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November 16, 2010
Effective Date of Changes to NFA's Enhanced Supervisory Requirements
Several changes to NFA Compliance Rule 2-9's Interpretive Notice entitled "Enhanced Supervisory Requirements" (Notice) will become effective on January 3, 2011. An explanation of the changes to the Notice is set forth below.
Under the current Notice, when a firm becomes subject to the Requirements, any principals of that firm will also cause any other firms at which they are or become principals, to be subject to the Requirements. Because this provision in the Notice sometimes captures principals that do not pose concerns regarding their ability to effectively supervise their firms, NFA has modified the Notice to exempt firms that employ a principal who meets the following criteria:
- the principal has not been personally subject to a disciplinary action by NFA or the CFTC;
- the principal has been a principal of only one firm that has qualified for the Requirements;
- the principal has never been a principal or an AP of a current Disciplined Firm;
- the one firm in the principal's history that qualified for the enhanced supervisory requirements either received a full waiver from abiding by those requirements or abided by those requirements for at least two years and is no longer subject to the enhanced supervisory requirements; and
- the one firm in the prinicipal's history that qualified for the enhanced supervisory requirements has not become subject to a sales practice or promotional material based disciplinary action by NFA or the CFTC since qualifying for the enhanced supervisory requirements.
Enhanced capital requirements
The Notice currently provides that FCMs affected by the Notice are required to maintain adjusted net capital (ANC) of at least $1,000,000. Since NFA raised the minimum ANC for an FCM to $1,000,000 this provision has no impact. In order to avoid this situation in the future, NFA is modifying the Notice to impose a flexible enhanced ANC, which is tied to the early warning requirement (150% of ANC) under CFTC Rules.
The Notice also currently requires CPOs and CTAs that qualify for the Requirements to maintain an ANC of at least $250,000. Over the years, NFA's Waiver Committee has frequently provided partial relief from this requirement. Therefore, NFA is modifying the Notice to reduce enhanced ANC for CPOs and CTAs to $100,000. NFA has also simplified the recordkeeping and reporting requirements so that affected CPOs and CTAs are only required to demonstrate compliance with enhanced ANC levels to NFA upon request.
Written supervisory procedures and reporting
Firms subject to the Requirements must file monthly reports regarding their compliance with NFA. NFA has modified the Notice so that it provides specific guidance for firms with respect to the information which must be included in the report and changed the frequency of the report from monthly to quarterly.
Members that qualify for the requirements based on commissions and fees charged
The Notice currently provides that firms qualify for the Requirements if they charge 50% or more of their customers round-turn commissions, fees and other charges that total more than $100 or more per futures, forex or options contract. Some Members charge commissions just under $100 to purchase an out-of-the-money option that if liquidated, would bring total charges above $100. However, because these out-of-the-money options often expire worthless, no additional costs are assessed. NFA has amended the Notice to make it clear that an options contract that would result in total commissions, fees and other charges of $100 or more if the trade was liquidated will be deemed to have been charged $100 even if the contract is not ultimately liquidated.
The effect of receiving a waiver on future situations
NFA has revised the Notice to make clear that even if a Member receives a full or partial waiver from the Requirements, that Member is still deemed to have met the criteria for purposes of the Notice.
Clarification regarding the effect of having worked at a Member on the list of "five year" disciplined firms
Member firms that were permanently barred from the futures industry as a result of sales practice or promotional material violations are permanently placed on NFA's Disciplined Firm List. Member firms that, while not permanently barred, have been sanctioned by either NFA or the CFTC for sales practice or promotional material violations remain on the Disciplined Firm List for a period of five years (this list is known as the "five year" list). NFA has amended the Notice to clarify that these firms on the five year list are not considered a Disciplined Firm after the five year period.
More information on NFA Compliance Rule 2-9's Interpretive Notice entitled "Enhanced Supervisory Requirements" can be found in NFA's October 6, 2010 Submission Letter to the CFTC. Questions concerning these changes should be directed to Philip Raleigh, Assistant General Counsel (firstname.lastname@example.org or 312-781-1405).