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Notice I-14-08

February 27, 2014

Proposed Amendments to NFA's Articles of Incorporation for Changes to the Structure of NFA's Board of Directors and Executive Committee

Important: Ballot Enclosed Must Be Submitted by March 21, 2014

Introduction

In August 2012, NFA's Board of Directors (Board) adopted significant changes to the composition of the Board and the Executive Committee to integrate Swap Dealers (SDs) and Major Swap Participants (MSPs). These changes were made at the recommendation of the Board-appointed Special Committee on NFA Governance (Special Committee).

The Special Committee recently reviewed the 2012 governance changes and recommended to the Board that additional changes be made. At its meeting on February 20, 2014, the Board accepted the Special Committee's recommendations and unanimously ratified changes to NFA's Articles of Incorporation (Articles) to provide that:

  • The Executive Committee would have two representatives from the FCM/IB, CPO/CTA, Swap Participant/RFED and exchange categories. In addition, the Chairperson would be a member of the Executive Committee in his/her role as Chairperson but would vote only in case of a tie vote;
  • A separate RFED Director seat be eliminated and RFEDs be combined with SDs and MSPs for the purposes of Board representation; and
  • The Articles provide that Public Representatives continue to comprise 35% of the Board but do not reflect an exact number (i.e. 14) of Public Representatives.

Changes to the Executive Committee

In 2009, the Board made significant changes to the composition of the Executive Committee to voluntarily comply with the CFTC's requirement that public representatives comprise at least 35% of NFA's governing bodies. Specifically, NFA's President was made an ex-officio non-voting member of the Executive Committee, and the Board's Chairperson no longer sat on the Executive Committee by virtue of his/her position but would represent the membership category that he/she represented on the Board. This permitted the Executive Committee to remain a reasonable size while adding three public representatives to satisfy the 35% requirement.

In 2012, the Special Committee adopted the same approach (i.e. the Chairperson represents his/her membership category) in recommending that the Executive Committee have two representatives from each membership category and five public directors. The Special Committee's decision to recommend that the Chairperson represent his/her membership category rather than be a member of the Executive Committee by virtue of his/her position as Chairperson was based on keeping the Executive Committee a reasonable size and avoiding tie votes.

The Special Committee recently recommended a return to the Chairperson being a member of the Executive Committee by virtue of his/her position as Chairperson. The Special Committee believed that over the past two years the position of the Board's Chairperson has evolved and this change is warranted. The Special Committee accomplished this change by maintaining a reasonable size for the Executive Committee and by avoiding the situation of tie votes.

The Special Committee recommended that the Executive Committee's size be increased by one member to fourteen with a composition as follows: the Chairperson, 2 FCM/IBs, 2 SD/MSPs/RFEDs, 2 CTA/CPOs, 2 contract markets, and 5 public representatives. In order to address the desire to avoid tie votes, the Special Committee also recommended that the Chairperson be a non-voting member of the Executive Committee, except in the case of tie votes.

RFED Director

In August 2012, the Special Committee recommended that the RFED category have one Board representative. As of April 30, 2012, there were 18 Forex Dealer Members (FDMs) consisting of eleven RFED/FCMs, two RFEDs only, and five FCMs-only. Their total liability to customers was about $870 million. Since then, the number of FDMs has dramatically dropped to ten-six RFED/FCMs, two RFEDs only and two FCMs-only-and their total liability to customers is about $655 million. Three of the RFEDs and an affiliate of a fourth RFED are also provisionally registered SDs; and one of the FCM-only FDMs is an SD.

The Special Committee made its recommendation in 2012 in part "to reflect the fact that the retail forex community may have interests not fairly and adequately represented by traditional FCMs." The Special Committee has reconsidered this recommendation in light of the drastic reduction in the number of RFED Members and the fact that these FDMs' business model and products more closely resemble SDs.

This alignment of interests can be observed since as noted above three RFED Members and an affiliate of a fourth RFED are also SD Members. Additionally, from a counterparty transactional perspective, combining RFEDs with SD/MSPs for the purpose of Board representation is a logical approach. The only significant difference between RFEDs and SDs appears to be that RFEDs act as counterparty to forex transactions (likely considered swaps without Section 1a(47)(B)(i)'s exclusion) with non-ECPs, whereas SDs act as counterparty to forex swaps transactions with ECPs. The Special Committee therefore recommended that RFEDs be combined with SDs and MSPs for the purposes of Board representation, and the separate RFED Board seat be eliminated.

Public Representatives

NFA's voluntary compliance with a 2007 CFTC Acceptable Practice for exchange governance and conflicts of interest requires that 35% of NFA's Board be comprised of public representatives. The 2012 Board restructuring to integrate Swap Participants required that the number of public representatives on the Board be increased over a four-year period from ten to fourteen. Since the Board's size may increase or decrease over time, the Special Committee recommended that the Articles eliminate any reference to an exact numerical figure (i.e. 14) for public representatives and merely indicate that by 2016 the Board will have 35% public representatives.

Miscellaneous Amendments

A number of technical amendments to the Articles are necessary.

Action Steps

NFA's Board unanimously ratified a proposal to amend Articles VII (Board of Directors), VIII (Executive Committee), X (Nominating Committee), XI (Bylaws), XVII (Adoption, Amendment and Repeal of Articles) and XVIII (Definitions) as described above. Attached are the proposed amendments to the Articles.

Amendments to NFA's Articles require the affirmative vote of a majority of those Members actually voting in each Member category - Contract Market, FCM/LTM/IB/FDM, CPO/CTA, and SD/MSP. Please use the enclosed ballot to vote and fax, email, or mail it to NFA for receipt no later than March 21, 2014. Should you have any questions, please contact Tom Sexton, NFA's General Counsel, at (312) 781-1413 or at tsexton@nfa.futures.org.

NATIONAL FUTURES ASSOCIATION

BALLOT

Printable Ballot

Please Fax This Ballot to NFA,
Attention Tom Sexton
(Fax Number: 312-781-1467)

or

Email it to Ballot2014@NFA.futures.org

or

Mail it to:
Tom Sexton
National Futures Association
300 South Riverside Plaza
Suite 1800
Chicago, IL 60606

Must Be Received or Postmarked
No Later than March 21, 2014


Amendments to the following NFA Articles of Incorporation to provide that the Chairperson of the Board be a member of the Executive Committee in his/her role as Chairperson but vote only in case of a tie vote; that a separate RFED Director seat be eliminated and RFEDs be combined with the SDs and MSPs for purposes of Board representation; that the number of public representatives on the Board be reduced by one; and that various technical amendments be made.

  • Article VII (Board of Directors);
  • Article VIII (Executive Committee);
  • Article X (Nominating Committee);
  • Article XI (Bylaws);
  • Article XVII (Adoption, Amendment and Repeal of Articles); and
  • Article XVIII (Definitions)

APPROVE

DISAPPROVE

Please Check Your Member Category

  • _____ Contract Market
  • _____ FCM/LTM/IB/FDM
  • _____ CPO/CTA
  • _____ SD/MSP

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