70 FR 187 pgs. 56608-56611 - Definition of “Client” of a Commodity Trading Advisor
Type: PRORULEVolume: 70Number: 187Pages: 56608 - 56611
FR document: [FR Doc. 05-19323 Filed 9-27-05; 8:45 am]
Agency: Commodity Futures Trading Commission
Official PDF Version: PDF Version
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AC20
Definition of "Client" of a Commodity Trading Advisor
AGENCY:
Commodity Futures Trading Commission.
ACTION:
Proposed rules.
SUMMARY:
The Commodity Futures Trading Commission (Commission or CFTC) isproposing to amend Rule 1.3(bb) by adding to that rule a definition of the term "client," as itrelates to commodity trading advisors (CTAs) (Proposal). This would clarify inconsistencies inthe Commission's regulations concerning the advisees of CTAs. The Proposal would also reflectthe Commission's longstanding view that its antifraud authority extends to all CTAs, irrespectiveof whether they provide advice on a personalized or nonpersonalized basis.
DATES:
Comments must be received on or before November 28, 2005.
ADDRESSES:
Comments on the Proposal should be sent to Jean A. Webb, Secretary,Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,Washington, DC 20581. Comments may be sent by facsimile transmission to (202) 418-5528, orby e-mail to secretary@cftc.gov . Reference should be made to "Proposed Rule Regarding the Definition of 'Client' of a Commodity Trading Advisor." Comments may also be submitted byconnecting to the Federal eRulemaking Portal at http://www.regulations.gov and following thecomment submission instructions.
FOR FURTHER INFORMATION CONTACT:
Barbara S. Gold, Associate Director, orR. Stephen Painter, Jr., Staff Attorney, Division of Clearing and Intermediary Oversight,Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,Washington, DC 20581, telephone number: (202) 418-5450 or (202) 418-5416, respectively;facsimile number: (202) 418-5528; and electronic mail: bgold@cftc.gov or spainter@cftc.gov ,respectively.
SUPPLEMENTARY INFORMATION:
I. The Proposal
A. Background
Section 1a(6)(A) of the Commodity Exchange Act (Act)1defines the term "commodity trading advisor" to mean any person who:
Footnotes:
1 7 U.S.C. 1a(6) (2000). The Act and the Commission's regulations issued thereunder canbe accessed at http://www.access.gpo.gov/uscode/title7/chapter1_.html and http://www.gpoaccess.gov/ecfr , respectively.
(i) For compensation or profit, engages in the business of advisingothers, either directly or through publications, writings, orelectronic media, as to the value of or the advisability of trading in-
(I) Any contract of sale of a commodity for futuredelivery made or to be made on or subject to therules 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 theactivities referred to in clause (i).
Under the language of Section 1a(6)(A) of the Act, the term "commodity trading advisor" caninclude advisors who provide nonpersonalized advice, such as publishers of advisory newslettersor Web sites, as well as advisors who provide advice tailored to the needs of particular personsand advisors who direct other persons' trading pursuant to a power of attorney or other written authorization. Section 1a(6)(B) of the Act excludes certain persons from the CTA definitionwhere, as provided for in Section 1a(6)(C) of the Act, their furnishing of advice with respect totrading in commodity futures and options is solely incidental to the conduct of their business orprofession.2
Footnotes:
2 These excluded persons include, among others, teachers and publishers. In this regard,the Commission notes that, for a teacher or publisher to claim the exclusion from the CTAdefinition in Section 1a(6)(B) of the Act, the trading advice activity may not be the sole teachingor publishing activity, but instead must be solely incidental to the teacher's or publisher's otherteaching and publishing activities. See e.g., In the Matter of Armstrong, et al. , [1992-1994Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,657 (CFTC Feb. 8, 1993) (holding thatpublishers of standardized advice are not excluded from the definition of CTA where publicationis "largely devoted to advice about trading commodity futures or options contracts").
Rule 1.3(bb)3contains essentially the same definition of the term "commodity tradingadvisor" as that contained in section 1a(6) of the Act.4However, neither the Act nor theCommission's regulations issued thereunder define who the "others" are that are advised byCTAs. Moreover, neither the Act nor the regulations are consistent when referring to theseadvisees. Although most of the relevant provisions refer solely to "clients,"5a few of theprovisions refer to "clients and subscribers."6The Proposal is intended to clarify theseinconsistencies.7Specifically, the Proposal is intended to clarify that, as used in provisions ofthe Act and the regulations relating to CTAs, the term "client" refers to all customers of a CTA,including persons who receive advice by subscribing to a newsletter or other information service.A "subscriber," then, as used in these statutory provisions and rules, is one type of "client."8
Footnotes:
3 Commission rules cited to herein are found at 17 CFR Ch. I (2005).
4 The Commodity Futures Modernization Act of 2000 (CFMA) amended the statutorydefinition of "commodity trading advisor" to take account of the new type of trading facilityknown as a "derivatives transaction execution facility." See Commodity Futures ModernizationAct of 2000, Pub. L. 106-554, Appendix E, 114 Stat. 2763, Section 123(a)(1)(A). TheCommission intends to make a conforming change to its rules in connection with final action onthe Proposal. The CFMA can be accessed through the Commission's Web site: http://www.cftc.gov/files/ogc/ogchr5660.pdf .
5 The Act refers solely to "clients" of CTAs in, for example, Section 4k(3)(i), 7 U.S.C.6k(3)(i) (registration of persons associated with CTAs), and 4 o (1)(A) and (B), 7 U.S.C. 6 o (1)(A)and (B) (antifraud provisions applicable to CTAs). The regulations refer solely to "clients" ofCTAs in, for example, Rules 4.30 (prohibited activities of CTAs) and 4.41(a) (advertising byCTAs).
6 For example, Section 4n(3)(A) of the Act, 7 U.S.C. 6n(3)(A), and Rule 4.33(recordkeeping requirements for CTAs) refer to "clients" and "subscribers" of CTAs.
The Act also refers to "subscribers" other than advisees of CTAs, but these provisions arenot relevant for the purposes of the Proposal. See , e.g. , Section 1a(1)(C) of the Act, 7 U.S.C.1a(1)(C) (definition of alternative trading system) and Section 5f(b) of the Act, 7 U.S.C. 7b-1(b) (designation of securities exchanges and associations as contract markets).
7 When Congress originally defined the term "commodity trading advisor" in 1974, thedefinition included any person providing trading advice "either directly or through publicationsor writings." With the advent of various electronic media, Congress expanded the CTAdefinition in 1982 to include "publications, writings or electronic media ." Pub. L. 97-444,96 Stat. 2294, Sec. 201 (Jan. 11, 1983) (emphasis added). Since 1982, these electronic mediahave proliferated, now including the Internet, email, and any number of software programsdeveloped by CTAs. By defining "client" of a CTA using the terms of the statutory CTAdefinition, the Commission intends to update the scope of that term to include subscribers to, andother advisees of, the various electronic or print media now available.
8 The usual presumption that different terms in a statute have separate meanings is rebuttedas to the terms "client" and "subscriber" in the provisions of the Act regulating CTAs, by thelanguage of the introductory provision, Section 4 l (1), which lists "subscriptions" as one of the"arrangements with clients" entered into by CTAs. This language implies that, in connectionwith CTAs, a person who arranges for a subscription, in other words a "subscriber," is a type of"client." Moreover, a definition of "client" that excludes "subscribers" would not make sense inlight of the language of Section 1a(6)(A)(i) of the Act defining a "commodity trading advisor" toinclude a person who provides advice "through publications, writings, or electronic media." Thecustomers of such CTAs could reasonably be described as "subscribers," but there is no logicalreason for such customers to receive less protection under the statute than other customers of CTAs.
In addition, the Commission believes that defining the term "client" of a CTA is necessary as a result of several court cases in which various CTAs have argued that, because the antifraud provisions of Section 4 o of the Act9refer to "client" rather than "client or subscriber," those provisions apply only to CTAs who provide advice on a personalized basis.10As explained more fully below, the proposed definition would clarify that Section 4 o applies to all CTAs, and not just to those who provide advice on a personalized basis. In this regard, the Commission notes that the only federal appeals court to have reached the merits of the meaning of the term "client" in Section 4 o , the Seventh Circuit in Commodity Trend Service ,11deferred to the Commission's interpretation of Section 4 o , finding that the Commission's position was a reasonable interpretation of the statutory language and that it appeared to effectuate Congressional intent. The court held that the use of the term "client" in Section 4 o does not connote only a personalized relationship. Instead, according to the court, the term "client" "can refer to * * * those who receive tailored advice from professionals or those who receive any kind of service regardless of whether it is personalized."12
Footnotes:
9 7 U.S.C. 6 o .
10 Commodity Trend Serv., Inc. v. CFTC , 233 F.3d 981 (7th Cir. 2000); R W Technical Servs. Ltd. v. CFTC , 205 F.3d 165 (5th Cir. 2000); CFTC v. Vartuli , 228 F.3d 94 (2d Cir. 2000).
11 Commodity Trend Serv. , 233 F.3d at 981.
12 Id. at 991.
B. Proposed Rule 1.3(bb)(2)
The Commission is proposing to add paragraph (bb)(2) to Rule 1.3, which would define the term "client," as it relates to a CTA, as including:
Any person (i) to whom a commodity trading advisor provides advice, for compensation or profit, either directly or through publications, writings, or electronic media, as to the value of, or the advisability of trading in, any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market or derivatives transaction execution facility, any commodity option authorized under section 4c of the Act, or any leverage transaction authorized under section 19 of the Act; or (ii) to whom, for compensation or profit, and as part of a regular business, the commodity trading advisor issues or promulgates analyses or reports concerning any of the activities referred to [above]. The term 'client' includes, without limitation, any subscriber of a commodity trading advisor.
The proposed definition, then, would include clients to whom a CTA provides personalized trading advice as well as clients to whom a CTA provides nonpersonalized trading advice. Such nonpersonalized advice would include, among other things, standardized advice provided by newsletters, seminars, tutorials, periodicals, computer software, Internet Web sites, voicemail recordings, e-mails, and facsimiles. The definition also would cover advice provided over a period of time pursuant to a subscription arrangement or on a one-time basis.
Because the proposed definition of "client" of a CTA would include a person to whom the CTA provides advice on either a personalized or nonpersonalized basis, it would make clear that the antifraud provisions of Section 4 o 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.13This view is consistent with the Commission's longstanding interpretation of the provisions of Section 4 o of the Act. Specifically, more than 25 years ago, in explaining why it adopted certain exemptions from CTA registration-as opposed to exclusions from the CTA definition-the Commission rejected the notion that Section 4 o applies solely to CTAs who have a personalized relationship with their advisees, stating:
Footnotes:
13 7 U.S.C. 6m(1).
Section 4 o should remain applicable to the persons covered by the rule because * * * their clients and subscribers are entitled to the protections of the antifraud provisions whether or not these persons remain obligated to be registered[.]14
Footnotes:
14 43 FR 32291, 32292 (July 26, 1978) (emphasis added).
The Commission additionally explained that "Section 4 o basically makes it unlawful, among other things, for any CTA to defraud an existing or prospective client or subscriber ." Id. at n.2 (emphasis added).
More recently, in connection with its adoption of Rule 4.14(a)(9), the Commission expressly noted that a CTA exempt from registration by virtue of its offering nonpersonalized advice and its not directing client accounts nevertheless remains subject to the provisions of the Act that apply to all CTAs, including the antifraud provisions of Section 4 o .15
Footnotes:
15 65 FR 12938, 12941 (March 10, 2000); see also 68 FR 47221, 47222 (Aug. 8, 2003) (providing for additional CTA registration exemptions, but noting that "regardless of registration status, all persons who come within the * * * CTA definition are subject to * * * provisions of the Act and the Commission's rules prohibiting fraud that apply to * * * CTAs"; see also 68 FR 34790, 34791 (June 11, 2003) (expanding the class of account managers permitted to bunch orders to include, among others, CTAs who are exempt from the registration requirement, but noting that "the Commission will retain antifraud and antimanipulation authority over account managers who are exempt from registration.")
The Commission has consistently enforced the antifraud provisions of Section 4 o against both registered CTAs and CTAs not required to register under the Act. E.g. , In the Matter of Stephen Alan Pierce , CFTC Docket No. 02-15 (January 21, 2003) ("Section 4 o of the Act prohibits both registered and unregistered CTAs from defrauding their clients."); In the Matter of Michael Radcliffe , CFTC Docket No. 02-04 (June 10, 2002); In the Matter of CTS Fin. Publ'g, Inc., et al. , CFTC Docket No. 00-34 (July 5, 2001).
II. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)16requires that agencies, in proposing rules, consider the impact of those rules on small businesses. The Commission has previously established certain definitions of "small entities" to be used by the Commission in evaluating the impact of its rules on such entities in accordance with the RFA.17
Footnotes:
16 5 U.S.C. 601 et seq.
17 47 FR 18618 (April 30, 1982).
With respect to CTAs, the Commission has previously stated that it would evaluate within the context of a particular rule proposal whether all or some affected CTAs would be considered to be small entities and, if so, the economic impact on them of the proposal.18The Commission does not believe that proposed Rule 1.3(bb)(2) would have a significant impact on affected CTAs. This is because the only burden imposed by the proposed amendment would be the obligation to comply with the antifraud provisions of Section 4 o of the Act. Assuming arguendo, however, that compliance with Section 4 o would constitute a significant burden, the burden is neither new nor additional, because proposed Rule 1.3(bb)(2) is consistent with the Commission's longstanding interpretation of Section 4 o as applicable to all CTAs.
Footnotes:
18 Id. at 18620.
Accordingly, the Chairman, on behalf of the Commission, certifies pursuant to Section 605(b) of the RFA19that the proposed rule will not have a significant economic impact on a substantial number of small entities. However, the Commission invites the public to comment on this finding.
Footnotes:
19 5 U.S.C. 605(b).
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 ("PRA") imposes certain requirements on Federal agencies (including the Commission) in connection with their conducting or sponsoring any collection of information as defined by the PRA. The proposed rule amendment does not require a new collection of information on the part of any entities. Accordingly, for purposes of the PRA, the Commission certifies that the proposed rule amendment, if promulgated in final form, would not impose any new reporting or recordkeeping requirements.
C. Cost-Benefit Analysis
Section 15(a) of the Act20requires 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.
Footnotes:
20 7 U.S.C. 19(a).
Section 15(a) further specifies that costs and benefits shall be evaluated in light of five broad areas of market and public concern: protection of market participants and the public; efficiency, competitiveness, and financial integrity of futures markets; price discovery; sound risk management practices; and other public interest considerations. Accordingly, the Commission could in its discretion give greater weight to any one of the five enumerated areas and could in its discretion determine that, notwithstanding its costs, a particular rule was necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act.
The Proposal is intended to define the term "client" of a CTA and to clarify that all CTAs are within the purview of the antifraud provisions of Section 4 o of the Act. The Commission is considering the costs and benefits of this rule in light of the specific provisions of Section 15(a) of the Act as follows:
1. Protection of Market Participants and the Public
Because the Proposal expressly brings all CTAs within the purview of the antifraud provision of Section 4 o of the Act, the Proposal should enhance the Commission's ability to protect market participants and the public.
2. Efficiency and Competition
The Proposal should have no effect, from the standpoint of imposing costs or creating benefits, on efficiency or competition.
3. Financial Integrity of Futures Markets and Price Discovery
The Proposal should have no effect, from the standpoint of imposing costs or creating benefits, on the financial integrity or price discovery function of the commodity futures and option markets.
4. Sound Risk Management Practices
The Proposal should have no effect, from the standpoint of imposing costs or creating benefits, on the available range of sound risk management alternatives.
5. Other Public Interest Considerations
The Proposal should have no effect, from the standpoint of imposing costs or creating benefits, on any other public interest considerations.
After considering these factors, the Commission has determined to propose the amendment discussed above. The Commission invites public comment on its application of the cost-benefit provision. Commenters also are invited to submit any data that they may have quantifying the costs and benefits of the Proposal with their comment letters.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and recordkeeping requirements.
For the reasons presented above, the Commission proposes to amend 17 CFR part 1 as follows:
PART 1-GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority:
7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6 l , 6m, 6n, 6 o , 6p 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24, as amended by the Commodity Futures Modernization Act of 2000, appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
2. Section 1.3 is proposed to be amended by adding new paragraph (bb)(2) to read as follows:
§ 1.3 Definitions.
(bb)(1) * * *
(2) Client. This term, as it relates to a commodity trading advisor, means any person (i) to whom a commodity trading advisor provides advice, for compensation or profit, either directly or through publications, writings, or electronic media, as to the value of, or the advisability of trading in, any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market or derivatives transaction execution facility, any commodity option authorized under section 4c of the Act, or any leverage transaction authorized under section 19 of the Act; or (ii) to whom, for compensation or profit, and as part of a regular business, the commodity trading advisor issues or promulgates analyses or reports concerning any of the activities referred to in paragraph (bb)(2)(i) of this section. The term "client" includes, without limitation, any subscriber of a commodity trading advisor.
Issued in Washington, DC, on September 22, 2005 by the Commission.
Catherine D. Daniels,
Assistant Secretary of the Commission.
[FR Doc. 05-19323 Filed 9-27-05; 8:45 am]
BILLING CODE 6351-01-M