Proposed Rule

Bylaw 306 provides that an NFA Member is a Forex Dealer Member ("FDM") if it is the counterparty or offers to be the counterparty to retail forex transactions (and is not exempt as an otherwise regulated entity). Bylaw 1301(e) imposes annual dues on FDMs based on their gross annual revenue from their retail forex business. This fee structure is designed to recover NFA's regulatory costs so that fees from on-exchange transactions do not subsidize regulation of off-exchange transactions. Because Bylaw 306 is self-executing, a firm does not become an FDM until it is the counterparty or offers to be a counterparty for retail customers. Therefore, when it initially becomes a Member, NFA collects only those dues owed by a futures commission merchant ("FCM") Member ($5,625 if NFA is the Member's DSRO, otherwise $1,500).

Currently, NFA does not collect FDM dues until an FDM's annual membership renewal date, even if the firm has been active during its first year. This poses two problems. First, by collecting dues in this manner, NFA is unable to recoup its regulatory costs if an FDM ceases to be a Member prior to its first renewal date. A recent example is an FDM that NFA spent significant resources investigating and filed a Member Responsibility Action against. The FDM withdrew its membership prior to its annual renewal date and, accordingly, never paid the higher FDM dues. Second, NFA spends considerable resources on FDMs prior to their registration being granted. For example, unlike FCMs, NFA reviews an FDM's unregistered solicitors and performs testing of the FDM's trading system.

Therefore, NFA will begin collecting the minimum FDM dues ($20,000 if NFA is the Member's DSRO, otherwise $15,875) as soon as a firm qualifies under Bylaw 306. This should ensure that FDMs contribute appropriately to the regulatory costs of their retail forex business.

Although Bylaw 1301(e) does not specify how dues will be collected, the discussion regarding FDM dues in the related Interpretive Notice has been amended to include this new policy. This will help to avoid any misunderstanding by those applying to become FDMs.

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act. NFA intends to make the proposed amendments to the Interpretive Notice regarding Forex transactions with FDMs 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.