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9051 - NFA COMPLIANCE RULES 2-9 and 2-36: ETHICS TRAINING REQUIREMENTS
(Board of Directors, July 1, 200;. effective September 30, 2019.)
In October 2001, the CFTC issued a Statement of Acceptable Practices ("Statement") for ethics training. This Statement replaces the Commission's prescriptive ethics training rule and allows flexibility in the format, frequency and providers of ethics training, permitting each firm to tailor its training program to better suit its own operations. By the same token, this shifted the responsibility to each firm to adopt and implement an appropriate ethics training scheme. The Commission intended that the compliance with the Statement's principles would serve as a "safe harbor" concerning acceptable procedures for ethics training programs and topics that ethics training programs should address. Because the Statement is fairly general in nature, however, Members have requested that NFA provide additional information to assist them to comply with their ethics training requirement.
Ethics training is one of a Member's supervisory obligations under NFA's Compliance Rules 2-9 and 2-36. The repeal of the specific regulations relating to ethics training does not diminish Members' and Associates' obligation to diligently supervise its employees. Professional ethical standards remain an essential element of each Member's business model. The use of well-designed ethics training programs supports each Member's supervision of its employees and business activities. Like any other business process, remaining aware of changing industry standards and ensuring high ethical standards is an on-going effort. Developments in technology, commercial practices and regulations and other changes will have ethical ramifications associated with them. Good business practice dictates that employees receive periodic training to keep them cognizant of these developments and their ethical implications.
The first thing that all firms should have is written procedures that outline their ethics training program. Acceptable procedures will address:
- the topics that will be included in the training program;
- by whom the training will be provided;
- the format of the training, e.g., classroom instructions, software, etc.;
- the frequency with which the Member expects its employees to obtain ethics training; and
- how the firm will document that it has followed its written procedures.
The Statement lists the following as topics that an ethics training program should address:
- An explanation of the applicable laws and regulations and rules of self-regulatory organizations or contract markets and registered derivatives transaction execution facilities; 1
- The registrant's obligation to the public to observe just and equitable principles of trade;
- How to act honestly and fairly and with due skill, care and diligence in the best interest of customers and the integrity of the markets;
- How to establish effective supervisory systems and internal controls;
- Obtaining and assessing the financial situation and investment experience of customers;
- Disclosure of material information to customers; and
- Avoidance, proper disclosure and handling of conflicts of interest.
The Statement provides that ethics training should be focused to some extent on a person's registration category. Likewise, NFA believes it is appropriate for Members to tailor their ethics training programs to the specific obligations of their membership category and the roles of their personnel.
It is still acceptable to obtain ethics training sponsored by independent persons, firms, or industry associations. Each Member should ensure that its selected provider is qualified and obtain proof that the provider has completed relevant proficiency testing and has three years of relevant industry experience, or similar experience. NFA's Vice President of Registration may waive the testing requirement where the provider demonstrates competency comparable to satisfying proficiency testing requirements. Firms should only use providers that they reasonably in good faith believe are not subject to any investigations or bars from registration. In-house training is also acceptable; however, firms should apply these same criteria to any in-house training personnel. NFA's BASIC system, which can be found on our website, is an excellent resource to check registration and disciplinary history of providers.
Ethics training may be provided through a variety of media, including the Internet, audiotapes, computer software, and videotapes, as well as in-person courses. Less formal methods of training are also permitted, including distribution of periodicals, legal cases and advisories. Each Member should choose a format or formats that best suit its business operations and the nature of its workforce. For example, firms that have a high percentage of APs with disciplinary histories or who come from firms with disciplinary histories may well decide that more structured, formal training is appropriate.
Like format, Members should decide how frequently ethics training is required based on the business model, the composition of their sales force and the format of the training. For example, firms that opt for less formal training such as distribution of pertinent written materials should consider keeping the training on a more on-going basis. More formal training, such as classroom instruction, could appropriately be offered less frequently but on a periodic basis.
Maintaining documentation that the Member has complied with its procedures is a critical element of an acceptable ethics training program because it enables the Member to be certain that it is actually implementing the policies it has deemed necessary and appropriate for its business. The appropriate documentation will vary depending on the firm's overall ethics training program. Firms that distribute written materials should maintain documentation showing what materials were distributed, who selected them and when and to whom they were circulated. Firms that utilize more formal training programs should keep records showing who obtained the training, the date of training, and any materials used.
REQUIREMENTS OF OTHER SELF-REGULATORY ORGANIZATIONS
Other self-regulatory organizations have taken a variety of approaches to ethics training. Members are urged to review the ethics training requirements of the other self-regulatory organizations of which they are members.
Members that establish a corporate culture of high ethical behavior will provide the best service for their customers. Remaining aware of changing industry standards and adopting an appropriate ethics training program will help ensure that Members and their Associates continually adhere to the high ethical standards that the Members set for themselves.
1 The regulatory category for derivatives transaction execution facilities was removed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. NFA believes it is appropriate for an ethics training program to explain the rules of swap execution facilities applicable to a Member's business.