CFTC Staff Letter 87-09: No-Action Relief for Risk Disclosure and Discretionary Authorization Requirements

COMMODITY FUTURES TRADING COMMISSION
2033 K STREET, N.W., WASHINGTON, D.C. 20581 December 2~.1987.
Re: ~est. for. No-Action ResJarding the RiSk Disclosure and .
Discretionary Authorization Requirements in the Foreign Futures · and Options Rules Dear This is in response to your letter to the Division of Trading and Markets (11Division") dated Septeniber 30, 1987, in which you requested that the Division adopt a no-action positiox:t regarding the risk disclosure . ·requirement in rule 30.6 1/ and the discretionary authorization requireuent in the amendxrerits to current rule 166.2 2/ in connection with the camodi.ty Futures Trading Carmission' s ( "Ccmnission") foreign futures and options rules. Specifically, on behalf of the . _ you have requested that the requirements specified tnerein be appl.ied-prospectively to clients of futures camd.ssion merchants ("FCMs") .and introducing brokers ("IBs") solicited on or after the effective date of such rules on Januai:y 4, 1988~ . . . In YO'I;tt' letter, you have stated your understanding that:
Rule 30.6 prohibits the opening by an FCM or IB of a foreign futures or foreign options account fo~ a foreign futures or foreign options custaoor tinless the .,. l:_l 52 Fed. Reg. 28980, 28999 (Aug. 5, 1987) .• •': . J:j Rule 166.2, 17 C.F.R. §166.2 (1987), ~ am:mded ~52 Fed. :Reg. 28980 at
29003. . . '.·

F01 or IB first delivers to the custarer either in the custarer accciunt agreerrent or on a separate fo:rm, the prescribed risk disclosures. Fo~ non-discretionary accounts, no acknowledgement of risk disclosure is required. For discretionary accounts, the ~ must receive a signed acknowledgerrent of risk disclosure which can be contained in the general custarer account agreem::mt. Also, the FCM must receive an express grant of authority to engage in foreign futures and foreign options trans~ctions. This may be contained in the discretionary authority so long as foreign futures and foreign options are expressly included in the granting language. Rule 166. 2. Finally, if a cust.aoor wishes to engage in foreign options transactions, disclosure pursuant to rule 33.7 must [also] be maqe and a signed and dated acknc:Mledgerrent received fran the custarer. In connection with the foregoing, you have requested that the Division adopt a no-action position so that:
FCMs and IBs will be deen'ed to have· satisfied these 'requirements as to all custacers with accounts opened before the effective date of the rules (January 4,
1988) if a mailing of the foreign futures and foreign
6ptions disclosure statarent is effected by the :F01s and IBs along with m:mthly. stat.errents to those cust:an￾ers who must, under regulation 1.33(a), receive a xronthly sta:temmt for such xronth. The Division has cons~dered your request and has determined that it will not recomoond that the Camd.ssion take enforcarent action with respect to an FCM' s or IB' s failure to canply with the specific requiremmts of rule
30.6 and the arrendroonts to Ccmni.ssion rule 166.2 with respect to clients solici~ prior to January 4, 1988. This no-action position, h.C:Mever, is
subject to the follCMing te:rms and conditions. First, for a period of four consecutive xronths from January to April 1988, :E'CNs must iriclude the risk disclosure stateroont in rule 30.6 (a) in the xronthly account staterents which they are required to provide custarers under rule 1. 33 (a) 3/ for transactions in such clients' accounts for the m:mths of December throu'gh March, 1988. 4/ . - ~./ 17 C.F :R. §1. 33 {a) (1987) • 4/ Since Carrirl.ssion rule 1. 33 (a)' requires that an account statarent be sent no less frequently than once every thiee xoonths, a requirerrent that the disclosure stat:eJ:rent in rule 30.6 be included with such oonthly account · stateroont for a period of four consecutive xronths would ensure that . . . . ' (Footnote continued)

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Moreover, this no-action position is limited to an FCM' s and IB' s obligation to canply with the specific requirement in rule 30.6 to provide all custarers with the risk disclosure language prior to ope'ning a foreign futures or . options account and in no way di.rni.nishes or qualifies sueh registr~ts' other obligations, for example, their obligations under the antifraud provision in
section 4b of the Cc:mrodi ty Exchange ·Act to disclose all material facts or
their responsibilities under Commission rule 1.55(d), 17 C.F.R. §1.55(d) (1987), which remains applicable to such registrants. Second, with respect to those ·custarers solicited prior to January 4, 1988, and who have granted general discretionary authority to an FQ.1 or IB in accordance with rule 166.2, such FCM or IB need not arrend such docurrent to include express authorization to engage in foreign futures and foreign options transactions as required in the arrendrnents to rule 166. 2. As pre￾viously noted herein with respect to the risk disclosure language in rule
30.6 (a), hOW"eVer, the Division's no-action position in respect of the aroond￾ments to rule 166.2 is limited to an FCM's or IB's obligation to cc:nply with
the se2cific requirement to axrend the authorization language and in no way affects an FCM' s ·or IB' s obligation to otherwise obtain the· custarer' s · · • consent with respect to such transactions or its liabilities for engaging in unauthorized transactions. Moreover, if any custarer solicited prior to January 4, 1988, either requests new acc6unt documentation or if circumstances otherwise warrant new account docurrehtation for such custaner, .:E01s and IBs are required tq rrodify appropriately the discret:ionary

• authorization at that time to inc6xpc)rate expressly such ·authority with
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  respect to foreign futures and options tri:lllSactions.
  . The no-action positions adopted herein are subject to the conditions irrposed herein by ·the Division and in no way affect an FCM' s or IB' ·s 'obliga￾tions with respect to foreign futures and options custarers solicited on or after January 4, 1988. Moreover, the Division intends to ronitor this area and to respond to facts and circumStances, as appropriate. In addition, the positions adopted herein are solely those of this Division and do not necessarily represent those of the Camrl.s · n or ·any other unit of its staff.
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  ,:,ctistaoors solicited prior u; January 4,· l988, · .·popy of the disclosure sta~t.· · · :
  'receive at least one
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