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August 28, 2007
Effective Date of Amendments to NFA Interpretive Notice Regarding Enhanced Supervisory Requirements
NFA has received notice that the Commodity Futures Trading Commission ("CFTC") has approved a revised version of NFA's Interpretive Notice entitled "Compliance Rule 2-9: Enhanced Supervisory Requirements" ("Interpretive Notice") as well as a technical addition to NFA Compliance Rule 2-9(b). The changes to the Notice and Compliance Rule 2-9(b) will become effective on November 1, 2007.
The Interpretive Notice currently requires Members to adopt certain enhanced supervisory procedures ("Requirements") if they meet specific criteria set out in the Interpretive Notice. A Member firm triggering the Requirements must, among other items, tape record all telephone conversations between the Member's associated persons ("AP"s) and both existing and potential customers, submit all promotional material to NFA at least 10 days prior to first use, adopt written supervisory procedures, make quarterly reports of its compliance with the Requirements, and either operate pursuant to a guarantee agreement or maintain an increased level of adjusted net capital ("ANC").
The revised Interpretive Notice reorganizes the current version of the Notice to keep related topics in proximity to each other, and makes several technical adjustments to the Notice. It also, however, includes two new provisions which potentially expand the number of Members that may be impacted by the Interpretive Notice's triggering criteria beginning on November 1, 2007.
First, a new provision in the revised Interpretive Notice expands the definition of a Disciplined Firm beyond Members that have been permanently barred from the industry as the result of formal actions by either the CFTC or NFA for the use of deceptive telemarketing practices or promotional material. The new definition of a Disciplined Firm now also includes Members that have been sanctioned in any way by either the CFTC or NFA due to deceptive telemarketing practices or promotional material within the preceding five years.
It is important to note that a Member added as a Disciplined Firm based on this expanded definition will not itself be subject to the Requirements merely because they are now categorized as a Disciplined Firm. Rather, the effect of the change would be that if another Member firm employs an AP or lists a principal from a Disciplined Firm, then those APs and principals would be counted by the Member firm as having worked at a Disciplined Firm for purposes of determining whether the Member's employee mix triggers an obligation to adopt the Requirements.
Second, any Member that charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract is required to adopt the Requirements. Any Member that meets this criterion must promptly inform NFA after November 1, 2007 of this fact. In addition, upon request by NFA, Members shall have the burden of demonstrating to NFA that they charge more than 50% of their active customers round-turn commissions, fees and other charges that are less than the specified amounts. The term "active customers" as used in the Interpretive Notice means any customers who are entitled to a monthly statement under the provisions of CFTC Regulations Section 1.33(a).
Other changes to the Notice will-
- provide that APs may not qualify for an exemption from being counted as having worked at a Disciplined Firm if they have personally been subject to disciplinary action by NFA or the CFTC, or by any Securities SRO or the Securities and Exchange Commission in connection with sales practices involving security futures products;
- update the enhanced ANC obligation under the Requirements to impose minimum ANC requirements of $2,000,000 on affected Forex Dealer Members ("FDM"s), $1,000,000 on affected non-FDM futures commission merchants, and $250,000 on other Member categories;
- change the frequency of reports by affected Members regarding their compliance with the Requirements from quarterly to monthly;
- require firms that are obligated to adopt the Requirements to provide NFA and the CFTC upon request with the technical means to listen to recorded sales conversations.
- The Status History screen on ORS for individual APs and principals will display information regarding whether they have been employed by a Disciplined Firm.
- Since the Notice provides that when a Member firm meets the criteria to adopt the Requirements, any other Members of which the principals of that Member firm are, or become, principals must also adopt the Requirements or seek a waiver therefrom, the Status History screen for individual APs and principals will also display information regarding whether they have been a principal of a firm that has been subject to the Requirements.
- The Firm Profile section on ORS will include a link for Member firms to check how many APs the firm had as of the close of business on the previous day as well as the number of that Member firm's APs and principals, if any, who have a Disciplined Firm in their background. Similar information will be included for FCMs that guarantee introducing brokers.
- A current list of Disciplined Firms will no longer be provided on NFA's public website but will be available through ORS. This list will divide Disciplined Firms into two subsets-those permanently barred and those sanctioned within the preceding five years.
In addition to the revised Interpretive Notice, a technical amendment to NFA Compliance Rule 2-9(b) specifically recognizes that NFA's Board is entitled to establish criteria related to the employment history of Members' principals and the amount of commissions and fees that Members charge in imposing the Requirements.
NFA's February 27, 2007 submission letter to the CFTC contains a more detailed explanation of the changes and includes a copy to Compliance Rule 2-9(b) and the Interpretive Notice with the amendments marked. You can access an electronic copy of the submission letter at http://www.nfa.futures.org/news/newsRuleSubLetter.asp?ArticleID=1784.
Questions concerning any of the requirements described above should be directed to John Brodersen, Associate Director, Compliance, at firstname.lastname@example.org or (312) 781-2226.