Proposed Rule

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In November 2005, NFA's Board adopted amendments to NFA Compliance Rule 2-10 to require futures commission merchants ("FCMs") to maintain their books and records in an office located in either the U.S. or a Part 30 jurisdiction (if the firm is subject to the Part 30 regulatory scheme). The rule does not require the office to be under the supervision of an associated person ("AP") principal resident in that office, however.

This creates several potential problems. First, the rule allows the firm's principals to supervise the office from a remote location. Without a principal on the premises to oversee the office's day-to-day recordkeeping activities, the firm is less likely to discover potential problems quickly. Second, there may be no one in the office who is subject to NFA's disciplinary jurisdiction. Although the firm's AP principals may ultimately be responsible for the firm's books and records violations, their distance from the office could dilute their sense of accountability as well as the accountability of those in the office.

The lack of a resident principal also means that NFA Compliance staff may not have ready access to someone who can answer questions during an audit or investigation. Although Compliance Rule 2-10 requires all Members to have an individual who is authorized to act on the Member's behalf, is fluent in English, and is knowledgeable about the Member's business and about financial matters, it does not require that person to be located in the U.S. While the use of offshore personnel may be generally adequate for other registration categories, it can be problematic when NFA is seeking information from an FCM.

Accordingly, NFA amended Compliance Rule 2-10(b) to require that an FCM's books and records be kept in a U.S. or Part 30 office that is under the supervision of an AP principal resident in that office. As is currently the case, a firm could only use an office in a Part 30 jurisdiction if the firm is actually subject to regulation in that jurisdiction.

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