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News Facts Actions - Spring 2010

In this issue:



Commodity Pool Operators must now file quarterly reports with NFA 

Beginning with the quarter ended March 31, 2010, Commodity Pool Operators (CPOs) are now required to file quarterly reports with NFA through the Association's web-based EasyFile System. The due date for filing the March 31 reports is May 17, 2010.

The new reporting requirements are contained in the new NFA Compliance Rule 2-46, requiring a CPO to report certain quarterly information for each pool that it operates.

"The new filing requirements will enable us to obtain key pool information from our Member CPOs so that we can more fully utilize our new risk management system," said Senior Vice President of Compliance Regina Thoele.

NFA's risk management system is designed to assess risks, identify trends and assign audit priorities. However, NFA determined that the current information relating to commodity pools - particularly 4.7 exempt pools - did not provide sufficient data for the system to function effectively.

"The filing requirements apply to all pools that currently have reporting requirements under CFTC Regulation 4.22, including CFTC Regulation 4.7 exempt pools," said Thoele. "However, CFTC Regulation 4.13 exempt funds and pools that are organized as Master Funds are not required to file the reports."

The Pool Quarterly Report (PQR) filing is comprised of four sections: Key Relationships, Statement of Changes in Net Asset Value, Monthly Rates of Return and a Schedule of Investments.

NFA has produced a one-hour webinar that walks participants through the entire filing process. NFA will also provide firms with email reminders as the due date for each PQR approaches, as well as email notifications once the deadline passes and until the firm files its PQR.

"We have designed the filing system to be as user friendly as possible," said Thoele, "and we have provided a user's guide on our website to help our Member CPOs navigate through the system."

More information about NFA Compliance Rule 2-46 can be found in NFA's August 25, 2009 Submission Letter to the CFTC. Questions concerning the reporting requirements should be directed to Tracey Hunt, Senior Manager, Compliance (thunt@nfa.futures.org or 312-781-1284) or Mary McHenry, Senior Manager, Compliance (mmchenry@nfa.futures.org or 312-781-1420).  

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NFA proposes amendments to "Know Your Customer" rule

At its recent meeting in February, NFA's Board of Directors approved proposed amendments to NFA Compliance Rule 2-30 (often referred to as the "Know Your Customer" rule) and its related Interpretive Notice titled "Customer Information and Risk Disclosure." The proposed amendments have three main components:

  1. Expand the customers covered by the rule to reach all non-ECPs rather than just individuals.
  2. Require FCM Members to request at least annually that active customers update information on file if there are any material changes and require the FCM, IB or CTA member that currently solicits and communicates with the customer to determine if additional risk disclosure is required to be provided based on any changed information.
  3. Prohibit Members and Associates from making individualized recommendations to those customers whom the Member or Associate has or should have advised that futures trading is too risky for them.

In early September 2009, the CFTC and SEC held joint public meetings to discuss regulatory harmonization. One of the many issues discussed at the meetings related to the similarities and differences between the futures industry's know-your-customer requirements and the securities industry's suitability requirements.

In his testimony at the meeting, NFA President Dan Roth said, "[NFA's Know Your Customer rule] provides protections comparable to FINRA's suitability rule but that are tailored to the unique requirements of the futures industry. Since all futures contracts are highly volatile and risky instruments, our rule requires that a suitability determination be made on a customer-by-customer basis, rather than trade-by trade. It makes no sense to say that a customer is suitable for a recommendation to invest in heating oil futures but not in Treasury note futures. ...FINRA's rule certainly makes sense for an industry in which investors can purchase a wide variety of securities with varying degrees of risk potential that serve very different investment objectives. We feel that NFA's approach to the issue is based on the distinct nature of futures contracts and provides comparable regulatory protections."

On October 16, 2009, the CFTC and the SEC issued a Joint Report to Congress that contained over 20 recommendations relating to the markets, financial intermediaries, enforcement and operational coordination. However, the report stated that the two organizations currently had no recommendation on the issue of harmonizing the securities industry's suitability requirements and NFA's know-your-customer requirements.

"Although we believe our Know Your Customer rule has proven to be very effective and provides strong customer protection, we felt it was appropriate at this time to conduct a thorough review of the rule," said NFA's General Counsel Tom Sexton. "The Board's changes to Compliance Rule 2-30 are aimed at further enhancing customer protection."

NFA staff discussed the issue with the Board of Directors at its November 2009 meeting, held teleconferences with all three Advisory Committees in December and met with the Compliance Consultative Committee in January 2010. The resulting proposed amendments were presented to the Board in February. The amendments are currently under review at the CFTC and the SEC.

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NFA reminds firms to complete Annual Questionnaire regarding their futures/forex-related business

Every month, more than 100,000 background searches are conducted on futures industry firms and individuals through NFA's online Background Affiliation Status Information Center (BASIC). Investors, NFA Members, the media and other interested individuals use BASIC to verify registration status and research what enforcement actions (if any) have been taken against a firm or individual.

In the near future, BASIC will begin displaying information that will reflect whether or not firms are actively engaged in futures and/or forex-related business activity. In order for a firm to avoid being listed as "inactive", all Member firms must complete new questions related to their business in their Annual Questionnaire.

If the questions are not answered, the answers will default to "no activity", which is what will be displayed in BASIC, as illustrated below.

BASIC Screen Details

For additional information and instructions on accessing the Annual Questionnaire, click here.

If you have any questions, please contact NFA's Information Center at 800-621-3570 or 312-781-1410.

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Board Actions

The following actions were taken by NFA's Board of Directors at their meeting on February 18, 2010.

The Board approved the following committee appointments:

Appeals Committee: Jeffrey C. Borchardt, George E. Crapple, Michael C. Dawley, Michael F. McCoy and Susan M. Phillips

Membership Committee: Craig L. Caudle, Scott A. Cordes, Silas Keehn and Michael R. Schaefer

FDM Advisory Committee: Drew Niv, Muhammad Rasoul, Anthony C. Siragusa, Glenn Stevens and Michael Stumm (Chairman)

CPO/CTA Advisory Committee: Jerry Pascucci

IB Advisory Committee: Lawrence E. Hicks and Kurt M. Johnson

Hearing Committee: John Brand, James A. Gary, Mark J. Hawley, Lou Illes, Craig Kendall, John R. Kinsella, David M. Kozak, Joseph J. O'Neill and Frederick G. Uhlmann

The Board approved an amendment to NFA Financial Requirements Section 1 that will increase an FCM's minimum net capital requirement from $500,000 to $1,000,000; increase the risk-based capital requirement for non-customer accounts from 4% to 8% of the total risk margin requirement for positions carried in non-customer accounts and include cleared OTC derivative positions in an FCM's risk-based capital calculation for customer and non-customer accounts.

The Board approved an amendment to NFA Financial Requirements Section 11(b) that will eliminate certain foreign entities from the list of "unregulated persons" whose assets may not be included in the FDM's determination of its adjusted net capital.

The Board ratified an amendment to NFA's Interpretive Notice titled "NFA Compliance Rules 2-7 and 2-24 and Registration Rule 401: Proficiency Requirements for Security Futures Products." The amendment changes the date on which relief from the testing requirement for registrants engaged in security futures activities terminates from December 31, 2009 to December 31, 2012.

The Board approved amendments to NFA Compliance Rule 2-30 and its related Interpretive Notice titled "Customer Information and Risk Disclosure." (See separate story.)

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News Briefs

Additional demographic information will soon be requested on Form 8R
NFA's Registration Department is currently working on an Online Registration System (ORS) enhancement scheduled to be  deployed in early summer. The enhancement requires demographic information such as sex, race, eye color, hair color, height, weight already collected from FBI fingerprint cards to be entered by the applicant in the Form 8R application. This will allow NFA to download the demographic information from the Form 8R and submit fingerprints electronically to the FBI in a timelier manner. Additional notification will be made to members once we have an exact production date. If you have any questions concerning this matter please contact the Information Center by phone at 312-781-1410 or 800-621-3570, or send an email to information@nfa.futures.org.

NFA staff scheduled to participate in FIA Law and Compliance conference
Several NFA senior staff members will be panelists at various sessions of the FIA's 32nd Annual Law & Compliance Division Conference on the Regulation of Futures, Derivatives and OTC Products on April 28-30 in National Harbor, Maryland.

NFA's Executive Vice President and Chief Operating Officer Dan Driscoll and General Counsel Tom Sexton will participate in the "Soup to Nuts (Parts I and II)" sessions on April 28. The sessions will "review the resolution of practical day to day issues dealt with by compliance and legal personnel of exchanges, clearing houses, FCMs, IBs and CPOs and CTAs".

For more information on the conference, visit the FIA's website.

NFA notifies Member FCMs and IBs of enhancements to filing system for Suspicious Activity Reports
On February 3, 2010, NFA issued a Notice to Members regarding enhancements made by FinCEN to its BSA E-Filing System. Member FCMs and IBs may file Suspicious Activity Reports (SAR-SFs) via the E-Filing System.

In September 2009, FinCEN implemented Phase I of the BSA E-Filing SAR Acknowledgements and Validation Process. Phase I provides BSA E-Filers with a receipt acknowledging their filing of an SAR. In December 2009, FinCEN implemented Phase II of the project, which applies data quality checks and provides filers with information on the quality of their submission for electronically filed SARs of all types, including SAR-SFs.

The BSA E-Filing system allows FCMs and IBs to self-enroll to receive acknowledgements and validation error codes. FinCEN strong encourages filers to enroll to receive this critical feedback.

Anyone with questions regarding this process should contact the BSA E-Filing Help Desk at 1-888-827-2778 (option 6) or via email. FinCEN has also prepared a Q&A Manual on the process, including how to enroll, which can be accessed through FinCEN's website.

NFA will provide investor education at Los Angeles Traders Expo
NFA is sponsoring an information booth at the Los Angeles Traders Expo on June 9-12 at the Pasadena Convention Center. NFA staff will distribute copies of NFA's investor education materials and answer questions from expo attendees.

The Expo, which attracts more than 3,000 individual investors, 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 website at www.TradersExpo.com.

NFA spreads investor education message during Money Smart Week
NFA participated in two events in conjunction with Money Smart Week in Chicago. Coordinated by the Federal Reserve Bank of Chicago, Money Smart Week (April 17-24) offers more than 450 free educational classes, seminars and activities focusing on financial topics for people of all walks of life.

On Tuesday, April 20, NFA and AARP co-sponsored a seminar titled "Operation Fight Fraud". During the program, held at the Harold Washington Library in downtown Chicago, an AARP representative discussed the AARP Foundation Fraud Fighters program which provides tools consumers can use to educate family, friends and neighbors with recognizing and reporting fraud. Following the AARP portion of the program, an NFA representative provided attendees with advice on how to avoid becoming victims of investment fraud.

On Wednesday, April 21, NFA joined other regulatory and enforcement agencies at a Financial Regulators Fair at the State of Illinois Building, Thompson Center. Representatives from ten agencies, including the CFTC, FINRA, the SEC and the FDIC, will distribute information on financial protection, banking, credit and investing. 

For more information about other Money Smart Week events, visit www.moneysmartweek.org/Chicago.

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