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News Facts Actions - Fall 2006

In this issue:



NFA Board approves Interpretive Notice relating to commissions, fees and other charges

At its meeting on August 17, NFA's Board of Directors approved an Interpretive Notice to provide guidance on commissions, fees and other charges. The CFTC approved the Notice on November 1, 2006.

"Commissions for futures transactions have been set competitively since the 1970s," says NFA General Counsel Tom Sexton, "and NFA Members usually base these charges on their costs plus a reasonable profit, as well as the services provided by the Member."

However, over the years, NFA's Business Conduct Committee has charged several Members and their Associates with violating NFA requirements because they misled customers as to either the amount of commissions or the significant impact of the commission charges on the likelihood of obtaining any profit.

"Most of these cases have involved the sale to retail customers of commodity options and forex," says Sexton.

The Notice describes the types of sales practices relating to commissions, fees and other charges that have been found to be deceptive and misleading. It also describes relevant factors NFA uses to determine whether a Member or Associate has presented retail customers with a distorted and misleading view of the likelihood of earning profits by investing with a Member. These factors include:

  • Whether the Member or Associate adequately disclosed the amount of commissions, fees and other charges before the transaction occurred. In evaluating the adequacy of disclosure, the Member or Associate should consider whether the retail customer has little or no experience trading futures, options and forex, the customer's estimated annual income and net worth, and prior investment experience;
  • Whether the Member or Associate downplayed the significance of the commissions, fees and other charges, especially in connection with any suggestion that the retail customer is likely to reap profits;
  • If the Member or Associate solicits retail customers to engage in commodity option transactions or forex and charges commissions and fees well above the industry norm, what, if any, break-even analysis or additional disclosure has been provided about the significant impact that commissions, fees and other charges, including mark-ups for forex transactions, have on the likelihood of profit; and
  • Whether the Member or Associate engages in trading practices or recommends transactions or strategies to retail customers that are intended to increase the amount of commissions and fees generated, without serving any economic or other purpose for the customers.

"We reviewed the Notice with the FCM, IB and CPO/CTA Advisory Committees before presenting it to our Executive Committee and Board," says Sexton, "and all three committees provided helpful comments and expressed support for the proposal."

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NFA's Board of Directors creates new committee to advise NFA on compliance-related matters

In May 2006, NFA's Board of Directors created a Compliance Consultative Committee to advise the Board and NFA staff regarding compliance-related matters. The Committee held its first meeting on August 7, 2006.

"Over the past months, several directors have encouraged us to consider creating a committee similar to the Special Committee for Customer Protection Issues that the Board created in November 2004," says NFA President Dan Roth. "That committee provided us with valuable insights in formulating solutions to several customer protection issues, and we're confident that the Compliance Consultative Committee will provide us with equally valuable guidance in the area of compliance."

The Board has charged the Compliance Consultative Committee with reviewing NFA examination trends and issues, as well as monitoring and providing feedback on selected investigations and business conduct cases.

The Committee's structure is similar to that of NFA's Membership Committee, with both directors and non-directors serving as members.

"Having representatives from Member firms, as well as public directors and other public representatives on the Committee ensures that the issues will be discussed from a wide variety of perspectives," says Roth.

The Committee will also oversee the development of three new NFA systems related to its compliance activities, including:

  • an enhanced risk management system to help NFA identify and analyze risk and to track various trends;
  • an electronic audit system so auditors can perform their work in the field through a secure system linked to NFA's main system, and
  • a centralized relationship system to collect data and information about Members so NFA can better understand their relationships with other firms and how risks can be transmitted.

Charles P. Nastro, a former NFA Board Chairman, is heading up the Committee, which also includes: Mark G. Bagan, president and chief executive officer, Minneapolis Grain Exchange; Maureen Downs, executive vice president, Rosenthal Collins Group LLC; Paul J. Georgy, president, Allendale, Inc.; Douglas E. Harris, managing director, Promontory Financial Group LLC; Christopher K. Hehmeyer, co-chairman, Goldenberg Hehmeyer & Co.; and James R. Klingler, vice president/manager, business development, Gallatin Asset Management, Inc.

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NFA issues emergency enforcement action against Spot FX Clearing Corp.

On October 4, 2006, NFA issued a Member Responsibility Action (MRA) against Spot FX Clearing Corp., an NFA Member FCM located in Las Vegas, which handles customer accounts trading in off-exchange foreign currency (forex) transactions. The MRA substantially curtailed the business activities that Spot FX may engage in because it failed to demonstrate to NFA that it was in compliance with NFA's Financial Requirements.

Specifically, Spot FX was prohibited from soliciting or accepting any new customer funds or accounts or placing trades except to rollover existing positions. Spot FX was also prohibited from distributing, disbursing or transferring any funds (except to existing customers) without NFA's approval. In addition, Spot FX was required to provide copies of the MRA to all of its customers and to all banks and other financial institutions with which it has money on deposit.

"We began an audit of Spot FX in mid-September," says Regina Thoele, vice-president of Compliance. "We asked Spot FX to provide us with the required books and records that we need to complete our audit. Unfortunately, Spot FX failed to produce all of the books and records required of it."

Over the next four weeks, NFA made repeated requests to Spot FX for the information and records required to complete its examination, and Spot FX repeatedly failed to produce them. As a result, NFA was unable to determine whether the firm met its capital requirements and that it was otherwise in compliance with all other NFA Financial Requirements.

"We felt we had no alternative but to recommend to the Executive Committee that an MRA be issued against Spot FX," says Thoele.

Since the issuance of the MRA, NFA has been in regular contact with Spot FX's staff and attorneys who represent the firm. NFA staff also spent time at Spot FX, working with the firm's staff to resolve a number of issues. Despite these efforts, these issues have not been resolved and have, in fact, led to further concerns and questions.

On November 3, NFA issued additional sanctions against Spot FX, ordering the firm to meet a super capital requirement of $1.5 million by November 9, 2006. If it does not meet the deadline, Spot FX will be suspended and required to promptly liquidate all positions in customer accounts and remit the proceeds of any liquidation to the appropriate customers immediately.

Should Spot Fx meet the conditions of the November 9 deadline, the firm would still have to comply with other conditions and restrictions, including providing NFA with an internal control report and certified financial statements which are prepared by an independent public accountant familiar with Sarbanes-Oxley Act auditing. The firm must also remove its account opening forms from the Internet Web site of Coes FX, a foreign currency trading platform provider.

Spot FX can request a hearing before NFA's Hearing Committee and may petition the Commodity Futures Trading Commission for a stay of NFA's enforcement action.

The complete text of the amended Member Responsibility Action can be found on NFA's Web site (www.nfa.futures.org).

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Recent investor and Member education initiatives

In August, National Futures Association published a new investor education booklet entitled "Opportunity and Risk: An Educational Guide to Trading Futures and Options on Futures." The guide describes how futures and options on futures contracts are traded and the various ways investors can participate in the futures markets. The guide also includes a glossary of terms.

Single copies of the guide will be offered free of charge to the investing public. Individuals may order a copy of the publication by calling NFA's Information Center toll-free at 800-621-3570 or by emailing NFA at information@nfa.futures.org. Additional copies of the publication are available for $5.00 per copy.

Individuals also have the option of viewing and printing the publication by downloading it from the Investor Learning Center of NFA's Web site (www.nfa.futures.org).

On September 28, NFA hosted an anti-money laundering (AML) Web seminar for NFA Members. NFA staff discussed AML requirements for FCMs and IBs, customer identification programs, suspicious activity reporting and information sharing requirements. Also discussed were common AML audit deficiencies and how to correct them. The Web seminar is archived on NFA's Web site.

On October 24, NFA hosted a CPO/CTA Workshop in New York. The sold-out event covered many aspects of CPO and CTA operations, from registration to soliciting clients to filing financial statements. Due to the unprecedented response, NFA is planning additional workshops in 2007.

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Board Actions

NFA's Board of Directors took the following actions during the Board meeting on August 17, 2006 in Chicago, Illinois:

The Board made the following committee appointments:
Finance Committee: Jeffrey Borchardt; Paul Georgy; Robert Murray and Susan Phillips
Appeals Committee: Thomas A. Kloet

The Board approved amendments to NFA's Introducing Broker financial requirements providing for the electronic filing of certain certified financial statements.

The Board approved an Interpretive Notice relating to commissions, fees and other charges. (See separate story.)

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News Briefs

NFA schedules Member meeting in Las Vegas
NFA will hold an "Issues and Answers" Member meeting on Saturday, November 18, in Las Vegas, Nevada. The meeting, scheduled from 10:00 a.m. to 11:30 a.m. in the Palm B Room at the Mandalay Bay Resort & Hotel, is being held in conjunction with the Las Vegas Traders Expo (November 16-19).

NFA staff will lead discussions of current issues in the futures industry and provide updates on the latest rules and regulations (e.g., anti-money laundering requirements, supervision, performance reporting and promotional material). In an effort to tailor each meeting to the specific needs of the attendees, Members are encouraged to suggest discussion topics at the time they register.

There is no charge to attend the meeting; however, space is limited and we encourage you to pre-register. Individuals can register online or contact Deb Loehrke at 312-781-1392.

Since this meeting is being held in conjunction with the Las Vegas Traders Expo, you will also need to register for the Expo. Registration is free of charge and can be done online at www.tradersexpo.com/.

You can also register for the Expo onsite at the Mandalay Bay Convention Center the day of the meeting.

In addition to the "Issues and Answers" meeting, NFA will sponsor a booth in the Expo's Exhibit Hall. NFA staff will distribute investor education materials and demonstrate how to conduct a background check of futures firms and individuals using NFA's Web-based Background Affiliation Status Information Center (BASIC) system.

NFA staff member to speak at FIA luncheon
Carol Wooding, NFA's Assistant General Counsel, will participate in a panel discussion on Anti-Money Laundering issues at the Futures Industry Association's luncheon on November 8 in New York. The event will be held from 11:45 a.m. to 2:00 p.m. at the Down Town Association, 60 Pine Street, New York, NY.

Other panelists include Beverly Loew, regulatory policy project officer, FinCEN; Betty Santangelo, partner, Schulte, Roth & Zabel LLP; and Terry Arbit, counsel, Commodity Futures Trading Commission. The panel will discuss several aspects of anti-money laundering and know your customer rules, including information sharing among US financial institutions, Suspicious Activity Reports and recent enforcement actions.

The cost to attend the luncheon is $60.00 for FIA Law & Compliance Division Members ($65.00 for Non-members). For more information, contact Marsha Saunders at (202) 466-5460 or msaunders@futuresindustry.org.

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