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September 07, 2010
Effective Date of Changes to the Risk Disclosure Statement for Security Futures Contracts
An amendment to NFA's Interpretive Notice entitled "NFA Compliance Rule 2-30(b): Risk Disclosure Statement for Security Futures Contracts" will become effective on October 7, 2010. NFA Compliance Rule 2-30(b) requires Members and Associates who are registered as brokers or dealers under Section 15(b)(11) of the Securities Exchange Act of 1934 to provide a Risk Disclosure statement regarding the risks of trading security futures products (SFPs) to a customer at or before the time the Member approves the account to trade security futures products.
The Risk Disclosure statement, which is set forth in the Interpretive Notice, describes the features of a security futures product as those features existed in 2002. Recently, One Chicago LLC (OCX), an exchange listing security futures products, developed and plans to list a new class of security futures products whose dividend feature differs from the dividend feature described in the Risk Disclosure statement. Prior to this amendment, the Risk Disclosure statement provided that there are generally no adjustments for ordinary dividends because they are already accounted for in the pricing of the SFP. However, OCX's new product offering will adjust for any declared dividends because the dividend is not accounted for in the pricing of the security futures product.
In order to ensure that the Risk Disclosure statement accurately reflects the dividend feature of this new product, the third paragraph of "Section 8.1 Corporate Events" of the Risk Disclosure statement will be amended to indicate that price adjustments for ordinary dividends may be made for a specified class of security futures contracts based on the rules of the exchange and clearing organization. The amended paragraph will read as follows:
- "Corporate issuers also occasionally issue special dividends. A special dividend is an announced cash dividend payment outside the normal and customary practice of a corporation. The terms of a security futures contract may be adjusted for special dividends. The adjustments, if any, will be based upon the rules of the exchange and clearing organization. In general, there will be no adjustments for ordinary dividends as they are recognized as a normal and customary practice of an issuer and are already accounted for in the pricing of security futures. However, adjustments for ordinary dividends may be made for a specified class of security futures contracts based on the rules of the exchange and the clearing organization."
Members and Associates must distribute a copy of the amended third paragraph of "Section 8.1 Corporate Events" to all customers that have been approved to trade SFPs no later than the time a confirmation of a transaction is delivered to a customer who enters into an SFP transaction. Therefore, Members may comply with this requirement in various ways including, but not limited to, mailing or emailing the amended language either to all its customers previously approved to trade security futures or to a customer not later than the time a confirmation of an SFP transaction is delivered to the customer. Members and Associates may access the new language at http://www.nfa.futures.org/news/PDF/CFTC/Interpretive_Notice_Risk_Disclosure_Statement_Amended_Language.pdf.
In addition, Members and Associates must provide the revised Risk Disclosure statement to all new customers at or before the time the Member approves the account to trade SFPs. A revised copy of the Risk Disclosure statement may be downloaded at http://www.nfa.futures.org/NFA-compliance/publication-library/security-futures-disclosure.pdf.
More information on NFA's amendment to NFA's Interpretive Notice entitled "NFA Compliance Rule 2-30(b): Risk Disclosure Statement for Security Futures Contracts" can be found in NFA's July 8, 2010 Submission Letter to the CFTC. Questions concerning these changes should be directed to Sharon Pendleton, Director, Compliance (firstname.lastname@example.org or 312-781-1401) or Carol Wooding, Associate General Counsel (email@example.com or 312-781-1409).