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Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Security Futures Products
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-44823; File No. SR-NFA-2001-01)
September 20, 2001
Self-Regulatory Organization; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by National Futures Association Relating to Security Futures Products
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 ("Exchange Act"),1 and Rule 19b-7 under the Exchange Act,2 notice is hereby given that on August 21, 2001, the National Futures Association ("NFA") filed with the Securities and Exchange Commission ("SEC" or "Commission") the proposed rule change described in Items I, II, and III below, which Items have been prepared by NFA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
On July 20, 2001, the NFA submitted the proposed rule change to the Commodity Futures Trading Commission ("CFTC") for approval. The CFTC approved the proposed rule change on August 20, 2001.3
I. Self-Regulatory Organization's Description of the Proposed Rule Change
The Commodity Futures Modernization Act of 2000 ("CFMA") amended Section 15A of the Exchange Act to add new subsection (k),4 which makes NFA a national securities association for the limited purpose of regulating the activities of NFA Members who are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act.5 The most significant provisions of the proposed rule change would make the requirements that apply to the security futures activities of these NFA Members reasonably comparable to those that apply to NASD members,6 as required by Section 15(k)(2) of the Exchange Act.7
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
NFA has prepared statements concerning the purpose of, and basis for, the proposed rule change, burdens on competition, and comments received from members, participants, and others. The text of these statements may be examined at the places specified in Item IV below. These statements are set forth in Sections A, B, and C below. The text of the proposed rule change is available at the Office of the Secretary, NFA, and on the Commission's web site (http://www.sec.gov).
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The CFMA lifted the 18-year ban on single stock futures and narrow-based security indices (security futures products) and regulates these products as both securities and futures. The CFMA amended Section 15A of the Exchange Act to add new subsection (k),8 which makes NFA a national securities association for the limited purpose of regulating the activities of NFA Members who are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act,9 which was also added by the CFMA. Section 15A(k)(2)10 requires NFA to have anti-fraud, anti-manipulation, and customer protection rules reasonably comparable to those of the National Association of Securities Dealers, Inc. ("NASD") for the purpose of governing the security futures activities of these Section 15(b)(11)11 broker-dealers.
NFA represents that it already has anti-fraud, anti-manipulation, and customer protection rules that have proven effective in governing the futures activities of NFA Members. However, NFA's rules sometimes take a different approach than NASD's rules and, as a result, they do not correspond in every instance. Therefore, NFA has adopted the proposed rule change in order to ensure that NFA meets the standards imposed by Section 15A(k)(2) of the Exchange Act.12
In NFA staff's discussions with SEC staff, SEC staff suggested that NFA's rules should be comparable to those NASD rules that apply to options since both are derivative instruments. SEC staff also told NFA to include those rules that apply to writing options since the risks of futures transactions are more similar to the risks of writing options than to the risks of purchasing them. These principles guided NFA in developing the proposed rule change. A more detailed discussion of the rule change follows.
a. Bylaw 1101 (Doing Business With Non-Members)
Bylaw 1101 prohibits NFA Members from doing business with non-Members who are required to be registered with the CFTC as futures commission merchants ("FCMs"), introducing brokers ("IBs"), commodity pool operators ("CPOs"), or commodity trading advisors ("CTAs"). Section 4f(a)(4)(C) of the Commodity Exchange Act ("CEA")13 provides that registered futures associations may not prohibit their members from doing security futures business with FCMs and IBs registered under Section 4f(a)(2) of the CEA.14 Bylaw 1101 has been amended accordingly.
b. Bylaw 1507, Compliance Rule 1-1, and Code of Arbitration Section 1 (Definitions)
The definition of futures has been amended to include security futures products. The amendments make it clear that NFA has both compliance and arbitration jurisdiction over security futures transactions involving its NFA Members.
Compliance Rule 1-1 has also been amended to add a definition of "Exchange Act," since the Exchange Act is now referred to in a number of places in the Compliance Rules.
c. Compliance Rule 2-7 (Designated Security Futures Principals)
Proposed Compliance Rule 2-7(b) requires NFA Members who register as broker-dealers under Section 15(b)(11) of the Exchange Act15 ("passported Members") to designate one or more security futures principals and requires the principal to take the Series 30 examination (for futures branch office managers), which will be updated to include questions regarding supervision of activities involving security futures products.16 This is comparable to NASD Rule 1022(f), which requires NASD members who engage in options transactions to have at least one registered options principal.
Corresponding changes to Compliance Rules 2-8, 2-29, and 2-30 require a designated security futures principal to review discretionary trades, approve promotional material, and approve customer accounts for security futures transactions.
d. Compliance Rules 2-22 and 2-26
Compliance Rule 2-22 has been amended to prohibit NFA Members from implying that they have been sponsored, recommended, or approved by any federal or state regulatory body. This makes it comparable to NASD Rule 2210(d)(2)(J).
CFTC Regulations 155.317 and 155.418 dictate the terms under which an associated person ("AP") of one Member can open and trade an account with another Member. Compliance Rule 2-26 has been amended to incorporate these regulations in order to make it comparable to NASD Rule 3050.
e. Compliance Rule 2-29 (Promotional Material)
NFA's and NASD's promotional material rules are comparable for the most part. NASD's rules do, however, contain several requirements that are either not included or not explicitly stated in NFA's rules. The amendments to Compliance Rule 2-29 are intended to make it more like NASD's promotional material rules in the way it applies to promotional material for security futures products.
The amendment to Compliance Rule 2-29(b) adds new subsection (6) regarding testimonials. This requirement is actually stricter than NASD Rule 2210(d)(2)(D), which is the comparable NASD requirement, since the proposed NFA requirement actually prohibits the use of any testimonial that is not representative of all reasonably comparable accounts.
A new section (j) has been added to be comparable with various requirements in NASD Rules 2210 and 2220. This section applies only to the promotional material of passported NFA Members (and their Associates) that specifically refers to security futures products. Among other things, Compliance Rule 2-29(j):
f. Compliance Rule 2-30 (Suitability)
Two statutory provisions effectively require NFA to have suitability rules comparable to those of NASD. First, the suitability requirements are customer protection rules that are included in the requirements for qualification under Section 15A(k) of the Exchange Act.19 Second, the listing requirements in Section 2(a)(1)(D)(i)(V) of the CEA20 essentially bar transactions by FCMs, IBs, CTAs, CPOs, and APs that are not subject to suitability requirements comparable to those of NASD.
NFA Compliance Rule 2-30 requires NFA Members (and their Associates) to obtain information about each customer's experience, income, net worth and age before opening a futures account. It also requires NFA Members to give risk disclosure, with the risk disclosures required by the CFTC as the minimum. Compliance Rule 2-30 requires NFA Members to provide additional risk disclosure if the customer needs it to make an informed judgment about whether he or she should be involved in the futures markets. In fact, if the Member believes that futures are simply too risky for that customer, the Member must tell the customer that he has no business trading futures. This is true even if the Member makes no recommendations whatsoever to the customer. If the customer still decides to trade futures, however, the Member may open the account.
Like NASD requirements, Compliance Rule 2-30 is designed to keep customers from trading futures if they are unsuitable. Unlike NFA Compliance Rule 2-30, however, NASD Rules 2310, 2860(16), 2860(19), and IM-2860-2: (1) require members to obtain more extensive information from natural person customers; (2) require members to specifically approve or disapprove security options accounts based on an evaluation of the customer's suitability to trade those products; and (3) explicitly prohibit members from making unsuitable recommendations. Therefore, NFA has added a new section (j) to Compliance Rule 2-30 to include these requirements for security futures and apply them to NFA Members who are not also NASD members(and therefore are not subject to the NASD's suitability requirements).
NFA and a number of other self-regulatory organizations are currently drafting a standardized disclosure statement that must be given to all security futures customers. Compliance Rule 2-30(b) has been revised to require NFA Members to provide this statement when or before an account is approved to trade security futures products.
g. Compliance Rule 2-37 (Security Futures Products)
Compliance Rule 2-37 is an entirely new rule that applies only to the security futures activities of passported NFA Members and their Associates.
h. Interpretive Notice Regarding Enhanced Supervisory Requirements
This notice, found at Paragraph 9021 of the National Futures Association Manual, requires enhanced supervisory procedures for firms that have a significant number of Associates who were previously employed at firms closed down for sales practice fraud. Although the notice is generally stricter than NASD Rule 3010(b)(2), which is the comparable NASD requirement, it has been amended to provide that firms must have written supervisory procedures for complying with the requirements of the notice and all applicable provisions of the securities laws and must file quarterly reports with NFA concerning their compliance with the requirements of the notice.
i. Interpretive Notice Regarding Obligations to Customers and Other Market Participants
Both NFA and NASD have rules prohibiting their respective members from engaging in conduct inconsistent with just and equitable principles of trade as well as manipulative or fraudulent practices. See NFA Compliance Rules 2-2 and 2-4 and NASD Rules 2110 and 2120. Nonetheless, several NASD interpretive memoranda explicitly prohibit some specific conduct that has not been explicitly prohibited by NFA rules or interpretive notices. NFA's new interpretive notice explicitly prohibits this conduct.
One of the linchpins of the futures industry is the concept that registrants may not trade ahead of customer orders. Most, if not all, of the futures exchanges have rules prohibiting their members from engaging in this conduct, and CFTC Regulations 155.3(a)23 and 155.4(a)24 require FCMs and IBs to have and enforce procedures to insure that they and their employees do not trade ahead of customer orders. Although NFA does not have a specific requirement prohibiting NFA Members and Associates from trading ahead of customer orders, NFA has always considered it a violation of Compliance Rule 2-4. However, in order to make NFA rules more comparable to NASD IM-2110-2, NFA has specifically prohibited that conduct in this new interpretive notice. As noted previously, CFTC Regulations 155.325 and 155.426 have also been incorporated by reference into NFA Compliance Rule 2-26.
This interpretive notice also contains several provisions that apply only to passported NFA Members and their Associates when they engage in security futures activities. These provisions: (1) prohibit trading ahead of research reports (comparable to NASD IM-2110-4); (2) prohibit trading based on knowledge of an imminent block transaction (generally comparable to NASD IM-2110-3), with an exception for hedging counterparty risk under approved exchange block rules; and (3) require a sound basis for evaluating the facts regarding a particular security futures product (comparable to NASD Rule 2210(d)(1)(A)).
j. Interpretive Notice Regarding Special Supervisory Requirements for NFA Members Registered as Broker-Dealers under Section 15(b)(11) of the Exchange Act
Both the NFA and the NASD have extensive requirements regarding supervision. In some areas, however, the NASD's requirements are more detailed than NFA's. Therefore, NFA has adopted a new interpretive notice to NFA Compliance Rule 2-9 (Supervision) regarding Special Supervisory Requirements for Security Futures Products. The interpretive notice, which applies only to security futures activities by passported NFA Members, is intended to be comparable to various supervisory requirements in NASD Rules 2210(f), 2860(18), 2860(20), and 3010.
Among other things, this interpretive notice requires that:
k. Interpretive Notice on Use of Past or Projected Performance and Disclosing Conflicts of Interest for Security Futures Products
NFA has also adopted a new interpretive notice to NFA Compliance Rule 2-29 on Use of Past or Projected Performance and Disclosing Conflicts of Interest for Security Futures Products. The notice mostly describes positions taken by NFA's Business Conduct Committee and Hearing Panels regarding past and projected performance and is intended to be comparable to some of the specific provisions of NASD Rules 2210 and 2220. It also explains the responsibilities of passported NFA Members under new section (j) of Compliance Rule 2-29.
2. Statutory Basis
The rule change is authorized by, and consistent with, Section 15A(k) of the Exchange Act.27 The proposed amendments are designed to make NFA's rules correspond more closely to NASD's rules, as is contemplated by Section 15A(k) of the Exchange Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The rule change will not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act and the CEA, as they were amended by the CFMA. In fact, the CFMA is designed to promote an even regulatory playing field among securities and futures registrants - and among NFA members and NASD members - so that neither group has a competitive advantage over the other. NFA's rule change achieves that objective.
C. Self-Regulatory Organization's Statement of Comments on the Proposed Rule Change Received from Members, Participants, or Others
NFA worked with Member committees and industry trade associations in developing the rule change. NFA did not, however, publish the rule change for comment by its membership. NFA received one written comment letter from an industry trade association, which generally supported the rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The proposed rule change has become effective on August 20, 2001, which is the date of approval of the proposed rule change by the CFTC.
Within 60 days of the date of effectiveness of the proposed rule change, the Commission, after consultation with the CFTC, may summarily abrogate the proposed rule change and require that the proposed rule change be refiled in accordance with the provisions of Section 19(b)(1) of the Exchange Act.28
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change conflicts with the Exchange Act. Persons making written submissions should file nine copies of the submission with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments also may be submitted electronically to the following e-mail address: rule-comments@sec.gov. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of these filings also will be available for inspection and copying at the principal office of NFA. Electronically submitted comments will be posted on the Commission's Internet website (http://www.sec.gov). All submissions should refer to File No. SR-NFA-2001-01 and should be submitted by [insert date 21 days after publication in the Federal Register] .
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.29
Jonathan G. Katz
Secretary
Appendix A
Additions are in italics; deletions are in [brackets].
BYLAWS
* * *
CHAPTER 11 - DOING BUSINESS WITH NON-MEMBERS
BYLAW 1101. PROHIBITION.
No Member may carry an account, accept an order or handle a transaction in commodity futures contracts for or on behalf of any non-Member of NFA, or suspended Member, that is required to be registered with the Commission as an FCM, IB, CPO, CTA or LTM, and that is acting in respect to the account, order or transaction for a customer, a commodity pool or participant therein, a client of a commodity trading advisor, or any other person, unless:
(a) such non-Member of NFA is a member of another futures association registered with the Commission under Section 17 of the Act, or is exempted from this prohibition by Board resolution; [or]
(b) such non-Member of NFA is registered with the Commission as an FCM or IB under Section 4f(a)(2) of the Act and the account, order, or transaction involves only security futures products; or
(c) such suspended Member is exempted from this prohibition by the Appeals Committee.
No Member may accept orders in commodity futures contracts to cover leverage transactions, for or on behalf of any non-Member of NFA, or suspended Member, that is required to be registered with the Commission as an LTM, unless:
(a) such non-Member is a member of another futures association registered under Section 17 of the Act, or is exempted from this prohibition by Board resolution; or
(b) such suspended Member is exempted from this prohibition by the Appeals Committee.
* * *
CHAPTER 15 - MISCELLANEOUS PROVISIONS
* * *
BYLAW 1507. DEFINITIONS.
The terms used in these Bylaws shall have the same meaning as in the Articles: Provided, however, that the term "futures" as used in these Bylaws shall include:
(1) option contracts granted by a person that has registered with the Commission under Section 4c(d) of the Act as a grantor of such option contracts or has notified the Commission under the Commission's rules that it is qualified to grant such option contracts;
(2) foreign futures and foreign options transactions made or to be made on or subject to the rules of a foreign board of trade for or on behalf of foreign futures and foreign options customers as those terms are defined in the Commission's rules; [and]
(3) leverage transactions as that term is defined in the Commission's rules; and
(4) security futures products, as that term is defined in Section 1a(32) of the Act.
Such contracts are hereby declared to be a proper subject of NFA regulation and oversight (See Article XVIII, paragraph (k)).
* * *
COMPLIANCE RULES
Part 1 - DEFINITIONS
RULE 1-1. DEFINITIONS.
* * *
(i)
"Exchange Act" - means the Securities Exchange Act of 1934.
(j) "Foreign Board of Trade" - means a board of trade, exchange, or market located outside the United States, its territories or possessions.
[(j)] (k) "Foreign Futures" and "Foreign Options" - means futures and options transactions made or to be made on or subject to the rules of a foreign board of trade.
[(k)] (l) "Foreign Futures or Foreign Options Customer" - means any person located in the United States, its territories or possessions who trades in foreign futures or foreign options.
[(l)] (m) "Futures"
includes -
(1) futures and option contracts traded on a contract market;
(2) option contracts granted by a person that has registered with the Commission under Section 4c(d) of the Act as a grantor of such option contracts or has notified the Commission under the Commission's rules that it is qualified to grant such option contracts;
(3) foreign futures and foreign options made or to be made on or subject to the rules of a foreign board of trade for or on behalf of foreign futures or foreign options customers as those terms are defined in the Commission's rules; [and]
(4) leverage transactions as that term is defined in the Commission's rules; and
(5) security futures products, as that term is defined in Section 1a(32) of the Act.
[(m)] (n) "Futures Commission Merchant" or "FCM" - means a person who is required to register or is registered as a futures commission merchant under the Act and Commission Rules.
[(n)] (o) "Hearing Committee"
- means the Hearing Committee established under NFA Bylaw 707.
[(o)] (p) "Introducing Broker" or "IB" - means a person who is required to register or is registered as an introducing broker under the Act and Commission Rules.
[(p)] (q) "Leverage Transaction Merchant" or "LTM" - means a person who is required to regiser or is registered as a leverage transaction merchant under the Act and Commission Rules.
[(q)] (r) "Member" - means a Member of NFA other than a contract market.
[(r)] (s) "Person" - includes individuals, corporations, limited liability companies, partnerships, trusts, associations and other entities.
[(s)] (t) "Requirements" - includes any duty, restriction, procedure or standard imposed by a charter, bylaw, rule, regulation, resolution, or similar provision.
(u) "Security Futures Products" - has the same meaning as in Section 1a(32) of the Act.
Part 2 - RULES GOVERNING THE BUSINESS CONDUCT
OF MEMBERS REGISTERED WITH THE COMMISSION
* * *
RULE 2-7. BRANCH OFFICE MANAGERS AND DESIGNATED SECURITY FUTURES PRINCIPALS [PROFICIENCY TESTING REQUIREMENT].
(a) No Member shall allow an Associate to be a branch office manager, as that term is used in Registration Rule 101, unless:
[(a)] (1) The Associate has taken and passed the "Branch Manager Exam-Futures": Provided, however, that any Associate who subsequently ceases acting as a branch manager will not be required to retake and pass the examination in order to resume acting as a branch manager unless after acting as a branch manager the Associate was not registered in any capacity for a period of more than two years; or
[(b)] (2) The Associate is sponsored by a registered broker-dealer and is qualified to act as a branch office manager under the rules of either the New York Stock Exchange or National Association of Securities Dealers.
(b) Each Member registered as a broker-dealer under Section 15(b)(11) of the Exchange Act must have at least one designated security futures principal. No such Member shall designate a person as a security futures principal unless:
(1) The person is a partner, officer, director, branch office manager or supervisory employee of the Member;
(2) The person is a Member or an Associate of the Member as defined in Bylaw 301(b); and
(3) The person has taken and passed the "Branch Manager Exam-Futures."
RULE 2-8. DISCRETIONARY ACCOUNTS.
(a) Grant of Discretion Must Be in Writing.
No Member or Associate shall exercise discretion over a customer's commodity futures account unless the customer or account controller has authorized the Member or Associate, in writing (by power of attorney or other instrument) to exercise such discretion. No Member or Associate shall exercise discretion with regard to foreign futures or foreign options transactions on behalf of a foreign futures or foreign options customer unless the customer or account controller has specifically authorized the Member or Associate, in writing, to exercise discretion with regard to foreign futures or foreign options transactions. The Member or Associate does not need written authorization to exercise discretion with regard to time and price only. Each Member must maintain records which clearly identify which of the Member's accounts are accounts over which the Member or any Associate thereof has discretionary authority.
(b) Review of Discretionary Trades.
Each futures trade initiated in an account that a Member or Associate has written authorization to trade shall be presumed to have been made pursuant to that trading authorization unless otherwise indicated, in writing, at the time the trade was placed. Each Member initiating such trades (other than a Member who employs only one individual having discretionary authority if that individual is also the only principal who supervises futures activity) must adopt and enforce written procedures:
(1) Which ensure that a partner, officer, director, branch office manager or supervisory employee of the Member (other than any individual who exercises discretion in trading the account) regularly reviews discretionary trading activity and that a designated security futures principal regularly reviews discretionary security futures trading activity if the Member is registered as a broker-dealer under Section 15(b)(11) of the Exchange Act; and
(2) Which require such partner, officer, director, branch office manager or supervisory employee or designated security futures principal to make a written record that such review procedures were performed.
Discretionary trading activity must be regularly reviewed, and a written record of the review must be made, as required above.
(c) Minimum Experience Requirement.
No Member FCM or IB shall allow an Associate to exercise discretion over a customer's commodity futures account unless that Associate has been continuously registered under the Act for a minimum of two years and has worked in such registered capacity for that period of time. This requirement shall not apply to any individual registered as a CTA. This requirement may, in NFA's discretion, be waived upon a showing that the Associate has equivalent experience. Any Member seeking such a waiver may submit a written request to the Compliance Director and all such requests shall be ruled upon by a three-member panel consisting of three members of the Business Conduct Committee and/or the Hearing Committee, said members to be appointed by the Board from time to time. The decision of the panel shall be final and shall be based upon the written submissions and the views of the Compliance Director. The panel shall communicate its decision to the Compliance Director or a person designated by the Compliance Director, who shall then inform the Member seeking the waiver. An Associate who has been determined to have equivalent experience pursuant to the rules of any contract market Member of NFA having a similar minimum experience requirement shall be deemed to have satisfied the requirement of this Rule.
(d) Third-Party Account Controllers.
No FCM or IB shall accept an order from a third party, not an Associate of the FCM or IB, without first obtaining a copy of the account controller's written trading authorization or a written acknowledgment from the customer that such authorization has been given.
(e) Exception.
The provisions of sections (b), (c) and (d) of this Rule shall not apply when the individual who owns the account and the individual exercising discretion are members of the same family (a spouse, parent, child, grandparent, grandchild, brother, sister, aunt, uncle, nephew, niece or in-law).
* * *
RULE 2-22. PROHIBITED REPRESENTATIONS.
No Member or Associate shall represent or imply in any manner whatsoever that such Member or Associate has been sponsored, recommended or approved, or that such Member's or Associate's abilities have in any respect been passed upon, by NFA or any federal or state regulatory body: Provided, however, that this Rule shall not prohibit a Member from stating the fact of membership, or an Associate from stating the fact of registration as an Associate if the effect of NFA membership or registration as an Associate is not misrepresented, or from discussing or explaining the functions and purposes of NFA.
* * *
RULE 2-26. FCM AND IB REGULATIONS.
Any Member or Associate who violates any of CFTC Regulations 1.33, 1.55, 1.56, 1.57, [or] 1.65, 155.3, or 155.4, as applicable, shall be deemed to have violated an NFA Requirement. [Any Member IB who violates CFTC Regulation 1.57 shall be deemed to have violated an NFA Requirement.]
* * *
RULE 2-29. COMMUNICATIONS WITH THE PUBLIC AND PROMOTIONAL MATERIAL.
(a) General Prohibition.
No Member or Associate shall make any communication with the public which:
(1) operates as a fraud or deceit;
(2) employs or is part of a high-pressure approach; or
(3) makes any statement that futures trading is appropriate for all persons.
(b) Content of Promotional Material.
No Member or Associate shall use any promotional material which:
(1) is likely to deceive the public;
(2) contains any material misstatement of fact or which the Member or Associate knows omits a fact if the omission makes the promotional material misleading;
(3) mentions the possibility of profit unless accompanied by an equally prominent statement of the risk of loss;
(4) includes any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results; [or]
(5) includes any specific numerical or statistical information about the past performance of any actual accounts (including rate of return) unless such information is and can be demonstrated to NFA to be representative of the actual performance for the same time period of all reasonably comparable accounts and, in the case of rate of return figures, unless such figures are calculated in a manner consistent with that required under CFTC Regulation 4.25(a)(7)(i)(F); or
(6) includes a testimonial that is not representative of all reasonably comparable accounts, does not prominently state that the testimonial is not indicative of future performance or success, and does not prominently state that it is a paid testimonial (if applicable).
(c) Hypothetical Results.
(1) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past must include in the promotional material the following disclaimer prescribed by NFA's Board of Directors:
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
If a Member or Associate has either less than one year of experience in directing customer accounts or trading proprietary accounts, then the disclaimer must also contain the following statement:
(THE MEMBER) HAS HAD LITTLE OR NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
(2) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to a hypothetical composite performance record showing what a multi-advisor account portfolio or pool could have achieved in the past if assets had been allocated among particular trading advisors must include in the promotional material the following disclaimer prescribed by NFA's Board of Directors instead of the disclaimer prescribed by Section (c) (1) of this Rule:
THIS COMPOSITE PERFORMANCE RECORD IS HYPOTHETICAL AND THESE TRADING ADVISORS HAVE NOT TRADED TOGETHER IN THE MANNER SHOWN IN THE COMPOSITE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY MULTI-ADVISOR MANAGED ACCOUNT OR POOL WILL OR IS LIKELY TO ACHIEVE A COMPOSITE PERFORMANCE RECORD SIMILAR TO THAT SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD AND THE ACTUAL RECORD SUBSEQUENTLY ACHIEVED.
ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS AMONG THOSE TRADING ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON THE HISTORICAL RATES OF RETURN OF THE SELECTED TRADING ADVISORS. THEREFORE, COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER INHERENT LIMITATION ON THESE RESULTS IS THAT THE ALLOCATION DECISIONS REFLECTED IN THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND, THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE THE ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT REFLECTED IN THE COMPOSITE.
If a Member or Associate has less than one year of experience allocating assets among particular trading advisors, then the disclaimer must also contain the following statement:
(THE MEMBER) HAS HAD LITTLE OR NO EXPERIENCE ALLOCATING ASSETS AMONG PARTICULAR TRADING ADVISORS. BECAUSE THERE ARE NO ACTUAL ALLOCATIONS TO COMPARE TO THE PERFORMANCE RESULTS FROM THE HYPOTHETICAL ALLOCATION, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE RESULTS.
(3) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past must include in the promotional material comparable information regarding:
(i) past performance results of all customer accounts directed by the Member pursuant to a power of attorney over at least the last five years or over the entire performance history if less than five years;
(ii) if the Member has less than one year of experience in directing customer accounts, past performance results of his proprietary trading over at least the last five years or over the entire performance history if less than five years.
(4) No Member or Associate may use promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past if the Member or Associate has three months of actual trading results for that system.
(5) Any Member or Associate utilizing promotional material containing hypothetical performance results must adhere to all the requirements contained in the Board's Interpretive Notice relating to this issue.
(6) These restrictions on the use of hypothetical trading results shall not apply to promotional material directed exclusively to persons who meet the standards of a "Qualified Eligible Person" under CFTC Regulation 4.7.
(d) Statements of Opinion.
Statements of opinion included in promotional material must be clearly identifiable as such and must have a reasonable basis in fact.
(e) [Written] Supervisory [Procedures] Requirements.
Every Member shall adopt and enforce written procedures to supervise its Associates and employees for compliance with this Rule. [Such procedures shall require prior review and approval of all promotional material] Prior to its first use, all promotional material shall be reviewed and approved, in writing, by an officer, general partner, sole proprietor, branch office manager or other supervisory employee other than the individual who prepared such material (unless such material was prepared by the only individual qualified to review and approve such material). If the Member is registered as a broker-dealer under Section 15(b)(11) of the Exchange Act and the promotional material specifically refers to security futures products, the individual reviewing and approving the promotional material must be a designated security futures principal.
(f) Recordkeeping.
Copies of all promotional material along with a record of the review and approval required under paragraph (e) of this Rule and supporting materials for any results described under paragraphs (b)(5)-(6) or (c) of this Rule must be maintained by each Member and be available for examination for the periods specified in CFTC Regulation 1.31, measured from the date of the last use. Each Member who uses promotional material of the types described in paragraph (b)(5)-(6) or (c) of this Rule shall demonstrate the basis for any reported results to NFA upon request.
(g) Filing with NFA.
The Compliance Director may require any Member for any specified period to file copies of all promotional material with NFA promptly after its first use.
(h) Radio and Television Advertisements.
No Member shall use or directly benefit from any radio or television advertisement that makes any specific trading recommendation or refers to or describes the extent of any profit obtained in the past or that can be achieved in the future unless the Member submits the advertisement to NFA's Promotional Material Review Team for its review and approval at least 10 days prior to first use or such shorter period as NFA may allow in particular circumstances.
(i) Definitions.
(1) For purposes of this Rule "promotional material" includes: (i) Any text of a standardized oral presentation, or any communication for publication in any newspaper, magazine or similar medium, or for broadcast over television, radio, or other electronic medium, which is disseminated or directed to the public concerning a futures account, agreement or transaction; (ii) any standardized form of report, letter, circular, memorandum or publication which is disseminated or directed to the public; and (iii) any other written material disseminated or directed to the public for the purpose of soliciting a futures account, agreement or transaction.
(2) "Futures account, agreement or transaction" includes futures accounts and orders, commodity pool participations, agreements to direct or guide trading in futures accounts, and agreements and transactions involving the sale, through publications or otherwise, of non-personalized trading advice concerning futures.
(j) Security Futures Products
In addition to the other requirements of this Rule, Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates shall not use any promotional material that specifically refers to security futures products unless the promotional material:
(1) prominently identifies the Member;
(2) includes the date that the material was first used;
(3) provides contact information for obtaining a copy of the disclosure statement for security futures products;
(4) states that security futures products are not suitable for all customers;
(5) does not include any statement suggesting that security futures positions can be liquidated at any time;
(6) does not include any cautionary statement, caveat, or disclaimer that is not legible, that attempts to disclaim responsibility for the content of the promotional material or the opinions expressed in the material, that is misleading, or that is otherwise inconsistent with the content of the material;
(7) discloses the source of any statistical tables, charts, graphs, or other illustrations from a source other than the Member, unless the source of the information is otherwise obvious;
(8) states that supporting documentation will be furnished upon request if it includes any claims, comparisons, recommendations, statistics or other technical data;
(9) if soliciting for a trading program that will be managed by an FCM or IB or Associate of an FCM or IB, it includes the cumulative performance history of the Member's customers who have used the trading program; provided, however, that if the Member does not have customers who have traded the program through the Member, the promotional material must state that the trading program is unproven and must include all of the information required by section (c) of this Rule and the Interpretive Notice on the Use of Promotional Material Containing Hypothetical Performance Results (¶9025);
(10) refers to past recommendations regarding security futures products, the underlying securities, or a derivative thereof only if it sets forth all recommendations as to the same type, kind, grade, or classification of securities (including security futures products and other security derivatives) made by the Member or Associate within the last year; which information must include the name of each security recommended with the date and nature of each recommendation (e.g., whether to buy or sell), the price at the time of the recommendation, the price at which or the price range within which the recommendation was to be acted upon, and the general market conditions during the period covered if the promotional material refers to past recommendations regarding security futures products, the underlying securities, or a derivative thereof;
(11) includes current recommendations regarding security futures products only if: (i) the Member has a reasonable basis for the recommendation; (ii) the material discloses all material conflicts of interest created by the Member's or Associate's activities in the underlying security; and (iii) the material contains contact information for obtaining the list of prior recommendations described in subsection (10);
(12) includes only a general description of the security futures products for which accounts, orders, trading authorization, or pool participations are being solicited; the name of the Member; and contact information for obtaining a copy of the current disclosure statement for security futures products; provided, however, that this subsection does not apply if the promotional material is accompanied or preceded by the disclosure statement for security futures products; and
(13) has been submitted to NFA for review and approval at least ten days prior to first use if it reaches or is designed to reach a public audience through mass media (e.g., newspapers, magazines, radio, television, or other electronic media). This requirement does not apply to any promotional material in which the only reference to security futures products is contained in a listing of the Member's services.
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RULE 2-30. CUSTOMER INFORMATION AND RISK DISCLOSURE.
(a) Each Member or Associate shall, in accordance with the provisions of this Rule, obtain information about its futures customers who are individuals 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. The Member 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.
(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) the customer's current estimated annual income and net worth;
(3) the customer's approximate age; [and]
(4) an indication of the customer's previous investment and futures trading experience[.];
In addition, Members that are not also members of NASD Regulation, Inc. and their Associates must obtain the following information from each customer who is an individual if the customer trades security futures products:
(5) whether the customer's account is for speculative or hedging purposes;
(6) the customer's employment status (e.g., name of employer, self-employed, retired);
(7) the customer's estimated liquid net worth (cash, securities, other);
(8) the customer's marital status and number of dependents;
(9) 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, 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 NASD Regulation, Inc. 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.
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RULE 2-37. SECURITY FUTURES PRODUCTS.
This rule applies to Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates.
(a) No Member or Associate shall violate Sections 9(a), 9(b), or 10(b) of the Exchange Act or any applicable regulation thereunder in connection with any security futures product.
(b) In addition to the supervisory requirements contained in NFA Compliance Rule 2-9, Members must establish, maintain and enforce written procedures reasonably designed to achieve compliance with applicable securities laws, including Sections 9(a), 9(b), and 10(b) of the Exchange Act and any applicable regulation thereunder.
(c) Members who carry security futures accounts Act shall, not less than once a year, provide each security futures customer with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address.
(d) In addition to complying with Registration Rules 204(a) and 210(a), each Member shall notify NFA within 10 business days after the Member knows or should know that the Member or its associated person:
(1) has been found by a self-regulatory organization or professinal association in the accounting, banking, finance, insurance, law, real estate, or securities fields to have violated any provision of the securities laws or regulations or any rule or standard of conduct of the organization or association in connection with security futures transactions or to have engaged in conduct inconsistent with just and equitable principles of trade in connection with security futures transactions;
(2) is the subject of a written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery in connection with security futures transactions;
(3) is named as a defendant or respondent in any proceeding brought by a self-regulatory organization in the securities or insurance industry in connection with security futures transactions;
(4) is a defendant or respondent in any civil litigation or arbitration proceeding or is subject to any other claim for damages involving security futures transactions that has been disposed of by judgment, award, or settlement for an amount exceeding $15,000 if the claim is against an associated person or $25,000 if the claim is against the Member;
(5) is associated in any business or financial activity involving security futures products with any person who is subject to a statutory disqualification under either Section 8a of the Commodity Exchange Act or Section 15(b)(4) of the Exchange Act; or
(6) is the subject of a disciplinary action taken by the Member for activities involving security futures products if it results in suspension, termination, the withholding of commissions or imposition of fines in excess of $2,500, or any significant limitation on the Associate's activities on a temporary or permanent basis.
(e) In addition to complying with Registration Rules 206(a) and 210(b), each Associate shall promptly notify its sponsor of:
(1) any information the Associate is required to report under Registration Rule 206(a) or 210(b); or
(2) the existance of any of the circumstances listed in section (d) of this rule.
(f) Each Member shall file a quarterly report with NFA containing statistical and summary information regarding written customer complaints involving security futures products. The report must be filed with NFA, in the form NFA requires, by the 15th day of the month following the calendar quarter in which the complaints are received. A Member is not required to file a quarterly report for any quarter in which no complaints were received.
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CODE OF ARBITRATION
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SECTION 1. DEFINITIONS.
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(k) Futures"
-includes:
(1) futures and options contracts traded on a Commission-licensed exchange;
(2) options contracts granted by a person that has registered with the Commission under Section 4c(d) of the Act as a grantor of such option contracts or has notified the Commission under the Commission's Rules that it is qualified to grant such option contracts;
(3) foreign futures and foreign options transactions made or to be made on or subject to the rules of a foreign board of trade for or on behalf of foreign futures and foreign options customers as those terms are defined in the Commission's Rules; [and]
(4) leverage transactions as that term is defined in the Commission's Rules; and
(5) security futures products, as that term is defined in Section 1a(32) of the Act.
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COMPLIANCE RULE 2-9:
ENHANCED SUPERVISORY REQUIREMENTS
INTERPRETIVE NOTICE
Over the years, NFA's Board of Directors has adopted strict and effective rules to prohibit deceptive sales practices, and those rules have been vigorously enforced by NFA's Business Conduct Committee. The Board notes, however, that by their very nature enforcement actions occur after the customer abuse has taken place. The Board recognizes that NFA's goal must be not only to punish such deception of customers through enforcement actions but to prevent it, or minimize its likelihood, through fair and effective regulation.
One NFA rule designed to prevent abusive sales practices is NFA Compliance Rule 2-9. That rule places a continuing responsibility on every Member to supervise diligently its employees and agents in all aspects of their futures activities, including sales practices. Although NFA has not attempted to prescribe a set of supervisory procedures to be followed by all NFA Members, NFA's Board of Directors believes that Member firms which are identified as having a sales force that has received questionable training in sales practices should be required to adopt specific supervisory procedures designed to prevent sales practice abuse. Rule 2-9 authorizes the Board of Directors to require Members, which meet certain criteria established by the Board, to adopt specific supervisory procedures designed to prevent abusive sales practices.
The Board believes that in order for the criteria used to identify firms subject to the enhanced supervisory requirements to be useful, those criteria must be specific, objective and readily measurable. The Board also believes that any supervisory requirements imposed on a member must be designed to quickly identify potential problem areas so that the Member will be able to take corrective action before any customer abuse occurs. The purpose of this Interpretive Notice is to set forth the criteria established by the Board and the enhanced supervisory procedures which are required of firms meeting these criteria.
In developing the criteria, the Board concluded that it would be helpful to review Member firms which had been closed through enforcement actions taken by the CFTC or NFA for deceptive sales practices. The Board's purpose was to identify factors common to these Member firms and probative of their sales practice problems, which could be used to identify other Member firms with potential sales practice problems.
One factor identified by the Board as common to these firms and directly related to their sales practice problems is the employment history and training of their sales forces. For many of these Members, a significant portion of their sales force was previously employed and trained by one or more of the other Member firms closed for fraud. The Board believes that the employment history of a Member's sales force is a relevant factor to consider in identifying firms with potential sales practice problems. If a Member firm is closed for fraud related to either widespread telemarketing or promotional material problems, it is reasonable to conclude that the Member's training and supervision of its sales force was wholly inadequate or inappropriate. It is also reasonable to conclude that an AP who received inadequate or inappropriate training and supervision may have learned improper sales tactics, which he will carry with him to his next job. Therefore, the Board believes that a Member firm employing such a sales force must have stringent supervision procedures in place in order to ensure that the improper training its APs have previously received does not taint their sales efforts on behalf of the Member.
The Board has determined that a Member will be required to adopt the specific supervisory procedures over its sales practice activities if:
Additionally, for purposes of this requirement, a Disciplined firm is defined very narrowly to include only those firms which meet the following three criteria:
1. The firm has been formally charged by either the CFTC or NFA with deceptive telemarketing practices or promotional material;
2. Those charges have been resolved; and
3. The firm has been closed down and permanently barred from the industry as a result of those charges.
Attached is a list of firms currently meeting the definition of a Disciplined Firm. Although this list is current as of the date of this Interpretive Notice, NFA will provide Members with updated lists as necessary.
Any Member firm meeting these criteria will be required either to operate pursuant to a guarantee agreement or maintain an adjusted net capital of at least $250,000 for the entire period during which the Member is required to tape record its sales solicitations. Any Member opting to maintain the higher level of adjusted net capital would also be subject to the financial recordkeeping and reporting requirements applicable to FCMs. Eligible guarantor futures commission merchants are those that meet the eligibility requirements for executing a Supplemental Guarantor Certification Statement pursuant to NFA Registration Rule 504(a)(2)(B). The Board believes that requiring these Members to operate pursuant to a guarantee agreement will likely improve the overall level of supervision at these firms.
Those Member firms meeting the criteria will be required to tape record all telephone conversations which occur between their APs and both existing and potential customers. The Board believes that tape recording these conversations provides these Members with the best opportunity to monitor closely the activities of their APs and also provides these Members with complete and immediate feedback on each AP's method of soliciting customers. Members meeting the criteria must tape record these conversations for a period of two years and must retain such tapes for a period of five years from the date each tape is created and the tapes shall be readily accessible during the first two years of the five year period. In retaining the tape recorded conversations, Member firms must catalog the tapes by AP and date. Additionally, any Member firm meeting the criteria must require all its APs to maintain a daily log for sales solicitations which reflects at a minimum the identity of each customer or prospective customer the AP spoke with on each day. A Member firm must be able to promptly produce, upon request from NFA or the CFTC, all conversations relating to a specific AP, and only that AP, for a given date.
In addition, for a period of two years, those Member firms meeting the criteria will be required to file all promotional material, as defined in NFA Compliance Rule 2-29(g), with NFA at least ten days prior to its first use.
Those Members meeting the criteria shall have written supervisory procedures that include the titles, registration status and locations of the firm's supervisory personnel as these relate to the firm's commodity futures business, and applicable securities laws and regulations for the trading of security futures products. Member firms shall also maintain on an internal record the names of all persons who are designated as supervisory personnel and the dates for which the designation is or was effective. Additionally, a Member meeting the criteria shall by the 30th day of the month following the end of each calendar quarter file with NFA's Compliance Department a report relating to the Member firm's compliance with the supervisory requirements contained herein. Member firms shall retain the internal record and report(s) for a period of five years, the first two years in an easily accessible place.
If an NFA Business Conduct Committee disciplinary proceeding or Commodity Futures Trading Commission enforcement proceeding has been filed against a Member firm required to adopt these enhanced supervisory procedures, then the enhanced supervisory procedures will remain in effect for the applicable time period specified or until after the disciplinary or enforcement proceeding is closed and all appeals are completed or the time for appeal has passed without an appeal being filed or perfected, whichever occurs latest. Member firms shall be required to retain tapes for the five-year period as specified above.
Any Member required to adopt these enhanced procedures may seek a waiver of the enhanced supervisory requirements. NFA may grant such a waiver upon a satisfactory showing that the Member's current supervisory procedures provide effective supervision over its employees including enabling the Member to identify potential problem areas before the customer abuse occurs. Additionally, if a Member meets the criteria and trades security futures products, then the Member firm must also make a satisfactory showing that the Member's supervisory procedures ensure compliance with all applicable securities laws and regulations.
Some of the factors that the three-member Waiver Committee may consider in evaluating a waiver request include:
A Member firm that does not comply with this Interpretive Notice will violate NFA Compliance Rule 2-9 and will be subject to disciplinary action.
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OBLIGATIONS TO CUSTOMERS AND OTHER MARKET PARTICIPANTS
INTERPRETIVE NOTICE
The Commodity Futures Modernization Act of 2000 (CFMA), which was signed into law on December 21, 2000, lifts the 18-year ban on single-stock futures and narrow-based security indices ("security futures products"). NFA's current rules apply to activities involving security futures products. Unlike other futures contracts, however, security futures products are securities as well as futures. Therefore, NFA is adopting additional rules that apply only to security futures products.
NFA Compliance Rule 2-4 requires all Members and Associates to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business. This includes a requirement to deal fairly with customers and other market participants at all times. This interpretive notice reminds Members and Associates of their obligation not to trade ahead of customer orders in any commodity. It also discusses those fair dealing obligations that are unique to security futures products.
Trading Ahead of Customer Orders
CFTC Regulations 155.3 and 155.4 - which are incorporated into NFA rules through Compliance Rule 2-26 - require FCMs and IBs to establish and enforce internal rules, procedures, and controls to insure, to the extent possible, that those firms and their employees do not trade ahead of customer orders that are executable at or near the market price. Literally read, those regulations require procedures but do not contain an outright prohibition on trading ahead. However, trading ahead of customer orders violates NFA Compliance Rule 2-4, which requires Members and Associates to observe high standards and just and equitable principles of trade.
Further, Compliance Rule 2-4 also requires Members and Associates to exercise due care to avoid trading ahead of customer orders. Members and Associates will be considered to be exercising due care if they do not know or should not reasonably have known of the customer order. For example, absent knowledge, a Member will not be held accountable for trading ahead of customer orders that originate in a different branch office or for proprietary orders that originate in a trading department that does not have access to information regarding customer orders.
Trading Based on Material, Non-Public Information
Other than trading ahead, the Commodity Exchange Act, CFTC regulations, and NFA and exchange rules do not generally prohibit trading futures based on material, non-public information.30The securities laws, on the other hand, generally do prohibit this conduct. As required by the CFMA, NFA Compliance Rule 2-37(a) prohibits Members and Associates from violating Sections 9(a), 9(b) and 10(b) of the Securities Exchange Act of 1934 and the regulations thereunder in connection with security futures products. Insider trading and other forms of trading based on material, non-public information that are violations of SEC Rule 10b-5 would also be violations of NFA Compliance Rule 2-37(a).
Members may not purposefully establish, increase, decrease, or liquidate a position in any security futures product in anticipation of the issuance of a research report regarding the underlying security or a derivative based primarily upon the underlying security (including the security futures product itself). Members should consider developing and implementing firewalls to isolate specific information within research and other relevant departments of the firm so as to prevent the trading department from utilizing the advance knowledge of the issuance of the research report. Firms that choose not to develop these firewalls bear the burden of demonstrating that the change in position was not done in anticipation of the issuance of the report.
Block Orders
It shall be considered conduct inconsistent with just and equitable principles of trade for a Member or AP, for an account in which such Member or AP has an interest, for an account with respect to which such Member or AP exercises investment discretion, or for certain customer accounts, to cause to be executed:
(a) an order to buy or sell a security futures product when such Member or AP causing such order to be executed has material, non-public market information concerning an imminent block transaction in the underlying security, or when the customer has been provided such material non-public market information by the Member or AP; or
(b) an order to buy or sell an underlying security when such Member or AP causing such order to be executed has material, non-public market information concerning an imminent block transaction in a security futures product overlying that security, or when the customer has been provided such material, non-public market information by the Member or AP;
prior to the time information concerning the block transaction has been reported to the exchange.
The violative practice noted above may include transactions which are executed based upon knowledge of less than all of the terms of the block transaction, so long as there is knowledge that all of the material terms of the transaction have been or will be agreed upon imminently. A Member will not, however, violate this requirement if it has exercised due care to avoid trading on that information and the individual or individuals causing the order to be executed do not know and should not reasonably have known about the imminent block transaction.
The general prohibitions stated above shall not apply to transactions executed by member participants in automatic execution systems in those instances where participants must accept automatic executions. These prohibitions also do not include situations in which a Member or AP receives a customer's order of block size relating to both security futures product and the underlying security. In such cases, the Member and AP may position the other side of one or both components of the order. However, in these instances, the Member and AP would not be able to cover any resulting proprietary position(s) by entering an offsetting order until information concerning the block transaction involved has been reported to the exchange.
Additionally, a contract market or derivatives transaction execution facility may have a specific rule that permits block transactions that are privately negotiated. Pursuant to these rules, a block transaction must be reported to a designated exchange official and/or the exchange's clearing house within a specified time period after execution of the block transaction. During this time period after execution but prior to reporting, Member firms that are a party to the block transaction have a legitimate need to hedge their own risk exposure. Therefore, the general prohibitions stated above shall not apply to transactions executed by Member firms if done in conjunction with hedging the Member firm's own risk in a block transaction executed under the applicable rules of a contract market or derivatives transaction execution facility.
A transaction involving 10,000 shares or more of an underlying security or security futures product covering such number of shares is generally deemed to be a block transaction, although a transaction of less than 10,000 shares could be considered a block transaction in appropriate cases. A block transaction that has been agreed upon does not lose its identity as such by arranging for partial executions of the full transaction in portions which themselves are not of block size if the execution of the full transaction may have a material impact on the market. In this situation, the requirement that information concerning the block transaction be reported to the exchange will not be satisfied until the entire block transaction has been completed and reported to the exchange.
Communications with the Public
Under NFA Compliance Rules 2-4 and 2-29(a)(1), all communications with the public regarding security futures products must be based on principles of fair dealing and good faith and should provide a sound basis for evaluating the facts regarding any particular security futures product, including facts regarding the underlying security, industry, or group of securities. No material fact or qualification may be omitted if the omission, in the light of the context of the material presented, would cause the communication to be misleading.
COMPLIANCE RULE 2-9: SPECIAL SUPERVISORY REQUIREMENTS FOR MEMBERS REGISTERED AS BROKER-DEALERS UNDER SECTION 15(b)(11) OF THE SECURITIES EXCHANGE ACT OF 1934
INTERPRETIVE NOTICE
The Commodity Futures Modernization Act of 2000 (CFMA), which was signed into law on December 21, 2000, lifts the 18-year ban on single-stock futures and narrow-based security indices ("security futures products"). Unlike other futures contracts, however, the CFMA provides that security futures products are securities as well as futures. Therefore, under Section 15A(k) of the Securities Exchange Act of 1934 (Exchange Act), NFA is a national securities association (NSA) for the limited purpose of regulating the activities of Members who are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act (i.e., FCMs and IBs who "passport" in to broker-dealer registration because they limit their securities activities to security futures products).
NFA Compliance Rule 2-9 places a continuing responsibility on every Member to diligently supervise its employees and agents in all aspects of their futures business. Compliance Rule 2-9 and the interpretive notices issued under Compliance Rule 2-9 apply to activities involving security futures products just as they do to all other futures-related activities. When regulating the securities futures activities of Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act, however, Section 15A(k)(2)(B) of the Exchange Act requires NFA to impose requirements reasonably comparable to those of national securities associations registered under Section 15A(a) of the Exchange Act. This notice describes special supervisory requirements for those Members.31
A Member's security futures activities must be supervised by a designated security futures principal who meets the requirements of NFA Compliance Rule 2-7. A Member must also have one or more designated security futures principals at each main or branch office that solicits or accepts accounts or orders for or recommends or engages in transactions in security futures products on behalf of customers. The Member must have clear lines of supervision that assign each registered individual engaged in security futures activities to a particular designated security futures principal.
Members must develop and implement specific written procedures concerning the manner of supervision of customer accounts that trade security futures products and specifically providing for frequent supervisory review of those accounts. Within a reasonable time, Members must amend their procedures to incorporate applicable changes in the futures and securities laws and regulations and NFA requirements as well as changes in their supervisory systems. Each designated security futures principal shall be responsible for reviewing and enforcing the procedures and taking or recommending to senior management appropriate action reasonably designed to achieve the Member's compliance with the applicable futures and securities laws and regulations and with NFA requirements.
Each main or branch office that solicits or accepts accounts or orders or recommends or engages in transactions in security futures products - and each office that supervises these activities - must keep and maintain a current copy of the Member's written supervisory procedures governing these activities. Members must communicate all changes in the procedures to the appropriate offices.
Discretionary Accounts
Under Compliance Rule 2-8(b), a security futures principal must regularly review discretionary security futures trading activity and must make a written record of that review. A security futures principal must also consider the discretionary nature of the account when approving the account to trade security futures and must comply with the requirements of the interpretive notice entitled "Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs" (¶9019) regarding account activity and discretionary accounts.
Promotional Material and Correspondence
Members must comply with the interpretive notice entitled "NFA Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Sites" (¶9037) for security futures products. E-mails are not the only type of security futures correspondence that must be reviewed, however. Both incoming and outgoing correspondence must be reviewed, and the designated security futures principal must make a record of the review, including noting who conducted the review. The review must include steps to ensure that all correspondence is retained and that the names of the persons who prepared outgoing correspondence are ascertainable from the retained record.
Members must adopt review procedures that are appropriate in light of their business activities, including the structure, size, and nature of their business operations. In establishing criteria for review of correspondence, the procedures must take into consideration the nature of the communication, the relative sophistication of the customer and the training and background of the Member's employees or the employees of its guaranteed IBs. In some instances, spot-checking or sampling correspondence may be appropriate and in others it may not. For example, a firm dealing with sophisticated or institutional customers might choose to sample a relatively small but representative amount of correspondence, while firms dealing with individual, relatively unsophisticated retail customers must use a larger sample or even review all outgoing correspondence. Similarly, if any employee or employee of a guaranteed IB has a disciplinary history involving problems with customers or was previously employed at a firm that has been disciplined for fraud, then the firm must have a heightened level of scrutiny regarding that employee's correspondence.
In many instances outgoing correspondence may constitute promotional material. Correspondence directed to the public soliciting business constitutes promotional material and is subject to the same rules as any other form of promotional material. For example, a letter or e-mail message sent to targeted individuals or groups is promotional material if its ultimate purpose is to solicit funds or orders. Therefore, a Member's correspondence review procedures must also be designed to ensure compliance with NFA's promotional material content and review requirements.
Where the firm's procedures for the review of correspondence do not require review of all outgoing correspondence prior to its use or distribution, Members must educate and train their employees on the firm's policies regarding correspondence with the public. Special attention should be given to those employees with previous compliance or disciplinary problems.
Account Approval
Under NFA Compliance Rule 2-30(j)(1), accounts that trade security futures products must be approved in writing for that activity by the designated security futures principal. The Member must adopt and enforce specific written procedures regarding the approval process that include at least the following:
Compliance with Securities Laws
Compliance Rule 2-37(b) provides that Members must establish, maintain, and enforce written procedures reasonably designed to achieve compliance with applicable securities laws, including Sections 9(a), 9(b), and 10(b) of the Exchange Act and any applicable regulation thereunder. Again, these procedures must be approved, in writing, by a designated security futures principal.
Use and Disclosure of the Member's Name
Members must have supervisory procedures reasonably designed to ensure that the public understands who they are doing business with. It is conduct inconsistent with just and equitable principles of trade, and therefore a violation of NFA Compliance Rule 2-4, for Members and Associates to use misleading names or to fail to disclose their affiliation when dealing with the public. Similarly, Members and their Associates may not refer to another entity or individual in any manner that implies an affiliation that does not exist. Furthermore, CFTC Regulation 166.4 requires branch offices to use the name of the firm for all purposes and to hold itself out to the public under that name, and Appendix A to Part 3 of the CFTC's rules states that a person's registration can be denied, revoked, or conditioned under Section 8a(3)(M) of the Commodity Exchange Act if the person uses a misleading name. Members are, however, allowed to use non-misleading "doing business as" names if those names are reported to NFA on Form 7-R or Form 3-R.
The use of misleading names, affiliations, and qualifications is a violation of Compliance Rule 2-29(a)(1) and (b)(1). For example, if reference is made to membership in any organization (e.g., NFA, SIPC, an exchange), it should be clear which entity belongs to that organization. Similarly, Members and Associates may not state or imply that any individual has any degree or designation that does not exist or is self-conferred, nor may they use bona fide degrees or designations in a misleading manner. Therefore, the Member's supervisory procedures should be reasonably designed to ensure that neither the Member nor its employees use misleading names, affiliations, or qualifications in connection with their security futures activities.
Supervision of Branch Offices and Guaranteed IBs
As with other futures activities, Members must supervise each branch office and guaranteed IB that solicits or accepts accounts or orders for or recommends or engages in transactions in security futures products. A designated security futures principal must approve, in writing, and enforce written procedures that include all of the review steps discussed in the interpretive notice entitled "Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs" (¶9019). The review must be conducted under the supervision of a designated security futures principal and must include annual (or more frequent) on-site reviews of each branch office and guaranteed IB that solicits or accepts accounts or orders for or recommends or engages in transactions in security futures products.
Hiring Employees and Entering Into Guarantee Agreements
An adequate program for supervision must include thorough screening procedures for prospective employees who will be involved in commodity futures activities. In regard to prospective employees who may be involved in activities regarding security futures products and who have been registered in the securities industry, this screening process must include a check of the Central Registration Depository (CRD) for any derogatory information on the employee and his or her employer.32The screening does not have to be done by a designated security futures principal. The designated security futures principal must, however, regularly review hiring practices to ensure that the screening process is taking place and to otherwise ensure that qualified personnel are investigating the good character, business repute, qualifications, and experience of employees who may be involved in security futures activities. Furthermore, all relevant information must be considered in making the hiring decision and determining how much supervision the employee will require.
A Member must obtain and review a copy of the most recent Form 8-T or U-5 (including any amendments) filed by a new employee's most recent security or futures employer if the employee will be involved in registered activities regarding security futures products. The Member shall obtain the Form 8-T or U-5 (including any amendments) no later than sixty days after the individual files an application for registration as an associated person (AP) of the Member under the Commodity Exchange Act. A Member that does not obtain the information within 60 days has the burden of demonstrating that it has made a reasonable effort by attempting to obtain the information both from NFA and NASDR (through the CRD), as applicable, and from the employee. If the Form 8-T or U-5 includes any derogatory information, the employer shall take such action as it deems appropriate.
The procedures must also require the employee to provide a copy of the Form 8-T or U-5 (and any amendments) to the Member within two business days after the Member requests it or, if the former employer did not provide a copy of the Form 8-T or U-5 to the employee, the employee shall promptly request a copy from the former employer (or from NFA or NASDR if the former employer cannot or will not provide it), and must provide the Form 8-T or U-5 to the Member within two business days after receiving it. The procedures must also require the employee to promptly provide the Member with any subsequent amendments to the Form 8-T or U-5.33
Guarantor FCMs must also do a due diligence inquiry before entering into a guarantee agreement. If the IB may be involved in activities regarding security futures products, the prospective guarantor must check the CRD for any derogatory information on the IB, its principals, and its employees. Again, all relevant information must be considered when deciding whether to guarantee an IB and determining how much supervision a guaranteed IB will require.
Meetings with Associated Persons
Each employee registered as an associated person under the Commodity Exchange Act and engaging in security futures activities must participate, no less than once a year, in an individual interview or group meeting, conducted by persons designated by the Member, at which compliance matters relevant to the associated person's security futures activities are discussed. The interview or meeting may include other matters and may occur at a central or regional location or at the associated person's place of business.
NFA COMPLIANCE RULE 2-29: USE OF PAST OR PROJECTED PERFORMANCE;
DISCLOSING CONFLICTS OF INTEREST FOR SECURITY FUTURES PRODUCTS
INTERPRETIVE NOTICE
The Commodity Futures Modernization Act of 2000 (CFMA), which was signed into law on December 21, 2000, lifts the 18-year ban on single-stock futures and narrow-based security indices ("security futures products"). Unlike other futures contracts, however, the CFMA provides that security futures products are securities as well as futures. Therefore, under Section 15A(k) of the Securities Exchange Act of 1934 (Exchange Act), NFA is a national securities association (NSA) for the limited purpose of regulating the activities of Members who are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act (i.e., FCMs and IBs who "passport" in to broker-dealer registration because they limit their securities activities to security futures products).
NFA Compliance Rule 2-29 imposes high standards on Members' and Associates' communications with the public in connection with any of their futures activities. When regulating the securities futures activities of Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act, however, Section 15A(k)(2)(B) of the Exchange Act requires NFA to impose sales practice and promotional material requirements reasonably comparable to those of national securities associations registered under Section 15A(a) of the Exchange Act. In light of those requirements, this notice reiterates some of the requirements that apply to all products and describes some of the additional requirements imposed by new section (j) of Compliance Rule 2-29. Section (j) applies to the security futures activities of those Members who are registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates. Sections (a)-(i) apply to all Members.
The requirements described in this interpretation are in addition to - and do not in any way limit or amend - any other requirements imposed by NFA rules, including those discussed in other interpretations issued by the Board of Directors.
Use of Misleading Statements
NFA Compliance Rule 2-29(b)(1) prohibits the use of promotional material that is likely to deceive the public. Additionally, NFA Compliance Rule 2-29(b)(2) prohibits the use of promotional material which contains any material misstatement of fact or which the Member or Associate knows omits a fact which causes the material to be misleading. NFA has always considered the following items to be violations of these Rules:
Use of Past or Projected Performance
NFA Compliance Rule 2-29 places certain limitations on the use of past or projected performance in communications with the public. Some of those limitations - most of which apply to all futures contracts regardless of the underlying commodity - are discussed in this section.
Provided that the performance is representative of all reasonably comparable accounts, most promotional material may discuss past performance of actual or recommended transactions if it meets a number of standards.
Promotional material that discusses projected performance must also meet a number of standards.
Annual rates of return may not be used in any promotional material unless they are based on 12 consecutive months of actual performance, and they must be calculated in a manner consistent with CFTC Regulation 4.25(a)(7)(i)(F). (See NFA Compliance Rule 2-29(b)(5).) Furthermore, the promotional material must state that past results are not necessarily indicative of future results. (See NFA Compliance Rule 2-29(b)(4).)
NFA Compliance Rule 2-29(j) imposes additional restrictions on promotional material of Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates if the promotional material specifically refers to security futures products. Where the promotional material is accompanied or preceded by the disclosure statement for security futures products, references to past recommendations must include all of the information described in Compliance Rule 2-29(j)(9), and references to current recommendations must include instructions on how to obtain that information. However, promotional material for these products may not contain any discussion of past or projected performance unless accompanied or preceded by the disclosure statement for security futures products. This means that most forms of mass media advertising cannot discuss past or projected performance.
Research reports for underlying securities are not promotional material under NFA Compliance Rule 2-29 merely because the customers who receive the reports may trade security futures products in those securities. Compliance Rule 2-29 does, however, cover any research report that mentions security futures products or discusses any strategy that includes using security futures products.
Disclosing Conflicts of Interest in Security Futures Products by Members Registered as Broker-Dealers Under Section 15(b)(11) of the Exchange Act
Due to the nature of the securities markets, Members may have special conflicts of interest that may not necessarily be known to their customers. NFA Compliance Rule 2-29(j)(11) - which applies to Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act - provides that promotional material that makes a recommendation regarding security futures products must disclose material conflicts of interest that the Member may have due to its activities in the underlying security. In particular, the promotional material must disclose any of the following conflicts, if applicable:
Footnotes
1
15 U.S.C. 78s(b)(7).2
17 C.F.R. 240.19b-7.3
On August 29, 2001, the NFA submitted a proposed rule change to the CFTC to amend the "Interpretive Notice on Obligation to Customers and Other Market Participants" ("Interpretive Notice") that is included in the instant proposed rule change. On September 7, 2001, pursuant to Section 17(j) of the Commodity Exchange Act, 7 U.S.C. 21(j), the CFTC deemed the proposed rule change to amend the aforementioned Interpretive Notice to be effective. Telephone conversation with Kathryn Camp, Associate General Counsel, NFA, and Marc McKayle and Andrew Shipe, Special Counsel, Division of Market Regulation ("Division"), Commission, on September 13, 2001. On September 18, 2001, the NFA filed a proposed rule change (SR-NFA-2001-02) with the Commission that incorporates the amendment to the Interpretive Notice. 4
15 U.S.C. 78o-3(k).5
15 U.S.C. 78o(b)(11).6
For purposes of clarity, references to "NASDR," "NASDR members" and "NASDR Conduct Rules" in this notice have been changed to "NASD ," "NASD members" and "NASD Rules," respectively. Telephone conversation with Kathryn Camp, Associate General Counsel, NFA, and Nancy Sanow, Assistant Director, and Marc McKayle, Special Counsel, Division, Commission, on September 19, 2001. 7
15 U.S.C. 78o-3(k)(2).8
15 U.S.C. 78o-3(k).9
15 U.S.C. 78o(b)(11).10
15 U.S.C. 78o-3(k)(2).11
15 U.S.C. 78o(b)(11).12
15 U.S.C. 78o-3(k)(2).13
7 U.S.C. 6f(a)(4)(C).14
7 U.S.C. 6f(a)(2).15
15 U.S.C. 78o(b)(11).16
Current registrants will not have to take the Series 30 examination if they take an appropriate training course.17
17 C.F.R. 155.3.18
17 C.F.R. 155.4.19
15 U.S.C. 78o-3(k).20
7 U.S.C. 4(a)(1)(D)(i)(V).21
15 U.S.C. 78o-3(k)(2)(A).22
15 U.S.C. 78i(a), 78i(b), and 78j(b).23
17 C.F.R. 155.3(a).24
17 C.F.R. 155.4(a).25
17 C.F.R. 155.3.26
17 C.F.R. 155.4.27
15 U.S.C. 78o-3(k).28
15 U.S.C. 78s(b)(1).29
17 C.F.R. 200.30-3(a)(75).30CFTC Regulation 1.59 prohibits self-regulatory organization board and committee members from using or disclosing material, non-public information obtained as part of their service on the board or committee. Depending on the circumstances, Members and Associates may also violate a fiduciary obligation by trading on material, non-public information obtained from their customers or employer or making use of information that the Member or Associate knows was wrongfully disclosed.31This notice does not change the general supervisory responsibilities that Compliance Rule 2-9 imposes on other NFA Members.32If the prospective employer does not have direct access to the CRD, it can obtain the information from NASD Regulation, Inc. (NASDR) using NASDR's public disclosure program. NASDR's public disclosure program can be accessed through its web site at www.nasdr.com.33It is conduct inconsistent with just and equitable principles of trade, and therefore a violation of Compliance Rule 2-4, for an Associate to violate written procedures that are required by NFA, the CFTC, or the SEC.34See, In the Matter of MBH Commodity Advisors, Inc., NFA Case No. 96-BCC-015 (Hearing Panel, May 5, 1998), aff'd, NFA Case No. 98-APP-001 (App. Comm., Feb. 19, 1999); aff'd, CFTC Docket No. CRAA 99-3 (CFTC, Mar. 31, 2000), aff'd, MBH Commodity Advisors, Inc. v. Commodity Futures Trading Commission, No. 00-1957, 7th Cir., May 7, 2001.35See, In re Universal Commodity Corporation, NFA Case No. 95-BCC-20 (Hearing Panel, Feb. 3, 1998), aff'd, In re Parks, NFA Case Nos. 98-APP-1, 98-APP-2, and 98-APP-3 (App. Comm., Mar. 14, 2000); In re JCC, Inc., NFA Case No. 90-BCC-30 (Aug. 25, 1992); aff'd, NFA Case Nos. 92-APP-2 through 92-APP-8 (App. Comm., July 19, 1993); aff'd, CFTC Docket No. CRAA 93-6 (CFTC, June 29, 1994).36See, In re Filler Zaner & Associates, NFA Case No. 89-BCC-32 (BCC, Nov. 30, 1989).
Last Reviewed or Updated: Sept. 20, 2001
66 FR 49439
