Supervision Issues for FCMs and IBs

Notice-Registered asBroker-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 the2-9 Interpretive Notice regarding supervision of e-mail 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?