Proposed Rule

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Almost fifteen years ago, NFA's Board of Directors adopted the Interpretive Notice to Compliance Rule 2-9 entitled "Compliance Rule 2-9: Enhanced Supervisory Requirements" ("Notice"). The Notice requires a Member to undertake certain enhanced supervisory procedures if its sales force includes a specified number of associated persons ("APs") who have worked at Disciplined Firms. The Notice and an enabling provision of NFA Compliance Rule 2-9(b) provide that affected Members may petition the Telemarketing Procedures Waiver Committee ("Waiver Committee") for relief from the obligations.

From time to time, the Board has amended the Notice's numerically-based automatic triggering mechanisms to provide relief to certain APs who, based upon their history, are not likely to pose a risk to the public. For example, in 2003, the Notice was amended to exclude APs who had worked at Disciplined Firms for less than sixty days more than ten years ago from having to be counted for purposes of calculating whether a Member that hires such an individual is required to adopt the enhanced supervisory procedures. Last year the Board reduced this period from ten years to five years while retaining the requirement that the individual must have worked at such a firm for less than sixty days.

A number of APs who may not pose a risk to the public remain in the population of APs who could trigger the rule. For example, a prospective AP who worked at one Disciplined Firm for more than sixty days a number of years ago but who otherwise had an unblemished personal and employment history in the industry would currently be afforded relief only if the firm seeking to hire the AP applied for a waiver. NFA's Waiver Committee often takes these individual factors into consideration when deciding whether to grant a waiver to a firm.

Without an exemption, these individuals may not ever reach the Waiver Committee. Employers, and small firms in particular, may be wary of hiring these individuals, merely because their hiring might trigger enhanced supervisory procedures and require the firm to apply for a waiver. In addition, some firms are simply loath to hire an individual who would be counted on their staff as having come from a Disciplined Firm even if hiring them would not trigger enhanced supervisory procedures.

The amendments adopted by the Board expand the existing narrow exemptions from being counted as an AP from a Disciplined Firm for purposes of triggering the requirements by adding individuals who meet all the following narrow criteria:

  • The AP has only worked for one Disciplined Firm;

  • The AP has not worked for a Disciplined Firm in more than ten years;

  • The AP has not worked for a Member that has been subject to a sales practice action by NFA or the CFTC since leaving the Disciplined Firm;

  • The AP has not been personally subject to a disciplinary action by NFA or the CFTC; and

  • The AP has been an NFA Member or Associate Member for at least eight of the preceding ten years.

NFA performed an analysis of registration and disciplinary data and found that a significant number of currently active APs who have long tenures in the industry meet the aforementioned criteria and therefore would be exempt from being counted as having worked at a Disciplined Firm. Specifically, applying the new criteria would exempt 82 currently active APs, who are employed by 67 Member firms, from being counted as APs who had worked at a Disciplined Firm for purposes of determining whether their current sponsor or any prospective sponsors would trigger an obligation to undertake the enhanced supervisory procedures.

NFA believes that adding these exemptions will reduce the burden on the membership while still imposing enhanced supervision on firms that cause concern. Excluding APs who worked at a single Disciplined Firm more than ten years ago, have since been employed by compliant Members, and have good personal compliance histories will also make the Waiver Committee more efficient since an increased number of non-problematic firms and individuals would be removed from the waiver process.

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act. NFA intends to make the amendments to the Interpretive Notice regarding Compliance Rule 2-9: Enhanced Supervisory Requirements 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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