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August 28, 2007
Effective Date of Amendments to NFA Interpretive Notice Regarding Enhanced Supervisory Requirements
NFA has received notice that the Commodity Futures Trading Commission ("CFTC") has approved a revised version of NFA's Interpretive Notice entitled "Compliance Rule 2-9: Enhanced Supervisory Requirements" ("Interpretive Notice") as well as a technical addition to NFA Compliance Rule 2-9(b). The changes to the Notice and Compliance Rule 2-9(b) will become effective on November 1, 2007.
The Interpretive Notice currently requires Members to adopt certain enhanced supervisory procedures ("Requirements") if they meet specific criteria set out in the Interpretive Notice. A Member firm triggering the Requirements must, among other items, tape record all telephone conversations between the Member's associated persons ("AP"s) and both existing and potential customers, submit all promotional material to NFA at least 10 days prior to first use, adopt written supervisory procedures, make quarterly reports of its compliance with the Requirements, and either operate pursuant to a guarantee agreement or maintain an increased level of adjusted net capital ("ANC").
The revised Interpretive Notice reorganizes the current version of the Notice to keep related topics in proximity to each other, and makes several technical adjustments to the Notice. It also, however, includes two new provisions which potentially expand the number of Members that may be impacted by the Interpretive Notice's triggering criteria beginning on November 1, 2007.
First, a new provision in the revised Interpretive Notice expands the definition of a Disciplined Firm beyond Members that have been permanently barred from the industry as the result of formal actions by either the CFTC or NFA for the use of deceptive telemarketing practices or promotional material. The new definition of a Disciplined Firm now also includes Members that have been sanctioned in any way by either the CFTC or NFA due to deceptive telemarketing practices or promotional material within the preceding five years.
It is important to note that a Member added as a Disciplined Firm based on this expanded definition will not itself be subject to the Requirements merely because they are now categorized as a Disciplined Firm. Rather, the effect of the change would be that if another Member firm employs an AP or lists a principal from a Disciplined Firm, then those APs and principals would be counted by the Member firm as having worked at a Disciplined Firm for purposes of determining whether the Member's employee mix triggers an obligation to adopt the Requirements.
Second, any Member that charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract is required to adopt the Requirements. Any Member that meets this criterion must promptly inform NFA after November 1, 2007 of this fact. In addition, upon request by NFA, Members shall have the burden of demonstrating to NFA that they charge more than 50% of their active customers round-turn commissions, fees and other charges that are less than the specified amounts. The term "active customers" as used in the Interpretive Notice means any customers who are entitled to a monthly statement under the provisions of CFTC Regulations Section 1.33(a).
Other changes to the Notice will-
In addition to the revised Interpretive Notice, a technical amendment to NFA Compliance Rule 2-9(b) specifically recognizes that NFA's Board is entitled to establish criteria related to the employment history of Members' principals and the amount of commissions and fees that Members charge in imposing the Requirements.
NFA's February 27, 2007 submission letter to the CFTC contains a more detailed explanation of the changes and includes a copy to Compliance Rule 2-9(b) and the Interpretive Notice with the amendments marked. You can access an electronic copy of the submission letter at http://www.nfa.futures.org/news/newsRuleSubLetter.asp?ArticleID=1784.
Questions concerning any of the requirements described above should be directed to John Brodersen, Associate Director, Compliance, at email@example.com or (312) 781-2226.