NFA'S REGULATORY OPERATIONS
One of the principal functions of NFA is to establish, audit and enforce minimum financial requirements for its FCM, FDM and IB Members and to receive and analyze financial reports from those Members. No such requirements currently are established under NFA rules for other Members of NFA, such as CPOs and CTAs. Under the Joint Audit Agreement, executed between NFA and the various exchanges, the futures exchanges are responsible for financial compliance for exchange-member FCMs, although at the request of an exchange NFA may perform those functions for such FCMs.
NFA financial requirements were patterned after existing financial standards of the CFTC and futures exchanges. Certain financially related matters, such as the setting of margin levels, remain exclusively with the exchanges (although NFA retains authority to require Member FCMs to collect margins in accordance with exchange requirements).
The ethical standards adopted by NFA include those specifically required by Section 17 of the Commodity Exchange Act, such as prohibitions against fraud, manipulative and deceptive acts and practices, and unjust and inequitable dealings. In addition, bucketing is prohibited, and there are required procedures for the supervision of employees and the handling of discretionary accounts that are similar to CFTC and exchange requirements. In addition, CPO and CTA Members are required to follow specific CFTC rules, and detailed rules have been prescribed for exchange-traded options transactions. NFA has also adopted an advertising rule which contains specific provisions concerning communications with the public and promotional material and a "know your customer" rule which requires Members to obtain information about new customers and provide disclosure about the risks of futures trading before the customers open futures or forex accounts and to verify the information annually and determine whether additional disclosure is required.
Members and Associates.
Membership in NFA is open to any CFTC registrant and any futures exchange, unless the registrant or exchange is subject to one of the specified membership disqualifications (e.g., a CFTC order revoking registration). Each employee of a Member of NFA who is an "associated person" under the Commodity Exchange Act is required to become an NFA "Associate." These individuals are subject to the same disqualification standards as Members.
An important first step in regulating NFA Members and Associate Members is screening the applicants for membership and registration as Associates. NFA staff conducts the initial screening process. Based on the screening process, NFA's President may determine that the applicant does not meet the membership qualifications or that the application is intentionally incomplete, inaccurate or false. NFA's President must notify the applicant in writing of this determination and provide the Membership Committee with a copy. The Membership Committee makes the final determination on membership eligibility, after providing the applicant with an opportunity for a hearing before the Membership Committee.
Under the supervision of the Compliance Director, NFA's Compliance Department is responsible for monitoring NFA Members for compliance with NFA's financial and business conduct requirements. In the event the Compliance Department determines that a Member or Associate has committed a possible violation of an NFA Rule, the Compliance Department prepares a written report summarizing the matter and submits it to NFA's Business Conduct Committee (BCC) for review. The BCC determines whether to close the matter or serve a written and dated Complaint outlining the alleged violation(s) on the Member or Associate. If a Complaint is issued, the Member or Associate must file an Answer and may request a hearing on the charges before an NFA's Hearing Panel. If the matter is not settled, and the Hearing Panel issues a decision finding the Member or Associate committed the alleged violations, the Member or Associate may appeal the decision to NFA's Appeals Committee, which is a committee of Board members created to hear these matters. The Appeals Committee's decision is final, subject to review by the CFTC.
NFA has authority to discipline any Associate and any of its Members that are required to be registered with the CFTC.
The penalties that may be assessed include expulsion or suspension for a specified period from NFA membership or from being associated with a Member, censure, reprimand, an order to cease and desist, a fine not to exceed $250,000 per violation, or any other appropriate penalty or remedial action. A summary action may be taken by the President with the concurrence of the Executive Committee when necessary to protect the markets, customers or other Members. If it is not practicable to hold a hearing before the summary action is taken, the Member or Associate will be afforded an opportunity for a hearing before the Hearing Committee as promptly as possible.
Another principal function of NFA is to provide a fair, equitable and expeditious procedure for settling customer claims and grievances as required under Section 17(b)(10) of the Commodity Exchange Act. NFA's Code of Arbitration provides a framework for this procedure. NFA's arbitration program has been fully operational since 1983. Subject to certain exceptions, NFA arbitration is mandatory when a Demand for Arbitration is filed by a customer against an FCM, FDM, IB, CTA or CPO Member, or its employees, or against an Associate. Also, under NFA's Member Arbitration Rules arbitration between and among NFA Members and Associates is mandatory in most cases. Counterclaims, cross-claims and third-party claims involving the same acts or transactions that form the basis of the customer's or Member's claim also will be heard.
Arbitration claims are decided by panels of one or three arbitrators appointed by NFA's Secretary. Customers generally have the right to request a non-Member panel consisting of a majority of arbitrators not connected with an NFA Member or NFA to decide their claim. Smaller claims are generally resolved by a single arbitrator through written submissions. Proceedings are informal; however, parties may be represented by counsel. No appeal to NFA is permitted. Awards may be enforced in any court of competent jurisdiction.
Additionally, to complement its successful arbitration program and to encourage settlements, NFA incorporated mediation into the early stages of the arbitration process in June 1991, making NFA arbitration even less expensive and more efficient.