May 6, 2005
Common Registration Deficiencies
Over the past few years, NFA has noted during examinations of Member firms some recurring registration deficiencies. These deficiencies appear unintentional for the most part and relate to the following areas-the reporting of principals, reporting terminations of associated persons and principals, and the failure to update the Member's registration records due to changes in the firm's operations. NFA is providing the following guidance to help its Members avoid those types of registration deficiencies in the future.
Reporting of Principals
NFA Registration Rule 204(a)(2)(A) provides, in pertinent part, that each applicant for registration as an FCM, IB, CPO and CTA must have at least one individual principal affiliated with it. Additionally, NFA Registration Rule 208 provides, in part, that within 20 days of any person becoming a principal of an applicant or registrant, the firm using NFA's Online Registration System ("ORS") must add the new principal by filing a Form 3-R if the new principal is an entity and a Form 8-R if the new principal is an individual.
NFA Registration Rule 101(s) defines principal to mean the following with respect to an applicant or registrant: (1) an individual who is a sole proprietor, general partner, director, president, chief executive officer and chief operating officer, chief financial officer, or person in charge of a business unit, division or function subject to regulation by the CFTC; (2) an individual who directly or indirectly, through agreement, holding companies, nominees, trusts or otherwise is either the owner of 10% or more of the outstanding shares of any class of stock or entitled to vote 10% or more of any class of voting securities, has the power to sell or direct the sale of 10% or more of any class of voting securities, has contributed 10% or more capital, is entitled to receive 10% or more net profits, or has the power to exercise a controlling influence over activities subject to regulation by the CFTC; and (3) an entity that is either a general partner of a partnership or the direct owner of 10% or more of any class of securities, or has directly contributed 10% or more capital unless such capital contribution consists of certain subordinated debt.
Recent examinations have found that Member firms do not always properly report principals. One type of improper reporting occurs when a holding company with an ownership interest in a Member firm should be reported as a principal, but the Member fails to do so. As noted above, an entity is a principal either because it is a general partner of a partnership or it is the direct owner of 10% or more of any class of securities, or has directly contributed 10% or more capital. An entity's status as a principal based on its ownership or capital contribution is determined solely by its direct relationship with a Member firm. Therefore, holding companies that directly own 10% or more of a class of a Member firm's stock or directly contribute 10% or more of a Member firm's capital are principals of the Member. In contrast, a holding company that indirectly either owns a Member's stock or contributes capital is not a principal. The following example illustrates how direct and indirect ownership impact a holding company's status as a principal.
A second area of improper reporting relates to when the individual owners of a holding company principal should also be listed as principals. Unlike an entity's status as a principal that is determined solely by its direct relationship with a Member firm, an individual's status as a principal based on his/her financial interest is determined by his/her direct and indirect relationships with a Member firm. The following examples should provide a helpful guide regarding this issue.
This same analysis also applies to capital contributions of equivalent amounts.
Reporting Terminations of Associated Persons and Principals
Registration Rule 214 provides, in pertinent part, that Member firms must notify NFA within 20 days of terminating either an AP or a principal. If terminations are not reported within this 20 day period, then NFA assesses a late termination fee of $100. Despite this requirement and fee, Member firms do not always file timely notice that an associated person or principal has been terminated. Member firms should process all terminations through ORS within twenty days of the termination date to ensure that the Member firm is not held responsible for the activities of an AP who is no longer employed at the firm.
Update Member Firm Registration Records
Member firms should also use ORS to routinely check their registration status, reflect any changes in the registration status of their associates and principals, as well as, update any other information that has changed, including contact information. Moreover, recent examinations have found that some Member firms fail to update NFA's ORS records to list branch office locations and branch office managers.
NFA recommends that every Member designate two people as security managers (size of firm permitting). This is beneficial in the event a security manager leaves your firm or is unavailable. The back-up security manager can access ORS and make changes without delay including designating new security managers. You can access ORS and its help pages through NFA's Web site at http://www.nfa.futures.org.
NFA's Self Examination Questionnaire can also provide detailed guidance regarding your registration requirements. You can also access the Self Examination Questionnaire at http://www.nfa.futures.org/NFA-compliance/publication-library/self-exam-questionnaire.HTML.
Finally, NFA staff is available to answer any questions you may have regarding the requirements discussed in this Advisory or any other of your regulatory requirements. Please feel free to contact NFA Information Center at (800) 621-3570.
NFA Members can file many of their required documents electronically.