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Explanation of Proposed AmendmentsIn 1993, NFA's Board adopted an Interpretive Notice to NFA Compliance Rule 2-9 that requires firms, which employ a significant number of APs who have previously worked at a Disciplined Firm, to adopt enhanced supervisory procedures, including tape recording all conversations between APs and customers. Since 1993, the Interpretive Notice has defined a Disciplined Firm as one that meets the following three criteria:
Last month, the question was raised as to the proper interpretation of the phrase "closed down and permanently barred," as used in the third criterion. This issue arose in the context of a settlement of an NFA Business Conduct Committee ("BCC") sales practice complaint alleging telemarketing fraud against a south Florida firm.
The firm went out of business in February 2001 and withdrew its NFA membership and CFTC registration in April 2001. Although NFA had informed the firm that it was under investigation in the Spring of 2001, the BCC issued the sales practice Complaint against the firm in October 2001 and the Complaint was settled in October 2002. Under the terms of the settlement, the firm agreed to be permanently barred from NFA membership.
The firm maintains that it should not be considered a "Disciplined Firm," under the Interpretive Notice, because it does not meet the third criterion listed above. Specifically, the firm argues that it was not "closed down" as a result of the charges in the recent BCC Complaint since it had already gone out of business and withdrawn its CFTC registration and NFA membership when the Complaint was issued.
NFA staff does not agree with the firm's position. NFA has always taken the view that "closed down" and "permanently barred" describe the same thing, namely, a final resolution in a sales practice case which results in a permanent bar and closure of a firm. Although it is true that, in this case, the firm ceased operations and withdrew its NFA membership prior to the issuance of the Complaint, there was nothing to prevent the firm from reapplying for NFA membership and resuming business. It was not until the firm agreed to be permanently barred from NFA membership in settlement of the BCC Complaint that the firm was finally and irreversibly "closed down and permanently barred" as contemplated by the Interpretive Notice.
If the firm's interpretation were to prevail, any firm that is the subject of a sales practice investigation could merely cease operations, prior to the issuance of a Complaint, reopen under a different name and, thereby, avoid being designated as a "Disciplined Firm." Such a result would neutralize the Interpretive Notice and render it useless. Therefore, NFA's Board determined to clarify the interpretive notice by deleting the phrase "closed down" from the third criterion.