Supervision Issues for FCMs and IBs Notice-Registered as Broker-Dealers

Introduction Supervisory requirements developed with CFTC and SEC Significant impact on supervisory issues and requirements Rule Amendments –Compliance Rule 2-7 –Compliance Rule 2-8 –Compliance Rule 2-29 –Compliance Rule 2-30

Introduction New rule: Compliance Rule 2-37 Two major changes to supervision rules: –Interpretive notices issued: Special supervisory requirements for Members registered as broker-dealers under section 15(b)(11) of the Securities Exchange Act of 1934 Enhanced supervisory requirements

Supervision Issues All 2-9 rules apply to trading security futures Will highlight additional supervisory requirements for firms with SF activities Two keys –Designated Security Futures Principal (DSFP) –Written Supervisory Procedures

Designated Security Futures Principal What is a DSFP? –Individual at the location where SF activity takes place who is responsible for supervising that activity Qualifications: –Must meet the requirements of NFA Compliance Rule 2-7 –Testing or training?

Designated Security Futures Principal Members must have at least one DSFP at each location that does security futures business Lines of supervision clearly defined and communicated (written chain of command)

Written Supervisory Procedures - General Members must develop specific written procedures regarding supervision of customer accounts Frequent supervisory review Incorporate changes All locations must have current copy

Discretionary Accounts DSFP must review all SF discretionary account activity Written record of review must be maintained

Discretionary Accounts Review for SF transactions that are excessive in size or frequency DSFP must adhere to the rules outlined in the 2-9 Interpretive Notice regarding discretionary accounts

Promotional Material - Correspondence Members must comply with the 2-9 Interpretive Notice regarding supervision of and web sites Incoming and outgoing correspondence must be reviewed by a DSFP and a record of the review maintained: Name of person conducting the review Name of person preparing outgoing correspondence

Promotional Material - Correspondence Supervision procedures for correspondence must consider: –Structure, size and nature of business –Nature of communication –Level of sophistication of the customer –Training and background of broker

Promotional Material Procedures for reviewing SF promotional material must be designed to ensure compliance with all NFA’s promotional content and review requirements Amendment to Rule 2-29: –Prior to first use, all material must be reviewed and approved in writing –If SF material, review and approval must be by DSFP

Account Approval Specific written procedures for account approval include: –Criteria and standards to be used in evaluating the suitability of customers to trade security futures –Procedures that require a DSFP to grant written approval to accounts to trade security futures

Account Approval –DSFP must explain in writing why approval was granted to an account that does not meet its criteria and standards –Financial requirements for approval and maintenance of SF accounts

Securities Laws Compliance with Securities Laws –NFA Compliance Rule 2-37(b): Written supervisory procedures must be designed to comply with applicable securities laws See “Information for Notice-Registered Broker-Dealers”

Use and Disclosure of Member’s Name Must adequately disclose the name of the entity Any reference to membership (Exchange, NFA, SIPC) must: –Clearly identify which entity belongs to the organization

Use and Disclosure of Member’s Name No reference to self-conferred degrees Bona fide degrees may not be used in a misleading manner All aliases or dba’s must be: –Listed on the form 7-R or 3-R –Clearly identified and not misleading

Branch Offices and Guaranteed IBs DSFP must approve, in writing: –Procedures for supervision of all GIBs and BOs engaging in security futures Review must be conducted under the supervision of a DSFP On-site review of GIBs and BOs engaging in security futures must be done annually

Hiring Employees When hiring employees to engage in security futures, a firm must: –Have a DSFP periodically review hiring procedures –Check the CRD for any information on the individual –Obtain the 8-T or U-5 if the individual was previously registered

Hiring Employees The individual must: –Provide the firm with a copy of the 8-T or U-5 within two days of firm request –Contact NFA or the NASD and request form 8-T or U-5, and provide a copy to the firm within two days of receiving the copy

Guarantee Agreements When entering into Guarantee Agreements an FCM must: –Check the CRD for information relating to the IB, principals and employees

Meeting with Associated Persons A person designated by the firm must meet with all APs engaging in security futures to discuss compliance issues: –Must take place at least once a year and may take the form of: Annual group meeting with all employees Individual interviews –May also cover other areas deemed relevant by the firm

Case Study

QUESTIONS?