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February 9, 2001
Change In Personnel Will No Longer Be An Option To Avoid Adopting NFA Compliance Rule 2-9's Enhanced Supervisory Procedures
In January 1993, NFA's Board of Directors amended NFA Compliance Rule 2-9 to require enhanced supervisory procedures for certain NFA Member firms. Specifically, those Members who employ a substantial number of associated persons ("AP") who were previously employed by firms closed for sales practice violations ("Disciplined Firms") are required to adopt the following enhanced supervisory procedures for a period of two years:
- tape record all conversations that occur between the firm's APs and potential and existing customers;
- submit promotional material to NFA prior to first use; and
- meet a $250,000 minimum capital requirement or operate pursuant to a guarantee agreement.
The triggering criteria used to identify Member firms subject to these procedures is the ratio of APs that previously worked for Disciplined Firms to the total number of APs employed by the firm. This criteria varies from 40 percent for small firms to 20 percent for large firms.
Since 1993, few NFA Members have met the triggering criteria. Those Members that have met the criteria in the past generally seek relief from adopting the enhanced supervisory procedures. Members have sought this relief by either requesting a waiver from the requirements, as permitted under the Rule, or by exercising a one-time option that permits a firm to alter its personnel to bring the firm outside the triggering criteria. While neither NFA Compliance Rule 2-9 nor the Interpretive Statement provide that altering personnel is an alternative to adopting the enhanced supervisory requirements, staff has previously afforded this relief to Members that claimed to have unintentionally met the criteria.
Recently, the Commodity Futures Trading Commission suggested, and NFA agrees, that the allowance for a one-time personnel change has outlived its usefulness. As this option was never intended to allow Members to vary their obligations under the requirements by falling outside the criteria through personnel changes, NFA will no longer afford this relief to Member firms meeting the triggering criteria. Therefore, as of February 15, 2001, NFA will no longer allow an NFA Member firm that meets the triggering criteria to change personnel to avoid adopting NFA Compliance Rule 2-9's enhanced supervisory requirements. As explained in the Rule and its accompanying Interpretive Notice, NFA Members may still request a waiver from adopting the Rule's enhanced supervisory requirements.
Members should consult NFA's web site at www.nfa.futures.org for a list of current Disciplined Firms and those firms that will be added to the Disciplined Firm list in the future. The list can be found in the Compliance Section under Disciplined Firms. If you have any questions regarding this notice, please contact Gena Kusiak at 312-781-1447.