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In the last several years, NFA has encountered several instances where brokers, who have been barred from NFA membership as a result of an NFA disciplinary case, have continued to work at a Member firm. Because NFA is unable to monitor, minute by minute, the activities of these individuals, it is virtually impossible to determine if these individuals are complying with their membership bar or, on the other hand, improperly acting in a capacity requiring registration and NFA membership.
One recent case involved a guaranteed introducing broker ("IB") located in Florida. The firm was founded by an individual who has been charged twice with sales practice fraud, most recently in October 2001 when NFA's Business Conduct Committee ("BCC") issued a sales practice Complaint against him alleging that he made deceptive, misleading and high-pressured sales solicitations while an associated person ("AP") of another firm. He settled that matter by agreeing to withdraw from NFA associate membership and principal status and not to reapply for three years.
Shortly before the individual's NFA membership bar was to take effect, he supposedly divested himself of all interest in the IB by assigning all of his interest in the firm to his wife, who had no previous experience in the futures industry. In late February 2003, NFA paid a surprise visit to the IB's offices to determine if the individual was abiding by the terms of the Decision. When NFA auditors arrived at the firm, they found that he was apparently still in charge, as though nothing had changed. He was at the same desk and in the same office that he had maintained before the NFA membership bar took effect. His nameplate remained on his desk, as did his computer monitor, trade publications, and personal effects. When asked what he was doing at the firm, he said that he was a "motivator" at the morning sales meetings but, otherwise, was completely out of the firm's operations. There were indications that he may have been more heavily involved, however. The BCC filed a Complaint against the IB that, among other things, cited the firm for permitting the individual to act in disregard of the Hearing Panel's prior Decision. NFA settled the case with the IB whereby the firm and its guarantor agreed to pay a fine of $150,000.
Besides this individual, NFA has suspected other individuals who have been barred from NFA membership as the result of NFA disciplinary actions of working at Member firms in various roles. Obviously, it is problematic if these individuals are acting in a capacity that requires them to be registered APs and NFA Associates. However, it is equally problematic that these suspended or expelled individuals are performing activities on behalf of, and in connection with, an NFA Member's futures business, regardless of whether such activities require registration or NFA membership.
NFA Compliance Rule 2-6 currently provides, in pertinent part, that "[n]o Member or Associate shall conduct commodity futures business with a suspended Member or Associate during the period of suspension unless authorized by the Business Conduct Committee or the Appeals Committee." At its meeting in November 2004, NFA's Board amended this rule to extend it to cover individuals who have been expelled from membership. If a Member or Associate is prohibited from conducting commodity futures with a suspended Member, a similar prohibition should extend to those expelled from NFA membership. The amendments to Compliance Rule 2-6 also provide that no Member or Associate shall conduct commodity futures business with a person who is subject to a similar sanction-as an expulsion or suspension-that temporarily or permanently prohibits the person from NFA membership. Staff recommended that this language be adopted because oftentimes in settling NFA disciplinary cases respondents do not agree to the use of the word "expulsion" but rather agree to a sanction tantamount to an expulsion (e.g. withdraw from NFA membership and never reapply).
The Board also adopted a new Interpretive Notice to NFA Compliance Rule 2-6, which clarifies that the phrase "commodity futures business", as used in the Rule, means any and all activities performed by an expelled or suspended Member or Associate on behalf of, and in connection with, an NFA Member's futures business, regardless of whether such activities require registration or NFA membership. In early December 2004, NFA submitted the proposed amendments to NFA Compliance Rule 2-6 and the Interpretive Notice to the Commission for approval.
Shortly after NFA submitted this proposal to the Commission for approval, NFA recognized that the proposal's language that focuses on being "subject to a similar sanction" may have a broader application than intended. For example, as proposed, Member firms would be prohibited from employing individuals in a non-registered capacity that may be subject to a potential statutory disqualification or a non-NFA regulatory action resulting in a sanction tantamount to suspension or expulsion unless the person's activities were authorized by NFA's Business Conduct Committee, Hearing Committee or the Appeals Committee. NFA's proposal did not intend to reach individuals in these situations, however.
Since NFA intended to limit Compliance Rule 2-6's amendments to situations where NFA has taken a disciplinary action resulting in the suspension or expulsion or similar sanction tantamount thereto, NFA's Board in November approved a slight modification to the language to clarify a narrower application of the rule. This modification is consistent with Compliance Rule 2-6's original language, which contains references to a Member, Associate, expulsion and suspension. To accomplish this result, the first sentence of Compliance Rule 2-6 now provides that: "No Person who has been expelled or suspended or is subject to a similar sanction by NFA in a proceeding brought pursuant to Part 3 of NFA's Compliance Rules that temporarily or permanently prohibits the person from NFA membership or affiliation in any capacity with an NFA Member shall hold himself out as a Member in good standing of NFA, or as affiliated with a Member, as the case may be, during the period during which the sanction is in effect." A corresponding change was also made to the Interpretive Notice.
NFA respectfully requests that the Commission review and approve the proposed amendments to Compliance Rule 2-6 and the proposed Interpretive Notice regarding conducting commodity futures business with an expelled or suspended Member or Associate.