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Ethics Training: The rules have changed but not your obligation to operate with high ethical standards

During examinations of our Member firms, we like to obtain feedback on any areas in which Members may need more guidance. One of the areas that has recently caused some confusion is ethics training. Last year, the CFTC issued a Statement of Acceptable Practices for ethics training. This guide was designed to allow flexibility in the format, frequency and providers of ethics training, giving each firm the freedom to tailor training to suit their own operations. Also, firms are no longer required to submit ethics training information to NFA.

Because the CFTC Statement is more general in nature, our Members have indicated that they would like NFA to provide some type of additional guidance. In an effort to assist our Members in interpreting the changes to the ethics training rules, we have outlined the changes and provided some examples that may be helpful to your firm. Please watch our Web site, www.nfa.futures.org, for more information on this topic in the future.

The repeal of the specific regulations relating to ethics training does not diminish the fact that professional ethical standards are still essential elements of a firm's fitness, and the use of ethics training programs helps firms maintain adequate supervision over their employees. Firms and their associated persons have an obligation to the public to observe "just and equitable principles of trade."

It is up to each Member to remain current on issues relating to new technology, commercial practices, regulations and other changes, and the ethical ramifications of these changes. As a result, firms should ensure that their APs receive training on a periodic basis. Each firm can decide the frequency of this training, based on the type of futures business that is conducted, the disciplinary background of the individuals employed at the firm and the size of the firm's operations. Firms should remain aware of changing industry standards and ensure high ethical standards are in place on a continuing basis.

Ethics training content
The first thing that all firms should have is written procedures which outline their ethics training program. The Statement of Acceptable Practices is intended to serve as a "safe harbor" concerning acceptable procedures relating to fitness and supervision. It lists the following topics that Members should ensure that their ethics training programs address:

  1. An explanation of the applicable laws and regulations, and the rules of self-regulatory organizations or contract markets and registered derivatives transaction execution facilities;

  2. The registrant's obligation to the public to observe just and equitable principles of trade;

  3. How to act honestly and fairly and with due skill, care and diligence in the best interest of customers and the integrity of the markets;

  4. How to establish effective supervisory systems and internal controls;

  5. Obtaining and assessing the financial situation and investment experience of customers;

  6. Disclosure of material information to customers;

  7. Avoidance, proper disclosure and handling of conflicts of interest.

Training providers
It is still acceptable to use classes sponsored by independent persons, firms or industry associations. Although NFA no longer provides a list of ethics trainers, many of the providers that were previously listed continue to offer ethics training. Classes are available through a variety of mediums, including the Internet, audiotapes, computer software, and videotapes, as well as in-person courses.

Each Member should ensure that their selected provider is qualified and should obtain proof that the provider has completed their proficiency testing and has three years of relevant industry experience, or similar experience. Firms should only use providers that they reasonably in good faith believe are not subject to any investigations or bars from registration. In-house training is also acceptable; however, firms should apply these same criteria to any in-house training personnel. NFA's BASIC system, which can be found on our Web site, provides an excellent method for checking registration and disciplinary history of providers.

The Statement of Acceptable Practices also permits less formal methods of training. If this is the case, the firm should consider providing the training on a more on-going basis. Appropriate methods may include distributing periodicals, legal cases and advisories. Firms can have personnel sign off on these updates to ensure they are reviewed or some firms may prefer to hold monthly or quarterly discussions. These less formal methods seem to be more appropriate for smaller entities.

Regardless of the method the firm chooses, procedures on how the registrant will fulfill its ethics training should be maintained. Larger firms should consider adding more controls to their procedures such as those who attended training, the date of training, and any records of materials used for training.

Frequency of training
Procedures for ethics training should also include the frequency of the training. Larger firms that transact business with a large segment of the public may want to hold periodic classroom training. Smaller firms may opt for more frequent training as mentioned above, but in either case, a corporate culture of high ethical standards should be established. Firms that adhere to high ethical standards will provide the best service for their customers, so it is important that each firm tailor their ethics training in such a way that makes this possible.

Questions regarding ethics training can be directed to Jennifer Augustyn, Associate Director of Compliance, at (212) 513-6034 or via e-mail at jaugustyn@nfa.futures.org.

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