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News Facts Actions - Winter 2005

In this issue:



Special Committee to present forex rule amendment recommendations at February Board meeting  

"The rule amendments address several retail forex issues, including capital requirements for FCMs with forex affiliates and forex sales practices," says W. Robert Felker, chairman of the Special Committee. "Our goal in recommending these amendments is to increase NFA's ability to protect retail forex investors."

The Special Committee to Study Customer Protection Issues was appointed by NFA's Board of Directors in November 2004. Although the Board gave the Special Committee a broad mandate to consider many significant customer protection issues, it directed the Committee to begin its work with issues involving retail forex transactions.

"The Committee members were selected for their knowledge and experience in the areas of sales practices, regulatory accounting and trading practices," says Felker. "We met on several occasions and developed some ideas for best practices and behavior. We then solicited input from regulators, industry participants and others before finalizing our recommendations."

NFA also discussed the Committee's recommendations with its Forex Dealer Members, as well as all three NFA Advisory Committees (FCM, IB and CPO/CTA).

"We wanted to get some additional feedback from the industry on these recommendations before we submitted them to the Executive Committee," says NFA President Dan Roth.

The Special Committee's recommendations include:

  • An amendment to increase the capital requirements for certain FCMs whose affiliates conduct retail forex business.
  • An amendment to impose a concentration charge on Forex Dealer Members who have large positions with affiliates or unregulated entities.
  • An amendment to extend NFA's forex sales practice rules to most Members who solicit retail forex or manage retail forex accounts.

"The work done by this Special Committee underscores one of the benefits of self-regulation," says Roth. "Effective self-regulation involves industry experts drawing on their knowledge and experience to develop rules that reflect the reality of the marketplace and that provide strong investor protection."

In addition to Mr. Felker, the Special Committee includes the following individuals:

Bruce L. Cleland
President and CEO
Campbell & Company, Inc.
Maureen Downs
Executive Vice President
Rosenthal Collins Group LLC

Paul J. Georgy
President
Allendale, Inc.

Christopher K. Hehmeyer
Co-Chairman
Goldenberg Hehmeyer & Co.

Bonnie Litt
Managing Director and Associate General Counsel
Goldman Sachs & Co.

Marla M. Miller
Chief Operating Officer
MG Financial Group

Joseph J. Murphy
President
Refco LLC

Charles P. Nastro
New York, New York

Todd E. Petzel
Managing Director
Azimuth Trust Company LLC

John F. Sandner
Special Policy Advisor
Chicago Mercantile Exchange

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NFA rule amendment and interpretive notice increase NFA's ability to keep suspended or expelled Members or Associates from conducting commodity futures business with NFA Member firms

NFA's Board of Directors recently approved amendments to NFA Compliance Rule 2-6 that will increase NFA's ability to keep suspended or expelled Members or Associates from conducting commodity futures business with NFA Member firms. The rule amendments and accompanying interpretive notice have been sent to the CFTC for review.

"In the last few years, NFA has encountered several instances where brokers who have been barred from NFA membership as a result of an NFA sales practice case have continued to work at a Member firm as 'consultants', 'motivational speakers' or some similar capacity," says Assistant General Counsel Ron Hirst. "Although these individuals claim that they are not acting in any capacity that would require them to be registered with the CFTC, we have found evidence that they have continued to perform the same activities they performed prior to being barred from membership."

To address this issue, NFA has developed an Interpretive Notice for NFA Compliance Rule 2-6 clarifying that the phrase "commodity futures business", as used in the Rule, means any and all activities performed by an expelled or suspended Member or Associate on behalf of, and in connection with, an NFA Member's futures business, regardless of whether such activities require registration or NFA membership.

NFA has also proposed an amendment to Compliance Rule 2-6. The rule currently states that no Member or Associate shall conduct commodity futures business with a suspended Member or Associate. The Rule amendment will add that no Member or Associate shall conduct commodity futures business with an expelled Member.

"If a Member of Associate is prohibited from conducting commodity futures with a suspended Member, a similar prohibition should extend to those expelled from NFA membership," says Hirst. "In the interest of investor protection, we must do everything we can to prevent these individuals from interacting with Member firms during the time they are expelled or suspended."

The proposed rule amendment and interpretive notice can be accessed in their entirety in the Rules Submission section of NFA's Web site (www.nfa.futures.org). For additional information, contact Ron Hirst at (312) 781-1394 or rhirst@nfa.futures.org.

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NFA questionnaires help Members write anti-money laundering and other regulatory programs

NFA has published a series of questionnaires to assist Member firms in adopting written policies for anti-money laundering requirements, business continuity/disaster recovery planning, privacy policies and ethics training. The questionnaires have been incorporated into NFA's Self-Examination Checklist and Regulatory Requirements Guide.

"We have received a lot of feedback from our Members, either during the audit process, at Member meetings and by email, suggesting that we provide them with additional tools to help them meet some of their new regulatory requirements," says Regina Thoele, vice-president of Compliance. "We realize these new requirements, especially in the area of anti-money laundering, are complex, and we hope these new questionnaires will help Members develop effective policies and procedures."

Given the differences in the size and complexity of each firm's operations, NFA provides Members with the flexibility to design procedures that are tailored to their specific situation. If a firm intends to use the questionnaire as its formal procedures, however, the firm should answer all of the questions as completely as possible. Although a firm may answer "not applicable" to particular questions, it should carefully consider its operations before doing so.

"Each Member firm must adopt written policies tailored to its operations regarding these areas and maintain written procedures on file," says Thoele. "Just as importantly, firms must communicate their policies to their employees and implement their procedures once they are developed."

All four questionnaires have been added to the Self-Examination Checklist and the Regulatory Requirements Guide. Members can view and download both publications in the Compliance Publications section on NFA's Web site (www.nfa.futures.org). Members may also be able to access the questionnaires by clicking on the following links:

Anti-Money Laundering Questionnaire
Business Continuity & Disaster Recover Plan Questionnaire
Ethics Training Questionnaire
Privacy Policy Questionnaire
 

Members who have additional questions or concerns regarding these procedures should contact NFA at (800) 621-3570 or information@nfa.futures.org.

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NFA launches electronic system for filing pool financial statements

On January 10, 2005, NFA introduced a new Web-based system that allows Commodity Pool Operators (CPOs) to file their annual pool financial statements electronically with NFA. The new program is an extension of the EasyFile system launched in July 2004, giving Introducing Brokers (IBs) the ability to file unaudited 1-FR-IB statements electronically.

"We believe that CPOs will find EasyFile to be a more efficient and cost-effective way for them to meet their financial reporting requirements," says Yvonne Downs, senior vice-president of Compliance.

Participation in the EasyFile program is voluntary; and several CPOs have already volunteered. Downs asks that any CPO wishing to volunteer should contact Lisa Marlow at (312) 684-6525 or Patricia Cushing at (312) 658-6747. CPOs that elect to submit their PFS electronically do not need to file a hard copy of the statement with either NFA or the CFTC.

"For CPOs that voluntarily participate in the program, the CFTC has provided relief from the requirement to file a manually signed PFS with NFA and the CFTC," says Downs. "However, CFTC recordkeeping regulations require that you maintain on file a manually signed PFS and any reconciliation or record showing where the balances entered onto the schedule of key financial balances appear on the PDF statement."

NFA has prepared a Notice to Members (I-05-01) that outlines the steps necessary for setting up and using EasyFile. Members who have additional questions regarding the program should contact Patricia Cushing by telephone at (312) 658-6747 or by e-mail at pcushing@nfa.futures.org, or Lisa Marlow at (312) 684-6525 or lmarlow@nfa.futures.org.

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Board Report

NFA's Directors took the following actions at their quarterly Board meeting on November 18, 2004 in New York.

The Board ratified the Audit Committee's recommendation to approve NFA's Financial Statements as of June 30, 2004 and 2003, together with the Auditor's Report.

The Board approved amendments to NFA Compliance Rule 2-6 and adopted the Interpretive Notice entitled "Conducting Commodity Futures Business with an Expelled or Suspended Member or Associate."

The Board approved amendments to NFA Bylaws 301 and 701 and Registration Rules 402, 501, 503 and 504. the amendments require that at least one Public Director be a member of the Membership Committee and that at least one-third of the members of the Membership Committee and each of its designated subcommittees be non-Members. The amendments also provide the Appeals Committee with the authority to review decisions in membership actions and authorize the Vice President of Registration and Membership to perform a number of registration-related activities previously delegated to the Vice President of Compliance.

The Board affirmed the Executive Committee's decision to authorize NFA to enter into a Regulatory Services Agreement with the Chicago Climate Exchange,® Inc. to provide services to its subsidiary, the Chicago Climate Futures Exchange.

The Board approved the Executive Committee's action forming the Special Committee to Study Customer Protection Issues. The Committee will consist of the following individuals:

W. Robert Felker, Committee Chairman
Chairman, J.P. Morgan Futures Inc.

Bruce L. Cleland
President and CEO
Campbell & Company, Inc.

Maureen Downs
Executive Vice President
Rosenthal Collins Group LLC

Paul J. Georgy
President
Allendale, Inc.

Christopher K. Hehmeyer
Co-Chairman
Goldenberg Hehmeyer & Co.

Bonnie Litt
Managing Director and Associate General Counsel
Goldman Sachs & Co.

Marla M. Miller
Chief Operating Officer
MG Financial Group

Joseph J. Murphy
President
Refco LLC

Charles P. Nastro
New York, New York

Todd E. Petzel
Managing Director
Azimuth Trust Company LLC

John F. Sandner
Special Policy Advisor
Chicago Mercantile Exchange

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News Briefs

First "Issues and Answers" meeting of 2005 will be held in Ft. Lauderdale
NFA will hold the first "Issues and Answers" meeting of 2005 on February 8 in Ft. Lauderdale. The meeting is scheduled from 2:00 to 4:00 p.m. at the Westin Ft. Lauderdale, 400 Corporate Drive.

"Issues and Answers" is a series of Member meetings NFA conducts at various locations around the country. NFA staff members lead discussions of current issues in the futures industry and provide updates on the latest rules and regulations.

There is no charge to attend the meeting; however, space is limited and NFA encourages Members to pre-register online. Individuals can also register by contacting Deb Loehrke at (312) 781-1392.

NFA to participate in TradersExpo in New York
NFA is sponsoring an information booth at the International TradersExpo to be held on February 12-15 at the Marriott Marquis Hotel in New York City. The Expo offers educational seminars and workshops as well as an exhibit hall featuring trading software providers, futures and options exchanges and other vendors. In previous years, the Expo has attracted more than 5,000 traders.

NFA staff will distribute copies of NFA's investor education materials and demonstrate how to conduct a background check of a futures firm or individual using NFA's Web-based Background Affiliation Status Information Center (BASIC).

Individuals wishing to learn more about the Expo can visit the Expo's Web site at http://www.tradersexpo.com/.

NFA to co-sponsor International Regulators Dinner
NFA will co-sponsor with the Managed Funds Association an International Regulators Dinner in Boca Raton on March 15. The dinner will be held in conjunction with a day-long meeting for international regulators that coincides with the Futures Industry Association annual conference (March 16-19). CFTC commissioners and senior staff, exchange representatives and regulators from around the world are expected to attend.

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