Proposed Rule

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EXPLANATION OF PROPOSED BYLAW 1508

The Securities Exchange Act of 1934 requires NFA, as a limited purpose national securities association, to adopt and enforce SFP sales practice rules for notice-registered broker-dealers. Twenty-one exchange-member FCMs are also notice-registered as broker-dealers and, since NFA is not the designated self-regulatory organization for these firms, we do not audit them.

Bylaw 1508 authorizes NFA to enter into a regulatory services agreement with the futures exchanges that audit notice-registered broker-dealers. The bylaw also provides that NFA retains full responsibility for its obligations under the Exchange Act. If the futures exchanges do not conduct the appropriate audit steps or do not report potential violations to NFA, then NFA will be responsible to the SEC for those failures.

NFA Bylaw 1508 will allow staff to enter into a Security Futures Audit Agreement with the futures exchanges. The Executive Committee has already approved the agreement, so we will execute it as soon as the ten-day review period has passed (unless the CFTC takes review).

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act. NFA intends to make NFA Bylaw 1508 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.

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