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November 09, 2001
Rule Amendments Regarding Ethics Training Requirements and Definition of Principal
On October 23, 2001, the Commodity Futures Trading Commission ("Commission") issued Final Rules substantially revising ethics training requirements and the definition of "principal." NFA has submitted to the Commission conforming amendments to its rules concerning principals that it expects to become effective by November 15, 2001. To conform to the Commission's actions regarding ethics training, NFA staff anticipates that in February 2002, NFA's Board of Directors will approve amendments that repeal its rules relating to ethics training. NFA expects that those amendments will become effective shortly thereafter. Since the Commission's rules became immediately effective, NFA will not in the interim enforce its existing ethics training rules. The changes are explained further below.
Ethics Training Requirements
Prior to October 23, 2001, the Commission's ethics training regulations detailed the frequency and general content of ethics training. The Commission also delegated to NFA the responsibility to approve ethics training providers and to maintain pertinent records concerning ethics training and ethics training providers. NFA's rules provided mechanisms for ensuring that registrants met their ethics training obligations and for NFA to approve ethics training providers and to revoke an ethics training provider's approved status. NFA also maintained publicly available data reflecting the dates by which registrants must have completed ethics training, whether they had in fact completed the required training and a list of approved ethics training providers.
The Commission's October 23rd rules repealed its specific ethics training requirements and adopted a Statement of Acceptable Practices with Respect to Ethics Training.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. It also provides Commission guidance on the role of ethics training and the content, format and implementation of an ethics training program. The Statement of Acceptable Practices is available on 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 not prospectively keep records concerning registrants' ethics training due dates or compliance status. NFA will maintain the ethics training completion dates already in its records and will make that information available upon request. NFA will also no longer maintain a list of approved ethics training providers. Registrants should refer to the Commission's Statement of Acceptable Practices regarding the use of third-party ethics training providers.
Definition of Principals
As amended, NFA's Registration Rule 101(n) defines "principal" as:
- an individual who is:
- a sole proprietor of a sole proprietorship;
- a general partner of a partnership;
- a director, president, chief executive officer, chief operating officer, chief financial officer or a person in charge of a business unit, division or function subject to regulation by the Commission of a corporation, limited liability company or limited partnership; or
- a manager, managing member or a member vested with the management authority for a limited liability company or limited liability partnership; or
- is the owner of 10% or more of the outstanding shares of any class of an entity's stock;
- is entitled to vote 10% or more of any class of an entity's voting securities;
- has the power to sell or direct the sale of 10% or more of any class of an entity's voting securities;
- has contributed 10% or more of an applicant or registrant's capital;
- is entitled to receive 10% or more of an applicant or registrant's net profits; or
- has the power to exercise a controlling influence over an applicant or registrant's activities that are subject to regulation by the Commission; or
- is a general partner of a partnership;
- is the direct owner of 10% or more of any class of an entity's securities; or
- has directly contributed 10% or more of an applicant or registrant's capital unless such capital contribution consists of subordinated debt contributed by:
- an unaffiliated bank insured by the Federal Deposit Insurance Corporation;
- a United States branch or agency of an unaffiliated foreign bank that is licensed under the laws of the United States and regulated, supervised and examined by United States government authorities having regulatory responsibility for such financial institutions; or
- an insurance company subject to regulation by any State.
an individual who directly or indirectly, through agreement, holding companies, nominees, trusts or otherwise:
an entity that:
To implement these changes, NFA has developed new registration application forms which will be available for use beginning November 15, 2001, after which NFA will not accept the existing Form 7-R or Form 8-R. Copies of the new applications may be obtained from NFA by calling NFA's Information Center at 1.800.621.3570 or by downloading them from NFA's web site at www.nfa.futures.org. The Form 7-R will contain instructions to assist applicants and registrants in determining the individuals and entities they must list as principals in accordance with the new definition.
The new definition changes the way indirect owners of the registrant are reflected in the firm's registration records. Prior to the change, registrants that listed an entity as principal ("holding company") were also required to list the individuals and entities that owned the holding company. The new definition modifies this requirement in two ways. First, firms do not need to list entities that own their holding companies. Second, registrants do not need to list individuals simply because they own 10% or more of their holding companies. Instead, individuals who have a 10% or more financial interest in the registrant, even if that financial interest is held indirectly through holding companies, must now be listed as principals of the registrant.
Accordingly, NFA will automatically update the firms' registration records by terminating the "owner of holding company" status of all entity and individual owners of holding companies. Registrants do not need to file any Form 3-Rs to accomplish this. However, registrants that previously listed individuals as owners of holding companies will need to decide whether any of these individuals need to be listed instead as principals of the registrant. NFA will contact registrants in this situation to assist them in making that determination and will make appropriate changes to registration records.