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News Facts Actions - Spring 2007

In this issue:

NFA Board approves revisions to "Enhanced Supervisory Requirements" Notice

At its meeting in February, NFA's Board of Directors approved several revisions to NFA Compliance Rule 2-9's Interpretive Notice entitled "Enhanced Supervisory Requirements." The revisions include two major changes as well as several technical adjustments. The revisions were recently approved by the CFTC and will become effective in the near future.

"We have also taken this opportunity to submit a new version of the entire Notice to better organize the various topics," says NFA's General Counsel Tom Sexton. "Since our Board of Directors first adopted the Notice in January 1993, it has amended the Notice on numerous occasions based on various changes affecting the membership and on lessons we have learned administering the Notice."

One of the proposed revisions to the Notice would expand the definition of Disciplined Firm to include firms that have been sanctioned in any way during the preceding five years for deceptive telemarketing practices or promotional material.

"The Notice currently defines Disciplined Firm as firms that have been formally charged by either the CFTC or NFA with using deceptive telemarketing practices or promotional material and have been permanently barred from the industry as a result of those charges," says Sexton. "By expanding the definition to include firms that have been sanctioned in any way for these types of violations during the preceding five years, we will be able to impose stringent supervisory procedures on firms that may pose a threat to investors."

The second proposed revision would impose the enhanced supervisory requirements on any Member firm that charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract.

"We reviewed the commission and fee structure of a number of Member firms which have been subject to disciplinary action and arbitration claims during recent years," says Sexton, "and we found a significant correlation between firms that are cited for misleading sales practices and firms that charge abnormally high commissions and fees."

Before setting the commission triggering level at $100, NFA obtained feedback from NFA's Advisory Committees, the Executive Committee and Joint Audit Committee representatives.

The revised Notice imposes a duty on NFA Members to notify NFA if they charge round-turn commissions, fees and other charges that reach the triggering levels. In addition, if asked by NFA, Members will have the burden of demonstrating that they do not meet the triggering levels.

The Board also approved three additional amendments to the notice, including:

  • A proposal to require all individuals who fall under the Notice's exemption requirements from being counted as having worked at a Disciplined Firm to be free from disciplinary action;
  • Proposals to update and clarify the Notice's adjusted net capital requirements for firms subject to the enhanced supervisory requirements and that define which FCMs are eligible guarantors; and
  • A proposal to require firms that are obligated to adopt the enhanced supervisory requirements to provide NFA and the CFTC with the technical means to listen to recordings that they create upon request.

In addition, the Board approved a technical amendment to NFA Compliance Rule 2-9(b) to include the employment history of principals and commission charges as factors which may trigger the enhanced supervisory requirements.

"These latest revisions reflect our ongoing commitment to protecting customers by imposing the appropriate requirements on specific firms and individuals," says Sexton.

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Member survey results highlight NFA's strengths and suggest ways to improve performance

In December 2006, NFA surveyed approximately 4,800 NFA Member contacts to gauge how the membership viewed NFA's regulatory efforts. The survey had a mixture of open and closed-ended questions, relating specifically to NFA's audit process, Online Registration System, Information Center and Web site. In addition, the survey asked Members for their views on issues and trends facing the futures industry.

Survey results indicate that Members generally agree with NFA's approach to regulation: Identifying and prosecuting those Members who violate NFA rules, while serving as an information resource to the overwhelming majority of NFA Members who strive to run their businesses with high standards of professional conduct.

"We received 677 responses to the survey," says NFA President Dan Roth, "which represents an above-average 15% response rate. Because so many people responded, we believe the results give us an accurate representation of Member opinions."

As a benchmark, NFA compared the findings with interviews conducted in 2001 by an external consulting firm.

"The 2001 interviews revealed a significant gap between the job we thought we were doing and the way we were being perceived by our Members," says Roth. "We have worked very hard over the last several years to correct that, and the results of this new survey clearly show that the gap has narrowed significantly."

For example, in 2001, 80% of those interviewed said they would like to see NFA increase its ability to be a helpful resource and act less as an "enforcer." In 2007, 96% agreed that NFA helps its Members meet their regulatory responsibilities.

A sampling of the data from the most recent survey reveals:

  • Compared to other regulatory organizations, 97% of survey respondents said NFA was "as efficient" or "more efficient";
  • 91% said that NFA applies a common sense approach to regulation;
  • 92% rated NFA auditors as "knowledgeable" or "very knowledgeable" about the critical business issues facing the firms they audited;
  • 91% said NFA's Information Center representatives were prompt and 92% said they were courteous when responding to Members' questions; and
  • 84% said they "agreed" or "strongly agreed" that NFA's Web site was timely and 87% found the site informative.

"Statistics are helpful in measuring our effectiveness," says Roth. "Equally as important, however, are the answers to the open-ended questions because they pinpoint specific areas where we can improve our programs and services."

For example, although NFA's auditors were generally rated very favorably, several respondents recommended that auditors be given more flexibility to interpret the rules to fit the individual firm they were examining. Some even suggested specific rules that they found particularly cumbersome.

"This is an area we are constantly examining," says Regina Thoele, vice president of Compliance. "Our membership runs the gamut from sole proprietor Introducing Brokers to multimillion dollar Futures Commission Merchants with branch offices located around the country. That makes it very challenging to apply the same rules across the board without burdening small firms with unnecessary paperwork."

Regarding NFA's Online Registration System (ORS), 83% of survey respondents indicated they were either Satisfied or Very Satisfied with the system; however, their written responses indicated several areas where they would like to see enhancements made.

In addition to reviewing the survey suggestions, NFA senior staff visited with 14 of the largest users of ORS - broker/dealer FCMs and FCMs with a large number of Guaranteed IBs - to discuss their experiences with the system.

"Based on the feedback we received from the visits with users and the suggestions submitted in the survey, we have identified 27 different system enhancements," says Greg Prusik, vice president of Registration. "These range from large-scale enhancements to relatively small projects. As part of the budgeting process for Fiscal Year 2008, we are working with our Information Systems staff to prioritize the enhancements and develop a project schedule."

In addition to developing improvements to ORS and the audit program, NFA is also looking at the survey results to plan improvements to the Information Center and the Web site.

"We will continue to review the data and suggestions in the survey to help us develop regulatory, policy and operational changes that reflect our philosophy of regulation," says Roth.

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NFA distributes new Member information on CD

In an effort to increase efficiency and reduce costs, NFA has developed a new method for distributing information to new NFA Members. NFA has replaced the traditional 3-ring binder containing NFA regulatory guides and a hardcopy of the NFA Manual with a compact disc. The CD contains the same information as the binder with some additional resource material and links to NFA's Web site.

"By putting all of this information on a CD, we are able to reduce printing, postage and shipping charges substantially," says Larry Dyekman, director of Communications and Education. "Because NFA processes approximately 600 new Member applications every year, distributing the information on a CD will result in substantial savings for NFA."

The information contained on the CD is tailored to each category of NFA membership. For example, the CD for FCMs contains the Margins Handbook, while the CD for CPOs and CTAs contains the Disclosure Document Guide.

"Using electronic copies of these materials will also allow us to send the most up-to-date versions," says Dyekman.

Although the CDs are primarily targeted for new NFA Members, they are available to any Member. If you would like a copy of the CD, please contact NFA's Information Center at 800-621-3570.

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Board Actions

NFA's Board of Directors took the following actions at a meeting on February 15, 2007 in Chicago:

The CPO/CTA Directors elected Craig L. Caudle to fill the vacancy caused by the resignation of James R. Klingler. Mr. Caudle, Chief Executive Officer of Liberty Funds Group Inc., will serve the remaining portion of Mr. Klingler's term, which expires in 2008.

The Board re-elected Thomas W. Ewing and Silas Keehn for two-year terms as Public Directors.

The Board re-elected Michael R. Schaefer and W. Robert Felker for one-year terms as Chairman and Vice Chairman, respectively.

The Board elected the following individuals to serve one-year terms on NFA's Executive Committee: Jeffrey C. Borchardt, Kansas City Board of Trade; Bruce L. Cleland, Campbell and Company; George E. Crapple, The Millburn Corporation; W. Robert Felker, J. P. Morgan Futures Inc.; Paul J. Georgy, Allendale, Inc.; Douglas O. Kitchen, Rosenthal Collins Group LLC; Todd E. Petzel, Azimuth Asset Management, LLC; and John F. Sandner, Chicago Mercantile Exchange. Board Chairman Michael Schaefer and NFA President Dan Roth also serve on the Executive Committee.

The Board approved the following Committee appointments:

  • Appeals Committee: Jeffrey C. Borchardt, George E. Crapple, Thomas W. Ewing and William F. McCoy.
  • Membership Committee: Craig L. Caudle, Mark J. Hawley, Lou Illes, Silas Keehn, Douglas O. Kitchen, David M. Kozak, Robert E. Murray and Charles P. Nastro.
  • Business Conduct Committee: Clarence Delbridge, III and Frank A. Gelber.
  • FCM Advisory Committee: Dennis A. Klejna, Bonnie Litt and Russell R. Wasendorf, Sr.
  • CPO/CTA Advisory Committee: Robert J. Amedo, Douglas L. Bry, Barbara A. Pfendler, Ken Steben and Gerald Trevino.
  • IB Advisory Committee: Scott W. Stewart.
  • Educational/Testing Advisory Committee: Peter Alonzi, Dr. Lloyd A. Besant and Lawrence J. Schneider.
  • Hearing Committee: L. Carlton Anderson, Patricia C. Donahue, Carl W. Gilmore, Lawrence O. Kaplan, Timothy J. Lankford, Ronald S. Oppenheimer, Natalie McNeely Peters, Mark J. Powers, Carmen C. Soldato and John D. Streich.

The Board appointed the following individuals as officers of National Futures Association:

  • Daniel J. Roth - President and Chief Executive Officer
  • Daniel A. Driscoll - Executive Vice President and Chief Operating Officer
  • Kenneth F. Haase - Senior Vice President, Information Systems
  • Karen K. Wuertz - Senior Vice President, Strategic Planning and Communications
  • David L. Hawrysz - Vice President, Chief Financial Officer and Treasurer
  • Gregory C. Prusik - Vice President, Registration
  • Thomas W. Sexton - Vice President, General Counsel and Secretary
  • Regina G. Thoele - Vice President, Compliance

The Board approved an amendment to the Interpretive Notice entitled "Forex Transactions with Forex Dealer Members" to require Forex Dealer Members to pay their entire first year NFA dues amount when they begin conducting retail forex business.

The Board approved amendments to NFA Financial Requirements Section 11 and the Interpretive Notice entitled "Forex Transactions with Forex Dealer Members" relating to the concentration charge.

The Board approved a new Financial Requirements Section 14 and an amendment to the Interpretive Notice entitled "Forex Transactions with Forex Dealer Members" to require Forex Dealer Members to maintain a sufficient amount owed to U.S. customers at qualifying institutions in the U.S. or a money center country.

The Board approved an amendment to NFA Compliance Rule 2-10 to require that an FCM keep its books and records in a U.S. office or a Part 30 jurisdiction (if the firm is subject to the Part 30 regulatory scheme) office that is under the supervision of an AP principal resident in that office.

The Board approved a new Interpretive Notice to NFA Compliance rule 2-4 entitled "Disclosure Guidelines for FCMs Offering Sweep Accounts."

The Board approved revisions to NFA Compliance Rule 2-9's Interpretive Notice entitled "Enhanced Supervisory Requirements." See separate story.

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News Briefs

NFA announces CPO/CTA workshop in Chicago
NFA will hold a full-day workshop for CPOs and CTAs on Thursday, May 3, at the UBS Conference Center in Chicago. The workshop will feature NFA staff and other industry professionals discussing a variety of CPO/CTA issues, including registration, disclosure documents, reporting performance, pool financial statements, promotional material and business operations. Walter Lukken, Commissioner at the Commodity Futures Trading Commission, will give the keynote address.

"The format for this workshop will be very similar to the CPO/CTA workshop we held last October in New York," says Karen Wuertz, senior vice president of Strategic Planning and Communications. "That workshop sold out in two days and the feedback from attendees was very positive."

The fee for attending the workshop is $100 per person for NFA Members and $150 for non-Members. The fee includes all workshop sessions, continental breakfast, refreshment breaks and lunch. Those interested in attending can register online.

NFA distributes more than $700,000 in restitution payments to defrauded investors
On March 20, NFA returned more than $700,000 to 51 investors as part of a consent order issued on September 11, 2003, against two individuals and the four companies they owned. The case was filed by the CFTC in the United States District Court for the Southern District of Florida.

The court order is a result of a complaint the CFTC filed on June 10, 2002, against Daniel Fasciana and Anthony Russo, along with the four companies they owned: Offshore Financial Consultants (Florida and Georgia), Global Financial Consultants and International Currency Merchants.

"With this distribution of restitution funds, 51 investors will receive approximately 87% of their losses," says NFA President Dan Roth. "In the last 10 years, NFA has distributed more than $12.5 million to over 7,000 investors."

Rule amendment and new Interpretive Notice will become effective on July 1
FCMs which maintain a U.S. or Part 30 office (if the firm is subject to regulation in the Part 30 jurisdiction) responsible for preparing and maintaining its books and records will be subject to an additional requirement as of July 1, 2007. The CFTC has approved an amendment to NFA Compliance Rule 2-10 requiring the FCM's U.S. office to be under the supervision of a listed principal and registered associated person resident in that office.

A new Interpretive Notice to NFA Compliance Rule 2-4 will also become effective on July 1. The Notice, which applies only to FCMs, regards disclosure guidelines for FCMs offering sweep accounts.

NFA schedules two "Issues and Answers" meetings for NFA Members
NFA will hold two "Issues and Answers" meetings in the coming months. The first meeting will be held on Wednesday, May 16 at the Marriott Financial Center in New York from 2:00 to 4:00 p.m. The second meeting will be held on Wednesday, June 20 at the Marriott Marina and Hotel in San Diego, California, from 2:00 to 4:00 p.m.

"Issues and Answers" meetings give NFA staff and Members the opportunity to discuss current regulatory issues in an informal atmosphere. There is no charge to attend these meetings; however, pre-registration is encouraged. To register to attend one of the meetings, visit NFA's Web site.

NFA staff member scheduled to speak at hedge fund conference
NFA Associate Director of Compliance Patricia Cushing will be a panelist at an international hedge fund conference on May 13-16 in the Cayman Islands. The conference, sponsored by Global Alternative Investment Management (GAIM), will offer 28 educational sessions covering operational issues affecting investors and fund managers. Ms. Cushing will participate in the "Spotlight on Regulators" session along with Harry S. Davis, Partner, Schulte Roth & Zabel LLP; Yolanda McCoy, head of the Investment Division, Cayman Islands Monetary Authority; and Kevin J. O'Connor, United States Attorney, District of Connecticut.

NFA will participate in San Diego Traders Expo
NFA is sponsoring an information booth at the San Diego Traders Expo on June 20-23 at the Marriott Marina and Hotel. 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).

The Expo offers educational seminars and workshops as well as an exhibit hall featuring trading software providers, futures and options exchanges and other vendors. For more information visit the Expo's Web site at

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