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Explanation of Proposed Amendments

A) Explanation of Proposed Interpretive Notice Concerning Proficiency Requirements

The Commodity Futures Modernization Act of 2000 amended the Securities Exchange Act of 1934 to require NFA to "have rules that ensure that members and natural persons associated with members meet such standards of training, experience, and competence necessary to effect transactions in security futures products and are tested for their knowledge of securities and security futures products." NFA is in the process of updating the Series 3 examination to include questions relating to security futures products. NFA is also in the process of updating the Series 30 examination to include questions regarding security futures for persons who are designated security futures principals under Compliance Rule 2-7(b). Until the examinations are finalized, individuals will be allowed to meet the proficiency requirements by taking an appropriate training course before engaging in activities involving security futures products. The proposed interpretive notice describes the conditions under which these individuals can substitute training for testing.

NFA, in partnership with NASD and the Institute for Financial Markets, has developed a web-based training program that will satisfy the training requirement. The program can be accessed through NFA's web site, and there is no charge for completing the training program.

The proposed interpretive notice explains that 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 the content outline that can be found on NFA's web site. New registrants can also qualify through training if they are registered no later than six months after the first retail, exchange-traded contract begins trading.

The proposed interpretive notice explains that in order to qualify as a designated security futures principal, current supervisors may take a portion of the training program devoted to supervisory issues as well as the portions intended for all Associates within six months after the first retail, exchange-traded contract begins trading. After the six-month period, individuals may qualify as a security futures principal by taking the training program in lieu of taking a supervisory proficiency examination, provided those individuals are qualified to act as a branch office manger no later than six months after the first retail, exchange-traded contract begins trading.

As indicated above, the proposed interpretive notice grandfathers in current registrants and those who take the Series 3 and/or Series 30 examination within six months after security futures begin trading, provided they take an appropriate training program before they begin soliciting for security futures transaction or supervising security futures activities. The grandfather provision would expire on December 31, 2006. Registrants who subsequently decide to engage in security futures activities will be required to first take the relevant examination.

The proposed interpretive notice states that NFA Members and Associates are not required to notify NFA that they have completed a training program, but Members must be able to demonstrate to NFA during an audit that those registered individuals who are engaging in security futures activities have completed the necessary training.

B) Explanation of Proposed Interpretive Notice Concerning Risk Disclosure

NFA, NASD, and a number of securities and futures exchanges have jointly developed a risk disclosure statement for security futures products and are awaiting final comments from the SEC. The current working draft of this document is approximately 21 pages primarily due to the SEC's request that the equity options statement be the template. Futures and securities firms will both be required to provide this document to security futures customers, regardless of where the products are traded. As soon as the disclosure statement is finalized, NFA will make the statement available on its web site.

The proposed interpretive notice states that NFA Compliance Rule 2-30(b) requires Members and Associates who are not members of NASD 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. The interpretive notice identifies the statement that must be provided and notifies Members that it is available on NFA's web site.

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