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A. Explanation to Proposed Deletion of Compliance Rules 2-13(d) and 2-35(d) and the Interpretive Notice Concerning CPO Profile Documents
Currently, NFA Compliance Rule 2-13(d) permits CPOs to solicit accredited investors with a notice of intended offering and statement of terms, and NFA Compliance Rule 2-35(d) permits CPOs to solicit customers with a profile document. NFA adopted these rules to make it easier for CPOs to solicit pool participants without giving them the pool's disclosure document.
As the Commission recently amended its Part 4 rules to allow CPOs and CTAs to advertise their commodity pools or their advisory services to all types of customers before they deliver a disclosure document, the Board determined that NFA Compliance Rules 2-13(d) and 2-35(d) and a related interpretive notice are no longer needed and, in fact, are unnecessarily restrictive.
B. Explanation to Proposed Amendments to Registration Rules 204 and 802
NFA recently implemented a process in the Online Registration System ("ORS") for foreign firms to apply for an exemption from registration under CFTC Regulation 30.5. At the CFTC's request, NFA did not include foreign firms exempt under CFTC Regulation 30.10 in this process, though NFA anticipates adding them in the future. In the meantime, the Board determined to amend Rule 204 to treat both 30.5 and 30.10 exempt firms the same for registration fee purposes. Currently, 30.5 exempt firms, like all other firms except 30.10 exempt firms, pay the annual $100 records maintenance fee that was implemented when ORS was developed. Although 30.10 firms cannot apply for the exemption using ORS, their records are still maintained in ORS and, therefore, the Board believes they should pay the annual $100 fee. As with 30.5 exempt firms, the failure to pay this fee will result in the loss of the confirmation of their exempt status.
Additionally, 30.5 exempt firms are required to file an agency agreement with NFA designating a U.S. agent for service of process. If this agreement is terminated and the 30.5 exempt firm does not file a new agreement, the firm is deemed to request withdrawal of its confirmed 30.5 exempt status. The current rule provides that the deemed request to withdraw occurs 30 days after the agency agreement is terminated, with the withdrawal request becoming effective in another 30 days. In contrast, the termination of a guaranteed IB's guarantee agreement constitutes a request to withdraw from registration effective 30 days after the termination unless the IB files a new guarantee agreement. For consistency purposes, the Board amended Rule 204 so that the termination of a 30.5 exempt firm's agency agreement is treated in the same manner and constitutes a request to withdraw the firm's confirmed exempt status effective 30 days after the agreement is terminated unless a new agency agreement is filed.
As the Commission is aware, as part of the registration application process, foreign firms agree to make their books and records available in the U.S. on 72 hours notice by NFA or the CFTC. The Board believes that time period is too long when the firm holds customer funds, particularly in circumstances which give NFA reason to believe that those funds may be in jeopardy. The Board therefore amended Rule 802 to provide that foreign firms applying to be registered as an FCM must agree that they will produce their books and records in the U.S. on 24 hours notice unless good cause is shown. This amendment will provide NFA with the discretion to require production of a foreign firm's books and records on short notice in appropriate circumstances. Additionally, NFA currently does not have ready access to examination reports issued to or disciplinary actions taken against foreign firms by foreign regulators. Similarly, the firms' non-U.S. regulators may require the firms, either by rule or otherwise, to provide notice to it of certain events. While NFA can require that the firms provide such matters under NFA Compliance Rule 2-5, the Board amended Rule 802 so that foreign firms will agree, as part of the registration process, that they will provide this information at the time they apply for registration and thereafter.
C. Explanation to Proposed Amendments to Arbitration Rules
Section 2(a)(iii) of the Code of Arbitration ("Code") refers to claims delegated to NFA by an exchange under Section 5a(11) of the CEA. The December 2000 amendments to the CEA eliminated Section 5a(11) and replaced it with a core principle now found in Section 5(d)(13). The Board, therefore, amended Section 2(a)(iii) of the Code to delete the reference to Section 5a(11) of the CEA.
Section 4 of NFA's Member Arbitration Rules ("Member Rules") states that a counterclaim is timely if it is filed within two years after the Member or Associate knew or should have known about it or within 45 days after the original claim is filed, whichever is later. When this provision was adopted, it corresponded to the 45-day time period for when answers were due. Last year NFA amended the Member Rules and shortened the Answer due date for claims under $50,000 but did not make a corresponding change to Section 4. The Board, therefore, amended Section 4 of the Member Rules to provide that a counterclaim must be filed within two years or in a timely filed Answer.
The Board also amended Section 5(g)(2) of the Member Rules to give a party 35 days to file a Reply to a Counterclaim or Cross-Claim if the aggregate claim amount exceeds $50,000. This time frame corresponds with the Code and with last year's amendments to the Member Rules.
As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act and will make the proposals contained herein effective ten days after receipt of this submission by the Commission unless the Commission notifies NFA that the Commission has determined to review the proposals for approval.