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October 08, 2019
Effective Date for Updated Interpretive Notice Regarding the Supervision of Branch Offices and Guaranteed IBs
NFA's Interpretive Notice entitled Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs establishes minimum requirements that each FCM, IB, CPO and CTA Member and FDM should implement to supervise its branch offices and guaranteed IBs. NFA updated this Interpretive Notice to reflect advances in electronic trading, electronic communications and other technologies and to incorporate references to existing anti-money laundering, information systems security program and bunched order requirements. The updated Interpretive Notice provides Members with increased flexibility while continuing to subject branch offices and guaranteed IBs to robust supervision, surveillance and annual inspection requirements.
Members may immediately rely on the guidance in the updated Interpretive Notice. Effective January 1, 2020, Members must comply with the requirements in the updated Interpretive Notice, which will replace the existing Interpretive Notice.
The updated Interpretive Notice has been restructured into three substantive sections: due diligence reviews, written supervisory policies and procedures and ongoing training. The first section addresses the due diligence review necessary to determine whether to establish a branch office or guaranteed IB relationship and the appropriate supervision. One of the substantive changes in this section requires Members to ensure that one or more individuals at the branch office or guaranteed IB is knowledgeable about and will track developments related to the Commodity Exchange Act, CFTC Regulations and NFA Rules.
The second section, which addresses supervisory policies and procedures and the annual inspection requirement for branch offices and guaranteed IBs, includes substantive changes such as:
- Providing Members with the flexibility to both implement supervisory processes and perform routine supervision and surveillance at intervals designed to meet the specific needs of their business.
- Detailing two exceptions to the annual on-site branch office and guaranteed IB inspection requirement. The first exception requires Members to promptly perform a branch office or guaranteed IB on-site inspection if it becomes aware of any irregularities. The second exception allows Members to determine that it may appropriate to perform a remote annual inspection for certain branch offices and guaranteed IBs every other year rather than an on-site annual inspection based on certain factors including those set out in the Notice. Members that perform remote inspections must have sufficient information and technology to complete a robust remote inspection and document the rationale supporting this determination that it is appropriate to perform a remote inspection of a branch office or guaranteed IB.
- Requiring policies and procedures to mandate that an AP notify the Member if any new circumstances arise that may require disclosure on the CFTC's Form 8-R and address when the Member will escalate any significant issues uncovered through surveillance or periodic inspection to NFA or other appropriate regulators.
The final section requires Members to implement policies and procedures designed to ensure that branch office and guaranteed IB personnel receive adequate training to follow industry rules and regulations, properly handle customer accounts and satisfy ethics training requirements.
More information on these amendments is available in the May 21, 2019 submission letter to the CFTC. If you have any questions regarding these amendments, please contact Nicole Wahls, Manager, Compliance (312-781-1886 or email@example.com).