9059 - NFA COMPLIANCE RULE 2-4: DISCLOSURE GUIDELINES FOR FCMS OFFERING SWEEP ACCOUNTS
(Board of Directors, February 15, 2007; effective July 1, 2007)
Due to the increasingly competitive industry environment, Futures Commission Merchants ("FCMs") may seek to develop and offer to customers sweep account programs to manage cash balances. These sweep account programs transfer a customer's excess funds from a regulated commodity account (whether a customer segregated or secured account) to a non-regulated account for the customer at the FCM, an affiliate of the FCM or another entity so that the customer can obtain a higher investment return than maintaining the funds in the FCM's customer regulated commodity accounts.
Given disclosure concerns regarding these programs, NFA's Board of Directors believes that FCMs offering sweep account programs should adopt certain disclosure guidelines. The guidelines contained in this Notice apply only to sweep account programs offered by an FCM, including those regularly recommended by the FCM. In other words, if a customer elects on its own to transfer funds to a particular sweep account program that is not offered by the FCM, then the FCM does not have any disclosure obligations pursuant to this Notice. Additionally, this Notice's disclosure guidelines are inapplicable to transfers made pursuant to an FCM's customer agreement's provisions whereby a customer authorizes the transfer of funds from a regulated commodity account to any other account maintained by the customer at the FCM or one of its affiliates as may be necessary to avoid a margin call or to reduce the debit balance in the other account, or to satisfy any other obligation to the FCM or its affiliates.
Failure to follow the disclosure guidelines contained in this Notice may be deemed conduct inconsistent with a Member's obligation under NFA Compliance Rule 2-4 to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its commodity futures business. NFA recognizes, however, that FCMs offering these sweep account programs may have to modify these guidelines to address their particular programs.
Initially, FCMs should identify the entity maintaining the sweep account and whether that entity is subject to regulation, and should disclose any material terms and conditions, risks and features of their offered programs. In addition, FCMs should advise customers of any conflicts of interest in connection with the offered programs, including whether the FCM receives compensation or other benefits for customer balances maintained in the sweep account, and the FCM should advise the customer which entity to contact to gain access to any swept funds. An FCM should make these disclosures at the time a sweep account program is offered to a customer and, of course, the disclosures should be updated for participants if any material changes are made to an existing sweep program. The Board believes that if a customer elects to participate in a sweep program offered by the FCM, then the FCM must obtain the customer's written consent prior to any funds being transferred pursuant to the program.
The Board also believes that FCMs should advise customers of the consequences of transferring monies from the FCM's customer regulated accounts. Specifically, the FCM should disclose that by transferring excess funds from an FCM's customer regulated commodity accounts, the customer will not receive the preferential treatment afforded funds held in a customer regulated commodity account pursuant to Part 190 of the CFTC's Regulations and the U.S. Bankruptcy Code. The Board recognizes, however, that an FCM may offer programs that transfer monies to an account whereby customers receive certain protections (e.g. SIPC or FDIC) in the event of a bankruptcy. In this case, the FCM should disclose the nature and extent of the protection available, including any applicable SIPC or FDIC coverage. If the FCM's programs transfer funds to a non-regulated account that does not offer protections comparable to those afforded funds held in a customer regulated commodity account, then the FCM must clearly disclose this fact and describe the impact upon customer funds in the unlikely event that the entity maintaining the sweep account files for bankruptcy.