Appendix A to Part 30 - Interpretative Statement With Respect to the Commission's Exemptive Authority Under § 30.10 of Its Rules
17:1.0.1.1.23.0.7.14.22 : Appendix A
Appendix A to Part 30 - Interpretative Statement With Respect to
the Commission's Exemptive Authority Under § 30.10 of Its Rules
Part 30 of the Commission's regulations establishes the
regulatory structure governing the offer and sale in the United
States of futures and options contracts made or to be made on or
subject to the rules of a foreign board of trade. Section 30.10 of
these regulations provides that, upon petition, the Commission may
exempt any person from any requirement of this part. Specifically,
section 30.10 states:
Any person adversely affected by any requirement of this part
may file a petition with the Secretary of the Commission, which
petition must set forth with particularity the reasons why that
person believes that he should be exempt from such requirement. The
Commission may, in its discretion, grant such an exemption if that
person demonstrates to the Commission's satisfaction that the
exemption is not otherwise contrary to the public interest or to
the purposes of the provision from which exemption is sought. The
petition will be granted or denied on the basis of the papers
filed. The petition may be granted subject to such terms and
conditions as the Commission may find appropriate.
As the provisions of this section make clear, any person subject
to regulation under part 30 may petition the Commission for an
exemption. In adopting these regulations, however, the Commission
noted in particular that persons located outside the United States
that solicit or accept orders directly from United States customers
for foreign futures or options transactions and that are subject to
a comparable regulatory scheme in the country in which they are
located may apply under section 30.10 for exemption from some or
all of the requirements that would otherwise be applicable to such
persons. This interpretative statement sets forth the elements that
the Commission intends to evaluate in determining whether a
particular regulatory program may be found to be comparable to the
Commission's program.
The Commission wishes to emphasize, however, that this
interpretative statement is not all inclusive, and that information
with respect to other aspects of a particular regulatory program
may be submitted by a petitioner or requested by the Commission. In
this connection, the Commission would have broad discretion to
determine that the policies of any program element generally are
met, notwithstanding the fact that the offshore program does not
contain an element identical to that of the Commission's regulatory
program and conversely may assess how particular elements are in
fact applied by offshore authorities. Thus, for example, in order
to find that a particular program is comparable, the regulations
thereunder would have to be applicable to all United States
customers, notwithstanding any exemptions that might otherwise be
available to particular classes of customer located offshore. A
petitioner, therefore, must set forth with particularity the
factual basis for a finding of comparability and the reasons why
such policies and purposes are met, notwithstanding differences of
degree and kind in its regulatory program.
No exemptions of a general nature will be granted unless the
persons to which the exemption is to be applied consent to submit
to jurisdiction in the United States by designating an agent for
service of process pursuant to the provisions of rule 30.5 with
respect to any activities of such persons otherwise subject to
regulation under this part and to notify the National Futures
Association of the commencement or termination of business in the
United States. In this connection, to be exempted, such person must
further agree to respond to a request to confirm that it continues
to do business in the United States.
Persons located outside the United States may seek an exemption
on their own behalf or an exemption may be sought on a general
basis through the governmental agency responsible for the
implementation and enforcement of the regulatory program in
question, or the self-regulatory organizations of which such
persons are members. The appropriate petitioner is a matter of
judgment and may be determined by the parties seeking the
exemption. The Commission, however, notes that it will be able to
address petitions more efficiently if they are filed by the
governmental agency or self-regulatory organization responsible for
the regulatory program.
In this connection, as will be discussed in more detail below,
any exemption of a general nature based on comparability will be
conditioned upon appropriate information sharing arrangements
between the Commission and the relevant governmental agency and/or
self-regulatory organization. Representations from the appropriate
governmental agency with respect to the applicability of any
blocking statutes that may prevent the sharing of information
requested under private arrangements would also be considered.
Finally, in considering an exemption request, the Commission will
take into account the extent to which United States persons or
contracts regulated by the Commission are permitted to engage in
futures-related activities or be offered in the country from which
an exemption is sought.
In the Commission's review, the minimum elements of a comparable
regulatory program would include: (1) Registration, authorization
or other form of licensing, fitness review or qualification of
persons through which customer orders are solicited and accepted;
(2) minimum financial requirements for those persons that accept
customer funds; (3) protection of customer funds from
misapplication; (4) recordkeeping and reporting requirements; (5)
minimum sales practice standards, including disclosure of the risks
of futures and opotions transactions and, in particular, the risk
of transactions undertaken outside the jurisdiction of domestic
law; and (6) compliance.
Qualification. Under domestic law, registration
identifies to the Commission, the public and other governmental
agencies the individuals and entities that are properly authorized
to solicit and accept customer orders and are in good standing.
Equally important, the procedure provides the Commission, through
the National Futures Association, the opportunity to determine
whether applicants are unfit to deal with the public. In this
connection, the standards for determining whether a person through
its principals is fit for registration with the Commission are set
forth in section 8a(2)-8a(4) of the Act. Timely access to
information as to a firm's good standing and the application by
relevant authorities of membership and licensing criteria, as well
as the criteria themselves, will be considered by the Commission in
assessing comparability.
Minimum Financial Requirements. Minimum financial
requirements for persons that handle customer funds serve at least
three critical functions. First, they provide a cushion together
with margin such that in the event of a default of a customer, the
losses of that customer need not adversely affect the funds held on
behalf of other customers. Second, they help ensure that the person
has sufficient funds to operate its business and, therefore, is
less likely to be tempted to misapply customer funds for its own
purposes. Third, they ensure that the person holding customer funds
has some financial stake in its business and, therefore, is serious
in its intent. In assessing comparability, capital rules or their
equivalent will be considered together with any provisions made for
insuring customer losses, the scope of clearing guarantees and
segregation or customer trust calculation and accounting
requirements which, to the extent they cover undermargined
accounts, can provide significant protection of one customer from
another customer's losses.
Customer Funds. The Act requires the strict segregation
of customer funds from those of the person holding such funds. One
of the primary purposes of this requirement is to prevent the
misapplication of those funds for purposes other than those
intended by the customer, which may affect not only the customer
but the market as a whole. The purpose of segregation is also to
identify customer deposits as assets of the customer, rather than
the firm, in order that in bankruptcy such funds are payable only
to satisfy the carrying firm's obligations to such customers and
not other obligations of the firm. In assessing comparability of
protection of customer funds, the Commission will consider
protections accorded customer funds in a bankruptcy under
applicable law, as well as protection from fraud.
Recordkeeping and Reporting. Recordkeeping requirements
have long been recognized as the linchpin of the Commission's
regulatory scheme. Reporting and recordkeeping requirements assist
in determining that a registrant is acting in accordance with the
provisions of the Act and the rules, regulations and orders of the
Commission thereunder. Similarly, reporting requirements ensure
that customers are timely advised of the transactions that have
been executed on their behalf, thus ensuring that they are aware of
their positions in the markets and may object to any transactions
that they believe are in error. The Commission will consider the
types of records maintained, the ability through those records to
trace funds and transactions, and the period of retention and
accessibility of records under the information sharing arrangements
discussed below in considering comparability.
Sales Practice Standards. In 1982, Congress reaffirmed
the importance of minimum sales practice standards to protect
customers from fraud or misrepresentation by requiring any futures
association registered by the Commission to adopt and enforce rules
governing the sales practices of its members. The Commission has
consistently provided that written disclosure of the risks of
futures and options trading is essential to ensure that potential
customers are aware of these risks and are not otherwise misled and
that other appropriate disclosure is made. The Commission will
review the type and manner of disclosure given and the mechanisms
for assuring the disclosure requirements are met and, in
particular, the treatment of discretionary accounts for which, for
example, Commission rule 166.2 requires particularized
documentation of intent to confer discretion in the case of foreign
futures and options transactions.
Compliance. Finally, in assessing comparability of a
program, the Commission will examine the procedures employed by the
governmental authority or the appropriate self-regulatory
organization to audit for compliance with, and to take action as
appropriate against those persons that violate, the requirements of
that program.
Information Sharing. As noted above, any exemption of a
general nature would also require an information sharing
arrangement between the Commission and the appropriate governmental
or self-regulatory organization to ensure Commission access to
information on an as needed basis as may be necessary to fulfill
its regulatory responsibilities. The information subject to these
arrangements generally would be of a type necessary in the first
instance to monitor domestic markets and to protect domestic
customers trading on foreign markets.
Firm-specific information that is potentially relevant to
protection of domestic customers engaged in foreign transactions
could include the following: (1) Registration qualification status;
(2) names of principals; (3) current capital; (4) location of
customer funds; (5) address of main office and branches; (6)
exchange and self-regulatory organization memberships; (7) the
existence of any derogatory information such as that required to be
disclosed on the Commission's Form 7-R; (8) notice of limitations
imposed on activities; (9) notice of undersegregation or
undercapitalization; (10) notice of misuse of customer funds; and
(11) notice of sanctions or of expulsion from exchange or
self-regulatory organization membership. The Commission believes
that much of the above information would be public in the ordinary
course in most jurisdictions. From time to time, the Commission
also may need immediate access to financial information concerning
risks posed to domestic firms by the carrying of foreign
positions.
In addition to information that relates to the financial
stability and creditworthiness of the firm, the Commission should
have access to transaction-specific information that confirms the
execution of orders and prices and facilitates tracing of customer
funds. Such data could include records reflecting: (1) That an
order has been received by a firm on behalf of one or more United
States customers; (2) that an order has been executed on an
exchange on behalf of one or more United States customers; (3) that
funds to margin, guarantee or secure United States customer
transactions have been received by a firm and deposited in an
appropriate depository; and (4) the price at which a transaction
was executed and general access to pricing information.
Again, such information is likely to be maintained in the
ordinary course of business. Tracing of customer funds would be
most essential in cases of insolvency where repatriation of funds
is at issue.
The Commission may also seek relevant position data information,
including the identity of the position holder and related
positions, in connection with surveillance of a potential “market
disruption.” This is particularly true in the case of integrated
markets.
The Commission wishes to emphasize that the information sharing
arrangements discussed herein are not necessarily a substitute for,
nor would they preclude, a more formal agreement or arrangement
with respect to the sharing of information.
Marketing Activities by Firms Granted Rule 30.10 Relief
FR date and citation: November 3, 1992, 57 FR 49644; August 17,
1994, 59 FR 42158.
[52 FR 28998, Aug. 5, 1987, as amended at 59 FR 42158, Aug. 17,
1994]