Speeches and Testimonies

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January 06, 2002



Introductory Remarks
My name is Karen Wuertz, and I am Senior Vice President for Strategic Planning at National Futures Association. I would like to thank NASAA for their gracious invitation to visit such a warm and beautiful place. NFA and NASAA have a long history of cooperative enforcement work. We have participated and attended most of your conferences and worked on several projects jointly over the years. We truly value this relationship and feel that our work with all of you has helped us meet our regulatory mission and also contributed to your efforts in combating fraud in the financial services industry.

I would like to talk to you this morning about some of NFA's regulatory and investigatory initiatives and how many of them can support your efforts. These initiatives have produced meaningful and tangible results in our efforts to protect the investing public.

I have been with NFA for over 15 years and a lot of my early work at NFA involved dealing with customer complaints and brokers who engaged in misleading and fraudulent sales practices. We all know how brokers can take advantage of investors, an unscrupulous practice which not only harms investors but also damages the integrity of the industry and the vast majority of the people in the industry who conduct futures business using just and equitable principles of trade. My remarks this morning will discuss the regulatory and enforcement databases that we have developed to serve many purposes, such as:

  • Helping us work more effectively identify problems before they start
  • Helping investors conduct thorough due diligence
  • Assisting other regulatory bodies in protecting investors and weeding out the problems
  • Utilizing technology to its fullest to reduce regulatory costs that in turn allows these databases to be used by an ever-increasing number of users

NFA Background
I know many of you are familiar with NFA and its activities. However, I would like to take just a minute to describe NFA and its regulatory mission. Since 1982, NFA has been the nationwide self-regulatory organization for the US futures industry and the only registered futures association under the Commodity Exchange Act. NFA's primary mission is to protect the public from unscrupulous, fraudulent and unethical business practices through efficient and effective regulation of its Members. NFA's current membership includes approximately 4,000 firms and 50,000 individuals. NFA has four congressionally mandated activities — registration, compliance, education and arbitration. NFA's regulatory process begins with screening firms and individuals when they seek registration to conduct futures-related business and continues with regular examinations of them throughout their business lives. NFA also monitors its Members' sales practices. When appropriate, NFA initiates formal disciplinary actions, and these actions can prohibit firms or individuals from conducting futures business ever again. As a result of its activities and because it is the sole nationwide SRO in the futures industry, NFA maintains a large, centralized and the most comprehensive database containing disciplinary, registration, background and financial information about the firms and individuals operating in the futures industry.

Historically, NFA provided futures industry disciplinary information about firms and individuals to regulators and the public at large through a toll-free telephone system. While NFA still offers that service, in 1999, NFA became the first financial services industry SRO to make disciplinary information available to the public on the web when it introduced its BASIC system. BASIC stands for Background, Affiliation, Status Information Center. BASIC contains information regarding all formal disciplinary actions ever taken by NFA and all administrative and injunctive actions ever taken by the CFTC. In addition, all US futures exchanges contributed information regarding their regulatory actions from at least 1990 to the present. Think about that for a moment. That's almost 10 years of exchange actions, more than 16 years of NFA actions and almost a quarter century of CFTC actions.

BASIC also contains registration status and history information about all firms and individuals ever registered in the futures industry. As well, it includes the main office address and telephone number for each currently registered firm, along with the names of the firm's principals. The system also includes information regarding NFA arbitration claims filed by customers against NFA members in cases that have been adjudicated since January 1990.

That's a lot of information — information that a potential customer might want to know before investing — information that a regulator may want to know before registering a firm or individual to conduct business in its jurisdiction — information that may aid you in your investigations. It is hard to overstate the value of this system and its easy availability. Last month alone, there were over 36,000 BASIC searches conducted, and this number increases monthly. Last year, we logged almost 500,000 BASIC searches.

NFA also maintains a variety of information about firms and individuals in its databases that we do not make public but that we routinely share with regulators on request. This includes information on customer complaints that have not resulted in formal disciplinary actions, referrals from other regulators, open investigations, matters arbitrated at NFA and regulatory and criminal information that individuals and firms have disclosed on their application forms.

Other Regulatory Initiatives
It is important to note that NFA's BASIC system does not operate in a vacuum. The reduction in customer complaints and rogue brokers in the futures industry is due to a number of initiatives in addition to the BASIC system. NFA has also adopted a rule that targets brokers who move from firms that are shut down for sales fraud. NFA adopted this rule because it was our experience that the firms that NFA closed for fraudulent sales activity had employed brokers from other firms that NFA had previously shut down for the same reason. To address this situation, NFA's rule requires that a firm must tape-record all of its brokers' telephone conversations if it employs a specified minimum percentage of brokers who come from previously closed-down firms. NFA uses its information systems to constantly monitor the movement of these brokers and to identify the firms that are subject to the tape-recording requirement. I am happy to report that since 1988 the number of "rogue brokers" in the futures industry has decreased by 75% and since 1983, customer complaints have decreased by 72%.

As you can see, this approach has been very valuable to NFA and we believe that it could be valuable in other financial services industries if the industry regulators can establish a connection between brokers' employment histories and fraudulent activities committed by firms they migrate to. In the securities industry, NASDR has adopted a similar rule to apply to the broker-dealer and registered representative community. The efficacy of this approach would have to be judged by each industry based upon its unique circumstances.

Financial Surveillance Database
There is one more database that I thought worth mentioning. A large part of NFA's regulatory responsibility involves financial surveillance of our member firms. Firms must file regular financial statements with NFA, which they have been able to do electronically for five years. The INFAST system allowed firms to import their financial information into a custom-built worksheet, encrypt and transmit it to NFA. The data is stored in NFA's database, and an initial analysis to determine the firm's financial risk is performed automatically by the system. All of this data is then stored in our databases. Although this is not a database that we make public, we would be willing to share this information with other regulators to aid them in completing their work.

Antifraud Network Act
In March of last year, I was asked to testify on behalf of NFA for two subcommittees of the House Committee on Financial Services on this same topic that we are discussing today. Many of you are familiar with the Financial Services Antifraud Network Act. Because of the continuing success and the dramatic growth of our Internet-based system that provides tremendous background and disciplinary information after just a few clicks, we were very pleased to give our input into the development of this bill. The development of a convenient and efficient network that allows regulatory bodies easy access to all of the various background and disciplinary databases available makes a tremendous amount of sense and could be a valuable regulatory tool if developed properly. It must be developed simply and at a low cost. An expensive system with a lot of complicated bells and whistles will not be used. Regulatory bodies will avoid this new system and resort to continuing to use the telephone if there are costs associated with usage and if it is difficult to use.

International Regulators Alert System
In today's global marketplace, the number of firms and individuals that conduct business both on their domestic market and in foreign jurisdictions is rising dramatically. This is a trend that is likely to continue, and accelerate. As a result, it will become increasingly more important, and more difficult, for each regulator to be kept informed in a timely manner of the authorization status, financial condition and fitness of firms and individuals from foreign jurisdictions that have access to a regulator's domestic markets. The Commodity Futures Trading Commission has entered into a number of Memoranda of Understanding with regulators in other jurisdictions that include agreements to share these kinds of information.

Because of the success of our databases and the easy access to information through the use of technology, we've been asked by the CFTC and other international regulators to develop a system to provide immediate alerts concerning material or critical events for U.S. firms which are operating in foreign jurisdictions using their CFTC license. In addition to alerts, the system will provide periodic reports containing less time-sensitive information, such as changes in principals, minor disciplinary actions, changes in a firm's address or exchange membership etc. All of this can be done very simply through effective searches through our databases and easy distribution of the information through e-mail.

This system will only allow the CFTC to provide information to other regulators. The broader issue, of course, is how can regulators outside the U.S. provide important disciplinary information and background regarding firms and individuals conducting business with U. S. investors. It is our hope that this may be the first step to developing a truly international, multilateral information sharing system.

Closing Remarks
We're all familiar with the adage "knowledge is power." I would add that "shared knowledge is even more powerful." As part of our mission to provide regulatory programs and services, NFA is committed to sharing appropriate information with a variety of audiences in a useful, intuitive format. This shared knowledge can reduce the regulatory burdens of our Members, help investors perform the due diligence necessary before making investment decisions and assist regulators and enforcement agencies like NASAA in their investigations.

Before I leave, I'd like to show you how easy it is to access our BASIC system. Just go to our web site at www.nfa.futures.org and click on the BASIC button. You will be given all the information you need to conduct a search. If you need additional information, you can contact me either by telephone (312-781-1335) or by e-mail (Kwuertz@nfa.futures.org). You can also contact Regina Thoele, an associate director in our Compliance department, at 312-781-1327 or Rthoele@nfa.futures.org.

Thank you for your time and attention this morning. I would be happy to answer any questions you might have.

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