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Amendments to Compliance Rule 2-46. CPO and CTA Reporting Requirements
June 30, 2017— Amendments to Compliance Rule 2-46. and new NFA Interpretive Notice NFA Compliance Rule 2-46: Reporting Financial Information on NFA Forms PQR and PR. An explanation of the amendments and Interpretive Notice can be found in the September 6, 2016 rule submission letter.
Part 2 - Rules Governing the Business Conduct of Members Registered with the Commission
RULE 2-30. CUSTOMER INFORMATION AND RISK DISCLOSURE.
[Adopted effective June 1, 1986. Effective date of amendments: January 1, 1990; August 21, 2001 December 10, 2002; December 17, 2007; January 3, 2011; and September 19, 2016.]
(a) Each Member or Associate shall, in accordance with the provisions of this Rule, obtain information from all individual customers and any other customers who are not eligible contract participants (as defined in Section 1(a)(18) of the Act) and provide such customers with disclosure of the risks of futures trading.
(b) The Member or Associate shall exercise due diligence to obtain the information and shall provide the risk disclosure at or before the time a customer first opens a futures trading account to be carried or introduced by the Member, or first authorizes the Member to direct trading in a futures account for the customer. A Member registered as a broker or dealer under Section 15(b)(11) of the Exchange Act shall provide a copy of the disclosure statement for security futures products at or before the time the Member approves the account to trade security futures products. For an active customer who is an individual, the FCM Member carrying the customer account shall contact the customer, at least annually, to verify that the information obtained from that customer under Section (c) of this Rule remains materially accurate, and provide the customer with an opportunity to correct and complete the information. Whenever the customer notifies the FCM Member carrying the customer's account of any material changes to the information, a determination must be made as to whether additional risk disclosure is required to be provided to the customer based on the changed information. If another FCM or IB introduces the customer's account on a fully disclosed basis or a CTA directs trading in the account, then the carrying FCM must notify that Member of the changes to the customer's information. The Member or Associate who currently solicits and communicates with the customer is responsible for determining if additional risk disclosure is required to be provided based on the changed information. In some cases, this may be the Member introducing or controlling the account; in other cases, it may be the carrying FCM.
(c) The information to be obtained from the customer shall include at least the following:
(1) The customer's true name and address, and principal occupation or business;
(2) For customers who are individuals, the customer's current estimated annual income and net worth. For all other customers, the customer's net worth or net assets and current estimated annual income, or where not available, the previous year's annual income;
(3) For individuals, the customer's approximate age or date of birth;
(4) An indication of the customer's previous investment and futures trading experience; and
(5) Such other information deemed appropriate by such Member or Associate to disclose the risks of futures trading to the customer.
In addition, Members that are not also members of the Financial Industry Regulatory Authority and their Associates must obtain the following information from each customer who is an individual if the customer trades security futures products:
(6) Whether the customer's account is for speculative or hedging purposes;
(7) The customer's employment status (e.g., name of employer, self-employed, retired);
(8) The customer's estimated liquid net worth (cash, securities, other);
(9) The customer's marital status and number of dependents;
(10) Such other information used or considered to be reasonable by such Member or Associate in making recommendations to the customer.
(d) The risk disclosure to be provided to the customer shall include at least the following:
(1) the Risk Disclosure Statement required by CFTC Regulation 1.55, if the Member is required by that Regulation to provide it;
(2) the Disclosure Document required by CFTC Regulation 4.31, if the Member is required by that Regulation to provide it;
(3) the Options Disclosure Statement required by CFTC Regulation 33.7, if the Member is required by that Regulation to provide it; and
(4) the Disclosure Document required by CFTC Regulation 31.11, if the Member is required by that Regulation to provide it.
(e) In the case of an account which is introduced by an FCM or IB or for which a CTA directs trading, and except as otherwise provided in subsections (b) and (j), it shall be the responsibility of the Member soliciting the account to comply with this Rule.
(f) A Member or Associate shall be entitled to rely on the customer [as the sole source] for the information obtained under Section (c) of this Rule and shall not be required to verify such information, except as provided in section (j)(2) of this rule.
(g) Each Member or Associate shall make or obtain a record containing the information obtained under Section (c) of this Rule at the time the information is obtained. If a customer declines to provide the information set forth in Section (c) of this Rule, the Member or Associate shall make a record that the customer declined, except that such a record need not be made in the case of a non-U.S. customer unless such customer trades security futures products. Subject to the provisions of Section (i) of this Rule, a Member may open, introduce or agree to direct a futures trading account for a customer only upon the approval of a partner, officer, director, branch office manager or supervisory employee of the Member. Each Member shall keep copies of all records made pursuant to this Rule in the form and for the period of time set forth in CFTC Regulation 1.31.
(h) Each Member shall establish and enforce adequate procedures to review all records made pursuant to this Rule and to supervise the activities of its Associates in obtaining customer information and providing risk disclosure.
(i) Nothing herein shall relieve any Member from the obligation to comply with all applicable CFTC and SEC Regulations and NFA Requirements.
(j) Members that are not also members of the Financial Industry Regulatory Authority and their Associates shall adhere to the following additional requirements relating to accounts for customers that trade security futures products:
(1) A Member shall exercise due diligence to learn the essential facts relative to the customer, including the customer's investment objectives and financial situation and, based upon those facts (including any information obtained under subsection (c) of this Rule, if applicable), a partner, officer, director, branch office manager, or supervisory employee of the Member shall approve or disapprove the customer's account for security futures transactions. If the Member is an FCM or IB, the account must be approved or disapproved by a designated security futures principal. The approval or disapproval shall be in writing and shall identify the person approving or disapproving the account. Additionally, the customer's account records shall contain information about the account, including the name of the Associate, how the customer's information was obtained, and the date that the disclosure statement for security futures products was provided.
(2) A Member or Associate shall forward the background and financial information upon which the customer's account has been approved for trading security futures products to each customer who is an individual, unless the information has been obtained in writing from the customer, for verification of accuracy within fifteen days after the customer's account has been approved. A copy of the background and financial information on file with the Member shall also be sent to each customer who is an individual for verification within fifteen days after the Member becomes aware of any material change in the customer's financial status. In all cases, absent notice to the contrary from the customer, the information is deemed verified.
(3) No FCM or IB Member or Associate thereof shall recommend to a non-institutional customer a transaction in security futures products or a particular trading strategy relating to such products without making reasonable efforts to obtain current information regarding the customer's financial status and investment objectives; provided, however, that this requirement does not apply to transactions in discretionary accounts. For purposes of this requirement, a non-institutional customer is any customer who is not:
(i) a bank, savings and loan association, insurance company, registered investment company, a registered commodity pool operator, or a commodity pool operated by a registered commodity pool operator;
(ii) an investment advisor registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions) or a registered commodity trading advisor;
(iii) an investment company exempt from registration under the Investment Company Act of 1940, a commodity pool operator exempt from registration under the Commodity Exchange Act, a commodity pool operated by a commodity pool operator exempt from registration under the Commodity Exchange Act, an investment advisor exempt from both federal and state registration under the Investment Advisers Act of 1940, or a commodity trading advisor exempt from registration under the Commodity Exchange Act;
(iv) a registered broker-dealer or futures commission merchant; or
(v) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.
(4) No FCM or IB Member or Associate thereof shall recommend to any customer a transaction in security futures products or a particular trading strategy relating to such products without reasonable grounds for believing that the recommendation or strategy is not unsuitable for the customer on the basis of the customer's current investment objectives, financial situation and needs, and any other information known by the Member or Associate.
(5) No FCM or IB Member or Associate shall recommend a security futures transaction to a customer unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that the customer may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended transaction.
(6) No Member or Associate exercising discretion over an account may effect security futures transactions that are excessive in size or frequency in view of the customer's investment objectives and financial situation.