NFA Regulatory Reminder

As you know, Security Futures Products (SFPs) commenced trading in November of 2002 and since that time NFA has seen an increase in the number of notice-registered firms that have begun to offer these products to their customers. As part of NFA's efforts to provide our Members with ongoing guidance, we want to remind notice-registered broker-dealers of some of their obligations when trading these products. NFA's Interpretive Notice to 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, addresses the additional supervisory obligations placed upon these Members when engaging in SFP activities. NFA has summarized some of the key obligations of that interpretive notice below.

Written Procedures

A notice-registered broker-dealer must develop and implement written supervisory procedures and appoint a designated security futures principal (DSFP) at each location that trades security futures products. These procedures must be reviewed and approved by the DSFP. The written procedures need to identify the specific steps the firm will take to supervise customer accounts that trade SFPs. The DSFP is responsible for enforcing your firm's procedures and recommending to senior management any action necessary to ensure compliance with the securities laws and NFA requirements.

Account Approval

NFA Compliance Rule 2-30(j)(1) requires all accounts that trade SFPs to be approved in writing by a DSFP of the notice-registered broker-dealer. Further, the Member must develop written procedures for approving customer accounts. At a minimum, these procedures must address the following:

• Specific criteria and standards to be used in evaluating the suitability of a customer to engage in SFP trading;
  
• Specific procedures for approving accounts to engage in security futures transactions, including requiring written approval by a DSFP
  
• A requirement that the DSFP explain, in writing, why he or she has approved an account that does not meet the specific criteria and standards set forth in the procedures; and
  
• Specific financial requirements for initial approval and maintenance of customer accounts that engage in security futures transactions.

Supervision of Branch Offices and Guaranteed IBs

Members must supervise each branch office and guaranteed IB that solicits or accepts accounts or orders for SFPs. Qualified personnel must conduct an annual, in-person, on-site review of each branch office and guaranteed IB that engages in security futures activities.

Employee Hiring and Entering Into Guarantee Agreements

Members must implement a thorough screening program for the hiring of new employees who will be involved in SFP activities. For notice-registered broker-dealers, this program must include a review of the Central Registration Depository (CRD) for any derogatory information on the prospective employee or his or her previous employer. A DSFP must regularly review the firm's screening program to ensure that it is effective and that qualified personnel are reviewing candidates based on character, business reputation, qualifications and experience.

A notice-registered broker-dealer must also obtain and review a copy of the most recent 8-T or U5 (including amendments) filed by a prospective employee's former employer. The firm has 60 days to perform this review.

Guarantor FCMs must also perform a due diligence inquiry before entering into a guarantee agreement. For notice-registered broker-dealers, this includes checking CRD for any derogatory information on the IB, its principals, and its employees.

Filing quarterly reports

Compliance Rule 2-37(f) requires notice-registered broker-dealers to file quarterly reports with NFA containing statistical and summary information regarding written customer complaints involving SFPs. The reports must be filed by the 15th day of the month following the calendar quarter in which the complaints are received.

At a minimum these reports should contain the following information about each customer complaint:

• customer's first and last name, full address, and telephone number;
  
• allegations in the complaint;
  
• names of firm personnel involved;
  
• date the complaint was received by the firm;
  
• dollar amount (if any) of the dispute;
  
• firm disposition; and
  
• name of a contact person at the firm regarding the complaint.

Firms that receive no customer complaints during a calendar quarter are not required to file a report for that quarter.

Members can file their quarterly SFP customer complaint report with NFA's Compliance Department in one of two ways:

1. By email. Member firms can file their reports electronically by emailing them to custcomplaints@nfa.futures.org.
2. By fax. Member firms can fax their reports to NFA's Compliance Department at (312) 220-9003.

For all reports filed, Members should include their full name and NFA ID number.

Questions and concerns regarding the above should be directed to:

Joe Patrick
Team Manager, Compliance Department
National Futures Association
200 West Madison Street
Chicago, IL 60606-3447
(312) 658-6521
jpatrick@nfa.futures.org