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October 11, 2000
Technical Amendments to NFA Compliance Rules and Interpretive Notices
A number of technical amendments to NFA's Compliance Rules and Interpretive Notices became effective on July 24, 2000. The current version of these requirements is located on NFA's web site at www.nfa.futures.org in the online NFA Manual. The amendments are not reflected in Volume 7, Number 1 of the hardcopy NFA Manual, which was distributed to Members in September, since that edition only included changes and additions as of July 1, 2000.
A brief explanation of the amendments to each Compliance Rule and Interpretive Notice follows.
- Compliance Rule 1-1. This is the definition section of the Compliance Rules. The changes either clarify specific definitions, add definitions for terms that are frequently used in the Compliance Rules (e.g., commodity pool operator and commodity trading advisor), or make the definition section internally consistent. None of the changes are substantive.
Compliance Rule 2-2. The amendment codifies the prohibition against Members and Associates acting in a different capacity than the one they are registered in (e.g., a CTA accepting and pooling customer funds, thereby acting as a CPO). NFA has formerly charged this conduct as a violation of Compliance Rule 2-4, Conduct Inconsistent with Just and Equitable Principles of Trade.
Compliance Rule 2-5. The change specifically prohibits Members and Associates from violating an order issued by an NFA committee or panel that has authority to issue orders. This is another type of conduct that currently results in a charge under Compliance Rule 2-4.
Compliance Rule 2-8. The primary change to subsection (b) eliminates the word "conclusively" to describe the presumption that discretion was used, thereby conforming it to subsequent changes to exchange rules by making the presumption rebuttable. Subsection (c) does not cover any activity that is not already covered by Compliance Rule 2-9, Supervision, so it has been eliminated. The other changes merely clarify the meaning of the rule.
Compliance Rules 2-11 and 2-12. Compliance Rule 2-11 provided a process for an FCM to obtain NFA's approval before carrying customer accounts. Compliance Rule 2-12 provided for both the omnibus FCM and the carrying FCM to notify NFA whenever an omnibus account is opened or closed. In practice, both of these requirements have proven to be administratively unwieldy and unnecessary. Compliance Rule 2-11 has been amended to require FCMs to notify NFA before carrying customer accounts, rather than requiring affirmative approval by NFA, and Compliance Rule 2-12 has been deleted. Of course, FCMs are still required to notify NFA of their carrying brokers and omnibus accounts upon request.
Compliance Rules 2-15 through 2-18. These options rules have been deleted. They were adopted when exchange-traded options were first authorized as part of a pilot program to comply with CFTC Regulations in effect at that time. However, both subsequent amendments to the CFTC Regulations and the existence of nearly identical NFA requirements covering both futures and options (i.e., Compliance Rules 2-9, 2-10, and 2-29) made those rules unnecessary.
Compliance Rule 2-26. Compliance Rule 2-26 makes it a violation of NFA rules for a Member FCM or IB to violate any of several CFTC Regulations specified in the rule. The Commission has since adopted CFTC Regulation 1.65 regarding bulk transfers. The amendment adds that regulation to those specified in Compliance Rule 2-26.
Compliance Rule 2-29(c). The interpretive notice on hypothetical results, which is incorporated into Compliance Rule 2-29(c) by reference, specifically states that no Member or Associate may use hypothetical results for any program with three months of actual trading results. This requirement is now spelled out in the rule itself.
Compliance Rule 2-29(f). The amendments change the record retention period to conform to CFTC Regulation 1.31. In addition, the last sentence of Subsection (f) requires Members to demonstrate the basis for hypothetical results to NFA upon request. The amendment extends this requirement to actual results and specifically provides that Members must retain records to support those results.
Compliance Rule 2-29(h). Subsection (h) was amended to clarify that "futures account, agreement, or transaction" includes commodity pool participations, managed account services, and non-personalized trading advice.
¶9003. Interpretive Notice on Communications with the Public and Promotional Material. The principal change is to eliminate a discussion of hypothetical results that is no longer correct in light of subsequent changes to Compliance Rule 2-29. The remaining changes are purely technical.
¶9005. Interpretive Notice on Disclosure by FCMs and IBs of Costs Associated with Futures Transactions. This Interpretive Notice required FCMs and IBs to disclose detailed information to individual customers regarding fees that are based on anything other than a traditional commission. Obviously, all fees and charges should be disclosed to customers. However, the Board felt that the extensive information required by the Notice is not helpful to customers and imposed an unnecessary burden on FCMs and IBs. The amendments retain the requirement that FCMs and IBs disclose the basis for their fees but eliminate the excessive detail formerly required by the Notice.
¶9019. Interpretive Notice on Supervision of Branch Offices and Guaranteed IBs. Over the years, NFA staff has issued a number of notices on supervision of branch offices and guaranteed IBs. In 1992, the Board adopted this Interpretive Notice, which contains most of the information from the previous staff notices. The changes to the Interpretive Notice incorporate the few non-duplicative provisions of the staff notices, which have been eliminated.
¶9020. Interpretive Notice on Self-Audit Questionnaires. The amendment to this Interpretive Notice informs Members that the self-examination checklist can be downloaded from NFA's web site.
¶9023. Interpretive Notice on Break-Even Analyses. A staff Notice addressed the same subject as this Interpretive Notice. The non-duplicative information from the staff notice was added to this Interpretive Notice and the staff notice was eliminated.
¶9028. Interpretive Notice on the Electronic Filing of Financial Reports. The amendments to this Interpretive Notice delete references to sections of NFA's Financial Requirements that were recently eliminated.
¶9030. Interpretive Notice on FCM and IB Filing Requirements. This Interpretive Notice advised Members of the number of days they had to file financial requirements during a transitional period that has since expired. The Interpretive Notice is no longer necessary and has been eliminated.
As noted above, NFA eliminated a number of duplicative staff notices from the Interpretive Notice Section of the Rulebook. Those notices were formerly located at paragraphs 9008 (Supervision of Branch Offices and Guaranteed IBs), 9012 (Branch Office and Guaranteed IB On-Site Visits), 9015 (Due Diligence Check of Guaranteed IBs), and 9024 (Break-Even Analysis).