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Compliance Q&A

I recently heard about a change to NFA's "telemarketing rule." What exactly is the change and how does it affect firms and their APs?

In January 1993, NFA amended our Compliance Rule 2-9 to require enhanced supervisory procedures for certain NFA Member firms. Members who employ a substantial number of associated persons ("AP") who were previously employed by firms closed for sales practice violations are required to adopt enhanced supervisory procedures. These procedures include tape recording all conversations between APs and potential or existing customers, submitting promotional material to NFA prior to first use and meeting a $250,000 minimum capital requirement or operating pursuant to a guarantee agreement.

In order to determine if a firm is required to adopt these procedures, the number of APs that previously worked for Disciplined Firms is compared to the total number of APs employed by the firm. The triggering percentage varies from 40 percent for small firms to 20 percent for larger firms.

Since 1993, those NFA Members that have met the criteria generally sought relief from adopting the enhanced supervisory procedures in one of two ways: (1) by requesting a waiver from the requirements, as permitted under the Rule, or (2) by exercising a one-time option that permitted a firm to change its personnel make-up in order to bring the firm outside the triggering criteria. While neither NFA Compliance Rule 2-9 nor the Interpretive Statement provides that altering personnel is an alternative to adopting the enhanced supervisory requirements, staff had previously afforded this relief to Members that claimed to have unintentionally met the criteria.

Recently, the Commodity Futures Trading Commission suggested, and NFA agreed, that the allowance for a one-time personnel change has outlived its usefulness. Therefore, as of February 15, 2001, NFA no longer allows an NFA Member firm that meets the triggering criteria to change personnel in order to avoid adopting enhanced supervisory requirements. Members may still request a waiver from adopting the Rule's enhanced supervisory requirements. See Notices to Members, Notice I-01-02, for additional information.

It is the responsibility of the Member firms to monitor the percentage of APs they have employed that have been previously employed by a Disciplined Firm. Members should consult NFA's web site at www.nfa.futures.org for a list of current Disciplined Firms and those firms that will be added to the Disciplined Firm list in the future. The list can be found in the Compliance Section under Disciplined Firms.

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