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Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

NFA Compliance Rule 2-36(d) makes Forex Dealer Members (FDMs) subject to discipline for the actions of their unregulated solicitors, even if there is no agency relationship between them. NFA Compliance Rule 2-39 incorporates some parts of Compliance Rule 2-36 and applies them to otherwise unregulated Members who solicit or manage retail forex accounts. While that rule includes supervisory responsibilities over agents, it does not make these Members subject to discipline for unregulated solicitors and account managers with whom they do not have an agency relationship. Therefore, NFA's current rules reach unregulated solicitors who introduce business directly to FDMs but, absent an agency relationship, do not reach unregulated solicitors who introduce accounts indirectly through a Member that is not an FDM.

Lately, NFA has seen a trend where former FDMs are giving up their counterparty activities, remaining NFA Members, and introducing retail forex accounts to FDMs on a fully disclosed basis. These firms do not directly solicit customers but have unregistered solicitors introduce accounts to them, which they then introduce to a current FDM that acts as the counterparty. These firms could remain as FCMs with a minimum net capital requirement of $500,000 or be registered IBs with a capital requirement of $45,000. Since the FDM is dealing with an NFA Member, depending on the particular business relationships the FDM may not be subject to discipline under Compliance Rule 2-36(d) and, therefore, the FDM could be insulated from liability for the unregulated solicitors' conduct. Additionally, the Member that has the relationship with the unregulated solicitors would not be subject to discipline for the unregistered solicitors' conduct under Compliance Rule 2-39 absent an agency relationship.

As the principal to the transaction, FDMs should always know who a retail customer was solicited or introduced by and who is managing that customer's account. Amendments to Compliance Rule 2-39 prohibit otherwise-unregulated Members from using unregulated solicitors when acting as fully disclosed forex intermediaries.

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