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Compliance Q&A

Is it true I can file my financial statements electronically? How do I go about doing this, and is it a requirement?

Filing your financial statements electronically is actually a very easy process utilizing NFA's iNFAst System. Financial Statement Forms 1FR-FCM, 1FR-IB, as well as the SEC's FOCUS report can all be filed electronically. In order to file electronically, you will need a personal computer with a modem, an Internet e-mail address, Microsoft Excel (version 5 or later) and Windows 3.x or Windows 95 operating system or later. Balances can be entered manually into the electronic form or they can be downloaded from existing financial software.

The process of completing the electronic form is fairly straightforward and involves some data entry. To file your statements electronically with NFA, send an e-mail (from the address where you wish to receive the iNFAst software) to NFA at iNFAst@nfa.futures.org. By return e-mail, NFA will send you a filing agreement, which needs to be printed out, manually signed by a principal of the firm and returned by mail to NFA. NFA then issues the firm's Personal Identification Number (PIN) by return mail. Once you begin filing statements electronically, there is no longer a need for you to send in a hardcopy of the statement as well. Additionally, filing dates and financial requirements are the same whether the filing is done electronically or via hardcopy.

NFA is encouraging all of its Members to file financial statements electronically. Additionally, NFA is looking into the possibility of requiring firms to file statements electronically at some point in the future. Currently, firms must also file a copy of all financial reports with the CFTC in a hardcopy format.

For further information regarding NFA's iNFAst system, please see our Notice to Members I-97-13, dated June 17, 1997. If you have any further questions, please contact Bob Krewer at 312-781-1324 or Tim McHenry at 312-781-1425.

[Editor's note: When the ban on single stock futures trading was lifted last year, NFA heard from many Members who wanted to know more about what effect it would have on them. Below is a Q & A of some of the inquiries from our Members.]

What kind of training will be required of registrants who want to trade single stock futures?
NFA is working with the other self-regulatory organizations (SROs) to develop standards for a training program for current registrants. Instead of taking an exam, these registrants would complete the training prior to soliciting or accepting orders for or supervising activities involving security futures products.

NFA is also working with the SROs to develop proficiency testing and training for security futures products that will be added to the Series 3 examination (for futures registrants) and to either the Series 7 or Series 33 examination (for securities registrants). Questions on security futures will also be added to the Series 30 examination and to securities examinations for options supervisors (probably the Series 4 and Series 9/10.)

How will the issue of suitability be addressed?
The Commodity Futures Modernization Act (CFMA) requires NFA to adopt a suitability rule for security futures products comparable to that of the securities industry. NFA Compliance Rule 2-30 currently requires Members to know their customers and provide adequate risk disclosure. Members will also be required to specifically approve accounts to trade security futures and will be prohibited from making unsuitable recommendations.

What kind of additional supervisory procedures will Members have to take?
Members who register as broker-dealers under Section 15 (b)(11) of the Securities Exchange Act of 1934 ("passported members") will be required to adopt additional supervisory procedures for security futures products. Among other things, these Members will be required to have one or more designated security futures principals, and a designated security futures principal will oversee review of branch offices and guaranteed IBs that engage in security futures activities. Members must also report certain information regarding customer complaints to NFA and check securities records as well as futures records when deciding whether to hire an employee or guarantee an IB.

Are there any new provisions designed to protect customers?
NFA currently prohibits Members from engaging in conduct inconsistent with just and equitable principles of trade and manipulative and fraudulent practices. New provisions will specifically prohibit trading ahead of customer orders. Passported Members will also be prohibited from purposefully establishing, increasing, decreasing or liquidating a position in any security futures product in anticipation of the issuance of material non-public information regarding the underlying security, and trading based on material, non-public information concerning an imminent block transaction. An exception to this is provided for Member firms that are parties to block transactions that are privately negotiated under exchange rules. These firms will be able to hedge their own risk exposure before the transaction is reported without violating the prohibition.

Will a new risk disclosure document be drafted, and where do I get it?
The SEC and CFTC will require a separate risk disclosure statement for security futures products that will be modeled after Characteristics and Risks of Standardized Options (the disclosure document for standardized equity options). NFA and the other SROs are working together to draft the document. Futures and securities firms will both be required to provide this document to security futures customers, regardless of where the products are traded.

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