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Proposed Rule

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An NFA Interpretive Notice titled "NFA Compliance Rules 2-7 and 2-24 and Registration Rule 401: Proficiency Requirements for Security Futures Products" (paragraph 9049) provides that new registrants can satisfy their proficiency requirements for security futures by taking an appropriate training program if they take the Series 3 examination and apply for registration before the Series 3 examination is updated to include security futures questions.1 The Interpretive Notice also provides that new branch office managers and current supervisory personnel can satisfy the proficiency requirements for designated security futures principals through training before the Series 30 examination is updated.2 Current registrants and branch office managers can also satisfy their proficiency requirements by training.

Although the Interpretive Notice does not include a deadline for updating the Series 3 and Series 30 examinations, NFA anticipated updating these examinations by January 2004.3 In fact, NFA has already prepared the necessary questions and could easily add them to the question banks for the Series 3 and Series 30 examinations. Given the low trading volume in these products and the relatively small number of individuals who are interested in qualifying to engage in security futures activities, however, testing is an inefficient option at this time. Furthermore, the existing training program is an effective way to ensure that individuals who solicit accounts and orders from and manage accounts for customers trading in these markets have the necessary knowledge. Therefore, NFA proposes postponing the updated Series 3 and Series 30 examinations until activity increases to a point where a test becomes more practical.

Security futures account for a very small amount of U.S. futures volume. Extrapolating from current volume figures, we estimate that annual trading volume on U.S. futures exchanges will be approximately 1.3 billion contracts for calendar year 2003, while security futures volume will be approximately 2.5 million contracts.4

The number of individuals qualifying to engage in security futures activities is also a small percentage of those eligible to qualify. From January through November 2003, 1054 futures-only registrants have completed the web-based proficiency training offered by NFA and NASD. In the last four months, the number of individuals who completed the proficiency training has dropped significantly, averaging just under 50 futures-only registrants per month.5 Since the proficiency training is used by existing registrants as well as new registrants, the number of new registrants taking the training should be considerably lower.

Looking at the same period, 2459 individuals took the Series 3 examination from January through November. Unlike the training figures, however, the number of people taking the exam has remained relatively steady, with a monthly average of 241 for the last four months.6 These figures demonstrate that most individuals who take the Series 3 exam are not interested in security futures at this time.

The regulatory scheme for security futures is different from and more complex than the regulatory scheme for other futures contracts. As a result, when NFA adds security futures products questions to the Series 3 examination, the exam will be a significantly longer and will require applicants to learn additional material. NFA does not believe it is cost-effective to impose a burden on all new entrants to learn this information when the vast majority of them do not appear to be interested in selling or trading these products. Similar considerations apply to updating the Series 30 examination.

We have been coordinating with NASD and are aware that it has requested similar relief. NFA and NASD have the same regulatory aims and, in fact, the regulatory scheme for security futures products anticipates that the two entities will have comparable regulatory requirements. Postponing the testing requirement for both NFA and NASD promotes regulatory comparability and reduces the potential for regulatory arbitrage.

For the reasons discussed above, NFA proposes to postpone the use of the revised exams indefinitely. In the meantime, we will continue to coordinate with NASD and will monitor the level of activity and the amount of interest in security futures products. In particular, we will review the following security futures information on an ongoing basis:

  • Volume,
  • Who is trading these products,
  • Number of associated persons completing the training program,
  • Number of accounts approved for trading,
  • Nature of those customers,
  • Customer complaints, and
  • Audit findings that indicate potential regulatory concerns.

As noted above, we have already prepared test questions and can add them to the Series 3 and Series 30 question banks with a minimum of effort. We will be able to update the Series 3 and Series 30 examinations quickly if our review indicates that it is either necessary or cost-effective or if either the SEC or the CFTC so requests. We will, of course, need enough lead-time for test preparation services to update their course materials so that new applicants can study the appropriate material before taking the examination, but the entire process should not take more than four months.

* * *

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act and will make the proposal contained herein effective ten days after receipt of this submission by the Commission unless the Commission notifies NFA that the Commission has determined to review the proposal for approval.

1The Series 3 is a comprehensive examination that qualifies registered associated persons to engage in all types of non-supervisory activities requiring registration. NFA has other examinations that qualify individuals to engage in more limited activities, but these examinations are all subsets of the Series 3 examination.
2The Series 30 examination is NFA's supervisory examination.
3 The Interpretive Notice originally included a deadline of six months after the first security futures contract began trading, but the notice was previously amended, effective May 5, 2003, to eliminate that deadline.
4 Total volume is based on information reported by the individual futures exchanges and compiled by the Futures Industry Association, and the security futures volume is based on information reported by the Options Clearing Corporation.
5 NFA's audits of notice-registered broker-dealers show that they are all using the web-based training program to qualify their employees.
6 Dual registrants take the training through NASD, and these registrants are not reflected in the futures-only figures discussed in the text. Even when combining futures and securities registrants, however, fewer than 100 individuals have completed the proficiency training in each of the last four months.

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