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Notice I-97-04

February 18, 1997

Amendment to Interpretive Notice Regarding Supervision of Telemarketing Activity

The CFTC recently approved several changes to NFA’s Interpretive Notice to NFA Compliance Rule 2-9: Supervision of Telemarketing Activity. These changes were adopted by NFA’s Board of Directors in its continuing effort to ensure that Member firms whose hiring practices invite potential telemarketing problems adopt enhanced supervisory practices. The full text of the revised Interpretive Notice is attached. The primary changes that were made are summarized below:

  • Member firms meeting the criteria set forth in the Interpretive Notice are required either to operate pursuant to a guarantee agreement or maintain an adjusted net capital of at least $250,000 for the entire period during which the Member is required to tape record its sales solicitations. Any Member opting to maintain the higher level of adjusted net capital will also be subject to the financial recordkeeping and reporting requirements applicable to FCMs. Eligible guarantor FCMs are those that meet the eligibility requirements for executing a Supplemental Guarantor Certification Statement pursuant to NFA Registration Rule 504(a)(2)(B).
  • The time period for tape recording all conversations which occur between the Member firm’s APs and both existing and potential customers has been extended from one year to two years.
  • The time period for retaining tape recorded conversations has been extended from one year to two years from the date each tape is created.
  • In retaining the tape recorded conversations, Member firms must catalog the tapes by AP and date.
  • APs must maintain a daily log of sales solicitations which reflects at a minimum the identity of each customer or prospective customer the AP spoke with on each day.
  • A Member firm must be able to promptly produce, upon request from NFA or the CFTC, all conversations relating to a specific AP, and only that AP, for a given date.
  • For a period of two years, Member firms meeting the criteria are required to file all promotional material, as defined in NFA Compliance Rule 2-29(h), with NFA at least 10 days prior to its first use.
  • If an NFA Business Conduct Committee disciplinary proceeding or CFTC enforcement proceeding has been filed against a Member firm required to adopt the enhanced supervisory procedures, then the enhanced supervisory procedures will remain in effect for the applicable time period specified or until after the disciplinary or enforcement proceeding is closed and all appeals are completed or the time for appeal has passed without an appeal being filed or perfected, whichever occurs last. However, Member firms are not required to retain tapes for more than two years after they are created.

INTERPRETIVE NOTICE TO COMPLIANCE RULE 2-9:
SUPERVISION OF TELEMARKETING ACTIVITY

NFA’s Board of Directors has over the years adopted strict and effective rules to prohibit deceptive sales practices, and those rules have been vigorously enforced by NFA’s Business Conduct Committee. The Board notes, however, that by their very nature enforcement actions occur after the customer abuse has taken place. The Board recognizes that NFA’s goal must be not only to punish such deception of customers through enforcement actions but to prevent it, or minimize its likelihood, through fair and effective regulation.

One NFA rule designed to prevent abusive sales practices is NFA Compliance Rule 2-9. That rule places a continuing responsibility on every Member to supervise diligently its employees and agents in all aspects of their futures activities, including telemarketing. Although NFA has not attempted to prescribe a set of supervisory procedures to be followed by all NFA Members, NFA’s Board of Directors believes that Member firms which are identified as having a sales force which has received questionable training in sales practices should be required to adopt specific supervisory procedures designed to prevent sales practice abuse. Rule 2-9 authorizes the Board of Directors to require Members which meet certain criteria established by the Board to adopt specific supervisory procedures designed to prevent abusive sales practices.

The Board believes that in order for the criteria used to identify firms subject to the enhanced supervisory requirements to be useful, those criteria must be specific, objective and readily measurable. The Board also believes that any supervisory requirements imposed on a Member must be designed to quickly identify potential problem areas so that the Member will be able to take corrective action before any customer abuse occurs. The purpose of this Interpretive Notice is to set forth the criteria established by the Board and the enhanced supervisory procedures which are required of firms meeting these criteria.

In developing the criteria, the Board concluded that it would be helpful to review Member firms which had been closed through enforcement actions taken by the CFTC or NFA for deceptive sales practices. The Board’s purpose was to identify factors common to these Member firms and probative of their sales practice problems which could be used to identify other Member firms with potential sales practice problems.

One factor identified by the Board as common to these firms and directly related to their sales practice problems is the employment history and training of their sales forces. For many of these Members, a significant portion of their sales force was previously employed and trained by one or more of the other Member firms closed for fraud. The Board believes that the employment history of a Member’s sales force is a relevant factor to consider in identifying firms with potential sales practice problems. If a Member firm is closed for fraud related to widespread telemarketing problems, it is reasonable to conclude that the Member’s training and supervision of its sales force was wholly inadequate or inappropriate. It is also reasonable to conclude that an AP who received inadequate or inappropriate training and supervision may have learned improper sales tactics which he will carry with him to his next job. Therefore, the Board believes that a Member firm employing such a sales force must have stringent supervision procedures in place in order to ensure that the improper training its APs have previously received does not taint their sales efforts on behalf of the Member.

The Board has determined that a Member will be required to adopt the specific supervisory procedures over its telemarketing activities if:

  • for firms with at least five but less than 10 APs, 40 percent or more of its APs have been employed by one or more Member firms which have been disciplined by NFA or the CFTC for sales practice fraud ("Disciplined Firms");
  • for firms with at least 10 but less than 20 APs, four or more of its APs have been employed by one or more Disciplined Firms;
  • for firms with at least 20 APs, 20 percent or more of its APs have been employed by one or more Disciplined Firms.

For purposes of this requirement, a Disciplined Firm is defined very narrowly to include only those firms which meet the following three criteria:

1. The firm has been formally charged by either the CFTC or NFA with deceptive telemarketing practices;

2. those charges have been resolved; and

3. the firm has been closed down and permanently barred from the industry as a result of those charges.

Attached is a list of firms currently meeting the definition of a Disciplined Firm. Although this list is current as of the date of this Interpretive Notice, NFA will provide Members with updated lists as necessary.

Any Member firm meeting these criteria will be required either to operate pursuant to a guarantee agreement or maintain an adjusted net capital of at least $250,000 for the entire period during which the Member is required to tape record its sales solicitations. Any Member opting to maintain the higher level of adjusted net capital would also be subject to the financial recordkeeping and reporting requirements applicable to FCMs. Eligible guarantor FCMs are those that meet the eligibility requirements for executing a Supplemental Guarantor Certification Statement pursuant to NFA Registration Rule 504(a)(2)(B).

Those Members meeting the criteria will be required to tape record all telephone conversations which occur between their APs and both existing and potential customers. The Board believes that tape recording these conversations provides these Members with the best opportunity to monitor closely the activities of their APs and also provides these Members with complete and immediate feedback on each AP’s method of soliciting customers. Members meeting e criteria must tape record these conversations for a period of two years and must retain such tapes for a period of two years from the date each tape is created. In retaining the tape recorded conversations, Member firms must catalog the tapes by AP and date. Additionally, any Member firm meeting the criteria must require all its APs to maintain a daily log for sales solicitations which reflects at a minimum the identity of each customer or prospective customer the AP spoke with on each day. A Member firm must be able to promptly produce, upon request from NFA or the CFTC, all conversations relating to a specific AP, and only that AP, for a given date.

In addition, for a period of two years, those Members meeting the criteria will be required to file all promotional material, as defined in NFA Compliance Rule 2-29(h), with NFA at least 10 days prior to its first use.

If an NFA Business Conduct Committee disciplinary proceeding or CFTC enforcement proceeding has been filed against a Member firm required to adopt these enhanced supervisory procedures, then the enhanced supervisory procedures will remain in effect for the applicable time period specified or until after the disciplinary or enforcement proceeding is closed and all appeals are completed or the time for appeal has passed without an appeal being filed or perfected, whichever occurs latest. However, Member firms are not required to retain tapes for more than two years after they are created.

Any Member required to adopt these enhanced procedures may seek a waiver of the enhanced supervisory requirements. NFA may grant such a waiver upon a satisfactory showing that the Member’s current supervisory procedures provide effective supervision over its employees including enabling the Member to identify potential problem areas before customer abuse occurs.

A Member firm that does not comply with this Interpretive Notice will violate NFA Compliance Rule 2-9 and will be subject to disciplinary action.

Apache Trading Corporation
Atlantic Futures, Inc.
Atlantic Mercantile Group, Inc.
Bachus & Stratton Commodities, Inc.
BP Financial of Boston, Inc.
Chicago Commodity Corp.
Chilmark Commodities Corp.
Churchill Group, Inc.
Commodity Fluctuations Systems, Inc.
D.E. Jones Commodities, Inc.
Diversified Trading Systems, Inc.
Dunhill Investments Corporation
Durkin & Associates, Inc.
E. David Stephens Commodities Corp.
England, Mark W. d.b.a. Paragon Futures Association
Financial Services Group, Inc.
First Commodity Corp. of Boston
First National Monetary Corp.
First Sierra Corporation
Futures Financial Advisors of Palm Beach
Gabriel Brokerage, Inc.
Gemini Investments, Inc.
Grandview Holding Corp.
Great American Commodities Corp., Inc.
Index Services, Inc.
International Futures Strategists, Inc.
International Trading Group, Ltd.
Investment Syndication Corporation
JCC, Inc.
Masters Trading Organization, Ltd.
Montgomery International Trading, Inc.
Multivest Options, Inc.
Murlas Commodities, Inc.
Nationwide Futures Corporation
Neimann-Lloyds, Inc.
Option America, Inc.
Premex Incorporated
Presidential Futures, Inc.
Stirn, Barry Gerald
Tara Securities Corp.
Trinity Financial Group, Inc.
Waters Tan & Co., Inc.
Whitehall Investors International, Inc.
Zipkin, William L.

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