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April 28, 2003
New Requirements Will Become Effective on July 1, 2003
The Commodity Futures Trading Commission (CFTC) has approved an NFA rule and two Interpretive Notices that will become effective on July 1, 2003. Compliance Rule 2-38, the Interpretive Notices, and a list of ethics training providers as of October 2001 are attached.
NFA Compliance Rule 2-38 requires all NFA Members to establish and maintain a written business continuity and disaster recovery plan that outlines procedures to be followed during an emergency or a significant business disruption. The Interpretive Notice provides further guidance on the components of the plan and gives Members the flexibility to tailor their plans to their individual businesses.
Compliance Rule 2-38 also requires Members to provide NFA with the name of and contact information for one or two individuals who NFA can contact during an emergency. We are currently updating our systems to make this process as easy as possible, and we will notify you about how and when to provide the contact information.
Responding to Member requests, NFA adopted a new Interpretive Notice regarding ethics training requirements. In 2001, the CFTC issued a Statement of Acceptable Practices (Statement) for ethics training that was designed to give each firm freedom to tailor the training to its own operations. Because the CFTC Statement is general in nature, Members asked NFA to provide additional guidance. The Interpretive Notice discusses the procedures, content, training format, training providers, frequency and documentation for ethics training.
Many Members have asked NFA for the names of ethics training providers. NFA used to maintain a list of approved ethics training providers, but that list has not been updated since the CFTC issued the Statement. To assist our Members, we are providing the list of approved ethics training providers as of October 2001. We have not updated the list since then, and we do not plan on updating it in the future.
Questions concerning the above should be directed to:
Associate Director, Compliance
National Futures Association
200 West Madison Street
Chicago, Illinois 60606-3447
Associate Director, Compliance
National Futures Association
120 Broadway, Suite 1125
New York, New York 10271
RULE 2-38. BUSINESS CONTINUITY AND DISASTER RECOVERY PLAN.
- (a) Each Member must establish and maintain a written business continuity and disaster recovery plan that outlines procedures to be followed in the event of an emergency or significant business disruption. The plan shall be reasonably designed to enable the Member to continue operating, to reestablish operations, or to transfer its business to another Member with minimal disruption to its customers, other Members, and the commodity futures markets.
(b) Each Member must provide NFA with the name of and contact information for an individual who NFA can contact in the event of an emergency, and the Member must update that information upon request. Each IB, CPO, and CTA Member that has more than one principal and each FCM Member must also provide NFA with the name of and contact information for a second individual who can be contacted if NFA cannot reach the primary contact, and the Member must update that information upon request. These individuals must be authorized to make key decisions in the event of an emergency.
NFA Compliance Rule 2-38: Business Continuity and Disaster Recovery Plan
Since the events of September 11, 2001, the financial services industry has devoted increased attention to issues relating to disaster recovery plans. NFA's Board of Directors (Board) believes that disaster recovery and business continuity issues are of utmost importance and that NFA should be proactive in ensuring that its Members have adequate disaster recovery plans in place. As a result, NFA's Board recently adopted NFA Compliance Rule 2-38 to require all Members to adopt a business continuity and disaster recovery plan (Plan).
Compliance Rule 2-38 is broadly written to provide Members with the flexibility to adopt a Plan tailored to their individual needs. NFA recognizes that the exact form of the Plan adopted by a Member will vary based on a number of factors, including the size and complexity of the Member's business and the firm's resources. Nevertheless, the Board believes Members need additional guidance on the essential components of a Plan and what is required to maintain a Plan. This interpretive notice provides that guidance.
Compliance Rule 2-38 requires Members to have a Plan reasonably designed to enable them to continue operating, to reestablish operations, or to transfer their business to other Members with minimal disruption to their customers, other Members, and the commodity futures markets. A Plan should address the following, as applicable:
- Establishing back-up facilities, systems, and personnel that are located in one or more reasonably separate geographic areas from the Member's primary facilities, systems, and personnel (e.g. primary and back-up facilities should be located in different power grids and different telecommunication vendors should be used), which may include arrangements for the temporary use of facilities, systems, and personnel provided by third parties;
- Backing up or copying essential documents and data (e.g. general ledger) on a periodic basis and storing the information off-site in either hard-copy or electronic format;
- Considering the impact of business interruptions encountered by third parties and identifying ways to minimize that impact; and
- Developing a communication plan to contact essential parties such as employees, customers, carrying brokers, vendors and disaster recovery specialists.
These components are minimum areas that should be addressed in Members' Plans. A Member's Plan should also address any other areas that are essential to its business operations. An effective Plan will be designed to meet the Member's individual situation and needs.
Maintaining the Plan
In order for a Member's Plan to remain effective, the Member must update its Plan as necessary to respond to material changes in the Member's operations. Each Member must also periodically conduct and evidence reasonable reviews designed to assess the Plan's effectiveness.
Even the best Plan is useless if it is not available when needed. Therefore, each Member should distribute and explain the Plan to its key employees and communicate the essential components of the Plan to all employees. Each Member should also maintain copies of the Plan at one or more off-site locations that are readily accessible to key employees. NFA Compliance Rule 2-38 requires NFA Members to establish and maintain business continuity and disaster recovery plans that are consistent with this interpretive notice. The Rule provides Members with flexibility in developing those Plans, and each Member should adopt a Plan that meets its individual situation and needs.
NFA Compliance Rule 2-9: Ethics Training Requirements
In October 2001, the CFTC issued a Statement of Acceptable Practices ("Statement") for ethics training. This Statement replaces the Commission's prescriptive ethics training rule and allows flexibility in the format, frequency and providers of ethics training, permitting each firm to tailor its training program to better suit its own operations. By the same token, this shifted the responsibility to each firm to adopt and implement an appropriate ethics training scheme. The Commission intended that the compliance with the Statement's principles would serve as a "safe harbor" concerning acceptable procedures for ethics training programs and topics that ethics training programs should address. Because the Statement is fairly general in nature, however, Members have requested that NFA provide additional information to assist them to comply with their ethics training requirement.
Ethics training is one of a Member's supervisory obligations under NFA's Compliance Rule 2-9. The repeal of the specific regulations relating to ethics training does not diminish Members' and Associates' obligation to diligently supervise its employees. Professional ethical standards remain an essential element of each Member's business model. The use of well-designed ethics training programs supports each Member's supervision of its employees and business activities. Like any other business process, remaining aware of changing industry standards and ensuring high ethical standards is an on-going effort. Developments in technology, commercial practices and regulations and other changes will have ethical ramifications associated with them. Good business practice dictates that employees receive periodic training to keep them cognizant of these developments and their ethical implications.
The first thing that all firms should have is written procedures that outline their ethics training program. Acceptable procedures will address:
- the topics that will be included in the training program;
- by whom the training will be provided;
- the format of the training, e.g., classroom instructions, software, etc.;
- the frequency with which the Member expects its employees to obtain ethics training; and
- how the firm will document that it has followed its written procedures.
The Statement lists the following as topics that an ethics training program should address:
- An explanation of the applicable laws and regulations and rules of self-regulatory organizations or contract markets and registered derivatives transaction execution facilities;
- The registrant's obligation to the public to observe just and equitable principles of trade;
- How to act honestly and fairly and with due skill, care and diligence in the best interest of customers and the integrity of the markets;
- How to establish effective supervisory systems and internal controls;
- Obtaining and assessing the financial situation and investment experience of customers;
- Disclosure of material information to customers; and
- Avoidance, proper disclosure and handling of conflicts of interest.
It is still acceptable to obtain ethics training sponsored by independent persons, firms, or industry associations. Each Member should ensure that its selected provider is qualified and obtain proof that the provider has completed relevant proficiency testing and has three years of relevant industry experience, or similar experience. NFA's Vice President of Registration may waive the testing requirement where the provider demonstrates competency comparable to satisfying proficiency testing requirements. Firms should only use providers that they reasonably in good faith believe are not subject to any investigations or bars from registration. In-house training is also acceptable; however, firms should apply these same criteria to any in-house training personnel. NFA's BASIC system, which can be found on our website, is an excellent resource to check registration and disciplinary history of providers.
Ethics training may be provided through a variety of media, including the Internet, audiotapes, computer software, and videotapes, as well as in-person courses. Less formal methods of training are also permitted, including distribution of periodicals, legal cases and advisories. Each Member should choose a format or formats that best suit its business operations and the nature of its workforce. For example, firms that have a high percentage of APs with disciplinary histories or who come from firms with disciplinary histories may well decide that more structured, formal training is appropriate.
Like format, Members should decide how frequently ethics training is required based on the business model, the composition of their sales force and the format of the training. For example, firms that opt for less formal training such as distribution of pertinent written materials should consider keeping the training on a more on-going basis. More formal training, such as classroom instruction, could appropriately be offered less frequently but on a periodic basis.
Maintaining documentation that the Member has complied with its procedures is a critical element of an acceptable ethics training program because it enables the Member to be certain that it is actually implementing the policies it has deemed necessary and appropriate for its business. The appropriate documentation will vary depending on the firm's overall ethics training program. Firms that distribute written materials should maintain documentation showing what materials were distributed, who selected them and when and to whom they were circulated. Firms that utilize more formal training programs should keep records showing who obtained the training, the date of training, and any materials used.
FUTURES EXCHANGE REQUIREMENTS
The futures exchanges have taken a variety of approaches to ethics training. Members are urged to review the ethics training requirements of the exchanges of which they are members.
Members that establish a corporate culture of high ethical behavior will provide the best service for their customers. Remaining aware of changing industry standards and adopting an appropriate ethics training program will help ensure that Members and their Associates continually adhere to the high ethical standards that the Members set for themselves.
As of October 23, 2001
On October 23, 2001, the Commodity Futures Trading Commission ("Commission") repealed its specific ethics training requirements and adopted a Statement of Acceptable Practices with Respect to Ethics Training. This Statement of Acceptable Practices allows for greater flexibility by providing that registrants may develop their own ethics training programs in order to meet their ethics training obligations required by the Commodity Exchange Act. The Statement of Acceptable Practices is accessible through the registration section of NFA's web site at www.nfa.futures.org or the Commission's web site at www.cftc.gov/foia/fedreg01/foi011023a.htm.
Because the Commission has placed the responsibility for ethics training with registrants, NFA will no longer maintain a list of authorized ethics training providers. The list below represents the firms that were known to NFA as of October 23, 2001 to provide ethics training. Neither the Commission nor NFA have reviewed or approved the specific content of the training programs and do not recommend the provider of such training.
|NAME OF PROVIDER||COURSE CONTENT|
11014 Burns Avenue
Westchester, IL 60154
|Provides 1, 2 and 4 hour courses for all registrants. The training that is offered is in person or teleconference.|
|BISYS Educational Services, Inc.
5728 Jefferson Highway
New Orleans, LA 70123-5113
|Provides 1, 2 and 4 hour courses for all registrants except Floor Brokers and Floor Traders. The training that is offered is computer based.|
|Center for Futures Education, Inc.
P.O. Box 309
Grove City, PA 16127
|Provides 1, 2 and 4 hour courses for all registrants. The training that is offered is in person, by teleconference, or on video.|
|Dearborn Financial Institute, Inc.
155 North Wacker Drive
Chicago, IL 60606-1719
|Provides 1, 2 and 4 hour courses for all registrants. The 1, 2 and 4 hour courses are offered in person. Computer based 1 and 4 hour courses are also offered.|
1892 First Street
Highland Park, IL 60035
|Provides 1, 2 and 4 hour courses for all registrants. The training that is offered is in person, on video or is computer based. The 1 and 4 hour courses are also offered on the internet, by audiotape, or by teleconference.|
|Financial Training Services, Inc.
1120 Avenue of the Americas
New York, NY 10036
|Provides 1, 2 and 4 hour courses for all registrants. The training that is offered is in person or by teleconference.|
|Institute for Financial Markets (formerly the Futures Industry Institute)
2001 Pennsylvania Ave., N.W.
Washington, D.C. 20006-1807
|Provides 1, 2 and 4 hour courses for all registrants. The 1, 2 and 4 hour courses are offered in person or are computer based. The 1 and 4 hour courses are also offered on the internet.|
40 Exchange Place
New York, NY 10005
|Provides 1, 2 and 4 hour courses for all registrants. The training that is offered is in person.|
|National Ethics Mandatory Education (NEME)
2925 Wellesley Drive
Columbus, OH 43221
|Provides 1, 2 and 4 hour courses for all registrants. The 1 and 4 hour courses are offered in person or on audiotape. The 2 hour course is only offered in person.|
|Securities Training Corporation
17 Battery Place
New York, NY 10004
|Provides 1 and 4 hour courses for all registrants except Floor Brokers and Floor Traders. The training that is offered is in person.|
Fountain Valley, CA 92708
|Provides 1, 2 and 4 hour courses for all registrants. The training that is offered is in person or is computer based.|
|Walsh Agency, Inc.
P.O. Box 37
Hastings, MI 49058
|Provides 1 and 4 hour courses for all registrants except Floor Brokers and Floor Traders. The training that is offered is in person, by teleconference, on video, on audiotape, on the internet, or is computer based.|