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Notice I-14-11

May 19, 2014

Late Disclosure Filing Fee

NFA staff spends a considerable amount of time and effort to obtain disclosure of matters that applicants or registrants fail to disclose but that NFA discovers on its own. NFA recently adopted rule changes that provide for payment of a $1,000 fee when a firm or individual fails to disclose a disciplinary matter on a registration application or fails to promptly update an existing registration record to disclose a new disciplinary matter. This fee is intended to offset, in part, the cost associated with NFA's efforts in reviewing non-disclosed matters. The rule will become effective on June 1, 2014, and will apply to registration applications filed after that date and updates to report matters occurring after that date. Contemporaneously, NFA will institute a policy of not taking adverse registration actions when the failure to disclose is the result of negligence or carelessness.

In December 2007, NFA issued a Notice to Members (I-07-48) that described its policies with respect to failures to disclose based on discussions with CFTC staff. The Notice to Members advised that a non-intentional failure to disclose a disciplinary matter could nonetheless constitute a willful failure to disclose and therefore subject the firm or individual to being statutorily disqualified from registration. The Notice further stated that a failure to disclose is willful if the firm or individual knew about the matter but did not disclose it on a registration application or promptly update an existing registration record to disclose a new matter.

As a consequence, since December 2007 NFA has initiated numerous adverse registration actions based solely upon a failure to disclose without regard to whether the non-disclosure was simply negligent or careless. Recent discussions with CFTC staff have resulted in a modification of that policy in coordination with the imposition of the late disclosure fee. NFA will continue to review each failure to disclose and evaluate the explanation provided for the non-disclosure to determine whether the circumstances surrounding the non-disclosure evidence negligence or carelessness. However, if the facts and circumstances evidence that the non-disclosure was truly willful and not simply negligent or careless, the non-disclosure would constitute a basis for an adverse registration action. For example, if an individual has failed to disclose matters in the past, NFA may institute an adverse registration action based solely on the non-disclosure even if the underlying matter is not itself used as a basis to disqualify the individual. NFA may also include the non-disclosure of a matter as an independent basis to disqualify an individual if NFA also uses the undisclosed matter itself as a basis for the adverse registration action. These examples are not meant to be exhaustive but represent two common scenarios.

The late disclosure fee will be imposed irrespective of whether or not NFA initiates an adverse registration action based on the failure to disclose or the underlying matter. With respect to disclosure of new matters, the sponsor is responsible for promptly reporting not only matters that relate to the firm but also matters related to its APs and principals, who must advise their sponsor of any new matters. Generally, NFA considers a matter to have been promptly disclosed if the firm, whether for itself or its APs and principals, discloses the matter before NFA discovers the matter and requests disclosure of it.

Additionally, in the case of an AP's or principal's non-disclosure, the individual's sponsor, as part of its supervisory obligations, is responsible for performing sufficient due diligence to reasonably ensure that all matters requiring disclosure are in fact disclosed. Consequently, the rule provides that the sponsor is responsible for payment of the late disclosure fee to NFA when a principal or AP fails to disclose a matter. However, the rule does not prohibit the sponsor from requiring the individual to reimburse it for the late filing fee. Finally, when an individual is sponsored as an AP by or is a principal of multiple entities, each sponsor bears equal responsibility to perform the necessary due diligence, and each sponsor will be assessed the late filing fee.

If you have any questions regarding this Notice or registration requirements generally, please contact Michael J. Crowley, Associate General Counsel, at (312) 781-1388 or mcrowley@nfa.futures.org.

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