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News Facts Actions - Spring 2011

In this issue:

NFA expands its jurisdiction of forex regulation to reflect changes in retail market

NFA has proposed several changes to its Forex Requirements, including an amendment that will subject all NFA Members that engage in retail forex transactions, regardless of whether they are an otherwise regulated entity under the Commodity Exchange Act (CEA), to NFA's Forex Requirements. In addition, the proposed amendments require Members to comply with the same "know your customer" requirements for forex customers as are currently required for futures customers. The amendments are currently being reviewed by the Commodity Futures Trading Commission (CFTC).

"The regulation of retail forex continues to evolve and these amendments are a reflection of that evolution," said NFA's General Counsel Tom Sexton. "Most importantly, regulatory exemptions that NFA established several years ago now need to be eliminated in light of recent legislative changes."

Currently, NFA Bylaw 306 excludes certain entities from the definition of Forex Dealer Member (FDM), and NFA Compliance Rule 2-39 excludes these same entities that engage in soliciting or managing retail forex accounts from certain Forex Requirements. The list of excluded entities includes, in part, NFA Members that are otherwise regulated financial institutions, financial holding companies, insurance companies, broker-dealers that are members of the Financial Industry Regulatory Authority (FINRA) and material associated persons of broker-dealers (if the broker-dealer is a member of FINRA).

"NFA adopted these exclusions about a decade ago because we were reluctant to impose additional regulatory burdens on Members who were highly regulated in other industries and who offered retail forex as a limited portion of their business," said Sexton. "With the growth of retail forex trading, however, we are now concerned that these exclusions could lead to unintended regulatory gaps."

Specifically, NFA had concerns that an otherwise regulated entity that is not subject to any meaningful regulatory scheme could become an NFA Member for the primary - or sole purpose - of cloaking itself with a mantle of respectability for its forex activities. Because these entities are NFA Members, their customers or potential customers could mistakenly believe that NFA regulates their forex activities.

"By eliminating the exclusions, we will ensure that all NFA Members conducting retail forex business are subject to our Forex Requirements," said Sexton.

Another proposed amendment will require that the "know your customer" requirements set forth in Compliance Rule 2-30 be applied to Members engaged in forex activities. "We don't see any reason why Members and Associates should have a different obligation with respect to forex customers as opposed to futures customers," said Sexton.

The proposed amendments will also require FDMs registered as Retail Foreign Exchange Dealers to maintain an office in the continental United States, Alaska, Hawaii or Puerto Rico that is responsible for preparing and maintaining CFTC and NFA required financial records and reports and be under the supervision of a listed principal and registered associated person of the FDM who resides in that office. "These are the same requirements that FCMs are subject to," said Sexton.

A copy of the complete rule submission letter is available on NFA's website.

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NFA's Self-Examination Checklist enhanced and renamed Self-Examination Questionnaire

NFA has recently enhanced its Self-Examination Checklist to make the document more useful for both NFA Members and NFA staff. Since the format of the Checklist was modified to generate a "yes" or "no" answer from Members to applicable questions, the publication has been renamed the Self-Examination Questionnaire. The Questionnaire is currently available on NFA's website.

The Questionnaire was originally developed in 1991 to help Members regularly review the adequacy of their supervisory procedures and identify potential problem areas. The Questionnaire was designed so that if a Member identified a deficiency, the Member could then revise or strengthen their supervisory procedures accordingly.

In 2010, NFA's Compliance Consultative Committee directed NFA staff to review the Questionnaire to identify possible enhancements. Based on that review, the Questionnaire has been modified in the following respects:

  • Added a supplemental section specifically tailored to a Forex Dealer Member's (FDM) operations (i.e. financials, trading systems, disclosure obligations, trading standards) and updated other Questionnaire sections to require other Members engaging in forex transactions to review their forex operations;
  • Included references to specific NFA and CFTC requirements applicable to the pertinent areas covered; and
  • Shortened the Questionnaire by removing outdated practices. In addition, although the text of the Questionnaire still refers to applicable appendices where appropriate (which are intended to assist new Members in drafting procedures), NFA has removed the appendices from the Questionnaire and placed them in another area of NFA's website.

NFA's Interpretive Notice entitled "NFA Compliance Rule 2-9, 2-36 and 2-39: Self-Audit Questionnaires" requires all Members, including FDMs and other Members involved in forex transactions, to review the general questionnaire and one or more of the applicable supplemental questionnaires on a yearly basis. The questionnaires must be reviewed by the appropriate supervisory personnel in the home and branch office, if applicable. After reviewing the questionnaire, an appropriate supervisory person must sign the questionnaire stating that the Member's operations have been evaluated based on the questionnaire and attesting that the Member's procedures comply with all applicable NFA requirements.

Questions regarding the amended Interpretive Notice or the new Self-Examination Questionnaire should be directed to the Compliance Department at (800) 621-3570 or through the "contact" feature of NFA's website.

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FinCEN issues final rules relating to confidentiality of suspicious activity reports

On January 19, 2011, NFA issued a Notice to Members regarding FinCEN's recently announced information regarding suspicious activity reports (SARs) applicable to FCM and IB Members.

First, FinCEN issued new rules governing the confidentiality of SARs. The amended regulations clarify that the confidentiality provisions apply not only to SARs but to any information that would reveal the existence of a SAR. In addition, the amendments make it clear that the disclosure prohibition is not limited to the person involved in the transaction that is the subject to the SAR, but rather applies to all persons except as specifically authorized by the regulation. Second, FinCEN issued new guidance which permits FCMs and IBs to share SARs with certain affiliates. Both the final rules and guidance became effective on January 3, 2011, and firms should make appropriate changes to the Anti-Money Laundering (AML) programs immediately.

Finally, FinCEN issued an advisory reminding financial institutions of the importance of maintaining the confidentiality of SARs. The advisory encourages financial institutions to consider including information on SAR confidentiality and the penalties associated with unauthorized disclosure in its ongoing training of employees. The advisory also identifies additional risk-based measures that may help ensure the confidentiality of SARs, including limiting access to a "need-to-know" basis, establishing restricted areas for reviewing SARs, maintaining a log of access to SARs, using cover sheets for SARs or supporting documentation that indicates the filing of a SAR, or using electronic notices that highlight confidentiality concerns before a person may access or disseminate the information.

More information regarding these changes can be found by accessing the following links from FinCEN: and The advisory may be accessed at Individuals may also contact Sharon Pendleton, Director, Compliance ( or 312-781-1401) or Valerie Kretschmer, Senior Manager, Compliance ( or 312-781-1290).

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Board Actions

The following actions were taken by NFA's Board of Directors at their meeting on February 17, 2011.

The Board approved the following committee appointments:

Membership Committee: Charles P. Nastro

Business Conduct Committee: James P. O'Hara, Maureen C. Guilfoile

FCM Advisory Committee: Clarence Delbridge III, Robert F. Klein, Marc Nagel, Maria Chiodi, Susan M. Schultz

FDM Advisory Committee: Daniel J. Skowronski

CPO/CTA Advisory Committee: Bruce A. Beatus, Ernest L. Jaffarian, David A. Kauppi

IB Advisory Committee: John W. Crane, Michael J. Nugent

Hearing Committee: Armando T. Belly, Lawrence S. Block, Stephen T. Bobo, David Buchalter, Charles S. Collier, Martin F. Doyle, Richard A. Driver, Bryan T. Durkin, Joseph S. Geisel Sr., George Gero, Douglas O. Kitchen, Pamela Klein-Kurland, Robert A. Kruchoski, Kent Lawrence, Doris Lindbergh, William T. Maitland, Christopher Malo, Gloria J. Matthews Harris, Charles R. Mills, Paul O. Kelly, Joseph W. Ott, William H. Pauly, Scott Reeves, Susan M. Schultz

The Board approved an amendment to NFA Interpretive Notice 9031 - Standard List of Documents to be Exchanged Under Section 8 of NFA's Code of Arbitration to include documents relevant to an arbitration claim involving a forex dispute.

The Board approved amendments to NFA's Code of Arbitration and Member Arbitration Rules to provide that NFA's President may summarily bar from membership a former Member or Associate if that Member of Associate fails to comply with an award or a settlement agreement, and the bar will remain in effect until the award is paid or settlement agreement complied with.

The Board approved changes to NFA's Forex Requirements including NFA's jurisdiction over Members engaging in forex activities. (See separate story.)

The Board approved amendments to NFA's Interpretive Notice entitled "NFA Compliance Rule 2-9: Self-Audit Questionnaires" to require that Forex Dealer Members and other Members engaged in forex operations review the general questionnaire and one or more of the applicable supplemental questionnaires (e.g., FCM, FDM, IB, CPO or CTA) on an annual basis. After reviewing the questionnaire, an appropriate supervisory person must sign the questionnaire stating that the Member's operations have been evaluated based on the questionnaire and attesting that the Member's procedures comply with all applicable NFA requirements. (See separate story.)

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News Briefs

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 33rd Annual Law & Compliance Division Conference on the Regulation of Futures, Derivatives and OTC Products on May 4-6 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: Who Wants to Be a CCO? No Really, Who Wants to Be a CCO? (Parts I and II)" sessions on May 4. 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".

On Thursday, May 5, NFA's Senior Vice President of Compliance Regina Thoele will participate in the "ABCs of FCMs, IBs, SDs, MSPs, SBSDs and MSBSPs" session, focusing on the definitions under the Dodd-Frank Act that implicate registration requirements, including of swap dealer, major swap participant, security-based swap dealer and major security-based swap participant, as well as who qualifies as an end-user. Also on Thursday, NFA's Assistant General Counsel Carol Wooding will be a panelist at the "Business Conduct Standards" session, discussing the proposed regulations under the Dodd-Frank Act imposing new requirements on FCMs, swap dealers and major swap participants. Finally, NFA's Vice President of Market Regulation Ed Dasso, will be a panelist at the "ABCs of DCMs, SEFs and SROs" session, examining exchange and SRO developments since May 2010.

On Friday, May 6, Mary McHenry, Senior Manager, Compliance, will be a panelist at the "Developments for Hedge Funds and Investment Managers" session, providing an overview of legislative changes and regulatory initiatives applicable to the asset management community with the passage of Dodd-Frank and the Volker Rule.

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

NFA staff participate in CFTC events
On March 31, NFA's Vice President of Market Regulation Ed Dasso participated in CFTC Commissioner Scott O'Malia's "SEF Showcase: Current Technology and Market Direction". The event was developed to explore the attributes necessary to make swap execution facilities (SEFs) successful. Dasso's panel featured a discussion by asset management funds, pension funds, end-users, swap market observers, dealers and public interest groups. The panel discussed a wide range of topics from execution functionality to making the transition from OTC execution to regulated execution.

NFA's Vice President of Market Regulation is a new position created to oversee the surveillance of SEFs. Dasso comes to NFA from the InterContinental Exchange, where he served as the Manager of Market Regulation. Dasso previously spent several years at NFA as the Managing Director of Trade Practice and Market Surveillance.

NFA's Senior Vice President of Strategic Planning and Communication Karen Wuertz and Director of Communications and Education Larry Dyekman have been invited to participate in the "CFTC Roundtable: Enhancing Consumer Education" that will be held on Thursday, April 28, 2011 at the CFTC headquarters in Washington D.C. The event will consist of three panel discussions. The first panel will identify gaps in consumer education and outreach to be filled by the CFTC. The second will discuss the benefits of having a consumer education and outreach program. And the third panel will focus on communication, messaging and outreach.

NFA will provide investor education at Dallas Traders Expo
NFA is sponsoring an information booth at the Dallas Traders Expo on June 16-18 at the Hyatt Regency Dallas at Reunion Hotel. 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

NFA spreads investor education message during Money Smart Week
NFA participated in two events in conjunction with Money Smart Week held April 2-9 in Chicago. Coordinated by the Federal Reserve Bank of Chicago, Money Smart Week offers more than 450 free educational classes, seminars and activities focusing on financial topics for people of all walks of life.

On Thursday, April 7, 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, distributed information on financial protection, banking, credit and investing.

On Friday, April 8, NFA, the CFTC and AARP co-sponsored a seminar on how to protect yourself against investment fraud. 

Receive notification of NFA comment letters and rule submission letters via email
Individuals can now subscribe to receive notification of NFA comment letters and rule submission letters via email. Visit NFA's website to view or update your email subscription and to view a list of all NFA communications available via email.

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