Proposed Rule

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NFA has seen a marked increase in the number of foreign firms applying for FCM registration and NFA membership. Compliance Rule 2-10 requires all Members to maintain books and records necessary to conduct their business, but that requirement is useless if NFA staff cannot audit or understand those books and records.

NFA is concerned about its ability to audit and obtain information from foreign FCMs located in countries without regulatory systems comparable to that in the U.S. Furthermore, there have been instances where promotional materials and other documents prepared by U.S. Members were in a foreign language and it fell on NFA to get them translated. Amending Compliance Rule 2-10 ensures that NFA has effective access to books and records maintained by foreign firms or in a foreign language.

Although NFA has had foreign firms as Members since its inception, they have been concentrated in the CPO and CTA categories, with a few IBs sprinkled in. Applications from foreign FCMs were rare, and those firms all had a U.S. office by the time they became Members. This has changed recently, primarily due to membership applications from foreign firms that want to offer retail forex to U.S. customers.

As of October 3, 2005, NFA had six foreign FCM Members. Four of the foreign FCMs are located in London and the other two are located in Ontario, Canada, so they are all subject to established regulatory schemes in their home countries. As of that same date, there were three firms with pending applications for FCM registration and NFA membership and one firm with a pending application for registration only. The four pending firms are located in Colombia (two firms), Cyprus, and Israel. Within the past few years, NFA has also received applications from firms located in Argentina, Jordan, Pakistan, Romania, Russia, and Singapore, although those firms withdrew their applications before they completed the registration process.

Since December 1987, NFA has required foreign firms to certify that they can and will produce their books and records in the U.S. within 72 hours and that they are not subject to any blocking, privacy, or secrecy laws that would interfere with this inspection. NFA shortened the response time for FCMs to 24 hours in 2003, after more foreign firms started applying for FCM registration.

NFA audits most foreign firms by asking them to provide copies of their books and records, and this procedure has proven workable for auditing CPOs, CTAs, and IBs. For the foreign FCMs, NFA sent auditors to Canada, and each of the London firms either maintains a U.S. office to prepare and maintain the books relating to its U.S.-regulated business or provides those books and records through a U.S. agent. As the number of foreign FCM applicants grows, however, concerns about NFA's ability to conduct efficient and effective audits of these firms increases.

Finally, U.S. firms occasionally provide NFA with documents written in foreign languages without also providing a translation. NFA has taken at least two disciplinary actions involving foreign-language solicitations made to a targeted group within the U.S. In the most recent case, a Forex Dealer Member located in California solicited Chinese-speaking individuals to trade OTC forex. In the other case, a CTA Member located in New York solicited Chinese-speaking individuals to trade products on U.S. exchanges. In both cases, NFA bore the onus of translating the materials into English. We believe this onus should be on the Member rather than on NFA, although NFA would check the accuracy of the translations in appropriate circumstances.

The amendments to Compliance Rule 2-10 add three new sections, with the current text becoming section (a). 1 Section (b) requires FCMs to maintain their books and records in an office located in the U.S. or a Part 30 jurisdiction (e.g., Great Britain, Canada). Section (b) also requires FCMs that do not maintain their books and records in the U.S. to reimburse NFA for travel and related expenses if travel to a foreign jurisdiction is necessary.

Section (c) applies to all Members subject to minimum capital requirements (i.e., FCMs and independent IBs). It requires them to prepare financial and other required reports in English, using U.S. dollars and U.S. accounting standards, and to maintain a general ledger in English using U.S. dollars. Section (d) applies to all Members. That section requires them to:

  • file documents with NFA in English;
  • maintain English translations of foreign-language promotional material;
  • maintain required procedures in English;
  • provide English translations of other documents when requested by NFA; and
  • ensure that an English-speaking individual who is knowledgeable about the firm's business is available to assist NFA during an audit.

NFA respectfully requests that the Commission review and approve the proposed amendments to Compliance Rule 2-10 regarding recordkeeping.

1 Many of these requirements are taken from NASD Rule 1090 or CBOE Rule 3.4 regarding foreign members.

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