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Security Futures Products

  1. What are security futures?
  2. How are security futures products regulated?
  3. Must FCMs and IBs register with the SEC before offering security futures?
  4. Must broker-dealers register with the CFTC before offering security futures?
  5. Must CPOs register with the SEC before trading security futures for a fund?
  6. I operate a hedge fund but am not registered as a CPO. Do I have to register before I can trade security futures for the fund?
  7. I operate an investment company but am not registered as a CPO. Do I have to register before I can trade security futures for the investment company?
  8. I am a registered CTA. Do I have to register as an investment advisor before trading security futures?
  9. I am a registered investment advisor. Do I have to register as a CTA before trading security futures?
  10. What are the proficiency requirements for security futures salespeople and supervisors?
  11. How can I satisfy the security futures training requirement?
  12. Who must oversee security futures sales activity at an FCM or IB?
  13. My firm is a registered CPO/CTA and is a Member of NFA. Does the firm have to designate a security futures principal and have its associated persons (APs) take the proficiency training?

1. What are security futures?

As their name suggests, "security futures" are financial instruments that are both securities and futures. There are two types of security futures: futures on individual securities and futures on narrow-based security indexes. Security futures can be traded on both securities and futures exchanges.

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What are security futures?

2. How are security futures products regulated?

These products are regulated jointly by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

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How are security futures products regulated?

3. Must FCMs and IBs register with the SEC before offering security futures?

Yes. Brokerage firms must be registered with both the CFTC and the SEC in order to offer and trade these products. 

If your firm is a registered FCM or IB that is also fully registered with the SEC as a broker-dealer, it has no further registration obligations.  

If your firm is not currently registered as a broker-dealer, it must notice register by filing a Broker-Dealer Notice Registration Form (Form BD-N) with NFA. You can download this four-page form directly from NFA's Web site (www.nfa.futures.org). There is no filing fee and the firm's notice-registration is effective upon filing as long as the form is complete and the eligibility requirements are met.   

If your firm notice-registers as a broker-dealer, it will be exempt from some requirements of the securities laws that duplicate futures requirements. These include financial requirements, prohibitions on certain exchange members doing both proprietary and customer trading, and risk assessment rules. Also, your firm is not required to become a member of FINRA since the firm's securities business must be limited to offering and trading security futures products.

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Must FCMs and IBs register with the SEC before offering security futures?

4. Must broker-dealers register with the CFTC before offering security futures?

Yes. However, broker-dealers who are not currently FCMs or IBs can notice-register as FCMs or IBs if they are registered with the SEC as full-fledged broker dealers and members of FINRA. These firms notice-register with the CFTC on Notice Form 7-R, which is only two pages long. You can download the form on our Web site and file it with NFA. There is no fee, and registration is effective upon filing.

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Must broker-dealers register with the CFTC before offering security futures?

5. Must CPOs register with the SEC before trading security futures for a fund?

It depends. SEC registration is not automatically required. However, you may be required to register a fund as an investment company and the CPO as an investment adviser if the fund's security futures activities (combined with its other securities activities) bring it within the Investment Company Act's definition of investment company, although hedge fund exemptions may apply.

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Must CPOs register with the SEC before trading security futures for a fund?

6. I operate a hedge fund but am not registered as a CPO. Do I have to register before I can trade security futures for the fund?

Not necessarily. CFTC Regulation 4.13 provides exemptive relief for hedge fund operators if certain conditions are met.

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I operate a hedge fund but am not registered as a CPO. Do I have to register before I can trade security futures for the fund?

7. I operate an investment company but am not registered as a CPO. Do I have to register before I can trade security futures for the investment company?

No. CFTC Regulation 4.5 excludes operators of registered investment companies from the definition of CPO.

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I operate an investment company but am not registered as a CPO. Do I have to register before I can trade security futures for the investment company?

8. I am a registered CTA. Do I have to register as an investment advisor before trading security futures?

It depends. If you are a registered CTA, you do not have to register as an investment adviser unless you primarily act as an investment adviser or you provide securities advice to registered investment companies or business development companies.

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I am a registered CTA. Do I have to register as an investment advisor before trading security futures?

9. I am a registered investment advisor. Do I have to register as a CTA before trading security futures?

It depends. SEC-registered investment advisers do not have to register as CTAs unless they primarily act as CTAs or provide futures advice to funds whose primary activities are in exchange-traded futures.

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I am a registered investment advisor. Do I have to register as a CTA before trading security futures?

10. What are the proficiency requirements for security futures salespeople and supervisors?

Unlike brokerage firms, salespeople and supervisors do not have to be dually registered, but they must complete a training program covering security futures. The proficiency requirements apply to all sole proprietors and APs, including CPOs and CTAs and joint Series 3/Series 7 registrants.

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What are the proficiency requirements for security futures salespeople and supervisors?

11. How can I satisfy the security futures training requirement?

There are two ways to satisfy the training requirement. The first is through a free web-based training program that NFA developed in collaboration with FINRA and The Institute for Financial Markets. The training is available on NFA's website. The other option is to take another training program that covers the same basic content. In either case, individual registrants must complete the training prior to engaging in security futures activities.

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How can I satisfy the security futures training requirement?

12. Who must oversee security futures sales activity at an FCM or IB?

All FCMs and IBs who are notice-registered as broker-dealers must have one or more designated security futures principals (DSFPs) to oversee security futures activities at their firms. Branch office managers and current supervisors can qualify to become DSFPs through training. DSFPs must complete the supervision section of the security futures training program in addition to the other required sections.

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Who must oversee security futures sales activity at an FCM or IB?

13. My firm is a registered CPO/CTA and is a Member of NFA. Does the firm have to designate a security futures principal and have its associated persons (APs) take the proficiency training?

CPOs and CTAs are not required to have a designated security futures principal. If the pool or trading program will trade security futures, APs must take the proficiency training before they solicit pool participations or clients or engage in any other security futures activities that require AP registration. Even if the CPO or CTA does not solicit business, however, the person overseeing the firm's security futures activities should take the training.

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My firm is a registered CPO/CTA and is a Member of NFA. Does the firm have to designate a security futures principal and have its associated persons (APs) take the proficiency training?
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