Proposed Rule

On May 6, 1996, the Commodity Futures Trading Commission ("CFTC" or "Commission") approved changes to CFTC Regulation 3.34 which, among other things, authorized National Futures Association ("NFA") to establish experience and testing requirements for ethics training providers. In the same Federal Register release, the Commission provided NFA with guidance on the types of testing and experience requirements it would consider appropriate.

Pursuant to its delegated authority, NFA's Board of Directors ("Board") has established that any person seeking to be included on the list of eligible ethics training providers must present satisfactory evidence to NFA that each individual who acts as an instructor, prepares ethics training video tapes or electronic presentations or supervises those who perform these functions has taken and passed the National Commodity Futures Examination ("Series 3"). This testing requirement shall not apply to any individual who is currently acting as an instructor or course preparer for an ethics training provider which has already been authorized by the Commission. The requirement would apply, however, to individuals hired by previously authorized ethics training providers as instructors or course preparers after the effective date of this Notice.

In addition, this testing requirement may be waived by NFA's Vice President of Compliance under circumstances approved by NFA's Board. The Board feels that such a waiver would be appropriate where the instructor or course preparer certifies to NFA that he:

• is acting without compensation, except for reimbursement of travel expenses;

• meets the minimum experience requirements for ethics training providers established by NFA's Board; and

• co-instructs with at least one individual who satisfies the proficiency testing requirements for ethics training providers.

The Commission also amended the rules to provide that each person seeking to be included as an eligible ethics training provider must demonstrate to NFA's satisfaction that each of its instructors or course preparers has three years of "relevant experience," as established by NFA. In doing so, the Commission recognized that what constitutes "relevant experience" is not susceptible to precise definition and, therefore, provided NFA with a degree of flexibility in administering this requirement. In general, NFA expects each course instructor to have a minimum of three years of experience either in the teaching profession or in the futures industry. In evaluating an individual's industry experience, the core question would be whether that person's background demonstrates an understanding of and sensitivity to the high ethical standards required of futures industry professionals. By way of example, individuals who have practiced law in futures-related areas or have had compliance or supervisory responsibility within a registered firm could be deemed to have satisfied the experience requirement.

The Commodity Futures Trading Commission ("CFTC" or "Commission") has delegated to National Futures Association ("NFA") the authority to maintain a list of eligible ethics training providers and to determine that a person should not be included on the list or should be removed from the list. See CFTC Regulation 3.34 and 60 Fed. Reg. 63907 (1995). This interpretive notice sets out the procedures which an ethics training provider must follow to be included on the list and which NFA must follow in determining that an ethics training provider should not be included on the list or should be removed from the list.

A. Applicant. Applicant means any person who seeks to be included on the list of eligible ethics training providers.

B. Certification Notice. A certification notice is a request to be added to the list of eligible ethics training providers, filed on a form provided by NFA, and any amendments or updates thereto.

C. Current Provider. Current provider means any person currently on the list of eligible ethics training providers.

D. Instructor. Instructor means any person who prepares or has input into the content of or who presents ethics training, including any individual who prepares or has input into the content of an ethics training videotape or electronic presentation but does not include any individual who merely assists in the administrative or technical aspects of any ethics presentation.

E. Membership Committee. Membership Committee means an NFA Committee formed pursuant to NFA Bylaw 701.

F. Person. Person means an individual, association, partnership, corporation, limited liability company, limited liability partnership, joint venture, trust or any other form of business organization.

G. Principal. Principal has the same meaning as in NFA Registration Rule 101 (n): Provided, however, that, with respect to any ethics training provider which is registered with the CFTC as a futures commission merchant, introducing broker, commodity pool operator, or commodity trading advisor and provides training only to its own employees and employees of its guaranteed introducing brokers, principal does not include any person who would be a principal under NFA Registration Rule 101 (n) but is not directly or indirectly involved in the ethics training activities of the firm.

A. Requests to be added to the list of eligible ethics training providers. Any person who wants to be added to the list of eligible ethics training providers must file a certification notice with NFA, on a form provided by NFA, which certifies that the applicant has taken and passed the proficiency testing requirements for an ethics training provider; possesses a minimum of three years of relevant experience for an ethics training provider; and includes identifying information and the certifications required by CFTC Regulation 3.34 (b) (3) (iii). The certification notice must also include an addendum for each principal and instructor on a form provided by NFA. Failure to respond within 30 days to a written request by NFA for clarification or the correction of a deficiency shall be deemed to constitute a withdrawal of the certification notice.

B. Reporting of deficiencies, inaccuracies, and changes. Each applicant and current provider must promptly correct any certification notice, including any addendum, which is deficient or inaccurate and must promptly report changes in the information on the certification notice, including any addendum, to NFA. An applicant or current provider must notify NFA, in writing, when a principal or instructor's affiliation with the applicant or current provider is terminated. In addition, an applicant or current provider which adds additional principals or instructors must promptly file an addendum for each such individual on a form provided by NFA.

C. Updates. Each current provider must file an updated certification notice with NFA at least every three years upon receiving a request from NFA.

D. Voluntary withdrawal of certification notice list/voluntary request to be removed from the list. An applicant may, at any time, request that his certification notice be withdrawn and no further consideration be given to his request to be included on the list. In addition, a current provider may, at any time, request that he be removed from the list of eligible providers.

E. Fees.

1. Each certification notice must be accompanied by a fee of $100 plus $50 for each addendum. Failure to pay the appropriate fee at the time of filing will be considered a deficiency in the certification notice.

2. Each addendum to add an additional principal or instructor must be accompanied by a fee of $50. Each triennial update must be accompanied by a fee of $100. Failure to pay the appropriate fees within 30 days after NFA notifies a current provider that the fees are overdue will result in the summary removal of the ethics training provider from the list of eligible ethics training providers. The procedures in Part IV of this interpretive notice shall not apply.

F. Address for Filing. Certification notices, addendums, updates and amendments shall be filed with the Vice President, Membership and Registration, of National Futures Association, 200 West Madison Street, Chicago, Illinois 60606.

A. Current providers shall provide records of attendees at ethics training programs to NFA in the format requested by NFA.

A. Basis for Action.

NFA may determine not to include any applicant on the list of eligible ethics training providers and may determine to remove any current provider from the list if:

(1) The applicant or current provider or any principal or instructor thereof is subject to:
(a) a statutory disqualification from registration under Section 8a(2) or (3) of the Commodity Exchange Act;

(b) a bar from serving on self-regulatory organization governing boards or committees based on disciplinary histories pursuant to Commission Rules 1.63 or any self-regulatory organization rule adopted thereunder; or

(c) a pending adjudicatory proceeding under Section 6 (c), 6 (d), 6c, 6d, or 9 of the Commodity Exchange Act, or a similar proceeding under Section 8a of the Commodity Exchange Act, or Commission Rules 3.55, 3.56 or 3.60;

(2) The applicant or current provider will or does conduct training via videotape or electronic presentation and fails to certify that the person will maintain or fails to maintain documentation reasonably designed to verify the attendance of registrants at the videotape or electronic presentation for the minimum time requirement;

(3) The applicant or current provider failed to report deficiencies, inaccuracies, or changes in the information provided to NFA within a reasonable time after the applicant or current provider knew, or in the exercise of reasonable diligence should have known, of the deficiency, inaccuracy, or change;

(4) The applicant or current provider filed a false certification; or

(5) The applicant or current provider's inclusion or continued inclusion on the list of eligible ethics training providers would be inconsistent with the purposes of Commission Regulation 3.34.

B. Proceedings to be Conducted by the Membership Committee.

A Final Order determining not to include an applicant on or to remove a current provider from the list of eligible ethics training providers shall be made by the Membership Committee or a designated Subcommittee in accordance with procedures set forth in this Part IV. A designated Subcommittee shall consist of three members of the Membership Committee. In cases submitted by the President to the Membership Committee or a designated Subcommittee, removal from the list of eligible ethics training providers shall not be effected pending a final determination by the Membership Committee or a designated Subcommittee. No member of the Membership Committee or a designated Subcommittee shall participate in an action to deny an applicant inclusion on or to remove a current provider from the list of eligible ethics training providers if the member, or any person with whom the member is connected, has a financial, personal or other direct interest in the matter under consideration.

C. General Provisions.

(1) Service.
(a) Service upon an applicant or current provider will be sufficient if mailed by certified mail return receipt requested, delivered to a generally recognized overnight courier service or delivered to a messenger service, properly addressed to the applicant or current provider at the address shown on his most recent certification notice filed with NFA or any amendment thereto. Service will be complete upon mailing, delivery to a generally recognized overnight courier service or delivery to a messenger service. Where a party effects service by mail, the time within which the person served may respond thereto shall be increased by three days.

(b) Documents served by an applicant or current provider upon NFA under this Part IV shall be considered served or filed only upon actual receipt by the Legal Docketing Department of National Futures Association, 200 West Madison Street, Chicago, Illinois 60606.

(2) Extensions of Time for Filing.

(a) Except as otherwise provided by law or by this Part IV, for good cause shown, the Membership Committee or a designated Subcommittee before whom a proceeding brought under this Part IV is then pending, on their own motion or the motion of a party, may at any time extend or shorten the time limit prescribed by this Part IV for filing any document. In any instance in which a time limit is not prescribed for an action to be taken concerning the matter, the Membership Committee or a designated Subcommittee may set a time limit for that action.

(b) Absent extraordinary circumstances, in any instance in which a time limit has been prescribed for an action to be taken exceeds seven days from the date of the order or provision establishing the time limit, requests for extension of time shall be filed at least five days prior to the expiration of the time limit and shall explain why an extension of time is necessary.

D. Withdrawal of Request to be Included on the List of Eligible Ethics Training Providers.

(1) Whenever information comes to the attention of NFA that an applicant is subject to any of the disqualifying conditions set forth in Section A, the Vice President of Compliance or the Vice President's designee may serve written notice upon the applicant which shall specify the disqualifying conditions to which the applicant may be subject and notify the applicant that:
(a) the information, if true, is a basis upon which the ethics training provider's request to be included on the list of eligible providers may be denied;

(b) unless the applicant voluntarily withdraws his request, it may be necessary to institute the denial procedures described in this Part IV; and

(c) if the applicant does not confirm in writing that he wishes to have his request given further consideration, his request will be deemed to have been withdrawn.

(2) The applicant must serve the written confirmation referred to in paragraph (1)(c) of this Section upon NFA's Legal Docketing Department within 20 days of the date the written notice from NFA was served.

E. Procedures Governing Applicants and Current Providers Subject to Any of the Disqualifying Conditions Set Forth in Section A.

(1) Notice of Intent. On the basis of information which NFA has obtained, the President of NFA may at any time serve a Notice of Intent upon any applicant or current provider, stating that:
(a) NFA alleges that the applicant or current provider is subject to one or more of the disqualifying conditions set forth in Section A;

(b) the allegations set forth in the Notice of Intent, if true, constitute a basis upon which the applicant or current provider can be denied inclusion on or removed from the list of eligible ethics training providers; and

(c) the applicant or current provider is entitled to have the Membership Committee or a designated Subcommittee consider evidence of the type set forth in Part 2 of this Section E.

The Notice of Intent shall also inform the applicant or current provider of the procedures which will be followed if no written submission is made in accordance with Part 2 of this Section E. The Notice of Intent must include evidence of the disqualifying conditions through affidavits and any other relevant documents. The Notice of Intent may include a request for an oral hearing.

(2) Written Response to the Notice of Intent

(a) Within 60 days of the date of service of the Notice of Intent upon the applicant or current provider, the applicant or current provider shall file with NFA's Legal Docketing Department a written response. The written response may challenge the accuracy of the allegations establishing that the applicant or current provider is subject to one of the disqualifying conditions set forth in Section A and/or show that notwithstanding the accuracy of the allegations set forth in the Notice of Intent, the applicant or current provider's inclusion or continued inclusion on the list of eligible ethics training providers would not be contrary to the public interest.

(b) Evidence challenging the accuracy of the allegations may include, but is not limited to, evidence as to:

(i) the applicant or current provider's identity;

(ii) the existence of a clerical error in any record documenting the disqualifying condition;

(iii) the nature or date of the disqualifying condition;

(iv) the post-conviction modification of any record of conviction; or

(v) the favorable disposition of any appeal.

The applicant or current provider shall state the nature of each challenge in the response and submit affidavits and any other documents which support facts material to each challenge.

(c) Evidence showing that notwithstanding the accuracy of the allegations set forth in the Notice of Intent, the applicant or current provider's inclusion on the list of eligible providers would not be contrary to the public interest may include, but is not limited to:

(i) mitigation evidence relating to the facts and circumstances surrounding the conduct underlying the disqualifying condition; and

(ii) evidence of rehabilitation since the conduct underlying the disqualifying condition.

The response must include affidavits and any other documents which the applicant or current provider believes support facts material to this showing.

(d) The response may include a request for an oral hearing. Any request for an oral hearing must be accompanied by a fee of $1,000. The fee shall be refunded if the Membership Committee or the designated Subcommittee denies the request.

(3) Default of Applicant or Current Provider to Notice of Intent. If the applicant or current provider fails to file a timely written response to the Notice of Intent, the applicant or current provider shall be deemed to have waived his right to submit a written response, and the facts stated in the Notice of Intent shall be deemed to be true for the purpose of determining that the applicant or current provider shall not be included on or shall be removed from the list of eligible ethics training providers. The Membership Committee or a designated Subcommittee shall thereafter, upon finding that service was properly effected in accordance with Section C (1), enter a final order denying an applicant inclusion on or removing a current provider from the list of eligible ethics training providers. Such finding shall be based upon the evidence of the disqualifying condition and the Notice of Intent with proof of service. In order to prevent injustice and on such conditions as may be appropriate, the Membership Committee or a designated Subcommittee may set aside a default order. Any motion to set aside a default order shall be made within a reasonable time, shall state the reasons for the failure to file and shall specify the nature of the proposed defense.

(4) NFA's Reply. Within 30 days after the date the applicant or current provider serves a copy of the response to the Notice of Intent on NFA, the Vice President of Compliance may prepare a reply and serve a copy of the reply on the applicant or current provider. The reply may include affidavits and other documents which NFA believes rebut the defense set forth in the response. The reply may also include a request for an oral hearing.

(5) Review of Written Submissions. Within 30 days of the later of the date the applicant or current provider files its response in accordance with paragraph (2) of this Section E, or the date NFA files its reply in accordance with paragraph (4) of this Section E, the Membership Committee or a designated Subcommittee shall review each party's written submissions and supporting documentation and shall make a finding as to whether an applicant has shown that his inclusion on the list of eligible ethics training providers should not be denied or whether a current provider has shown that he should not be removed from the list of eligible ethics training providers and shall issue an order accordingly, pursuant to the standards set forth in Section F: Provided, however, that the Membership Committee or a designated Subcommittee may, in its sole discretion, on its own motion or the motion of any party, schedule an oral hearing. Any oral hearing will be held pursuant to the provisions of NFA Registration Rule 506.

(6) Termination. At any time after the issuance of a Notice of Intent but prior to the effective date of a Final Order, the Membership Committee or a designated Subcommittee may issue a Withdrawal of Notice of Intent indicating that because the applicant has withdrawn its request to be included on the list of eligible providers, the current provider has requested to be removed from the list of current providers or for other good cause shown, further proceedings are not warranted.

F. Decision of Membership Committee or a Designated Subcommittee.

(1) Standards of Proof. The written decision of the Membership Committee or a designated Subcommittee shall specifically consider whether NFA has shown by a preponderance of evidence that the applicant or current provider is subject to the disqualifying condition set forth in the Notice of Intent, and, where appropriate, whether the applicant or current ethics training provider has shown by the preponderance of evidence that person's inclusion or continued inclusion on the list of eligible ethics training providers would not be contrary to the public interest.

(2) Findings. In making its written decision, the Membership Committee or designated Subcommittee shall set forth facts material to its conclusion and provide an explanation of its decision in light of the disqualifying condition set forth in the Notice of Intent and, where appropriate, its findings regarding:

(a) evidence challenging the accuracy of the allegations that the applicant or current provider is subject to one of the disqualifying conditions set forth in Section A;

(b) evidence mitigating the seriousness of the wrongdoing underlying the applicant or current provider's disqualifying condition; and

(c) evidence that the applicant or current provider has undergone rehabilitation since the time of the wrongful conduct underlying the disqualifying condition.

G. Orders.

(1) Final Orders. All orders of the Membership Committee or a designated Subcommittee granting an applicant or current provider inclusion or continued inclusion on or denying an applicant inclusion on or removing a current provider from the list of eligible ethics training providers shall become a final order of NFA on the date of service upon the applicant or current provider. A copy of each final order issued by NFA shall be served upon the Commission at the same time it is served upon the applicant or current provider. All final orders shall inform the applicant or current provider of his right to petition the Commission for review under CFTC Regulation 3.34 (b) (3) (v).

(2) Effective Date. Any final order of NFA issued under this Interpretive Notice shall become effective 30 days after the date of service of the order on the applicant or registrant, except as otherwise directed by the Commission.