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PROPOSED AMENDMENTS
(additions are underscored and deletions are stricken through)

COMPLIANCE RULES

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RULE 2-7. BRANCH OFFICE MANAGERS AND DESIGNATED SECURITY FUTURES PRINCIPALS.

(a) No Member shall allow an Associate to be a branch office manager unless:

(1) The Associate has taken and passed the "Branch Manager Exam-Futures": Provided, however, that any Associate who subsequently ceases acting as a branch manager will not be required to retake and pass the examination in order to resume acting as a branch manager unless after acting as a branch manager the Associate was not registered in any capacity for a period of more than two years; or

(2) The Associate is sponsored by a registered broker-dealer and is qualified to act as a branch office manager under the rules of either the New York Stock Exchange or National Association of Securities Dealers the Financial Industry Regulatory Authority.

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RULE 2-30. CUSTOMER INFORMATION AND RISK DISCLOSURE.

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(c) The information to be obtained from the customer shall include at least the following:

(1) the customer's true name and address, and principal occupation or business;

(2) the customer's current estimated annual income and net worth;

(3) the customer's approximate age; and

(4) an indication of the customer's previous investment and futures trading experience;

In addition, Members that are not also members of NASD Regulation, Inc. the Financial Industry Regulatory Authority and their Associates must obtain the following information from each customer who is an individual if the customer trades security futures products:

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(j) Members that are not also members of NASD Regulation, Inc. the Financial Industry Regulatory Authority and their Associates shall adhere to the following additional requirements relating to accounts for customers that trade security futures products:

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FINANCIAL REQUIREMENTS

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SECTION 11. FOREX DEALER MEMBER FINANCIAL REQUIREMENTS.

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(b) A Forex Dealer Member may not include assets held by an affiliate (unless approved by NFA) or an unregulated person in its current assets for purposes of determining its adjusted net capital under CFTC Rule 1.17. An affiliate is any person that controls, is controlled by, or is under common control with the Forex Dealer Member.

For purposes of this section and section (c), a person is unregulated unless it is:

    (i) a financial institution regulated by a U.S. banking regulator;

    (ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NASD Inc. the Financial Industry Regulatory Authority;

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SECTION 14. ASSETS COVERING LIABILITIES TO RETAIL FOREX CUSTOMERS.

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(c) For assets held in the United States, a qualifying institution is:

    (i) a bank or trust company regulated by a U.S. banking regulator;

    (ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NASD Inc. the Financial Industry Regulatory Authority; or

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REGISTRATION RULES

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RULE 209. ALTERNATIVE TO THE FINGERPRINT FILING REQUIREMENT IN CERTAIN CASES.

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(d) Any sponsor that is registered as a Broker/Dealer that files a Form 8-R on behalf of an AP applicant or a principal may, in lieu of submitting a fingerprint card for the applicant or principal, represent in the Form 8-R that, within the last 90 days, an application for registration as a General Securities Representative has been filed on behalf of the applicant with the National Association of Securities Dealers, Inc. Financial Industry Regulatory Authority and that a fingerprint card containing the applicant's or principal's fingerprints accompanied the application.

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RULE 401. QUALIFICATION TESTING REQUIREMENT.

(a) Except as provided elsewhere in this Rule, any individual applying to become a Member of NFA as an FCM, an IB, a CPO, a CTA, an LTM, or for registration under the Act as an AP of any of the foregoing, or applying for registration with NFA as an Associate pursuant to NFA Bylaw 301(b) shall not be granted NFA membership, registered under the Act as an AP, or registered as an Associate Member of NFA unless:

(1) NFA has received satisfactory evidence that the applicant has taken and passed the National Commodity Futures Examination (Series 3) on a date which is no more than two years prior to the date the application is received by NFA; or

(2) NFA has received satisfactory evidence that the applicant has taken and passed the National Commodity Futures Examination (Series 3) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as a FB, AP or principal of an FCM, IB, CTA, CPO or LTM.

(b) Notwithstanding the provisions of Rule 401(a), a person applying to be registered as an AP will satisfy the proficiency requirements of this Rule if:

(1) the applicant currently is registered with the National Association of Securities Dealers, Inc., Financial Industry Regulatory Authority as a General Securities Representative ("GSR") of the sponsor; and

(2) the applicant's sole activities, subject to regulation by the Commission, are and will continue to be limited to referring clients to an AP of the sponsor who has satisfied the proficiency requirements set forth in this Rule, provided that the applicant's referral of clients is solely incidental to his business as a GSR of the sponsor; or the supervision on behalf of the sponsor of persons whose activities are so limited.

(c) Notwithstanding the provisions of Rule 401(a), a person applying to be registered as an AP will satisfy the proficiency requirements of this Rule if:

(1) NFA receives satisfactory evidence the applicant has taken and passed the Futures Managed Funds Examination (Series 31) on a date which is no more than two years prior to the date the application is received by NFA; or

(2) NFA has received satisfactory evidence that the applicant has taken and passed the Futures Managed Fund Examination (Series 31) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as an FB, AP or principal of an FCM, IB, CTA, CPO or LTM; and

(3) the applicant currently is registered with the National Association of Securities Dealers, Inc., Financial Industry Regulatory Authority as a GSR of the sponsor; and

(4) the applicant's sole activities, subject to regulation by the Commission, are and will continue to be limited to the solicitation on behalf of the sponsor of funds, securities, or property for participation in a commodity pool, the solicitation on behalf of the sponsor of clients to open discretionary accounts to be managed by registered CTAs, or the supervision on behalf of the sponsor of persons whose activities are so limited.

(d) Notwithstanding the provisions of Rule 401(a), a person applying to be registered as an AP will satisfy the proficiency requirements of this Rule if:

(1) NFA has received satisfactory evidence that the applicant has taken and passed the Financial Instruments Examination (Series 33) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as an AP or a principal of an FCM, IB, CTA, CPO or LTM; and

(2) the applicant currently is registered with the National Association of Securities Dealers, Inc., Financial Industry Regulatory Authority as a GSR of the sponsor; and

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INTERPRETIVE NOTICES

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NFA COMPLIANCE RULE 2-4: CONFIDENTIALITY LANGUAGE IN RELEASE AGREEMENTS

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The National Association of Securities Dealers, Inc. ("NASD") Financial Industry Regulatory Authority ("FINRA") has also encountered the use of this language by some of its members. In response, the NASD FINRA issued a notice informing its members that this practice may be viewed as unethical and would constitute a violation of NASD FINRA rules.

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COMPLIANCE RULE 2-9: ENHANCED SUPERVISORY REQUIREMENTS

I. INTRODUCTION

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One factor identified by the Board as common to these firms and directly related to their sales practice problems is the employment history and training of their sales forces and firm principals. For many of these Members, a significant portion of these individuals were previously employed and trained by one or more Member firms which had been disciplined for fraud. The Board believes that the employment history of a Member's APs and principals is a relevant factor to consider in identifying firms with potential sales practice problems. If a Member firm is disciplined by NFA or the CFTC for fraud related to widespread telemarketing or promotional material problems or by the NASD Financial Industry Regulatory Authority or the SEC for fraud related to its sales practices regarding security futures products as defined in Section 1a (32) of the Commodity Exchange Act ("Act"), it is reasonable to conclude that the training and supervision of its sales force was wholly inadequate or inappropriate. It is also reasonable to conclude that an AP or principal who received inadequate or inappropriate training and supervision may have learned improper sales tactics, which he will carry with him to his next job. Therefore, the Board believes that a Member firm employing such a sales force must have stringent supervisory procedures in place in order to ensure that the improper training its APs and principals have previously received does not taint their sales efforts on behalf of the Member.

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COMPLIANCE RULE 2-9: SPECIAL SUPERVISORY REQUIREMENTS FOR MEMBERS REGISTERED AS BROKER-DEALERS UNDER SECTION 15(b)(11) OF THE SECURITIES EXCHANGE ACT OF 1934

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HIRING EMPLOYEES AND ENTERING INTO GUARANTEE AGREEMENTS

An adequate program for supervision must include thorough screening procedures for prospective employees who will be involved in commodity futures activities. In regard to prospective employees who may be involved in activities regarding security futures products and who have been registered in the securities industry, this screening process must include a check of the Central Registration Depository (CRD) for any derogatory information on the employee and his or her employer.2 The screening does not have to be done by a designated security futures principal. The designated security futures principal must, however, regularly review hiring practices to ensure that the screening process is taking place and to otherwise ensure that qualified personnel are investigating the good character, business repute, qualifications, and experience of employees who may be involved in security futures activities. Furthermore, all relevant information must be considered in making the hiring decision and determining how much supervision the employee will require.

A Member must obtain and review a copy of the most recent Form 8-T or U-5 (including any amendments) filed by a new employee's most recent security or futures employer if the employee will be involved in registered activities regarding security futures products. The Member shall obtain the Form 8-T or U-5 (including any amendments) no later than sixty days after the individual files an application for registration as an associated person (AP) of the Member under the Commodity Exchange Act. A Member that does not obtain the information within 60 days has the burden of demonstrating that it has made a reasonable effort by attempting to obtain the information both from NFA and NASDR FINRA (through the CRD), as applicable, and from the employee. If the Form 8-T or U-5 includes any derogatory information, the employer shall take such action as it deems appropriate.

The procedures must also require the employee to provide a copy of the Form 8-T or U-5 (and any amendments) to the Member within two business days after the Member requests it or, if the former employer did not provide a copy of the Form 8-T or U-5 to the employee, the employee shall promptly request a copy from the former employer (or from NFA or NASDR FINRA if the former employer cannot or will not provide it), and must provide the Form 8-T or U-5 to the Member within two business days after receiving it. The procedures must also require the employee to promptly provide the Member with any subsequent amendments to the Form 8-T or U-5.3

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2 If the prospective employer does not have direct access to the CRD, it can obtain the information from NASD Regulation, Inc. (NASDR) the Financial Industry Regulatory Authority ("FINRA") using NASDR's FINRA's public disclosure program. NASDR's FINRA's public disclosure program can be accessed through its web site at www.nasdr.com www.finra.org.

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NFA COMPLIANCE RULE 2-37: FAIR COMMISSIONS

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The vast majority of NFA Members charge fair commissions, and Compliance Rule 2-37(g) will not require them to make any changes to their commission practices for security futures products. Commissions for futures transactions have been set competitively since the 1970s. They are usually based on the Member's costs plus a reasonable profit. Commission rates also vary based on the services provided by the Member. Additionally, Members who deal with institutional customers often negotiate commissions based on volume or similar measures. All of these practices continue to be acceptable for security futures products.1

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1 NFA does not believe it is appropriate to apply a guideline similar to NASD's the Financial Industry Regulatory Authority's 5% guideline for securities mark-ups. The cost of executing orders in the futures markets tends to have little correlation with either the notional value of the contract or the amount of margin. Although nothing prohibits NFA Members from setting commissions for security futures contracts based on the notional value of the contract or the amount of margin, those commissions must be reasonable in light of all of the circumstances, including the Member's expenses and the value of the Member's services.

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NFA COMPLIANCE RULES 2-7 AND 2-24 AND REGISTRATION RULE 401: PROFICIENCY REQUIREMENTS FOR SECURITY FUTURES PRODUCTS

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Current NFA Members and Associates will be able to satisfy their proficiency requirements for security futures by taking any training program that covers the subject matter included in a content outline that has been jointly developed by NFA, NASD the Financial Industry Regulatory Authority, and a number of securities and futures exchanges. A copy of that outline can be found on NFA's website at www.nfa.futures.org. New registrants can also qualify through training if they take the Series 3 examination and apply for registration before the revised examination becomes available. THE TRAINING MUST BE COMPLETED BEFORE AN INDIVIDUAL REGISTRANT ENGAGES IN ACTIVITIES INVOLVING SECURITY FUTURES PRODUCTS. Any registrant who is eligible to qualify through training has until December 31, 2009 before that eligibility lapses. Registrants who subsequently decide to engage in security futures activities will be required to take the relevant examination.2

NFA, in partnership with NASD the Financial Industry Regulatory Authority and the Institute for Financial Markets, has developed a web-based training program that will satisfy the training requirement. That program can be accessed at www.nfa.futures.org. There is no charge for completing this training program.

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NFA COMPLIANCE RULE 2-30(B): RISK DISCLOSURE STATEMENT FOR SECURITY FUTURES CONTRACTS

NFA Compliance Rule 2-30(b) requires Members and Associates who are registered as brokers or dealers under Section 15(b)(11) of the Securities Exchange Act of 1934 to provide a disclosure statement for security futures products to a customer at or before the time the Member approves the account to trade security futures products.1 NFA Compliance Rule 2-30(j)(1) requires these Members and Associates to make a record of when the disclosure statement was provided, and Compliance Rule 2-29(j)(12) prohibits them from including anything other than basic information in promotional material unless the promotional material is preceded or accompanied by the disclosure statement.2


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2 NASD Financial Industry Regulatory Authority ("FINRA") members are subject to equivalent NASD FINRA requirements.

The disclosure statement for security futures products referred to in these Rules is a uniform statement that has been jointly developed by NFA, NASD the Financial Industry Regulatory Authority, and a number of securities and futures exchanges.

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FOREX TRANSACTIONS

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A. BYLAW 306

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Bylaw 306(b) excludes Members that are otherwise subject to regulatory oversight for their forex activities, which means that these Members are not Forex Dealer Members and do not have to comply with Compliance Rule 2-36.2 The exclusions mostly follow Section 2(c)(2)(B)(ii) of the CEA, although the exclusions for broker-dealers and their affiliates are conditioned on NASD Financial Industry Regulatory Authority ("FINRA") membership. In particular, the following entities are not Forex Dealer Members:

  • financial institutions (e.g., banks and savings associations);

  • certain insurance companies and their regulated subsidiaries or affiliates;

  • financial holding companies;

  • investment bank holding companies;

  • registered broker-dealers that are members of NASD FINRA;3 and

  • Material Associated Persons of registered broker-dealers that are members of NASD FINRA.4

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B. COMPLIANCE RULE 2-36

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3. Supervision - Members and their Associates having supervisory responsibilities must diligently supervise the Member's forex business, including the activities of the Member's Associates and agents. Members must establish, maintain, and enforce written supervisory procedures.

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A Forex Dealer Member and a listed principal that is also a registered associated person (see Financial Requirements 15(c)) must supervise the preparation of a Forex Dealer Member's financial books and records. Diligent supervision includes hiring and retaining qualified staff. In determining whether an individual responsible for preparing the Member's financial books and records is qualified, the firm and its financial principal should consider the following:

  • Is the individual qualified for the position by experience or training?

  • Does the individual exercise independent judgment?

  • Has the individual ever been sanctioned or refused membership or licensing by NFA, the CFTC, the SEC, NASD or FINRA, the Public Company Accounting Oversight Board, or any other financial regulator?

  • Has the individual ever been sanctioned or refused membership by the American Institute of Certified Public Accountants or any other accounting organization?

  • Has any firm for which the individual performed auditing, accounting, or bookkeeping been subject to an emergency action or sanctioned by NFA, the CFTC, the SEC, NASD or FINRA, the Public Company Accounting Oversight Board, or any other financial regulator for failure to comply with financial requirements or for having inadequate books and records while the individual was engaged in those activities?

  • Are there any pending actions against the individual or a firm for which the individual performed auditing, accounting, or bookkeeping?

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C. OTHER REQUIREMENTS

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2. Financial Requirements Section 11(b)

Section 11(b) prohibits a Forex Dealer Member from including assets held by an affiliate (unless approved) or an unregulated person in the firm's current assets for purposes of determining its adjusted net capital under CFTC Rule 1.17. This means an FDM may not count any of those assets for capital purposes.17

An unregulated person is any person that is not:

(i) a financial institution regulated by a U.S. banking regulator;

(ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NASD Inc. FINRA;

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3 Bylaw 306(b)(ii) excludes broker-dealers that are members of any fully-registered national securities association and FCMs that are members of another registered futures association. At this time, however, NASD FINRA is the only fully-registered national securities association and NFA is the only registered futures association.

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COMPLIANCE RULE 2-36(e): SUPERVISION OF THE USE OF ELECTRONIC TRADING SYSTEMS

NFA Compliance Rule 2-36(e) places a continuing responsibility on every Forex Dealer Member (FDM) to diligently supervise its employees and agents in all aspects of its forex activities, and Compliance Rule 2-39 applies this same requirement to certain Members who solicit, introduce, or manage forex customer accounts.1

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1 Compliance Rule 2-39 and this Interpretive Notice apply to all Members except those who are described in Bylaw 306(b). It does not apply to Members who are registered as broker-dealers and members of NASD the Financial Industry Regulatory Authority.

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