriber’’ that the United States
Supreme Court recognized in Lowe v.
SEC.13 This commenter further
suggested that, because the Act and the
Commission’s regulations refer to
‘‘clients’’ and ‘‘subscribers,’’ Congress
must have intended those words to have
different meanings. Consequently,
according to the commenter, the
policy consideration in determining the
Commission’s regulatory approach toward CTAs
whose relationship with their clients is limited to
standardized advice through media such as
newsletters, prerecorded telephone newslines,
Internet Web sites, and non-customized computer
software.’’ 65 FR 12938, 12939 (March 10, 2000).
12 Indeed, the Commission may constitutionally
prohibit the dissemination of commercial speech
that is ‘‘false, deceptive, or misleading.’’ Zauderer
v. Office of Disciplinary Counsel, 471 U.S. 626, 638
(1985).
One commenter suggested that the proposed
definition of ‘‘client’’ would violate the First
Amendment because it would clarify that Section
4o of the Act covers fraud in connection with
nonpersonalized advice. According to this
commenter, Section 4o of the Act imposes fiduciary
standards and such standards cannot
constitutionally be imposed on providers of
impersonal advice. The premise of this argument
was rejected by the Court of Appeals in Commodity
Trend Serv., Inc. v. CFTC (CTS), 233 F.3d 981 (7th
Cir. 2000). The court held that Section 4o of the Act
‘‘effectuates the extant fiduciary duties of
personalized advisors * * * but does not impose
fiduciary obligations on impersonal advisors.’’ Id. at
990, see also 233 F.3d at 993–95 (discussing the
scope of Section 4o of the Act as applied to
impersonal CTAs and holding the provision
constitutional if properly applied). The Commission
agrees with the analysis of this issue in CTS and
finds it to be an adequate response to the
commenter’s concern.
13 472 U.S. 181 (1985). That case involved a
securities investment adviser and the application of
the Investment Advisers Act (IAA), 15 U.S.C. § 80b–
1 et seq., to his conduct.
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Commission does not have the authority
to amend Regulation 1.3(bb) to clarify
that a ‘‘subscriber’’ is one type of
‘‘client.’’
Both of these arguments were
considered and rejected by the United
States Court of Appeals for the Seventh
Circuit in Commodity Trend Service,
Inc. (CTS).14 As explained in the
Proposing Release,15 CTS deferred to the
Commission’s interpretation of Section
4o of the Act, finding that the
Commission’s position was a reasonable
interpretation of the statutory language
and that it appeared to effectuate
Congressional intent. In CTS, the court
held that the use of the term ‘‘client’’ in
Section 4o does not connote only a
personalized relationship. Instead, 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.’’ 16
According to CTS, the distinction
drawn by Lowe between the term
‘‘client’’ and the term ‘‘subscriber’’ is
not necessarily applicable to the CEA.
Looking at the broad exclusion from the
IAA for publishers, the Court in Lowe
held that, under the IAA, Congress
intended the term ‘‘client’’ to refer only
to a personalized relationship;
investment advisers providing advice on
a nonpersonalized basis are excluded
entirely from the scope of the IAA
because they generally fall within the
IAA’s broad exclusion for publishers.17
The CEA, on the other hand, does not
exclude all publishers from its scope.
Rather, the CEA expressly brings within
its scope certain advisors that provide
advice on a nonpersonalized basis—for
example, publishers of nonpersonalized
advice may come within the CTA
definition, provided that their advice is
not ‘‘solely incidental’’ to their
publishing business.18 According to the
court in CTS, if the use of the term
‘‘client’’ in Section 4o were construed as
removing from the scope of that
section’s antifraud provisions CTAs
who provide advice on a
nonpersonalized basis, certain of those
CTAs would come within the CTA
definition, but virtually none of the
Act’s provisions would apply to them.19
According to the CTS court, Congress
likely did not intend such an anomalous
result.20
14 CTS,
233 F.3d 981.
FR 56608, 56609.
16 CTS, 233 F.3d at 991.
17 Id. at 988.
18 See supra note 3.
19 CTS, 233 F.3d at 988–89.
20 Id. at 989.
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Nor does the Commission believe that
by using the terms ‘‘client’’ and
‘‘subscriber,’’ Congress intended
‘‘client’’ to refer only to CTAs that
provide advice on a personalized basis.
As noted by CTS,21 and as explained in
the Proposing Release,22 the usual
presumption that different terms in a
statute have separate meanings is
rebutted as to the terms ‘‘client’’ and
‘‘subscriber’’ by the language of Section
4l(1) of the Act, 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.’’
In light of the foregoing, the
Commission is adopting as proposed
Regulation 1.3(bb)(2).
D. Amended Regulation 1.3(bb)(1)
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.’’ 23 As
noted in the Proposing Release,24 the
Commission is adopting a conforming
change to the CTA definition contained
in Regulation 1.3(bb)(1).
II. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 25 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 regulations
on such entities in accordance with the
RFA.26
With respect to CTAs, the
Commission has previously stated that
it would evaluate within the context of
a particular 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.27 As explained in the
Proposing Release, the Commission
does not believe that Regulation
21 Id.
at 989–90.
FR 56608, 56609 n.8.
23 See Commodity Futures Modernization Act of
2000, Pub. L. 106–554, Appendix E, 114 Stat. 2763,
Section 123(a)(1)(A). The CFMA may be accessed
through the Commission’s Web site: https://
www.cftc.gov/files/ogc/ogchr5660.pdf.
24 70 FR 56608, 56609 n.4.
25 5 U.S.C. 601 et seq.
26 47 FR 18618 (April 30, 1982).
27 Id. at 18620.
22 70
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1.3(bb)(2) will have a significant impact
on affected CTAs. This is because the
only burden imposed by the amendment
is the obligation to comply with the
antifraud provisions of Section 4o of the
Act. Assuming arguendo, however, that
compliance with Section 4o does
constitute a significant burden, the
burden is neither new nor additional,
because new Regulation 1.3(bb)(2) is
consistent with the Commission’s
longstanding interpretation of Section
4o as applicable to all CTAs.
The Commission did not receive any
public comments on its analysis of the
application of the RFA to proposed
Regulation 1.3(bb)(2).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA)28 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.
This rulemaking does not require a new
collection of information on the part of
any entities subject to it. Accordingly,
for purposes of the PRA, the
Commission certified that the proposed
amendment did not impose any new
reporting or recordkeeping
requirements.
C. Cost-Benefit Analysis
Section 15(a) of the Act 29 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.
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
regulation 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 Commission has evaluated the
28 44
29 7
U.S.C. 3501 et seq.
U.S.C. 19(a).
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costs and benefits of new Regulation
1.3(bb)(2) in light of the specific
considerations identified in Section
15(a) of the Act as follows:
I
1. Protection of Market Participants and
the Public
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9445
Because Regulation 1.3(bb)(2)
expressly brings all CTAs within the
purview of the antifraud provisions of
Section 4o of the Act, the regulation will
enhance the Commission’s ability to
protect market participants and the
public.
2. Efficiency and Competition
Regulation 1.3(bb)(2) will 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
Regulation 1.3(bb)(2) will 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
Regulation 1.3(bb)(2) will 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
Regulation 1.3(bb)(2) will have no
effect, from the standpoint of imposing
costs or creating benefits, on any other
public interest considerations.
Accordingly, after considering these
factors, the Commission has determined
to adopt the amendments to Regulation
1.3(bb) set forth below.
List of Subjects in 17 CFR Part 1
17 CFR Part Brokers, Commodity
futures, Consumer protection, Reporting
and recordkeeping requirements.
For the reasons presented above, the
Commission is amending 17 CFR part 1
as follows:
I
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
I
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).
PO 00000
Frm 00019
Fmt 4700
Sfmt 4700
2. Section 1.3 is amended by revising
paragraph (bb)(1) and adding new
paragraph (bb)(2) as follows:
§ 1.3
Definitions.
*
*
*
*
(bb)(1) Commodity trading advisor.
This term means any person who, for
compensation or profit, engages in the
business of advising others, either
directly or through publications,
writings or electronic media, as to the
value of or the advisability of trading in
any contract of sale of a commodity for
future delivery made or to be made on
or subject to the rules of a contract
market 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 who, for compensation or profit, and
as part of a regular business, issues or
promulgates analyses or reports
concerning any of the foregoing; but
such term does not include (i) Any bank
or trust company or any person acting
as an employee thereof, (ii) any news
reporter, news columnist, or news editor
of the print or electronic media, or any
lawyer, accountant, or teacher, (iii) any
floor broker or futures commission
merchant, (iv) the publisher or producer
of any print or electronic data of general
and regular dissemination, including its
employees, (v) the named fiduciary, or
trustee, of any defined benefit plan
which is subject to the provisions of the
Employee Retirement Income Security
Act of 1974, or any fiduciary whose sole
business is to advise that plan, (vi) any
contract market or derivatives
transaction execution facility, and (vii)
such other persons not within the intent
of this definition as the Commission
may specify by rule, regulation or order:
Provided, That the furnishing of such
services by the foregoing persons is
solely incidental to the conduct of their
business or profession: Provided further,
That the Commission, by rule or
regulation, may include within this
definition, any person advising as to the
value of commodities or issuing reports
or analyses concerning commodities, if
the Commission determines that such
rule or regulation will effectuate the
purposes of this provision.
(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
E:\FR\FM\24FER1.SGM
24FER1
9446
Federal Register / Vol. 71, No. 37 / Friday, February 24, 2006 / Rules and Regulations
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 February 21,
2006 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06–1745 Filed 2–23–06; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF ENERGY
Federal Energy Regulatory
Commission
I. Background
2. On November 25, 2003, the
Commission issued a Final Rule
adopting Standards of Conduct for
Transmission Providers (Order No.
2004).2 Under Order No. 2004, the
Standards of Conduct govern the
relationships between Transmission
Providers 3 and all of their Marketing
Affiliates 4 and Energy Affiliates.5 The
18 CFR Part 358
[Docket No. RM01–10–005]
Interpretive Order Relating to the
Standards of Conduct
Issued February 16, 2006.
Federal Energy Regulatory
Commission, DOE.
ACTION: Interpretive order.
AGENCY:
SUMMARY: The Federal Energy
Regulatory Commission (Commission) is
issuing this Order to clarify that
Transmission Providers may
communicate with affiliated nuclear
power plants regarding certain matters
related to the safety and reliability of the
transmission system on the nuclear
power plants, in order to comply with
requirements of the Nuclear Regulatory
Commission.
DATES: The interpretive order will
become effective February 24, 2006.
Comments are due March 20, 2006.
Reply comments are due April 19, 2006.
FOR FURTHER INFORMATION CONTACT:
Demetra Anas, Office of the Market
Oversight and Investigations, Federal
Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426,
(202) 502–8178,
Demetra.Anas@ferc.gov.
Before
Commissioners: Joseph T. Kelliher,
Chairman; Nora Mead Brownell, and
Suedeen G. Kelly.
Standards of Conduct for
Transmission Providers.
wwhite on PROD1PC61 with RULES
SUPPLEMENTARY INFORMATION:
VerDate Aug<31>2005
18:05 Feb 23, 2006
Jkt 208001
1. The Federal Energy Regulatory
Commission (Commission) clarifies that
sections 358.5(a) and (b) of the
Commission’s regulations, 18 CFR
358.5(a) and (b) (2005), do not prohibit
a Transmission Provider and its
affiliated nuclear power plant from
engaging in necessary communications
related to the safety and reliability of the
transmission system or the nuclear
power plant, including information
relating to the loss of or potential loss
of transmission lines that provide offsite power to the nuclear power plant
regardless of ownership of those lines.
The Commission is issuing this
Interpretive Order to clarify that
Transmission Providers may
communicate with affiliated and nonaffiliated nuclear power plants to enable
the nuclear power plants to comply
with the requirements of the Nuclear
Regulatory Commission (NRC) as
described in the NRC’s February 1, 2006
Generic Letter 2006–002, Grid
Reliability and the Impact on Plant Risk
and the Operability of Offsite Power
(Generic Letter).1
1 Nuclear Regulatory Commission’s Generic Letter
2006–002, Grid Reliability and the Impact on Plant
Risk and the Operability of Offsite Power. February
1, 2006. OMB Control No.: 3150–0011.
2 Standards of Conduct for Transmission
Providers, Order No. 2004, FERC Stats. & Regs.,
Regulations Preambles ¶ 31,155 (2003), order on
reh’g, Order No. 2004–A, III FERC Stats. & Regs.
¶ 31,161 (2004), 107 FERC ¶ 61,032 (2004), order on
reh’g, Order No. 2004–B, III FERC Stats. & Regs.
¶ 31,166 (2004), 108 FERC ¶ 61,118 (2004), order on
reh’g, Order No. 2004–C, 109 FERC ¶ 61,325 (2004),
order on reh’g, Order No. 2004–D, 110 FERC
¶ 61,320 (2005), appeal docketed sub nom.,
National Gas Fuel Supply Corporation v. FERC, No.
04–1183 (D.C. Cir. June 9, 2004).
3 A Transmission Provider means: (1) Any public
utility that owns, operates or controls facilities used
for the transmission of electric energy in interstate
commerce; or (2) Any interstate natural gas pipeline
that transports gas for others pursuant to subpart A
of part 157 or subparts B or G of part 284 of this
chapter. A Transmission Provider does not include
a natural gas storage provider authorized to charge
market-based rates that is not interconnected with
the jurisdictional facilities of any affiliated
interstate natural gas pipeline, has no exclusive
franchise area, no captive ratepayers and no market
power. 18 CFR 358.3(a) (2005).
4 A Marketing Affiliate means an affiliate as that
term is defined in section 358.3(b) or a unit that
engages in marketing, sales or brokering activities
as those terms are defined at section 358.3(e). 18
CFR 358.3(k) (2005).
5 An Energy Affiliate means an affiliate of a
Transmission Provider that:
PO 00000
Frm 00020
Fmt 4700
Sfmt 4700
Standards of Conduct also contain
various information sharing
prohibitions to help ensure that
Transmission Providers do not use their
access to information about
transmission to unfairly benefit their
own or their affiliates’ sales to the
detriment of competitive markets.
Absent one of the exceptions articulated
in section 358.5, if a Transmission
Provider discloses transmission
information to its Marketing or Energy
Affiliate, the Transmission Provider is
required to immediately post that
information on its OASIS or Internet
Web site.6
3. On January 9, 2006, at the request
of the NRC, FERC Staff participated in
a public meeting/workshop of the NRC
regarding its then-proposed Generic
Letter concerning Grid Reliability and
the Operability of Offsite Power. During
that discussion, participants expressed
concern that the Commission’s
Standards of Conduct appear to restrict
communications between Transmission
Providers and their affiliated nuclear
power plants, which are Energy
Affiliates, thereby limiting the ability of
the nuclear power plants to comply
with all the requirements of the NRC.
The participants also expressed concern
that the information sharing
prohibitions of the Standards of
Conduct would prevent the nuclear
power plants from answering all the
questions posed in the NRC’s draft
Generic Letter.
4. The NRC’s Generic Letter
information request focuses on four
areas: (1) Use of protocols,
communications and coordination
procedures between the nuclear power
plant and the transmission system
operators (TSO), independent system
operator (ISO) or reliability coordinator/
authority (RC), including the use of realtime contingency analysis or other
programs to monitor the operability of
(1) Engages in or is involved in transmission
transactions in U.S. energy or transmission markets;
or
(2) Manages or controls transmission capacity of
a Transmission Provider in U.S. energy or
transmission markets; or
(3) Buys, sells, trades or administers natural gas
or electric energy in U.S. energy or transmission
markets; or
(4) Engages in financial transactions relating to
the sale or transmission of natural gas or electric
energy in U.S. energy or transmission markets.
(5) An LDC division of an electric public utility
Transmission Provider shall be considered the
functional equivalent of an Energy Affiliate, unless
it qualifies for the exemption in § 358.3(d)(6)(v). 18
CFR 358.3(d) (2005). Affiliates that are not Energy
Affiliates are described at 18 CFR 358.3(d)(6)(i)–(vi)
(2005).
6 The information sharing prohibitions of the
Standards of Conduct are found at 18 CFR 358.5(a)
and (b).
E:\FR\FM\24FER1.SGM
24FER1
]]>Agencies
[Federal Register Volume 71, Number 37 (Friday, February 24, 2006)]
[Rules and Regulations]
[Pages 9442-9446]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1745]
=======================================================================
-----------------------------------------------------------------------
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: Final regulations.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission) is
amending Regulation 1.3(bb) by adding to that regulation a definition
of the term ``client,'' as it relates to commodity trading advisors
(CTAs). This amendment clarifies inconsistencies in the Commission's
regulations concerning the advisees of CTAs, and it reflects 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. The Commission is also amending Regulation
1.3(bb) by adding the term ``derivatives transaction execution
facility'' to the CTA definition set forth in that regulation.
DATES: Effective Date: March 27, 2006.
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
On September 28, 2005, the Commission published for public comment
a proposed amendment to Regulation 1.3(bb) (Proposal).\1\ That
amendment, which the Commission is
[[Page 9443]]
adopting as proposed, defines the term ``client'' of a CTA.
---------------------------------------------------------------------------
\1\ 70 FR 56608. This Federal Register release announcing the
Proposal (Proposing Release) may be accessed through the
Commission's Web site: https://www.cftc.gov/files/foia/fedreg05/
foi050928a.pdf. In the Proposing Release, the Commission provided a
detailed explanation of the proposed amendment to Regulation
1.3(bb). Accordingly, the Commission encourages interested persons
to read the Proposing Release for a fuller discussion of the purpose
of the amendment to Regulation 1.3(bb).
The Commission's regulations are found at 17 CFR Ch. I (2005)
and may be accessed at https://www.gpoaccess.gov/ecfr.
---------------------------------------------------------------------------
Section 1a(6)(A) of the Commodity Exchange Act (Act or CEA) \2\
defines the term ``commodity trading advisor'' to mean any person who:
---------------------------------------------------------------------------
\2\ 7 U.S.C. 1a(6) (2000). The Act may be accessed at https://
www.access.gpo.gov/uscode/title7/chapter1--.html.
(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'' includes 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 authorization.\3\
---------------------------------------------------------------------------
\3\ As noted in more detail in the Proposing Release, 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. 70 FR 56608, 56609.
---------------------------------------------------------------------------
Regulation 1.3(bb) contains essentially the same definition of the
term ``commodity trading advisor'' as that contained in Section 1a(6)
of the Act. However, neither the Act nor the Commission's regulations
issued thereunder define who the ``others'' are that CTAs advise.
Moreover, neither the Act nor the regulations are consistent when
referring to these advisees. As explained in more detail in the
Proposing Release,\4\ although most of the relevant provisions refer
solely to ``clients,'' a few provisions of the Act and regulations
refer to ``clients and subscribers.''
---------------------------------------------------------------------------
\4\ 70 FR 56608, 56609 nn.5-6.
---------------------------------------------------------------------------
The definition of the term ``client'' of a CTA being adopted today
clarifies these inconsistencies. Specifically, the amendment to
Regulation 1.3(bb) clarifies that, as used in the provisions of the Act
and the regulations relating to CTAs, the term ``client'' refers to all
advisees of a CTA, including persons who receive advice by subscribing
to a newsletter or other information service. A ``subscriber,'' as used
in these statutory provisions and regulations, is one type of
``client.'' \5\ In this regard, the Commission notes that, as it stated
in the Proposing Release,\6\ the amendment to Regulation 1.3(bb)
clarifies that the antifraud provisions of Section 4o of the Act apply
to all CTAs, and not just to those who provide advice on a personalized
basis.
---------------------------------------------------------------------------
\5\ As noted in the Proposing Release, 70 FR 56608, 56609 n.8,
and as discussed in more detail below, the usual presumption that
different terms in a statute have separate meanings is rebutted as
to the terms ``client'' and ``subscriber'' in Section 4l(1) of the
Act. Consequently, the phrase ``clients and subscribers,'' as used
in the Act and in the regulations, does not imply that ``clients''
and ``subscribers'' are two separate classes of advisees.
\6\ Id. at 56609.
---------------------------------------------------------------------------
B. New Regulation 1.3(bb)(2)
As proposed and as adopted, new Regulation 1.3(bb)(2) defines 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.
This new definition of ``client'' includes clients to whom a CTA
provides personalized trading advice as well as clients to whom a CTA
provides nonpersonalized trading advice. Such nonpersonalized advice
includes, among other things, standardized advice provided by
newsletters, seminars, tutorials, periodicals, computer software,
Internet websites, voicemail recordings, emails, and facsimiles. The
definition also covers advice provided over a period of time pursuant
to a subscription arrangement or on a one-time basis.
As the Commission noted in the Proposing Release,\7\ because the
definition of the term ``client'' of a CTA includes within its scope
persons to whom the CTA provides advice on either a personalized or
nonpersonalized basis, new Regulation 1.3(bb)(2) makes 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.\8\
---------------------------------------------------------------------------
\7\ Id. at 56609.
\8\ 7 U.S.C. 6m(1).
---------------------------------------------------------------------------
C. Comments on the Proposal
The Commission received five comment letters on the Proposal: \9\
One from the Association of the Bar of the City of New York (Bar
Association), one from an attorney who represents certain CTAs that
provide commodity trading advice on a nonpersonalized basis, and three
from CTAs. The Bar Association wrote in support of the Proposal,
agreeing that the Commission should eliminate inconsistencies in the
regulations concerning the advisees of CTAs. It further agreed that the
term ``client'' as used in the Act was not intended to abridge the
Commission's jurisdiction to proceed against fraud by CTAs that provide
advice on a nonpersonalized basis.
---------------------------------------------------------------------------
\9\ The comment letters may be accessed through the Commission's
Web site: https://www.cftc.gov/foia/comment05/foi05-005_1.htm.
---------------------------------------------------------------------------
The other commenters wrote in opposition to the Proposal, with each
suggesting that the proposed definition of ``client'' of a CTA might
raise issues under the First Amendment of the United States
Constitution.\10\ The Commission disagrees, because the definition of
``client'' does no more than clarify that the manner in which advice is
provided, whether on a personalized or nonpersonalized basis, does not
affect whether a person comes within the CTA definition of Section
1a(6)(A) of the Act. As proposed and as adopted, new Regulation
1.3(bb)(2) does not impose any registration obligation on those CTAs
that are currently eligible to claim the registration exemption of
Regulation 4.14(a)(9).\11\ Consequently, because this
[[Page 9444]]
new regulation does not require CTAs that provide advice on a
nonpersonalized basis to register if they are otherwise eligible to
claim the registration exemption of Regulation 4.14(a)(9), the
Commission believes that the regulation does not implicate the First
Amendment. By defining the term ``client'' of a CTA, the Commission is
merely clarifying its longstanding view that all CTAs, regardless of
whether they provide personalized or nonpersonalized advice, are
subject to the Commission's antifraud authority. The Commission does
not believe that the regulation of false, deceptive, or misleading
speech of CTAs--even of those CTAs that provide advice on a
nonpersonalized basis--runs afoul of the protections of the First
Amendment.\12\
---------------------------------------------------------------------------
\10\ The First Amendment prohibits Congress from, among other
things, making any law abridging the freedom of speech. U.S. Const.
amend. I.
\11\ Regulation 4.14(a)(9) provides a registration exemption for
CTAs that do not engage in either of the following activities: (1)
Directing client accounts; or (2) providing commodity trading advice
based on, or tailored to, the commodity interest or cash market
positions or other circumstances or characteristics of particular
clients. The Commission adopted Regulation 4.14(a)(9) in response to
several Federal district court cases holding that the CTA
registration requirement, as applied to certain ``publisher'' CTAs,
constitutes an unconstitutional prior restraint on speech.
Specifically, the Commission adopted Regulation 4.14(a)(9) because
of its belief that ``minimizing impact on speech, other than false,
deceptive or misleading speech, is a relevant policy consideration
in determining the Commission's regulatory approach toward CTAs
whose relationship with their clients is limited to standardized
advice through media such as newsletters, prerecorded telephone
newslines, Internet Web sites, and non-customized computer
software.'' 65 FR 12938, 12939 (March 10, 2000).
\12\ Indeed, the Commission may constitutionally prohibit the
dissemination of commercial speech that is ``false, deceptive, or
misleading.'' Zauderer v. Office of Disciplinary Counsel, 471 U.S.
626, 638 (1985).
One commenter suggested that the proposed definition of
``client'' would violate the First Amendment because it would
clarify that Section 4o of the Act covers fraud in connection with
nonpersonalized advice. According to this commenter, Section 4o of
the Act imposes fiduciary standards and such standards cannot
constitutionally be imposed on providers of impersonal advice. The
premise of this argument was rejected by the Court of Appeals in
Commodity Trend Serv., Inc. v. CFTC (CTS), 233 F.3d 981 (7th Cir.
2000). The court held that Section 4o of the Act ``effectuates the
extant fiduciary duties of personalized advisors * * * but does not
impose fiduciary obligations on impersonal advisors.'' Id. at 990,
see also 233 F.3d at 993-95 (discussing the scope of Section 4o of
the Act as applied to impersonal CTAs and holding the provision
constitutional if properly applied). The Commission agrees with the
analysis of this issue in CTS and finds it to be an adequate
response to the commenter's concern.
---------------------------------------------------------------------------
In addition to raising First Amendment concerns, one commenter also
suggested that the Commission lacks authority to adopt the Proposal
because the amendment to Regulation 1.3(bb) would eliminate a
substantive distinction between the terms ``client'' and ``subscriber''
that the United States Supreme Court recognized in Lowe v. SEC.\13\
This commenter further suggested that, because the Act and the
Commission's regulations refer to ``clients'' and ``subscribers,''
Congress must have intended those words to have different meanings.
Consequently, according to the commenter, the Commission does not have
the authority to amend Regulation 1.3(bb) to clarify that a
``subscriber'' is one type of ``client.''
---------------------------------------------------------------------------
\13\ 472 U.S. 181 (1985). That case involved a securities
investment adviser and the application of the Investment Advisers
Act (IAA), 15 U.S.C. Sec. 80b-1 et seq., to his conduct.
---------------------------------------------------------------------------
Both of these arguments were considered and rejected by the United
States Court of Appeals for the Seventh Circuit in Commodity Trend
Service, Inc. (CTS).\14\ As explained in the Proposing Release,\15\ CTS
deferred to the Commission's interpretation of Section 4o of the Act,
finding that the Commission's position was a reasonable interpretation
of the statutory language and that it appeared to effectuate
Congressional intent. In CTS, the court held that the use of the term
``client'' in Section 4o does not connote only a personalized
relationship. Instead, 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.'' \16\
---------------------------------------------------------------------------
\14\ CTS, 233 F.3d 981.
\15\ 70 FR 56608, 56609.
\16\ CTS, 233 F.3d at 991.
---------------------------------------------------------------------------
According to CTS, the distinction drawn by Lowe between the term
``client'' and the term ``subscriber'' is not necessarily applicable to
the CEA. Looking at the broad exclusion from the IAA for publishers,
the Court in Lowe held that, under the IAA, Congress intended the term
``client'' to refer only to a personalized relationship; investment
advisers providing advice on a nonpersonalized basis are excluded
entirely from the scope of the IAA because they generally fall within
the IAA's broad exclusion for publishers.\17\ The CEA, on the other
hand, does not exclude all publishers from its scope. Rather, the CEA
expressly brings within its scope certain advisors that provide advice
on a nonpersonalized basis--for example, publishers of nonpersonalized
advice may come within the CTA definition, provided that their advice
is not ``solely incidental'' to their publishing business.\18\
According to the court in CTS, if the use of the term ``client'' in
Section 4o were construed as removing from the scope of that section's
antifraud provisions CTAs who provide advice on a nonpersonalized
basis, certain of those CTAs would come within the CTA definition, but
virtually none of the Act's provisions would apply to them.\19\
According to the CTS court, Congress likely did not intend such an
anomalous result.\20\
---------------------------------------------------------------------------
\17\ Id. at 988.
\18\ See supra note 3.
\19\ CTS, 233 F.3d at 988-89.
\20\ Id. at 989.
---------------------------------------------------------------------------
Nor does the Commission believe that by using the terms ``client''
and ``subscriber,'' Congress intended ``client'' to refer only to CTAs
that provide advice on a personalized basis. As noted by CTS,\21\ and
as explained in the Proposing Release,\22\ the usual presumption that
different terms in a statute have separate meanings is rebutted as to
the terms ``client'' and ``subscriber'' by the language of Section
4l(1) of the Act, 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.''
---------------------------------------------------------------------------
\21\ Id. at 989-90.
\22\ 70 FR 56608, 56609 n.8.
---------------------------------------------------------------------------
In light of the foregoing, the Commission is adopting as proposed
Regulation 1.3(bb)(2).
D. Amended Regulation 1.3(bb)(1)
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.'' \23\ As noted in the Proposing
Release,\24\ the Commission is adopting a conforming change to the CTA
definition contained in Regulation 1.3(bb)(1).
---------------------------------------------------------------------------
\23\ See Commodity Futures Modernization Act of 2000, Pub. L.
106-554, Appendix E, 114 Stat. 2763, Section 123(a)(1)(A). The CFMA
may be accessed through the Commission's Web site: https://
www.cftc.gov/files/ogc/ogchr5660.pdf.
\24\ 70 FR 56608, 56609 n.4.
---------------------------------------------------------------------------
II. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \25\ 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 regulations on such entities in accordance
with the RFA.\26\
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\25\ 5 U.S.C. 601 et seq.
\26\ 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 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.\27\ As explained in
the Proposing Release, the Commission does not believe that Regulation
[[Page 9445]]
1.3(bb)(2) will have a significant impact on affected CTAs. This is
because the only burden imposed by the amendment is the obligation to
comply with the antifraud provisions of Section 4o of the Act. Assuming
arguendo, however, that compliance with Section 4o does constitute a
significant burden, the burden is neither new nor additional, because
new Regulation 1.3(bb)(2) is consistent with the Commission's
longstanding interpretation of Section 4o as applicable to all CTAs.
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\27\ Id. at 18620.
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The Commission did not receive any public comments on its analysis
of the application of the RFA to proposed Regulation 1.3(bb)(2).
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA)\28\ 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. This rulemaking does not require a
new collection of information on the part of any entities subject to
it. Accordingly, for purposes of the PRA, the Commission certified that
the proposed amendment did not impose any new reporting or
recordkeeping requirements.
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\28\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Analysis
Section 15(a) of the Act \29\ 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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\29\ 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 regulation 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 Commission has evaluated the costs
and benefits of new Regulation 1.3(bb)(2) in light of the specific
considerations identified in Section 15(a) of the Act as follows:
1. Protection of Market Participants and the Public
Because Regulation 1.3(bb)(2) expressly brings all CTAs within the
purview of the antifraud provisions of Section 4o of the Act, the
regulation will enhance the Commission's ability to protect market
participants and the public.
2. Efficiency and Competition
Regulation 1.3(bb)(2) will 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
Regulation 1.3(bb)(2) will 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
Regulation 1.3(bb)(2) will 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
Regulation 1.3(bb)(2) will have no effect, from the standpoint of
imposing costs or creating benefits, on any other public interest
considerations.
Accordingly, after considering these factors, the Commission has
determined to adopt the amendments to Regulation 1.3(bb) set forth
below.
List of Subjects in 17 CFR Part 1
17 CFR Part Brokers, Commodity futures, Consumer protection,
Reporting and recordkeeping requirements.
0
For the reasons presented above, the Commission is amending 17 CFR part
1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
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).
0
2. Section 1.3 is amended by revising paragraph (bb)(1) and adding new
paragraph (bb)(2) as follows:
Sec. 1.3 Definitions.
* * * * *
(bb)(1) Commodity trading advisor. This term means any person who,
for compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic media,
as to the value of or the advisability of trading in any contract of
sale of a commodity for future delivery made or to be made on or
subject to the rules of a contract market 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 who, for compensation or profit, and as part of a regular
business, issues or promulgates analyses or reports concerning any of
the foregoing; but such term does not include (i) Any bank or trust
company or any person acting as an employee thereof, (ii) any news
reporter, news columnist, or news editor of the print or electronic
media, or any lawyer, accountant, or teacher, (iii) any floor broker or
futures commission merchant, (iv) the publisher or producer of any
print or electronic data of general and regular dissemination,
including its employees, (v) the named fiduciary, or trustee, of any
defined benefit plan which is subject to the provisions of the Employee
Retirement Income Security Act of 1974, or any fiduciary whose sole
business is to advise that plan, (vi) any contract market or
derivatives transaction execution facility, and (vii) such other
persons not within the intent of this definition as the Commission may
specify by rule, regulation or order: Provided, That the furnishing of
such services by the foregoing persons is solely incidental to the
conduct of their business or profession: Provided further, That the
Commission, by rule or regulation, may include within this definition,
any person advising as to the value of commodities or issuing reports
or analyses concerning commodities, if the Commission determines that
such rule or regulation will effectuate the purposes of this provision.
(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
[[Page 9446]]
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 February 21, 2006 by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06-1745 Filed 2-23-06; 8:45 am]
BILLING CODE 6351-01-P
