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NFA's Functions Explained
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[¶ 1001] NFA IN BRIEF
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[¶ 1001.1] Nature.
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NFA is a not-for-profit membership corporation formed in 1976 to become a futures industry's self-regulatory organization under Section 17 of the Commodity Exchange Act. Section 17 was added to the Commodity Exchange Act by Title III of the Commodity Futures Trading Commission ("CFTC") Act of 1974 and provides for the registration and CFTC oversight of self-regulatory associations of futures professionals. NFA's formal designation as a "registered futures association" was granted by the CFTC on September 22, 1981 and the first of NFA's regulatory operations began on October 1, 1982.

The final NFA plan, as approved by the CFTC in 1981 and made operational in 1982, provided for a phase-in of NFA programs. This plan evolved from numerous meetings and discussions among NFA organizers, futures industry leaders and CFTC officials, from legislative efforts in 1978 to perfect Section 17, and from a sober and realistic assessment by NFA organizers of both the benefits and limitations of a registered futures association (See Organizing Efforts below and Genesis of the NFA Concept, Preliminary Statement to NFA's March 16, 1981 Application for Registration Under Section 17 of the Commodity Exchange Act, and NFA Organizing Committee.).

[¶ 1001.2] Principal Features.
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NFA performs several regulatory activities:

  • Auditing and conducting surveillance of Members to enforce compliance with NFA financial requirements;
  • establishing and enforcing rules and standards for customer protection;
  • conducting arbitration of futures-related disputes;
  • performing screening to determine fitness to become or remain an NFA Member. NFA's programs are operational for Futures Commission Merchants ("FCMs"), Introducing Brokers ("IBs"), Commodity Trading Advisors ("CTAs"), and Commodity Pool Operators ("CPOs").

In addition, as authorized under Section 17, NFA performs registration functions under the Commodity Exchange Act — functions previously performed by the CFTC.

Membership in NFA is open to any person registered with the CFTC, all futures exchanges, and any other person engaged in the futures business, provided that the applicant meets NFA's membership qualification standards. In addition, as of August 31, 1985, Member employees who are "associated persons" under the Commodity Exchange Act are required to register with NFA as "Associates."

The CFTC has also authorized NFA to process applications, screen applicants, and where appropriate, grant floor broker and floor trader registrations.

By virtue of NFA Bylaw 1101 and CFTC Rule 170.15, membership is mandatory in NFA for any FCM, IB, CTA and CPO that transacts futures business with the public.

[¶ 1001.3] Objectives.
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From the beginning, NFA's leadership recognized that NFA must benefit both the public and the futures industry to reach its full potential. To accomplish this, two basic objectives were set, which are incorporated in NFA rules approved by the CFTC:

  • More effective policing by the futures industry itself of those segments operating outside the system of exchange standards and surveillance.
  • Better cost control over regulatory expenses by eliminating duplication, overlap and conflict between existing governmental and self-regulatory programs, and by facilitating a reduction in the cost of federal regulation for the benefit of taxpayers in general and market users in particular.

[¶ 1001.4] Organizing Efforts.1
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The driving force behind NFA was an organizing committee (See NFA Organizing Committee.) formed in 1976 by futures industry officials from Chicago and New York City, with broad experience in exchange operations, brokerage house management, commodity merchandising, and trade association activities. Each member of the organizing committee conferred individually with other futures industry leaders, and formal meetings of the organizing committee with industry representatives were held on a number of occasions. These meetings continued into 1981 when NFA formally applied for registration by the CFTC.

Early in its deliberations, the organizing committee reached certain important conclusions. First, substantial cost savings could best be realized from a single organization representing all futures industry segments nationwide, rather than a separate futures association for each segment or region. Second, industry segments could not be successfully self-regulated unless they joined NFA and could not freely resign from it to avoid compliance with ethical and financial rules. Accordingly, the organizing committee decided that membership in NFA should be open to everyone in the futures industry, and that membership in NFA should be mandatory for those who handle transactions directly with the trading public.

In February 1977 the organizing committee appeared before the CFTC to explain its preliminary proposal. In response, the CFTC announced that the NFA proposal was "a valuable first step toward implementing the purposes" of a registered futures association. Moreover, the CFTC offered "to work with the representatives of the NFA to establish a viable organization" and "to find solutions to problems and to seek alternatives where required." In June 1977, the NFA organizing committee presented to the CFTC its plan for uniform required membership, whereby industry segments doing a direct public business would have to be members of NFA, and the CFTC "approved in principle" this concept of mandatory NFA membership.

During 1978, the organizing committee focused its attention on proposed amendments to the Commodity Exchange Act. Three amendments sought by NFA were adopted by Congress in the Futures Trading Act of 1978. These amendments dealt with the mandatory membership question as well as the streamlining of costly programs. Additional perfecting amendments were enacted by the Futures Trading Act of 1982, including an expansion of NFA's authority to assume all registration responsibilities under the Commodity Exchange Act. In addition, Congress again affirmed the principle of mandatory NFA membership.

During its organizational period, NFA received funds from futures exchanges to use to further its efforts and gained tax-exempt status under the Internal Revenue Code. NFA also published and distributed a handbook and a brochure explaining the NFA concept in detail. NFA also participated in the rulemaking which resulted in the adoption by the CFTC of Part 170 of its rules, which governs registered futures associations. A provisional board of directors consisting of the members of the organizing committee was elected by the incorporators of NFA, and temporary officers of NFA were appointed for administrative purposes.

NFA's formal application for registration was filed with the CFTC on March 16, 1981. Following hearings and review of extensive public commentary, the CFTC registered NFA on September 22, 1981. An acting executive director was named in December 1981 and temporary offices were opened in January 1982.

During the remainder of 1982, NFA's full-time president was appointed; experienced administrative, legal, compliance, audit and registration staff were hired; systems were designed and implemented; membership enrollment began; a transitional board of directors was named; and permanent offices in Chicago and New York were opened. The first of NFA's regulatory programs (FCMs) was initiated on October 1, 1982. NFA's first Member-elected Board of Directors assumed office in February 1983, marking the end of an extraordinary organizational effort that had spanned more than six years.

1 A detailed description of the genesis of the NFA concept appears at 1005. Knowledge of the history and development of NFA is useful in understanding fully NFA's functions and present and anticipated role in the futures industry.

[¶ 1002] NFA STRUCTURE
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[¶ 1002.1] Board of Directors.
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NFA's Board of Directors is composed of 25 directors as follows:

Six exchange members of NFA are represented on the Board. Four exchange directors would represent the top four exchanges based on volume; the other two would be elected by the remaining exchanges that are not affiliated with any of the top four.

Ten directors represent FCM and IB Members of NFA; four FCM representatives would come from the top ten FCMs based on the amount of segregated funds and secured amount and the rest from all other FCMs. One IB director would be an independent IB and the second, a guaranteed IB.

Four directors serve from the "Industry Participant" category. Specifically, in the CPO/CTA category, two directors would be affiliated with either CPOs or CTAs that are ranked in the top 20% of funds under management allocated to futures.

Finally, five seats are held by "public" directors (i.e., individuals who are not employed by a Member of NFA).

[¶ 1002.2] Executive Committee.
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While all decisions about Bylaws, budgets, funding, plans and priorities are made by the full NFA Board, it is too large to serve as the daily overseer of NFA management. Thus an Executive Committee has been created to perform that function.

The Executive Committee has 10 members. The President is a member, as are nine directors, including Chairman of the Board. Two directors represent exchange members – one for an "over-20 percent" exchange and one for a smaller market. Three directors representing FCMs or IBs serve on the Executive Committee. There are two representatives from the Industry Participant category. Finally, one public director serves on the Committee.

Because the Executive Committee is organized along category lines, the members are elected by the directors in that particular category. The public director on the Committee, however, is elected by the full Board.

[¶ 1002.3] Election to the Board.
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The Board (except as defined below) is elected by the Members of NFA at an Annual Election held in January of each year.

The representatives of the contract market members are selected by the contract markets they represent.

In the case of other directors (except the public, commercial firm and commercial bank directors), candidates can emerge from three sources. First, NFA's Nominating Committee presents a slate of candidates. Second, 50 or more NFA Members in a particular category can nominate a candidate in that category by filing a petition. Third, any association recognized by NFA as fairly representing a particular category of Members may nominate candidates in that category.

Nominees receiving a plurality of votes in their respective category (e.g., the FCM directors are elected solely by the FCM Members) are elected unless the winning candidates are subject to the regional or one-representative-only restrictions discussed above. In that event, the eligible candidate having the most votes is elected. A person that is a "dual" Member of NFA (e.g., a firm that is both a CTA and a CPO) is permitted to vote only in that category to which its business activities primarily relate.

The public, commercial firm and commercial bank directors are elected by the full Board from a list of candidates compiled by the Members.

Each elected director serves a two-year term. The terms of the members of the initial Board elected by the membership in 2002 were staggered, however, to assure continuity. In the exchange category, each representative serves a one-year term, from the date of the Board's regular annual meeting following the Annual Election.

[¶ 1002.4] Mandatory Membership.
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In 1978, Congress amended Section 17 of the Commodity Exchange Act expressly to permit NFA to have rules resulting in mandatory membership. NFA's Articles of Incorporation seek to achieve this result with respect to certain futures professionals. Basically, the Articles as implemented by Bylaw 1101 prohibit a Member of NFA from accepting futures orders from another person (except a direct customer) unless that other person belongs either to NFA or another registered futures association.1 The requirement focuses on the flow of customer orders and, in effect, interrupts that flow if an ineligible person becomes involved.

One exception to the requirement is the handling of orders by floor brokers. Floor brokers and floor traders are regulated by the exchange where they conduct business, not by NFA. Thus, floor brokers and floor traders are not compelled to join NFA in order to accept futures orders for execution. However, from the point of order origination (i.e., the first FCM, IB, CTA or CPO) until the order reaches a floor broker for execution, only eligible persons may participate in that order flow.

1 In addition, CFTC Rule 170.15 requires that every FCM required to register as such must be a member of a registered futures association.

[¶ 1003] NFA'S REGULATORY OPERATIONS
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[¶ 1003.1] Financial Requirements.
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One of the principal functions of NFA is to establish, audit and enforce minimum financial requirements for its FCM and IB Members and to receive and analyze financial reports from those Members. No such requirements currently are established under NFA rules for other Members of NFA, such as CPOs and CTAs. NFA's financial compliance functions for exchange-member FCMs have been delegated by NFA to the exchanges, although at the request of an exchange NFA may perform those functions for such FCMs.

NFA financial requirements were patterned after existing financial standards of the CFTC and futures exchanges. Certain financially related matters, such as the setting of levels of margin, remain exclusively with the exchanges (although NFA retains authority to require Member FCMs to collect margins in accordance with exchange requirements).

[¶ 1003.2] Ethical Standards.
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The ethical standards adopted by NFA include those specifically required by Section 17 of the Commodity Exchange Act, such as prohibitions against fraud, manipulative and deceptive acts and practices, and unjust and inequitable dealings. In addition, bucketing is prohibited, and there are required procedures for the supervision of employees and the handling of discretionary accounts that are similar to CFTC and exchange requirements. In addition, CPO and CTA Members are required to follow specific CFTC rules, and detailed rules have been prescribed for exchange-traded options transactions. NFA has also adopted an advertising rule which contains specific provisions concerning communications with the public and promotional material and a "know your customer" rule which requires Members to obtain information about new customers and provide disclosure about the risks of futures trading before the customers open futures accounts.

[¶ 1003.3] Members and Associates.
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Membership in NFA is open to any CFTC registrant and any futures exchange, unless the registrant or exchange is subject to one of the specified membership disqualifications (e.g., a CFTC order revoking registration). Each employee of a Member of NFA who is an "associated person" under the Commodity Exchange Act is required to register with NFA as an "Associate." These individuals are subject to the same admission requirements as Members.

[¶ 1003.4] Membership Screening.
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An important first step in the regulation of NFA Members and Associates is the screening of applicants for membership and registration as Associates. The initial screening process is handled by NFA staff. Final decisions on admittance are made by a committee of NFA directors (the Membership Committee) following a hearing, if the President finds there is reason to believe that an applicant may not be qualified for membership or registration with NFA as an Associate, and the applicant or the Membership Committee seeks a hearing.

[¶ 1003.5] Disciplinary Proceedings.
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NFA has a Compliance Department responsible for financial auditing and ethical surveillance, under the supervision of NFA's Executive Vice President and Chief Compliance Officer. In the event of a possible infraction of NFA rules, a report is prepared and submitted to the Business Conduct Committee. The Committee acts on the report by either closing the matter or by serving a formal complaint on the Member or Associate. In the latter event, the respondent must answer and is entitled to a hearing before the Hearing Committee. If the matter is not settled, and a decision is rendered against the respondent, that Member or Associate may appeal the decision to a committee of directors created for that purpose (the Appeals Committee). The decision on appeal is final, subject to review by the CFTC.

NFA has authority to discipline any Associate and any of its Members (other than floor brokers and floor traders, all of whom are subject to exchange regulation) that are required to be registered with the CFTC.

The penalties that may be assessed include expulsion, suspension for a fixed period, a prohibition upon being associated with a Member, censure, reprimand, a fine not to exceed $250,000 per violation, or any other appropriate penalty or remedial action. A summary action may be taken by the President with the concurrence of the Executive Committee when necessary to protect the markets, customers or other Members. If it is not practicable to hold a hearing before the action is taken, the Member or Associate will be afforded an opportunity for a hearing before the Business Conduct Committee as promptly as possible.

[¶ 1003.6] Arbitration Proceedings.
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Another principal function of NFA is to provide a fair, equitable and expeditious procedure for the settlement of customer claims and grievances as required under Section 17(b)(10) of the Commodity Exchange Act. NFA's Code of Arbitration and Member Arbitration Rules provide a framework for these procedures. NFA's arbitration program has been fully operational since 1983. Subject to certain exceptions, NFA arbitration is mandatory when a Demand for Arbitration is filed by a customer against an FCM, IB, CTA or CPO Member, or its employees, or against an Associate. Also, arbitration between and among NFA Members and Associates is mandatory in most cases. Counterclaims, cross-claims and third-party claims involving the same acts or transactions which form the basis of the customer's or Member's claim also will be heard.

Arbitrations are heard by panels of one or three arbitrators appointed by the President. Customers generally have the right, at their request, to a non-Member panel consisting of a majority of arbitrators not connected with an NFA Member or NFA. Smaller claims are generally resolved by a single arbitrator through written submissions. Proceedings are informal; however, parties may be represented by counsel. No appeal to NFA is permitted. Awards may be enforced in any court of competent jurisdiction.

Additionally, to complement its successful arbitration program and to encourage settlements, NFA incorporated mediation into the early stages of the arbitration process in June 1991, making NFA arbitration even less expensive and more efficient.

[¶ 1004] FUNDING
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The Bylaws of NFA set forth the following funding plan.

[¶ 1004.1] Exchanges.
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The annual assessment for each exchange member is calculated on the basis of $0.01 for each round-turn futures contract traded there. The total of such assessments paid by a contract market Member that had 20 percent of aggregate contract market transaction volume during that fiscal year shall not be more than $150,000 and the total of such assessments paid by a contract market Member that had transaction volume of 20 percent or less of aggregate contract market transaction volume during that fiscal year shall not be more than $100,000. Where "mini contracts" are involved, an adjustment is made to equalize them with the larger-sized contracts in the same commodity (e.g., five 1,000 ounce or bushel contracts will be treated as one 5,000 unit contract, if the latter is traded). Each exchange is free to raise these funds in any manner that it chooses.

[¶ 1004.2] FCMs.
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The annual assessment for FCMs consists of two elements:

  • Annual dues of $1,500 for exchange Member FCMs and $5,625 for non-exchange Member FCMs.
  • An assessment fee of $.04 for each commodity futures contract (other than an option contract traded on a contract market and a dealer option contract) on a round-turn basis and $.02 for each option contract traded on a contract market on a per-trade basis carried for a customer who is not a member (or an affiliate under common ownership with a member) of the exchange where the trade is made. The assessment must be invoiced to the customer. The collection of this assessment can be suspended or the fee adjusted by the Board for a period not to exceed three months when in the judgment of the Board such action is appropriate in light of NFA's overall financial goals. The assessment fee does not apply to trades that are executed by clearing FCMs for customer omnibus accounts that they carry for non-clearing FCMs, where the non-clearing FCM has already made the assessment. (The non-clearing FCM will make the assessment in this situation because it has the direct relationship with the customer.)

[¶ 1004.3] Forex Dealer Members.
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Forex Dealer Members do not pay assessment fees on off-exchange forex transactions. Instead, Forex Dealer Members pay dues based on their gross annual revenue from retail customers for these activities. Effective April 30, 2006 the dues structure is as follows:

  • If the firm's gross annual revenue from retail forex is $500,000 or less, the firm's dues are $20,000 if NFA is responsible for auditing the firm and $15,875 if NFA is not responsible for auditing the firm.
  • If the firm's gross annual revenue from retail forex is more than $500,000 but not more than $2,000,000, the firm's dues are $30,000 if NFA is responsible for auditing the firm and $25,875 if NFA is not responsible for auditing the firm.
  • If the firm's gross annual revenue from retail forex is more than $2,000,000 but not more than $5,000,000, the firm's dues are $50,000 if NFA is responsible for auditing the firm and $45,875 if NFA is not responsible for auditing the firm.
  • If the firm's gross annual revenue from retail forex is more than $5,000,000, the firm's dues are $100,000 if NFA is responsible for auditing the firm and $95,875 if NFA is not responsible for auditing the firm.

[¶ 1004.4] Other Members.
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Generally, all other Members of NFA are assessed annual dues, as follows:

  • Commodity Pool Operators: $ 750 per year.
  • Commodity Trading Advisors: $ 750 per year.
  • Introducing Brokers (Guaranteed) $ 750 per year.
  • Introducing Brokers (Independent) $ 750 per year.

[¶ 1005] GENESIS OF THE NFA CONCEPT
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[¶ 1005.1] Initial Industry Concerns.
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Section 17 of the Commodity Exchange Act, creating the possibility of a "futures association" within the futures industry, was originally known as Title III of the Commodity Futures Trading Commission Act of 1974. Like most other provisions of the CFTC Act, Section 17 became effective in April of 1975. For more than a year after that date, however, no effort was made within the futures industry to make use of Section 17 to form a futures association.

A principal concern of futures industry leaders was that a futures association might simply add a new regulator with new requirements. Already, many futures professionals were confronted with multiple regulators. While increasing the cost of doing business, this new regulator might serve no useful purpose for either the industry or the public.

Also, Section 17 clearly contemplated an organization akin to the Financial Industry Regulatory Authority ("FINRA"), originally established as the National Association of Securities Dealers, Inc. ("NASD"). FINRA, however, was formed to regulate the over-the-counter securities business that operates outside of the system of stock exchange self-regulation. There is no "over-the-counter" futures business. In fact, the Commodity Exchange Act prohibits it; all futures trading must take place on organized futures exchanges, through exchange members and under self-regulatory oversight.

A further concern, particularly within the exchange community, was whether a futures association would set standards or impose requirements in conflict with the rules of the exchanges, so that the members of both entities would face incompatible duties. Frequently, the members of a futures association would also belong to one or more exchanges, and all of their futures transactions would pass through the exchanges. Obviously, the futures association and the exchanges would have to work closely together if conflicts were to be avoided.

[¶ 1005.2] FIA Proposal.
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While these issues were still under debate within the industry, a proposal was submitted in August 1976 by the Futures Industry Association ("FIA") to the CFTC. The FIA proposal called for the formation of a futures association limited initially to the screening of associated persons, but with the potential eventually to set a wide variety of standards governing the relationship between futures firms and their customers. Because FIA is not organized as a self-regulatory organization, however, it advised the CFTC that it would be necessary to make major changes in FIA bylaws and devote considerable time and effort to develop a funding plan.

FIA's proposal had two principal features. First, its regulatory program applied only to FCMs, CPOs and CTAs. (Thus, it focused on those firms dealing directly with the trading public.) Second, its regulatory efforts were to be limited to "off-exchange" activities such as customer relations, advertising and the financial strength of firms doing business with the public. According to the proposal, FIA would not become involved "with other aspects of regulation which would relate to the workings of the market place, such as floor operations, contract details, prevention of manipulations and financial integrity of clearinghouses, etc."

Thus, the earliest proposal for a registered futures association recognized two essential features of any futures association: membership must be defined along functional lines — doing business with the public, regardless of statutory label — and conflicts with the self-regulatory programs of the exchanges must be avoided.

[¶ 1005.3] Industry Response.
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One month after the FIA proposal reached the CFTC, Leo Melamed of the Chicago Mercantile Exchange met with the chairman of the Chicago Board of Trade, Paul McGuire, to discuss this development and to exchange views on whether the exchanges should take an active part in the development of a futures association. As a result of conversations with FIA officials, they were aware that FIA preferred that a separate, distinct entity act as the Title III Organization (rather than FIA) and that FIA's proposal primarily was made to draw industry support for the concept of a national futures association and to spur others within the industry into action.

After careful analysis (See Motivating Factors below.), Mr. Melamed and Mr. McGuire concluded that a Title III organization would unquestionably benefit the legitimate interests of the futures industry and the public it serves, but that such an organization must be broadly based and provide for participation by the exchanges. They agreed to proceed on that basis. FIA, when advised of that decision, immediately concurred and offered its support.

In September 1976, articles of incorporation were developed under the direction of Mr. Melamed and Mr. McGuire, and National Futures Association was chartered in the state of Delaware. The purposes of NFA were defined generally at the time, but with the realization that the Articles of Incorporation as originally written would serve principally as a basis for negotiation within the industry and with the CFTC.

[¶ 1005.4] Motivating Factors.
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Several industry developments gave momentum to the idea of a futures association and motivated both FIA and the NFA incorporators. First, the 1974 amendments to the Commodity Exchange Act expressly recognized the existence of futures industry professionals operating largely beyond exchange supervision-CPOs and CTAs, for example. The CFTC had found through its registration process that these persons numbered in the many hundreds.

Second, each month brought the futures industry closer to fully negotiated commission rates which, in turn, would reduce the economic incentive for commercial firms and some FCMs to belong to exchanges (where, previously, members alone received discounts on commission rates). This meant that, as the futures industry grew, many new FCMs might choose not to join an exchange, in order to avoid complying with rigorous exchange financial and ethical requirements and scrutiny.

In fact, the number of industry participants operating without exchange supervision was already higher than expected and was certain to increase in the years to come. This could prove to be a danger to the proven financial integrity of the futures market system. And while the CFTC could expand in dollars and staff to meet this challenge, a self-regulatory association was the better answer. The self-regulatory philosophy was strong in the futures industry and had a long history, beginning with the founding of the Chicago Board of Trade in 1848.

Additionally, the futures association concept received support from within the industry because it offered the promise of greater efficiency in the self-regulatory process. Self-regulation in the futures industry had become complex. A number of autonomous exchanges existed, each with its own rulebook, its own surveillance staff and its own disciplinary system. Any brokerage firm belonging to more than one exchange sometimes faced duplicative self-regulatory programs at a minimum, and many also confronted conflicting exchange requirements. Therefore, a national self-regulatory association like NFA offered the hope that some of these piecemeal functions over time could be coordinated and even consolidated.

Finally, a futures association was regarded by many futures industry leaders as the next and necessary step in the evolution of the futures markets. The U.S. futures industry had reached a level of national and international visibility and participation that demanded a unified national association which, for certain specific purposes, could bring within its fold all the different exchanges, diverse interests and a multitude of market users. Logic dictated the creation of a national association which could act as the coordinated self-regulatory body for the entire industry in specific areas critical to the continued growth, viability and well-being of futures markets and the business communities which they serve.

[¶ 1005.5] Building Consensus.
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In October of 1976, Mr. Melamed and Mr. McGuire extended invitations to five other industry leaders to form an NFA organizing committee reflecting regional considerations as well as differences in business activities. To reflect regional considerations, three invitees were from New York City and two were from Chicago. To accommodate differences in types of businesses, three invitees were officials of major brokerage houses, while firms specializing in commodities were represented also. The exchange community was represented through Mr. Melamed and Mr. McGuire and by the president of the Chicago Board of Trade. Other invitees had occupied leadership roles at the New York markets. Three of the invitees, moreover, had been leaders of FIA at the time of its original proposal to the CFTC. All accepted.

In December of 1976, the organizing committee met in New York with representatives of the various exchanges and FIA to outline its proposal. From that meeting came a consensus that the NFA organizing committee should continue to work toward a futures association utilizing the concepts discussed at the meeting.

On February 10, 1977, the CFTC heard the proposal of the NFA organizing committee and, five days later, announced that it "endorses this concept of cooperative regulation and considers the NFA proposal to be a valuable first step toward implementing the purposes of Title III."

In June of 1977, the NFA organizing committee returned to the CFTC with the view that neither NFA nor any other futures association would be an effective self-regulator if eligible industry participants could refuse to join or, once members, could resign at the first sign of disciplinary action. The organizing committee urged that it have the tools to avoid such a "revolving-door" syndrome. On June 7, 1977, the CFTC agreed: "The Commission, as a matter of policy, approves the concept of 'Uniform Required Membership' as proposed by the N.F.A. organizing committee."

[¶ 1005.6] Antitrust Division Objections.
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In October of 1977, however, without any contact whatsoever with NFA, staff members of the antitrust division of the U.S. Department of Justice released to the media and the CFTC a lengthy legal memorandum attacking the proposal and, in particular, the concept of mandatory membership. The antitrust division authors raised constitutional questions, argued that Congress had not "intended" that membership in a futures association be compulsory, and expressed the view that there should be many competing futures associations.

[¶ 1005.7] Congress Responds.
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After carefully reviewing the antitrust memorandum, the NFA organizing committee filed a detailed reply with the CFTC in January 1978 addressing each of the arguments made. The issue was not resolved, however, until completion later that year of the 1978 CFTC reauthorization process. Section 17 of the Commodity Exchange Act was amended expressly to sanction NFA's proposed mandatory membership concept, and to otherwise perfect Section 17. The message was unmistakable: Congress wanted NFA.

[¶ 1005.8] The Registration Process.
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During 1979 and 1980 many additional meetings were held to develop the details of NFA's formal submission to the CFTC; comments were prepared in response to the CFTC's proposed Part 170 rules governing futures associations; and extensive drafting was undertaken to develop NFA's application papers-a 300-page legal document filed with the CFTC on March 16, 1981. The actual filing followed extensive industry briefings in February and early March of 1981, which resulted in even more fine-tuning.

NFA's application consisted of a detailed registration statement, as required by CFTC rules, and the following documents:

  • Articles of Incorporation-NFA's "constitution"-which contain a number of carefully drawn protections essential to a viable, effective Title III organization.
  • NFA Bylaws-which provide the organizational and operational details.
  • NFA Compliance Rules-which contain NFA's code of conduct, as well as the procedures for Member/Associate discipline.
  • NFA Code of Arbitration-which provides for a system of customer-initiated arbitration.
  • NFA Financial Requirements-applicable to Member FCMs.

In addition, in a "preliminary statement" to the application, the organizers summarized their principal motivations in proceeding with the ambitious NFA plan. (See Preliminary Statement to NFA's March 16, 1981 Application for Registration Under Section 17 of the Commodity Exchange Act.)

Public comments were solicited by the CFTC and hearings were held before the CFTC on June 4, 1981. Speaking on behalf of NFA, organizing committee chairman Leo Melamed emphasized NFA's goal of integrated, coordinated self-regulation:

    In an era of deregulation long overdue in my opinion, and essential to the long-term health and economic survival of America — it would be ironic, if not tragic, if NFA were to represent yet another layer of regulation. Duplicative, costly, inefficient, suffocating regulation. A fundamental goal of NFA organizers has been, and is, to avoid just this. We do not want NFA to become but another regulatory layer. We do not want to duplicate existing self-regulatory efforts. Rather, we want to complement and perfect existing programs. Nor do we want to precipitate useless turf battles. Rather, we want to recognize the essential, central role of the exchange community and draw upon its considerable talents and expertise. After all, they have done a remarkably fine job for over 100 years, within their area of limited jurisdiction.

    Thus the NFA proposal of integrated, coordinated self-regulation is the only rational one, the only one, we submit, that Congress could have intended. Our plan fully complies with the spirit and the letter of the law. Moreover, it best reflects what is the essence of futures trading: In the words of Holbrook Working, "Futures trading is trading conducted under special regulations and conventions, more restrictive than that applied to any other class of commodity transactions, which [regulations and conventions] serve to facilitate hedging and speculation by promoting exceptional convenience and economy of transactions." Regulators — self or otherwise — must never lose sight of that.

Following extensive review, and analysis of further objections from the antitrust division and NFA's detailed response, NFA's registration was granted by the CFTC on September 22, 1981.

[¶ 1005.9] 1982 Congressional Affirmation.
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Approximately four months later, however, the future of NFA was put in serious doubt, as the CFTC urged Congress to adopt a futures transaction tax. This novel tax, if enacted, would have deprived NFA of its funding base at a critical time and would have jeopardized futures industry support for the NFA concept. Congress soundly rejected the CFTC tax proposal, however, in favor of NFA.

In this connection, Congress comprehensively reexamined and significantly amended Section 17 of the Commodity Exchange Act to enhance further the NFA role. Congress also affirmed that "every registered commodity professional, except floor brokers, must be a member of NFA in order to fulfill the 1978 congressional grant of authority to the CFTC to make membership in a registered futures association compulsory." [128 Cong. Rec. H7507 (daily ed. remarks of Rep. Wampler). Accord 128 Cong. Rec. S13097 (daily ed. remarks of Sen. Percy).] The Committee of Conference on the Futures Trading Act of 1982 emphasized explicitly that "under the Act, the Commission has the authority to adopt . . . [CFTC Rule 170.15]" H.R. Rep. No. 964, 97th Cong., 2d Sess. 50 (1982).

In short, Congress in 1982 squarely faced the question whether NFA would have a meaningful place in the Commodity Exchange Act's regulatory scheme or whether direct governmental regulation by the CFTC would be preferred. See, e.g., 128 Cong. Rec. H7517 (daily ed. remarks of Rep. Volmer). Congress selected the self-regulatory approach of NFA and Section 17 of the Act. To that end, Congress also sought to ensure that NFA would fulfill the self-regulatory mission reflected in Section 17. The 1982 Act therefore contains significant revisions to Section 17 covering the assumption by NFA of CFTC registration functions, NFA rule approval procedures, expansion of NFA arbitration remedies, the establishment of performance standards for NFA, and a broad study of NFA performance.

In the context of this vast array of amendments, Congress expressly recognized "that unless all persons covered by the regulatory program of a futures association join an association, the self-regulatory purposes of Section 17 of the Commodity Exchange Act will not be fulfilled and, in particular, the goal of new Section 17(q) may be impossible to achieve." H.R. Rep. No. 964, 97th Cong., 2d Sess. 49-50 (1982) (Report of Committee of Conference).

New Section 17(q) required NFA to develop a comprehensive program that fully implements NFA's rules approved by the CFTC. In enacting Section 17(q), Congress thus made clear its appreciation of the nexus between the provisions of that Section and mandatory NFA membership. Indeed, the Conference Committee report on Section 17(q) contained the following directive to the CFTC.

    The conferees expect that the Commission will exercise . . . [its] authority and adopt such rules or take such other action as it deems to be necessary or appropriate to insure that persons eligible for membership in a registered futures association become and remain members of at least one such association.
H.R. Rep. No. 964, 97th Cong., 2d Sess. 50 (1982).

In 1982, therefore, Congress ratified the CFTC's mandatory NFA membership policy, directed in Section 17(q) that NFA self-regulatory programs and rules be fully implemented, stated explicitly that mandatory futures association membership was necessary to effectuate that directive as well as the specific purposes of Section 17, and emphasized its expectation that the CFTC would exercise its authority to accomplish fully the mandatory NFA membership objective.3

3 On June 1, 1983 the CFTC adopted Rule 170.15 (effective August 8, 1983), which provides that each FCM required to register as such must become and remain a member of at least one registered futures association.

[¶ 1006] PRELIMINARY STATEMENT TO NFA'S MARCH 16, 1981 APPLICATION FOR REGISTRATION UNDER SECTION 17 OF THE COMMODITY EXCHANGE ACT
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The National Futures Association (hereinafter "NFA") is the first applicant for registration under the Commodity Exchange Act (hereinafter "the Act") as a Registered Futures Association. Section 17 of the Act provides for the registration with the Commodity Futures Trading Commission (hereinafter "Commission") of one or more such associations.

Among the fundamental purposes of NFA is to relieve the Commission of a significant part of its current burden under the Act, especially in the direct regulation of futures commission merchants that have elected to operate without membership on contract markets where they do business. With the Commission's consent, the NFA could also relieve the agency of much of the clerical burden connected with the registration and testing of associated persons. In all likelihood, the efforts of NFA will allow the Commission to realize other savings in manpower and money as well.

The incorporators and organizers of NFA believe that the assumption by the private sector, through NFA, of a significant part of the Commission's existing burden is both prudent and desirable because it will enable the Commission to devote more of its scarce resources to duties under the Act which, if delayed or deferred, would have a serious adverse impact upon the continued growth of the commodity futures industry and would unnecessarily deprive the public (including businesses and institutions) of the expanding services of that industry.

In particular, the incorporators and organizers note already lengthy processing time at the Commission on such vital matters as approval of proposed new futures contracts; review of changes in contract market rules necessary to assure efficient exchange operations, to meet competition, and to better serve the public; inauguration of commodity options trading under exchange sponsorship; the resolution of customer claims under the reparations program; and other matters.

The incorporators and organizers of NFA believe that the Congress has mandated the regulation of commodity futures trading because it recognizes the important role played by these markets in the economic life of this nation. As such, we believe that Congress' desire to regulate in the public interest was never intended to impede the honest operation or the natural growth of futures markets. We view the creation of NFA as an opportunity for the Commission to carry out that Congressional intent, despite limited resources, and our decision to apply under Section 17 of the Act is motivated in substantial part by the expectation that duties of the Commission under the Act affecting industry growth and development can and will in the future be performed expeditiously.

[¶ 1007] NFA ORGANIZING COMMITTEE (1976-1982)
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Leo Melamed, Chairman
David T. Johnston, Vice Chairman
John J. Conheeney
George D.F. Lamborn
Warren W. Lebeck
Leslie Rosenthal
Howard A. Stotler

[¶ 1008] NFA'S MISSION STATEMENT
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In 1997, NFA performed a comprehensive internal evaluation which resulted in the creation of the following mission statement: As a congressionally authorized self-regulatory organization, NFA's mission is to provide innovative regulatory programs and services that ensure futures industry integrity, protect market participants and help our Members meet their regulatory responsibilities. NFA is committed to making decisions and taking actions that reflect the highest level of service excellence for our customers: NFA Members and the investing public.

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Articles of Incorporation
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[¶ 3011] ARTICLE I: NAME
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The name of the Corporation shall be National Futures Association (hereinafter "NFA").

[¶ 3017] ARTICLE II: LOCATION
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NFA's principal office shall be in Chicago, Illinois. NFA shall maintain a regional office in New York, New York and at such other locations as the Board of Directors (hereinafter "Board") may designate.

[¶ 3023] ARTICLE III: PURPOSES
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[Effective dates of amendments: April 14, 1983; January 1, 1990 and April 23, 2001.]

[¶ 3023.1] Section 1: Fundamental Purposes.
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Subject to the limitations in Section 2 of this Article, the fundamental purposes of NFA are to promote the improvement of business conditions and the common business interests of persons engaged in commodity futures or related activity

    (i) undertaking the regulation of persons that are members of NFA (hereinafter "Members") as set forth in this Article;

    (ii) relieving the Commodity Futures Trading Commission (hereinafter "Commission") from the substantial burden of direct regulation in such matters; and

    (iii) providing such regulatory services to such markets as the Board may from time to time approve. Actions of NFA to effectuate these purposes may include:

    (a) Public Interest.

    The adoption, administration and enforcement as to the following persons of requirements regarding fair practice and designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and, in general, to protect the public interest

      (i) Members that are registered with the Commission as Futures Commission Merchants, Commodity Pool Operators, Commodity Trading Advisors, Introducing Brokers or Leverage Transaction Merchants; and

      (ii) Associates (See Article XVIII).

    (b) Financial Standards.

    Notwithstanding the provisions of Section 2(a) of this Article, the adoption with respect to its Members that are Futures Commission Merchants, Introducing Brokers or Leverage Transaction Merchants of financial and related requirements designed to protect against insolvency, bankruptcy, or unsafe or unsound financial condition of such Members; the conduct, directly or through agents, of audits and reviews of the financial condition and related matters of such Members; and the adjudication and enforcement of compliance with NFA's financial and related requirements for all such Members, except as may otherwise be provided under Commission Regulations: Provided, however, it is expressly understood that contract markets and clearing organizations shall have the right to adopt, administer and enforce financial and related requirements governing the eligibility of Members for membership privileges on such contract markets or clearing organizations.

    (c) Arbitration.

    The adoption and administration of a fair and equitable procedure through arbitration or otherwise for the voluntary settlement of customers' claims or grievances against Members described in paragraph (a) above, their employees, and Associates, in accordance with Section 17(b)(10) of the Commodity Exchange Act (hereinafter "the Act"), or claims or grievances of such Members or Associates against customers, or claims or grievances between or among such Members or Associates: Provided, however, no such procedure shall apply to the settlement of a claim or grievance where the parties, by valid and binding agreement, have committed themselves to the resolution of such claim or grievance in a forum other than NFA, or where parties having claims or grievances between or among themselves are required by contract market rules to submit the controversy to the settlement procedures of such contract market.

    (d) Qualifications Standards.

    The adoption of appropriate standards with respect to such training, experience and other qualification requirements as NFA deems necessary and appropriate to insure the fitness of Members and Associates; the development and administration of written proficiency examinations of Members and Associates; and, with the approval of the Commission, the administration of the registration of Members, Associates and any other persons required to be registered with the Commission. Such requirements, examinations and registrations adopted by NFA with respect to Associates shall, with the consent of each contract market Member conducting comparable activities, replace and supplant the requirements, examinations and related activities theretofore conducted with respect to Associates by the contract market Member.

    (e) Protection of Customers.

    Notwithstanding the provisions of Section 2(a) of this Article, the adoption, administration and enforcement of uniform, industrywide requirements regarding the dealings and relations between and among Members described in paragraph (a) above, Associates and the customers of such Members and Associates, including, without limitation, requirements governing the manner, method, and place of soliciting business, including the content of such solicitations and the form and manner of handling, recording, and accounting for customers' orders, transactions, and accounts.

    (f) Doing Business With Non-Members.

    The prohibition of Members from carrying accounts, accepting orders, or handling transactions, in commodity futures contracts, for or on behalf of any non-Member, or suspended Member, that is required to be registered with the Commission as a Futures Commission Merchant, Commodity Pool Operator, Commodity Trading Advisor, Introducing Broker or Leverage Transaction Merchant 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

      (i) such non-Member is a member of another futures association registered under Section 17 of the Act or is exempted from this prohibition by the Board or

      (ii) such suspended Member is exempted from this prohibition by the Board or a committee thereof.

    The prohibition of Members from accepting orders in commodity futures contracts to cover leverage transactions, for or on behalf of any non-Member, or suspended Member that is required to be registered with the Commission as a Leverage Transaction Merchant, unless

      (i) such non-Member is a member of another futures association registered under Section 17 of the Act or is exempted from this prohibition by the Board or

      (ii) such suspended Member is exempted from this prohibition by the Board or a committee thereof.

    (g) Corporate Powers.

    The purchase or other acquisition, and the holding, owning, maintaining, working, developing, selling, leasing, exchanging, hiring, conveying, mortgaging or otherwise disposing of and dealing in, lands and leaseholds, and any interest, estate and rights in personal property, and any personal or mixed property, and any franchises, rights, licenses or privileges necessary, convenient or appropriate for any of the purposes herein expressed; the borrowing of funds for NFA's purposes and the pledging of real, personal or mixed property in connection therewith; the institution and defense of suits in NFA's name, and the settlement or compromising of any claim or controversy by or against it; and, subject to the delineation of purposes recited herein and the limitations set forth in Section 2 of this Article, the carrying out of all and everything necessary, suitable or proper for the accomplishment of any of the purposes, or the attainment of any of the objects, or the furtherance of any of the powers hereinabove set forth, and the performance of every other act or acts incident or appurtenant to, or growing out of, or connected with the aforesaid business or powers, or any part or parts thereof, and the exercise of all or any of its corporate powers or rights in the State of Delaware and in the various other states, territories, and dependencies of the United States, in the District of Columbia and in all or any foreign countries.

[¶ 3023.2] Section 2: Contract Markets.
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    (a) Non-applicability of NFA Rules.

    No NFA requirement shall purport to govern or otherwise regulate the specific conduct of a Member or Associate if such conduct is governed or regulated by the requirements of a contract market and such Member or Associate is subject to the contract market's disciplinary jurisdiction for such conduct.

    (b) Prohibition Upon Adoption of Certain Rules.

    NFA shall not adopt, administer or enforce upon any Member or Associate a rule, standard, requirement or procedure which purports to govern or otherwise regulate any of the following:

      (i) The minimum level or margin required for any futures contract or type of futures transaction, the method for calculation thereof, or compliance therewith, unless such rule, standard, requirement or procedure conforms and is not inconsistent with applicable contract market requirements.

      (ii) Eligibility for membership in, clearing privileges on, or service on the governing board or committees of, a contract market.

      (iii) The rights, privileges, duties or responsibilities of membership in any contract market or clearing organization.

      (iv) The content, interpretation, administration or enforcement of any rule, standard, requirement or procedure of a contract market or clearing organization.

      (v) The conduct of business or other activities on the trading floor of a contract market.

      (vi) The terms or conditions of any futures contract.

[¶ 3023.3] Section 3: Communications With Legislative Bodies.
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NFA shall not communicate any statement as its official position, view or opinion to a legislative body on any matter pending or contemplated to be pending before such body, except with the prior approval of the Board.

[¶ 3029] ARTICLE IV: FORM OF ORGANIZATION
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[Effective dates of amendments: October 15, 2001.]

NFA shall be a membership corporation and shall have no capital stock and shall have no authority to issue any stock. NFA is not organized and shall not be conducted for profit, and no part of its net revenues or earnings shall inure to the benefit of any Member except for the repayment of bona fide loans or other credit extended by a Member to NFA.

ARTICLE V: [RESERVED]
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[¶ 3041] ARTICLE VI: MEMBERS
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[Effective dates of amendments: February 10, 1983; April 14, 1983; February 7, 1986; January 1, 1990 and August 16, 1993.]

[¶ 3041.1] Section 1: Membership Eligibility.
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Persons eligible to become NFA Members shall include:

    (a) any person registered with the Commission;
    (b) any contract market; and
    (c) any person designated by Commission Rule as eligible for NFA membership.

[¶ 3041.2] Section 2: Membership Category.
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Each Member which qualifies for membership status in one or more of the following categories-

    (a) FCMs;
    (b) CPOs;
    (c) CTAs;
    (d) IBs; or
    (e) LTMs

-shall be deemed to be a Member for the purposes of Articles VII, VIII, and X only in that single category to which its business activities primarily relate. Each Member shall have one vote on all matters on which the Member's category is entitled to vote, except that a CPO, CTA, or IB Member shall not be entitled to vote in such category if:

    (a) it is an employee of an FCM Member;
    (b) an FCM Member or employee thereof holds a majority equity interest in the Member; or
    (c) the Member is otherwise directly or indirectly controlled by an FCM Member, except that an IB Member which has entered into a guarantee agreement with an FCM Member shall not be deemed for purposes of this Section to be directly or indirectly controlled by such FCM Member solely by reason of such agreement;

Provided, however, that such CPO, CTA, or IB Member shall be entitled to vote in any one of such other categories (e.g., FCM) in which it qualifies for membership status.

[¶ 3047] ARTICLE VII: BOARD OF DIRECTORS
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[Effective dates of amendments: February 10, 1983; November 27, 1984; February 7, 1986; January 22, 1988; July 19, 1988; January 1, 1990; August 2, 1990; September 8, 1992; October 16, 1992; August 16, 1993; January 21, 1994; October 24, 1994; July 23, 1996; May 1, 1998; January 22, 2001; October 15, 2001; and October 9, 2007.]

[¶ 3047.1] Section 1: General.
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The duties of the Board of Directors shall include the management of NFA's business, the adoption of NFA's Bylaws, and the fulfillment of NFA's fundamental purposes.

[¶ 3047.2] Section 2: Composition of Board.
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The Board of Directors shall be comprised as follows:

    (a) Contract Market Representatives.

      (i) In the event that there are five (5) or less contract market Members having annual transaction volume during the prior calendar year of more than 1,000,000, then one representative of each such contract market Member.

      (ii) In the event that there are more than five (5) contract market Members with annual transaction volume during the prior calendar year of more than 1,000,000:

        (a) One representative of each contract market Member ranked in the top three (3) contract market Members based on annual transaction volume during the prior calendar year.

        (b) Two (2) elected representatives of contract market Members with annual transaction volume during the prior calendar year of more than 1,000,000 that are not included in Section 2(a)(ii)(a) above. Only contract market Members not represented in accordance with Section 2(a)(ii)(a) shall be eligible to vote for the representatives elected in accordance with this Section 2(a)(ii)(b).

      (iii) A specific contract market's annual transaction volume shall be the number of commodity futures contracts entered into on the contract market during the calendar year. The number of contracts entered into on a contract market shall be adjusted where necessary because of differences in sizes of contracts (e.g., one 5,000 oz. contract for a particular commodity would equal five 1,000 oz. contracts for that commodity for purposes of the computation).

      (iv) A contract market Member and all contract market Members with which it is affiliated shall have no more than one representative on the Board at any one time. For the purposes of this limitation, a contract market Member shall be deemed to be affiliated with another contract market Member if it directly or indirectly owns 100 percent of or is owned 100 percent by or has 100 percent ownership in common with such other contract market Member.

    (b) Futures Commission Merchant, Leverage Transaction Merchant and Introducing Broker Representatives.

      (i) Ten (10) elected representatives of registered Futures Commission Merchant (hereinafter "FCM") Members, registered Leverage Transaction Merchant (hereinafter "LTM") Members, and registered Introducing Broker (hereinafter "IB") Members, divided as follows:

        (A) Four (4) representatives of FCMs ranked in the top ten FCMs based on the total of segregated funds and secured amounts, as those terms are defined in the applicable Commission regulations, held as of June 30 of the prior calendar year.

        (B) Four (4) representatives of FCMs and LTMs not ranked in the top ten FCMs based on the total of segregated funds and secured amounts, as those terms are defined in the applicable Commission regulations, held as of June 30 of the prior calendar year.

        (C) One representative of IBs required to maintain minimum adjusted net capital.

        (D) One representative of IBs not required to maintain minimum adjusted net capital.

      (ii) No FCM, LTM or IB shall have more than one representative on the Board at any one time. For purposes of this limitation, a person shall be deemed a representative of an FCM, LTM or IB Member if the person is an officer, director, partner, employee or beneficial owner of more than 10 percent of the equity stock of the FCM, LTM or IB, and the person is not a contract market representative.

    (c) Commodity Pool Operator, Commodity Trading Advisor and Public Representatives.

      (i) Four (4) elected representatives of registered commodity pool operators (hereinafter "CPOs") and registered commodity trading advisors (hereinafter "CTAs") that are NFA Members, including at least two (2) representatives of CPOs or CTAs that rank within the top 20 percent of CPOs or CTAs with funds under management allocated to futures (as defined in Article XVIII(k)).

      (ii) Five (5) individuals who are not officers, directors, partners, employees or beneficial owners of more than 10 percent of the equity stock of any Member of NFA (hereinafter "Public Representatives").

      (iii) No CPO or CTA may have more than one representative on the Board at any one time. For purposes of this limitation, a person shall be deemed a representative of an CPO or CTA if the person is an officer, director, partner, employee or beneficial owner of more than 10 percent of the equity stock of the CPO or CTA, and the person is not a contract market representative.

[¶ 3047.3] Section 3: Nominations; Election.
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The elected Directors shall be chosen as follows:

    (a) Nominating Committee.

    The Nominating Committee (see Article X) shall nominate at least one candidate for each elected FCM and LTM, IB, and CPO and CTA Director position to be filled. These nominations shall be made in accordance with the eligibility requirements contained in this Article. The Nominating Committee shall nominate candidates whose election shall result in diverse segments of each category being represented on the Board based upon the size of the Member, the type of business conducted by the Member and the type of customer serviced by the Member.

    (b) Petition Procedure.

    Nominations may be made for elected FCM and LTM, IB, and CPO and CTA Director positions by:

      (i) Petition signed by 50 or more NFA Members in the category for which the nomination is made (i.e., FCM and LTM, IB, and CPO and CTA); or

      (ii) Petition submitted by any organization or association recognized by NFA as fairly representing the category (See (b)(i) above) for which the nomination is made.

    Petitions shall be submitted in the manner specified in the Bylaws. No petition may nominate more than one candidate for the same position.

    (c) Election.

    If there is a contested election in any category (See (b)(i) above) of NFA Members, the Members in that category shall thereafter elect by plurality vote from such nominees the Directors that are to represent that category. The election shall be conducted in the manner provided in the Bylaws, which shall provide for an Annual Election.

    (d) Public Representatives.

    The Public Representatives shall be chosen as follows: Before the Annual Election, the Board shall solicit from the Members the nomination of individuals to serve on the Board in the Public Representative category. At the Board's regular annual meeting, the Board shall, by majority vote, select from among such nominees the Public Representatives to serve on the Board.

    (e) Contract Markets

    In the event of an election as described in Article VII, Section 2(a)(ii)(b), the contract market representatives shall be elected as follows: Before the Annual Election, the Board shall solicit from contract market Members eligible to have representatives pursuant to Article VII, Section 2(a)(ii)(b) the nomination of individuals to serve on the Board as representatives of such contract market Members. If there is a contested election of such contract market Members, the contract market Members eligible to vote pursuant to Article VII, Section 2(a)(ii)(b) shall thereafter elect by plurality vote from such nominees the Directors that will represent them. The election shall be conducted in the manner provided in the Bylaws, which shall provide for an Annual Election.

[¶ 3047.4] Section 4: Terms of Directors.
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    (a) Contract Market Directors.

    Directors representing contract market Members shall serve for one-year terms, from the date of the Board's regular annual meeting as set forth in Bylaw 506 until the date of the Board's regular annual meeting one year hence.

    (b) Other Directors.

    Directors other than contract market Member Directors shall serve for two-year terms, from the date of the Board's regular annual meeting following the Annual Election at which they are elected until the date of the Board's regular annual meeting two years hence: Provided, however, the terms of the Directors elected at the Annual Election in 2002 shall be staggered. Except for Public Representatives, half of the Directors in each category elected at the Annual Election in 2002 shall serve two-year terms, and half shall serve one-year terms. The Directors who receive the highest number of votes in each category shall serve the two-year terms. Ties shall be resolved by random draw. Three of the Public Representatives elected at the Board's regular annual meeting held in 2002 shall serve two-year terms and two shall serve one-year terms. The Public Representatives who serve two-year terms shall be determined by random draw.

[¶ 3047.5] Section 5: Voting; Quorum.
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Each Director shall have one vote upon any matter coming before the Board for official action, and, except as otherwise provided in these Articles or NFA's Bylaws, the affirmative vote of a majority of the Directors present and voting at a meeting of the Board shall be NFA's official act if a quorum is present. A quorum of the Board shall consist of one-half of the Directors, except where NFA Bylaws specify a lesser number in emergency situations.

[¶ 3047.6] Section 6: Establishment of Major Plans and Priorities.
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The Board shall establish for observance by the Executive Committee (See Article VIII) and NFA staff major plans and priorities, including those regarding the commitment and expenditure of NFA funds.

[¶ 3047.7] Section 7: Chairman and Vice Chairman.
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There shall be a Chairman and Vice Chairman of the Board. They shall serve for one-year terms and shall be elected by the Board at its regular annual meeting, by majority vote. The Chairman shall be elected from among the Directors in office and the Vice Chairman shall be elected from among Directors elected to serve on the Executive Committee.

[¶ 3047.8] Section 8: Vacancies.
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A vacancy that occurs on the Board before the expiration of a Director's term shall be filled (for the unexpired term) by an eligible individual elected by majority vote of the remaining Directors who represent the category of Members in which the vacancy occurred, except that if the vacancy involves a representative of a contract market Member, that contract market Member shall designate the successor. In the event there are no Directors remaining who represent the category of Members in which the vacancy occurred, the vacancy shall be filled by an eligible individual elected by the Board.

[¶ 3053] ARTICLE VIII: EXECUTIVE COMMITTEE
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[Effective dates of amendments: November 27, 1984; February 7, 1986; January 22, 1988; January 1, 1990; August 16, 1993; May 1, 1998; January 22, 2001 and October 15, 2001.]

[¶ 3053.1] Section 1: General.
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There shall be an Executive Committee of the Board, which may exercise all powers of the Board except as set forth in Section 2 below. The authorized actions of the Executive Committee shall be deemed actions of the Board.

[¶ 3053.2] Section 2: Board Powers Not Exercisable By Executive Committee.
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    (a) General Prohibitions.

    The Executive Committee shall not exercise any power of the Board when the Board is in session, and the Executive Committee shall at no time take any action with respect to any matter that is the subject of a notice of a pending Board meeting without the concurrence of the Board.

    (b) Specific Prohibitions.

    The Executive Committee shall at no time exercise any of the following powers of the Board:

      (i) The adoption, amendment or repeal of any Bylaw unless such power has been delegated by the Board in accordance with Article XI, Section 1(a); or the ratification of any proposal to adopt, amend or repeal these Articles.

      (ii) The establishment of major plans and priorities, including those regarding the commitment and expenditure of NFA funds, except that the Board may authorize the Executive Committee to make expenditures within specific monetary limits prescribed in the Bylaws or Board Resolutions.

      (iii) The election, appointment or removal of any NFA Director, officer or committee member.

      (iv) The adoption of a plan of merger or consolidation with another entity.

      (v) The sale, lease, exchange or mortgage of all or substantially all of NFA property or assets.

      (vi) The voluntary dissolution of NFA or the revocation of proceedings therefor.

      (vii) The adoption of a plan for the distribution of NFA assets.

      (viii) The amendment or repeal of any Board Resolution that, by its terms, provides that it shall not be amended or repealed by the Executive Committee.

[¶ 3053.3] Section 3: Composition.
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The Executive Committee shall comprise the following:

    (a) NFA's President, and

    (b) Nine (9) Directors, as follows:

      (i) The Chairman of the Board of Directors, and

      (ii) Eight (8) other Directors, as follows:

        (A) Two (2) Directors representing contract markets:

          (1) One (1) representative of a contract market that had transaction volume of more than 20 percent of aggregate contract market transaction volume during the prior calendar year. A specific contract market's transaction volume shall be the number of commodity futures contracts entered into on the contract market. The aggregate contract market transaction volume shall be the number of such contracts entered into on all U.S. contract markets. The number of contracts entered into on a contract market shall be adjusted where necessary because of differences in sizes of contracts (e.g., one 5,000 oz. contract for a particular commodity would equal five 1,000 oz. contracts for that commodity for purposes of the computation); and

          (2) One (1) representative of a contract market other than a contract market described in clause (1) above: Provided, however, if no contract market described in clause (1) above is represented on the Board, there shall be two Directors on the Committee from contract markets represented on the Board;

        (B) Three (3) Directors representing FCMs, LTMs or IBs;

        (C) Two (2) Directors representing CPOs and CTAs; and

        (D) One (1) Director who is a Public Representative.

[¶ 3053.4] Section 4: Election of Members; Vacancies.
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The elected members of the Executive Committee shall be chosen by the Board at the regular annual meeting as follows: The Directors representing contract markets that had transaction volume of more than 20 percent of aggregate contract market transaction volume during the prior calendar year shall elect the Committee member in category (b)(ii)(A)(1) above; the Directors representing all other contract markets shall elect the Committee member in category (b)(ii)(A)(2) above; the Directors representing FCMs, LTMS, and IBs shall elect the Committee members in category (b)(ii)(B) above; the Directors representing CPOs and CTAs shall elect the Committee members in category (b)(ii)(C) above; and the Public Representative Director shall be elected by the Board. A vacancy that occurs on the Executive Committee shall be filled in like manner. Tie votes may be resolved by the Board by random draw.

[¶ 3053.5] Section 5: Voting; Quorum.
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Each member of the Executive Committee shall have one vote on Executive Committee matters. A quorum of the Committee shall consist of one contract market Member of the Committee, one FCM, LTM or IB member of the Committee, and any three other Committee members.

[¶ 3059] ARTICLE IX: PRESIDENT AND SUBORDINATE OFFICERS
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There shall be a President, a Secretary, and a Treasurer, and such other subordinate officers as the Board deems appropriate. The foregoing officers shall be appointed, and may be removed, by the Board, as prescribed in the Bylaws. The President shall be the Chief Executive Officer of NFA and shall have the duties prescribed in these Articles, the Bylaws and Board Resolutions.

[¶ 3065] ARTICLE X: NOMINATING COMMITTEE
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[Effective dates of amendments: April 14, 1983; February 7, 1986; July 19, 1988; January 1, 1990; August 2, 1990; February 10, 2000; January 22, 2001 and October 15, 2001.]

[¶ 3065.1] Section 1: General.
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There shall be a Nominating Committee, composed of three Subcommittees, one for each of the following categories of Members: FCMs and LTMs, IBs, and CPOs and CTAs. Each Subcommittee shall nominate at least one candidate for each position to be filled on the Board in the Subcommittee's category, in accordance with the eligibility requirements of Article VII.

[¶ 3065.2] Section 2: Composition; Term of Members.
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    (a) Each Subcommittee of the Nominating Committee shall be composed of three representatives of the Subcommittee's category, except that:

      (i) The FCM and LTM Subcommittee shall be composed of three representatives, including at least one representative of FCMs or LTMs described in Article VII, Section 2(b)(i)(A) and at least one representative of FCMs or LTMs described in Article VII, Section 2(b)(i)(B); and

      (ii) The IB Subcommittee shall be composed of three representatives, including at least one representative of IBs required to maintain minimum adjusted net capital and at least one representative of IBs not required to maintain minimum adjusted net capital.

      (iii) The CPO and CTA Subcommittee shall include at least one representative that primarily acts as a CPO and at least one representative that primarily acts as a CTA.

    (b) Members of the Nominating Committee shall serve staggered terms of three years from the date of the Board's regular annual meeting following the Annual Election at which they are elected until the date of the Board's regular annual meeting three years hence.

[¶ 3065.3] Section 3: Selection of Committee Members.
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Each Subcommittee of the Nominating Committee shall nominate, for each position to be filled on the Nominating Committee, one eligible individual for election by the Members to that Subcommittee for the following term. Additional nominations may be made for each such position by petition in the manner set forth in Article VII, Section 3. The procedures for such election shall be the same as those prescribed in Article VII, Section 3. No person shall be nominated or elected to the Nominating Committee who has served on the Nominating Committee during the preceding term, and no person shall be nominated or elected to the Nominating Committee who, at the time of such nomination or election, is a Director. Any vacancy that occurs on the Nominating Committee shall be filled by the Board from among persons eligible under this Article to serve thereon.

[¶ 3071] ARTICLE XI: BYLAWS
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[Effective dates of amendments: February 7, 1986; January 1, 1990; August 16, 1993 and October 15, 2001.]

[¶ 3071.1] Section 1: Adoption, Amendment and Repeal.
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Bylaws of NFA may be adopted, amended or repealed by a majority of all Directors in office at the time, except that the Board shall not take the following actions unless a two-thirds majority of all Directors present and voting approves:

    (i) Delegating or otherwise granting authority to any NFA Committee, officer, employee or agent, or any other person, to adopt, amend or repeal any Bylaw.

    (ii) Adopting, amending or repealing any Bylaw regarding dues or assessments; and

    (iii) Adopting, amending or repealing any Bylaw regarding dues, assessments or similar charges imposed on contract market Members.

[¶ 3071.2] Section 2: Content of Bylaws.
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Except insofar as such matters are expressly contained in these Articles, the following shall be as provided from time to time in NFA's Bylaws: The conditions of, method of admission to, and qualifications for membership and Associate registration; the limitations, rights, powers and duties of Members and Associates; dues and assessments; the method of expulsion from and the termination of membership and Associate registration; the procedures for the settlement of claims and grievances; and all other matters pertaining to membership in, registration with, and the conduct, management and control of the business, property and affairs of NFA.

[¶ 3077] ARTICLE XII: EFFECTIVE DATE OF REQUIREMENTS
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The NFA Board may establish such effective date for any of its requirements as it deems appropriate in light of NFA resources and the prudent initiation of particular NFA operations and programs.

[¶ 3083] ARTICLE XIII: DURATION
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NFA shall have perpetual existence.

[¶ 3089] ARTICLE XIV: MEMBERS' LIABILITY
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The private property of the Members shall not be subject to the payment of NFA's debts or liabilities to any extent whatsoever.

[¶ 3095] ARTICLE XV: FINANCING
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[¶ 3095.1] Section 1: Costs.
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The initial costs of organization of NFA shall be borne by the Organizers, except that the Board in its discretion may reimburse the Organizers for all or any part of such verified organizational expenses.

[¶ 3095.2] Section 2: Initial Working Capital.
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The initial working capital of NFA shall consist of borrowings from contract markets or other sources, to be evidenced by loan agreements, promissory notes or other evidences of indebtedness, which shall be repaid as promptly as practicable from dues, assessments or other revenue received by NFA.

[¶ 3095.3] Section 3: Revenue.
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The operating income of NFA shall consist of dues, assessments, fees and other charges upon Members and others as prescribed from time to time in NFA's Bylaws, subject to Sections 1(a)(ii) and 1(b) of Article XI. NFA schedules of such charges may prescribe different rates or amounts for different categories of Members, or sub-categories therein, endeavoring to reflect differences in the financial burden borne or expected to be borne by NFA in carrying out its duties and programs for each such category or sub-category.

[¶ 3095.4] Section 4: Loans and Other Receipts.
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Nothing herein shall prohibit or inhibit the Board, in its discretion, from securing loans, accepting gifts, grants or contributions, or otherwise obtaining financing to meet NFA's initial or on-going needs in lieu of or in addition to the other methods of financing recited in this Article.

[¶ 3101] ARTICLE XVI: MISCELLANEOUS
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[Effective dates of amendments: April 14, 1983 and July 1, 1987.]

[¶ 3101.1] Section 1: Registered Office.
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The registered office of NFA in the State of Delaware is located at 100 West Tenth Street, City of Wilmington, County of New Castle, Delaware. The name and address of its resident agent is the Corporation Trust Company, 100 West Tenth Street, Wilmington, Delaware.

[¶ 3101.2] Section 2: Incorporators.
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The names and addresses of the incorporators of NFA are as follows:

Paul F. McGuire
184 Maple Avenue
Highland Park, Illinois 60035

 Leo Melamed
350 Sunrise Circle
Glencoe, Illinois 60022

[¶ 3101.3] Section 3: Indemnification.
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NFA shall provide in its Bylaws for indemnification of its past and present directors, officers, committee members, employees and agents, and any person who is serving or has served at NFA's request as a director, officer, committee member, employee or agent of another organization, to the full extent permitted by law.

[¶ 3101.4] Section 4: Dissolution.
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Upon dissolution, the net assets of NFA, after payment of liabilities, shall be distributed to the then members in proportion to the dues and assessments previously paid.

[¶ 3101.5] Section 5: Directors' Liability.
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To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of this corporation shall not be liable to the corporation or its members for monetary damages for breach of fiduciary duty as a director.

[¶ 3107] ARTICLE XVII: ADOPTION, AMENDMENT AND REPEAL OF ARTICLES
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[Effective dates of amendments: April 14, 1983; February 7, 1986; September 8, 1987; January 1, 1990; October 16, 1992 and October 15, 2001.]

No provision of these Articles may be adopted, amended or repealed except in the manner prescribed in this Article. Each such proposed change to the Articles shall be reviewed by the Board, and shall be submitted to the Members of NFA only upon ratification of the proposal by two-thirds of the Directors. If any such proposed change relates to Article III, Section 2, such proposed change shall not be considered by the Board for ratification unless at least 60 days written notice of the proposed change has been given to each contract market Member. Upon such ratification, the proposal shall be submitted to a ballot vote of the Members and shall be adopted upon the affirmative vote of a majority of those Members in each of the categories set forth in Sections 2(a), 2(b) and 2(c) of Article VII who submit a proper ballot in a timely manner.

[¶ 3113] ARTICLE XVIII: DEFINITIONS.
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[Effective dates of amendments: April 14, 1983; February 7, 1986; January 1, 1990; May 1, 1998; January 22, 2001 and October 15, 2001.]

As used in these Articles-

    (a) "Act"-means the Commodity Exchange Act.

    (b) "Affiliate"-means a person controlled by, in control of, or under common control with another person.

    (c) "Associate"-means a person who is associated with a Member within the meaning of the term "associated person" as used in the Commodity Exchange Act or Commission Rules and who is required to be registered as an "associated person" with the Commodity Futures Trading Commission; and any other person designated by the Board to be an Associate.

    (d) "Board" or "Board of Directors"-means the Board of Directors of NFA.

    (e) "Commission"-means the Commodity Futures Trading Commission.

    (f) "Commodity Pool Operator" or "CPO"-means a commodity pool operator as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Act and Commission Rules, except any CPO that the Board has designated to be an Associate.

    (g) "Commodity Trading Advisor" or "CTA"-means a commodity trading advisor as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Act and Commission Rules, except any CTA that the Board has designated to be an Associate.

    (h) "Contract Market"-means an exchange designated by the Commission as a derivatives transaction execution facility or registered by the Commission as a contract market.

    (i) "Clearing Organization"-means an entity (whether a unit or division of the contract market, or a separate organization) that clears commodity futures transactions executed on a contract market.

    (j) "Fees"-means charges for processing applications, administering qualifications examinations, conducting arbitrations, and other clerical and administrative fees. The term "fees" does not include dues, assessments or similar charges.

    (k) "Futures"-includes options contracts traded on a contract market, and such other commodity-related instruments as the Board may from time to time declare by Bylaw to be properly a subject of NFA regulation and oversight.

    (l) "Futures Commission Merchant" or "FCM"-means a futures commission merchant as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Act and Commission Rules.

    (m) "Industry Participant"-refers to those members of NFA's Board of Directors who represent CPOs and CTAs, as described in paragraph 2(c)(i) of Article VII.

    (n) "Introducing Broker" or "IB"-means an introducing broker as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Act and Commission Rules.

    (o) "Leverage Transaction Merchant" or "LTM"-means a leverage transaction merchant as that term is used in Commission Rules, and that is required to be registered as such under the Act and Commission Rules.

    (p) "Member"-means a member of NFA.

    (q) "Person"-includes individuals, corporations, partnerships, trusts, associations and other entities.

    (r) "Public Representative"-refers to those members of NFA's Board of Directors who are not employed by any NFA Member, as described in paragraph 2(c)(ii) of Article VII.

    (s) "Requirements"-includes any duty, restriction, procedure, or standard imposed by a charter, bylaw, rule, regulation, resolution or similar provision.

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Bylaws
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CHAPTER 1. OFFICES
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[¶ 4011] BYLAW 101. REGISTERED OFFICE.
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The registered office of National Futures Association (hereinafter "NFA") shall be in the City of Wilmington, County of New Castle, State of Delaware.

[¶ 4017] BYLAW 102. OTHER OFFICES.
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NFA's principal office shall be in Chicago, Illinois. NFA shall maintain a regional office in New York, New York, and offices at such other locations as NFA's Board of Directors (hereinafter "Board of Directors" or "Board") designates.

CHAPTER 2. PURPOSES
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[¶ 4023] BYLAW 201. PURPOSES.
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NFA's purposes are as stated in Article III of NFA's Articles of Incorporation (hereinafter "Articles").

CHAPTER 3. MEMBERSHIP AND ASSOCIATION WITH A MEMBER
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[¶ 4029] BYLAW 301. REQUIREMENTS AND RESTRICTIONS.
(Click Here to Print this Rule) [Effective dates of amendments: April 11, 1983; July 28, 1983; September 16, 1983; June 4, 1985; August 1, 1985; January 28, 1986; December 30 1986; July 29, 1988; January 1, 1990; October 29, 1991; August 16, 1993; September 21, 1993; April 1, 1997; March 10, 1998; March 18, 2003; July 21, 2003; September 15, 2003 and December 15, 2004.]

[¶ 4029.1] (a) Eligibility for Membership.
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    (i) No person, unless eligible for membership in the contract market category, shall be eligible to become or remain an NFA Member or associated with a Member unless such person is registered, temporarily licensed or exempt from registration under the Commodity Exchange Act (hereinafter "Act") or the rules of the Commodity Futures Trading Commission (hereinafter "Commission").

    (ii) Except as provided in paragraph (e) below, no person shall be eligible to become or remain a Member or associated with a Member who:

      (A) Has been and is suspended or expelled from a registered futures association or contract market for violating any rule of the association or contract market that:

        (1) prohibits any act or transaction constituting conduct inconsistent with just and equitable principles of trade; or

        (2) requires any act which, if omitted, constitutes conduct inconsistent with such principles;

      (B) Has been and is barred or suspended from being associated with all members of a registered futures association or contract market for violating a rule described in paragraph (A) above;

      (C) Is subject to an order of the Commission denying, suspending or revoking the person's registration under Section 6(b) of the Act; expelling or suspending the person from membership in a registered futures association or contract market; or barring or suspending the person from being associated with an FCM;

      (D) Whether before or after becoming a Member or associated with a Member, was, by the person's conduct while associated with a Member, a cause of any suspension, expulsion or order described in paragraphs (a)(ii)(A)-(C) above that is in effect with respect to the person; or

      (E) Has associated with the person any other person who is known to, or in the exercise of reasonable care should be known to, the person to be ineligible to become or remain a Member or associated with a Member under paragraphs (a)(ii)(A)-(D) above.

    (iii) No person, unless eligible for membership in the contract market category, shall be eligible to become or remain a Member unless at least one of its principals is registered as an "associated person" under the Act and Commission Rules.

[¶ 4029.2] (b) Registration of Associates.
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No person may be associated with a Member of NFA unless the person is registered with NFA as an Associate or is an NFA Member. As used in these Bylaws, the term "associated with a Member" means any person who is associated with a Member of NFA within the meaning of the term "associated person" as used in the Act or Commission Rules and who is required to be registered as such with the Commission. Registration with NFA as an Associate is not registration as an associated person under the Act.

[¶ 4029.3] (c) Restrictions on Becoming or Remaining a Member or Associated with a Member.
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A person may be deemed disqualified to become or remain a Member or associated with a Member-

    (i) If a prior registration under the Act of such person in any capacity has been suspended (and the period of such suspension has not expired) or has been revoked;

    (ii) If registration of such person in any capacity has been refused within five years preceding the filing of the application for membership or at any time thereafter;

    (iii) If such person is permanently or temporarily enjoined by order, judgment or decree of any court of competent jurisdiction, including an order entered pursuant to an agreement of settlement to which the Commission or any Federal or State agency or other governmental body is a party, from:

      (1) acting as a futures commission merchant, introducing broker, floor broker, commodity trading advisor, commodity pool operator, leverage transaction merchant, associated person of any registrant under the Act, securities broker, securities dealer, municipal securities broker, municipal securities dealer, transfer agent, clearing agency, securities information processor, investment adviser, investment company or affiliated person or employee of any of the foregoing; or

      (2) engaging in or continuing any activity involving any transaction in or advice concerning contracts of sale of a commodity for future delivery, concerning matters subject to Commission regulation under Section 4c or 19 of the Act, or concerning securities;

    (iv) If such person has been convicted of any felony or if such person has been convicted within 10 years preceding the filing of the application for membership or at any time thereafter of any misdemeanor that:

      (1) involves any transactions or advice concerning any contract of sale of a commodity for future delivery, or any activity subject to Commission regulation under Section 4c or 19 of the Act, or concerning a security;

      (2) arises out of the conduct of the business of a futures commission merchant, introducing broker, floor broker, commodity trading advisor, commodity pool operator, leverage transaction merchant, associated person of any registrant under the Act, securities broker, securities dealer, municipal securities broker, municipal securities dealer, transfer agent, clearing agency, securities information processor, investment adviser, investment company, or an affiliated person or employee of any of the foregoing;

      (3) involves embezzlement, theft, extortion, fraud, fraudulent conversion, misappropriation of funds, securities of property, forgery, counterfeiting, false pretenses, bribery, or gambling; or

      (4) involves the violation of Section 152, 1341, 1342, or 1343, or Chapter 25, 47, 95, or 96 of Title 18, United States Code;

    (v) If such person has been found by any court of competent jurisdiction, by the Commission or any Federal or State agency or other governmental body, or by settlement agreement to which the Commission or any Federal or State agency or other governmental body is a party:

      (1) to have violated any provision of the Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Securities Investors Protection Act of 1970, the Foreign Corrupt Practices Act of 1977, or any similar statute of a State or foreign jurisdiction, or any rule, regulation, or order under any such statutes, or the rules of the Municipal Securities Rulemaking Board; or

      (2) to have willfully aided, abetted, counseled, commanded, induced, or procured such violation by any other person;

    (vi) If such person is subject to an outstanding order denying trading privileges on any contract market to such person, denying, suspending, expelling or revoking such person's membership in any contract market, registered futures association or any other self-regulatory organization, or barring or suspending such person from being associated with a registrant under the Act or with a member of a contract market, registered futures association or other self-regulatory association;

    (vii) If such person is a futures commission merchant or introducing broker and shall knowingly accept any order for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market from any person denied trading privileges on a contract market by order of the Commission under Section 6(b) of the Act and the period of denial specified in such order shall not have expired;

    (viii) Such person failed reasonably to supervise another person, who is subject to such person's supervision, with a view to preventing violations of the Act, or of any of the statutes set forth in paragraph (c)(v) of this Bylaw or of any of the rules, regulations, or orders thereunder, and the person subject to supervision committed such a violation: Provided, however, that no person shall be deemed to have failed reasonably to supervise another person, within the meaning of this paragraph if:

      (1) there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and

      (2) such person has reasonably discharged the duties and obligations incumbent upon that person, as supervisor, by reason of such procedures and system, without reasonable cause to believe that such procedures and system were not being complied with;

    (ix) Such person was debarred by any agency of the United States from contracting with the United States;

    (x) Such person willfully made any material false or misleading statement or willfully omitted to state any material fact in any application of such person for registration under the Act or for membership in NFA, in any report required to be filed with the Commission by the Act or the regulations thereunder, in any proceeding before the Commission, in any report required to be filed with NFA or in any proceeding before any Committee of NFA;

    (xi) Such person has pleaded nolo contendere to criminal charges of felonious conduct, or has been convicted in a State court or in a foreign court of conduct which would constitute a felony under Federal law if the offense has been committed under Federal jurisdiction;

    (xii) In the case of an applicant for membership in any capacity to which NFA's Financial Requirements apply, such person has not established that such person meets NFA's Financial Requirements;

    (xiii) Such person has been found by any court of competent jurisdiction or by any Federal or State agency or other governmental body, or by agreement of settlement to which any Federal or State agency or other governmental body is a party:

      (1) to have violated any statute or any rule, regulation, or order thereunder which involves embezzlement, theft, extortion, fraud, fraudulent conversion, misappropriation of funds, securities or property, forgery, counterfeiting, false pretenses, bribery, or gambling; or

      (2) to have willfully aided, abetted, counseled, commanded, induced or procured such violation by any other person;

    (xiv) Such person has associated with any other person and knows, or in the exercise of reasonable care should know, of facts regarding such other person that are set forth as statutory disqualifications in Section 8a(2) of the Act, unless such person has notified the Commission or NFA, if NFA has been authorized or required to make the determination described in Section 4k(5) of the Act with respect to such other person, of such facts and the Commission or NFA, as the case may be, has determined that such other person should be registered or temporarily licensed;

    (xv) There is other good cause; or

    (xvi) Any principal has been or could be refused membership: Provided, however, that for the purposes of this Bylaw, "principal" shall mean any entity or individual defined as "principal" in NFA Registration Rule 101.

[¶ 4029.4] (d) Qualification.
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Except as provided in paragraph (e) below, no person may become or remain an FCM, CTA, CPO, IB or LTM Member or associated with such a Member unless qualified to do so in conformity with such standards of training and experience and proficiency testing requirements as NFA shall establish and such other qualification standards as NFA finds necessary or desirable.

[¶ 4029.5] (e) Exceptions from Ineligibility, Restrictions and Qualifications.
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A person who is ineligible or disqualified to become or remain a Member or associated with a Member under paragraphs (a) or (d) above may nevertheless become or remain a Member or associated with a Member:

    (i) Subject to the provisions of Section 17(b)(3) of the Act, upon a finding by the Membership Committee (See Chapter 7) that the reason for ineligibility does not cause the person to pose a threat to Members, Associates or customers; or

    (ii) In such other situations as may be approved or directed by the Commission.

[¶ 4029.6] (f) Application.
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    (i) All applications to become a Member or to register as an Associate shall be filed electronically and provide such information as required by the Membership Committee. The Member or applicant for membership shall file all applications for itself and its Associates by accessing NFA's registration and membership database in the manner provided by NFA. Each Member or applicant for membership shall designate the person or persons authorized to file its application and the applications of its Associates. NFA may require any individual applying for registration as an Associate to electronically verify the information contained in the application. Applicants for registration as Associates may not authorize any other person to make such verification on their behalf. Each applicant for membership shall pay such application fee as the Membership Committee may prescribe from time to time.

    (ii) The electronic filing of the application or verification of the information contained in the application shall constitute:

      (A) a representation that the information supplied in the application is complete and accurate;

      (B) a representation that the applicant or Member has authorized the person filing the application to make such filing and all representations and agreements required by this paragraph; and

      (C) an express agreement by the applicant that, if admitted to NFA membership or registered as an Associate, the applicant shall become and remain bound by all NFA requirements as are then and thereafter in effect and that such agreement shall apply each time the applicant becomes a Member or Associate.

    (iii) An application may be returned by the Secretary of NFA without action if it is materially incomplete or materially inaccurate.

    (iv) Database Security.

      (A) No applicant, Member or Associate may access NFA's electronic registration and membership database until NFA has assigned it a unique identifying code and password;

      (B) Each applicant, Member and Associate is responsible for maintaining the security and confidentiality of its identifying code and password and those of the persons whom it authorizes, if permitted, to make electronic registration filings on its behalf. NFA's electronic registration and membership database shall record and store the identifying code of each person accessing NFA's database and shall logically associate in the database such identifying code with any electronic filing made by the person using such identifying code. The person whose identifying code is used to make an electronic filing will be deemed to have made such filing;

      (C) Each FCM, IB, CPO or CTA applicant or Member shall make available any person it has authorized to make or actually performing duties related to electronic filings, for testimony in court or before the Commission, NFA or any contract market or DTF regarding the authentication, integrity or accuracy of any electronic filing; and

      (D) The ability to electronically access NFA's registration and membership database is a privilege and not a right. NFA may disable any person's identifying code and password and terminate the person's ability to access the database at any time, without notice or a hearing, in NFA's sole discretion, if NFA believes that the person has not complied with this Bylaw or any procedures that NFA establishes to implement this Bylaw.

    (v) Any required application fee shall be sent to the Secretary for processing, in accordance with such procedures as shall be adopted by the Membership Committee.

    (vi) As soon as practicable after the application is received and reviewed, the Secretary shall notify the applicant of the action taken (See paragraph (g) below).

[¶ 4029.7] (g) Denial and Revocation.
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    (i) If the President has reason to believe that: (1) an applicant for membership or registration with NFA as an Associate does not meet the qualifications set forth in this Chapter for NFA membership or association with a Member, as the case may be; (2) a Member or registered Associate does not meet the qualifications set forth in this Chapter for continuation as a Member or Associate; or (3) the person has submitted an intentionally incomplete, inaccurate or otherwise false application to NFA for membership or registration as an Associate, the President shall promptly so notify the person in writing and furnish a copy of the notice to the Membership Committee, setting forth the specific grounds for the determination. The person shall be given an opportunity to show to the President that the qualifications are met, or that the application is not intentionally incomplete, inaccurate or false. If the person requests, or if the Membership Committee orders, a hearing shall be held before the Membership Committee or its designated Subcommittee, and a record shall be kept. Such designated Subcommittee shall consist of at least three members of the Membership Committee. At least one-third of the members of the designated Subcommittee shall not be NFA Members or Associates or employees of an NFA Member. Each member of the designated Subcommittee shall be appointed by a majority of the Membership Committee. The person may be represented at the hearing, and submit evidence in the proceeding, call and examine witnesses, examine the evidence upon which the President's determination was based, and, in the discretion of the Membership Committee or its designated Subcommittee, present written or oral argument. No member of the Membership Committee or a designated Subcommittee shall participate in a membership action if the member, or any person with whom the member is connected, has a finanial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 708(c).

    (ii) If a hearing before the Membership Committee is held, the Committee or Subcommittee shall make a final, written determination upon the record before it, setting forth the specific grounds for its determination. Such determination shall include the specific grounds for the denial, bar, expulsion or restriction; the findings made concerning those grounds; and an explanation of the result reached in light of the grounds of ineligibility found and the findings made. A copy of the determination shall promptly be sent to the person.

    (iii) (A) The Respondent may appeal any adverse decision of the Membership Committee or Subcommittee issued under Bylaw 301(g)(ii) to the Appeals Committee by filing a written notice of appeal with NFA within 15 days after the date of the decision. The notice must describe those aspects of the membership action to which exception is taken, and must contain any request by the Respondent to present written or oral argument.

    (B) The Appeals Committee may also order review of any decision of the Membership Committee or Subcommittee issued under Bylaw 301(g)(ii). If such a review will be conducted, the Appeals Committee will give written notice to the Respondent within 15 days of the date of the decision. Such review may be conducted by the Appeals Committee:

      (1) on its own motion, or

      (2) pursuant to a petition filed by the Registration and Membership Department, the granting of which shall be discretionary with the Appeals Committee. The petition will state why the Registration and Membership Department is seeking review and must contain any request by the Registration and Membership Department to present written or oral argument.

    (C) The Respondent's filing of a notice of appeal under paragraph (A) above or the institution by the Appeals Committee of its own review under paragraph (B) above shall operate as a stay of the effective date of the membership order, until the Appeals Committee renders its decision.

    (D) No member of the Appeals Committee shall participate in the proceeding if the member participated in any prior stage of the membership proceeding (other than the review of a settlement offer submitted under Registration Rule 509) or if the member, or any person with which the member is connected, has a financial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 708(c). Except for good cause shown, the appeal or review shall be conducted solely on the record before the Membership Committee or Subcommittee, the written exceptions filed under paragraph (a) above, and such written or oral arguments of the parties as the Appeals Committee may authorize.

    (E) If the Appeals Committee authorizes written argument, briefs shall be filed as follows unless otherwise ordered by the Appeals Committee:

      (1) the party required to submit the initial brief shall file it with NFA's Legal Docketing Department and serve it on the other parties to the appeal within 30 days after the Appeals Committee issues an order authorizing written argument;

      (2) the responding party shall file its brief with NFA's Legal Docketing Department and serve it on the other parties to the appeal within 30 days after service of the initial brief;

      (3) the party which filed the initial brief may file an answer to the responding brief with NFA's Legal Docketing Department and serve it on the other parties to the appeal within 10 days after service of the responding party's brief;

      (4) the initial brief or responding brief of any party shall not exceed 35 pages and the answer to the responding brief shall not exceed 10 pages, exclusive of any table of contents, table of cases, index and appendix containing transcripts of testimony, exhibits, rules and regulations; and

      (5) no other written argument on substantive issues raised on appeal will be accepted from the parties or considered by the Appeals Committee.

    (F) Promptly after reviewing the matter, the Appeals Committee shall issue a written and dated decision, based on the weight of the evidence. The decision shall include:

      (1) the specific grounds for the denial, bar, expulsion or restriction and its effective date;

      (2) the finding made by the Appeals Committee concerning those grounds;

      (3) an explanation for the results reached in light of the grounds for ineligibility found;

      (4) a statement that any person aggrieved by the membership action may appeal the action pursuant to Commission Regulations, Part 171, within 30 days of service; and

      (5) a statement that any person aggrieved by the membership action may petition the Commission for a stay of the effective date pursuant to Commission Regulations, Part 171, within 10 days of service.

    (G) The decision of the Appeals Committee shall be final 30 days after the date of service.

[¶ 4029.8] (h) Suspension and Termination of Membership and Associate Membership.
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The membership or Associate membership of any person may be terminated or withdrawn as set forth below. Termination or withdrawal of a person's membership or associate membership shall not relieve the Member or Associate of any responsibility under the NFA Code of Arbitration, Member Arbitration Rules, Bylaws, Compliance Rules, Financial Requirements, Registration Rules, Interpretive Notices or Orders issued by the Executive Committee, Membership Committee, Appeals Committee, Hearing Committee or any designated Subcommittee or Panel of such Committees for activities prior to termination, or of the obligation to pay any dues, assessments, fines, penalties or other charges theretofore accrued and unpaid.

    (i) Termination of Temporary License.

    The termination of the temporary license of any Member or Associate shall also terminate such person's membership or associate membership unless such person remains otherwise eligible for membership under Bylaw 301(a).

    (ii) Withdrawal of Registration.

    The membership of any Member that withdraws all registrations under the Act shall be withdrawn without further prior notice.

    (iii) Termination of Employment as Associate.

    Each Member shall promptly file a Form 8-T, completed and filed in accordance with all pertinent instructions, notifying the Secretary of the termination of employment of any registered or pending Associate with the Member. Unless otherwise provided by these Bylaws or NFA Registration Rules, Members and applicants for membership must file their Form 8-Ts electronically by accessing NFA's registration and membership database in the manner provided by NFA. If such person is no longer listed as an Associate of any Member following such termination, the individual's registration with NFA as an Associate shall.

    (iv) Withdrawal from Membership or Application for Membership.

    A Member may request to withdraw its application for membership at any time before approval or request to withdraw from membership at any time by filing a Form 7-W, completed and filed in accordance with all pertinent instructions. Unless otherwise provided by these Bylaws or NFA Registration Rules, Members and applicants for membership must file their Form 7-Ws electronically by accessing NFA's registration and membership database in the manner provided by NFA. A request to withdraw an application for membership will become effective on the 30th day after the Member files the request, or earlier upon notice from NFA of the granting of such request. A request to withdraw from membership, including a deemed request to withdraw from membership, will become effective on the 30th day after the Member files or is deemed to have made the request, or earlier upon notice from NFA of the granting of such request, unless prior to the effective date NFA notifies the Member in writing that the request is denied because:

      (1) NFA has instituted a proceeding under Bylaw 301(g) or Part 3 of the Compliance Rules;

      (2) NFA is imposing or intends to impose terms or conditions upon such withdrawal from membership;

      (3) The Member is currently the subject of an investigation to determine, among other things, whether the Member has violated, is violating, or is about to violate NFA Bylaws, Compliance Rules, Financial Requirements, Registration Rules, Interpretive Notices or Orders issued by the Executive Committee, Membership Committee, Appeals Committee, Hearing Committee or any designated Subcommittee or Panel of such Committees;

      (4) NFA has requested, is requesting or intends to request from the Member further information pertaining to its request for withdrawal from membership; or

      (5) NFA has determined that it would be contrary to NFA's Articles of Incorporation, Bylaws, Compliance Rules, Financial Requirements, Registration Rules, Interpretive Notices or Orders issued by the Executive Committee, Membership Committee, Appeals Committee, Hearing Committee or any designated Subcommittee or Panel of such Committees, or to the public interest to permit such withdrawal from membership.

    (v) Failure to Notify of Address Change (See Bylaw 301(i)).

    (vi) Default in Payment of Dues or Assessment or Audit Fees (See Bylaw 1303).

    (vii) Suspension and Revocation.

    The membership of any Member or any person associated with a Member whose registration under the Act is suspended shall be suspended for the term of the registration suspension without further prior notice. The membership of any Member or any person associated with a Member whose registration under the Act is revoked shall terminate without further prior notice.

    (viii) Failure to Submit Annual Questionnaire.

    On an annual basis, NFA shall provide each NFA Member FCM for which NFA is the Designated Self-Regulatory Organization, IB, CPO, CTA, and LTM with a questionnaire concerning its business activities. The Member shall complete the questionnaire and submit the completed questionnaire on the date specified thereon. NFA shall deem the failure to file the completed questionnaire within 30 days following such date a request to withdraw from NFA membership, and shall notify the Member accordingly.

[¶ 4029.9] (i) Name and Address.
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(a) Each Member shall at all times register and maintain with the Secretary its correct name and principal address, and the correct name and address of each registered Associate employed by the Member. Except as provided in subsection (b) of this Bylaw, the principal address of each Member and the address of each registered Associate currently on file with NFA shall be deemed by NFA the correct address for delivery to the Member or Associate of any written communication, document or notice from NFA. Delivery of any written communication, document or notice shall be complete upon mailing, delivery to a generally recognized overnight courier service or delivery to a messenger service. The failure of a Member to notify NFA of a change in the Member's principal address shall constitute grounds for summary suspension or termination of the NFA membership of such Member by order of the President on seven days' written notice.

(b) Each Member may provide to NFA, and if provided, shall maintain, in the manner required by NFA, one or more email addresses for the purpose of receiving communications, documents or notices from NFA. Unless a different method of delivery is specifically required, NFA may deliver any communication, document or notice to the email address or addresses currently on file. The email address or addresses currently on file shall be deemed by NFA the correct address or addresses for delivery to the Member of the communication, document or notice by email. Delivery of any communication, document or notice by email shall be complete upon sending.

[¶ 4029.10] (j) Notice.
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NFA may provide any notice required by Bylaw 301 electronically unless written notice is specifically required. Notices provided electronically shall be complete upon display in NFA's Online Registration System. Notices provided in writing shall be complete upon mailing.

[¶ 4030] BYLAW 302. ADMISSION TO MEMBERSHIP, OR REGISTRATION AS AN ASSOCIATE, ON A CONDITIONAL BASIS.
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The Membership Committee may admit an applicant to membership, or grant an applicant registration as an Associate, subject to such terms and conditions as the Committee deems appropriate.

[¶ 4031] BYLAW 303. RIGHTS AND LIABILITIES OF MEMBERS.
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The private property of the Members shall not be subject to the payment of NFA's debts or liabilities to any extent whatsoever, except that Members shall be liable to NFA for dues, assessments, fees, and similar charges imposed on them by NFA. With the Board's approval, a Member may receive compensation for services rendered to NFA and reimbursement for expenses, including overhead, reasonably incurred on behalf of NFA, and may be repaid for loans or other credit extended by the Member to NFA.

[¶ 4032] BYLAW 304. TRANSFER OF MEMBERSHIP.
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Membership in NFA shall not be transferable or assignable.

[¶ 4033] BYLAW 305. REGISTRATION RULES.
(Click Here to Print this Rule) [Adopted effective July 28, 1983. Effective dates of amendments: November 29, 1983; May 4, 1984; November 5, 1984; December 3, 1984; December 16, 1984; March 1, 1985; September 30, 1985; January 28, 1986; June 13, 1986; September 23, 1986; January 2, 1987; March 26, 1987; July 1, 1987; April 4, 1988 and August 1, 1994.]

Subject to Articles III and XI and Bylaw 1506, the Board shall adopt Registration Rules in accordance with which NFA shall perform the portion of the registration functions under the Act which it is required or authorized by the Commission to perform pursuant to Section 8a(10) or Section 17(o) of the Act and in accordance with which NFA shall determine proficiency for purposes of determining fitness to be registered under the Act (except with respect to floor brokers and floor traders) and for purposes of determining membership qualification under Bylaw 301(d), which rules shall be deemed a part of these Bylaws.

[¶ 4034] BYLAW 306. FOREX DEALER MEMBERS.
(Click Here to Print this Rule) [Adopted effective June 28, 2002. Effective dates of amendments: December 1, 2003; June 13, 2005; and February 13, 2007.]

(a) Except as provided in section (b), Members of NFA are Forex Dealer Members if they are the counterparty or offer to be the counterparty to forex transactions (as defined in Bylaw 1507(b)).

(b) The following Members are not Forex Dealer Members:

    (i) Entities described in subsection (I) and subsections (IV) through (VI) of Section 2(c)(2)(B)(ii) of the Act;

    (ii) Entities described in subsection (II) of Section 2(c)(2)(B)(ii) of the Act that are members of another futures association registered under Section 17 of the Act or of a national securities association registered under Section 15A(b) of the Securities Exchange Act of 1934; and

    (iii) Entities described in subsection (III) of Section 2(c)(2)(B)(ii) of the Act based on their affiliation with an entity described in subsection (II) of Section 2(c)(2)(B)(ii) of the Act that is a member of another futures association registered under Section 17 of the Act or of a national securities association registered under Section 15A(b) of the Securities Exchange Act of 1934.

CHAPTER 4. MEMBER MEETINGS AND ELECTIONS
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[¶ 4053] BYLAW 401. PLACE OF MEETING.
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Meetings of NFA Members may be held at such place, either in Delaware or elsewhere, as may be designated by the Board or the officers calling the meeting. If no designation is made, the place of meeting shall be NFA's principal office in Chicago.

[¶ 4059] BYLAW 402. ANNUAL MEETINGS.
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Beginning with a calendar year of 1983, the annual meeting of the Members shall be in February of each year, for the transaction of such business as may come before the meeting. The meeting date shall be fixed and announced by the Board not less than 45 days before such date.

[¶ 4065] BYLAW 403. SPECIAL MEETINGS.
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Special meetings of the Members may be called by the Chairman, the President or the Board. Special meetings shall also be called by the President when requested in writing by at least 10 percent of the Members. This request must state the purpose or purposes for which the special meeting is called, and the business transacted at the meeting shall be limited to the purpose recited in the request.

[¶ 4071] BYLAW 404. NOTICE OF MEETINGS.
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A written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting requested by Members, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 40 days before the date of the meeting, either personally or by mail, by or at the direction of the Secretary, to each Member who appears on the rolls of NFA as of the date of the notice. If mailed, the notice shall be deemed delivered when deposited in the United States mail, addressed to the Member at his or her address as it appears on NFA records, with postage prepaid. Appearance at a meeting by a Member shall constitute waiver of any objection relating to the issuance, receipt or content of the meeting notice.

[¶ 4077] BYLAW 405. VOTING; QUORUM.
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All voting by Members shall be conducted by written ballot, either mailed or delivered to the Secretary. A Member may withdraw a written ballot before the counting of ballots by instructing the Secretary to withdraw the ballot and by furnishing the Secretary with a new ballot. The Board shall establish procedures for the submission, verification and counting of ballots. Voting by proxy shall not be permitted. One hundred (100) Members shall constitute a quorum at any meeting of the Members. If a quorum is not present at a meeting, the Members in attendance may act to adjourn the meeting.

[¶ 4083] BYLAW 406. ELECTIONS.
(Click Here to Print this Rule) [Effective dates of amendments: February 7, 1986; January 1, 1990; August 3, 1990; October 16, 1992; October 15, 2001; and October 9, 2007.]

The Annual Election shall be held on the third Tuesday in January, at which the contested vacancies on the Board and Nominating Committee shall be filled. Before the October 15 preceding the election, the Secretary shall:

    (1) notify all Members in the FCM and LTM, IB, CPO and CTA categories of the elected Directors and the members of the Nominating Committee whose terms will expire at the Annual Election, and

    (2) request the submission to the Nominating Committee of the names of eligible persons to fill those positions.

Before the November 20 preceding the election, the Nominating Committee shall submit its list of nominees for the positions to the Secretary, who shall promptly notify the Members of the nominations. Other nominations may be made by petition, as prescribed in the Articles. Each petition must identify the position to which the nomination pertains. Petitions must be received by the Secretary within 21 days of the issuance of the Secretary's notification of the candidates proposed by the Nominating Committee. Promptly after the expiration of the period within which petitions may be submitted, the Secretary shall notify the Members of all of the candidates for Director and member of the Nominating Committee. In the event of a contested election in any of the FCM and LTM, IB, or CPO and CTA categories, the Secretary shall cause written ballots to be sent to all Members in that category by December 15. Promptly after December 31 of the year immediately preceding the election, the Secretary shall notify the contract market Members that shall have representatives on the Board during the current calendar year. Provided, however, that if an election is held pursuant to Article VII, Section 2(a)(ii)(b), then the Secretary shall request the contract market Members eligible to have a representative in accordance with Article VII, Section 2(a)(ii)(b) to nominate eligible persons to represent such contract market Members. In the event of a contested election in the contract market category, the Secretary shall cause written ballots to be sent to all contract market Members eligible to vote in accordance with Article VII, Section 2(a)(ii)(b) by January 10.

[¶ 4089] BYLAW 407. INTERIM BOARD AND INTERIM COMMITTEES.
(Click Here to Print this Rule) [Effective dates of amendments: October 15, 2001.]

The Directors holding office and all members of the Executive Committee, Nominating Committee, Appeals Committee and Membership Committee ("Committees") as of September 1, 2001 shall constitute an interim Board of Directors and interim Committees. The terms of all interim Directors and interim Committee Members shall end on the date of the Board's regular annual meeting in 2002. The interim Board and interim Committees shall have all the powers of the Board of Directors and Committees, respectively except the power to adopt, amend or repeal Articles.

CHAPTER 5. BOARD OF DIRECTORS
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[¶ 4095] BYLAW 501. GENERAL POWERS AND DUTIES.
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NFA's property, business and affairs shall be managed by its Board, and the Board may exercise all such powers of NFA as are directed, required or permitted by law, the Articles or these Bylaws to be exercised by the Board.

[¶ 4101] BYLAW 502. TERM OF OFFICE.
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Each Director shall hold office for the term prescribed in the Articles and until his successor shall have been duly elected and qualified, or until the Director's death, resignation or removal. Directors need not be Delaware residents.

[¶ 4107] BYLAW 503. REMOVAL OF DIRECTORS.
(Click Here to Print this Rule) [Effective dates of amendments: February 7, 1986; January 1, 1990; July 30, 1990; October 15, 2001 and October 9, 2007.]

Notwithstanding the provisions of Bylaw 515, Directors may be removed from office as follows:

    (a) Any Director representing a contract Market Member described in Article VII, Section 2(a)(ii)(b) and any FCM and LTM, IB or CPO and CTA Director may be removed by a majority of the Members eligible to elect the Director whenever, in their judgment, the best interests of NFA will be served thereby.

    (b) Upon recommendation of the Executive Committee, any Director may be removed by two-thirds of the Directors present and voting at a duly convened meeting of the Board whenever, in their judgment, the best interests of NFA will be served thereby.

[¶ 4113] BYLAW 505. RESIGNATIONS.
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Any Director may resign at any time by giving written notice to the Chairman, President or Secretary. The resignation shall take effect at the time set forth therein, and, unless otherwise specified therein, the acceptance of the resignation shall not be necessary to make it effective.

[¶ 4119] BYLAW 506. REGULAR MEETINGS.
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The Board's regular annual meeting shall be held in February, for the election of Officers and the appointment of Committee members. The date, time and place of the meeting shall be fixed by the Board. The Board may by resolution specify the time and place, either in Delaware or elsewhere, for the holding of additional regular meetings without notice other than such resolution.

[¶ 4125] BYLAW 507. SPECIAL MEETINGS.
(Click Here to Print this Rule) [Effective dates of amendments: August 16, 1993 and October 15, 2001.]

[¶ 4125.1] (a) General.
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Special meetings of the Board shall be held at the request of the Chairman, the President, or any 10 Directors. The date and place of the meeting shall be determined by the Chairman and specified in the notice of the meeting.

[¶ 4125.2] (b) Notice of Emergencies.
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Notice of each special meeting shall be provided in accordance with such procedures as the Board may specify by resolution. The Chairman shall cause notice of the meeting to be given at the earliest practicable time, and, except in unusual circumstances, at least two days before the date on which the meeting is to be held.

Attendance of a Director at the meeting shall constitute a waiver of notice of the meeting, except where a Director attends a meeting exclusively for the limited purpose of objecting to the transaction of any business thereat on the ground that the meeting shall be limited to the matters specified in the notice of such meeting.

In the event of an emergency (as defined herein), the Chairman or President may call a meeting on one-hour notice to all Directors. Such notice may be given by telephone, telegraph or other means. The business of the meeting shall be limited to the emergency. A quorum shall consist of 14 8 Directors, provided there is present at least one contract market Director, one FCM Director and one CPO, CTA or Public Representative Director (See Article VII, Sections 2(a)-(c)). For purposes of this Bylaw, an emergency shall exist when the Chairman or President determines that, because of an unusual, unforeseeable and adverse circumstance, it is necessary to hold a meeting on one hour notice.

[¶ 4131] BYLAW 508. ADJOURNMENT; LACK OF QUORUM.
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In the absence of the quorum, a majority of the Directors present and voting may adjourn the meeting to a day certain and, except in emergencies or other unusual circumstances, the Secretary shall give all absent Directors five days' notice of such adjourned date.

[¶ 4137] BYLAW 509. MANNER OF VOTING BY DIRECTORS.
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The Directors who are physically present at a regular or special Board meeting may adopt for that meeting a procedure whereby, for quorum purposes or otherwise, any Director not physically present may be deemed present if the Director is able to communicate with each other Director who is deemed to be present, and to participate in the proceedings of the meeting, by telephone or otherwise.

[¶ 4143] BYLAW 510. INFORMAL ACTION BY DIRECTORS.
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Any action that must or may be taken at a Board meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all Directors then in office. This consent shall constitute a waiver of notice and meeting and shall have the same effect as a unanimous vote of all Directors.

[¶ 4149] BYLAW 511. INTERPRETATION OF NFA REQUIREMENTS.
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The Board shall have authority to interpret any NFA requirement. Any such interpretation of the Board shall be final and conclusive.

[¶ 4151] BYLAW 512. VOTING ON FLOOR BROKER OR FLOOR TRADER REGISTRATION RESPONSIBILITIES.
(Click Here to Print this Rule) [Adopted effective September 23, 1986. Effective dates of amendments: April 26, 1993.]

NFA will not seek or accept any authority in connection with the registration of floor brokers or floor traders that exceeds the authority granted to NFA in the initial Commission orders authorizing NFA to perform certain floor broker and floor trader registration functions or any other authority sought or accepted by NFA under the terms of this Bylaw, without the consent of contract market directors representing two-thirds of contract market Members.

[¶ 4152] BYLAW 513. DIRECTORS ACTING AS COUNSEL IN NFA PROCEEDINGS.
(Click Here to Print this Rule) [Adopted effective July 1, 1987.]

No Director shall represent or appear as counsel on behalf of any person involved in an NFA investigation or a registration, membership or disciplinary proceeding undertaken by NFA.

[¶ 4153] BYLAW 514. PROHIBITION AGAINST USE OF NON-PUBLIC INFORMATION.
(Click Here to Print this Rule) [Adopted effective June 15, 1988. Effective dates of amendments: December 4, 2000.]

No Director or functional equivalent thereof shall use or disclose material, non-public information, obtained as a result of participation on the Board of Directors or any subcommittee of the Board of Directors, for any purpose other than the performance of official duties as a Director or subcommittee member.

[¶ 4154] BYLAW 515. QUALIFICATIONS OF DIRECTORS.
(Click Here to Print this Rule) [Adopted effective June 2, 1990. Effective dates of amendments: December 10, 1993.]

    (a) No individual shall be eligible to serve as a Director if such person:

      (i) is subject to any of the disqualifications set forth in CFTC Regulation 1.63(b);

      (ii) has been convicted of a felony within the prior 10 years; or

      (iii) is subject to a Member Responsibility Action or Associate Responsibility Action which is currently in effect.

    (b) In the event that a Director becomes disqualified after election to the Board, the vacancy shall be filled as prescribed by Article VII, Section 8. If the sanction is stayed or overturned on appeal before the vacancy is filled, the Director shall be entitled to resume his seat on the Board.

    (c) NFA shall publish a list of those Rules which, if violated, would constitute a disciplinary offense as defined in CFTC Regulation 1.63(a)(6)(i).

(See Interpretive Notice NFA Bylaws 515, 708 and 802: NFA Requirements which Constitute Disciplinary Offenses.)

[� 4155] BYLAW 516. VOTING BY INTERESTED DIRECTORS
(Click Here to Print this Rule) [Adopted effective March 12, 1999.]

No Director may deliberate or vote on any matter that the Director is prohibited from voting on by CFTC Regulation 1.69(b)(1)(i). A director who is prohibited from deliberating or voting on a matter must disclose to NFA staff both the prohibition and the reason for the prohibition before the Board considers the matter.

CHAPTER 6. OFFICERS
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[¶ 4160] BYLAW 601. OFFICERS.
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The officers of NFA shall consist of a Chairman of the Board, a Vice Chairman of the Board, a President, a Secretary, and a Treasurer. The Chairman and Vice Chairman shall be elected by the Board at its regular annual meeting in each year, to hold office until the next regular annual meeting of the Board or until their respective successors are elected and qualified. The Board shall appoint a President, a Secretary, and a Treasurer. Vacancies occurring in any office by death, resignation, removal or otherwise shall be filled by the Board, and such replacement officers shall serve, in the case of the Chairman and Vice Chairman, until their successors are elected, or, in the case of other officers, until their successors are appointed. No single individual may hold any two of the following positions concurrently: Chairman, Vice Chairman, President and Secretary. The Board may provide for such other offices and may appoint incumbents thereto, and assign their respective duties to them, from time to time, as the Board may deem advisable. In its discretion, the Board may execute, on behalf of NFA, contracts of employment with appointed officers.

[¶ 4161] BYLAW 602. CHAIRMAN AND VICE CHAIRMAN.
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The Chairman, and in the Chairman's absence the Vice Chairman, shall preside at all meetings of the Members and of the Board. In the absence of both, the Members or the Board, as the case may be, shall elect a presiding officer for the meeting.

[¶ 4167] BYLAW 603. PRESIDENT.
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The President shall be Chief Executive Officer. As Chief Executive Officer, the President shall have general and active management of NFA business. The President shall see that all orders and resolutions of the Board are carried into effect and may execute bonds, mortgages, and other contracts. The President shall have general superintendence of all other appointed NFA officers and all employees, and shall see that their duties are properly performed. The President shall submit a report of the operations of NFA for the preceding fiscal year to the Members at the annual meeting, and from time to time shall report to the Board all matters which the interests of NFA may require to be brought to its notice.

[¶ 4173] BYLAW 604. SECRETARY.
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The Secretary shall keep or cause to be kept full minutes of all meetings of the Members, the Board and Committees and shall attend the sessions of the Board and act as clerk thereof and record all the acts and votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary shall see that all notices are duly given in accordance with these Bylaws or law, and shall perform such other duties as may be from time to time assigned. The Secretary shall have custody of the corporate seal and shall affix the same to all papers and documents whenever the seal shall be required to be so affixed. The Secretary shall have custody of and properly keep or cause to be kept all the records and books of NFA.

[¶ 4179] BYLAW 605. TREASURER.
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The Treasurer shall keep full and correct account of receipts and disbursements in the books belonging to NFA, and shall deposit all moneys and equivalents to the credit of NFA, in such financial institutions as may be designated by the Board. The Treasurer shall dispose of NFA funds as may be ordered by the Board by general resolution or in specific instances, taking proper vouchers for such disbursements, and shall render to the President and the Board, whenever they may require it, an account of all transactions as Treasurer and of NFA's financial condition.

[¶ 4185] BYLAW 606. RESIGNATIONS.
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Any officer may resign at any time by giving written notice to the Board or the Secretary. Any such resignation shall take effect at the time set forth therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

[¶ 4191] BYLAW 607. REMOVAL.
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The Chairman, Vice Chairman, President, Secretary and Treasurer may be removed by the Board whenever in its judgment the best interests of NFA will be served thereby. Removal of the Chairman and Vice Chairman shall be by the vote of a majority of the total number of Directors then in office. Removal of the President shall be by the vote of not less than two-thirds of the total number of Directors then in office. Removal of the Secretary and Treasurer shall be by a majority vote of the Directors present and voting at any meeting where a quorum is present. Other officers may be removed in the same manner as the Secretary or Treasurer, or by any superior officer upon whom such removal power has been conferred by Board resolution.

CHAPTER 7. COMMITTEES
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[¶ 4197] BYLAW 701. MEMBERSHIP COMMITTEE.
(Click Here to Print this Rule) [Effective dates of amendments: July 1, 1987; October 15, 2001; and February 15, 2005.]

There shall be a Membership Committee, consisting of five Directors and six other persons. At least one of the Directors shall be a public Director and at least three of the six other persons shall not be an NFA Member or an Associate or an employee of an NFA Member. A majority of the Committee members eligible to participate in a proceeding shall constitute a quorum, except that in cases in which a Subcommittee has been designated a quorum shall consist of a majority of such Subcommittee members but no fewer than three. The Committee members shall be proposed by the President and appointed by the Board. The President and the Board shall endeavor to propose and appoint Directors and persons who reflect the various categories of Members described in the Articles. The Committee or its designated Subcommittee shall review actions taken by the President pursuant to the President's authority under Chapter 3 to make the initial determination regarding: (a) applicants for membership in NFA or registration as Associates, and (b) continued eligibility for such membership or registration. Each Committee member shall serve for two years or until the member's successor is appointed and qualified, or until the member's death, resignation, ineligibility or removal. A Committee vacancy shall be filled in the manner prescribed in Bylaw 601 for officers. A Committee member may be removed by the Board for cause.

[¶ 4203] BYLAW 702. APPEALS COMMITTEE.
(Click Here to Print this Rule) [Effective dates of amendments: July 1, 1987; March 15, 1994; October 15, 2001; and January 1, 2005.]

There shall be an Appeals Committee, consisting of five Directors, at least one of whom shall be a Public Director and not more than three of whom shall represent FCMs, IBs, and CPO/CTAs. A majority of the Committee members eligible to participate in a proceeding shall constitute a quorum. The Committee members shall be proposed by the President and appointed by the Board. The President and the Board shall endeavor to propose and appoint Directors who reflect the various categories of Members described in the Articles. The Committee shall hear and decide appeals from and reviews of decisions in disciplinary cases by the Business Conduct Committee or the Hearing Committee under the Compliance Rules. Each Committee member shall serve for two years, or until the member's successor is appointed and qualified, or until the member's death, resignation, ineligibility or removal. A Committee vacancy shall be filled in the manner prescribed in Bylaw 601 for officers. A Committee member may be removed by the Board for cause.

[¶ 4209] BYLAW 703. ADVISORY COMMITTEES.
(Click Here to Print this Rule) [Effective dates of amendments: January 28, 1986 and November 9, 1988.]

The Board shall appoint Advisory Committees, not having or exercising the authority of the Board, including a Committee to advise the Board on FCM matters and a Committee to advise the Board on matters relating to CPOs and CTAs. No person then serving as a member of the Board shall simultaneously serve as a member of any NFA Advisory Committee. Each member of an Advisory Committee shall serve for three years, except that the terms initially established shall be staggered, or until the member's successor is appointed and qualified, or until the member's death, resignation, ineligibility or removal. A vacancy in an Advisory Committee shall be filled in the manner prescribed in Bylaw 601 for officers. A Committee member may be removed by the Board whenever in its judgment the best interests of NFA will be served thereby. No member of an Advisory Committee shall use or disclose material, non-public information, obtained as a result of participation on the Advisory Committee, for any purpose other than the performance of official duties as a member of the Advisory Committee.

[¶ 4215] BYLAW 704. BUSINESS CONDUCT COMMITTEE.
(Click Here to Print this Rule) [Effective dates of amendments: July 1, 1987; June 15, 1988; March 15, 1994; and January 1, 2005.]

There shall be a Business Conduct Committee, consisting of nine individuals who shall be Members, persons connected therewith or members of the public. A majority of the Business Conduct Committee members eligible to participate in a proceeding shall constitute a quorum, except that in cases in which a Panel has been appointed (See Compliance Rule 3-11) a quorum shall consist of a majority of such Panel members but no fewer than three. The members of the Business Conduct Committee shall be proposed by the President and appointed by the Board. The President and the Board shall propose and appoint individuals who reflect the various categories of NFA Members and members of the public. At least three members of the Business Conduct Committee shall not be NFA Members or Associates or employees of NFA Members. Each member of the Business Conduct Committee shall serve for three years, or until the member's death, resignation, ineligibility or removal. A vacancy in the Business Conduct Committee shall be filled in the manner prescribed in Bylaw 601 for officers. A Business Conduct Committee member may be removed by the Board for cause. No Business Conduct Committee member shall use or disclose material, non-public information, obtained as a result of participation on the Business Conduct Committee, for any purpose other than the performance of official duties as a member of the Business Conduct Committee.

[¶ 4217] BYLAW 705. FINANCE COMMITTEE.
(Click Here to Print this Rule) [Adopted effective March 12, 1984. Effective dates of amendments: June 13, 1986 and January 1, 1990.]

There shall be a Finance Committee not having or exercising the authority of the Board, to advise the Executive Committee on matters of NFA financial policy including the establishment of major plans and priorities regarding the commitment and expenditure of NFA funds and the establishment of dues, assessments, fees and other charges upon Members and others. The Finance Committee shall consist of six members as follows:

    (a) NFA's President;

    (b) NFA's Vice Chairman (who shall act as Chairman of the Finance Committee); and

    (c) Four (4) other Directors as follows who shall not also be members of the Executive Committee and who shall be proposed by the Executive Committee and appointed by the Board at the first Board meeting in each fiscal year:

      (i) One (1) Director representing contract markets;
      (ii) One (1) Director representing FCMs, LTMs or IBs;
      (iii) One (1) Director representing CPOs or CTAs; and
      (iv) One (1) Director who is a public representative.

[¶ 4218] BYLAW 706. NOMINATING COMMITTEE.
(Click Here to Print this Rule) [Adopted effective November 9, 1988.]

No member of the Nominating Committee or any subcommittee thereof shall use or disclose material, non-public information, obtained as a result of participation on the Committee or any subcommittee thereof, for any purpose other than the performance of official duties as a member of the Committee or any subcommittee thereof.

[¶ 4219] BYLAW 707. HEARING COMMITTEE.
(Click Here to Print this Rule) [Adopted effective March 15, 1994. Effective dates of amendments: January 1, 2005.]

There shall be a Hearing Committee, consisting of at least 15 individuals who shall be Members, persons connected therewith or members of the public. A majority of the Hearing Committee members eligible to participate in a proceeding shall constitute a quorum, except that in cases in which a Panel has been appointed (See Compliance Rule 3-7) a quorum shall consist of a majority of such Panel members but no fewer than three. The members of the Hearing Committee shall be proposed by the President and approved by the Board. The President and the Board shall propose and appoint individuals who reflect the various categories of NFA Members and members of the public. At least one-third of the members of the Hearing Committee shall not be NFA Members or Associates or employees of NFA Members. Each member of the Hearing Committee shall serve for three years, or until the member's death, resignation, ineligibility or removal. A vacancy in the Hearing Committee shall be filled in the manner prescribed in Bylaw 601 for officers. A Hearing Committee member may be removed by the Board for cause. No Hearing Committee member shall use or disclose material, non-public information, obtained as a result of participation on the Hearing Committee, for any purpose other than the performance of official duties as a member of the Hearing Committee.

[¶ 4220] BYLAW 708. QUALIFICATIONS AND OBLIGATIONS OF MEMBERS OF NFA COMMITTEES.
(Click Here to Print this Rule) [Adopted effective June 2, 1990. Effective dates of amendments: December 10, 1993; March 21, 1994; March 12, 1999 and December 4. 2000.]

    (a) No individual shall be eligible to serve as a member of any NFA Committee or any subcommittee thereof if such person:

      (i) is subject to any of the disqualifications set forth in CFTC Regulation 1.63(b);

      (ii) has been convicted of a felony within the prior 10 years; or

      (iii) is subject to a Member Responsibility Action or Associate Responsibility Action which is currently in effect.

    (b) No member or functional equivalent thereof of any NFA Committee or subcommittee shall use or disclose material, non-public information, obtained as a result of participation on the Committee or subcommittee, for any purpose other than the performance of official duties as a member of the Committee or subcommittee thereof.

    (c) No member of any NFA Committee or subcommittee may deliberate or vote on any matter that the member is prohibited from voting on by CFTC Regulation 1.69(b)(1)(i). A member who is prohibited from deliberating or voting on a matter must disclose to NFA staff both the prohibition and the reason for the prohibition before the Committee or subcommittee considers the matter.

(See Interpretive Notice NFA Bylaws 515, 708 and 802: NFA Requirements which Constitute Disciplinary Offenses.)

CHAPTER 8. ARBITRATION
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[¶ 4221] BYLAW 801. CODE OF ARBITRATION.
(Click Here to Print this Rule)

Subject to Articles III and XI and Bylaw 1506, the Board shall adopt rules constituting a Code of Arbitration which rules shall be deemed a part of these Bylaws.

[¶ 4222] BYLAW 802. QUALIFICATIONS OF MEMBERS OF ARBITRATION PANELS.
(Click Here to Print this Rule) [Adopted effective June 2, 1990.]

    (a) No individual shall be eligible to serve as a Panel member if such person:

      (i) is subject to any of the disqualifications set forth in CFTC Regulation 1.63(b);

      (ii) has been convicted of a felony within the prior 10 years; or

      (iii) is subject to a Member Responsibility Action or Associate Responsibility Action which is currently in effect.

    (b) The Secretary may disqualify an individual from serving on a Panel for conditions other than those set forth in paragraph (a) of this Bylaw and may adopt eligibility standards in addition to those set forth in paragraph (a) of this Bylaw.

    (c) Service on a Panel by an individual who is ineligible for service pursuant to this Bylaw shall not constitute grounds to challenge an award rendered by the Panel.

(See Interpretive Notice NFA Bylaws 515, 708 and 802: NFA Requirements which Constitute Disciplinary Offenses.)

CHAPTER 9. ENFORCEMENT AND DISCIPLINE
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[¶ 4227] BYLAW 901. COMPLIANCE RULES.
(Click Here to Print this Rule)

Subject to Articles III and XI and Bylaw 1506, the Board shall adopt compliance rules for the enforcement of NFA requirements and the disciplining of Members and Associates for violating those requirements, which rules shall be deemed a part of these Bylaws.

CHAPTER 10. FINANCIAL REQUIREMENTS
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[¶ 4233] BYLAW 1001. FINANCIAL REQUIREMENTS.
(Click Here to Print this Rule) [Effective dates of amendments: July 27, 1983.]

Subject to Articles III and XI and Bylaw 1506, the Board shall adopt minimum financial and related reporting requirements, which rules shall be deemed a part of these Bylaws.

CHAPTER 11. DOING BUSINESS WITH NON-MEMBERS
(Click Here to Print this Section)

[¶ 4239] BYLAW 1101. PROHIBITION.
(Click Here to Print this Rule) [Effective dates of amendments: July 27, 1983; January 1, 1990; and August 21, 2001.]

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;

    (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.

    (See Interpretive Notice Compliance with NFA Bylaw 1101.)

[¶ 4245] BYLAW 1102. EFFECTIVE DATE OF PROHIBITION.
(Click Here to Print this Rule)

The Board may establish such effective date or dates for Section 1101, as to any category or subcategory of persons or programs, as it deems appropriate in light of NFA resources and the prudent initiation of particular NFA operations and programs.

CHAPTER 12. PROPERTY AND INVESTMENTS
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[¶ 4251] BYLAW 1201. PROPERTY.
(Click Here to Print this Rule)

All property, whether real, personal or mixed, received by NFA shall be held by NFA or disposed of by it on such terms and conditions not inconsistent with the Articles as the Board shall determine.

[¶ 4257] BYLAW 1202. INVESTMENTS.
(Click Here to Print this Rule)

Unless otherwise specified by the terms of a particular gift, bequest, devise, grant or other instrument, NFA funds may be invested, from time to time, in such manner as the Board may deem advantageous without regard to restrictions applicable to trustees or trust funds.

CHAPTER 13. DUES AND ASSESSMENTS
(Click Here to Print this Section)

[¶ 4263] BYLAW 1301. SCHEDULE OF DUES AND ASSESSMENTS.
(Click Here to Print this Rule) [Effective dates of amendments: January 10, 1983; July 27, 1983; November 29, 1983; February 27, 1984; April 1, 1984; June 4, 1985; January 28, 1986; July 1, 1988; May 22, 1989; July 1, 1989; January 1, 1990; July 1, 1991; July 1, 1993; January 1, 1994; July 1, 1994; January 1, 1995; January 1, 1998; July 1, 1999; July 1, 2001; October 15, 2001; January 1, 2002; April 1, 2002; July 1, 2002; September 9, 2002; January 1, 2003; September 15, 2003; December 1, 2003; July 1, 2004; January 1, 2005; April 30, 2006; December 4, 2006; October 1, 2007; and January 1, 2008.]

Subject to the provisions of Article XII, dues and assessments of Members shall be as follows:

[¶ 4263.1] (a) Contract Markets.
(Click Here to Print this Rule)

Each contract market Member shall pay to NFA an assessment calculated on the basis of $.005 for each round-turn transaction in a commodity futures contract (purchase and sale or sale and purchase) executed on the contract market, except that in any NFA fiscal year, the total of such assessments paid by a contract market Member that had transaction volume of more than 20 percent of aggregate contract market transaction volume during that fiscal year shall not be more than $150,000 and the total of such assessments paid by a contract market Members that had transaction volume of 20 percent or less of aggregate contract market transaction volume during that fiscal year shall not be more than $100,000. A specific contract market's transaction volume shall be the number of commodity futures contracts entered into on the contract market. The aggregate contract market transaction volume shall be the number of such contracts entered into on all U.S. contract markets. The number of contracts entered into on a contract market shall be adjusted where necessary because of differences in sizes of contracts (e.g., one 5,000 oz. contract for a particular commodity would equal five 1,000 oz. contracts for that commodity for purposes of the computation).

[¶ 4263.2] (b) FCM Members.
(Click Here to Print this Rule)

    (i) Each FCM Member shall pay to NFA an assessment equal to:

      (A) $.02 for each commodity futures contract traded on or entered into subject to the rules of a contract market (other than an option contract) on a round-turn basis;

      (B) $.01 for each option contract traded on or entered into subject to the rules of a contract market on a per trade basis;

      (C) $.02 for each security futures contract, as defined in Section 1a(31) of the Act, traded on a round-turn basis, carried by it in a commodity futures account,

    carried by it for a customer other than: (1) a person having privileges of membership on a contract market where such contract is entered (except that this exemption does not apply to transactions by commodity pools operated by NFA Member CPOs); (2) a business affiliate of such FCM that directly or indirectly owns 100 percent of or is owned 100 percent by or has 100 percent ownership in common with such FCM provided such FCM has privileges of membership on the contract market where such contract is entered; or (3) an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM;

      (D) $.02 for each commodity futures contract traded on or entered into subject to the rules of a foreign board of trade (other than an option contract) on a round-turn basis;

      (E) $.01 for each option contract traded on or entered into subject to the rules of a foreign board of trade on a per trade basis,

    carried by it for a customer other than on an omnibus account basis for another FCM Member for which assessments are payable to NFA by the other FCM; and

      (F) $.01 for each dealer option contract on a per trade basis carried by it for a customer other than a business affiliate of such FCM that directly or indirectly owns 100 percent of or is owned 100 percent by or has 100 percent ownership in common with such FCM Member:

      Provided, however, such assessments shall be suspended or adjusted by the Board for a period not to exceed three months when in the judgment of the Board such action is appropriate in light of NFA's overall financial goals. The FCM Member shall invoice these assessments to its customer and shall remit the amount due to NFA; and

    (ii) Each FCM for which NFA serves as the DSRO, as defined in NFA Financial Requirements Section 2, shall pay to NFA annual dues of $5,625 and each FCM for which NFA does not serve as the DSRO as defined in NFA Financial Requirements Section 2, shall pay to NFA annual dues of $1,500.

[¶ 4263.3] (c) LTM Members.
(Click Here to Print this Rule)

    (i) Each LTM Member shall pay to NFA an assessment equal to $.09 for each leverage contract purchased from or sold to the LTM by a customer: Provided, however, such assessments shall be suspended or adjusted by the Board for a period not to exceed three months when in the judgment of the Board such action is appropriate in light of NFA's overall financial goals. The LTM Member shall invoice these assessments to its customers and shall remit the amount due to NFA; and

    (ii) Each LTM Member shall pay to NFA annual dues of $750.

[¶ 4263.4] (d) Other Members.
(Click Here to Print this Rule)

Annual dues for the other membership categories shall be as follows:

    (i) Commodity Trading Advisor-$750
    (ii) Commodity Pool Operator-$750
    (iii) Introducing Broker-$750

    Subject to the two-thirds majority voting requirements contained in Article XI, Section 1, the Board may in its discretion waive or establish lower annual dues for particular Members.

[¶ 4263.5] (e) Forex Dealer Members.
(Click Here to Print this Rule)

    (i) Each Forex Dealer Member shall pay to NFA annual dues in the amount provided under section (b)(ii) of this bylaw plus a surcharge of $44,375 if its gross annual revenue from the activities described in Bylaw 306(a) is $500,000 or less, a surcharge of $69,375 if its gross annual revenue from those activities is more than $500,000 but not more than $2,000,000, a surcharge of $94,375 if its gross annual revenue from those activities is more than $2,000,000 but not more than $5,000,000, and a surcharge of $119,375 if its gross annual revenue from those activities is more than $5,000,000. These dues replace the dues that would otherwise be payable based on the Forex Dealer Member's registration category.

    (ii) Each Forex Dealer Member that is subject to discipline for the activities of solicitors and account managers shall pay a separate annual fee as follows payable on the firm's annual renewal date — for 1 to 4 solicitors and account managers, the fee is $5,000; for 5 to 19 solicitors and account managers the fee is $10,000; for 20 to 99 solicitors and account managers the fee is $25,000; and for 100 or more solicitors and account managers the fee is $50,000. In determining whether this fee applies, a Forex Dealer Member must calculate the highest number of solicitors and account managers it was responsible for at any one point of time during the year. This number does not include solicitors and account managers that are Members of NFA, meet the criteria in Bylaw 306(b), or would be exempt from Commission registration if they were acting in the same capacity in connection with exchange-traded futures contracts.

    (iii) Each Forex Dealer Member shall pay an assessment of .0001% on the notional value of each initiating (non-rollover) forex transaction (as forex is defined in Bylaw 1507(b)). For transactions with a notional value less than $10,000, the Forex Dealer Member may aggregate separate transactions and pay $.01 on each multiple of $10,000.

Subject to the two-thirds majority voting requirements contained in Article XI, Section 1, the Board may in its discretion waive or establish lower annual dues for particular Members.

(See Interpretive Notice NFA Bylaw 1301: NFA Assessment Fee Questions and Answers for FCMs and Interpretive Notice NFA Bylaw 1301: Forms and Procedures for Assessment Fee Computation.)

[¶ 4269] BYLAW 1302. PAYMENT OF DUES AND ASSESSMENTS.
(Click Here to Print this Rule) [Effective dates of amendments: April 11, 1983; July 27, 1983; November 29, 1983; December 30, 1986; January 1, 1990; July 1, 1991 and October 1, 2007.]

Annual dues and fees shall be payable in advance on the first day of January of each year, or at such other time or times as the Board shall determine. Members paying dues or fees after the date they are payable shall be subject to a late payment charge of $25 per month or portion thereof. Assessments based upon futures or forex transactions shall be payable to NFA within 30 days after the end of each month for transactions effected during that month. In addition to such assessments each FCM, Forex Dealer Member, and LTM shall pay to NFA an amount equal to one month's interest at an annual rate of 10 percent (or such other rate of interest as the President, with the concurrence of the Executive Committee, may determine from time to time) on the amount of any such assessment payable by that Member for every month or fraction thereof such assessment payment is late. If a Member claims overpayment of its assessments based upon futures or forex transactions, the Member may request a refund at any time prior to the end of the 18th calendar month following the due date for payment of assessments for the month with respect to which such claimed overpayment was made. After that time, no refunds, adjustments or offsets will be made or allowed. Except as the Board may otherwise provide by resolution, each Member shall pay dues and assessments, as applicable, for each category in which the Member — or an affiliate thereof, unless such affiliate is a Member in its own right — is registered with the Commission and conducts business.

[¶ 4275] BYLAW 1303. DEFAULT AND DEEMED REQUEST TO WITHDRAW MEMBERSHIP.
(Click Here to Print this Rule) [Effective dates of amendments: June 4, 1985; January 1, 1990; January 1, 2001; March 18, 2003 and October 1, 2007.]

When any Member shall be in default in the payment of dues or annual fees for a period of 30 days or assessments or audit fees for a period of three months after such dues, annual fees, assessments or audit fees became payable, NFA shall deem that Member's non-payment of dues, annual fees, assessments or audit fees to be a request to withdraw from NFA membership and shall notify that Member accordingly. NFA may provide the notice required by this Bylaw electronically.

[¶ 4276] BYLAW 1304. AUDIT FEES FOR LTMS.
(Click Here to Print this Rule) [Adopted effective January 1, 1990.]

Each LTM Member shall pay an audit fee to NFA each year within 30 days of the date the invoice is mailed by NFA. The Board of Directors shall determine the audit fee each year based on the anticipated cost of such audits. If the fee paid is less than the actual cost of auditing the LTM during the calendar year for which it was paid, NFA will invoice the LTM for the difference, and the LTM Member shall pay the invoiced amount within 30 days. If the fee paid is greater than the actual costs of auditing the LTM, the excess will be applied to the fee of the following year. In addition to such audit fee, each LTM shall pay to NFA an amount equal to one month's interest at an annual rate of 10 percent (or such other rate of interest as the President, with the concurrence of the Executive Committee, may determine from time to time) on the amount of any such audit fee payable by that LTM for every month or fraction thereof such audit payment is late.

CHAPTER 14. INDEMNIFICATION AND LAWSUITS AGAINST NFA.
(Click Here to Print this Section)

[¶ 4281] BYLAW 1401. INDEMNIFICATION.
(Click Here to Print this Rule)

NFA shall, to the fullest extent permitted by law, indemnify any person who is, or is threatened to be, made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a Director, officer, employee or agent of NFA, or member of a committee of NFA, or is or was serving at NFA's request as a Director, officer, employee, agent or committee member of another entity, against all reasonable expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement, actually incurred by the person in connection with such action, suit or proceeding.

[¶ 4282] BYLAW 1402. LAWSUITS AGAINST NFA.
(Click Here to Print this Rule) [Effective date of amendment: November 12, 2004.]

Any current or former Member or Associate who fails to prevail in a lawsuit or any other type of legal proceeding instituted in a court of law or otherwise against NFA or any of its officers, directors, committee members, volunteers, arbitrators, employees or agents shall pay to NFA any and all reasonable expenses and disbursements, including reasonable attorney's fees, incurred by NFA to defend such lawsuit or proceeding.

CHAPTER 15. MISCELLANEOUS PROVISIONS
(Click Here to Print this Section)

[¶ 4287] BYLAW 1501. CORPORATE SEAL.
(Click Here to Print this Rule) [Effective dates of amendments: August 21, 2001.]

The corporate seal of NFA shall be circular in form bearing the name of the corporation and the word "DELAWARE" in the marginal circle, and the words "Corporate Seal" in the inner circle. This seal may be used by causing it, or a facsimile or equivalent thereof, to be impressed, affixed or reproduced.

[¶ 4293] BYLAW 1502. DEPOSITORIES.
(Click Here to Print this Rule)

All NFA moneys and equivalents not otherwise employed shall be deposited from time to time to the credit of NFA in such financial institutions as may be designated by the Board.

[¶ 4299] BYLAW 1503. CHECKS, DRAFTS, NOTES, ETC.
(Click Here to Print this Rule)

All checks, drafts or other orders for the payment of money, and all notes or other evidences of indebtedness issued in the name of NFA, shall be signed by such person or persons and in such manner as the Board shall determine from time to time by resolution.

[¶ 4305] BYLAW 1504. FISCAL YEAR.
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The fiscal year of NFA shall begin on the first day of July and end on the last day of June in each year.

[¶ 4311] BYLAW 1505. EFFECTIVE DATES.
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The Board shall determine the effective dates for the Code of Arbitration, Compliance Rules and Financial Requirements.

[¶ 4317] BYLAW 1506. AMENDMENTS TO BYLAWS.
(Click Here to Print this Rule) [Effective dates of amendments: April 11, 1983; January 1, 1990; August 16, 1993 and October 15, 2001.]

No Bylaw may be adopted, amended or repealed except as specified in a written notice sent to each Director at least two weeks prior to the meeting at which the Board considers the same: Provided, however, that such prior notice is not required in an emergency as defined by Bylaw 507, or where a two-thirds majority of all Directors present and voting approves.

[¶ 4323] BYLAW 1507. DEFINITIONS.
(Click Here to Print this Rule) [Effective dates of amendments: February 1, 1988; January 1, 1990; and February 13, 2007.]

Except as provided in this Bylaw, the terms used in these Bylaws shall have the same meaning as in the Articles.

(a) 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;

    (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.

(b) The term "forex" means:

    (1) foreign currency futures and options and any other agreement, contract, or transaction in foreign currency that is offered or entered into on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis;

    (2) offered to or entered into with persons that are not eligible contract participants as defined in Section 1a(12) of the Act; and

    (3) not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade.

    Provided, however, that the term does not include any security that is not a security futures product, any contract of sale that results in actual delivery within two days, or any contract of sale that creates an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business, unless the transaction involves a futures contract or an option.

Such contracts are hereby declared to be proper subjects of NFA regulation and oversight (see Article XVIII, paragraph (k)).

[¶ 4324] BYLAW 1508. SECURITY FUTURES AGREEMENTS.
(Click Here to Print this Rule) [Effective dates of amendments: September 17, 2004.]

Staff may, with the approval of the Executive Committee, enter into one or more agreements with one or more designated contract markets to provide regulatory services to NFA to assist NFA in discharging its obligations under Sections 15A(k) and 19(g) of the Securities Exchange Act of 1934. Any action taken by a designated contract market, or its employees or authorized agents, acting on behalf of NFA pursuant to a regulatory services agreement shall be deemed to be an action taken by NFA; provided, however, that nothing in this provision shall affect the oversight of the designated contract market by the Commodity Futures Trading Commission. Notwithstanding the fact that NFA may enter into one or more regulatory services agreements regarding security futures, NFA shall retain ultimate legal responsibility for, and control of, its self-regulatory responsibilities under the Securities Exchange Act of 1934, and any such regulatory services agreement shall so provide.

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Compliance Rules
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PART 1-DEFINITIONS
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[¶ 5011] RULE 1-1. DEFINITIONS.
(Click Here to Print this Rule) [Effective date of amendments: April 7, 1982; July 27, 1983; January 14, 1988; September 29, 1989; July 24, 2000; August 21, 2001; May 1, 2004; February 13, 2007.]

[¶ 5011.1] (a) "Act" -means the Commodity Exchange Act.

[¶ 5011.2] (b) "Actual Funds" - means the equity in a commodity trading account over which a CTA has trading authority and funds that can be transferred to that account without the client's consent to each transfer.

[¶ 5011.3] (c) "Appeals Committee" -means the Appeals Committee established under NFA Bylaw 702.

[¶ 5011.4] (d) "Associate" -means a person who is associated with a Member within the meaning of the term "associated person" as used in the Act and Commission Rules and who is required to be registered as an "associated person" with the Commission.

[¶ 5011.5] (e) "Business Conduct Committee" -means the Business Conduct Committee established under NFA Bylaw 704.

[¶ 5011.6] (f) "Commission" or "CFTC" -means the Commodity Futures Trading Commission.

[¶ 5011.7] (g) "Commodity Pool Operator" or "CPO" - means a person who is required to register or is registered as a commodity pool operator under the Act and Commission Rules.

[¶ 5011.8] (h) "Commodity Trading Advisor" or "CTA" - means a person who is required to register or is registered as a commodity trading advisor under the Act and Commission Rules.

[¶ 5011.9] (i) "Contract Market" -means an exchange designated by the Commission as a contract market in one or more commodities or licensed by the Commission for the trading of options.

[¶ 5011.10] (j) "Exchange Act" - means the Securities Exchange Act of 1934.

[¶ 5011.11] (k) "Foreign Board of Trade" -means a board of trade, exchange, or market located outside the United States, its territories or possessions.

[¶ 5011.12] (l) "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.

[¶ 5011.13] (m) "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.

[¶ 5011.14] (n) "Forex" - has the same meaning as in Bylaw 1507(b).

[¶ 5011.15] (o) "Forex Dealer Member" - has the same meaning as in Bylaw 306.

[¶ 5011.16] (p) "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;

    (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.

[¶ 5011.17] (q) "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.

[¶ 5011.18] (r) "Hearing Committee" - means the Hearing Committee established under NFA Bylaw 707.

[¶ 5011.19] (s) "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.

[¶ 5011.20] (t) "Leverage Transaction Merchant" or "LTM" -means a person who is required to register or is registered as a leverage transaction merchant under the Act and Commission Rules.

[¶ 5011.21] (u) "Member" -means a Member of NFA other than a contract market.

[¶ 5011.22] (v) "Nominal Account Size" - means the account size agreed to by the client that establishes the level of trading in the particular trading program.

[¶ 5011.23] (w) "Partially-Funded Account" - has the same meaning as in CFTC Regulation 4.10(m).

[¶ 5011.24] (x) "Person" - includes individuals, corporations, limited liability companies, partnerships, trusts, associations and other entities.

[¶ 5011.25] (y) "Qualified Eligible Person" or "QEP" - has the same meaning as in CFTC Regulation 4.7(a).

[¶ 5011.26] (z) "Requirements" -includes any duty, restriction, procedure or standard imposed by a charter, bylaw, rule, regulation, resolution or similar provision.

[¶ 5011.27] (aa) "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
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[¶ 5017] RULE 2-1. CONTRACT MARKET JURISDICTION.
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No Member or Associate shall be charged with an offense under these Rules if the specific conduct alleged to constitute the offense is governed or otherwise regulated by the requirements of a contract market and such Member or Associate is subject to the disciplinary jurisdiction of the contract market for such conduct. The foregoing shall not apply if the contract market has expressly delegated enforcement responsibility to NFA, or if the offense under these Rules is a violation of NFA Financial Standards requirements adopted pursuant to Section 1(b) of Article III or NFA Customer Protection requirements adopted pursuant to Section 1(e) of Article III of the NFA Articles of Incorporation.

[¶ 5023] RULE 2-2. FRAUD AND RELATED MATTERS.
(Click Here to Print this Rule) [Effective date of amendments: March 21, 1983 and July 24, 2000.]

No Member or Associate shall:

    (a) Cheat, defraud or deceive, or attempt to cheat, defraud or deceive, any commodity futures customer;

    (b) Bucket a customer's commodity futures order or engage in a business that is of the nature of a bucket shop;

    (c) Willfully make or cause to be made to a customer a false report, or willfully to enter or cause to be entered for a customer a false record, in or in connection with any commodity futures contract;

    (d) Disseminate, or cause to be disseminated, false or misleading information, or a knowingly inaccurate report, that affects or tends to affect the price of any commodity that is the subject of a commodity futures contract;

    (e) Engage in manipulative acts or practices regarding the price of a commodity futures contract;

    (f) Willfully submit materially false or misleading information to NFA or its agents;

    (g) Effect a commodity trade on a contract market for a person who is subject to a Commission prohibition from trading on any contract market, unless the Member or Associate did not know or have reason to know of the prohibition; or

    (h) Embezzle, steal, purloin or knowingly convert any money, securities or other property received from or accruing to a customer, client or pool participant in or in connection with commodity futures contracts.

    (i) Act in any capacity requiring registration under the Act unless the Member or Associate is either registered in that capacity or exempt from registration.

[¶ 5029] RULE 2-3. SHARING IN PROFITS.
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No Member or Associate shall share, directly or indirectly, in the profits or losses accruing from commodity futures trading in any account of a customer carried by the Member, or another Member, unless the customer's prior written authorization therefor is obtained.

[¶ 5035] RULE 2-4. JUST AND EQUITABLE PRINCIPLES OF TRADE.
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Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business.

[See Interpretive Notice Interpretation of NFA Compliance Rule 2-4: Guideline for the Disclosure by FCMs and IBs of Costs Associated with Futures Transactions and Interpretive Notice NFA Compliance Rule 2-4:Confidentiality Language in Release Agreements.]

[¶ 5041] RULE 2-5. COOPERATION IN NFA INVESTIGATIONS AND PROCEEDINGS.
(Click Here to Print this Rule) [Effective date of amendments: July 24, 2000.]

Each Member and Associate shall cooperate promptly and fully with NFA in any NFA investigation, inquiry, audit, examination or proceeding regarding compliance with NFA requirements or any NFA disciplinary or arbitration proceeding. Each Member and Associate shall comply with any order issued by the Executive Committee, the Membership Committee, the Business Conduct Committee, the Appeals Committee or any NFA hearing or arbitration panel.

[¶ 5047] RULE 2-6. EXPELLED OR SUSPENDED MEMBER OR ASSOCIATE.
(Click Here to Print this Rule) [Effective date of amendments: July 20, 2005; and June 5, 2007.]

No person who has been expelled or suspended or is subject to a similar sanction by NFA in a proceeding brought pursuant to Part 3 of NFA's Compliance Rules that temporarily or permanently prohibits the person from NFA membership or affiliation in any capacity with an NFA Member shall hold himself out as a Member in good standing of NFA, or as affiliated with a Member, as the case may be, during the period during which the sanction is in effect. No Member or Associate shall conduct commodity futures or forex business with such a person during the period the sanction is in effect unless authorized by the Business Conduct Committee, Hearing Committee or the Appeals Committee.

[See Interpretive Notice NFA Compliance Rule 2-6: Conducting Commodity Futures Business With an Expelled or Suspended Member or Associate

[¶ 5053] RULE 2-7. BRANCH OFFICE MANAGERS AND DESIGNATED SECURITY FUTURES PRINCIPALS.
(Click Here to Print this Rule) [Adopted effective September 30, 1992. Effective date of amendments: January 28, 1994; August 21, 2001; December 9, 2005; and December 17, 2007.]

(a) No Member shall allow an Associate to be a branch office manager unless:

    (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

    (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 the Financial Industry Regulatory Authority.

(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."

[¶ 5059] RULE 2-8. DISCRETIONARY ACCOUNTS.
(Click Here to Print this Rule) [Effective date of amendments: July 28, 1983; January 24, 1985; January 14, 1988; March 15, 1994; August 29, 1996; April 23, 1998; July 24, 2000 and August 21, 2001.]

[¶ 5059.1] (a) Grant of Discretion Must Be in Writing.
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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.

[¶ 5059.2] (b) Review of Discretionary Trades.
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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.

[¶ 5059.3] (c) Minimum Experience Requirement.
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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.

[¶ 5059.4] (d) Third-Party Account Controllers.
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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.

[¶ 5059.5] (e) Exception.
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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).

[¶ 5065] RULE 2-9. SUPERVISION.
(Click Here to Print this Rule) [Effective date of amendments: October 29, 1991; January 19, 1993; March 15, 1994; April 23, 2002; and November 1, 2007.]

(a) Each Member shall diligently supervise its employees and agents in the conduct of their commodity futures activities for or on behalf of the Member. Each Associate who has supervisory duties shall diligently exercise such duties in the conduct of that Associate's commodity futures activities on behalf of the Member.

(b) NFA's Board of Directors may require Members which meet specific criteria established by the Board relating to the employment history of its APs or principals or to the total commissions, fees and other charges paid by their customers to adopt supervisory procedures specified by the Board for the supervision of telemarketing. This requirement may, in NFA's discretion, be waived upon a showing by the Member that the Member's current supervisory procedures provide effective supervision over its employees and agents. Any Member seeking such a waiver may submit a written request to 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. Within 30 days after a Member submits a waiver request, the Compliance Director will submit a written response to the panel. The decision of the panel shall be final and shall be based upon the written submissions of the Member and of the Compliance Director.

(c) Each FCM and IB Member shall develop and implement a written anti-money laundering program approved in writing by senior management reasonably designed to achieve and monitor the Member's compliance with the applicable requirements of the Bank Secrecy Act (31 U.S.C. 5311, et. seq.), and the implementing regulations promulgated thereunder by the Department of the Treasury and, as applicable, the Commodity Futures Trading Commission. That anti-money laundering program shall, at a minimum,

    (1) Establish and implement policies, procedures, and internal controls reasonably designed to assure compliance with the applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder;

    (2) Provide for independent testing for compliance to be conducted by Member personnel or by a qualified outside party;

    (3) Designate an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program; and

    (4) Provide ongoing training for appropriate personnel.

[See Interpretive Notice NFA Compliance Rule 2-9: FCM And IB Anti-Money Laundering Program and Interpretive Notice NFA Compliance Rule 2-29: Review of Promotional Material Prior to its First Use and Interpretive Notice Compliance Rule 2-9: Self-Audit Questionnaires and Interpretive Notice Compliance Rule 2-9: Supervision of Telemarketing Activity and Interpretive Notice Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Sites and Interpretive Notice Compliance Rule 2-29 and 2-9: NFA's Review and Approval of Certain Radio and Television Advertisements]

[¶ 5071] RULE 2-10. RECORDKEEPING.
(Click Here to Print this Rule) [Effective date of amendments: April 11, 1983; April 1, 2006 and July 1, 2007.]

(a) Each Member shall maintain adequate books and records necessary and appropriate to conduct its business including, without limitation, the records required to be kept under CFTC Regulations 1.18 and 1.32 through 1.37 for the period required under CFTC Regulation 1.31.

(b) Each FCM Member must either:

    (1) Maintain an office in the continental United States, Alaska, Hawaii, or Puerto Rico responsible for preparing and maintaining financial and other records and reports required by CFTC and/or NFA rules under the supervision of a listed principal and registered associated person of the FCM who is resident in that office; or

    (2) Maintain an office in a jurisdiction that the CFTC has found to have a comparable regulatory scheme for purposes of Part 30 of the CFTC's rules and be subject to that regulatory scheme. This foreign office must be responsible for preparing and maintaining financial and other records and reports required by CFTC and/or NFA rules under the supervision of a listed principal and registered associated person of the FCM who is resident in that office, and the Member must agree to reimburse NFA for any travel, translation, telephone, and similar expenses incurred in connection with inquiries, examinations and investigations of the Member that exceed the normal expenses incurred by NFA in examining an FCM Member located at the closest point in the continental United States, Alaska, Hawaii, or Puerto Rico.

(c) Each Member subject to minimum capital requirements must:

    (1) prepare financial reports required to be filed with the CFTC and/or NFA in English, using U.S. dollars, and according to U.S. accounting standards; and

    (2) maintain a general ledger in English using U.S. dollars.

(d) Each Member must:

    (1) file reports, requests for extensions, and other documents required to be filed with the CFTC and/or NFA in English;

    (2) maintain English translations of all foreign-language promotional material, including disclosure documents and Web sites, distributed to or intended for viewing by customers located in the United States, its territories, or possessions;

    (3) maintain written procedures required by CFTC or NFA rules in English (as well as in any other language if necessary for them to be understood by the Member's employees and agents);

    (4) provide English translations of other foreign-language documents and records and file financial information in U.S. dollars when requested by NFA; and

    (5) make available to NFA (during an examination or to respond to other inquiries) an individual who is authorized to act on the Member's behalf, is fluent in English, and is knowledgeable about the Member's business and about financial matters.

[See Interpretive Notice NFA Compliance Rule 2-10: The Allocation of Block Orders for Multiple Accounts. and Interpretive Notice Compliance Rule 2-10: Orders Eligible For Post-Execution Allocation]

[¶ 5077] RULE 2-11. CUSTOMER ACCOUNTS.
(Click Here to Print this Rule) [Adopted effective September 30, 1982. Effective date of amendments: July 24, 2000.]

No Member FCM, unless a member of a contract market, shall carry customer accounts without prior notice to NFA.

[¶ 5083] RULE 2-12. [RESERVED].
(Click Here to Print this Rule)

[¶ 5089] RULE 2-13. CPO/CTA REGULATIONS.
(Click Here to Print this Rule) [Adopted effective September 29, 1982. Effective date of Amendments: April 11, 1983; July 5, 1984; April 4, 1988; August 24, 1995; October 10, 1996; July 24, 2000 and December 14, 2003.]

(a) Any Member who violates any of CFTC Regulations 4.1, 4.7, 4.12 and 4.16 through 4.41 shall be deemed to have violated an NFA requirement.

(b) Each Member CPO which delivers or causes to be delivered a Disclosure Document under CFTC Regulation 4.21 must include in the Disclosure Document a break-even analysis which includes a tabular presentation of fees and expenses. The break-even analysis must be presented in the manner prescribed by NFA's Board of Directors and must be accurate as of the date of the Disclosure Document.

(c) Each Member required to file any document with or give notice to the CFTC under CFTC Regulations 4.7, 4.12, 4.22, 4.26 or 4.36 shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC. Any CPO Member may file with NFA a request for an extension of time in which to file the annual report required by CFTC Regulation 4.22(c) or a request for approval of a change to its fiscal-year election.

[See Interpretive Notice Interpretation of NFA Compliance Rule 2-13: Guideline for the Disclosure by CPOs and CTAs of "Up Front" Fees and Organizational and Offering Expenses and Interpretive Notice Compliance Rule 2-13: Break-Even Analysis (Board of Directors).]

[¶ 5095] RULE 2-14. COMPLIANCE JURISDICTION.
(Click Here to Print this Rule) [Effective date of amendments: September 29, 1982 and July 24, 2000.]

Any Member or Associate who violates or fails to comply with any NFA requirement shall be subject to appropriate Member or Associate Responsibility Action or disciplinary action, or both, in accordance with these rules.

[¶ 5101] RULE 2-15. [RESERVED]
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[¶ 5107] RULE 2-16. [RESERVED]
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[¶ 5113] RULE 2-17. [RESERVED]
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[¶ 5119] RULE 2-18. [RESERVED]
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[¶ 5125] RULE 2-19. [RESERVED]
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[¶ 5131] RULE 2-20. [RESERVED]
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[¶ 5137] RULE 2-21. [RESERVED]
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[¶ 5143] RULE 2-22. PROHIBITED REPRESENTATIONS.
(Click Here to Print this Rule) [Adopted effective April 22, 1983. Effective date of amendments: August 1, 1985 and August 21, 2001]

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.

[¶ 5149] RULE 2-23. FCM RESPONSIBILITY FOR GUARANTEED MEMBER IBs.
(Click Here to Print this Rule) [Adopted effective February 27, 1984.]

Any Member FCM which enters into a guarantee agreement, pursuant to CFTC Regulation 1.10(j), with a Member IB, shall be jointly and severally subject to discipline under NFA Compliance Rules for acts and omissions of the Member IB which violate NFA requirements occurring during the term of the guarantee agreement.

[¶ 5155] RULE 2-24. QUALIFICATION TESTING OF ASSOCIATED PERSONS OF FCMs.
(Click Here to Print this Rule) [Adopted effective May 4, 1984. Effective date of Amendments: January 1, 1990 and September 9, 2002.]

(a) Testing Requirement.

Subject to the provisions of paragraphs (d) and (e) of Bylaw 301, no FCM, IB, CPO, CTA or LTM Member of NFA shall have associated with it (See Bylaw 301(b)) any person who has not satisfied the applicable proficiency requirements set forth in Registration Rule 401.

(b) Limitations on Activities.

    (i) No person registered with NFA as an Associate of an NFA Member (See Bylaw 301(b)) who has satisfied the requirements of Registration Rule 401 by the use of an alternative to the National Commodity Futures Examination (Series 3) that requires the person to limit their futures-related activities may exceed such limits.

    (ii) No Member of NFA shall have associated with it (See Bylaw 301(b)) any person who has satisfied the requirements of Registration Rule 401 by the use of an alternative to the National Commodity Futures Examination (Series 3) that requires the person to limit their futures-related activities and who exceeds such limits.

[¶ 5161] RULE 2-25. REQUIREMENTS FOR DEALER OPTIONS TRANSACTIONS OF FCMs.
(Click Here to Print this Rule) [Adopted effective November 5, 1984]

Any Member who violates any of the CFTC Part 32 Regulations shall be deemed to have violated an NFA requirement. Each Member required to file any documents with or give notice to the CFTC under the CFTC Part 32 Regulations shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

[¶ 5167] RULE 2-26. FCM AND IB REGULATIONS.
(Click Here to Print this Rule) [Adopted effective January 24, 1985. Effective date of Amendments: February 1, 1996; August 29, 1996; July 24, 2000 and August 21, 2001.]

Any Member or Associate who violates any of CFTC Regulations 1.33, 1.55, 1.56, 1.57, 1.65, 155.3, or 155.4, as applicable, shall be deemed to have violated an NFA Requirement.

[¶ 5173] RULE 2-27. TRANSFER OF CUSTOMER ACCOUNTS.
(Click Here to Print this Rule) [Adopted effective January 24, 1985.]

(a) Upon receipt of a signed instruction from a customer to transfer an account from one Member to another, and provided that such instruction contains the customer's name, address and account number (and, if the transfer is not of the entire account, a description of which portions are to be transferred) and the name and address of the receiving Member, the carrying Member shall confirm to the receiving Member all balances in the account, whether money, securities or other property, and all open positions, within two business days or within such further time as may be necessary in the exercise of due diligence. Within three business days of the day such confirmation is due, or within such further time as may be necessary in the exercise of due diligence, and provided that the receiving Member agrees to accept the account, the carrying Member shall effect the transfer of the balances and positions to the receiving Member.

(b) This rule shall apply only to transfers made at the request of a customer.

(c) This rule shall not prohibit transfers based upon oral requests.

[¶ 5179] RULE 2-28. [RESERVED]
(Click Here to Print this Rule)

[¶ 5185] RULE 2-29. COMMUNICATIONS WITH THE PUBLIC AND PROMOTIONAL MATERIAL.
(Click Here to Print this Rule) [Adopted effective November 19, 1985. Effective date of Amendments: February 1, 1996; August 29, 1996; March 28, 2000; July 24, 2000; December 4, 2000; August 21, 2001 and May 1, 2004.]

(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;

    (5) includes any specific numerical or statistical information about the past performance of any actual accounts (including rate of return)

      (i) 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,

      (ii) in the case of rate of return figures, unless such figures are calculated in a manner consistent with CFTC Regulation 4.25(a)(7) for commodity pools and with CFTC Regulation 4.35(a)(6), as modified by NFA Compliance Rule 2-34(a), for figures based on separate accounts, 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.

    [See Interpretive Notice Compliance Rule 2-29: Use of Promotional Material Containing Hypothetical Performance Results.]

    (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) Supervisory Requirements

Every Member shall adopt and enforce written procedures to supervise its Associates and employees for compliance with this Rule. 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.

[See Interpretive Notice NFA Compliance Rule 2-29: Communications with the Public and Promotional Material and Interpretive Notice NFA Compliance Rule 2-29: Review of Promotional Material Prior to its First Use and Interpretive Notice Compliance Rule 2-29: Use of Promotional Material Containing Hypothetical Performance Results and Interpretive Notice NFA Compliance Rule 2-29: Deceptive Advertising (1996) and Interpretive Notice NFA Compliance Rule 2-29: Deceptive Advertising (1998) and Interpretive Notice Compliance Rule 2-29: High Pressure Sales Tactics and Interpretive Notice NFA Compliance Rules 2-29 and 2-9: NFA's Review and Approval of Certain Radio and Television Advertisements]

[¶ 5191] RULE 2-30. CUSTOMER INFORMATION AND RISK DISCLOSURE.
(Click Here to Print this Rule) [Adopted effective June 1, 1986. Effective date of amendments: January 1, 1990, August 21, 2001 December 10, 2002, December 17, 2007]

(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. A Member registered as a broker or dealer under Section 15(b)(11) of the Exchange Act shall provide a copy of the disclosure statement for security futures products at or before the time the Member approves the account to trade security futures products.

(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 the Financial Industry Regulatory Authority and their Associates must obtain the following information from each customer who is an individual if the customer trades security futures products:

    (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, and except as otherwise provided in subsections (b) and (j), it shall be the responsibility of the Member soliciting the account to comply with this Rule.

(f) A Member or Associate shall be entitled to rely on the customer [as the sole source] for the information obtained under Section (c) of this Rule and shall not be required to verify such information, except as provided in section (j)(2) of this rule.

(g) Each Member or Associate shall make or obtain a record containing the information obtained under Section (c) of this Rule at the time the information is obtained. If a customer declines to provide the information set forth in Section (c) of this Rule, the Member or Associate shall make a record that the customer declined, except that such a record need not be made in the case of a non-U.S. customer unless such customer trades security futures products. Subject to the provisions of Section (i) of this Rule, a Member may open, introduce or agree to direct a futures trading account for a customer only upon the approval of a partner, officer, director, branch office manager or supervisory employee of the Member. Each Member shall keep copies of all records made pursuant to this Rule in the form and for the period of time set forth in CFTC Regulation 1.31.

(h) Each Member shall establish and enforce adequate procedures to review all records made pursuant to this Rule and to supervise the activities of its Associates in obtaining customer information and providing risk disclosure.

(i) Nothing herein shall relieve any Member from the obligation to comply with all applicable CFTC and SEC Regulations and NFA Requirements.

(j) Members that are not also members of the Financial Industry Regulatory Authority and their Associates shall adhere to the following additional requirements relating to accounts for customers that trade security futures products:

    (1) A Member shall exercise due diligence to learn the essential facts relative to the customer, including the customer's investment objectives and financial situation and, based upon those facts (including any information obtained under subsection (c) of this Rule, if applicable), a partner, officer, director, branch office manager, or supervisory employee of the Member shall approve or disapprove the customer's account for security futures transactions. If the Member is an FCM or IB, the account must be approved or disapproved by a designated security futures principal. The approval or disapproval shall be in writing and shall identify the person approving or disapproving the account. Additionally, the customer's account records shall contain information about the account, including the name of the Associate, how the customer's information was obtained, and the date that the disclosure statement for security futures products was provided.

    (2) A Member or Associate shall forward the background and financial information upon which the customer's account has been approved for trading security futures products to each customer who is an individual, unless the information has been obtained in writing from the customer, for verification of accuracy within fifteen days after the customer's account has been approved. A copy of the background and financial information on file with the Member shall also be sent to each customer who is an individual for verification within fifteen days after the Member becomes aware of any material change in the customer's financial status. In all cases, absent notice to the contrary from the customer, the information is deemed verified.

    (3) No FCM or IB Member or Associate thereof shall recommend to a non-institutional customer a transaction in security futures products or a particular trading strategy relating to such products without making reasonable efforts to obtain current information regarding the customer's financial status and investment objectives; provided, however, that this requirement does not apply to transactions in discretionary accounts. For purposes of this requirement, a non-institutional customer is any customer who is not:

      (i) a bank, savings and loan association, insurance company, registered investment company, a registered commodity pool operator, or a commodity pool operated by a registered commodity pool operator;

      (ii) an investment advisor registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions) or a registered commodity trading advisor;

      (iii) an investment company exempt from registration under the Investment Company Act of 1940, a commodity pool operator exempt from registration under the Commodity Exchange Act, a commodity pool operated by a commodity pool operator exempt from registration under the Commodity Exchange Act, an investment advisor exempt from both federal and state registration under the Investment Advisers Act of 1940, or a commodity trading advisor exempt from registration under the Commodity Exchange Act;

      (iv) a registered broker-dealer or futures commission merchant; or

      (v) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

    (4) No FCM or IB Member or Associate thereof shall recommend to any customer a transaction in security futures products or a particular trading strategy relating to such products without reasonable grounds for believing that the recommendation or strategy is not unsuitable for the customer on the basis of the customer's current investment objectives, financial situation and needs, and any other information known by the Member or Associate.

    (5) No FCM or IB Member or Associate shall recommend a security futures transaction to a customer unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that the customer may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended transaction.

    (6) No Member or Associate exercising discretion over an account may effect security futures transactions that are excessive in size or frequency in view of the customer's investment objectives and financial situation.

[See Interpretive Notice NFA Compliance Rule 2-30: Customer Information and Risk Disclosure (Board of Directors) and Interpretive Notice NFA Compliance Rule 2-30: Customer Information and Risk Disclosure (Staff).]

[¶ 5197] RULE 2-31. FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS.
(Click Here to Print this Rule) [Adopted effective February 1, 1988.]

Any Member who violates any of the CFTC Part 30 Regulations shall be deemed to have violated an NFA Requirement.

[¶ 5203] RULE 2-32. LEVERAGE TRANSACTIONS.
(Click Here to Print this Rule) [Adopted effective January 1, 1990.]

Any Member or Associate who violates any of the CFTC Part 31 Regulations shall be deemed to have violated an NFA Requirement.

[¶ 5209] RULE 2-33. FCM RECEIPT OF FUNDS FROM OMNIBUS ACCOUNTS.
(Click Here to Print this Rule) [Adopted effective July 24, 1990.]

Each FCM must give notice to its DSRO or, if so directed by its DSRO, to NFA whenever the FCM accepts other than immediately available funds from an FCM doing business on an omnibus basis. Notice must be received within 24 hours of such acceptance. For purposes of this Rule, wire transfers and certified checks shall be considered immediately available funds for which notice is not required.

[¶ 5215] RULE 2-34. CTA PERFORMANCE REPORTING AND DISCLOSURES
(Click Here to Print this Rule) [Adopted effective May 1, 2004.]

(a) Performance Information

    (1) Member CTAs must calculate rate of return according to CFTC Regulation 4.35(a)(6) using nominal account size as the denominator.

    (2) Draw-down information reported under CFTC Regulation 4.35(a)(1)(v) and (vi) must be based on rate of return figures using nominal account size as the denominator.

    (3) In calculating net performance, Member CTAs may include interest earned on actual funds but may not impute interest on other funds.

(b) Written Confirmation for Partially-Funded Accounts

    (1) For partially-funded accounts, a Member CTA must either receive from a client or deliver to a client a written confirmation that contains the following information:

      (i) the name or description of the trading program, and

      (ii) the nominal account size agreed to by the client and the CTA.

    (2) For new clients, the written confirmation must be received from or delivered to the client before the CTA places the first trade for the client.

    (3) For existing clients, the written confirmation must be received from or delivered to the client before the CTA places the first trade after any of the information required under Section (b)(1) of this rule changes. The written confirmation must include the new information and the effective date of the change but need not include any information that will remain the same.

(c) Additional Disclosures for Partially-Funded Accounts

CTAs must provide the following information to clients with partially-funded accounts if the clients are not QEPs:

    (1) A statement of how management fees will be computed relative to the nominal account size,

    (2) An explanation of how cash additions, cash withdrawals, and net performance will affect the nominal account size,

    (3) A brief explanation regarding the effect of partial funding on margin and leverage,

    (4) A statement that partial funding increases the fees and commissions as a percentage of actual funds but does not increase the dollar amount of those fees, and

    (5) A description, by example or formula, of the effect of partial funding on rate of return and drawdown percentages.

(d) CPO Use of CTA Performance Information

Member CPOs who are required by CFTC Regulation 4.25(c) to disclose CTA performance must report the CTA performance on the same basis as the CTA is required to report it.

[¶ 5221] RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS.
(Click Here to Print this Rule) [Effective dates of amendments: November 1, 2000 and December 14, 2003.]

(a)Required Delivery of Pool Disclosure Document and Statement of Additional Information

    (1) The Disclosure Document required by CFTC Regulation 4.21(a) must be as clear and concise as possible, using plain English principles, and must contain only the information required or allowed by subsection (b).

    (2) In addition to the Disclosure Document, the CPO of a commodity pool required to register its securities under the Securities Act of 1933 must deliver (or cause to be delivered) a separate Statement of Additional Information to a prospective participant prior to accepting or receiving funds from the prospective participant. The information that may be included in the Statement of Additional Information is described in subsection (c).

    (3) The CPO of a commodity pool that is not required to register its securities under the Securities Act of 1933 may, but is not required to, prepare and distribute a Statement of Additional Information containing any or all of the information described in subsection (c). The Statement of Additional Information may be bound together with the Disclosure Document as long as the Disclosure Document comes first. If the Statement of Additional Information is separately bound, the CPO is not required to provide it to a prospective participant unless the prospective participant requests it.

    (4) If a Statement of Additional Information is required under paragraph (2) of this section, the cover page of the Disclosure Document required under paragraph (1) of this section and the Statement of Additional Information required under paragraph (2) of this section shall state that the Disclosure Document is in two parts, both of which must be provided to a prospective participant prior to investing in the offered pool. If a Statement of Additional Information is prepared and separately distributed under paragraph (3) of this section, the cover page of the Disclosure Document required under paragraph (1) of this section shall state that the Statement of Additional Information is available free of charge and shall indicate how to obtain a copy of the Statement of Additional Information.

(b) Disclosures Required in the Disclosure Document

    (1) The Disclosure Document required under subsection (a)(1) of this Rule must include the following:

      (i) The information required by CFTC Regulation 4.24, and the performance disclosures required by CFTC Regulation 4.25, provided, however, that a CPO may provide the performance information required under CFTC Regulation 4.25(c)(5) in the Statement of Additional Information; and

      (ii) Any other information necessary to understand the fundamental characteristics of the pool or keep the Disclosure Document from being misleading.

    (2) The Disclosure Document required under subsection (a)(1) for pools required to register their securities under the Securities Act of 1933 shall include any other information that the Securities and Exchange Commission or state securities administrators require to be included in Part I of a two-part disclosure document. For all other pools, Disclosure Documents required under subsection (a)(1) may include such information.

(c) Information Included in the Statement of Additional Information

    (1) If the CPO of a commodity pool prepares a Statement of Additional Information, the cover page must include the following:

      (i) The name of the commodity pool;

      (ii) A brief statement that the Statement of Additional Information is the second part of a two-part document and that it should be read in conjunction with the pool's Disclosure Document, with instructions on how to obtain a free copy of the Disclosure Document;

      (iii) The date of the most recent Disclosure Document for the pool; and

      (iv) The date of the Statement of Additional Information.

    (2) The cover page must be immediately followed by a table of contents.

    (3) The Statement of Additional Information may also include:

      (i) Disclosures, not included in the Disclosure Document, that are required by the Securities and Exchange Commission or state securities administrators;

      (ii) Statements that expand on or explain the disclosures in the Disclosure Document, provided that the statements are not misleading or inconsistent with applicable statutes, rules, or regulations; and

      (iii) Any other information about the commodity pool; its investments; its CPO, CTA(s), service providers, and their principals and employees; the commodity futures markets; or any other markets, including cash markets, that affect the value of the pool's investments, provided that the information is not misleading or otherwise inconsistent with applicable statutes, rules, or regulations.

[¶ 5227] RULE 2-36. REQUIREMENTS FOR FOREX TRANSACTIONS
(Click Here to Print this Rule) [Adopted effective June 28, 2002. Effective dates of amendments: December 1, 2003; November 30, 2005; February 13, 2007; October 25, 2007; and April 1, 2009.]

(a) General Prohibition

No Forex Dealer Member shall engage in any forex transaction that is prohibited under the Commodity Exchange Act.

(b) Fraud and Related Matters

No Forex Dealer Member or Associate of a Forex Dealer Member engaging in any forex transaction shall:

    (1) Cheat, defraud or deceive, or attempt to cheat, defraud or deceive any other person;

    (2) Willfully make or cause to be made a false report, or willfully to enter or cause to be entered a false record in or in connection with any forex transaction;

    (3) Disseminate, or cause to be disseminated, false or misleading information, or a knowingly inaccurate report, that affects or tends to affect the price of any foreign currency;

    (4) Engage in manipulative acts or practices regarding the price of any foreign currency or a forex transaction;

    (5) Willfully submit materially false or misleading information to NFA or its agents with respect to forex transactions;

    (6) Embezzle, steal or purloin or knowingly convert any money, securities or other property received or accruing to any person in or in connection with a forex transaction.

(c) Just and Equitable Principles of Trade

Forex Dealer Members and their Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their forex business.

(d) Doing Business with Non-Members

A Forex Dealer Member that is the counterparty, or offers to be the counterparty, to forex transactions for customers shall be subject to discipline for the activities of any person that solicits or introduces a customer to the Member or that manages such customer's accounts, unless such person is a Member or Associate of NFA, meets the criteria in Bylaw 306(b), or would be exempt from Commission registration if it were acting in the same capacity in connection with exchange-traded futures contracts.

(e) Supervision

Each Forex Dealer Member shall diligently supervise its employees and agents in the conduct of their forex activities for or on behalf of the Forex Dealer Member. Each Associate of a Forex Dealer Member who has supervisory duties shall diligently exercise such duties in the conduct of that Associate's forex activities for or on behalf of the Forex Dealer Member.

(f) Affiliates

Each Forex Dealer Member that has an affiliate that is authorized to engage in forex transactions solely by virtue of its affiliation with the Forex Dealer Member shall supervise its affiliate's forex activities for compliance with the same requirements that apply to the Forex Dealer Member, including section (a) of this rule. The Forex Dealer Member shall make the affiliate's books and records available to NFA staff upon request and shall be subject to discipline for acts and omissions of the affiliate that violate the standards imposed by NFA requirements.

(g) BASIC Disclosure

When a customer first opens an account and at least once a year thereafter, each Forex Dealer Member shall provide each customer with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address.

(h) Filing Promotional Materials with NFA.

The Compliance Director may require any Forex Dealer Member for any specified period to file copies of all promotional material with NFA for its review and approval at least 10 days prior to its first use or such shorter period as NFA may allow. The Compliance Director may also require a Forex Dealer Member to file for review and approval copies of promotional material prepared or used by some or all of the non-Members it is responsible for under Section (d).

(i) Hypothetical Results

Any Member who uses promotional material that includes a measurement or description or makes any reference to hypothetical forex transaction performance results that could have been achieved had a particular trading system of the Member or Associate been employed in the past must comply with Compliance Rule 2-29(c) and the related Interpretive Notice as if the performance results were for transactions in on-exchange futures contracts.

(j) Scope

This rule governs forex transactions as defined in Bylaw 1507(b).

(k) Definition of Customer

For purposes of this rule, the term "customer" means a counterparty that is not an eligible contract participant as defined in Section 1a(12) of the Act.

[¶ 5233] RULE 2-37. SECURITY FUTURES PRODUCTS.
(Click Here to Print this Rule) [Adopted effective August 21, 2001. Effective dates of amendments: April 16, 2002.]

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 professional 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 existence 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.

    (g) Members shall not charge customers more than a fair commission or service charge for transactions in security futures products, taking into consideration all relevant circumstances, including the expense of executing the order and the value of any service the Member may have rendered by reason of its experience in and knowledge of the security futures product and the market in that product.

[¶ 5239] RULE 2-38. BUSINESS CONTINUITY AND DISASTER RECOVERY PLAN.
(Click Here to Print this Rule) [Adopted effective April 7, 2003.]

(a) Each Member must establish and maintain a written business continuity and disaster recovery plan that outlines procedures to be followed in the event of an emergency or significant business disruption. The plan shall be reasonably designed to enable the Member to continue operating, to reestablish operations, or to transfer its business to another Member with minimal disruption to its customers, other Members, and the commodity futures markets.

(b) Each Member must provide NFA with the name of and contact information for an individual who NFA can contact in the event of an emergency, and the Member must update that information upon request. Each IB, CPO, and CTA Member that has more than one principal and each FCM Member must also provide NFA with the name of and contact information for a second individual who can be contacted if NFA cannot reach the primary contact, and the Member must update that information upon request. These individuals must be authorized to make key decisions in the event of an emergency.

[¶ 5245] RULE 2-39. SOLICITING, INTRODUCING, OR MANAGING FOREX TRANSACTIONS OR ACCOUNTS.
(Click Here to Print this Rule) [Adopted effective September 15, 2005. Effective dates of amendments: February 13, 2007; June 5, 2007; September 21, 2007; October 25, 2007; and April 1, 2009.]

(a) Except for members who meet the criteria in Bylaw 306(b) and Associates acting on their behalf, Members and Associates who solicit customers, introduce customers to a counterparty, or manage accounts on behalf of customers in connection with forex transactions shall comply with Sections (a),(b),(c),(e),(h), and (i) of Compliance Rule 2-36.

(b) No Member except a Forex Dealer Member or a Member who meets the criteria in Bylaw 306(b) may accept forex orders or accounts or receive compensation-directly or indirectly-for forex transactions from any person unless that person is a Member or Associate of NFA, meets the criteria in NFA Bylaw 306(b), or would be exempt from Commission registration if it were acting in the same capacity in connection with exchange-traded futures products.

(c) For purposes of this rule, the term "customer" means a person that is not an eligible contract participant as defined in Section 1a(12) of the Act and includes persons who participate in pooled accounts.

[¶ 5251] RULE 2-40. BULK ASSIGNMENT OR LIQUIDATION OF FOREX POSITIONS; CESSATION OF CUSTOMER BUSINESS.
(Click Here to Print this Rule) [Adopted effective February 16, 2007. Effective dates of amendments: June 5, 2007.]

(a) Bulk Assignment, Transfer, or Liquidation. A Forex Dealer Member may not enter into a bulk assignment, transfer, or liquidation of forex positions or accounts unless the assignment, liquidation, or transfer complies with procedures established by NFA.

(b) Obligation of Assignees. If forex positions or accounts are assigned or transferred to a Forex Dealer Member, the Member may not accept orders initiating new positions until it has either:

    (1) obtained personal and financial information from the customer and provided the disclosures required under Compliance Rule 2-36; or

    (2) if the assignor was a Forex Dealer Member, obtained the necessary personal and financial information pertaining to the customer from the assignor and obtained reliable written evidence (which may include electronic records) that the assignor provided the required disclosures.

(c) Ceasing Business. A Forex Dealer Member must notify NFA by e-mail or facsimile seven calendar days prior to ceasing its forex business.

(d) Definitions. For purposes of this rule, the term "forex" has the same meaning as in Bylaw 1507(b) and the term "customer" has the same meaning as in Compliance Rule 2-36(i).

[See Interpretive Notice of NFA Compliance Rule 2-40: Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business.]

[¶ 5257] RULE 2-41. FOREX POOL OPERATORS AND TRADING ADVISORS
(Click Here to Print this Rule) [Adopted effective November 30, 2008. Effective date of amendments: December 8, 2008.]

(a) Pool Operators. Except for Members who meet the criteria in Bylaw 306(b) and Associates acting on their behalf, any Member or Associate operating or soliciting funds, securities, or property for a pooled investment vehicle that is not an eligible contract participant as defined in Section 1a(12) of the Act must comply with this section (a) if it enters into or intends to enter into any transaction described in NFA Bylaw 1507(b)(1) except as described in NFA Bylaw 1507(b)(3). For purposes of this section, a pooled investment vehicle may not claim to be an eligible contract participant by virtue of Section 1a(12)(A)(v)(II) or (III) of the Act.

    (1) For each such pooled investment vehicle, the Member or Associate must prepare a Disclosure Document and must file it with NFA at least 21 days before soliciting the first potential pool participant that is not an eligible contract participant.

    (2) The Member or Associate must deliver the Disclosure Document to a prospective pool participant who is not an eligible contract participant no later than the time it delivers the subscription agreement for the pool. Any information delivered before the Disclosure Document must be consistent with the information in the Disclosure Document.

    (3) The Disclosure Document must comply with the requirements in CFTC Regulations 4.24, 4.25, and 4.26 as if operating a pool trading on-exchange futures contracts. The term "commodity interest" in those regulations should be read to include forex transactions, and the Risk Disclosure Statement required by CFTC Regulation 4.24(b)(1) must be replaced by the following if the pool does not trade on-exchange contracts and must be added as a separate statement if the pool trades both on-exchange contracts and forex.

      RISK DISCLOSURE STATEMENT

      YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A POOLED INVESTMENT VEHICLE. IN SO DOING, YOU SHOULD BE AWARE THAT THIS POOL ENTERS INTO TRANSACTIONS THAT ARE NOT TRADED ON AN EXCHANGE, AND THE FUNDS THE POOL INVESTS IN THOSE TRANSACTIONS MAY NOT RECEIVE THE SAME PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTIONS CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND THE POOL HAS A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY, THE POOL'S CLAIM MAY NOT RECEIVE A PRIORITY. WITHOUT A PRIORITY, THE POOL IS A GENERAL CREDITOR AND ITS CLAIM WILL BE PAID, ALONG WITH THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM ITS OWN OPERATING FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF OTHER GENERAL AND PRIORITY CREDITORS.

      FOREX TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.

      INVESTMENTS IN THE POOL MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY, AND BROKERAGE FEES, AND THE POOL MAY NEED TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETING OR EXHAUSTING ITS ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE (SEE PAGE [insert page number]) AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT (SEE PAGE [insert page number]).

      THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE YOU SHOULD CAREFULLY REVIEW THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT (SEE PAGE [insert page number]).

      NATIONAL FUTURES ASSOCIATION HAS NEITHER PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

(b) Trading Advisors. Except for Members who meet the criteria in Bylaw 306(b) and Associates acting on their behalf, any Member or Associate managing, directing or guiding, or soliciting to manage, direct, or guide, accounts or trading on behalf of a client that is not an eligible contract participant as defined in Section 1a(12) of the Act by means of a systematic program must comply with this section (b) if it intends to manage, direct, or guide the client's account or trade in transactions described in NFA Bylaw 1507(b).

    (1) The Member or Associate must prepare a Disclosure Document and must file it with NFA at least 21 days before soliciting the first potential client that is not an eligible contract participant.

    (2) The Member or Associate must deliver the Disclosure Document to a prospective client who is not an eligible contract participant no later than the time it delivers the agreement to manage, direct, or guide the client's account or trading. Any information delivered before the Disclosure Document must be consistent with the information in the Disclosure Document.

    (3) The Disclosure Document must comply with the requirements in CFTC Regulations 4.34, 4.35, and 4.36 as if managing, directing, or guiding accounts or trading in on-exchange futures contracts. The term "commodity interest" in those regulations should be read to include forex transactions, and the Risk Disclosure Statement required by CFTC Regulation 4.34(b)(1) must be replaced by the following if the managed, directed, or guided account or trading will not include transactions in on-exchange contracts and must be added as a separate statement if it will include transactions in both on-exchange contracts and forex.

      RISK DISCLOSURE STATEMENT

      THE RISK OF LOSS IN FOREX TRADING CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD ALSO BE AWARE OF THE FOLLOWING:

      FOREX TRANSACTIONS ARE NOT TRADED ON AN EXCHANGE, AND THOSE FUNDS DEPOSITED WITH THE COUNTERPARTY FOR FOREX TRANSACTIONS MAY NOT RECEIVE THE SAME PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTIONS CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT RECEIVE A PRIORITY. WITHOUT A PRIORITY, YOU ARE A GENERAL CREDITOR AND YOUR CLAIM WILL BE PAID, ALONG WITH THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY CLAIMS ARE PAID. EVEN CUSTOMER FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM ITS OWN OPERATING FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF OTHER GENERAL AND PRIORITY CREDITORS.

      THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FOREX TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

      MANAGED ACCOUNTS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES AND THE ACCOUNT MAY NEED TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETING OR EXHAUSTING ITS ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE ACCOUNT MANAGER. (SEE PAGE [insert page number]).

      THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND SIGNIFICANT ASPECTS OF THE FOREX MARKETS. THEREFORE, YOU SHOULD CAREFULLY REVIEW THIS DISCLOSURE DOCUMENT BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT (SEE PAGE [insert page number]).

      NATIONAL FUTURES ASSOCIATION HAS NEITHER PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

[¶ 5263] RULE 2-42. FOREX POOL REPORTING
(Click Here to Print this Rule) [Adopted effective November 30, 2008. Effective date of amendments: December 8, 2008.]

(a) Except for Members who meet the criteria in Bylaw 306(b), any Member operating a pool that is not an eligible contract participant as defined in Section 1a(12) of the Act and that trades forex must comply with the requirements in CFTC Regulation 4.22 in the same manner as would be applicable to the operation of a pool trading on-exchange futures contracts. The term "commodity interest" in that regulation should be read to include forex transactions. For purposes of this section, a pool may not claim to be an eligible contract participant by virtue of Section 1a(12)(A)(v)(II) or (III) of the Act.

(b) A Member may file with NFA a request for an extension of time in which to file the annual report in the same form as provided for in CFTC Regulation 4.22(f).

As of May 15, 2009, new Compliance Rule 2-43 will read:

[¶ 5269] RULE 2-43. FOREX ORDERS
(Click Here to Print this Rule) [Adopted effective May 15, 2009.]

(b) Offsetting Transactions

    Forex Dealer Members may not carry offsetting positions in a customer account but must offset them on a first-in, first-out basis. At the customer's request, an FDM may offset same-size transactions even if there are older transactions of a different size but must offset the transaction against the oldest transaction of that size.

As of June 12, 2009, Compliance Rule 2-43 will read:

[¶ 5269] RULE 2-43. FOREX ORDERS
(Click Here to Print this Rule) [Adopted effective May 15, 2009. Effective dates of amendments: June 12, 2009.]

(a) Price Adjustments

    (1) A Forex Dealer Member may not cancel an executed customer order or adjust a customer account in a manner that would have the direct or indirect effect of changing the price of an executed order except when:

      (i) the cancellation or adjustment is favorable to the customer and is done as part of a settlement of a customer complaint; or

      (ii) if a Forex Dealer Member's platform exclusively uses straight-through processing such that the Forex Dealer Member automatically (without human intervention and without exception) enters into the identical but opposite transaction with another counterparty (creating an offsetting position in its own name) and that counterparty cancels or adjusts the price at which the position was executed.

    (2) With regard to cancellations or adjustments made pursuant to section (a)(1)(ii), a Forex Dealer Member must:

      (i) provide written notification to the customer within fifteen (15) minutes of the customer order having been executed that it is seeking to cancel the executed order or adjust the customer's account to reflect the adjusted price provided by the Forex Dealer Member's counterparty, as applicable, and the written notification must include documentation of the cancellation or adjustment from the Forex Dealer Member's counterparty; and

      (ii) either cancel or adjust all executed customer orders executed during the same time period and in the same currency pair or option regardless of whether they were buy or sell orders.

    (3) Notwithstanding section (a)(2)(ii), a Forex Dealer Member may choose to honor transactions in which customer orders resulted in profits for the customers but must do so with regard to all similarly situated customers.

    (4) Cancellations and adjustments to executed customer orders must be reviewed and approved by a listed principal that is also an NFA Associate. Such review and approval must be documented by a written record, must include any supporting documentation, and must be provided to NFA in the manner requested by NFA.

    (5) A customer order is considered executed upon the earlier of the customer receiving notification of the execution price from the Forex Dealer Member or when the position established by such order is identified in the customer's account, whether electronically or otherwise.

    (6) If a Forex Dealer Member may cancel or adjust an executed order under the circumstances provided for in section (a)(1)(ii), the FDM must provide customers with written notice that the Forex Dealer Member may cancel or adjust executed customer orders based upon liquidity provider price changes prior to the time they first engage in forex transactions with the Forex Dealer Member. The notice may be included in a customer agreement.

    (7) Any provision in a customer agreement or any contract between a Forex Dealer Member and a customer that reserves to the Forex Dealer Member the right to make price or equity adjustments to a customer account except as allowed by this Rule is prohibited.

(b) Offsetting Transactions

    Forex Dealer Members may not carry offsetting positions in a customer account but must offset them on a first-in, first-out basis. At the customer's request, an FDM may offset same-size transactions even if there are older transactions of a different size but must offset the transaction against the oldest transaction of that size.

As of June 1, 2009, new Compliance Rule 2-44 will read:

[¶ 5275] RULE 2-44. FOREX CUSTOMER STATEMENTS
(Click Here to Print this Rule) [Adopted effective June 1, 2009.]

Forex Dealer Members must provide customers with confirmations, daily statements, and monthly statements as provided in this rule.

(a) Confirmations

Written confirmations must be provided to customers within one business day after any activity in the customer's account, including offsetting transactions, rollovers, deliveries, option exercises, option expirations, trades that have been reversed or adjusted, and monetary adjustments. The confirmations must contain the following information regarding the transaction and the funds in the account:

    (1) Transaction date;
    (2) Transaction type (e.g., new position, offsetting position, rollover, adjustment);
    (3) Currency pair
    (4) Buy or sell (if a new or offsetting position);
    (5) Size
    (6) Price or premium (for new or offsetting positions or price adjustments);
    (7) Price or premium change (for price adjustments);
    (8) Monetary adjustments (debit or credit);
    (9) Net profit or loss for offsetting positions; and
    (10) Charges for each transaction (e.g., rollover interest and/or fees).

(b) Daily Statements

Daily statements must show the account equity as of the end of the previous day. The daily statements may be provided electronically as long as they are readily accessible to customers. The daily statements may be combined with the confirmations but, in that event, they may not be provided electronically without the customer's consent.

(c) Monthly or Quarterly Statements

Monthly statements are required for all accounts that have open positions at the end of the month or changes in the account balance or equity since the prior statement. Quarterly statements are required for all other open accounts. The monthly or quarterly statements must contain the following information regarding the transactions during the reporting period and the funds in the account:

    (1) The account equity at the beginning of the reporting period;
    (2) All initiating or offsetting transactions, deliveries, option exercises, or option expirations that occurred during the reporting period, with the following information for each: date, currency pair, buy or sell, size, and price or premium (with any price or premium adjustment noted);
    (3) All open positions in the account, with the following information for each position: date initiated, currency pair, long or short, size, price or premium at which it was initiated (with any price or premium adjustment noted), and the unrealized profit or loss;
    (4) All deposits and withdrawals during the reporting period;
    (5) All other monetary adjustments (debits and credits) to the account;
    (6) The amount of cash in the account (excluding non-cash collateral and unrealized profits and losses);
    (7) A breakdown by type of all fees and charges during the period, including commissions and interest expense or rollover fees; and
    (8) The account equity at the end of the reporting period.

(d) Options

For options transactions, Forex Dealer Members must provide the following additional information:

    (1) On confirmations and monthly or quarterly statements, strike price and expiration date; and
    (2) For open positions on monthly or quarterly statements, the value of the option marked to the market.

(e) Account Equity

Each daily, monthly, or quarterly statement must prominently display the account equity. The account equity is the sum of all realized profits and losses, all unrealized profits and losses, and any other cash and collateral in the account.

(f) Electronic Delivery

Daily statements may be provided on-line or by other electronic means as long as they are readily accessible to customers. Confirmations and monthly/quarterly statements may be provided on-line or transmitted by other electronic means if the customer consents to the specific method used.

(g) Adjustments

For purposes of this Rule, the term "adjustment" means any change to the price or premium of an initiating or offsetting transaction and any debit or credit to the account that has the same effect (monetary adjustment).

PART 3-COMPLIANCE PROCEDURES
(Click Here to Print this Section)

[¶ 5500] RULE 3-1. DEPARTMENT OF COMPLIANCE.
(Click Here to Print this Rule) [Effective date of amendments: March 18, 1994.]

[¶ 5500.1] (a) Duties.

There is hereby established a Department of Compliance (hereinafter "Compliance Department"), under the direction and control of a Director of Compliance (hereinafter "Compliance Director"), which shall conduct audits and examinations, and shall investigate violations of NFA requirements, prepare reports and conduct prosecutions, as provided in this Part. The Compliance Department shall commence investigations at the direction of the Commission; upon the discovery or receipt of information by NFA (such as complaints from customers or Members) that, in the Compliance Director's opinion, indicates a possible basis for finding that a violation has occurred; on the Compliance Director's own initiative. The Compliance Director shall have the authority to compel testimony, subpoena documents and require statements under oath from any Member, Associate or person connected therewith.

[¶ 5500.2] (b) Prohibitions.
(Click Here to Print this Rule)

Neither the Compliance Director nor any employee or agent of the Compliance Department (including persons hired on a contract basis to perform compliance duties) may be a Member or Associate or have any connection, direct or indirect, with a Member or Associate, except as approved by the President. Except with the President's approval, the Compliance Director and any employee of the Compliance Department shall not trade, directly or indirectly, any commodity interest. A commodity interest shall be defined as any commodity futures or commodity option contract traded on or subject to the rules of a contract market or linked exchange, or cash commodities traded on or subject to the rules of a board of trade which has been designated as a contract market.

[¶ 5506] RULE 3-2. INVESTIGATION.
(Click Here to Print this Rule) [Effective date of amendments: June 13, 1986; March 15, 1994 and March 12, 1999.]

[¶ 5506.1] (a) Initiation; Report.
(Click Here to Print this Rule)

In each case in which the Compliance Director has reason to believe that any NFA requirement is being, has been or is about to be violated, the Compliance Director shall submit a written report of the matter to the Business Conduct Committee. (See NFA Bylaw 704.) The report shall include:

    (i) the reason the investigation was begun;

    (ii) a summary of the complaint, if the investigation was begun as the result of a complaint;

    (iii) the relevant facts; and

    (iv) the Compliance Director's conclusion whether the Business Conduct Committee should proceed with the matter.

[¶ 5506.2] (b) Termination.
(Click Here to Print this Rule)

If upon completing the investigation the Compliance Director concludes that there is no reason to believe that an NFA requirement is being, has been or is about to be violated, the Compliance Director shall submit a report to the Business Conduct Committee, containing the information specified in paragraph (a) above and, if applicable, recommending whether the Business Conduct Committee should issue or authorize the Compliance Director to issue a warning letter. The report, and any warning letter issued, shall become part of the investigation file, which may thereafter be closed as the Compliance Director deems appropriate. Investigations shall be completed within four months of commencement except for good cause.

[¶ 5506.3] (c) Review of Report.
(Click Here to Print this Rule)

Each investigation report shall be reviewed by the Business Conduct Committee. If, upon review of the report, the Business Conduct Committee finds that additional investigation or evidence is necessary, it shall so instruct the Compliance Director. Within 30 days after receiving a completed report the Business Conduct Committee shall either:

    (i) close the matter, if it finds (A) no reasonable basis that a violation has occurred, is occurring or is about to occur; or (B) that prosecution is otherwise unwarranted (in which case the Business Conduct Committee may issue or cause to be issued a warning letter). The closure order shall be in writing and briefly state the reasons therefor, and a copy of the order shall be promptly furnished to the President. Such order shall become final 10 days after the President's receipt thereof unless, within such time, the President refers the matter to the Appeals Committee (See NFA Bylaw 702) for its review. In such case, the closure order shall become final 30 days after the date of referral by the President unless, within such time, the Appeals Committee directs the Business Conduct Committee to issue a complaint; or

    (ii) serve a written and dated Complaint, if it finds reason to believe that an NFA requirement is being, has been or is about to be violated and that the matter should be adjudicated.

No member of the Business Conduct Committee or its designated Panel shall participate in the matter if the member, or any person with which the member is connected, has a financial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 708(c).

[¶ 5512] RULE 3-3. SERVICE.
(Click Here to Print this Rule) [Adopted effective March 15, 1994. Effective date of amendments: June 3, 1997; June 8, 2007; and December 10, 2007.]

For purposes of any proceeding brought under Part 3 of these Rules:

(a) service of a Complaint will be sufficient if mailed to the person charged ("the Respondent") by first class and overnight mail, to the last address provided by the Respondent on record with NFA, or the address of his duly authorized agent for service;

(b) one copy of all pleadings, motions and briefs filed with NFA subsequent to the Complaint shall be served by the party upon all parties not in default (including the attorney of record in NFA's General Counsel's Office), unless otherwise provided. Service on a party's representative shall be service on the party. Service shall be made either by personal service (effective upon delivery), mail (effective upon deposit), facsimile (effective upon receipt of a readable document), or e-mail (effective upon receipt of a readable document): provided, however, that service by facsimile or e-mail shall only be permitted on Parties who have consented to service by that means. Proof of service of a document shall be made by attaching thereto an affidavit or certificate of service. To mail means to deposit in the U.S. Mail, first-class postage prepaid, or with an overnight delivery service, delivery fee prepaid; and

(c) documents filed with NFA under this Part must be delivered or mailed to:

National Futures Association
300 South Riverside Plaza
Chicago, IL 60606
Attn: Legal Docketing Department

or sent by facsimile to the attention of the Legal Docketing Department at a facsimile number provided in the original complaint or by e-mail to Docketing@nfa.futures.org. Filing by delivery or mailing is effective upon receipt. Filing by electronic means is effective upon receipt of a readable document; and

(d) parties who file documents by electronic means thereby consent to accept service of pleadings in the proceedings by same method and waive any objection based on authenticity and genuineness to the use and admissibility into evidence in the proceeding of any document that they file by electronic means. The first document that a party files by electronic means must identify that party's facsimile number or e-mail address at which other parties may serve pleadings in the proceeding. Parties who provide a facsimile number or an e-mail address must advise Legal-Docketing and all other parties not in default of any change to the facsimile number or e-mail address.

[¶ 5518] RULE 3-4. NOTICE OF CHARGES.
(Click Here to Print this Rule) [Adopted effective March 15, 1994, amendments effective September 17, 1999.]

(a) A Complaint issued by the Business Conduct Committee under these Rules must:

    (i) state each NFA requirement alleged to be, to have been or about to be violated; and

    (ii) state each act or omission that constitutes, constituted or will constitute the alleged violation.

(b) NFA shall advise the Respondent in writing:

    (i) that the Respondent must file a written Answer to the Complaint with NFA, within 30 calendar days of the date of the Complaint;

    (ii) that failure to file an Answer as provided in Part (i) above shall be deemed an admission of the facts and legal conclusions contained in the Complaint;

    (iii) that failure to respond to any allegation shall be deemed an admission of that allegation; and

    (iv) that failure to file an Answer as provided in Part (i) above shall be deemed a waiver of hearing.

[¶ 5524] RULE 3-5. RIGHT TO COUNSEL.
(Click Here to Print this Rule) [Effective date of amendments: December 8, 1987, March 15, 1994 and March 12, 1999.]

The Respondent may be represented by an attorney-at-law or other person at any stage of the investigation or disciplinary proceeding.

[¶ 5530] RULE 3-6. ANSWER.
(Click Here to Print this Rule) [Effective date of amendments: March 15, 1994 and March 12, 1999.]

(a) The Respondent must file a written Answer to the Complaint with NFA within 30 days from the date of the Complaint.

(b) Failure to file a timely Answer shall be deemed an admission of the facts and legal conclusions contained in the Complaint, and a waiver of hearing. The Answer shall respond to each allegation in the Complaint by admitting, denying or averring that the Respondent lacks sufficient knowledge or information to admit or deny the allegation. An averment of insufficient knowledge or information may be made only after a diligent effort has been made to ascertain the relevant facts, and shall be deemed to be a denial of the pertinent allegation. The failure to respond to any allegation shall be deemed an admission of that allegation.

(c) For good cause shown, the Business Conduct Committee, or a Hearing Panel may waive the effects of failure to file a timely or complete Answer.

(d) On motion of the Respondent for good cause shown, then Chairman of the Business Conduct Committee, or another member of the Business Conduct Committee designated by the Chairman may grant an extension of time in which to comply with this Rule.

[¶ 5536] RULE 3-7. APPOINTMENT OF HEARING PANEL.
(Click Here to Print this Rule) [Effective date of amendments: March 15, 1994; March 12, 1999; and December 10, 2007.]

The Respondent shall be afforded a hearing on the charges and possible sanctions. The hearing shall be before a designated Hearing Panel of the Hearing Committee ("Hearing Panel"). A Hearing Panel shall consist of no fewer than three members of the Hearing Committee. The Chairman and the remaining members of the Hearing Panel shall be appointed by the Chairman of the Hearing Committee or his designee. If a Hearing Panel member's term on the Hearing Committee expires while the member is serving on a Hearing Panel, the member may continue to serve on that Hearing Panel until the matter is concluded. The hearing shall be held at such location as the Chairman of the Hearing Panel shall determine.

[¶ 5542] RULE 3-8. PRE-HEARING PROCEDURES.
(Click Here to Print this Rule) [Effective date of amendments: March 15, 1994 and March 12, 1999.]

(a) The Respondent shall be entitled to a reasonable pre-hearing examination of all evidence in the Compliance Department's possession or under its control that is to be relied upon by the Compliance Department or that is relevant to the Complaint. Such pre-hearing examination:

    (i) must be requested by the Respondent in writing;

    (ii) can be conducted either by the Respondent examining all such evidence at the offices of NFA, or by the Respondent requesting that all such evidence be copied and sent to him with any transportation and copying costs borne by the Respondent making the request;

    (iii) is subject to the Compliance Department's right to withhold any privileged material (including, but not limited to, the investigation report), pursuant to all common law and statutory privileges it has available to it.

(b) Within 30 days after the Chairman of the Hearing Panel is appointed, the Chairman shall schedule and hold a pre-hearing conference with the parties. The order scheduling the pre-hearing conference shall specify the issues to be covered in the pre-hearing conference, including setting discovery and motion deadlines and scheduling the hearing. Such conferences may be conducted by telephone.

(c) The Chairman of the Hearing Panel shall schedule pre-hearing conferences and hearing sessions and shall decide all pre-hearing motions concerning discovery, motion deadlines, location of the hearing, continuances, and requests for telephonic or video testimony. All other motions shall be decided by the Hearing Panel.

(d) A motion for continuance shall be supported by an affidavit that provides a detailed description of the circumstances that form the basis for the continuance request.

[¶ 5548] RULE 3-9. HEARING.
(Click Here to Print this Rule) [Effective date of amendments: January 28, 1986; April 30, 1986; March 15, 1994; February 2, 1995 and March 12, 1999.]

If a hearing is held:

(a) The formal rules of evidence need not apply;

(b) Telephonic testimony shall be permitted if ordered by the Hearing Panel;

(c) The Respondent may appear personally, examine any witnesses, call witnesses and present relevant testimony and other evidence;

(d) Any party to a hearing may move for an order or the Hearing Panel, on its own motion, may issue an order requiring an NFA Member, Associate, or person connected therewith to testify or produce documents at a hearing at the moving party's expense. Such an order is discretionary with the Hearing Panel and shall be issued only for good cause shown; and

(e) A substantially verbatim record of the hearing shall be made (i.e., one that can be accurately transcribed). The cost of transcription shall be borne by the Respondent only if it requests the transcript, appeals the decision under Rule 3-13 below, or applies for Commission review and review is granted (See paragraph (f)(iii) of Rule 3-13). Otherwise, any transcription costs shall be borne by NFA.

No member of the Hearing Panel shall participate in the matter if the member, or any person with which the member is connected, has a financial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 708(c).

[¶ 5554] RULE 3-10. DECISION.
(Click Here to Print this Rule) [Effective date amendments: December 8, 1987 and March 15, 1994.]

After the hearing or other consideration of the matter, the Hearing Panel shall render a written decision, based upon the weight of the evidence, containing:

(a) the charges or a summary of the charges;

(b) the Answer, if any, or a summary of the Answer;

(c) a brief summary of the evidence produced at the hearing, or, where appropriate, incorporation by reference of the investigation report;

(d) a statement of findings and conclusions as to each allegation, including a statement setting forth: each act or practice the Respondent was found to have committed or omitted, is committing or omitting, or is about to commit or omit; each NFA requirement that such act or practice violated, is violating, or is about to violate; and whether the act or practice is deemed to constitute conduct inconsistent with just and equitable principles of trade;

(e) a declaration of any penalty imposed (See Rule 3-14) and the penalty's effective date; and

(f) a statement that the Respondent may appeal an adverse decision to the Appeals Committee by filing a written notice of appeal with NFA within 15 days after the date of the decision.

The decision shall be dated and promptly furnished to the Respondent and the Appeals Committee and shall be final upon expiration of time for appeal or review of the decision. (See Rule 3-13.)

[¶ 5560] RULE 3-11. SETTLEMENT.
(Click Here to Print this Rule) [Effective date of amendments: December 8, 1987; March 15, 1994 and March 24, 1998.]

[¶ 5560.1] (a) Offer.
(Click Here to Print this Rule)

    (i) A subject of an investigation in which the investigation report has been completed, or a Respondent in a disciplinary proceeding, shall submit any proposed settlement of the matter to the Business Conduct Committee or its designated Panel ("BCC Panel") at any time up until a Chairman of the Hearing Panel has been appointed. A BCC Panel shall consist of no fewer than three members of the Business Conduct Committee, each of whom shall be appointed by the Chairman of the Business Conduct Committee. After that date, any proposed settlement offer shall be submitted to the Hearing Panel. Settlement offers may also be submitted to the Appeals Committee if the matter is before it on appeal or review. The Business Conduct Committee, BCC Panel, Hearing Panel or Appeals Committee may accept or reject the settlement offer as it deems appropriate. The Compliance Director shall be afforded an opportunity to express the Compliance Department's views with respect to the proposed settlement;

    (ii) The Business Conduct Committee, BCC Panel, Hearing Panel or Appeals Committee may in its discretion accept an offer in which the person neither admits nor denies violating NFA requirements; and

    (iii) Every settlement offer:

      (a) shall contain the following language:
      [Respondent] acknowledges that the Compliance Department will present the settlement offer and its views on the proposed settlement orally, in writing or both;

      (b) presented to the Business Conduct Committee or BCC Panel shall also contain the following language:
      [Respondent] acknowledges that any settlement offer rejected by the Business Conduct Committee or BCC Panel will be forwarded to the Hearing Panel for its information in the event that [Respondent] subsequently submits a settlement offer to the Hearing Panel;

      (c) presented to the Hearing Panel shall also contain the following language:
      [Respondent] waives any objection to the Hearing Panel's participation in the hearing in the event that [Respondent's] settlement offer is rejected; and

      (d) presented to the Appeals Committee shall also contain the following language:
      [Respondent] acknowledges that any settlement offer rejected by the Appeals Committee will be forwarded to the Business Conduct Committee, BCC Panel or Hearing Panel for its information in the event that [Respondent] subsequently submits a settlement offer to the Business Conduct Committee, BCC Panel or Hearing Panel. [Respondent] waives any objection to the Appeals Committee's participation in the review in the event that [Respondent's] settlement offer is rejected; and

      (e) shall also contain the following language:
      [Respondent] acknowledges that this settlement offer may not be withdrawn by the [Respondent] after it has been submitted to the Business Conduct Committee, BCC Panel, Hearing Panel or Appeals Committee. In the event the settlement offer is rejected by the appropriate Committee or Panel, the settlement offer shall become null and void.

[¶ 5560.2] (b) Decision.
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If the Business Conduct Committee, BCC Panel, Hearing Panel or Appeals Committee accepts the offer, it shall issue a written decision specifying each NFA requirement it has reason to believe is being, has been or is about to be violated, any penalty imposed and whether the settling party has admitted or denied any violation.

A decision on settlement by the Business Conduct Committee, BCC Panel or Hearing Panel shall be promptly furnished to the President. A decision on settlement by the Business Conduct Committee, BCC Panel or Hearing Panel shall become final and binding 15 days after the date of the decision unless the President, with notice to all parties, refers the matter to the Appeals Committee for review. The Appeals Committee shall approve or disapprove the settlement within 30 days after the date of such referral. Its decision to approve or disapprove the settlement shall become final and binding 15 days after the date of that decision.

A decision on settlement by the Appeals Committee shall become final and binding 15 days after the date of the decision.

[¶ 5560.3] (c) Withdrawal of Settlement Offer Is Prohibited.
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A settlement offer may not be withdrawn by a Respondent after it is submitted to the Business Conduct Committee, BCC Panel, Hearing Panel or Appeals Committee. An offer that is rejected by the appropriate Committee or Panel shall be null and void and shall not be deemed to have been an admission of any matter.

[¶ 5566] RULE 3-12. NOTICE AND PUBLICATION OF DECISION.
(Click Here to Print this Rule) [Effective date of amendments: March 15, 1994.]

Written notice of any action taken under Rule 3-10 or Rule 3-11 that is adverse to the Respondent, including reasons, findings, and conclusions, shall be furnished to the Commission within 30 days after it becomes final.

[¶ 5572] RULE 3-13. APPEAL; REVIEW.
(Click Here to Print this Rule) [Effective date of amendments: December 8, 1987; October 29, 1991; March 15, 1994; February 2, 1995 and March 12, 1999.]

[¶ 5572.1] (a) Appeal.
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The Respondent may appeal any adverse decision of the Hearing Panel issued under Rule 3-10 to the Appeals Committee by filing a written notice of appeal with NFA within 15 days after the date of the decision. The notice must describe those aspects of the disciplinary action to which exception is taken, and must contain any request by the Respondent to present written or oral argument.

[¶ 5572.2] (b) Review.
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The Appeals Committee may also order review of any decision of the Hearing Panel issued under Rule 3-10. If such a review will be conducted, the Appeals Committee will give written notice to the Respondent within 15 days of the date of the decision. Such review may be conducted by the Appeals Committee:

    (i) on its own motion, or

    (ii) pursuant to a petition filed by the Compliance Department, the granting of which shall be discretionary with the Appeals Committee. The petition will state why the Compliance Department is seeking review and must contain any request by the Compliance Department to present written or oral argument.

[¶ 5572.3] (c) Stay.
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The Respondent's filing of a notice of appeal under paragraph (a) above or the institution by the Appeals Committee of its own review under paragraph (b) above shall operate as a stay of the effective date of the disciplinary order, until the Appeals Committee renders its decision.

[¶ 5572.4] (d) Conduct of Proceeding.
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No member of the Appeals Committee shall participate in the proceeding if the member participated in any prior stage of the disciplinary proceeding (other than the review of a settlement offer submitted under Rule 3-11) or if the member, or any person with which the member is connected, has a financial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 708(c). Except for good cause shown, the appeal or review shall be conducted solely on the record before the Hearing Panel, the written exceptions filed under paragraph (a) above, and such written or oral arguments of the parties as the Appeals Committee may authorize.

[¶ 5572.5] (e) Briefs.
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If the Appeals Committee authorizes written argument, briefs shall be filed as follows unless otherwise ordered by the Appeals Committee:

    (i) the party required to submit the initial brief shall file it with NFA's Legal Docketing Department and serve it on the other parties to the appeal within 30 days after the Appeals Committee issues an order authorizing written argument;

    (ii) the responding party shall file its brief with NFA's Legal Docketing Department and serve it on the other parties to the appeal within 30 days after service of the initial brief;

    (iii) the party which filed the initial brief may file an answer to the responding brief with NFA's Legal Docketing Department and serve it on the other parties to the appeal within 10 days after service of the responding party's brief;

    (iv) the initial brief or responding brief of any party shall not exceed 35 pages and the answer to the responding brief shall not exceed 10 pages, exclusive of any table of contents, table of cases, index and appendix containing transcripts of testimony, exhibits, rules and regulations; and

    (v) no other written argument on substantive issues raised on appeal will be accepted from the parties or considered by the Appeals Committee.

[¶ 5572.6] (f) Decision.
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Promptly after reviewing the matter, the Appeals Committee shall issue a written and dated decision, based on the weight of the evidence. The decision shall include:

    (i) the findings and conclusions of the Appeals Committee as to each charge and penalty reviewed, including the specific NFA requirement the Respondent was found by the Hearing Panel to have violated, to be violating, or to be about to violate;

    (ii) a declaration of any penalty imposed by the Appeals Committee, the basis for its imposition, and its effective date;

    (iii) a statement that any person aggrieved by the disciplinary action may appeal the action pursuant to Commission Regulations, Part 171, within 30 days of service; and

    (iv) a statement that any person aggrieved by the disciplinary action may petition the Commission for a stay of the effective date pursuant to Commission Regulations, Part 171, within 10 days of service.

[¶ 5572.7] (g) Finality.
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The decision of the Appeals Committee shall be final 30 days after the date of service.

[¶ 5578] RULE 3-14. PENALTIES.
(Click Here to Print this Rule) [Effective date of amendments: December 8, 1987; July 30, 1990 and March 15, 1994.]

[¶ 5578.1] (a) Types of Penalties.
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The Business Conduct Committee, BCC Panel or Hearing Panel, or the Appeals Committee on appeal or review, may at the conclusion of the disciplinary proceeding impose one or more of the following penalties:

    (i) Expulsion, or suspension for a specified period, from NFA membership; a two-thirds vote of the members of the Hearing Panel or the Appeals Committee present and voting shall be required for expulsion. A suspended Member shall be liable for dues and assessments but shall have no membership rights during the suspension period nor shall a suspended Member hold itself out as an NFA Member during the suspension period;

    (ii) Bar or suspension for a specified period from association with an NFA Member;

    (iii) Censure or reprimand;

    (iv) A monetary fine, not to exceed $250,000 per violation;

    (v) Order to cease and desist; and

    (vi) Any other fitting penalty or remedial action not inconsistent with this rule.

[¶ 5578.2] (b) Authority of Appeals Committee to Alter Penalty.
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The Appeals Committee may increase, decrease or set aside the penalties that were imposed by the Hearing Panel, or may impose other and different penalties, as it sees fit, subject to the requirements and limitations in paragraph (a) above.

[¶ 5578.3] (c) Payment of Fines.
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All fines shall be paid to the NFA Treasurer within 30 days of the date of the decision or within the time prescribed in the decision, and may be used for general NFA purposes. A person who fails to pay a fine on time may, after seven days written notice, be summarily suspended from membership or association with a Member, by order of the President, until the fine is paid.

[¶ 5584] RULE 3-15. MEMBER OR ASSOCIATE RESPONSIBILITY ACTIONS.
(Click Here to Print this Rule) [Effective date of amendments: December 8, 1987; October 29, 1991; September 30, 1992; March 15, 1994; February 2, 1995; March 12, 1999 and November 30, 2001.]

[¶ 5584.1] (a) Nature of Action.
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A Member or Associate may be summarily suspended from membership, or association with a Member, may be required to restrict its operations (e.g., restrictions on accepting new accounts), or may otherwise be directed to take remedial action, (e.g., may be ordered to immediately infuse additional capital or to maintain its adjusted net capital at a level in excess of its current capital requirement), where the President, with the concurrence of the NFA Board of Directors or Executive Committee, has reason to believe that the summary action is necessary to protect the commodity futures markets, customers, or other Members or Associates. No member of either the Board of Directors or the Executive Committee shall participate in a summary action if the member, or any person with whom the member is connected, has a financial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 516 or Bylaw 708(c). Notice of such summary action shall be given promptly to the Commission.

[¶ 5584.2] (b) Procedure.
(Click Here to Print this Rule)

The following procedures shall be observed in actions under this Rule:

    (i) The subject of the action (the "Respondent") shall, whenever practicable, be served with a notice before the action is taken. If prior notice is not practicable, the Respondent shall be served with a notice at the earliest opportunity. This notice shall (A) state the action taken or to be taken; (B) briefly state the reasons for the action; (C) state the time and date when the action became or becomes effective and its duration; and (D) state that any person aggrieved by the action may petition the Commission for a stay of the effective date of the action pending a hearing pursuant to Commission Regulations, Part 171, within 10 days of service. Service may be made by personal delivery (effective upon receipt), by telefax (effective upon transmission), or by mail (effective upon deposit). When service is effected by mail, the time within which the person served may respond shall be increased by five days.

    (ii) The Respondent shall be given an opportunity for a hearing promptly after the summary action is taken. Any such hearing shall be conducted before a Hearing Panel under the procedures of Rule 3-9.

    (iii) The Respondent shall have the right to be represented by an attorney-at-law or other person in all proceedings after the summary action is taken, but the Hearing Panel may bar from the proceeding any representative for dilatory, disruptive, or contumacious conduct.

    (iv) Promptly after the hearing, the Hearing Panel shall issue a written and dated decision affirming, modifying or reversing the action taken, based upon the evidence contained in the record of the proceeding. A copy of the decision shall be furnished promptly to the Respondent, the Appeals Committee and the Commission. The decision shall contain:

      (A) A description of the action taken and the reasons for the action;

      (B) A brief summary of the evidence received at the hearing;

      (C) Findings and conclusions;

      (D) A determination as to whether the summary action that was taken should be affirmed, modified or reversed; a declaration of any action to be taken against the Respondent as the result of that determination; the effective date and duration of that action; and a determination of the appropriate relief based on the findings and conclusions;

      (E) A statement that any person aggrieved by the action may have a right to appeal the action pursuant to Commission Regulations, Part 171, within 30 days of service; and

      (F) A statement that any person aggrieved by the action may petition to the Commission for a stay pursuant to Commission Regulations, Part 171, within 10 days of service.

[¶ 5584.3] (c) Appeal.
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The Respondent shall have no right to appeal a final action taken under this Rule to the Appeals Committee.

[¶ 5584.4] (d) Review.
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The Appeals Committee may on its own motion review a decision of the Hearing Panel issued under paragraph (b)(iv) above, by giving written notice to the Respondent of its decision to review within 15 days of the date of the decision. The review shall be conducted in accordance with paragraphs (d), (e), (f) and (g) of Rule 3-13.

[¶ 5590] RULE 3-16. RELATIONSHIP BETWEEN MEMBER OR ASSOCIATE RESPONSIBILITY ACTION AND DISCIPLINARY ACTION.
(Click Here to Print this Rule) [Effective date of amendments: March 15, 1994.]

The institution of a Member or Associate Responsibility Action (See Rule 3-15) shall not preclude the institution, at the same or any other time, of a disciplinary action (See Rule 3-2) involving the same matters or persons, nor shall any pending or completed disciplinary action involving the same matters or persons preclude a proceeding under Rule 3-15.

[¶ 5596] RULE 3-17. COMPOSITION OF COMMITTEES.
(Click Here to Print this Rule) [Adopted effective December 10, 1993. Effective dates of amendments: January 1, 2005.]

The Business Conduct Committee, Hearing Committee, Appeals Committee, Executive Committee, BCC Panel and Hearing Panel conducting a proceeding under these Part 3 rules shall include at least one member who is not an NFA Member or Associate or an employee of an NFA Member. When selecting Hearing Panels, the Chairman of the Hearing Committee or his designee shall endeavor to appoint panelists with diverse interests.

[¶ 5602] RULE 3-18. SANCTIONS FOR CONTUMACIOUS CONDUCT
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If a party, attorney for a party, or other representative of a party violates an order of the Business Conduct Committee, Hearing Panel, Chairman of the Business Conduct Committee or Hearing Panel, or Appeals Committee or engages in dilatory, disruptive, or contumacious conduct during a proceeding, the Business Conduct Committee, Hearing Panel, or Appeals Committee may impose those sanctions that are just under the circumstances. In particular, the Business Conduct Committee, Hearing Panel, or Appeals Committee may -

(a) Find that matters covered by the order or any other designated facts shall be taken as established against the noncomplying party;

(b) Refuse to allow the noncomplying party to support or oppose designated claims or defenses or prohibit the noncomplying party from introducing designated witnesses or documents into evidence;

(c) Strike portions of the noncomplying party's Complaint or Answer;

(d) Stay further proceedings until the noncomplying party complies with the order;

(e) Dismiss the Complaint if the Compliance Department is the noncomplying party or find the relevant facts and legal conclusions in the Complaint to be admitted if a Respondent is the noncomplying; or

(f) Bar an attorney or other representative from the proceeding if the attorney or representative has engaged in dilatory, disruptive, or contumacious conduct.

Part 4 - PROCEDURES GOVERNING ACCESS TO AND CERTIFICATION OF CFTC RECORDS, OTHER THAN REGISTRATION RECORDS, MAINTAINED BY NFA
(Click Here to Print this Section)

[¶ 5800] RULE 4-1. DISCLOSURE OF INFORMATION FROM CFTC RECORDS, OTHER THAN REGISTRATION RECORDS, MAINTAINED BY NFA.
(Click Here to Print this Rule) [Adopted effective June 2, 2006.]

(a) Definitions.

    (1) CFTC Records. For purposes of Rules 4-1 and 4-2, the term "CFTC records" shall be defined to include only those records that are in the custody of or maintained by NFA because such records were transferred from the Commission to NFA or because the Commission has delegated to NFA the authority to receive, generate, compile or maintain such records in performance of functions which NFA is authorized or required by the Commission to perform pursuant to Sections 8a(10) or 17(o) of the Act: Provided, however, that for purposes of Rules 4-1 and 4-2, the term "CFTC records" shall not include registration records subject to Part 700 of NFA's Registration Rules.

(b) Disclosure of Public Information.

    (1) If any member of the public requests access to CFTC records, or portions thereof, and the requested record, or portion, is "public" or "publicly available" under CFTC Regulations 1.10(g) or 145.0, then NFA will release that record or portion to the requester.

    (2) NFA may charge any member of the public a copying fee, not to exceed the fee charged by the Commission, for any copies of CFTC records provided by NFA directly to the requester.

(c) Disclosure of Non-Public Information. Requests for access to CFTC records, or portions thereof, not subject to disclosure as public or publicly available under paragraph (b)(1) of this Rule shall be referred or transmitted to the Commission for response; except that, NFA will disclose such records or portion thereof:

    (1) otherwise with the authorization of the Assistant Secretary of the Commission for FOI, Privacy and Sunshine Act Compliance or his or her designee, or the General Counsel of the Commission or his or her designee, in accordance with CFTC Regulations 145.7(b), (h) and (i); the Freedom of Information Act, 5 U.S.C. � 552; and the Privacy Act, 5 U.S.C. � 552a; and

    (2) to any individual or firm, or person acting on behalf of the individual or firm, who seeks access to his, her or its CFTC records: Provided, however, that NFA receives proper verification of the identity and authority of the party requesting the records.

[¶ 5806] RULE 4-2. CERTIFICATION OF THE AUTHENTICITY OF CFTC RECORDS MAINTAINED BY NFA.
(Click Here to Print this Rule) [Adopted effective June 2, 2006.]

(a) Designation of Custodian and Deputies. The President shall designate an NFA employee to serve as the NFA Record Custodian ("Custodian"). The President also may designate one or more NFA employees to serve as Deputy NFA Record Custodians ("Deputies"). The Custodian and the Deputies shall be responsible for maintaining all CFTC records in NFA's possession and shall be the legal custodians of these CFTC records.

(b) Authority of Custodian and Deputies. The Custodian, each of the Deputies, or in their absence, any NFA employee designated by the President, the Custodian or one of the Deputies, is authorized to certify in writing the authenticity of CFTC records in NFA's possession for purposes of any judicial or administrative proceeding. The Custodian, each of the Deputies or any designated employee also is authorized to certify in writing as to the maintenance and completeness of the CFTC records in NFA's possession, as well as the thoroughness of NFA's search for requested documents, for purposes of any judicial or administrative proceeding.

(c) Effectiveness of Certification. This written certification shall be effective when executed by the Custodian, one of the Deputies or any designated employee.

(d) Content of Certification. The written certification shall include that, pursuant to Commission authorization, the Custodian has and maintains legal custody of the official CFTC records that are the subject of the certification.

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Code of Arbitration
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[¶ 6011] SECTION 1. DEFINITIONS.
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[Effective dates of amendments: April 11, 1983; July 27, 1983; February 1, 1988; November 9, 1988; January 1, 1990; February 18, 1992; May 1, 1994; March 1, 2002; September 9, 2002; December 1, 2003; August 30, 2006; February 13, 2007; and June 5, 2007.]

As used in this Code:

[¶ 6011.1] (a) "Aggregate Claim" - means an Arbitration Claim plus any counterclaim, cross-claim and third-party claim filed in the same matter under this Code.

[¶ 6011.2] (b) "Arbitration Claim" - means a claim filed by the person instituting the Arbitration proceeding.

[¶ 6011.3] (c) "Associate" - means a person who is registered with NFA as an Associate or was so registered when the acts or transactions that are the subject of dispute occurred. (Under NFA Bylaws every person who is associated with a Member within the meaning of the term "associated person" as used in Section 4k of the Commodity Exchange Act, and who is required to be registered as such with the Commission, must register with NFA as an Associate.)

[¶ 6011.4] (d) "Claim" - means an Arbitration Claim, counterclaim, cross-claim or third-party claim filed under this Code.

[¶ 6011.5] (e) "Claimant" - means a person making a proper and timely claim under this Code.

[¶ 6011.6] (f) "Commission" - means the Commodity Futures Trading Commission.

[¶ 6011.7] (g) "Commodity Pool Operator" or "CPO" - means a commodity pool operator as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.

[¶ 6011.8] (h) "Commodity Trading Advisor" or "CTA" - means a commodity trading advisor as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.

[¶ 6011.9] (i) "Contract Market" - means an exchange designated by the Commission as a contract market in one or more commodities.

[¶ 6011.10] (j) "Cross-claim" - means a claim filed by one Respondent against a co-Respondent.

[¶ 6011.11] (k) "Futures Commission Merchant" or "FCM" - means a futures commission merchant as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.

[¶ 6011.12] (l) "Floor Broker" - means a floor broker as that term is used in the Commodity Exchange Act.

[¶ 6011.13] (m) "Forex" - has the same meaning as in Bylaw 1507(b).

[¶ 6011.14] (n) "Forex Dealer Member" - has the same meaning as in Bylaw 306.

[¶ 6011.15] (o) "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;

    (4) leverage transactions as that term is defined in the Commission's Rules;

    (5) security futures products, as that term is defined in Section 1a(32) of the Act; and

    (6) for purposes of jurisdiction under this Code:

      (i) forex transactions when the claim is brought against a Member or Associate who is subject to Compliance Rule 2-39; and

      (ii) forex transactions that are between a Forex Dealer Member and a person that is not an eligible contract participant as defined in Section 1a(12) of the Act. Forex Dealer Members, their employees, and Members and Associates who solicit transactions on behalf of, introduce customers to, or manage accounts for customers that enter into transactions with a Forex Dealer Member are all subject to mandatory arbitration in connection with those transactions.

[¶ 6011.16] (p) "Introducing Broker" or "IB"-means an introducing broker as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.

[¶ 6011.17] (q) "Leverage Transaction Merchant" or "LTM"-means a leverage transaction merchant as that term is used in Commission Rules, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.

[¶ 6011.18] (r) "Member" - means a Member of NFA or a person that was a Member at the time the acts or transactions that are the subject of the dispute occurred.

[¶ 6011.19] (s) "NFA" - means National Futures Association.

[¶ 6011.20] (t) "Panel" - means the arbitration panel appointed pursuant to Section 4(a) of this Code.

[¶ 6011.21] (u) "Person" - includes individuals, corporations, partnerships, trusts, associations and other entities.

[¶ 6011.22] (v) "Pleading" - means an Arbitration Claim, counter-claim, cross-claim, third-party claim, Answer or Reply filed under this Code.

[¶ 6011.23] (w) "President" - means the President of NFA.

[¶ 6011.24] (x) "Respondent" - means a person against whom a claim is asserted under this Code.

[¶ 6011.25] (y) "Secretary" - means the Secretary of NFA.

[¶ 6011.26] (z) "Third-party Claim" - means a claim filed by a Respondent against a person not a party to the action.

[¶ 6017] SECTION 2. ARBITRABLE DISPUTES.
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[Effective dates of amendments: April 11, 1983; June 28, 1985; November 9, 1988; June 12, 1989; January 1, 1990; February 18, 1992; September 8, 1992; May 17, 1993; May 1, 1994; March 1, 2002; September 9, 2002 and December 15, 2003.]

[¶ 6017.1] (a) Mandatory Arbitration.
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    (1) Claims. Except as provided in Sections 5 and 6 of this Code with respect to timeliness requirements, the following disputes shall be arbitrated under this Code if the dispute involves commodity futures contracts:

      (i) a dispute for which arbitration is sought by a customer against a Member or employee thereof, or Associate, provided that:

        (A) the customer is not an FCM, floor broker, Member or Associate;

        (B) the dispute does not solely involve cash market transactions that are not part of or directly connected with a commodity futures transaction; and

        (C) if brought against a Member or employee thereof, the Member is an FCM, an IB, a CPO, a CTA or an LTM.

      (ii) a customer claim that is required to be arbitrated by NFA under a lawful agreement that complies with Commission Rule 166.5.

      (iii) a customer claim whose resolution has been delegated to NFA by a contract market.

    (2) Counterclaims, Cross-claims and Third-party Claims. Except as provided in Sections 5 and 6 of this Code with respect to timeliness requirements, a counterclaim, cross-claim or third-party claim may be asserted in an arbitration brought under this Code if the counterclaim, cross-claim or third-party claim arises out of an act or transaction that is the subject of the Arbitration Claim.

[¶ 6017.2] (b) Disputes Which May Be Arbitrated in the President's Discretion.
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    (1) At the option of any party, the securities portion of a dispute involving unrelated futures and securities claims may, in the President's discretion, be arbitrated under this Code if the timeliness requirements of Sections 5 and 6 of this Code are met.

    (2) Except as required by the Member Arbitration Rules, other disputes involving commodity futures contracts between or among customers, Members, or Associates may, in the President's discretion, be arbitrated under this Code if the parties agree or have agreed to such arbitration and the timeliness requirements of Sections 5 and 6 of this Code are met.

[¶ 6023] SECTION 3. PRE-DISPUTE ARBITRATION AGREEMENTS.
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[Effective dates of amendments: June 13, 1986; November 9, 1988; January 1, 1990 and September 9, 2002.]

Any pre-dispute arbitration agreement between a customer and an FCM, IB, CPO, CTA or LTM Member or Associate thereof that does not comply with Commission Rule 166.5 shall be unenforceable under this Code.

[¶ 6029] SECTION 4. ARBITRATION PANEL.
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[Effective dates of amendments: November 24, 1982; January 28, 1986; November 9, 1988; July 12, 1989; October 29, 1990; February 18, 1992; May 1, 1994; June 23, 1997 and May 1, 2001]

[¶ 6029.1] a) Appointment of Panel.
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NFA shall conduct all arbitration proceedings under this Code before an arbitration Panel consisting of the following:

    (1) Where the aggregate claim amount does not exceed $50,000, NFA shall appoint one arbitrator. However, if the aggregate amount of the claim exceeds $25,000 but is not more than $50,000, NFA shall appoint three arbitrators if one of the parties serves a written request on NFA for three arbitrators by no later than 30 days after the last pleading is due or the sole arbitrator asks NFA to appoint two additional arbitrators.

    (2) Where the aggregate claim amount exceeds $50,000, NFA shall appoint three arbitrators.

All arbitration Panels shall be appointed by the Secretary and consist of individuals who are NFA Members or individuals connected therewith (one such Member or individual designated as Panel Chairperson). Provided, however, if a customer so requests in a timely filed pleading, the Chairperson and at least one other arbitrator, and the sole arbitrator where there is a single-person Panel, shall not be connected with an NFA Member or NFA (except as NFA arbitrators). For purposes of this section, any individual who performs a significant amount of work on behalf of NFA Members or Associates and any individual who was a Member or Associate or was an employee of a Member within the past three years shall be considered to be connected with an NFA Member.

[¶ 6029.2] (b) Disclosures Required.
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Prior to being appointed to the Panel, each arbitrator under consideration shall disclose to NFA any circumstances that might prevent the arbitrator from acting impartially.

[¶ 6029.3] (c) Appointment of Panel; Disclosure and Challenge.
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The Secretary shall thereupon appoint, pursuant to Section 4(a), an arbitration Panel to resolve the dispute. No arbitrator shall have acted as the mediator in the same dispute. NFA shall promptly notify the parties of the names, business affiliations and other information relevant to the classification of the arbitrator as a Member or non-Member panelist. Any objection of a party to such appointment shall be specific and for cause and submitted to NFA in written form. Each party or their representative shall disclose to NFA any circumstances likely to affect an arbitrator's impartiality, including any bias or any financial interest in the result of the arbitration or any past or present relationship with the arbitrator. Any party who fails to disclose such information shall be deemed to have waived any objection to that arbitrator based on such information. Each arbitrator appointed shall disclose to NFA any circumstances likely to affect impartiality, including any bias or any financial interest in the result of the arbitration or any past or present relationship with the parties or their representative. Upon receipt of such information from an arbitrator or other source, NFA shall communicate such information to the parties, and if NFA deems it appropriate to do so, to the Panel and others. Thereafter, NFA shall determine whether the arbitrator should be disqualified and shall inform the parties of the decision, which shall be conclusive.

[¶ 6029.4] (d) Arbitrator's Oath.
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Before proceeding with the hearing, each arbitrator shall execute an oath whereby the arbitrator promises to faithfully and fairly determine the matter before the Panel.

[¶ 6029.5] (e) Replacement.
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If an arbitrator becomes ineligible or otherwise unable to serve on the Panel, the Secretary shall (unless the parties request otherwise) appoint a replacement to the Panel. In the event an arbitrator is excused or recuses himself after the commencement of the hearing because a party failed to disclose information which may be grounds for objecting to the arbitrator, the party withholding the information shall be deemed to have waived his right to object to proceeding with the remaining two arbitrators. If a replacement is appointed after the commencement of the hearing, the Panel shall determine whether all or any part of any prior hearing sessions shall be repeated.

[¶ 6029.6] (f) Ex Parte Contacts.
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No party to the arbitration, or a representative thereof, shall communicate with any Panel member regarding the arbitration, other than inquiries concerning the status thereof, except at the hearing or in writing on notice to the other parties.

[¶ 6035] SECTION 5. TIME PERIOD FOR ARBITRATION.
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[Effective dates of amendments: February 18, 1992; May 1, 1994; June 7, 1996; June 23, 1997 and March 1, 2002.]

No Arbitration Claim may be arbitrated under this Code unless an Arbitration Claim or notice of intent to arbitrate (see Sections 6(a) and (c)) is received by NFA within two years from the date when the party filing the Arbitration Claim knew or should have known of the act or transaction that is the subject of the controversy. Except as is provided in Sections 6(f) and (h) below, no counterclaim, cross-claim or third-party claim may be arbitrated under this Code unless it is asserted in a timely filed Answer in accordance with Section 6(e) below. NFA shall reject any claim that is not timely filed. If, in the course of any arbitration, the Panel determines that the requirements of this section have not been met as to a particular claim, the Panel shall thereupon terminate the arbitration of the claim without decision or award.

[¶ 6041] SECTION 6. INITIATION OF ARBITRATION.
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[Effective dates of amendments: June 28, 1985; January 28, 1986; November 9, 1988; July 12, 1989; June 12, 1991; February 18, 1992; May 17, 1993; May 1, 1994; March 12, 1996; June 7, 1996; June 23, 1997; June 1, 1999; March 1, 2002; June 13, 2005 and June 5, 2007.]

An arbitration proceeding under this Code shall be initiated as follows:

[¶ 6041.1] (a) Notice of Intent to Arbitrate.
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If the two-year time limit under Section 5 of this Code is close to expiring, a person wanting to file an Arbitration Claim may notify NFA, either in writing or orally, of such person's intent to arbitrate. NFA shall maintain a record of the receipt of each such notice and shall promptly provide such person with a copy of this Code and an Arbitration Claim form.

[¶ 6041.2] (b) Arbitration Claim Pursuant to a Notice of Intent to Arbitrate.
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If a person who files a notice of intent to arbitrate decides to proceed with NFA arbitration, such person shall, within 35 days after the date NFA provided the person with a copy of the Code and an Arbitration Claim form under Section 6(a) above, serve a completed Arbitration Claim on NFA.

[¶ 6041.3] (c) Arbitration Claim
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NFA shall promptly review each Arbitration Claim for completeness. Any Arbitration Claim which NFA deems to be incomplete, or which is not accompanied by the appropriate fee, shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed Arbitration Claim on NFA, together with any unpaid fee, within 20 days following service by NFA. NFA shall reject any Arbitration Claim which has not been timely filed, or for which the appropriate fee has not been paid.

[¶ 6041.4] (d) Notice to Respondent.
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    (1) NFA shall promptly serve a copy of the completed Arbitration Claim on each person named therein as a Respondent, and a copy of any agreement to arbitrate.

    (2) If a guaranteed IB is named in the Arbitration Claim as a Respondent, NFA shall promptly serve a copy of the completed Arbitration Claim on the Member FCM that guaranteed the IB during the time of the acts or transactions involved in the claim. That Member FCM may intervene in the arbitration proceeding if it chooses to.

[¶ 6041.5] (e) Answer to an Arbitration Claim.
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A Respondent shall serve its Answer on NFA and concurrently serve a copy on the Claimant within the time period provided below. Any Member FCM served with the Arbitration Claim under Section 6(d)(2) above that wishes to intervene in the arbitration proceeding must serve an Answer and written notice of intervention on NFA and concurrently serve a copy on the Claimant within the time period provided below for filing the Answer. An allegation in the Arbitration Claim that is not denied in the Answer shall be deemed by the Panel to be admitted.

    (1) Claims of $25,000 or Less. Where the Arbitration Claim amount does not exceed $25,000, the Answer shall be served within 20 days following service of the Arbitration Claim by NFA.

    (2) Claims of more than $25,000 through $50,000. Where the Arbitration Claim amount exceeds $25,000 but is not more than $50,000, the Answer shall be served within 45 days following service of the Arbitration Claim by NFA. An arbitration service fee of $275.00 shall accompany each Answer. Any Answer which is not accompanied by the appropriate fee shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed Answer on NFA, together with any unpaid fee, within 20 days following service by NFA. NFA shall reject any Answer for which the appropriate fee has not been paid. Each Respondent who files an Answer but does not pay the service fee will have waived its right to an oral hearing and to otherwise participate in the proceeding. However, the Panel may, for good cause shown, accept the Answer and allow the Respondent to participate.

    (3) Claims of more than $50,000. Where the Arbitration Claim amount exceeds $50,000, the Answer shall be served within 45 days following service of the Arbitration Claim by NFA. An arbitration service fee of $675.00 shall accompany each Answer. Any Answer which is not accompanied by the appropriate fee shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed Answer on NFA, together with any unpaid fee, within 20 days following service by NFA. NFA shall reject any Answer for which the appropriate fee has not been paid. Each Respondent who files an Answer but does not pay the service fee will have waived its right to an oral hearing and to otherwise participate in the proceeding. However, the Panel may, for good cause shown, accept the Answer and allow the Respondent to participate.

[¶ 6041.6] (f) Counterclaim and Cross-claim.
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Any counterclaim or cross-claim under Section 2(a)(2) must be asserted in the Answer, unless the person against whom the counterclaim or cross-claim is asserted consents to a later assertion of the counterclaim or cross-claim. If any counterclaim or cross-claim is asserted, the party asserting the counterclaim or cross-claim shall promptly remit the appropriate fee to NFA. (See Sections 11 and 18.) Any counterclaim or cross-claim which NFA deems to be incomplete, or which is not accompanied by the appropriate fee, shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed counterclaim or cross-claim on NFA, together with any unpaid fee, within the time period provided below. NFA shall reject any counterclaim or cross-claim which has not been timely filed, or for which the appropriate fee has not been paid.

    (1) Claims of $25,000 or Less. Where the aggregate claim amount does not exceed $25,000, the completed counterclaim or cross-claim shall be served within 10 days following service of the incomplete counterclaim or cross-claim by NFA.

    (2) Claims of more than $25,000. Where the aggregate claim amount exceeds $25,000, the completed counterclaim or cross-claim shall be served within 20 days following service of the incomplete counterclaim or cross-claim by NFA.

[¶ 6041.7] (g) Reply to Counterclaim or Cross-claim.
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The person against whom the counterclaim or cross-claim is asserted shall serve its Reply to the counterclaim or cross-claim on NFA and concurrently serve a copy on the counterclaiming or cross-claiming Respondent within the time period provided below. Any allegation in the counterclaim or cross-claim that is not denied in the Reply shall be deemed by the Panel to be admitted.

    (1) Claims of $25,000 or Less. Where the aggregate claim amount does not exceed $25,000, the Reply shall be served within 10 days following service of the Answer, counterclaim or cross-claim by NFA.

    (2) Claims of more than $25,000. Where the aggregate claim amount exceeds $25,000, the Reply shall be served within 35 days following service of the Answer, counterclaim or cross-claim by NFA.

[¶ 6041.8] (h) Third-party Claim.
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Any third-party claim under Section 2(a)(2) must be asserted in the Answer, unless the third party consents to a later assertion of the claim. If the third party is not a Member or Associate, such person must agree or have agreed to submit to arbitration. If any third-party claim is asserted, the Respondent asserting the third-party claim shall promptly remit the appropriate fee to NFA. (See Sections 11 and 18 below.) Any third-party claim which NFA deems to be incomplete, or which is not accompanied by the appropriate fee, shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed third-party claim on NFA, together with any unpaid fee, within the time period provided below. NFA shall reject any third-party claim which has not been timely filed, or for which the appropriate fee has not been paid.

    (1) Claims of $25,000 or Less. Where the aggregate claim amount does not exceed $25,000, the completed third-party claim shall be served within 10 days following service of the incomplete third-party claim by NFA.

    (2) Claims of more than $25,000. Where the aggregate claim amount exceeds $25,000, the completed third-party claim shall be served within 20 days following service of the incomplete third-party claim by NFA.

[¶ 6041.9] (i) Notice to Third-party Respondent.
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NFA shall promptly serve a copy of the completed third-party claim on each person named therein as a Respondent, and a copy of any agreement to arbitrate.

[¶ 6041.10] (j) Answer to Third-party Claim.
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A third-party Respondent shall serve its Answer on NFA and concurrently serve a copy on the third-party Claimant within the time period provided below. An allegation in the third-party claim that is not denied in the Answer shall be deemed by the Panel to be admitted.

    (1) Claims of $25,000 or Less. Where the aggregate claim amount does not exceed $25,000, the Answer shall be served within 20 days following service of the third-party claim by NFA.

    (2) Claims of more than $25,000. Where the aggregate claim amount exceeds $25,000, the Answer shall be served within 45 days following service of the third-party claim by NFA.

[¶ 6041.11] (k) Amendments to Claims.
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After the appointment of a Panel, no new or different claim may be filed except with the Panel's consent.

[¶ 6041.12] (l) Late Answer, Reply or Notice of Intervention.
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NFA shall accept any Answer or Reply filed prior to the hearing. However, NFA or any party may present an objection to the Panel with regard to the timeliness of any filing. NFA will not accept a late notice of intervention unless the party filing the late notice explains in writing its reasons for the lateness and obtains the Panel's consent to file the late notice.

[¶ 6041.13] (m) Consolidation and Joinder.
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    (1) When Arbitration Claims involving common questions of fact or arising from the same act or transactions are received by the Secretary, the Secretary may, whether or not at the request of any party, order any or all of the proceedings to be consolidated for hearing in the interest of providing a fair, equitable and expeditious procedure and may take such action concerning the proceedings herein as may tend to avoid unnecessary or unreasonable delay.

    (2) A party may join multiple claims in a single Arbitration Claim involving common questions of fact or arising from the same act or transactions if the claims involve common questions of fact, arise from the same act or transactions, are filed by the same person against the same Respondents (even if the person filing the Arbitration Claim is acting in different capacities) or are filed on behalf of an individual and a corporation against the same Respondents if the individual is the sole shareholder of the corporation. The Secretary may, whether or not at the request of any party, order any or all joined claims to be separated in the interest of providing a fair, equitable or expeditious procedure or to avoid unnecessary or unreasonable delay.

[¶ 6041.14] (n) Dismissal Without Prejudice.
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The Panel may, at the written request of a party or on its own motion, dismiss without prejudice any claim which it determines is not a proper subject for NFA arbitration.

[¶ 6041.15] (o) Attestation.
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Any claim, answer, counterclaim, cross-claim, reply to counterclaim or cross-claim, third-party claim, or answer to third-party claim must include the following attestation: "The undersigned certifies that, to the best of his/her knowledge, information and belief, formed after a reasonable inquiry, the statements set forth in this pleading are true and correct."

[¶ 6047] SECTION 7. RIGHT TO COUNSEL.
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[Effective dates of amendments: November 9, 1988; July 12, 1989; June 12, 1991; June 23, 1997; December 17, 1999; and June 1, 2006.]

(a) A party may be represented at any time throughout the arbitration proceeding, including a mediation proceeding, by an attorney-at-law licensed to practice law in the highest court of any state, by a family member or other person who is representing the party without compensation and who does not have an interest in the outcome of the proceeding, or by an officer, partner or employee of the party. The attorney or other representative shall serve timely notice in writing on NFA and the other parties of the name and address of any such representative. The Panel may bar from the proceeding any representative for dilatory, disruptive or contumacious conduct.

(b) A representative of a party may withdraw upon submitting to NFA an affidavit that the party represented has actual knowledge of the withdrawal or that the representative has made a good faith effort to provide such notice.

[¶ 6048] SECTION 8. PRE-HEARING.
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[Adopted effective June 28, 1985. Effective dates of amendments: July 12, 1989; June 12, 1991; May 1, 1994; March 12, 1996; June 23, 1997; June 1, 1999; March 1, 2002; and June 1, 2006.]

[¶ 6048.1] (a) Exchange of Documents and Written Information.
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    (1) The parties shall cooperate, without resort to issuance of subpoenas, in the voluntary exchange of material and relevant documents and written information which may serve to facilitate a fair, equitable and expeditious hearing.

    (2) When a claim is accepted by NFA and served on each person named as a Respondent, NFA shall identify, from a list approved by NFA's Board of Directors, documents to be automatically exchanged between the parties. The parties shall exchange those documents no later than 15 days after the last pleading is due.

    [See Interpretive Notice Standard List of Documents to be Exchanged Under Section 8 of NFA's Code of Arbitration.]

    (3) All other requests for documents and written information shall be served as follows:

      (i) Where the aggregate claim amount does not exceed $25,000, the requesting party shall serve its requests for documents and written information on the responding party no later than 20 days after the last pleading is due. The responding party shall serve the documents and written information, including written objections, no later than 20 days after the request is due.

      (ii) Where the aggregate claim amount exceeds $25,000, the requesting party shall serve its request for documents and written information on the responding party no later than 30 days after the last pleading is due. The responding party shall serve the requesting party with the documents and written information, including written objections, no later than 30 days after the request is due.

    (4) Written requests to compel production of documents and written information must be served on NFA and all parties no later than 10 days after the written objections are due. Written responses to the request to compel must be served on the Secretary and all parties no later than 10 days after the request to compel was served.

    (5) A request to compel must include a written certification by the filing party or its representative. The certification must state that the filing party or its representative has made a good faith effort to resolve the matters forming the basis for the request through either a telephone conference or in-person meeting with the other party or its representative.

    (6) Unless the Panel directs otherwise, requests to compel will be decided on the written submission of the parties.

    (7) A request to compel that is not timely filed under Section 8(a)(4) above will not be allowed except for good cause shown as to why it was late.

    (8) Evidence that is otherwise discoverable or admissible in an arbitration proceeding shall not be rendered non-discoverable or inadmissible as a result of its use in connection with a mediation proceeding. However, documents and written information in the mediator's possession are not subject to discovery and may not be subpoenaed for use in the subsequent arbitration hearing.

[¶ 6048.2] (b) Documents to be Introduced into Evidence.
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    (1) Unless a Panel directs otherwise, each party shall serve on every other party all documents in such party's possession which the party intends to introduce into evidence at the hearing as part of its direct case and shall concurrently serve sufficient copies of the documents on NFA at least 10 days prior to the date assigned for an oral hearing.

    (2) At least 15 days before the date assigned for a summary proceeding to commence, each party shall serve on NFA sufficient copies of all documents in such party's possession which are to be submitted to the Panel as part of the party's case and shall concurrently serve copies on every other party. At least five days before the date assigned for a summary proceeding to commence, each party shall serve on NFA sufficient copies of all documents in such party's possession which are to be submitted to the Panel to rebut the documents previously served by another party and shall concurrently serve copies on every other party.

[¶ 6048.3] (c) Hearing Plan.
(Click Here to Print this Rule) The parties shall cooperate with NFA in the formulation of a written hearing plan. A hearing plan is a written document that summarizes each claim, Answer and Reply; identifies any facts the parties have agreed to; identifies the factual and legal issues in dispute; and lists the witnesses and exhibits that will be presented at the hearing. The parties shall serve on NFA and all parties a joint hearing plan, or separate hearing plans if they cannot agree on a joint one, no later than 30 days before the oral hearing date, unless the Panel directs otherwise.

[¶ 6048.4] (d) Failure to Comply.
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The failure of any party to comply with Sections 8(a) through 8(c) or any order of the Panel may be brought to the attention of the Panel by NFA or the party seeking such documents or information. The Panel may take such actions in regard to the failure as are just, including, among other things, the following:

    (1) finding that the matters regarding which the request was made or any other designated facts shall be taken to be established for the purpose of the action in accordance with the claim of the party making the request;

    (2) refusing to allow the nonresponsive party to support or oppose designated claims or defenses or prohibiting him from introducing designated matters in evidence;

    (3) striking out pleadings or portions thereof, staying further proceedings until the nonresponsive party complies with the request, dismissing the action or proceeding or any part thereof, or rendering an award by default against the nonresponsive party.

    (4) refusing to hear testimony of any witness or to accept any document into evidence if the witness or document was not listed in the hearing plan.

[¶ 6048.5] (e) Other Pre-Hearing Motions.
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    (1) Motions to dismiss for failing to state a claim will not be heard by the Panel. Other motions to dismiss must be included in a timely filed Answer or Reply. Motions for summary judgment may be raised at any time. Motions for directed verdict may be raised at the hearing.

    (2) Except as provided in Section 8(a)(4) above, a party has 10 days from the date a pre-hearing motion is received in which to serve a written response on NFA and all other parties. However, where a motion is received less than 20 days in advance of the date the hearing or summary proceeding is scheduled to commence, NFA may, in its discretion, require a written response within less than 10 days. No written replies to a party's response to a motion will be allowed except in the Panel's discretion.

    (3) NFA shall assess a motion fee as follows:

      (i) In cases involving one arbitrator, a party filing a motion shall include a $125 motion fee for each motion filed more than 80 days after the last pleading is due. This fee may be subsequently waived at the discretion of the arbitrator, or the arbitrator may assess the motion fee against the party causing the filing of the motion. However, this fee shall not apply to a request for a preliminary hearing under Section 9(a) or a request for a postponement under Section 11(c) below.

      (ii) In cases involving three arbitrators, any party filing a motion shall include a $425 motion fee for each motion filed more than 100 days after the last pleading is due. This fee may be subsequently waived at the discretion of the arbitrators, or the arbitrators may assess the motion fee against the party causing the filing of the motion. However, this fee shall not apply to a request for a preliminary hearing under Section 9(a) or a request for a postponement under Section 11(c) below.

[¶ 6048.6] (f) Pre-Hearing Decisions by the Arbitrators.
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    (1) For cases that will be decided through a summary proceeding, the Panel will decide all motions as part of the summary review, except for those related to discovery or postponement requests.

    (2) With the consent of the other Panel members, one or more of the arbitrators may act on behalf of the Panel to decide any pre-hearing motions from the parties or to conduct any pre-hearing conference with the parties. However, the Panel may not postpone the hearing or impose sanctions, dismiss a party, or dismiss all or any portion of a claim without a majority decision.

[¶ 6048.7](g) Pre-Hearing Conference.
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For cases that will be decided through an oral hearing, NFA may schedule a pre-hearing conference with the Panel and the parties. The notice scheduling the pre-hearing conference will specify the issues to be covered at the conference, including identifying outstanding discovery disputes, setting deadlines for other motions and scheduling the hearing. The conference will be conducted by telephone within 30 days after the motion to compel due date, unless the Panel directs otherwise.

[¶ 6048.8](h) Depositions.
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The Panel may, upon the motion of a party, order evidence depositions for good cause shown.

[¶ 6053] SECTION 9. HEARING.
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[Effective dates of amendments: November 24, 1982; December 30, 1983; June 28, 1985; January 28, 1986; November 9, 1988; July 12, 1989; June 12, 1991; February 18, 1992; December 1, 1992; May 1, 1994; June 23, 1997; May 1, 2001; March 1, 2002; June 1, 2006; October 15, 2007; and April 1, 2008.]

[¶ 6053.1] (a) Preliminary Hearing.
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The Panel may, at the written request of a party or on its own motion, schedule a preliminary hearing in extraordinary circumstances. Such hearing may be conducted orally, by telephone conference, or by written submissions.

[¶ 6053.2] (b) Place, Time and Notice of Hearing.
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Except as provided in Section 8(g) or Paragraph (i) of this Section, the place and time of the hearing shall be determined in the sole discretion of the Secretary, who shall endeavor to accommodate, if possible, the preferences of all parties as indicated in a timely-filed pleading. Upon setting the initial hearing date, NFA shall serve notice on each party at least 45 days before the hearing of the date, time and place. NFA shall give reasonable notice of any rescheduled oral hearing date.

[¶ 6053.3] (c) Failure to Prosecute or Defend.
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At the written request of any party or on its own motion, the Panel may review the procedural history of the proceeding and any written submissions and may find that a party has failed to prosecute or defend the proceeding. Any party found to have failed to prosecute or defend the proceeding will be deemed to have waived his right to an oral hearing.

[¶ 6053.4] (d) Procedure.
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    (1) Each party may appear personally at the hearing to testify and produce evidence.

    (2) Each party (or the party's representative) may present opening and closing arguments, and may examine any other party or witness at the hearing and any evidence produced at the hearing.

    (3) The Panel need not apply the technical rules of evidence.

    (4) Unless waived by the parties, the Panel shall cause a verbatim record to be made of the hearing, but no party shall be required to bear the costs of making the record unless the party requests a transcript, in which case a transcript must be furnished.

    (5) All testimony at the hearing shall be given under oath.

    (6) The Panel may allow stipulations and establish other procedures as appropriate to expedite the proceeding. The Panel may consider affidavits but shall give them such weight as it deems appropriate after considering objections to them.

    (7) The Panel may order Members and employees thereof, and Associates to testify and produce documentary evidence. The Panel may issue subpoenas to non-Members as authorized by law. The parties must submit all subpoena requests to the Panel and serve those requests in accordance with Section 16(b) below. Subpoenas issued by the Panel may be enforced in a court of competent jurisdiction.

    (8) The party requesting the appearance of a non-party witness shall bear all reasonable costs of such appearance. For purposes of this section, an employee or an Associate of any party shall be considered a party witness.

    (9) All conduct and statements, offers and promises, whether oral or written, made by the parties or their representatives in connection with a mediation proceeding shall be confidential and shall not be admissible for any purpose, including impeachment, in any pending or subsequent arbitration proceeding. The mediator may not be called as a witness in a pending or subsequent arbitration proceeding.

    (10) In all other respects, the hearing procedure shall be determined by the Panel. The Panel shall afford the parties every reasonable opportunity to present their case completely.

[¶ 6053.5] (e) Extensions and Postponements.
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Extensions of time or postponements of the hearing may be granted by the Panel when the interests of justice so require, but a hearing in progress shall not be adjourned or interrupted except in compelling circumstances.

[¶ 6053.6] (f) Failure to Comply.
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The failure of any party to appear at any hearing or any session thereof, or to comply with any notice, order, or procedure in connection therewith, may subject the party to such adverse action as the Panel deems appropriate, including the entry of an award or the dismissal of a claim.

[¶ 6053.7] (g) Reopening the Record.
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The record may be reopened by the Panel on its own motion or on the motion of a party for good cause at any time prior to the Panel rendering its award. A motion to reopen the record shall stay automatically the time period in which the award shall be rendered.

[¶ 6053.8] (h) Waiver of Defects.
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Where appropriate, the Panel may excuse any failure to comply with any provision of this section, or any Panel notice, order or procedure.

[¶ 6053.9] (i) Summary Proceeding.
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The proceeding shall be conducted entirely through written submissions when:

    (1) the aggregate amount of the claims (exclusive of interest and costs) does not exceed $15,000, unless the Secretary or the Panel directs otherwise;

    (2) the aggregate amount of the claims (exclusive of interest and costs) is more than $15,000 but not more than $25,000, unless the Secretary or the Panel directs otherwise or one of the parties to the proceeding serves a written request for an oral hearing on NFA, accompanied by a fee of $525.00, no later than 30 days after the last pleading is due; or

    (3) the Panel has consented to the written agreement of the parties to waive the oral hearing. A written agreement is not required of any party which has waived its rights to an oral hearing under any other provision of this Code.

[¶ 6059] SECTION 10. AWARD, SETTLEMENT AND WITHDRAWAL.
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[Effective dates of amendments: July 27, 1983; June 28, 1985; June 13, 1986; November 9, 1988; July 12, 1989; July 30, 1990; June 12, 1991; October 29, 1991; February 18, 1992; May 17, 1993; May 1, 1994; March 12, 1996; June 23, 1997; June 1, 1999; March 21, 2001; March 10, 2005; June 1, 2006; and October 1, 2006.]

[¶ 6059.1] (a) Issuance of Award.
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The Panel shall notify NFA of its decision within 30 days after the record is closed. NFA shall then prepare a written award form, to be dated and signed by the Panel members. NFA shall promptly serve a copy of the award on each party or its representative. The award shall be that of the Panel majority.

[¶ 6059.2] (b) Relief.
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The award may grant or deny any of the monetary relief requested, and may include an assessment of interest, costs or fees (See Sections 11 and 12). A request for declaratory relief will only be heard by the arbitrators if the Respondent agrees to have the arbitrators hear the claim.

[¶ 6059.3] (c) Finality.
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The Panel's award shall be final on the date thereof. The award may be modified by the Panel if a party submits a written request for modification which is received by NFA within 20 days from the date of service of the award on the parties, and the Panel deems modification necessary because:

    (1) there is an evident material miscalculation of figures or an evident material mistake in the description of any person, thing or property referred to in the award;

    (2) the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted; or

    (3) the award is imperfect in matter of form not affecting the merits of the controversy.

NFA will not forward a modification request to the Panel unless it is based on one of the grounds listed above. The timely filing of a request for modification shall stay automatically the finality of any award until NFA rejects the request or the Panel either modifies the award or denies the request for modification.

[¶ 6059.4] (d) Appeal.
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There shall be no right of appeal of the award.

[¶ 6059.5] (e) Award Binding.
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All parties shall be bound by the award and any modification thereof.

[¶ 6059.6] (f) Judgment.
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Judgment on the award may be entered in any court of competent jurisdiction.

[¶ 6059.7] (g) Failure to Comply.
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(1) The President may, on 30 days written notice, summarily suspend a Member or Associate when the Member, or employee thereof, or Associate:

(i) fails to comply with an award within 30 days from the date of service of the award by NFA or such other period as specified in the award unless

    (A) a request to modify the award is pending under Section 10(c) or

    (B) the Member, or employee thereof, or Associate who failed to comply has a pending application to vacate, modify or correct the award in a court of competent jurisdiction and has posted a bond with NFA equal to 150% of the amount of the award against that person or such lesser amount as NFA shall require in a particular case, but not less than 110% unless a satisfactory bond has been posted with the court; or

(ii) fails to comply with a settlement agreement within 30 days after NFA terminates the arbitration proceeding pursuant to Section 10(h) or such other period as specified in the settlement agreement; or

(iii) fails to comply with a settlement agreement executed in connection with an NFA-sponsored pre-arbitration mediation proceeding within 30 days after the time stated in the settlement agreement; or

(iv) fails to pay any fee assessed within the time so ordered by the Panel.

The suspension shall remain in effect until such award, settlement agreement, or order of the Panel has been satisfied.

(2) A Member which guaranteed an IB during the relevant time may, on 30 days written notice, be summarily suspended by the President if the guarantor fails to pay an award issued against the IB under Section 10(c) or a settlement agreement entered into by the IB under Section 10(h) within 30 days after the guarantor has received actual notice that the IB has failed to comply with the award or settlement agreement. The suspension shall be lifted if the award or settlement agreement is satisfied.

(3) In lieu of or in addition to suspending any Member or Associate for failing to comply with an award, settlement agreement or Panel order to pay a fee or monetary sanction, NFA may initiate disciplinary action under its Compliance Rules for the failure of any Member or employee thereof or Associate to comply with the award, settlement agreement or Panel's order.

[¶ 6059.8] (h) Satisfaction of Demand.
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At any time during the course of an arbitration, a party may satisfy a claim by payment or settlement, including settlement through mediation. The arbitration proceeding will terminate upon receipt of written notice of satisfaction and withdrawal of the claim duly executed by the parties and submitted to NFA. If NFA is notified that the claim has been settled, but the notification is not in writing or is not duly executed by the parties, NFA shall send written notice to the parties that the arbitration proceeding will terminate within 20 days of service of such notice unless NFA receives written notice that the claim has not been settled.

[¶ 6059.9] (i) Consent Award.
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If parties agree to satisfy a claim at any time during the arbitration, the Panel may, at the request of such parties, set forth the terms of the satisfied claim in a consent award.

[¶ 6059.10] (j) Withdrawal of Claim.
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    (1) At any time during the course of the arbitration, a party may withdraw a claim against any Respondent who has not filed an Answer. A written notice of withdrawal must be filed with NFA. The withdrawal will be without prejudice unless the notice states otherwise.

    (2) After a party has filed a pleading, a party may not withdraw a claim against that party unless the party consents. The notice and the consent must be in writing and filed with NFA. The withdrawal will be without prejudice unless the notice or the consent states otherwise.

[¶ 6065] SECTION 11. ARBITRATION FEES.
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[Effective dates of amendments: June 28, 1985; December 8, 1987; November 9, 1988; July 12, 1989; February 18, 1992; May 1, 1994; December 12, 1995; June 23, 1997; February 1, 2000; May 1, 2001 and March 1, 2002.]

[¶ 6065.1] (a) Filing and Hearing Fees.
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(1) Except as provided in Section 18 of this Code, each party filing a claim under this Code shall pay a filing and hearing fee based on the amount claimed, including punitive and treble damages but exclusive of interest and costs, as follows:

Amount of Claim Filing Fee Hearing Fee
$0.00 - $2,500.00 $50.00 $ 125.00
$ 2,500.01 - $5,000.00 $100.00 $ 125.00
$ 5,000.01 - $10,000.00 $150.00 $ 125.00
$ 10,000.01 - $15,000.00 $175.00 $ 125.00
$ 15,000.01 - $25,000.00 $200.00 $125.00
$ 25,000.01 - $50,000.00 $300.00 $275.00
$ 50,000.01 - $150,000.00 $550.00 plus 1%
of excess over
$50,000.00		 $1,275.00
$150,000.01 - $500,000.00 $1,550.00 $2,550.00
More than $500,000.00 $1,550.00 $5,100.00

(2) Where the hearing fees paid by the parties is not enough to cover the standard preset fees to be paid by NFA to the arbitrators, NFA shall collect additional fees to cover the fees to be paid to the arbitrators. If a case requires more than four days of hearing, the hearing fees will be twice the standard preset fees, unless the arbitrators order the fees to remain at the standard amount.

(3) NFA shall also collect additional hearing fees when:

    (i) a party requests a preliminary hearing under Section 9(a);

    (ii) a party requests an oral hearing under Section 9(i)(2); or

    (iii) a party requests three arbitrators under Section 4(a)(1). However, where the sole arbitrator asks NFA to appoint two additional arbitrators, NFA shall assess the additional fees equally against the parties.

(4) The arbitrators, in their discretion, may assess the entire fee against any party or may divide the fee among any or all parties. Hearing fees shall be paid to NFA in advance of the hearing sessions to which they apply.

[¶ 6065.2] (b) Refunds.
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    (1) A full refund of any filing and hearing fees paid under Section 11(a) above shall be made if, prior to the appointment of a Panel, a claim filed under Section 2(a) above is found to be not arbitrable or if the President declines to arbitrate a claim under Section 2(b) of this Code.

    (2) If all claims have been settled or withdrawn and NFA receives notice of the settlement or withdrawal at least five days in advance of the first scheduled pre-hearing conference date, if one is scheduled, or at least 30 days in advance of the first scheduled preliminary hearing date or oral hearing date, if no pre-hearing conference is scheduled, a full refund of the hearing fees paid under Section 11(a) and the arbitration service fees paid under Section 6(e) shall be made to the party paying the fee.

    (3) If all claims have been settled or withdrawn and NFA receives written notice of the settlement or withdrawal at least 15 days in advance of the summary proceeding start date or first scheduled oral hearing date or preliminary hearing date, the hearing fees paid under Section 11(a) and arbitration service fees paid under Section 6(e) shall be refunded to the party paying the fee in accordance with the schedule below.

Amount of Claim

$0.00 - $25,00.00
$25,000.01 - $50,000.00
$50,000.01 - $150,000.00
$150,000.01 - $500,000.00
More than $500,000.00

 Hearing Fee Refund

$ 125.00
$ 125.00
$ 925.00
$ 2,200.00
$ 4,750.00

 Service Fee Refund

N/A
$ 125.00
$ 325.00
$ 325.00
$ 325.00

 

 

 

 

[¶ 6065.3] (c) Postponement Fees.
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Each party causing an adjournment or postponement of any scheduled oral hearing shall pay to NFA a postponement fee of $250 for the first postponement request by that party, $500 for the second request by that party, and $1,000 for any subsequent request by that party. This fee may be waived at the discretion of the arbitrators. The arbitrators also may assess reasonable and necessary expenses incurred by the parties and their witnesses, including reasonable attorneys' fees, as a result of a postponement. No fee shall be assessed if an arbitrator becomes ineligible or otherwise unable to serve, or if a hearing extends over the expected time period.

[¶ 6071] SECTION 12. ARBITRATION COSTS.
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[Effective dates of amendments: June 28, 1985; November 9, 1988; July 12, 1989; February 18, 1992; May 1, 1994 and March 12, 1996.]

Costs which may be included in an award shall normally be limited to the costs of any transcript which a party may request (See Section 9(d)(4)). A Panel may, however, assess against a party any one or more of the following other costs, upon a finding that such party's claim or defense was frivolous or was made in bad faith, or that the party engaged in willful acts of bad faith during the arbitration: Reasonable and necessary expenses incurred by (a) the arbitrators or (b) any other party or witness, including reasonable attorneys' fees. The Panel may also award attorneys' fees provided that a statutory or contractual basis exists for awarding such fees. Requests for attorneys' fees and costs incurred in the arbitration proceeding must be raised in the proceeding or they are waived.

[¶ 6077] SECTION 13. NON-WAIVER OF NFA RIGHTS.
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[Effective dates of amendments: June 28, 1985.]

The submission of a matter to arbitration under this Code shall not affect any right of NFA regarding the matter, including the right to initiate a disciplinary proceeding.

[¶ 6078] SECTION 14. MEDIATION.
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[Adopted effective June 12, 1991. Effective dates of amendments: March 21, 2001]

NFA may, in its discretion, notify the parties of the option to proceed to mediation.

[¶ 6079] SECTION 15. DISPUTES NOT COVERED UNDER THIS CODE.
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[Adopted effective June 12, 1989. Effective dates of amendments: October 29, 1990.]

Pursuant to such rules as may be approved by the Board of Directors, NFA may provide an arbitration forum for the resolution of futures-related disputes not covered under this Code.

[¶ 6080] SECTION 16. MISCELLANEOUS.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994; June 23, 1997; March 21, 2001 March 1, 2002.]

[¶ 6080.1] (a) Computation of Time.
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    (1) (1) Except as otherwise provided in this Code, service shall be deemed to occur on the earlier of the date that the documents are faxed (as evidenced by affidavit of service), e-mailed (as evidenced by affidavit of service), postal mailed, (as evidenced by postmark or affidavit of service), or the date personally delivered (as evidenced by affidavit of service).

    (2) The counting of days shall include all calendar days. Should a due date fall on a weekend or legal holiday such due date will be computed as the next business day on which mail is delivered.

[¶ 6080.2] (b) Service of Process.
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Unless otherwise indicated, service may be accomplished by hand delivery, or by first class or certified mail, or by use of a generally recognized overnight delivery service to the party's last known business or home address on record with NFA. Documents may also be served by facsimile or electronic mail on NFA and any party who has consented to service by that method. All documents which are served on NFA shall be concurrently served on each party who has filed a pleading using methods designed to ensure that NFA and all parties will receive the documents on the same day. Service on a party's representative shall be service on the party.

[¶ 6080.3] (c) Address of Record.
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A party shall promptly notify NFA of any change in the party's address or addresses, including the party's e-mail address or facsimile number, or the address of the party's representative on record with NFA.

[¶ 6081] SECTION 17. AGREEMENTS CONFLICTING WITH THE CODE.
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[Adopted effective May 17, 1993.]

This Code shall supersede any provision in an agreement entered into between the parties, either before or after a dispute arises, if the provision in the agreement contradicts or limits the Code or imposes additional obligations on NFA or the arbitrators. However, in the Secretary's discretion, the provision may be applied to NFA arbitration if the agreement names NFA as the arbitration forum or the parties consent in writing to apply the provision to NFA arbitration.

[¶ 6082] SECTION 18. APPLICABILITY OF MEMBER ARBITRATION RULES.
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[Adopted effective March 24, 1994. Effective dates of amendments: December 17, 1999]

This Code shall govern any cross-claim or third-party claim filed by a Member or Associate against another Member or Associate under this Code, except that Sections 2(a) and (b) of the Member Arbitration Rules shall apply to cross-claims or third-party claims and Section 11(a) of the Member Arbitration Rules shall apply to third-party claim.

[¶ 6083] SECTION 19. NFA'S AUTHORITY TO INTERPRET THE CODE.
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NFA has the authority to interpret the provisions of this Code.

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Member Arbitration Rules
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[¶ 6511] SECTION 1. DEFINITIONS.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994; March 1, 2002; September 9, 2002 and June 5, 2007.]

As used in these Rules:

[¶ 6511.1] (a) "Aggregate Claim" - means an Arbitration Claim plus any counterclaim, cross-claim and third-party claim filed in the same matter under these Rules.

[¶ 6511.2] (b) "Arbitration Claim" - means a claim filed by a person instituting the Arbitration proceeding.

[¶ 6511.3] (c) "Associate" - means a person who is registered with NFA as an Associate or was so registered when the acts or transactions that are the subject of the dispute occurred. (Under NFA Bylaws every person who is associated with a Member within the meaning of the term "associated person" as used in Section 4k of the Commodity Exchange Act, and who is required to be registered as such with the Commission, must register with NFA as an Associate.)

[¶ 6511.4] (d) "Claim" - means an Arbitration Claim, counterclaim, cross-claim or third-party claim filed under these Rules.

[¶ 6511.5] (e) "Claimant" - means a person making a proper and timely claim under these Rules.

[¶ 6511.6] (f) "Commission" - means the Commodity Futures Trading Commission.

[¶ 6511.7] (g) "Contract Market" - means an exchange designated by the Commission as a contract market in one or more commodities.

[¶ 6511.8] (h) "Cross-claim" - means a claim filed by one Respondent against a co-Respondent.

[¶ 6511.9] (i) "Hearings" - includes both oral hearing and summary proceedings, unless otherwise specified.

[¶ 6511.10] (j) "Member" - means a Member of NFA other than a contract market or a person that was a Member (other than a contract market) at the time the acts or transactions that are the subject of the dispute occurred.

[¶ 6511.11] (k) "NFA" - means National Futures Association.

[¶ 6511.12] (l) "Panel" - means the arbitration panel selected pursuant to Section 3 of these Rules.

[¶ 6511.13] (m) "Person" - includes individuals, corporations, partnerships, trusts, associations and other entities.

[¶ 6511.14] (n) "Pleading" - means an Arbitration Claim, counterclaim, cross-claim, third-party claim, Answer or Reply filed under these Rules.

[¶ 6511.15] (o) "President" - means the President of NFA.

[¶ 6511.16] (p) "Respondent" - means a person against whom a claim is asserted under these Rules.

[¶ 6511.17] (q) "Secretary" - means the Secretary of NFA.

[¶ 6511.18] (r) "Self-regulatory organization" - means a contract market, a registered national securities exchange, or a registered national securities association.

[¶ 6511.19] (s) "Third-party Claim" - means a claim filed by a Respondent against a person not a party to the action.

[¶ 6517] SECTION 2. ARBITRABLE DISPUTES.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994; December 12, 1995; September 1, 1999 and March 1, 2002.]

[¶ 6517.1] (a) Claims between Members.
(Click Here to Print this Rule) Except as provided in Sections 4 and 5 of these Rules with respect to timeliness requirements, disputes between and among Members shall be arbitrated under these Rules unless:

    (1) the parties, by valid and binding agreement, have committed themselves to the resolution of such dispute in a forum other than NFA;

    (2) the parties to such dispute are all required by the rules of another self-regulatory organization to submit the controversy to the settlement procedures of that self-regulatory organization;

    (3) all parties to the dispute are members of a contract market which has jurisdiction over the dispute; or

    (4) one of the parties to the dispute is a party to a dispute pending in another forum and files a cross-claim or third-party claim in that forum. The cross-claim or third-party claim must arise out of an act or transaction that is the subject of the claim pending in that forum.

[¶ 6517.2] (b) Claims between Members and Associates.
(Click Here to Print this Rule) Except as provided in Sections 4 and 5 of these Rules with respect to timeliness requirements, disputes between Members and Associates and between Associates shall be arbitrated under these Rules, at the election of the person filing the claim, unless:

    (1) the parties, by valid and binding agreement, have committed themselves to the resolution of such dispute in a forum other than NFA;

    (2) the parties to such dispute are all required by the rules of another self-regulatory organization to submit the controversy to the settlement procedures of that self-regulatory organization; or

    (3) all parties to the dispute are members of a contract market which has jurisdiction over the dispute.

Once a claim is filed, arbitration is mandatory for the Member or Associate the claim is against.

[¶ 6517.3] (c) Counterclaims, Cross-claims and Third-party Claims.
(Click Here to Print this Rule) Except as provided in Sections 4 and 5 of these Rules with respect to timeliness requirements, a counterclaim, cross-claim or third-party claim must be asserted in an arbitration brought under paragraph (a) above and may be asserted in an arbitration brought under paragraph (b) above if the counterclaim, cross-claim or third-party claim arises out of an act or transaction that is the subject of the Arbitration Claim.

[¶ 6523] SECTION 3. ARBITRATION PANEL.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994; June 23, 1997; September 1, 1999 and May 1, 2001.]

[¶ 6523.1] a) Appointment of Panel.
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Except as provided under Section 7(e) of the Rules, NFA shall conduct all arbitration proceedings under these Rules before an arbitration Panel consisting of the following:

  1. Where the aggregate claim amount does not exceed $100,000, NFA shall appoint one arbitrator. However, if the aggregate amount of the claim exceeds $50,000 but is not more than $100,000, NFA shall appoint three arbitrators if one of the parties serves a written request on NFA for three arbitrators by no later than 30 days after the last pleading is due or the sole arbitrator asks NFA to appoint two additional arbitrators.

  2. Where the aggregate claim amount exceeds $100,000, NFA shall appoint three arbitrators.
All arbitration Panels shall be appointed by the Secretary and consist of individuals who are NFA Members or individuals connected therewith (one such Member or individual designated as Panel Chairperson).

[¶ 6523.2] (b) Disclosures Required.
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Prior to being appointed to the Panel, each arbitrator under consideration shall disclose to NFA any circumstances that might prevent the arbitrator from acting impartially.

[¶ 6523.3] (c) Appointment of Panel; Disclosure and Challenge.
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The Secretary shall thereupon appoint, pursuant to Section 3(a), an arbitration Panel to resolve the dispute. No arbitrator shall have acted as the mediator in the same dispute. NFA shall promptly notify the parties of each arbitrator's name, business affiliations, and other relevant information. Any objection of a party to such appointment shall be specific and for cause and submitted to NFA in written form. Each party or their representative shall disclose to NFA any circumstances likely to affect an arbitrator's impartiality, including any bias or financial interest in the result of the arbitration or any past or present relationship with the arbitrator. Any party who fails to disclose such information shall be deemed to have waived any objection to that arbitrator based on such information. Each arbitrator appointed shall disclose to NFA any circumstances likely to affect impartiality, including any bias or any financial interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Upon receipt of such information from an arbitrator or other source, NFA shall communicate such information to the parties, and if NFA deems it appropriate to do so, to the Panel and others. Thereafter, NFA shall determine whether the arbitrator should be disqualified and shall inform the parties of the decision, which shall be conclusive.

[¶ 6523.4] (d) Arbitrator's Oath.
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Before proceeding with the hearing, each arbitrator shall execute an oath whereby the arbitrator promises to faithfully and fairly determine the matter before the Panel.

[¶ 6523.5] (e) Replacement.
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If an arbitrator become ineligible or otherwise unable to serve on the Panel, the Secretary shall (unless the parties request otherwise) appoint a replacement to the Panel. In the event an arbitrator is excused or recuses himself after the commencement of the hearing because a party failed to disclose information which may be grounds for objecting to the arbitrator, the party withholding the information shall be deemed to have waived his right to object to proceeding with the remaining two arbitrators. If a replacement is appointed after the commencement of the hearing, the Panel shall determine whether all or any part of any prior hearing sessions shall be repeated.

[¶ 6523.6] (f) Ex Parte Contacts.
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No party to the arbitration, or any representative thereof, shall communicate with any Panel member regarding the arbitration, other than inquiries concerning the status thereof, except at the oral hearing or in writing on notice to the other parties.

[¶ 6529] SECTION 4. TIME PERIOD FOR ARBITRATION.
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[Adopted effective February 18, 1992. Effective dates of amendments: March 24, 1994; June 7, 1996; June 23, 1997; March 1, 2002 and December 15, 2003.]

No Arbitration Claim may be arbitrated under these Rules unless an Arbitration Claim or notice of intent to arbitrate (See Sections 5(a) and (c) below) is received by NFA within two years from the date when the party filing the Arbitration Claim knew or should have known of the act or transaction that is the subject of the controversy. No counterclaim, cross-claim or third-party claim may be arbitrated under these Rules unless it is received by NFA within two years from the date when the party asserting the counterclaim, cross-claim or third-party claim knew or should have known of the act or transaction that is the subject of the counterclaim, cross-claim or third-party claim or it is served on NFA with a timely filed Answer, whichever is later. NFA shall reject any claim that is not timely filed. If, in the course of any arbitration, the Panel determines that the requirements of this section have not been met as to a particular claim, the Panel shall thereupon terminate the arbitration of the claim without decision or award.

[¶ 6535] SECTION 5. INITIATION OF ARBITRATION.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994; March 12, 1996; June 7, 1996; June 23, 1997; June 1, 1999; March 1, 2002; December 15, 2003; June 13, 2005 and June 5, 2007.]

An arbitration proceeding under these Rules shall be initiated as follows:

[¶ 6535.1] (a) Notice of Intent to Arbitrate.
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If the two-year time limit under Section 4 of these Rules is close to expiring, a person wanting to file an Arbitration Claim may notify NFA, either in writing or orally, of such person's intent to arbitrate. NFA shall maintain a record of the receipt of each such notice and shall promptly provide such person with a copy of these Rules and an Arbitration Claim form.

[¶ 6535.2] (b) Arbitration Claim Pursuant to a Notice of Intent to Arbitrate.
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If a person who files a notice of intent to arbitrate decides to proceed with NFA arbitration, such person shall, within 35 days after the date NFA provided the person with a copy of the Rules and an Arbitration Claim form under Section 5(a) above, serve a completed Arbitration Claim on NFA.

[¶ 6535.3] (c) Arbitration Claim.
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NFA shall promptly review each Arbitration Claim for completeness. Any Arbitration Claim which NFA deems to be incomplete, or which is not accompanied by the appropriate fee, shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed Arbitration Claim, together with any unpaid fee, within 20 days following service by NFA. NFA shall reject any Arbitration Claim which has not been timely filed, or for which the appropriate fee has not been paid.

[¶ 6535.4] (d) Notice to Respondent.
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(1) NFA shall promptly serve a copy of the completed Arbitration Claim on each person named therein as a Respondent and a copy of any agreement to arbitrate.

(2) If a guarantee IB is named in the Arbitration Claim as a Respondent, NFA shall promptly serve a copy of the completed Arbitration Claim on the Member FCM that guaranteed the IB during the time of the acts and transactions involved in the claim. That Member FCM may intervene in the arbitration proceeding if it chooses to.

[¶ 6535.5] (e) Answer to an Arbitration Claim.
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A Respondent shall serve its Answer on and concurrently serve a copy on the Claimant within the time period provided below. Any Member FCM served with the Arbitration Claim under Section 5(d)(2) above that wishes to intervene in the arbitration proceeding must serve an Answer and written notice of intervention on NFA and concurrently serve a on the Claimant within the time period provided below for filing the Answer. An allegation in the Arbitration Claim that is not denied in the Answer shall be deemed by the Panel to be admitted.

    (1) Claims of $50,000 or Less. Where the Arbitration Claim amount does not exceed $50,000, the Answer shall be served within 20 days following service of the Arbitration Claim by NFA.

    (2) Claims of more than $50,000 through $100,000. Where the Arbitration Claim amount exceeds $50,000 but is not more than $100,000, the Answer shall be served within 45 days following service of the Arbitration Claim by NFA. An arbitration service fee of $275.00 shall accompany each Answer. Any Answer which is not accompanied by the appropriate fee shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed Answer on NFA, together with any unpaid fee, within 20 days following service by NFA. NFA shall reject any Answer for which the appropriate fee has not been paid. Each Respondent who files an Answer but does not pay the service fee will have waived its right to an oral hearing and to otherwise participate in the proceeding. However, the Panel may, for good cause shown, accept the Answer and allow the Respondent to participate.

    (3) Claims of more than $100,000. Where the Arbitration Claim amount exceeds $100,000, the Answer shall be served within 45 days following service of the Arbitration Claim by NFA. An arbitration service fee of $675.00 shall accompany each Answer. Any Answer which is not accompanied by the appropriate fee shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed Answer on NFA, together with any unpaid fee, within 20 days following service by NFA. NFA shall reject any Answer for which the appropriate fee has not been paid. Each Respondent who files an Answer but does not pay the service fee will have waived its right to an oral hearing and to otherwise participate in the proceeding. However, the Panel may, for good cause shown, accept the Answer and allow the Respondent to participate.

[¶ 6535.6] (f) Counterclaim and Cross-claim.
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If any counterclaim or cross-claim is asserted, the party asserting the counterclaim or cross-claim shall promptly remit the appropriate fee to NFA. (See Section 11 below.) Any counterclaim or cross-claim which NFA deems to be incomplete, or which is not accompanied by the appropriate fee, shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed counterclaim or cross claim on NFA, together with any unpaid fee, within the time period provided below. NFA shall reject any counterclaim or cross-claim which has not been timely filed, or for which the appropriate fee has not been paid.

    (1) Claims of $50,000 or Less. Where the aggregate claim amount does not exceed $50,000, the completed counterclaim or cross-claim shall be served within 10 days following service by NFA.

    (2) Claims of more than $50,000. Where the aggregate claim amount exceeds $50,000, the completed counterclaim or cross-claim shall be served within 20 days following service by NFA.

[¶ 6535.7] (g) Reply to Counterclaim or Cross-claim.
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The person against whom the counterclaim or cross-claim is asserted shall serve its Reply to the counterclaim or cross-claim on NFA, and concurrently serve a copy on the counterclaiming or cross-claiming Respondent within the time period provided below. Any allegation in the counterclaim or cross-claim that is not denied in the Reply shall be deemed by the Panel to be admitted.

    (1) Claims of $50,000 or Less. Where the aggregate claim amount does not exceed $50,000, the Reply shall be served within 10 days from the date of service of the Answer, counterclaim or cross-claim by NFA.

    (2) Claims of more than $50,000. Where the aggregate claim amount exceeds $50,000, the Reply shall be served within 35 days from the date of service of the Answer, counterclaim or cross-claim by NFA.

[¶ 6535.8] (h) Third-party Claim.
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A Respondent may file a third-party claim against a Member or Associate under these Rules. If any third-party claim is asserted, the Respondent asserting the third-party claim shall promptly remit the appropriate fee to NFA. (See Section 11 below.) Any third-party claim, which NFA deems to be incomplete, or which is not accompanied by the appropriate fee, shall be returned to the filing party by NFA. In that event, the filing party shall serve a completed third party claim on NFA, together with any unpaid fee, within the time provided below. NFA shall reject any third-party claim which has not been timely filed, or for which the appropriate fee has not been paid.

    (1) Claims of $50,000 or Less. Where the aggregate claim amount does not exceed $50,000, the completed third-party claim shall be served within 10 days following service of the incomplete third-party claim by NFA.

    (2) Claims of more than $50,000. Where the aggregate claim amount exceeds $50,000, the completed third-party claim shall be served within 20 days following service of the incomplete third-party claim by NFA.

[¶ 6535.9] (i) Notice to Third-party Respondent.
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NFA shall promptly serve a copy of the completed third-party claim on each person named therein as a Respondent, and a copy of any agreement to arbitrate.

[¶ 6535.10] (j) Answer to Third-party Claim.
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A third-party Respondent shall serve its Answer on NFA and concurrently serve a copy on the third-party Claimant within the time period provided below. An allegation in the third-party claim that is not denied in the Answer shall be deemed by the Panel to be admitted.

    (1) Claims of $50,000 or Less. Where the aggregate claim amount does not exceed $50,000, the Answer shall be served within 20 days following service of the third-party claim by NFA.

    (2) Claims of more than $50,000. Where the aggregate claim amount exceeds $50,000, the Answer shall be served within 45 days following service of the third-party claim by NFA.

[¶ 6535.11] (k) Amendments to Claims.
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After the appointment of a Panel, no new or different claim may be filed except with the Panel's consent.

[¶ 6535.12] (l) Late Answer, Reply or Notice of Intervention.
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NFA shall accept any Answer or Reply filed prior to the hearing. However, NFA or any party may present an objection to the Panel with regard to the timeliness of any filing. NFA will not accept a late notice of intervention unless the party filing the late notice explains in writing its reasons for the lateness and obtains the Panel's consent to file the late notice.

[¶ 6535.13] (m) Consolidation and Joinder.
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    (1) When Arbitration Claims involving common questions of fact or arising from the same act or transaction are received by the Secretary, the Secretary may, whether or not at the request of any party, order any or all of the proceedings to be consolidated for hearing in the interest of providing a fair, equitable and expeditious procedure and may take such action concerning the proceedings herein as may tend to avoid unnecessary or unreasonable delay.

    (2) A party may join multiple claims in a single Arbitration Claim if the claims involve common questions of fact, arise from the same act or transactions, are filed by the same person against the same Respondents (even if the person filing the Arbitration Claim is acting in different capacities) or are filed on behalf of an individual and a corporation against the same Respondents if the individual is the sole shareholder of the corporation. The Secretary may, whether or not at the request of any party, order any or all joined claims to be separated in the interest of providing a fair, equitable or expeditious procedure or to avoid unnecessary or unreasonable delay.

[¶ 6535.14] (n) Attestation.
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Any claim, answer, counterclaim, cross-claim, reply to counterclaim or cross-claim, third-party claim, or answer to third-party claim must include the following attestation: "The undersigned certifies that, to the best of his/her knowledge, information and belief, formed after a reasonable inquiry, the statements set forth in this pleading are true and correct."

[¶ 6541] SECTION 6. RIGHT TO COUNSEL.
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[Adopted effective February 18, 1992. Effective dates of amendments: June 23, 1997; December 17, 1999; and June 1, 2006.]

(a) A party may be represented at any time throughout the arbitration proceeding, including a mediation proceeding, by an attorney-at-law licensed to practice law in the highest court of any state, by a family member or other person who is representing the party without compensation and who does not have an interest in the outcome of the proceeding, or by an officer, partner or employee of the party. The attorney or other representative shall serve timely notice in writing on NFA and the other parties of the name and address of any such representative. The Panel may bar from the proceeding any representative for dilatory, disruptive or contumacious conduct.

(b) A representative of a party may withdraw upon submitting to NFA an affidavit that the party represented has actual knowledge of the withdrawal or that the representative has made a good faith effort to provide such notice.

[¶ 6547] SECTION 7. PRE-HEARING.
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[Adopted effective February 18, 1992. Effective dates of amendments: March 24, 1994; March 12, 1996; June 23, 1997; June 1, 1999; September 1, 1999; March 1, 2002; and June 1, 2006.]

[¶ 6547.1] (a) Exchange of Documents and Written Information.
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    (1) The parties shall cooperate, without resort to issuance of subpoenas, in the voluntary exchange of material and relevant documents and written information which may serve to facilitate a fair, equitable and expeditious hearing.

    (2) When a claim is accepted by NFA and served on each person named as a Respondent, NFA shall identify, from a list approved by NFA's Board of Directors, documents to be automatically exchanged between the parties. The parties shall exchange those documents no later than 15 days after the last pleading is due.

[See Interpretive Notice Standard List of Documents to be Exchanged Under Section 8 of NFA's Code of Arbitration.]

    (3) (3) All other requests for documents and written information shall be served as follows:

      (i) Where the aggregate claim amount does not exceed $50,000, the requesting party shall serve its requests for documents and written information on the responding party no later than 20 days after the last pleading is due. The responding party shall serve the documents and written information, including written objections, no later than 20 days after the request is due.

      (ii) Where the aggregate claim amount exceeds $50,000, the requesting party shall serve its request for documents and written information on the responding party by the requesting party no later than 30 days after the last pleading is due. The responding party shall serve the requesting party with the documents and written information, including written objections, no later than 30 days after the request is due.

    (4) Written requests to compel production of documents and written information must be served on NFA and all parties no later than 10 days after the written objections are due. Written responses to the request to compel must be served on the Secretary and all parties no later than 10 days after the request to compel was served.

    (5) A request to compel must include a written certification by the filing party or its representative. The certification must state that the filing party or its representative has made a good faith effort to resolve the matters forming the basis for the request through either a telephone conference or in-person meeting with the other party or its representative.

    (6) Unless the Panel directs otherwise, requests to compel will be decided on the written submissions of the parties.

    (7) A request to compel that is not timely filed under Section 7(a)(4) above will not be allowed except for good cause shown as to why it was late.

    (8) Evidence that is otherwise discoverable or admissible in an arbitration proceeding shall not be rendered non-discoverable or inadmissible as a result of its use in connection with a mediation proceeding. However, documents and written information in the mediator's possession are not subject to discovery and may not be subpoenaed for use in the subsequent arbitration hearing.

[¶ 6547.2] (b) Documents to be Introduced into Evidence.
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    (1) Unless the Panel directs otherwise, each party shall serve on every other party all documents in such party's possession which the party intends to introduce into evidence at the hearing as part of its direct case and shall concurrently serve sufficient copies of the documents on NFA at least 10 days prior to the date assigned for an oral hearing.

    (2) At least 15 days before the date assigned for a summary proceeding to commence, each party shall serve on NFA sufficient copies of all documents in such party's possession which are to be submitted to the Panel as part of the party's case and shall concurrently serve copies on every other party. At least five days before the date assigned for a summary proceeding to commence, each party shall serve on NFA sufficient copies of all documents in such party's possession which are to be submitted to the Panel to rebut the documents previously served by another party and shall concurrently serve copies on every other party.

[¶ 6547.3] (c) Hearing Plan.
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The parties shall cooperate with NFA in the formulation of a written hearing plan. A hearing plan is a written document that summarizes each claim, Answer and Reply; identifies any facts the parties have agreed to; identifies the factual and legal issues in dispute; and lists the witnesses and exhibits that will be presented at the hearing. The parties shall serve on NFA and all parties a joint hearing plan, or separate hearing plans if they cannot agree on a joint one, no later than 30 days before the oral hearing date, unless the Panel directs otherwise.

[¶ 6547.4] (d) Failure to Comply.
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The failure of any party to comply with Sections 7(a) through 7(c) or any order of the Panel may be brought to the attention of the Panel by NFA or the party seeking such documents or information. The Panel may take such actions in regard to the failure as are just, including, among other things, the following:

    (1) finding that the matters regarding which the request was made or any other designated facts shall be taken to be established for the purpose of the action in accordance with the claim of the party making the request;

    (2) refusing to allow the nonresponsive party to support or oppose designated claims or defenses or prohibiting him from introducing designated matters in evidence; or

    (3) striking out pleadings or portions thereof, staying further proceedings until the nonresponsive party complies with the request, dismissing the action or proceeding or any part thereof, or rendering an award by default against the nonresponsive party; or

    (4) refusing to hear the testimony of any witness or to accept any document into evidence if the witness or document was not listed in the hearing plan.

[¶ 6547.5] (e) Motions for Emergency Relief.
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    (1) A motion for emergency relief may be filed with an Arbitration Claim or at any time after a Demand is filed. The motion should include a statement explaining why emergency relief is needed and indicate the party or parties against whom the relief is sought. The party filing the motion shall pay a non-refundable fee of $500 and a hearing fee of $150 when filing the motion.

    (2) The party filing the motion shall concurrently serve a copy of the motion on the party against whom relief is sought. NFA shall schedule a hearing on the motion no later than five business days after the motion is received by NFA. A party against whom relief is sought may serve a written response on NFA and the other party at or before the hearing. Service under this section must be accomplished by hand delivery or by use of a generally recognized overnight delivery service.

    (3) One arbitrator will decide a motion for emergency relief unless NFA or the arbitrator directs otherwise. The arbitrator or arbitrators deciding the motion for emergency relief may be different from the arbitrator or arbitrators who are assigned to hear the Arbitration Claim.

    (4) When the hearing fee paid under Section 7(e)(1) above is not enough to cover the standard preset hearing fees to be paid by NFA to the arbitrator or arbitrators for the time spent hearing the motion, NFA shall collect additional fees to cover the fees to be paid to the arbitrator or arbitrators.

    (5) Any order granting emergency relief shall remain in effect until NFA serves the award under Section 10 of these Rules unless the order directs otherwise. The arbitrator or arbitrators may modify the order for good cause shown.

    (6) If an order is issued granting emergency relief, the arbitrator or arbitrators may expedite the hearing by setting deadlines for filing pleadings, conducting discovery, exchanging exhibits, preparing the hearing plan, and scheduling the hearing that are shorter than those established under the Rules.

[¶ 6547.6] (f) Other Pre-Hearing Motions.
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    (1) Motions to dismiss for failing to state a claim will not be heard by the Panel. Other motions to dismiss must be included in a timely filed Answer or Reply. Motions for summary judgment may be raised at any time. Motions for directed verdict may be raised at the hearing.

    (2) Except as provided in Section 7(a)(4) and Section 7(e) above, a party has 10 days from the date a pre-hearing motion is received in which to serve a written response on NFA and all other parties. However, where a motion is received less than 20 days in advance of the date the hearing or summary proceeding is scheduled to commence, NFA may, in its discretion, require a written response within less than 10 days. No written replies to a party's response to a motion will be allowed except in the Panel's discretion.

    (3) NFA shall assess a motion fee as follows:

      (i) In cases involving one arbitrator, a party filing a motion shall include a $125 motion fee for each motion filed more than 80 days after the last pleading is due. This fee may be subsequently waived at the discretion of the arbitrator, or the arbitrator may assess the motion fee against the party causing the filing of the motion. However, this fee shall not apply to a request for a preliminary hearing under Section 9(a) or a request for a postponement under Section 11(c) below.

      (ii) In cases involving three arbitrators, any party filing a motion shall include a $425 motion fee for each motion filed more than 100 days after the last pleading is due. This fee may be subsequently waived at the discretion of the arbitrators, or the arbitrators may assess the motion fee against the party causing the filing of the motion. However, this fee shall not apply to a request for a preliminary hearing under Section 9(a) or a request for a postponement under Section 11(c) below.

[¶ 6547.7] (g) Pre-Hearing Decisions by the Arbitrators.
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(1) For cases that will be decided through a summary proceeding, the Panel will decide all motions as part of the summary review, except for those related to discovery or postponement requests.

(2) With the consent of the other Panel members, one or more of the arbitrators may act on behalf of the Panel to decide any pre-hearing motions from the parties to conduct any pre-hearing conference with the parties. However, the Panel may not postpone the hearing or impose sanctions, dismiss a party, or dismiss all or any portion of a claim without a majority decision.

[¶ 6547.8] (h) Pre-Hearing Conference.
(Click Here to Print this Rule) For cases that will be decided through an oral hearing, NFA may schedule a pre-hearing conference with the Panel and the parties. The notice scheduling the pre-hearing conference will specify the issues to be covered at the conference, including identifying outstanding discovery disputes, setting deadlines for other motions and scheduling the hearing. The conference will be conducted by telephone within 30 days after the motion to compel due date, unless the Panel directs otherwise.

[¶ 6547.9] (i) Depositions.
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The Panel may, upon the motion of a party, order evidence depositions for good cause shown.

[¶ 6553] SECTION 8. DISMISSAL WITHOUT PREJUDICE.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994.]

The Panel may, at the written request of a party or on its own motion, dismiss without prejudice any claim which it determines is not a proper subject for NFA arbitration.

[¶ 6559] SECTION 9. HEARING.
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[Adopted effective February 18, 1992. Effective dates of amendments: December 1, 1992; May 1, 1994; June 23, 1997; May 1, 2001; March 1, 2002; June 1, 2006; and October 15, 2007.]

[¶ 6559.1] (a) Preliminary Hearing.
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The Panel may, at the written request of a party or on its own motion, schedule a preliminary hearing in extraordinary circumstances. Such hearing may be conducted orally, by telephone conference, or by written submissions.

[¶ 6559.2] (b) Place, Time and Notice of Hearing.
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Except as provided in Section 7(h) or Paragraph (i) of this Section, the place and time of the hearing shall be determined in the sole discretion of the Secretary, who shall endeavor to accommodate, if possible, the preferences of all parties as indicated in a timely-filed pleading. Upon setting the initial hearing date, NFA shall serve notice on each party at least 45 days before the hearing of the date, time and place. NFA shall give reasonable notice of any rescheduled oral hearing date.

[¶ 6559.3] (c) Failure to Prosecute or Defend.
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At the written request of any party or on its own motion, the Panel may review the procedural history of the proceeding and any written submissions and may find that a party had failed to prosecute or defend the proceeding. Any party found to have failed to prosecute or defend the proceeding will be deemed to have waived his right to an oral hearing.

[¶ 6559.4] (d) Procedure.
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    (1) Each party may appear personally at an oral hearing to testify and produce evidence.

    (2) Each party (or the party's representative) may present opening and closing arguments, and may examine any other party or witness at an oral hearing and any evidence produced at the oral hearing.

    (3) The Panel need not apply the technical rules of evidence.

    (4) Any party may cause a verbatim record of an oral hearing to be made at its own expense.

    (5) All testimony at the oral hearing shall be given under oath.

    (6) The Panel may allow stipulations and establish other procedures as appropriate to expedite the hearing. The Panel may consider affidavits but shall give them such weight as it deems appropriate after considering objections to them.

    (7) The Panel may order Members, employees thereof, and Associates to testify and produce documentary evidence. The Panel may issue subpoenas to non-Members as authorized by law. The parties must submit all subpoena requests to the Panel and serve those requests in accordance with Section 15(b) below. Subpoenas issued by the Panel may be enforced in a court of competent jurisdiction.

    (8) The party requesting the appearance of a non-party witness shall bear all reasonable costs of such appearance. For purposes of this section, an employee or an Associate of any party shall be considered a party witness.

    (9) All conduct and statements, offers and promises, whether oral or written, made by the parties or their representatives in connection with a mediation proceeding shall be confidential and shall not be admissible for any purpose, including impeachment, in any pending or subsequent arbitration proceeding. The mediator may not be called as a witness in a pending or subsequent arbitration proceeding.

    (10) In all other respects, the hearing procedures shall be determined by the Panel. The Panel shall afford the parties every reasonable opportunity to present their case completely.

[¶ 6559.5] (e) Extensions and Postponements.
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Extensions of time or postponements of the hearing may be granted by the Panel when the interests of justice so require, but a hearing in progress shall not be adjourned or interrupted except in compelling circumstances.

[¶ 6559.6] (f) Failure to Comply.
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The failure of any party to appear at any hearing or any session thereof, or to comply with any notice, order, or procedure in connection therewith, may subject the party to such adverse action as the Panel deems appropriate, including the entry of an award or the dismissal of a claim.

[¶ 6559.7] (g) Reopening the Record.
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The record may be reopened by the Panel on its own motion or on the motion of a party for good cause at any time prior to the Panel rendering its award. A motion to reopen the record shall automatically stay the time period in which the award shall be rendered.

[¶ 6559.8] (h) Waiver of Defects.
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Where appropriate, the Panel may excuse any failure to comply with any provision of this section, or any Panel notice, order or procedure.

[¶ 6559.9] (i) Summary Proceeding.
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The proceedings shall be conducted entirely through written submissions when:

    (1) the aggregate amount of the claims (exclusive of interest and costs) does not exceed $15,000, unless the Secretary of the Panel directs otherwise;

    (2) the aggregate amount of the claims (exclusive of interest and costs) is more than $15,000 but not more than $50,000, unless the Secretary or the Panel directs otherwise or one of the parties to the proceeding serves a written request for an oral hearing on NFA no later than 30 days after the last pleading is due; or

    (3) the Panel has consented to the written agreement of the parties to waive the oral hearing. A written agreement is not required of any party that has waived its right to an oral hearing under any other provision of these Rules.

[¶ 6565] SECTION 10. AWARD, SETTLEMENT AND WITHDRAWAL.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 17, 1993; March 24, 1994; March 12, 1996; June 23, 1997; June 1, 1999; September 1, 1999; March 21, 2001; March 10, 2005; June 1, 2006; and October 1, 2006.]

[¶ 6565.1] (a) Issuance of Award.
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The Panel shall notify NFA of its decision within 30 days after the record is closed. NFA shall then prepare a written award form, to be dated and signed by the Panel members. NFA shall promptly serve a copy of the award on each party or its representative. The award shall be that of the Panel majority.

[¶ 6565.2] (b) Relief.
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The award may grant or deny any of the relief requested and may include an assessment of interest, costs or fees (See Sections 7, 11 and 12). A request for declaratory relief will only be heard by the arbitrators if the Respondent agrees to have the arbitrators hear the claim.

[¶ 6565.3] (c) Finality.
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The Panel's award shall be final on the date thereof. The award may be modified by the Panel if a party submits a written request for modification which is received by NFA within 20 days from the date of service of the award on the parties, and the Panel deems modification necessary because:

    (1) there is an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award;

    (2) the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted; or

    (3) the award is imperfect in matter of form not affecting the merits of the controversy.

NFA will not forward a modification request to the Panel unless it is based on one of the grounds listed above. The timely filing of a request for modification shall stay automatically the finality of any award until NFA rejects the request or the Panel either modifies the award or denies the request for modification.

[¶ 6565.4] (d) Appeal.
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There shall be no right of appeal of the award.

[¶ 6565.5] (e) Award Binding.
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All parties shall be bound by the award and any modification thereof.

[¶ 6565.6] (f) Judgment.
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Judgment on the award may be entered in any court of competent jurisdiction.

[¶ 6565.7] (g) Failure to Comply.
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(1) The President may, on 30 days written notice, summarily suspend a Member or Associate when the Member, or employee thereof, or Associate:

(i) fails to comply with an award within 30 days from the date of service of the award by NFA or such other period as specified in the award unless

    (A) a request to modify the award is pending under Section 10(c) or

    (B) the Member or Associate who failed to comply has a pending application to vacate, modify or correct the award in a court of competent jurisdiction and has posted a bond with NFA equal to 150% of the amount of the award against that person or such lesser amount as NFA shall require in a particular case, but not less than 110% unless a satisfactory bond has been posted with the court; or

(ii) fails to comply with a settlement agreement within 30 days after NFA terminates the arbitration proceeding pursuant to Section 10(h) or such other period as specified in the settlement agreement, or

(iii) fails to comply with a settlement agreement executed in connection with an NFA-sponsored pre-arbitration mediation proceeding within 30 days after the time stated in the settlement agreement; or

(iv) fails to pay any fee assessed within the time so ordered by the Panel.

The suspension shall remain in effect until such award, settlement agreement, or order of the Panel has been satisfied.

(2) A Member which guaranteed an IB during the relevant time may, on 30 days written notice, be summarily suspended by the President if the guarantor fails to pay an award issued against the IB under Section 10(c) or a settlement agreement entered into by the IB under Section 10(h) within 30 days after the guarantor has received actual notice that IB has failed to comply with the award or settlement agreement. The suspension shall be lifted if the award or settlement agreement is satisfied.

(3) When any Member or Associate fails to comply with any interim order issued under Section 7(e) above, that Member or Associate may be summarily suspended by the President until the Member or Associate complies with the order. Any Member or Associate subject to a summary suspension may, within 30 days of the date of service of the Notice of Suspension, appeal the suspension to the Commission and may, within 10 days of service of the Notice of Suspension, petition the Commission for a stay of the suspension.

(4) In lieu of or in addition to suspending any Member or Associate for failing to comply with an award, settlement agreement or Panel order, NFA may initiate disciplinary action under its Compliance Rules for the failure of any Member or Associate to comply with the award, settlement agreement or Panel's order.

[¶ 6565.8] (h) Satisfaction of Demand.
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At any time during the course of an arbitration, a party may satisfy a claim by payment or settlement, including settlement through mediation. The arbitration proceeding will terminate upon receipt of written notice of satisfaction and withdrawal of the claim duly executed by the parties and submitted to NFA. If NFA is notified that a claim has been settled, but the notification is not in writing or is not duly executed by the parties, NFA shall send written notice to the parties that the arbitration proceeding will terminate within 20 days of service of such notice unless NFA receives written notice that the claim has not been settled.

[¶ 6565.9] (i) Consent Award.
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If parties agree to satisfy a claim at any time during the arbitration, the Panel may, at the request of such parties, set forth the terms of the satisfied claim in a consent award.

[¶ 6565.10] (j) Withdrawal of Claim.
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    (1) At any time during the course of the arbitration, a party may withdraw a claim against any Respondent who has not filed an Answer. A written notice of withdrawal must be filed with NFA. The withdrawal will be without prejudice unless the notice states otherwise.

    (2) After a party has filed a pleading, another party may not withdraw a claim against that party unless the party consents. The notice and the consent must be in writing and filed with NFA. The withdrawal will be without prejudice unless the notice or the consent states otherwise.

[¶ 6571] SECTION 11. ARBITRATION FEES.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994; December 12, 1995; June 23, 1997; February 1, 2000; May 1, 2001 and March 1, 2002.]

[¶ 6571.1] (a) Filing and Hearing Fees.
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(1) Each Member or Associate filing a claim under these Rules shall pay a filing and hearing fee based on the amount claimed, including punitive and treble damages but exclusive of interest and costs, as follows:

Amount of Claim

Filing Fee

Hearing Fee

$ 0.00 - $ 10,000.00

$ 750.00

$ 125.00

$ 10,000.01 - $ 20,000.00

$1,900.00

$ 125.00

$ 20,000.01 - $ 50,000.00

$1,900.00

$ 125.00

$ 50,000.01 - $100,000.00

$3,000.00

$ 275.00

$100,000.01 - $150,000.00

$4,400.00

$1,275.00

$150,000.01 - $500,000.00

$4,400.00

$2,550.00

More than $500,000.00

$4,400.00

$5,100.00

(2) Where the hearing fees paid by the parties is not enough to cover the standard preset fees to be paid by NFA to the arbitrators, NFA shall collect additional fees to cover the fees to be paid to the arbitrators. If a case requires more than four days of hearing, the hearing fees will be twice the standard preset fees, unless the arbitrators order the fees to remain at the standard amount.

(3) NFA shall also collect additional hearing fees when:

    (i) a party requests a preliminary hearing under Section 9(a);

    (ii) a party requests an oral hearing under Section 9(i)(2); or

    (iii) a party requests three arbitrators under Section 3(a)(1). However, where the sole arbitrator asks NFA to appoint two additional arbitrators, NFA shall assess the additional fees equally against the parties.

(4) The arbitrators, in their discretion, may assess the entire fee against any party or may divide the fee among any or all parties. Hearing fees shall be paid to NFA in advance of the hearing sessions to which they apply.

[¶ 6571.2] (b) Refunds.
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    (1) A full refund of any filing and hearing fees paid under Section 11(a) above shall be made if, prior to the appointment of a Panel, a claim filed under Section 2 above is found to be not arbitrable.

    (2) If all claims have been settled or withdrawn and NFA receives notice of the settlement or withdrawal at least five days in advance of the first scheduled pre-hearing conference date, if one is scheduled, or at least 30 days in advance of the first scheduled preliminary hearing date or oral hearing date, if no pre-hearing conference is scheduled, a full refund of the hearing fees paid under Section 11(a) and the arbitration service fees paid under Section 5(e) shall be made to the party paying the fee.

    (3) If all claims have been settled or withdrawn and NFA receives written notice of the settlement or withdrawal at least 15 days in advance of the summary proceeding start date or first scheduled oral hearing date or preliminary hearing date, the hearing fees paid under Section 11(a) and arbitration service fees paid under Section 5(e) shall be refunded to the party paying the fee in accordance with the schedule below.

Amount of Claim

Hearing Fee Refund

Service Fee Refund

$ 0.00 - $ 50,000.00

$ 125.00

N/A

$ 50,000.01 - $100,000.00

$ 125.00

$125.00

$100,000.01 - $150,000.00

$ 925.00

$325.00

$150,000.01 - $500,000.00

$2,200.00

$325.00

More than $500,000.00

$4,750.00

$325.00

[¶ 6571.3] (c) Postponement Fees.
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Each party causing an adjournment or postponement of any scheduled oral hearing shall pay to NFA a postponement fee of $300 for the first postponement request by that party, $500 for the second request by that party, and $1,000 for any subsequent request by that party. This fee may be waived at the discretion of the arbitrators. The arbitrators also may assess reasonable and necessary expenses incurred by the parties and their witnesses, including reasonable attorneys' fees, as a result of a postponement. No fee shall be assessed if an arbitrator becomes ineligible or otherwise unable to serve, or if a hearing extends over the expected time period.

[¶ 6577] SECTION 12. ARBITRATION COSTS.
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[Adopted effective February 18, 1992. Effective dates of amendments: May 1, 1994 and March 12, 1996.]

A Panel may assess against a party any one or more of the following costs, upon a finding that such party's claim or defense was frivolous or was made in bad faith, or that the party engaged in willful acts of bad faith during the arbitration: Reasonable and necessary expenses incurred by (a) the arbitrators or (b) any other party or witness, including reasonable attorneys' fees. The Panel may also award attorneys' fees provided that a statutory or contractual basis exists for awarding such fees. Requests for attorneys' fees and costs incurred in the arbitration proceeding must be raised in the proceeding or they are waived.

[¶ 6583] SECTION 13. NON-WAIVER OF NFA RIGHTS.
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[Adopted effective February 18, 1992.]

The submission of a matter to arbitration under these Rules shall not affect any right of NFA regarding the matter, including the right to initiate a disciplinary proceeding.

[¶ 6589] SECTION 14. MEDIATION.
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[Adopted effective February 18, 1992. Effective dates of amendments: March 21, 2001]

NFA may, in its discretion, notify the parties of the option to proceed to mediation.

[¶ 6595] SECTION 15. MISCELLANEOUS.
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[Adopted effective February 18, 1992. Effective dates of amendments: June 23, 1997; March 21, 2001 and March 1, 2002]

[¶ 6595.1] (a) Computation of Time.
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    (1) Except as otherwise provided in these Rules, service shall be deemed to occur on the earlier of the date that the documents are faxed (as evidenced by affidavit of service), e-mailed (as evidenced by affidavit of service), postal mailed (as evidenced by postmark or affidavit of service), or the date personally delivered (as evidenced by affidavit of service).

    (2) The counting of days shall include all calendar days and should a due date fall on a weekend or a legal holiday, such due date will be computed as the next business day on which mail is delivered.

[¶ 6595.2] (b) Service of Process.
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Unless otherwise indicated, service may be accomplished by hand delivery, or by first class or certified mail, or by use of a generally recognized overnight delivery service to the party's last known business or home address on record with NFA. Documents may also be served by facsimile or electronic mail on NFA and any party who has consented to service by that method. All documents which are served on NFA shall be concurrently served on each party who has filed a pleading using methods designed to ensure that NFA and all parties will receive the documents on the same day. Service on a party's representative shall be service on the party.

[¶ 6595.3] (c) Address of Record.
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A party shall promptly notify NFA of any change in the party's address or addresses, including the party's e-mail address or facsimile number, or the address of the party's representative on record with NFA.

[¶ 6596] SECTION 16. AGREEMENTS CONFLICTING WITH THE RULES.
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[Adopted effective May 17, 1993. Effective dates of amendments: March 24, 1994.]

These Rules shall supersede any provision in an agreement entered into between the parties, either before or after a dispute arises, if the provision in the agreement contradicts or limits the Rules or imposes additional obligations on NFA or the arbitrators. However, in the Secretary's discretion, the provision may be applied to NFA arbitration if the agreement names NFA as the arbitration forum or the parties consent in writing to apply the provision to NFA arbitration.

[¶ 6597] SECTION 17. NFA'S AUTHORITY TO INTERPRET THE RULES.
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[Adopted effective June 1, 1999.]

NFA has the authority to interpret the provisions of these Rules.

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Financial Requirements
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[¶ 7001] SECTION 1. FUTURES COMMISSION MERCHANT FINANCIAL REQUIREMENTS.
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[Effective dates of amendments: December 17, 1999; October 31, 2000; January 10, 2001; December 31, 2001; September 30, 2004; July 31, 2006; February 13, 2007; and October 31, 2008.]

(a) Each NFA Member that is registered or required to be registered with the Commodity Futures Trading Commission (hereinafter "CFTC") as a Futures Commission Merchant (hereinafter "Member FCM") must maintain "Adjusted Net Capital" (as defined in CFTC Regulation 1.17) equal to or in excess of the greatest of:

    (i) $500,000;

    (ii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $6,000 for each remote location operated (i.e., proprietary branch offices, main office of each guaranteed IB and branch offices of each guaranteed IB);

    (iii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $3,000 for each AP sponsored (including APs sponsored by guaranteed IBs);

    (iv) For securities brokers and dealers, the amount of net capital specified in Rule 15c3-1(a) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1(a));

    (v) Eight (8) percent of domestic and foreign domiciled customer and four (4) percent of non-customer (excluding proprietary) risk maintenance margin/performance bond requirements for all domestic and foreign futures and options on futures contracts excluding the risk margin associated with naked long option positions;

    (vi) For Member FCMs with an affiliate described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act that engages in forex transactions (as defined in Bylaw 1507(b)) and that is authorized to engage in those transactions solely by virtue of its affiliation with a registered FCM, $7,500,000; or

    (vii) For Member FCMs that are counterparties to forex options transactions (as forex in defined in Bylaw 1507(b)), $5,000,000, except that Forex Dealer Members must meet the higher requirement in Financial Requirements Section 11.

(b) Each Member FCM for which NFA is the designated self-regulatory organization ("DSRO") must file financial reports with NFA for each month-end, including its fiscal year end, within 17 business days of the date for which the report is prepared. All financial reports must be filed on Form 1-FR-FCM or, if the Member is a broker-dealer, on Form 1-FR-FCM or the FOCUS Report, and all financial reports except those required to be certified by a Certified Public Accountant must be filed electronically using an electronic medium approved by NFA.

(c) A Member FCM for which NFA is the DSRO that is required to file any document with or give any notice to its DSRO under CFTC Regulations 1.10 [Financial reports of futures commission merchants and introducing brokers], 1.12 [Maintenance of minimum financial requirements by futures commission merchants and introducing brokers], 1.16 [Qualifications and reports of accountants], or 1.17 [Minimum financial requirements for futures commission merchants and introducing brokers] or is required to file any financial report or statement (e.g., FOCUS Reports) with any other securities or futures self-regulatory organization of which it is a member shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC or the self-regulatory organization.

(d) No Member FCM may use forex customer equity as capital or may record forex customer equity as an asset without recording a corresponding liability. For purposes of this requirement:

    (i) Forex customer means any person who is not an eligible contract participant, as defined in Section 1a(12) of the Act, who enters into forex transactions (as defined in Bylaw 1507(b)) with the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III); and

    (ii) Forex customer equity means money, securities, and property received by the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) to margin, guarantee, or secure forex transactions between a forex customer and the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) or accruing to a forex customer as a result of such transactions.

[See NFA Financial Requirements for the Electronic Filing of Financial Reports.]

[¶ 7002] SECTION 2. ELIGIBILITY TO GUARANTEE IBS.
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[Effective dates of amendments: December 17, 1999; December 31, 2001; September 30, 2004; December 4, 2006; October 20, 2008.]

(a) A Member FCM, other than a Forex Dealer Member, which knows or should know that its Adjusted Net Capital is less than the greatest of:

    (i) $750,000;

    (ii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $9,000 for each remote location operated (i.e., proprietary branch offices, main office of each guaranteed IB and branch offices of each guaranteed IB);

    (iii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $4,500 for each AP sponsored (including APs sponsored by guaranteed IBs);

    (iv) For securities brokers or dealers, the amount of capital specified in Rule 17(a)-11(b) of the Regulations of the Securities and Exchange Commission (17 CFR 240.17a-11(b)); or

    (v) One hundred and ten (110) percent of the amount required in Financial Requirements Section 1(a)(v)

may not enter into a guarantee agreement with an IB until it files three successive month-end statements where the Member FCM's Adjusted Net Capital is equal to or greater than the amount required by this subsection.

(b) A Forex Dealer Member which knows or should know that its Adjusted Net Capital is less than the amount required by Financial Requirements Section 11 may not enter into a guarantee agreement with an IB until it files three successive month-end statements where the Member FDM's Adjusted Net Capital is equal to or greater than the amount required by Financial Requirements Section 11.

(c) A Member FCM or RFED which is a party to a guarantee agreement with an IB and whose Adjusted Net Capital is less than the amount set forth in paragraph (a) or (b) of this Section, as applicable, must also provide its DSRO, NFA and any IBs which it guarantees with a notice that the FCM's or RFED's Adjusted Net Capital is less than the amount required by paragraph (a) or (b). If the FCM or RFED cannot demonstrate to NFA and its DSRO, within 30 days after filing the required notice, that its Adjusted Net Capital is greater than the amount required by paragraph (a) or (b), the FCM must immediately notify, in writing, any IB which it guarantees that the guarantee agreement will terminate 30 days following the notice. A copy of the notice must also be filed with the CFTC, NFA, and the DSRO of the FCM or RFED. If the FCM or RFED demonstrates to its DSRO and NFA prior to the effective date of the termination of the guarantee agreement that its Adjusted Net Capital is greater than the amount required by paragraph (a) or (b), then it may notify any IB which it guarantees, the CFTC, NFA, and its DSRO, that the guarantee agreement will not terminate.

[¶ 7003] SECTION 3. RELIEF REQUESTS.
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[Effective dates of amendments: December 17, 1999.]

A Member FCM, for which NFA is DSRO, or IB that may file a request for relief from certain provisions of CFTC Regulations 1.10, 1.12, 1.16 and 1.17 with its DSRO may file such request with NFA. NFA may grant the relief request without receiving the prior concurrence of the CFTC unless such concurrence is required by CFTC Regulations. Any such grant of relief shall be valid and shall remain in full force and effect unless or until reversed by the CFTC or withdrawn by NFA.

[¶ 7004] SECTION 4. FINANCIAL REQUIREMENTS AND TREATMENT OF CUSTOMER PROPERTY.
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[Effective dates of amendments: December 17, 1999; and June 2, 2008.]

Any Member FCM or IB who violates any of CFTC Regulations 1.10, 1.12, 1.16, 1.17 or 1.20 through 1.30 (as applicable) shall be deemed to have violated an NFA requirement.

[¶ 7005] SECTION 5. INTRODUCING BROKER FINANCIAL REQUIREMENTS.
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[Effective dates of amendments: December 17, 1999; December 31, 2001; June 30, 2004; September 30, 2004; July 31, 2006; and December 22, 2006.]

(a) Each Member IB, except an IB operating pursuant to a guarantee agreement which meets the requirements set forth in CFTC Regulation 1.10(j), must maintain Adjusted Net Capital (as defined in CFTC Regulation 1.17) equal to or in excess of the greatest of:

    (i) $45,000;

    (ii) For Member IBs with less than $1,000,000 in Adjusted Net Capital, $6,000 per office operated by the IB (including the main office);

    (iii) For Member IBs with less than $1,000,000 in Adjusted Net Capital, $3,000 for each AP sponsored by the IB; or

    (iv) For securities brokers and dealers, the amount of net capital required by Rule 15c3-1(a) of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).

(b)

    (1) Each Member IB, except an IB operating pursuant to a guarantee agreement which meets the requirements set forth in CFTC Regulation 1.10(j), must file financial reports with NFA semi-annually, including its fiscal year end, within 17 business days of the date for which the report is prepared. All financial reports must be filed on Form 1-FR-IB or, if the Member is a broker-dealer, on Form 1-FR-IB or the FOCUS Report, and all financial reports except those filed on the FOCUS Report and required to be certified by a Certified Public Accountant must be filed electronically.

    (2) The Member IB shall electronically file its financial reports by accessing NFA's financial reports database in the manner provided by NFA. Each Member IB shall designate, in the manner provided by NFA, the person or persons authorized to file its financial reports.

    (3) The electronic filing of the Member IB's financial report shall constitute:

      (A) a representation that the person electronically filing the financial report is a person specified in CFTC Regulation 1.10 (d)(4);

      (B) an attestation that the person electronically filing the financial report is duly authorized to bind the Member IB submitting the financial report and representation that, to the best of such person's knowledge, all information contained therein is true, correct and complete;

      (C) an acknowledgement that it is understood that all required items and statements are integral parts of the financial report and that the submission of any amendment represents that all unamended items and statements remain true, correct and complete as previously submitted; and

      (D) an acknowledgement that it is further understood that any intentional misreports or omissions of facts constitute Federal Criminal Violations (see 18 U.S.C. 1001).

    (4)

      (A) No Member IB may access NFA's electronic financial reports database until NFA has assigned it a unique identifying code and password;

      (B) Each Member IB is responsible for maintaining the security and confidentiality of its identifying code and password and those of the persons whom it authorizes to make electronic financial report filings on its behalf. NFA's electronic financial reports database shall record and store the identifying code of each person accessing NFA's database and shall logically associate in the database such identifying code with any electronic filing made by the person using such identifying code. The person whose identifying code is used to make an electronic filing will be deemed to have made such filing;

      (C) Each Member IB shall make available any person it has authorized to make or actually performing duties related to electronic filings, for testimony in court or before the Commission, NFA or any contract market or DTF regarding the authentication, integrity or accuracy of any electronic filing; and

      (D) The ability to electronically access NFA's financial reports database is a privilege and not a right. NFA may disable any person's identifying code and password and terminate the person's ability to access the database at any time, without notice or a hearing, in NFA's sole discretion, if NFA believes that the person has not complied with this Financial Requirements Section 5 or any procedures that NFA establishes to implement this Financial Requirements Section 5.

(c) A Member IB that is required to file any document with or give any notice to the CFTC under CFTC Regulations 1.10 [Financial reports of futures commission merchants and introducing brokers], 1.12 [Maintenance of minimum financial requirements by futures commission merchants and introducing brokers], 1.16 [Qualifications and reports of accountants], or 1.17 [Minimum financial requirements for futures commission merchants and introducing brokers] or is required to file any financial report or statement (e.g., FOCUS Reports) with any other securities or futures self-regulatory organization of which it is a member shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC or the self-regulatory organization.

[See NFA Financial Requirements for the Electronic Filing of Financial Reports.]

[¶ 7006] SECTION 6. LEVERAGE TRANSACTION MERCHANT REPORTING REQUIREMENTS.
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[Effective dates of amendments: December 17, 1999.]

Each Leverage Transaction Merchant (hereinafter "Member LTM") is required to file any document with or give notice to the CFTC under CFTC Regulations 31.7 [Maintenance of minimum financial, cover and segregation requirements by leverage transaction merchants], 31.13 [Financial reports of leverage transaction merchants], 31.16 [Monthly reporting requirements], and 31.26 [Quarterly reporting requirements] shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

[¶ 7007] SECTION 7. PERFORMANCE MARGIN.
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[Effective dates of amendments: December 17, 1999.]

Every Member FCM that is not a member of a contract market or a foreign board of trade must collect performance margin (initial and maintenance) for all customer accounts at a level no less than that established for customer accounts by the rules of the applicable contract market or a foreign board of trade.

[¶ 7008] SECTION 8. ADDITIONAL INFORMATION REQUESTS.
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[Effective dates of amendments: December 17, 1999.]

If requested by NFA, a Member FCM or IB must promptly submit such additional reports and supplemental financial information which NFA deems necessary.

[¶ 7009] SECTION 9. NOTIFICATION OF REPORTABLE POSITIONS.
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[Effective dates of amendments: December 17, 1999.]

Each Member FCM for which NFA is the DSRO and which is required to file any document with or give notice to the CFTC under CFTC Regulation 15.03 shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

[¶ 7010] SECTION 10. LATE FINANCIAL REPORTS.
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[Adopted Effective April 7, 2003.]

Each financial report required by Section 1, 5, or 6 that is filed after it is due shall be accompanied by a fee of $200 for each business day it is late. Payment and acceptance of the fee does not preclude NFA from filing a disciplinary action under the Compliance Rules for failure to comply with the deadlines imposed by NFA Financial Requirements or CFTC rules.

[¶ 7011] SECTION 11. FOREX DEALER MEMBER FINANCIAL REQUIREMENTS.
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[Adopted Effective December 1, 2003. Effective dates of amendments: November 30, 2005; July 31, 2006; August 9, 2006; February 13, 2007; March 31, 2007; May 7, 2007; December 17, 2007; December 21, 2007; and October 31, 2008.]

(a) Each Forex Dealer Member must maintain "Adjusted Net Capital" (as defined in CFTC Regulation 1.17) equal to or in excess of the greatest of:

    (i) $10,000,000 through January 16, 2009, $15,000,000 from January 17, 2009 through May 15, 2009, and $20,000,000 from May 16, 2009 forward;

    (ii) 5% of all liabilities owed to customers (as customer is defined in Compliance Rule 2-36(i); or

    (iii) For FCMs, any other amount required by Section 1 of these Financial Requirements.

(b) A Forex Dealer Member may not include assets held by an affiliate (unless approved by NFA) or an unregulated person in its current assets for purposes of determining its adjusted net capital under CFTC Rule 1.17. An affiliate is any person that controls, is controlled by, or is under common control with the Forex Dealer Member.

For purposes of this section and section (c), a person is unregulated unless it is:

    (i) a financial institution regulated by a U.S. banking regulator;

    (ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority;

    (iii) a futures commission merchant registered with the U.S. Commodity Futures Trading Commission and a Member of NFA;

    (iv) a retail foreign exchange dealer registered with the U.S. Commodity Futures Trading Commission and a Member of NFA;

    (v) an insurance company regulated by any U.S. state;

    (vi) an entity regulated as a foreign equivalent of any of the above if regulated in a money center country as defined in CFTC Regulation 1.49; or

    (vii) any other entity approved by NFA.

(c) A Forex Dealer Member may not use an affiliate (unless approved by NFA) or an unregulated person, as defined in section (b), to cover its currency positions for purposes of CFTC Rule 1.17(c)(5).

(d) Each RFED must file financial reports with NFA for each month-end, including its fiscal year-end, within 17 business days of the date for which the report is prepared. All financial reports must be filed on the forms required by CFTC regulations, and all financial reports except those required to be certified by a Certified Public Accountant must be filed electronically using an electronic media approved by NFA.

(e) For purposes of this rule:

    (1) "Forex" has the same meaning as in Bylaw 1507(b);

    (2) "Forex Dealer Member" has the same meaning as in Bylaw 306; and

    (3) As used in section (c), "currency" refers to open foreign currency positions with counterparties regardless of whether those counterparties are eligible contract participants as defined in Section 1a(12) of the Act.

[¶ 7012] SECTION 12. SECURITY DEPOSITS FOR FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS.
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[Adopted Effective December 1, 2003. Effective dates of amendments: June 6, 2004; September 15, 2005; February 13, 2007; May 14, 2008; and October 31, 2008.]

(a) Except as provided in (b) below, each Forex Dealer Member shall collect and maintain the following minimum security deposit for each forex transaction between the Forex Dealer Member and a person that is not an eligible contract participant as defined in Section 1a(12) of the Act:

(i) 1% of the notional value of transactions in the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the Euro, the Australian dollar, the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish krone;

(ii) 4% of the notional value of other transactions;

(iii) for short options, the above amount plus the premium received; and

(iv) for long options, the entire premium.

(b) A Forex Dealer Member that consistently maintains adjusted net capital of at least 150% of the greater of the amount required by Section 11(a)(i) or (ii) of these Financial Requirements is exempt from (a) above.

(c)The Executive Committee may temporarily increase these requirements under extraordinary market conditions.

(d) For purposes of this rule:

    (1) "Forex" has the same meaning as in Bylaw 1507(b); and

    (2) "Forex Dealer Member" has the same meaning as in Bylaw 306.

(e) In addition to cash, a Forex Dealer Member required to collect and maintain a minimum security deposit under (a) above may accept those instruments described in CFTC Rule 1.25 as collateral for customers' security deposit obligations. The collateral must be in the FDM's possession and control and is subject to the haircuts in CFTC Rule 1.17.

[See Notice to Members I-03-05: New Requirements Will Become Effective on July 1, 2003]

[¶ 7013] SECTION 13. FOREX DEALER MEMBER WEEKLY REPORTS.
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[Adopted Effective July 25, 2006. Effective dates of amendments: April 1, 2009]

(a) Each Forex Dealer Member must file weekly electronic reports showing liabilities to customers and other financial information required by NFA. The report must be prepared as of the last business day of the week and must be filed by noon on the following business day in the format and using the electronic filing method provided by NFA.

(1) No Forex Dealer Member may access NFA's electronic financial reports database until NFA has assigned it a unique identifying code and password. Each Forex Dealer Member is responsible for maintaining the security and confidentiality of its identifying code and password and that of each person it authorizes to file weekly electronic reports on its behalf.

(2) Submitting the report certifies that the person filing it is a supervisory employee that is, or is under the ultimate supervision of, a listed principal who is also an NFA Associate; that the person filing it is duly authorized to bind the Forex Dealer Member; and that, to the best of that person's knowledge, all information in the report is true, correct, and complete.

(b) Each weekly report that is filed after it is due shall be accompanied by a fee of $200 for each business day it is late. Payment and acceptance of the fee does not preclude NFA from filing a disciplinary action for failure to comply with the deadlines imposed by this rule.

[¶ 7014] SECTION 14. ASSETS COVERING LIABILITIES TO RETAIL FOREX CUSTOMERS.
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[Adopted Effective July 1, 2007. Effective dates of amendments: December 17, 2007.]

(a) Each Forex Dealer Member shall calculate the amount owed to U.S. customers for forex transactions and shall hold assets equal to or in excess of that amount at one or more qualifying institutions in the United States or money center countries (as defined in CFTC Regulation 1.49).

(b) The amount owed to U.S. customers shall be calculated by adding up the net liquidating values of each forex account that liquidates to a positive number, using the fair market value for each asset other than open positions and the current market value for open positions.

(c) For assets held in the United States, a qualifying institution is:

    (i) a bank or trust company regulated by a U.S. banking regulator;

    (ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority; or

    (iii) a futures commission merchant registered with the U.S. Commodity Futures Trading Commission and a Member of NFA.

(d) For assets held in a money center country as defined in CFTC Regulation 1.49, a qualifying institution is:

    (i) a bank or trust company regulated in the money center country 1) which has in excess of $1 billion in regulatory capital or 2) whose commercial paper or long-term debt instrument or, if part of a holding company system, its holding company's commercial paper or long-term debt instrument, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization;

    (ii) an entity regulated in the money center country as an equivalent of a broker-dealer or futures commission merchant 1) which has in excess of $100 million in regulatory capital or 2) whose commercial paper or long-term debt instrument or, if part of a holding company system, its holding company's commercial paper or long-term debt instrument, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; or

    (iii) a futures commission merchant registered with the U.S. Commodity Futures Trading Commission and a Member of NFA.

(e) Assets held in a money center country are not eligible to meet the requirements of this rule unless the Forex Dealer Member and the qualifying institution have entered into an agreement, acceptable to NFA, authorizing the institution to provide NFA and the CFTC with information regarding the Forex Dealer Member's accounts and to provide that information directly to NFA or the CFTC upon their request. The Forex Dealer Member must file the signed agreement with NFA.

(f) For purposes of this rule, a U.S. customer is a retail customer that is:

    (i) a natural person who is a resident of the United States;

    (ii) a partnership, corporation, or other entity (including a collective investment vehicle) organized under the laws of the United States or which has its principal place of business in the United States;

    (iii) an estate or trust, the income of which is subject to United States income tax regardless of source; or

    (iv) an entity organized principally for passive investment (e.g., a commodity pool or investment company) in which U.S. persons beneficially own, in the aggregate, a 10% or greater interest.

[¶ 7015] SECTION 15. FOREX DEALER MEMBER INTERNAL FINANCIAL CONTROLS.
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[Adopted Effective September 21, 2007.]

(a) No Member may act as a Forex Dealer Member (as defined in Bylaw 306) until it has provided NFA with an internal control report prepared and certified by an independent public accountant who is registered under Section 102 of the Sarbanes-Oxley Act. The internal control report shall contain, at a minimum, a detailed explanation of the examination performed by the accountant and a representation by the accountant that it has examined and tested the Forex Dealer Member's system of internal controls to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal control report must also represent that the accountant has found that the Forex Dealer Member's system of internal financial controls has no material weaknesses and that it is adequate for establishing and maintaining internal control over financial reporting by the Member.

After a Forex Dealer Member has commenced business, NFA's Compliance Director may require it to provide an internal control report that complies with the requirements above if NFA believes that the Forex Dealer Member's internal controls are inadequate.

(b) Provided NFA's Compliance Director believes that a Forex Dealer Member's financial records are inadequate, the Compliance Director may require a Forex Dealer Member's annual certified financial statements to be prepared by an independent public accountant who is registered under Section 102 of the Sarbanes-Oxley Act.

(c) The individuals who prepare the Forex Dealer Member's financial books and records must be under the ultimate supervision of a listed principal and registered associated person of the Member. This principal must also be responsible for researching and selecting the independent public accountant that certifies the firm's annual financial statements.

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Registration Rules
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PART 100. DEFINITIONS
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[¶ 8101] Rule 101. Definitions.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; September 21, 1993; August 1, 1994; November 17, 2001 and May 31, 2002]

Rule 101. Definitions.

As used in these Registration Rules:

(a) "Acknowledgement of Conditioned Registration"-means a sponsor's or guarantor's representation that it meets the requirements set forth in Rule 509(b)(5) to sponsor a conditioned registrant; that it has reviewed the conditions contained in any current NFA or Commission order imposing conditions on the registration of the person; and that it will supervise the person in accordance with the conditions contained in the order. Acknowledgement of Conditioned Registration shall include any Supplemental Guarantor Certification Statement or Supplemental Sponsor Certification Statement that is required by the order.

(b) "Act"-means the Commodity Exchange Act, which is contained in Title 7 of the United States Code.

(c) "Applicant"-means a person seeking registration under the Act as an FCM, IB, CPO, CTA or LTM, an associated person of any of the foregoing, floor broker ("FB") or floor trader ("FT").

(d) "Associated Person" or "AP"-means an associated person as that term is used in the Act and the regulations thereunder who is required to be registered as such under the Act.

(e) "Commission" or "CFTC"-means the Commodity Futures Trading Commission.

(f) "Commodity Interest"-means: (1) any contract for the purchase or sale of a commodity for future delivery regulated under the Act and rules promulgated thereunder; and (2) any contract, agreement or transaction subject to Commission regulation under Sections 4c or 19 of the Act.

(g) "Current Active Status"- a person has a current active status if, subsequent to the filing of a previous Form 7-R or Form 8-R and continuously thereafter, the person has been either pending, registered, temporarily licensed or affiliated with a registrant as a principal.

(h) "Foreign Futures Authority"-means any foreign government or any department, agency, governmental body or regulatory organization empowered by a foreign government to administer or enforce a law, rule or regulation as it relates to a futures or options matter.

(i) "Form 7-R"-means the entire Form 7-R or any portions of the Form 7-R that NFA requires an applicant to file to obtain registration as an FCM, IB, CPO, CTA or LTM.

(j) "Form 8-R"-means the entire Form 8-R or any portions of the Form 8-R that NFA requires to be filed for an individual to obtain registration as an AP, FB or FT or because an individual is a principal of an applicant or registrant.

(k) "Form 3-R"-means the entire Form 3-R or any portions of the Form 3-R that NFA requires to be filed to correct any inaccuracy or deficiency in an applicant's or registrant's registration information.

(l) "Form 7-W"-means the entire Form 7-W or any portions of the Form 7-W that NFA requires a registrant to file to withdraw from registration or to withdraw an application for registration as an FCM, IB, CPO, CTA or LTM.

(m) "Form 8-T"-means the entire Form 8-T or any portions of the Form 8-T that NFA requires an applicant or registrant to file to notify NFA that an individual did not become or is no longer associated or affiliated with it as an AP, Branch Office Manager or principal.

(n) "Form 8-W"-means the entire Form 8-W or any portions of the Form 8-W that NFA requires a registrant to file to withdraw from registration as a FB or FT.

(o) "Membership Committee"-means an NFA Committee formed pursuant to NFA Bylaw 701. (p) "NFA"-means National Futures Association.

(q) "NFA Requirements"-means NFA Bylaws, Compliance Rules, Registration Rules, Financial Requirements, Code of Arbitration and Member Arbitration Rules.

(r) "Person"-means an individual, association, partnership, corporation, trust or any other form of business organization.

(s) "Principal"-means, with respect to an applicant, a registrant, or a person required to be registered under the Act:

    (1) an individual who is:

      (A) a proprietor of a sole proprietorship;
      (B) a general partner of a partnership;
      (C) a director, president, chief executive officer, chief operating officer, chief financial officer or a person in charge of a business unit, division or function subject to regulation by the Commission of a corporation, limited liability company or limited liability partnership; or
      (D) a manager, managing member or a member vested with the management authority for a limited liability company or limited liability partnership; or

    (2) an individual who directly or indirectly, through agreement, holding companies, nominees, trusts or otherwise:

      (A) is the owner of 10% or more of the outstanding shares of any class of an applicant or registrant's stock;
      (B) is entitled to vote 10% or more of any class of an applicant or registrant's voting securities;
      (C) has the power to sell or direct the sale of 10% or more of any class of an applicant or registrant's voting securities; (D) has contributed 10% or more of an applicant or registrant's capital;
      (E) is entitled to receive 10% or more of an applicant or registrant's net profits;
      (F) or has the power to exercise a controlling influence over an applicant or registrant's activities that are subject to regulation by the Commission; or

    (3) an entity that:

      (A) is a general partner of a partnership;
      (B) is the direct owner of 10% or more of any class of an applicant or registrant's securities; or
      (C) has directly contributed 10% or more of an applicant or registrant's capital unless such capital contribution consists of subordinated debt contributed by:

        (i) an unaffiliated bank insured by the Federal Deposit Insurance Corporation;
        (ii) a United States branch or agency of an unaffiliated foreign bank that is licensed under the laws of the United States and regulated, supervised and examined by United States government authorities having regulatory responsibility for such financial institutions; or
        (iii) an insurance company subject to regulation by any State.

(t) "Registrant"-means a person registered under the Act as an FCM, IB, CPO, CTA, LTM, an AP of any of the foregoing, FB or FT.

(u) "Rules"-means NFA Registration Rules.

(v) "Sponsor"-means the applicant or registrant FCM, IB, CPO, CTA or LTM that files a Form 8-R for an individual associated with it to become registered as an AP or for an individual principal.

(w) "Supplemental Guarantor Certification Statement ("SGCS")"-means a statement executed by an IB's guarantor wherein the guarantor indicates that it meets the requirements set forth in Rule 509(b)(5) to sponsor a conditioned IB and its willingness to supervise the IB subject to certain conditions imposed by NFA's President or its Membership Committee under these Rules or by the Commission.

(x) "Supplemental Sponsor Certification Statement ("SSCS")"-means a statement executed by an AP's, FB's or FT's sponsor wherein the sponsor indicates that it meets the requirements set forth in Rule 509(b)(5) to sponsor a conditioned AP, FB or FT and its willingness to supervise the AP, FB or FT subject to certain conditions imposed by NFA's President or its Membership Committee under these Rules or by the Commission.

PART 200. REGISTRATION REQUIREMENTS AND PROCEDURES
(Click Here to Print this Section)

[¶ 8201] RULE 201. REGISTRATION REQUIREMENTS AND PROCEDURES.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: August 3, 1990; April 26, 1993; September 21, 1993; August 1, 1994; June 30, 1998; September 7, 1998; January 6, 1999; September 17, 1999 and May 31, 2002.]

NFA shall perform registration functions in accordance with the provisions set forth in these Rules for all persons, except agricultural trade option merchants ("ATM"), principals of ATMs, and ATM APs, for whom it has been granted registration responsibilities pursuant to Section 8a(10) or Section 17(o) of the Act. Except as provided below, NFA shall perform registration functions with respect to persons required to register as ATMs, principals of ATMs and ATM APs in accordance with all of the Regulations governing the registration of ATMs, principals of ATMs, and ATM APs contained in Part 3 of the Commission's Regulations. Rule 203 of these Rules shall govern the registration fees for ATMs, principals of ATMs and ATM APs. Part 500 of these Rules shall govern adverse registration proceedings involving ATMs, principals of ATMs and ATM APs. Part 700 of these Rules shall govern access to and certification of registration records maintained by NFA regarding ATMs, principals of ATMs and ATM APs.

[¶ 8202] RULE 202. REGISTRATION PROCESSING AND NOTIFICATION OF REGISTRATION OR CONFIRMATION OF EXEMPTION FROM REGISTRATION.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: September 21, 1993; May 31, 2002 and July 21, 2003.]

(a) If registration has been granted or a temporary license issued under the Act, NFA shall notify the applicant, or the sponsor in the case of an applicant for registration as an AP, and each board of trade designated as a contact market or a derivative transaction execution facility ("DTF") by the Commission that has granted the applicant trading privileges in the case of an applicant for registration as an FB or FT. If an exemption from registration pursuant to CFTC Regulation 30.5 has been confirmed, NFA shall notify the applicant accordingly.

(b) NFA may provide any notice required by these Rules electronically unless written notice is specifically required. Notices provided electronically shall be complete upon display in NFA's Online Registration System. Notices provided in writing shall be complete upon mailing.

(c) Any registration form, schedule or supplement thereto, fingerprint card, or other document required by these Rules to be filed with NFA, whether electronically or in hardcopy format, shall be deemed for all purposes to have been filed with, and to be the official record of, the Commission. Part 700 of these Rules governs access to and certification of all such registration records maintained by NFA.

[¶ 8203] RULE 203. REGISTRATION FEES.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: June 8, 1988; January 1, 1990; November 1, 1990; July 1, 1992; April 26, 1993; September 21, 1993; August 1, 1994; January 30, 1997; June 30, 1998; July 1, 2001; May 31, 2002; July 21, 2003; August 1, 2007; and January 1, 2008.]

(a) Amount. The following fees shall apply:

    (1) Associated Person: $85 for each Form 8-R filed for registration as an AP, except that the fee shall be $65 for each Form 8-R filed in accordance with Rule 209 or for registration as an ATM AP.

    (2) Futures Commission Merchant: $500 for each Form 7-R filed for registration as an FCM, except a Notice Form 7-R filed pursuant to Rule 204(a)(4)(A).

    (3) Introducing Broker: $200 for each Form 7-R filed for registration as an IB, except a Notice Form 7-R filed pursuant to Rule 204(a)(4)(A).

    (4) Commodity Pool Operator and Commodity Trading Advisor: $200 for each Form 7-R filed for registration as a CPO or CTA.

    (5) Leverage Transaction Merchant: $500 for each Form 7-R filed for registration as an LTM.

    (6) Floor Broker: $85 for each Form 8-R filed for registration as a FB.

    (7) Floor Trader: $85 for each Form 8-R for registration as a FT.

    (8) Principal: $85 for each Form 8-R filed by a principal of an applicant or registrant, except that the fee shall be $65 for each Form 8-R filed by a principal in accordance with Rule 209 or a principal of an ATM. If the principal is also applying for registration as an AP of the applicant or registrant, only the fee required in paragraph (a)(1) of this Rule shall be paid.

    (9) Annual Registration Records Maintenance Fee: $100 for each registration category as an FCM, IB, CPO, CTA or LTM.

    (10) Late Termination Notice: $100 for each notice required by Rule 214(a) which is filed more than 30 days after the occurrence of the event requiring the notice.

    (11) Disqualification Fee: $1,000 for the first written submission to the Membership Committee or a designated Subcommittee filed under Rule 504. The fee shall be refunded if the Membership Committee or a designated Subcommittee finds that the applicant or registrant is not subject to a statutory disqualification.

    (12) Agricultural Trade Option Merchant: $200 for each application for registration as an ATM.

    (13) Exempt Foreign Introducing Broker, Commodity Pool Operator or Commodity Trading Advisor: $100 for each Form 7-R filed for exemption from registration as an IB, CPO or CTA pursuant to Commission Regulation 30.5.

    (14) Reinstatement Fee: $500.

(b) Form of Remittance. Registration fees must be remitted by check, bank draft or money order payable to NFA or by using NFA's Online Registration System Online Deposit function. All registration fees are non-refundable.

[¶ 8204] RULE 204. REGISTRATION OF FUTURES COMMISSION MERCHANTS, NOTICE FUTURES COMMISSION MERCHANTS, INTRODUCING BROKERS, NOTICE INTRODUCING BROKERS, COMMODITY POOL OPERATORS, COMMODITY TRADING ADVISORS AND LEVERAGE TRANSACTION MERCHANTS AND CONFIRMATION OF EXEMPTION FROM REGISTRATION PURSUANT TO COMMISSION REGULATION 30.5.
(Click Here to Print this Rule) [Adopted effective April 4, 1998. Effective dates of amendments: June 8, 1988; September 29, 1989; January 1, 1990; July 1, 1992; September 21, 1993; October 5, 1994; June 7, 1996; September 17, 2001; November 17, 2001; May 31, 2002; July 21, 2003; December 15, 2003 and August 1, 2007.]

(a) Application for Registration or Exemption from Registration.

    (1)(A) Each person applying for registration as an FCM, IB, CPO, CTA or LTM must:

      (i) file a Form 7-R, completed and filed in accordance with all pertinent instructions;
      (ii) pay the fee required by Rule 203(a); and
      (iii) file an Acknowledgement of Conditioned Registration executed by the sponsor if the applicant is subject to a Commission or NFA order imposing conditions on its registration.

    (B) Each application for registration as an FCM or an IB also must be completed and filed in accordance with CFTC Regulation 1.10.

    (C) Each application for registration as a CPO also must be completed and filed in accordance with CFTC Regulation 4.13(c).

    (D) Each application for registration as an LTM also must be completed and filed in accordance with CFTC Regulation 31.13.

    (2)(A) Each applicant for registration as an FCM, IB, CPO, CTA or LTM must have at least one individual principal affiliated with it and for each of its individual principals must:

      (i) file a Form 8-R completed and filed in accordance with all pertinent instructions;
      (ii) pay the fee required by Rule 203(a); and
      (iii) file the fingerprints of each individual principal on a fingerprint card provided by NFA for that purpose, unless the principal qualifies for an exemption from the fingerprinting requirement pursuant to Rule 209.

    (B) Each individual principal must verify the completeness and accuracy of the information contained in his Form 8-R.

    (C) The provisions of paragraphs (a)(2)(A)(ii) and (iii) and (a)(2)(B) do not apply to an individual principal who has a current active status at the time the applicant files the individual principal's Form 8-R.

    (3) When NFA determines that an applicant for registration as an FCM, IB, CPO, CTA or LTM and all of its principals appear fit for registration, NFA will provide notification to the applicant that the applicant's registration is granted.

    (4)(A) A broker or dealer that is registered with the Securities and Exchange Commission ("SEC") shall be registered as an FCM or IB upon the filing of a written Notice Form 7-R, completed and filed with NFA in accordance with all pertinent instructions, if: the broker or dealer limits its solicitation of orders, acceptance of orders, or execution of orders, or placing of orders on behalf of others involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or registered derivatives transaction facility, to security futures products as defined in Section 1a(32) of the Act; the registration of the broker or dealer is not suspended pursuant to an order of the SEC; and the broker or dealer is a member of a national securities association registered pursuant to Section 15A of the Securities Exchange Act of 1934 and that membership is not suspended.

    (B) Such registration shall be terminated immediately if any of the above-stated conditions set for registration in this paragraph are no longer satisfied. The provisions of paragraphs (a)(1)-(3) of this Rule do not apply to applicants filing a Notice Form 7-R in accordance with this paragraph.

    (5)(A) Each person applying for exemption from registration as a IB, CPO or CTA pursuant to the provisions of CFTC Regulation 30.5 must:

      (i) file a Form 7-R, completed and filed in accordance with all pertinent instructions;

      (ii) file the written agreement in the form specified in CFTC Regulation 30.5(a), provided that if the agreement is between the applicant and NFA, the agreement shall be an electronic agreement; and

      (iii) pay the fee required by Rule 203(a)(13).

    (B) Each IB, CPO or CTA applying for exemption or confirmed as exempt from registration pursuant to CFTC Regulation 30.5 shall promptly notify NFA in the event that the agreement in paragraph (a)(5)(A) of this Rule is terminated. Each IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 will be deemed to have requested a withdrawal of its confirmation of exemption from registration pursuant to CFTC Regulation 30.5 effective 30 days after the termination of such agreement unless it files a new agreement in accordance with paragraph (a)(5)(A), and NFA shall notify the IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 accordingly.

(b) Withdrawal of Application. Failure of an applicant to respond to a written or electronic request by NFA for clarification of application information, to resubmit fingerprints of a principal in accordance with such request, or to pay the required registration fees pursuant to Rule 203(a) shall be deemed to constitute a withdrawal of the applicant's Form 7-R and shall result in the immediate termination of an IB applicant's temporary license, and NFA shall notify the applicant accordingly.

(c) Duration of Registration.

    (1) A person who becomes registered as an FCM, IB, CPO, CTA or LTM in accordance with this Rule shall continue to be so registered until the effective date of any revocation or withdrawal of such registration. Such person is prohibited from engaging in activities requiring registration under the Act or from representing himself to be a registrant under the Act or the representative or agent of a registrant during the pendency of any suspension of such registration.

    (2) A person registered as an IB who was a party to a guarantee agreement with an FCM in accordance with CFTC Regulation 1.10(j) will be deemed to have requested a withdrawal of its registration effective 30 days after the termination of such guarantee agreement unless the procedures set forth in CFTC Regulation 1.10(j)(8) are followed.

(d) Annual Filing and Registration Records Maintenance Fees.

    (1) On an annual basis, NFA shall send a notice to each FCM, IB, CPO, CTA, and LTM registered in accordance with paragraph (a)(1) of this Rule advising each that it must electronically file an Annual Registration Update by a specified date. NFA shall also send an invoice to each FCM, IB, CPO, CTA, and LTM registered in accordance with paragraph (a)(1) of this Rule or confirmed as exempt from registration in accordance with paragraph (a)(5) of this Rule or pursuant to CFTC Regulation 30.10 requesting payment of the annual registration records maintenance fee set forth in Rule 203(a) and any other outstanding registration fees. NFA shall deem the failure to file the Annual Registration Update or to pay the required annual registration records maintenance fee and any other outstanding registration fees within 30 days following the specified date a request to withdraw from registration or to withdraw the confirmation of the exemption pursuant to CFTC Regulation 30.5 or CFTC Regulation 30.10, and shall notify the registrant or IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 or CFTC Regulation 30.10 accordingly.

    (2) Each FCM, IB, CPO, CTA, and LTM registered in accordance with paragraph (a)(1) of this Rule or confirmed as exempt from registration in accordance with paragraph (a)(5) of this Rule or pursuant to CFTC Regulation 30.10 whose registration or confirmation of exemption is withdrawn pursuant to this Rule may request, within 60 days of the withdrawal date, to have its registration or confirmation of exemption reinstated. Reinstatement requests received between 30 and 60 days from the withdrawal date are subject to the Reinstatement Fee as set forth in Rule 203(a). Provided that NFA receives all fees, including the required reinstatement fee and the annual registration records maintenance fee as set forth in Rule 203(a), and any other outstanding registration fees within 60 days of the withdrawal date, NFA shall reinstate the registration or confirmation of exemption. If the withdrawal was due in whole or in part to the failure to file the Annual Registration Update, the registration will be reinstated but will be subject to a deemed request to withdraw such registration. The failure to file the Annual Registration Update within 30 days following the reinstatement date shall result in the withdrawal of registration. Only one request for reinstatement may be made annually.

[¶ 8205] Rule 205. REGISTRATION OF FLOOR BROKERS AND FLOOR TRADERS.
(Click Here to Print this Rule) [Adopted effective May 31, 2002.]

(a) Application for Registration.

    (1) (A) Each individual applying for registration as a FB or FT must:

      (i) file a Form 8-R, completed and filed in accordance with all pertinent instructions;
      (ii) pay the registration fee required by Rule 203(a);
      (iii) file the fingerprints of the applicant on a fingerprint card provided by NFA for that purpose; and
      (iv) file an Acknowledgement of Conditioned Registration executed by the sponsor if the applicant is subject to a Commission or NFA order imposing conditions on the applicant's registration.

    (B) The provisions of paragraphs (a)(1)(A)(ii) and (iii) shall not apply to any applicant for registration as a FB or FT who has a current active status at the time the Form 8-R is filed.

    (2) When NFA determines that an applicant for registration as an FB or FT appears fit for registration and receives satisfactory evidence that a board of trade designated as a contact market or a DTF by the Commission has granted the applicant trading privileges, NFA will provide notification to the applicant and to each contract market or DTF that has granted the applicant trading privileges that the applicant's registration as an FB or FT is granted.

(c) Withdrawal of Application. Failure of an applicant to respond to a written or electronic request by NFA for clarification of application information, to submit or resubmit fingerprints in accordance with such request, or to pay the required registration fee pursuant to Rule 203(a) shall be deemed to constitute a withdrawal of the applicant's Form 8-R and shall result in the immediate termination of the applicant's temporary license, and NFA shall notify the applicant accordingly and each contract market or DTF that has granted the applicant trading privileges.

(d) Duration of Registration. A person registered as a FB or FT in accordance with this section, and whose registration has neither been revoked nor withdrawn, will continue to be so registered unless such person's trading privileges on all contract markets or DTFs have ceased: Provided, that if a FB or FT whose trading privileges on all contract markets have ceased for reasons unrelated to any Commission action or any contract market or DTF disciplinary proceeding and whose registration is not revoked, suspended or withdrawn is granted trading privileges as a FB or FT, respectively, by any contract market or DTF where he held such privileges within the preceding sixty days, such registration as a FB or FT, respectively, shall be deemed to continue and no new application or update need be filed solely on the basis of the resumption of trading privileges. A FB or FT is prohibited from engaging in activities requiring registration under the Act or from representing himself to be a registrant under the Act or the representative or agent of any registrant during the pendency of any suspension of such registration or of all such trading privileges. In accordance with Commission Regulation 3.31(d), each contract market or DTF that has granted trading privileges to a person who is registered, or has applied for registration, as a FB or FT, must notify NFA within 60 days after such person's trading privileges on such contract market or DTF have ceased.

[¶ 8206] RULE 206. REGISTRATION OF ASSOCIATED PERSONS OF FUTURES COMMISSION MERCHANTS, INTRODUCING BROKERS, COMMODITY POOL OPERATORS, COMMODITY TRADING ADVISORS AND LEVERAGE TRANSACTION MERCHANTS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; September 21, 1993; June 7, 1996 and May 31, 2002.]

(a) Application for Registration.

    (1) (A) Except as provided in Rule 207, the sponsor of each individual applying for registration as an AP of that sponsor must:

      (i) file a Form 8-R on behalf of the applicant, completed and filed in accordance with all pertinent instructions;
      (ii) pay the registration fee required by Rule 203(a); and
      (iii) file the fingerprints of the applicant on a fingerprint card provided by NFA for that purpose.

    (B) The applicant must verify the completeness and accuracy of information contained in the application that the sponsor files on his behalf.

    (2) The provisions of paragraphs (a)(1)(A) (ii) and (iii) and (a)(1)(B) of this Rule shall not apply to an applicant who has a current active status at the time the sponsor files his Form 8-R.

    (3) When NFA determines that an applicant for registration as an AP appears fit for such registration and receives satisfactory evidence that the applicant satisfies the proficiency requirements set forth in Part 400 of these Rules, NFA will provide notification to the applicant's sponsor that the applicant's registration as an AP is granted contingent upon the sponsor hiring or otherwise employing the applicant as an AP within 30 days.

(b) Special Registration Procedures When Previous Sponsor's Registration Ceases.

    (1) Any person whose registration as an AP in any capacity was terminated within the preceding 60 days because the previous sponsor's registration was revoked or withdrawn, and who becomes associated with a new sponsor, will be registered as an AP of such new sponsor upon the mailing by that new sponsor to NFA of an Acknowledgement of Conditioned Registration, if applicable, and written certifications stating:

    (A) that such person has been hired or is otherwise employed by that sponsor;

    (B) that such person's registration as an AP in any capacity is not suspended or revoked;

    (C) that such person is eligible to be registered in accordance with this paragraph (b);

    (D) whether there is pending against such person an adjudicatory proceeding brought under: (i) Sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act; (ii) CFTC Regulations 3.55 or 3.60; or (iii) NFA or exchange rules or, if within the preceding 12 months, the Commission or NFA has permitted the withdrawal of an application for registration in any capacity after instituting the procedures provided in CFTC Regulation 3.51 or Part 500 of these Rules and, if so, that the sponsor has been given a copy of the notice of the institution of a proceeding in connection therewith;

    (E) that the new sponsor has received a copy of the notice of the institution of a proceeding if the applicant for registration has certified, in accordance with paragraph (b)(1)(D) of this Rule, that there is a proceeding pending against him as described in that paragraph or that the Commission or NFA has permitted the withdrawal of an application for registration as described in that paragraph;

    (F) that the Disciplinary Information section of such person's registration application contains no "yes" answers, or none except those arising from a matter which already has been disclosed in connection with a previous application for registration in any capacity if such registration was granted, or which was disclosed more than 30 days previously in an amendment to such application; and

    (G) that the new sponsor will be responsible for supervising all activities of the person in connection with the sponsor's business as a registrant under the Act.

    (2) The certifications required by paragraphs (b)(1)(A), (E) and (G) of this Rule must be signed and dated by an officer of the sponsoring corporation, a general partner of the sponsoring partnership or the sponsoring sole proprietor. The certifications required by paragraphs (b)(1)(B), (C), (D) and (F) of this Rule must be signed and dated by the applicant for registration as an AP.

    (3) Upon receipt of notice from NFA, a person who is registered in accordance with the provisions of paragraph (b)(1) of this Rule shall be required to file with NFA his fingerprints on a fingerprint card provided by NFA for that purpose as well as such other information as NFA may require. NFA may require such a filing every two years or at such greater period of time as it may deem appropriate, after the AP has become associated with a new sponsor in connection with the requirements of paragraph (b)(1) of this Rule.

(c) Withdrawal of Application. Failure of an applicant or of a sponsor of an applicant to respond to a written or electronic request by NFA for clarification of application information, to submit or resubmit fingerprints in accordance with such request, or to pay the required registration fee pursuant to Rule 203(a)(1) shall be deemed to constitute a withdrawal of the applicant's Form 8-R and shall result in the immediate termination of the applicant's temporary license, and NFA shall notify the sponsor accordingly.

(d) Duration of Registration. A person registered in accordance with paragraphs (a) or (b) of this Rule, Rule 207 or Rule 301(e) and whose registration has not been revoked, shall continue to be so registered until the revocation or withdrawal of the registration of each of the registrant's sponsors, or until the cessation of the association of the registrant with each of his sponsors. Such person will be prohibited from engaging in activities requiring registration under the Act or from representing himself to be a registrant under the Act or the representative or agent of any registrant during the pendency of any suspension of his or his sponsor's registration. In accordance with Rule 214, each of the registrant's sponsors must file a notice with NFA on a Form 8-T reporting the termination of the association of the AP within 20 days thereafter.

(e) Reserved.

[¶ 8207] RULE 207. MULTIPLE ASSOCIATIONS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; September 21, 1993; June 7, 1996 and May 31, 2002.]

(a) Except as otherwise provided for in paragraph (d) of this Rule, any person whose application for registration as an AP is pending or who is temporarily licensed or registered as an AP and whose registration is not subject to conditions may become registered as an AP of another sponsor ("new sponsor") if the new sponsor (who must meet the requirements set forth in Rule 509(b)(5)) files a Form 8-R on behalf of the applicant with NFA in accordance with all pertinent instructions.

(b) (1) The applicant will be registered as an AP of the new sponsor upon the filing of the Form 8-R by the new sponsor in accordance with paragraph (a) of this Rule if the applicant is currently registered as an AP with another sponsor and if:

    (A) the applicant has satisfied the applicable proficiency requirements in Part 400 of these Rules; or

    (B) the Form 8-R filed by the new sponsor contains the representation that the applicant has taken one of the examinations to satisfy the applicable proficiency requirements in Part 400 of these Rules.

(2) NFA shall notify each of the current sponsors of the AP that the AP is applying for registration as an AP with a new sponsor.

(3) Each sponsor is responsible for supervising the AP. In addition, the new sponsor and each sponsor to whom NFA provides notice of the AP's application for registration with multiple sponsors shall be jointly and severally responsible for the conduct of the AP with respect to any customers common to it and any other sponsor of the AP for the:

    (A) solicitation or acceptance of customer orders; solicitation of funds, securities or property for a participation in a commodity pool;

    (B) solicitation of a client's or prospective client's discretionary account;

    (C) solicitation or acceptance of leverage customer orders for leverage transactions; and

    (D) AP's supervision of any person or persons engaged in any of the foregoing solicitations or acceptances.

(4) Each sponsor shall remain jointly liable in accordance with paragraph (b)(4) of this Rule until the individual is no longer associated with the sponsor as an AP and the sponsor files the Form 8-T required by Rule 206(d) and Rule 214 or the individual is no longer associated with multiple sponsors as an AP.

(c) Upon receipt of notice from NFA, an individual who is simultaneously associated with more than one sponsor in accordance with the provisions of paragraphs (a) and (b) of this Rule shall be required to file with NFA his fingerprints on a fingerprint card provided by NFA for that purpose, as well as such other information as may be required. Such a filing may be required every two years or at such greater period of time as NFA deems appropriate after the AP has become associated with a new sponsor in accordance with the requirements of paragraphs (a) and (b) of this Rule.

(d) If an individual is associated with an FCM or an IB and he directs customers seeking a managed account to use the services of a CTA(s) approved by the FCM or IB and all such customers' accounts solicited or accepted by that AP are carried by the FCM or introduced by the IB with which the AP is associated, such individual shall be deemed to be associated solely with the FCM or IB and may not also register as an AP of the CTA(s).

(e) Any individual seeking an exemption from the requirements of this Rule must file a petition with the Commission in accordance with Commission Regulation 3.12.

[¶ 8208] RULE 208. REPORTING OF PRINCIPALS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: June 8, 1988; January 1, 1990; September 21, 1993; November 17, 2001 and May 31, 2002.]

(a) Unless otherwise provided in this Rule:

    (1) an applicant for registration as an FCM, IB, CPO, CTA or LTM must comply with the provisions of Rule 204(a)(2) for each individual who is a principal of the applicant at the time the applicant files its application for registration; and

    (2) within 20 days after any person becomes a principal of an applicant or registrant subsequent to the filing of Form 7-R in accordance with Rule 204 ("new principal"), the applicant or registrant must:

      (A) if the new principal is an entity, file a Form 3-R to add the new principal; or

      (B) if the new principal is an individual, comply with the provisions of Rule 204(a)(2) for each new principal.

(b) After a registrant files a Form 3-R or a Form 8-R in accordance with paragraph (a) of this Rule, NFA may notify the registrant that the new principal may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act and that the registrant shall be suspended at such time as NFA issues a notice pursuant to Rule 504 that the registrant is disqualified from registration pursuant to Section 8a(2)(H) or Section 8a(3)(N) and Section 8a(4) of the Act and that its registration may be revoked thereunder. The registrant shall remain suspended pending: (1) a determination by the Membership Committee or its designated Subcommittee that the new principal appears fit to act as a principal of the registrant; or (2) the issuance by the Membership Committee of a Withdrawal of Notice of Intent. However, in no event shall the registrant be suspended pursuant to the provisions of this paragraph for a period exceeding six months.

(c) If the registrant files a Form 3-R or a Form 8-R for a new principal prior to the new principal becoming affiliated with the registrant in the capacity which requires the listing of such new principal, then any notice issued by NFA pursuant to the provisions of paragraph (b) of this Rule shall not operate to suspend the registrant's registration. The new principal may not become so affiliated with the registrant until: (1) NFA provides notice to the registrant that the new principal appears fit to act as a principal of the registrant; or (2) the Membership Committee or its designated Subcommittee determines that the new principal appears fit to act as a principal of the registrant.

[¶ 8209] RULE 209. ALTERNATIVE TO THE FINGERPRINT FILING REQUIREMENT IN CERTAIN CASES.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; September 21, 1993; May 31, 2002; and December 17, 2007.]

(a) Any individual who is required by these Rules to submit a fingerprint card is exempt from that requirement if NFA has received a report, record or notation from the Federal Bureau of Investigation within 90 days preceding the date the individual's Form 8-R is filed with NFA.

(b) Reserved.

(c) In lieu of submitting a fingerprint card in accordance with the provisions of Rules 204(a)(2) and 208, any FCM, IB, CTA, CPO or LTM that has a principal who is a director but is not also an officer or employee of the firm ("outside director") may file with NFA a Notice Pursuant to CFTC Regulation 3.21(c). A firm that has filed a Notice Pursuant to CFTC Regulation 3.21(c) with respect to an outside director described therein must file with NFA on behalf of such outside director a Form 8-R completed in accordance with all pertinent instructions and verified by the outside director. The exemption provided for by this paragraph is limited solely to the outside director's fingerprint requirement and does not affect any other duties or responsibilities of the firm or the outside directors under these Rules. In appropriate cases, NFA may require additional information from the firm with respect to any outside director referred to in the Notice Pursuant to CFTC Regulation 3.21(c).

(d) Any sponsor that is registered as a Broker/Dealer that files a Form 8-R on behalf of an AP applicant or a principal may, in lieu of submitting a fingerprint card for the applicant or principal, represent in the Form 8-R that, within the last 90 days, an application for registration as a General Securities Representative has been filed on behalf of the applicant with the Financial Industry Regulatory Authority and that a fingerprint card containing the applicant's or principal's fingerprints accompanied the application.

[¶ 8210] RULE 210. DEFICIENCIES, INACCURACIES AND CHANGES TO APPLICATION INFORMATION MUST BE REPORTED.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; January 22, 1993; September 21, 1993 and May 31, 2002.]

(a) Each applicant or registrant as an FCM, IB, CPO, CTA, LTM, FB or FT must promptly correct any deficiency or inaccuracy in a Form 7-R or Form 8-R which no longer renders accurate the information contained therein. Each such correction must be made on a Form 3-R and must be completed and filed in accordance with all pertinent instructions. Except when changing to or from a sole proprietorship, an applicant or registrant may file a Form 3-R for purposes of reporting a change in its form of organization. If a Form 3-R is filed to report a change in the applicant's or registrant's form of organization, the newly formed organization will be liable for all obligations of the pre-existing organization which arose out of the Act or the Regulations thereunder. A registrant or applicant that is changing form of organization to or from a sole proprietorship must file a Form 7-R for the newly formed organization and a Form 7-W for the pre-existing organization.

(b) Each applicant or registrant as an AP and each principal of an applicant or registrant must promptly correct any deficiency or inaccuracy in the Form 8-R which no longer renders current and accurate the information contained therein. Each AP applicant or registrant and each principal must promptly notify his sponsor of any deficiency or inaccuracy and the information necessary to correct it. Each applicant or registrant must promptly correct any deficiency or inaccuracy in its APs' or principals' registration information of which it is or should be aware. Each such correction must be made on a Form 3-R, completed and filed in accordance with all pertinent instructions.

[¶ 8211] RULE 211. SUPPLEMENTAL FILING REQUIREMENTS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: December 10, 1993 and May 31, 2002.]

Notwithstanding any other provisions of these Rules, NFA may, at any time, give notice to any applicant, registrant or person required to be registered:

(a)

    (1) that information has come to the attention of NFA's staff which, if true, could constitute grounds upon which to base a determination that the person is unfit to become or to remain registered in accordance with the Act, the Regulations thereunder, or NFA Rules and which sets forth such information and requests the person to provide evidence mitigating the seriousness of the statutory disqualification set forth in the notice and evidence that the person has undergone rehabilitation; or

    (2) that NFA has undertaken a routine or periodic review of the registrant's fitness to remain so registered; and

(b) that such person, or any individual who based upon his relationship with that person is required to file a Form 8-R in accordance with the requirements of these Rules, must, within five days of receipt thereof, or such shorter period of time as NFA may specify, file or cause to be filed a current Form 8-R, completed and filed in accordance with all pertinent instructions, and file or cause to be filed that individual's fingerprints on a fingerprint card provided by NFA for that purpose. Failure to provide the requested information pursuant to this paragraph is a violation of these Rules which in itself constitutes grounds upon which to base a determination that the person is unfit to become or to remain so registered.

[¶ 8212] RULE 212. REGISTRATION IN ONE CAPACITY DOES NOT INCLUDE REGISTRATION IN ANY OTHER CAPACITY.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990 and May 31, 2002.]

(a) Except as may be otherwise provided in the Act or in any Rule, Regulation, or order of the Commission, each AP, FB, FT, FCM, IB, CPO, CTA and LTM must register as such under the Act. Registration in one capacity under the Act shall not include registration in any other capacity.

(b) Except as may be provided in the Act or in any Rule, Regulation or order of the Commission, registration as an AP in one capacity shall not include registration as an AP in any other capacity. An AP sponsored by a registrant which is registered in more than one capacity need register only once to act as an AP of the registrant and shall be deemed to be an AP of such registrant in each such capacity.

[¶ 8213] RULE 213. CURRENT ADDRESS FOR PURPOSE OF DELIVERY OF COMMUNICATIONS
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: September 21, 1993 and May 31, 2002.]

(a) The address of each applicant, registrant and principal, as filed on the Form 7-R or Form 8-R, shall be deemed to be the address for delivery to the applicant, registrant or principal for any communications from the Commission or NFA, including any summons, complaint, reparations claim, arbitration demand, order, subpoena, special call, request for information, notice and other written document or correspondence, unless the applicant, registrant or principal specifies another address for this purpose: Provided, however, that the Commission or NFA may address any correspondence relating to a Form 8-R submitted for or on behalf of a principal to the sponsor with which the principal is affiliated and may address any correspondence relating to the registration of an AP to the sponsor with which the AP or the applicant is or will be associated.

(b) Each registrant, while registered and for two years after the termination of registration, and each principal, while affiliated with a registrant and for two years after the termination of affiliation, must notify NFA of any change of any of the addresses provided on the Form 7-R or Form 8-R or other address filed with NFA for the purpose of receiving written or electronic communications from the Commission or NFA. Failure to file a required response to any communication sent to the latest such address(es) filed with NFA which is caused by a failure to notify NFA of an address change may result in an order of default and award of claimed monetary damages or other appropriate order in any NFA or Commission proceeding, including a reparations proceeding brought under Part 12 of the Commission's Regulations.

[¶ 8214] RULE 214. TERMINATION OF ASSOCIATED PERSON REGISTRATION AND PRINCIPAL AFFILIATION.
(Click Here to Print this Rule) [Adopted effective September 21, 1993. Effective dates of amendments: May 31, 2002; and January 1, 2008.]

(a) After the filing of a Form 8-R on behalf of any individual for the purpose of permitting that individual to be an AP of a sponsor or a principal affiliated with a sponsor, that sponsor must notify NFA within 30 days after the occurrence of either:

    (1) the failure of that person to become associated with the sponsor as an AP or affiliated with the sponsor as a principal and, if required, the reasons therefore; or

    (2) the termination of the association of the AP or the affiliation as a principal with the sponsor and, if required, the reasons therefore.

(b) Any notice required by paragraph (a) of this Rule must be filed on a Form 8-T. The sponsor must promptly provide a copy of the Form 8-T to the individual whose association or affiliation has been terminated.

(c) If the notice required by paragraph (a) of this Rule is filed more than 30 days after the occurrence of the event requiring the notice, such notice shall be accompanied by the fee specified in Rule 203(a).

[¶ 8215] RULE 215. [RESERVED]
(Click Here to Print this Rule)

PART 300. TEMPORARY LICENSES
(Click Here to Print this Section)

[¶ 8301] RULE 301. TEMPORARY LICENSING OF ASSOCIATED PERSONS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: June 8, 1988; June 30, 1992; September 21, 1993; June 7, 1996; January 6, 1999 and May 31, 2002.]

(a) Qualifications.

    (1) Notwithstanding any other provisions of these Rules, and pursuant to the terms and conditions of this Rule, NFA may grant a temporary license ("TL") to any applicant for registration as an AP whose registration is not suspended or revoked upon the filing with NFA of a properly completed Form 8-R.

    (2) Temporary Licensing Upon Transfer of Associated Person Registration. Except as provided in Rule 207, NFA shall grant a TL to any applicant for registration as an AP upon the filing of a Form 8-R if as of the date the Form 8-R is filed:

      (A) the applicant has been hired or is otherwise employed by the sponsor;

      (B) the applicant's registration with a previous sponsor as an AP has terminated no more than 60 days prior to the date the sponsor files the Form 8-R;

      (C) the applicant's registration is not revoked or suspended;

      (D) the new sponsor has received a copy of the notice of the institution of:

        (i) any pending proceeding that was brought against the applicant under: Sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act; CFTC Regulations 3.55 or 3.60; or NFA or exchange rules; or
        (ii) any proceeding that was instituted in accordance with the procedures provided in CFTC Regulation 3.51 or Part 500 of these Rules and, within the prior 12 months, resulted in the Commission or NFA permitting the withdrawal of such person's application for registration in any capacity;

      (E) if the applicant is subject to a Commission or NFA Order imposing conditions on the applicant's registration, the sponsor meets the requirements set forth in Rule 509(b)(5); and

      (F) (1) the applicant has satisfied the applicable proficiency requirements in Part 400 of these Rules; or

    (2) the Form 8-R contains the representation that the applicant has taken one of the examinations to satisfy the applicable proficiency requirements in Part 400 of these Rules.

(b) Reserved.

(c) Restrictions Upon Activities.

An applicant for registration as an AP who has received notification that a TL has been granted may act in the capacity of an AP subject to all CFTC rules, regulations, orders and all NFA requirements.

(d) Termination of a TL.

    (1) A TL shall terminate:

      (A) immediately upon notice to the applicant's sponsor that, within 20 days following the date the TL is issued:

        (1) NFA has not received the applicant's fingerprint card, if required;

        (2) the sponsor does not meet the requirements regarding sponsorship of a registrant subject to conditions set forth in Rule 509(b)(5), if applicable;

        (3) NFA has not received the required registration fee pursuant to Rule 203(a), if required;

        (4) NFA has not received satisfactory evidence that the applicant has satisfied the applicable proficiency requirements in Part 400 of these Rules, if required; or

        (5) the applicant has failed to verify the information contained in the Form 8-R, if required;

      (B) immediately upon termination of the association of the applicant with the registrant which filed the Form 8-R;

      (C) upon failure of an applicant's sponsor or an applicant to respond to NFA's written or electronic request for clarification of application information or to submit or resubmit fingerprints in accordance with such request;

      (D) upon the revocation or withdrawal of the registration of the applicant's sponsor; or

      (E) upon notice to the applicant's sponsor that:

        (i) the applicant failed to comply with an award in an arbitration proceeding conducted pursuant to CFTC Rule 166.5 within the time permitted for such compliance as specified in Section 10(g) of NFA's Code of Arbitration or the comparable time period specified in the rules of a contract market or other appropriate arbitration forum;
        (ii) the applicant failed to pay the full amount of a reparations order within the time permitted under Section 14(f) of the Act;
        (iii) the applicant failed to comply with an order to pay a civil monetary penalty, restitution or disgorgement within the time permitted under Sections 6(e), 6b or 6c(d) of the Act;
        (iv) the applicant failed to disclose relevant disciplinary information in response to the disciplinary information questions on the Form 8-R; or
        (v) subsequent to the filing of the Form 8-R, an event has occurred that requires an affirmative response by the applicant to the disciplinary information questions in the Form 8-R; or

      (F) five days after service upon the applicant of a notice by NFA pursuant to Rule 504 that the applicant may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act.

        (1) Upon termination of a TL, the applicant may not engage in any activity which requires registration with the Commission as an AP.

(e) Relationship to Registration and Membership.

    (1) A TL shall not be deemed to be a registration or to confer any right to such registration.

    (2) The granting of a TL shall constitute the granting of NFA associate membership if the applicant's sponsor is an NFA Member.

    (3) Termination of a TL will affect NFA membership as described in Bylaw 301(h).

    (4) Unless a TL has been terminated, a TL shall become a registration with the Commission upon the earlier of:

      (A) a determination by NFA that the applicant is qualified for registration as an AP; or

      (B) the expiration of six months from the date of its issuance unless NFA has issued a notice pursuant to Rule 504 that the applicant may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act.

[¶ 8302] RULE 302. TEMPORARY LICENSING FOR GUARANTEED INTRODUCING BROKERS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: June 8, 1988; June 30, 1992; September 21, 1993; June 7, 1996; April 1, 1997; January 6, 1999; November 17, 2001 and May 31, 2002.]

(a) Qualifications. Notwithstanding any other provisions of these Rules, and pursuant to the terms and conditions of this Rule, NFA may grant a TL to any applicant for registration as an IB. To be eligible for a TL:

    (1) the IB must file with NFA :

      (A) A Form 7-R completed and filed in accordance with all pertinent instructions;

      (B) For each individual principal:

        (i) a Form 8-R completed and filed in accordance with all pertinent instructions;
        (ii) Legible fingerprints of the applicant, if a sole proprietor, and of each individual principal of the applicant on a fingerprint card provided by NFA for that purpose, unless the sole proprietor or principal has a current active status;
        (iii) the registration fees required by Rule 203(a) for the applicant and, if applicable, its individual principals; and

      (C) All other properly completed forms and documents that are required to become registered as an IB and to become an NFA Member.

    (2) The FCM that will be the guarantor:

      (A) must be eligible in accordance with all NFA Requirements to enter into such an agreement;

      (B) must file with NFA:

        (i) a properly completed guarantee agreement (Form 1-FR Part B);
        (ii) a certification stating that to the best of the FCM's knowledge, information, and belief, all of the publicly available information supplied by the applicant and its principals on the Forms 7-R and 8-R is accurate and complete;
        (iii) and if the IB's registration is subject to conditions, an Acknowledgement of Conditioned Registration signed by the FCM (who must meet the requirements set forth in Rule 509(b)(5)) that contains all of the conditions required by the order imposing them;

    (3) At least one principal of the IB is an applicant for registration as an AP of the IB or is a registered FB;

    (4) Each principal who is an individual must meet the eligibility requirements for a TL in any capacity; and

    (5) NFA has received satisfactory evidence that each principal who is applying for registration as an AP of the IB satisfies the proficiency requirements contained in Part 400 of these Rules.

(b) A guarantee agreement filed in connection with paragraph (a)(2)(B)(i) of this Rule shall become effective upon the granting of the TL.

(c) Restrictions Upon Activities.

    (1) An applicant for registration as an IB who has received notification from NFA that a TL has been granted may act in the capacity of an IB, subject to all CFTC rules, regulations, orders, and all NFA requirements.

    (2) An applicant for registration as an IB who has received a TL may be guaranteed by an FCM other than the FCM which provided the initial guarantee agreement described in paragraph (a)(2)(B)(i) of this Rule if the IB submits to NFA:

      (i) written notice of the termination of the initial guarantee agreement; and
      (ii) a properly completed new guarantee agreement (Form 1-FR Part B) which will become effective the day following the last effective date of the initial guarantee agreement.

Such written notice and new guarantee agreement must be submitted to NFA 10 days prior to the termination of the initial guarantee agreement or within such other period of time as NFA may allow for good cause shown, in accordance with NFA Requirements and CFTC Regulations 1.10(j)(4)(ii) or (j)(5).

(d) Termination of a Temporary License.

    (1) A TL shall terminate:

      (A) five (5) days after service upon the applicant of a notice by NFA pursuant to Rule 504 that the applicant may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act;

      (B) upon the revocation or withdrawal of the guarantor FCM's registration;

      (C) immediately upon termination of the applicant's guarantee agreement in accordance with NFA Requirements and CFTC Regulations 1.10(j)(4)(ii) or (j)(5) unless a new guarantee agreement is filed in accordance with paragraph (c)(2) of this Rule;

      (D) upon failure of an applicant:

        (i) to respond to NFA's request for clarification of application information;
        (ii) to pay the registration fees pursuant to Rule 203(a) for the applicant or, if required, its principals; or
        (iii) to submit or resubmit fingerprints in accordance with such request;

      (E) whenever a person not listed as a principal on the applicant's registration application becomes a principal of the applicant after the TL is granted if the TL would not have been granted to the applicant had the applicant filed a Form 8-R for the principal prior to the TL being granted; or

      (F) upon notice to the applicant and its guarantor FCM that:

        (i) the applicant failed to comply with an award in an arbitration proceeding conducted pursuant to CFTC Rule 166.5 within the time permitted for such compliance as specified in Section 10(g) of NFA's Code of Arbitration or the comparable time period specified in the rules of a contract market or other appropriate arbitration forum;
        (ii) the applicant failed to pay the full amount of a reparations order within the time permitted under Section 14(f) of the Act;
        (iii) the applicant failed to comply with an order to pay a civil monetary penalty, restitution or disgorgement within the time permitted under Sections 6(e), 6b or 6c(d)of the Act;
        (iv) the applicant failed to disclose relevant disciplinary information in response to the disciplinary information questions on the Form 7-R;
        (v) any principal of the applicant failed to disclose relevant disciplinary information in response to the disciplinary information questions on the Form 8-R; or
        (vi) subsequent to the filing of the applicant's Form 7-R or any principal's Form 8-R, an event has occurred leading to an affirmative response to the disciplinary information questions on the applicant's Form 7-R or on any principal's Form 8-R.

    (2) Upon termination of a TL, the applicant may not engage in any activity which requires registration with the Commission as an IB.

(e) Relationship to Registration and Membership.

    (1) A TL shall not be deemed to be a registration or to confer any right to such registration.

    (2) The granting of a TL shall constitute the granting of NFA membership.

    (3) Termination of a TL will affect NFA membership as described in Bylaw 301(h).

    (4) Unless a TL has been terminated, a TL shall become a registration with the Commission upon the earlier of:

      (A) a determination by NFA that the applicant is qualified for registration as an IB; or

      (B) the expiration of six months from the date of its issuance unless NFA has issued a notice pursuant to Rule 504 that the applicant may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act.

(f) Retention of Records. In accordance with Commission Regulation 1.31, the guarantor FCM must retain such records as are necessary to support the certification required by this Rule.

[¶ 8303] RULE 303. TEMPORARY LICENSING FOR FLOOR BROKERS AND FLOOR TRADERS
(Click Here to Print this Rule) [Adopted effective January 6, 1999. Effective dates of amendments: May 31, 2002]

(a) Qualifications. Notwithstanding any other provision of these Rules, and pursuant to the terms and conditions of this Rule, NFA may grant a TL to any applicant for registration as a FB or FT upon the filing with NFA of:

    (1) a Form 8-R completed and filed in accordance with all pertinent instructions;

    (2) the fingerprints of the applicant on a fingerprint card provided by NFA for that purpose, if required;

    (3) the registration fee by Rule 203(a), if applicable;

    (4) if the applicant is subject to a Commission or NFA order imposing conditions on the applicant's registration, an Acknowledgement of Conditioned Registration executed by a sponsor that meets the requirements contained in Rule 509(b)(5); and

    (5) receipt by NFA of satisfactory evidence that the applicant has been granted trading privileges by a contract market that has filed with NFA a certification signed by its chief operating officer with respect to the review of an applicant's employment, credit and other history in connection with the granting of trading privileges or by a DTF.

(b) Reserved.

(c) Restrictions Upon Activities. An applicant for registration as a FB who has received notification that a TL has been granted may act in the capacity of a FB. An applicant for registration as a FT who has received notification that a TL has been granted may act in the capacity of a FT. Any temporarily licensed applicant acting in the capacity of a FT or FB shall be subject to all Commission rules, regulations and orders.

(d) Termination of a Temporary License.

    (1) A TL shall terminate:

      (A) five days after service of a notice by NFA pursuant to Rule 504 that the applicant may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act;

      (B) immediately upon notification to the temporarily licensed applicant that the sponsor who filed the Acknowledgement of Conditioned Registration described in paragraph (a)(1)(D) of this Rule has terminated the sponsorship relationship;

      (C) upon failure of an applicant's sponsor or an applicant to respond to NFA's request for clarification of application information, to pay the required fee pursuant to Rule 203(a) or to submit or resubmit fingerprints in accordance with such request;

      (D) immediately upon revocation or withdrawal of the applicant's sponsor;

      (E) immediately upon loss of trading privileges on all contract markets that filed the certification described in Commission Regulation 3.40(d) and on all DTFs that granted such privileges;

      (F) upon notice to the applicant or the contract market or DTF that has granted the applicant trading privileges that:

        (i) the applicant has failed to comply with an award in an arbitration proceeding conducted pursuant to Commission Rule 166.5 within the time permitted for such compliance as specified in Section 10(g) of NFA's Code of Arbitration or the comparable time period specified in the rules of a contract market, DTF or other appropriate arbitration forum;
        (ii) the applicant failed to pay the full amount of a reparations order within the time permitted under Section 14(f) of the Act;
        (iii) the applicant failed to comply with an order to pay a civil monetary penalty, restitution or disgorgement within the time permitted under Sections 6(e), 6b or 6c(d) of the Act;
        (iv) the applicant failed to disclose relevant disciplinary information in response to the disciplinary information questions on the Form 8-R; or
        (v) subsequent to the filing of the Form 8-R, an event has occurred leading to an affirmative response to the disciplinary information questions on the applicant's Form 8-R.

    (2) Upon termination of a TL, the applicant may not engage in any activity that requires registration with the Commission as a FB or FT.

(e) Relationship to Registration.

    (1) A TL shall not be deemed to be a registration or to confer any right to such registration.

    (2) Unless a TL has been terminated, a TL shall become a registration with the Commission upon the earlier of:

    (A) a determination by NFA that the applicant is qualified for registration as a FB or FT; or

    (B) the expiration of six months from the date of its issuance unless NFA has issued a notice pursuant to Rule 504 that the applicant may be disqualified from registration under Sections 8a(2) through 8a(4) of the Act.

PART 400. PROFICIENCY REQUIREMENTS
(Click Here to Print this Section)

[¶ 8401] RULE 401. QUALIFICATION TESTING REQUIREMENT.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; August 11, 1993; September 21, 1993; May 4, 1994; July 28, 1995; October 6, 1997; May 31, 2002 and September 9, 2002; December 31, 2005; and December 17, 2007.]

(a) Except as provided elsewhere in this Rule, any individual applying to become a Member of NFA as an FCM, an IB, a CPO, a CTA, an LTM, or for registration under the Act as an AP of any of the foregoing, or applying for registration with NFA as an Associate pursuant to NFA Bylaw 301(b) shall not be granted NFA membership, registered under the Act as an AP, or registered as an Associate Member of NFA unless:

    (1) NFA has received satisfactory evidence that the applicant has taken and passed the National Commodity Futures Examination (Series 3) on a date which is no more than two years prior to the date the application is received by NFA; or

    (2) NFA has received satisfactory evidence that the applicant has taken and passed the National Commodity Futures Examination (Series 3) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as a FB, AP or principal of an FCM, IB, CTA, CPO or LTM.

(b) Notwithstanding the provisions of Rule 401(a), a person applying to be registered as an AP will satisfy the proficiency requirements of this Rule if:

    (1) the applicant currently is registered with the Financial Industry Regulatory Authority, as a General Securities Representative ("GSR") of the sponsor; and

    (2) the applicant's sole activities, subject to regulation by the Commission, are and will continue to be limited to referring clients to an AP of the sponsor who has satisfied the proficiency requirements set forth in this Rule, provided that the applicant's referral of clients is solely incidental to his business as a GSR of the sponsor; or the supervision on behalf of the sponsor of persons whose activities are so limited.

(c) Notwithstanding the provisions of Rule 401(a), a person applying to be registered as an AP will satisfy the proficiency requirements of this Rule if:

    (1) NFA receives satisfactory evidence the applicant has taken and passed the Futures Managed Funds Examination (Series 31) on a date which is no more than two years prior to the date the application is received by NFA; or

    (2) NFA has received satisfactory evidence that the applicant has taken and passed the Futures Managed Fund Examination (Series 31) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as an FB, AP or principal of an FCM, IB, CTA, CPO or LTM; and

    (3) the applicant currently is registered with the Financial Industry Regulatory Authority, as a GSR of the sponsor; and

    (4) the applicant's sole activities, subject to regulation by the Commission, are and will continue to be limited to the solicitation on behalf of the sponsor of funds, securities, or property for participation in a commodity pool, the solicitation on behalf of the sponsor of clients to open discretionary accounts to be managed by registered CTAs, or the supervision on behalf of the sponsor of persons whose activities are so limited.

(d) Notwithstanding the provisions of Rule 401(a), a person applying to be registered as an AP will satisfy the proficiency requirements of this Rule if:

    (1) NFA has received satisfactory evidence that the applicant has taken and passed the Financial Instruments Examination (Series 33) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as an AP or a principal of an FCM, IB, CTA, CPO or LTM; and

    (2) the applicant currently is registered with the Financial Industry Regulatory Authority, as a GSR of the sponsor; and

    (3) the applicant's sole activities, subject to regulation by the Commission, are and will continue to be limited to the solicitation or acceptance on behalf of the sponsor of customer orders for futures or options involving stock index, currency or interest rate products, or security futures products or the supervision on behalf of the sponsor of persons whose activities are so limited.

(e) Notwithstanding the provisions of Rule 401(a), any individual applying to become a Member of NFA as an FCM, an IB, a CPO, a CTA, an LTM, or for registration under the Act as an AP of any of the foregoing, or applying for registration with NFA as an Associate pursuant to NFA Bylaw 301(b), will satisfy the proficiency requirements of this Rule if:

    (1) the applicant is or within the past two years has been registered or licensed in a jurisdiction outside the United States;

    (2) the applicant has satisfied the proficiency requirements in that foreign jurisdiction and the Board of Directors has designated those proficiency requirements as an appropriate substitute for the market fundamentals portion of the National Commodity Futures Examination (Series 3); and

    (3) NFA has received satisfactory evidence that the applicant has taken and passed the Limited Futures Examination-Regulation (Series 32) on a date which is no more than two years prior to the date the application is received by NFA; or

    (4) NFA has received satisfactory evidence that the applicant has taken and passed the Limited Futures Examination-Regulation (Series 32) and since the date the applicant last passed such examination, there has been no period of two consecutive years during which the applicant has not been either registered as an AP or a principal of an FCM, IB, CTA, CPO or LTM.

(f) The applicant's sponsor must supervise the applicant's compliance with the limitations on the applicant's activities set forth in paragraphs (b)-(d) of this Rule. Any failure of the applicant to adhere to such limitations may be cause for, among other things, disciplinary action by NFA against the sponsor for violation of NFA Compliance Rule 2-9. The limitations set forth in paragraphs (b)-(d) of this Rule shall remain in effect until the applicant or the applicant's sponsor submits to NFA satisfactory evidence of having taken and passed the National Commodity Futures Examination (Series 3).

(g) An individual may contemporaneously engage in any activity permitted pursuant to the provisions of paragraphs (b)(2), (c)(4) and (d)(3) provided that the individual meets the other pertinent requirements of paragraphs (b)-(d).

(h) Willfully making any materially false or misleading statement or willfully omitting to state any material fact in any part of the application for registration, including information concerning the requirements of this Rule, is cause for denial, suspension, or revocation of registration and criminal prosecution.

[¶ 8402] RULE 402. WAIVER OF TESTING REQUIREMENT.
(Click Here to Print this Rule) [Adopted effective August 1, 1992. Effective dates of amendments: September 21, 1993; May 31, 2002; and December 15, 2004.]

The Vice-President of Registration and Membership may waive the requirements of Rule 401 under circumstances approved by the Board of Directors. The decision of the Vice-President of Registration and Membership shall be final.

[See Interpretive Notice Registration Rule 402: CPOs of Pools Trading Primarily in Securities and Interpretive Notice Registration Rule 402: CTAs Trading Primarily in Securities.]

PART 500. PROCEEDINGS TO DENY, CONDITION, SUSPEND, AND REVOKE REGISTRATION
(Click Here to Print this Section)

[¶ 8501] RULE 501. AUTHORITY TO DENY, CONDITION, SUSPEND AND REVOKE REGISTRATION.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; September 30, 1992; December 10, 1993; August 1, 1994; September 7, 1998; March 12, 1999; July 1, 2001 and December 15, 2004.]

NFA may refuse to register or register conditionally any person registered or applying for registration as an FCM, IB, CPO, CTA, LTM, ATM, as an AP of any of the foregoing, or as a floor broker or floor trader, or suspend or revoke the registration of any registrant in those categories, based upon the standards of fitness set forth in the Act. Interim Orders and Final Orders denying, revoking, conditioning, or suspending registration shall be made by the Membership Committee or a designated Subcommittee in accordance with the procedures set forth in Part 500 of these Rules. Such designated Subcommittee shall consist of three members of the Membership Committee for all categories except floor brokers and floor traders. The designated Subcommittee for floor brokers/floor traders shall consist of at least three persons, the majority of whom are members of the Membership Committee and the remainder of whom are registered floor brokers or floor traders approved by NFA's Board of Directors to be a member of such Subcommittee. At least one-third of the members on each designated Subcommittee shall not be an NFA Member or an Associate or an employee of an NFA Member. In cases submitted by the President to the Membership Committee or a designated Subcommittee, registration shall not be granted pending a final determination by the Membership Committee or a designated Subcommittee. No member of the Membership Committee or a designated Subcommittee shall either review a registration matter or participate in a registration action if the member, or any person with whom the member is connected, has a financial, personal or other direct interest in the matter under consideration or is disqualified under Bylaw 708(c).

[¶ 8502] RULE 502. GENERAL PROVISIONS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: December 10, 1993; August 1, 1994; July 1, 2001; June 8, 2007 and December 10, 2007.]

(a) For purposes of any proceeding to deny, condition, suspend, or revoke registration, service upon an applicant or registrant will be sufficient if mailed by certified mail return receipt requested, delivered to a generally recognized overnight courier service or delivered to a messenger service, properly addressed to the applicant or registrant at the address shown on his most recent registration application or any amendment thereto. Service will be complete upon mailing, delivery to a generally recognized overnight courier service or delivery to a messenger service. Where a party effects service by mail, the time within which the person served may respond thereto shall be increased by three days.

(b) A copy of any notice served in accordance with paragraph (a)(1) of this Rule shall also be served upon:

    (1) any sponsor of the applicant or registrant, if the applicant or registrant is an individual registered as or applying for registration as an AP and such sponsor's guarantor, if any; or

    (2) any FCM which has entered into a guarantee agreement pursuant to CFTC Regulation 1.10(j) with an applicant or registrant applying for registration as or registered as an IB; or

    (3) any contract market that has granted or is reviewing an application for trading privileges if the applicant or registrant is an individual registered as or applying for registration as a floor broker or floor trader.

(c) Documents served by an applicant or registrant upon NFA under this Part 500 shall be considered served or filed only upon actual receipt by the Legal Docketing Department of National Futures Association, 300 South Riverside Plaza, Chicago, Illinois 60606.

(d) Documents may also be served facsimile to the attention of the Legal Docketing Department or by email to Docketing@nfa.futures.org. Parties who file documents by electronic means thereby consent to accept service of pleadings in the proceedings by the same method and waive any objection based on authenticity and genuineness to the use and admissibility into evidence in the proceeding of any document that they file by electronic means. The first document that a party files by electronic means must identify that party's e-mail address or facsimile number at which NFA may serve pleadings in the proceeding. Parties who provide an e-mail address or facsimile number must advise Legal Docketing of any change to the e-mail address or facsimile number.

(e) Except as otherwise provided by law or these Rules, for good cause shown, the Membership Committee or a designated Subcommittee before whom a proceeding brought under these Part 500 Rules is then pending, on their own motion or motion of a party, may at any time extend or shorten the time limit prescribed by such Rules for filing any document. In any instance in which a time limit is not prescribed for an action to be taken concerning any matter, the Membership Committee or a designated Subcommittee may set a time limit for that action.

[¶ 8503] RULE 503. WITHDRAWAL OF APPLICATION FOR REGISTRATION.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: December 10, 1993 and December 15, 2004.]

(a) Whenever information comes to the attention of NFA that an applicant for registration in any capacity may be disqualified from registration under Section 8a(2), 8a(3) or 8a(4) of the Act, the Vice President of Registration and Membership or the Vice President's designee may serve written notice upon the applicant which shall specify the statutory disqualifications to which the applicant may be subject and notify the applicant that:

    (1) the information, if true, is a basis upon which the applicant's registration may be denied;

    (2) unless the applicant voluntarily withdraws his application, it may be necessary to institute the denial procedures described in Part 500 of these Rules; and

    (3) if the applicant does not confirm in writing that he wishes to have his application given further consideration, his application will be deemed to have been withdrawn.

(b) The applicant must serve the written confirmation referred to in paragraph (a)(3) of this Rule upon NFA's Legal Docketing Department within 20 days of the date the written notice from NFA was served.

[¶ 8504] RULE 504. PROCEDURES GOVERNING APPLICANTS AND REGISTRANTS DISQUALIFIED FROM REGISTRATION UNDER SECTION 8a(2), 8a(3) OR 8a(4) OF THE ACT.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: January 1, 1990; December 10, 1993; August 1, 1994; July 1, 2001; April 2, 2004; December 15, 2004; and March 6, 2009.]

(a) Notice of Intent. On the basis of information which NFA has obtained, the President of NFA may at any time serve a Notice of Intent upon any person registered or applying for registration in any capacity, stating that:

    (1) NFA alleges and is prepared to prove that the applicant or registrant is subject to one or more of the statutory disqualifications set forth in Section 8a(2), 8a(3) or 8a(4) of the Act;

    (2) the allegations set forth in the Notice of Intent, if true, constitute a basis upon which registration can be denied, conditioned, suspended or revoked (if the Notice of Intent proposes conditioning registration, the Notice shall specify the proposed conditions );

    (3) the applicant or registrant is entitled to have the Membership Committee or a designated Subcommittee considers written evidence of the type set forth in paragraph (f) of this Rule. The Notice of Intent shall inform the applicant or registrant of the procedures which will be followed if no written submission is made in accordance with this Rule; and

    (4) if an applicant for registration has been granted a temporary license, such temporary license shall terminate five days after service on the applicant of the Notice of Intent.

(b) Written Response to the Notice of Intent.

    (1) In response to a Notice of Intent alleging a disqualification from registration set forth in Section 8a(2), 8a(3) or 8a(4) of the Act, the applicant or registrant may submit a written response challenging the accuracy of the allegations establishing the statutory disqualification, including evidence as to:

      (A) the applicant's or registrant's identity;

      (B) the existence of a clerical error in any record documenting the statutory disqualification;

      (C) the nature or date of the statutory disqualification;

      (D) the post-conviction modification of any record of conviction; or

      (E) the favorable disposition of any appeal.

    (2) The applicant or registrant shall state the nature of each challenge in the response and submit an affidavit to support facts material to each challenge. In the response, the applicant or registrant also shall state whether he intends to show that, notwithstanding the accuracy of the allegations set forth in the Notice of Intent, his registration would pose no substantial risk to the public.

    (3) Time for Filing of Response. A written response to the Notice of Intent must be served upon NFA's Legal Docketing Department within 20 days of the date of the service of the Notice of Intent upon the applicant or registrant. All applicants and registrants must include the disqualification fee required by Rule 203(a)(11) with their response.

    (4) Default of Applicant or Registrant to Notice of Intent. If the applicant or registrant fails to file a timely written response to the Notice of Intent, the applicant or registrant shall be deemed to have waived his right to submit such written response, and the facts stated in the Notice of Intent shall be deemed to be true for the purpose of finding that the applicant or registrant is disqualified from registration under Section 8a(2), 8a(3) or 8a(4) of the Act. The Membership Committee or a designated Subcommittee shall thereafter, after a finding that service was properly effected in accordance with Rule 502, enter a Final Order denying, conditioning, suspending or revoking the registration. Such finding shall be based upon the evidence of the statutory disqualification and the Notice of Intent with proof of service. In order to prevent injustice and on such conditions as may be appropriate, the Membership Committee or a designated Subcommittee may set aside a default order. Any motion to set aside a default shall be made within a reasonable time, shall state the reasons for the failure to file and shall specify the nature of the proposed defense.

(c) Reply to Response of a Registrant Subject to an 8a(2) Disqualification. If a registrant who is alleged to be subject to an 8a(2) disqualification submits a written response, challenging the accuracy of the allegations establishing the statutory disqualification, the Vice President of Registration and Membership may submit a written reply to the Membership Committee or a designated Subcommittee and serve such reply upon the registrant within 10 days of the date of such written response. The reply shall include evidence establishing the existence of the statutory disqualification.

(d) Interim Order. After the receipt of a registrant's written response to the Notice of Intent and any reply thereto from the Vice President of Registration and Membership, the Membership Committee or a designated Subcommittee shall determine whether the registrant is disqualified from registration under Section 8a(2) of the Act.

    (1) If the Membership Committee or a designated Subcommittee determines that the registrant is disqualified under Section 8a(2) of the Act, the Membership Committee or a designated Subcommittee, within 30 days after receipt of the registrant's written response, if any, and any reply thereto, shall issue an interim order suspending the registration of the registrant. The interim order shall inform the registrant that the registration of the registrant shall be suspended, effective five days after the interim order is served upon the registrant, and such suspension shall remain in effect until a Final Order has been issued. In no event shall the registrant be suspended for a period to exceed six months.

    (2) If the Membership Committee or a designated Subcommittee determines that the registrant is not disqualified from registration under Section 8a(2) of the Act, the Membership Committee or a designated Subcommittee shall, within 30 days after receipt of the registrant's written response and any reply thereto, either issue a Withdrawal of Notice of Intent or, if the Membership Committee or a designated Subcommittee determines that the disqualification constitutes a Section 8a(3) disqualification, it may grant the Vice President leave to file an Amended Notice of Intent within thirty days. In either event, the Membership Committee or a designated Subcommittee shall make a finding that the registrant is not disqualified under Section 8a(2) of the Act.

    (3) If the Membership Committee or a designated Subcommittee determines that there is not enough evidence in the written record to decide whether the registrant should be disqualified from registration under Section 8a(2) of the Act, the Membership Committee or a designated Subcommittee may, within 30 days after receipt of the registrant's written response and any reply thereto, either decline to make a finding or issue an order for an oral hearing. The Membership Committee or a designated Subcommittee shall rely upon any evidence produced at an oral hearing and any written submissions to make the determination required in paragraphs (d)(1) or (d)(2) of this Rule.

(e) Oral Hearing. Within 30 days of the date the applicant or registrant files its response to the Notice of Intent, the Chairman of the Membership Committee shall appoint a Chairman of the Subcommittee, who shall notify the parties of the time and place of a hearing. At such hearing, the parties shall be limited in their case-in-chief to presentation of witnesses and documents listed in their submissions as described in (f) and (g) below, except for good cause shown.

(f) Respondent's Witnesses and Evidence. If, in response to the Notice of Intent, the applicant or registrant states that he intends to make the showing referred to in paragraph (b)(2) of this Rule, he shall, at least 30 days before the date of the hearing, file with NFA's Legal Docketing Department a statement of the applicant or registrant or his attorney identifying and summarizing the testimony of each witness whom the applicant or registrant intends to have testify in support of facts material to his showing. Such submission also must include copies of all documents which the applicant or registrant intends to introduce to support facts material to his showing. In making a showing pursuant to paragraph (b)(2) of this Rule, the applicant or registrant may present:

    (1) mitigating evidence relating to the facts and circumstances surrounding the disqualifying conduct;

    (2) evidence of rehabilitation since the disqualifying conduct; and

    (3) evidence that the applicant's or registrant's registration would be subject to supervisory controls, including proposed conditions likely to detect future wrongdoing by the applicant or registrant and protect the public from any harm arising from such future wrongdoing.

(g) NFA's Witnesses and Evidence. At least 15 days before the date of the hearing the Vice President of Registration and Membership shall serve, on the applicant or registrant a description of the factual issues raised in the applicant's or registrant's response and further submission, if any, that NFA regards as material and disputed. Such reply also shall include the identity and a summary of the expected testimony of each witness whom NFA intends to have testify at its case-in-chief and copies of all documents which NFA intends to introduce at such hearing.

(h) Termination. In the event that an applicant or registrant's pending or current registration is terminated after the issuance of a Notice of Intent but prior to the effective date of a Final Order, the Membership Committee or a designated Subcommittee may issue a Withdrawal of Notice of Intent indicating that because the applicant or registrant is no longer registered or pending registration, further proceedings are not warranted.

[¶ 8505] RULE 505. MOTIONS.
(Click Here to Print this Rule) [Adopted effective July 1, 2001.]

(a) All motions shall be in writing and served in accordance with these Rules. The Chairman of the Subcommittee may decide all pre-hearing motions concerning deadlines, location of the hearing, continuances, and requests for telephonic or video testimony. All other motions shall be decided by the full Subcommittee.

(b) NFA may, at any time, make a motion for summary judgment stating that, based upon the respondent's response and further submission, if any, and any other materials that are attached to the response, there are no issues of material fact to be determined and that registration should be denied or revoked.

(c) Both NFA and the respondent have a right to respond to any motion within ten days of service of the motion.

[¶ 8506] RULE 506. HEARING PROCEDURES.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: December 10, 1993 and August 1, 1994.]

(a) When a hearing is held before the Membership Committee or a designated Subcommittee, a record of the hearing shall be kept. At such hearing, the applicant or registrant may be represented by counsel, submit evidence, call and examine witnesses, examine the evidence upon which the Membership Committee or a designated Subcommittee made a determination as well as any documentary evidence which NFA intends to present at the hearing and, at the discretion of the Membership Committee or a designated Subcommittee, present oral or written argument.

(b) Upon notice of the time and place of an oral hearing, the parties may elect to participate by telephone. To effect such an election, a party shall file a notice with NFA's Legal Docketing Department and serve a copy on all opposing parties within 15 days of the date such notice is served. The filing of an election to participate by telephone will be deemed a waiver of the party's right to a full oral hearing on the parties' material disputes of fact. The Membership Committee or a designated Subcommittee shall order a telephonic hearing only if all parties to the proceeding elect such a procedure. Such telephonic hearing shall be held in accordance with the procedures set forth in the order. Following the telephonic hearing, the Membership Committee or a designated Subcommittee shall issue a written decision in accordance with the standards set forth in paragraphs (a) and (b) of Rule 507.

[¶ 8507] RULE 507. DECISION OF MEMBERSHIP COMMITTEE OR A DESIGNATED SUBCOMMITTEE.
(Click Here to Print this Rule) [Adopted effective December 10, 1993. Effective dates of amendments: August 1, 1994 and July 1, 2001.]

(a) Standards of Proof. The written decision of the Membership Committee or its designated Subcommittee shall specifically consider whether NFA has shown by a preponderance of the evidence that the applicant or registrant is subject to the statutory disqualification from registration set forth in the Notice of Intent and, where appropriate:

    (1) in actions involving statutory disqualifications set forth in Section 8a(2) of the Act, whether the applicant or registrant has made a clear and convincing showing that, notwithstanding the existence of the statutory disqualification, full or conditioned registration would not pose a substantial risk to the public; or

    (2) in actions involving statutory disqualifications set forth in Sections 8a(3) or 8a(4) of the Act, whether the applicant or registrant has shown by a preponderance of the evidence that, notwithstanding the existence of the statutory disqualification, full or conditioned registration would not pose a substantial risk to the public.

(b) Findings. In making its written decision, the Membership Committee or a designated Subcommittee shall set forth facts material to its finding that the applicant or registrant is, or is not, disqualified as alleged in the Notice of Intent and, where appropriate, its findings regarding:

    (1) evidence mitigating the seriousness of the wrongdoing underlying the applicant's or registrant's statutory disqualification;

    (2) evidence that the applicant or registrant has undergone rehabilitation since the time of the wrongful conduct underlying the statutory disqualification; and

    (3) evidence that the applicant's or registrant's registration on a conditional basis would be subject to supervisory controls likely both to detect future wrongful conduct by the applicant or registrant and protect the public from any harm arising from such conduct. Such decision shall describe the specific conditions being imposed and provide that any sponsor or guarantor of applicant or registrant must be "eligible" as that term is defined in Rule 509(b)(5). It shall also fix a time period after which the applicant or registrant may petition to lift or modify the conditions in accordance with Rule 510.

[¶ 8508] RULE 508. ORDERS.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: October 29, 1991; December 10, 1993; August 1, 1994 and July 1, 2001.]

(a) Final Orders and Withdrawals of Notice of Intent. All orders granting, denying, conditioning, suspending or revoking registration under this Part 500 (except an interim order suspending registration pursuant to Rule 504(b)) and all orders denying motions to vacate default orders under this Part 500 shall become a Final Order of NFA on the date of service upon the applicant or registrant. All Withdrawals of Notice of Intent shall become final on the date of service upon the applicant or registrant. A copy of each Final Order and Withdrawal of Notice of Intent issued by NFA shall be served upon the Commission at the same time it is served upon the applicant or registrant. All Final Orders shall inform the applicant or registrant of his right to petition the Commission for review under Section 17(o) of the Act and applicable Commission Regulations and of the right to petition the Commission for a stay of the effective date of the Final Order in accordance with Commission Regulation 171.22.

(b) Effective Date. Any Final Order of NFA or Withdrawal of Notice of Intent issued under this Part 500 shall become effective 30 days after the date of service of the order on the applicant or registrant, except as otherwise directed by the Commission pursuant to CFTC Regulations, Part 171.

[¶ 8509] RULE 509. SETTLEMENTS.
(Click Here to Print this Rule) [Adopted effective December 10, 1993. Effective dates of amendments: August 1, 1994; July 1, 2001; May 31, 2002 and April 2, 2004.]

(a) When Offers May be Made. Parties may propose offers of settlement at any time during the course of the proceeding. All offers of settlement shall be in writing.

(b) Content of Offer. Each offer of settlement made by a respondent shall:

    (1) acknowledge service of the Notice of Intent;

    (2) admit the jurisdiction of NFA with respect to the matters set forth in the Notice of Intent;

    (3) include a waiver of:

      (A) a hearing;

      (B) all post-hearing procedures;

      (C) Commission and judicial review;

      (D) any objection to NFA staff's participation in the consideration of the offer by the Membership Committee or a designated Subcommittee;

    (4) stipulate the basis in the record on which a Final Order may be entered, which basis may consist solely of the Notice of Intent and any findings contained in the order of settlement;

    (5) in a case where a respondent is offering to be registered subject to conditions, contain representations by the firm or the individual, if the individual is sponsoring a FB or FT applicant or registrant, that will be sponsoring the respondent that the sponsor will abide by any conditions imposed on the applicant's or registrant's registration and that the sponsor is eligible to sponsor a registrant whose registration is subject to conditions. A firm or individual is eligible to sponsor a registrant whose registration is subject to conditions if the sponsor is not:

      (A) subject to a pending adjudicatory proceeding brought by or before the Commission pursuant to the provisions of Sections 6(b), 6(c), 6c, 6d, 8a or 9 of the Act; or

      (B) subject to a pending adjudicatory proceeding brought by or before NFA alleging fraud or failure to supervise; or

      (C) subject to any special supervisory obligations imposed by the Commission or NFA or agreed to by such sponsor or guarantor; or

      (D) subject to the reporting requirements of NFA Financial Requirements Section 6 or CFTC Regulation 31.7(b); or

      (E) subject to a finding within the last five years, in an action by the Commission or NFA, that the firm or any of its current principals have engaged in fraud or have failed to supervise its APs;

      (F) subject to a pending adjudicatory proceeding brought by or before NFA, against any of the firm's current principals, alleging fraud or failure to supervise; and

    (6) consent to the entry of a Final Order reflecting the terms of settlement agreed upon, including where appropriate:

      (A) findings that the respondent is disqualified from registration under Section 8a(2), 8a(3) or 8a(4) of the Act; and

      (B) the revocation, suspension, denial or granting of full registration or imposition of conditioned registration.

(c) Submission of Offer. Offers of settlement made by a respondent shall be submitted in writing to NFA staff, which shall present them to the Membership Committee or a designated Subcommittee with staff's recommendation. NFA staff shall inform the respondent if the recommendation will be unfavorable, in which case the offer will not be presented to the Membership Committee or a designated Subcommittee unless the respondent so requests. Any offer of settlement not presented to the Membership Committee or a designated Subcommittee shall be null and void with respect to any acknowledgment, admission, waiver, stipulation or consent contained therein and shall not be used in any manner in the proceeding by any party thereto.

(d) Acceptance of Offer. The offer of settlement will only be deemed accepted upon issuance by the Membership Committee or a designated Subcommittee of a Final Order based on the offer. Upon issuance of the Final Order, the proceeding shall be terminated as to the respondent involved.

(e) Rejection of Offer. When an offer of settlement is rejected by the Membership Committee or a designated Subcommittee, the party making the offer shall be notified by NFA staff and the offer of settlement shall be deemed withdrawn. A rejected offer of settlement and any documents relating thereto shall not constitute a part of the record in the proceeding. The offer will be null and void with respect to any acknowledgment, admission, waiver, stipulation or consent contained therein and shall not be used in any manner in the proceeding by any party thereto.

[¶ 8510] RULE 510. PROCEDURES TO LIFT OR MODIFY CONDITIONS.
(Click Here to Print this Rule) [Adopted effective December 10, 1993. Effective dates of amendments: August 1, 1994 and July 1, 2001.]

(a) Petition. The registrant and, when applicable, his sponsor or guarantor may file a petition to lift or modify the conditions on the registrant's registration.

    (1) The petition may be filed after the period specified in the Final Order imposing the conditioned registration.

    (2) In the petition, the registrant and, when applicable, his sponsor or guarantor shall be limited to a showing by affidavit that the applicant or registrant has not violated the Act or Regulations, or NFA Rules, since the time of his application and that the conditions set forth in the Final Order have been satisfied. The affidavit of a sponsor or guarantor must be sworn to on behalf of the sponsor or guarantor by a person with actual knowledge of the registrant's activities.

(b) Response.

    (1) Within 30 days of the date of receipt of the petition pursuant to paragraph (a) of this Rule, NFA staff shall file a response. The response shall include a recommendation by staff as to whether to continue the conditions, modify the conditions or allow for a full registration.

    (2) If NFA staff agrees with the petitioner's request to lift or modify conditions on the petitioner's registration, it shall so recommend to the Membership Committee or a designated Subcommittee. Such recommendation will only be deemed accepted upon issuance by the Membership Committee or a designated Subcommittee of an order lifting or modifying the conditions on the petitioner's registration.

(c) Oral Hearing. If NFA staff requests a continuation or a modification of the conditions on the registration other than in accordance with the terms of the petition, the Membership Committee or a designated Subcommittee shall, within 30 days of the date that the response is filed pursuant to paragraph (b) of this Rule, determine whether an oral hearing is appropriate to the resolution of the registrant's petition.

    (1) If the Membership Committee or a designated Subcommittee determines that an oral hearing is appropriate, it shall notify the parties of its determination and shall schedule and conduct an oral hearing in accordance with Rule 506. Following the hearing, the Membership Committee or a designated Subcommittee shall issue a written decision or an order.

    (2) If the Membership Committee or a designated Subcommittee concludes that an oral hearing is unnecessary, it shall notify the parties and issue a written decision or an order.

PART 600. WITHDRAWAL FROM REGISTRATION.
(Click Here to Print this Section)

[¶ 8601] RULE 601. WITHDRAWAL FROM REGISTRATION.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: June 8, 1988; September 29, 1989; September 21, 1993 and May 31, 2002.]

(a) An FCM, IB, CTA, CPO, LTM, FB or FT may request that its registration be withdrawn in accordance with the requirements of this Rule if:

    (1) the registrant has ceased, or has not commenced, engaging in activities requiring registration in such capacity; or

    (2) the registrant is exempt from registration in such capacity; or

    (3) the registrant is excluded from the persons or any class of persons required to be registered in such capacity. Provided, that NFA may consider separately each capacity for which withdrawal is requested in acting upon such a request.

(b) An FCM, IB, CPO, CTA or LTM requesting withdrawal from registration under this Rule must file a Form 7-W completed and filed with NFA in accordance with all pertinent instructions. A FB or FT requesting withdrawal from registration under this Rule must file a Form 8-W completed and filed with NFA in accordance with all pertinent instructions. In addition, any FB or FT requesting withdrawal from registration must file a copy of his Form 8-W with each contract market or DTF that has granted him trading privileges.

(c) A request for withdrawal from registration will become effective on the 30th day after receipt of such request by NFA, or earlier upon notice from NFA of the granting of such request, unless prior to the effective date:

    (1) the Commission or NFA has instituted a proceeding to suspend or revoke such registration;

    (2) the Commission or NFA imposes or gives notice that it intends to impose terms or conditions upon such withdrawal from registration;

    (3) the registrant is given notice that it is currently the subject of an investigation to determine, among other things, whether such registrant has violated, is violating, or is about to violate the Act, rules, regulations, or orders adopted thereunder;

    (4) NFA requests from the registrant further information pertaining to its request for withdrawal from registration; or

    (5) NFA determines that it would be contrary to the requirements of the Act or of any rule, regulation or order thereunder, or to the public interest to permit such withdrawal from registration.

(d) Withdrawal from registration in one capacity does not constitute withdrawal from registration in any other capacity.

(e) Withdrawal from registration does not constitute a release from liability for any violation of the Act or of any rule, regulation or order thereunder, which occurred while a person was registered.

PART 700. PROCEDURES GOVERNING ACCESS TO AND CERTIFICATION OF REGISTRATION RECORDS MAINTAINED BY NFA
(Click Here to Print this Section)

[¶ 8701] RULE 701. DISCLOSURE OF INFORMATION FROM REGISTRATION RECORDS MAINTAINED BY NFA.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: June 8, 1988; July 29, 1988; September 21, 1993; May 31, 2002 and September 9, 2002.]

(a) Definitions.

    (1) Registration Records. For purposes of Rules 701 and 702, the term registration records shall be defined to include only the following types of records which are in the custody of or maintained by NFA because such records were transferred from the Commission to NFA or because such records have been received, generated, or compiled by NFA in performance of registration functions which NFA is authorized or required by the Commission to perform pursuant to Sections 8a(10) or 17(o) of the Act:

      (A) any application forms required to be filed to obtain registration, including any Form 8-R with respect to principals of an applicant or registrant, any schedules or supplements related to such forms, any fingerprint cards, any financial reports, statements and agreements required to be filed in connection with initial applications for registration;

      (B) any supplemental statement or filings to correct or update any registration information submitted in a previous filing or to give notice of termination of association of an AP or affiliation of a principal;

      (C) any written or electronic correspondence relating to registration between the Commission or NFA and an applicant or registrant;

      (D) reports reflecting information developed from sources outside the Commission or NFA compiled or generated in connection with determining fitness for registration or affiliation as a principal; and

      (E) reports from foreign governments and self-regulatory organizations and agreements appointing an agent for service of process if such reports and agreements are filed with NFA for the purpose of obtaining an exemption from registration, and any transmittal forms, cover letters or supplemental materials relating to such filings.

    (2) Registration Information. For purposes of Rules 701 and 702, the term registration information shall be defined as any information contained in, compiled from or related to registration records.

(b) Disclosure of Public Information.

    (1) If any member of the public requests access to registration records, or portions thereof, and the requested record, or portion, is "public" or "publicly available" under CFTC Regulations 1.10(g), 145.0(c) or 145.6(b), then NFA will release that record or portion to the requester.

    (2) NFA may charge any member of the public a copying fee, not to exceed the fee charged by the Commission, for any copies of registration records provided by NFA directly to the requester.

(c) Disclosure of Non-Public Information. Requests for access to registration records, or portions thereof, not subject to disclosure as public or publicly available under paragraph (b)(1) of this Rule shall be referred or transmitted to the Commission for response; except that, NFA will disclose such records or portion thereof:

    (1) to any person with whom an applicant or registrant is or plans to be associated as an AP or affiliated as a principal: Provided, however, that the person requesting the information makes an appropriate showing to NFA that the requester is the employer or prospective employer of the particular applicant, registrant, or principal;

    (2) to any FCM with whom an IB, whether an applicant or registrant, has or plans to enter into a guarantee agreement under CFTC Regulation 1.10: Provided, however, that the FCM makes an appropriate showing as to its status as the IB's guarantor or proposed guarantor;

    (3) to boards of trade designated as contract markets or DTFs or to any other futures associations registered with the Commission to assist those organizations in carrying out their responsibilities under the Act, or to national securities exchanges or national securities associations registered with the SEC to assist those organizations in carrying out their responsibilities under the Securities Exchange Act of 1934: Provided, however, that if a request is made in connection with a formal or apparent investigation or proceeding, NFA will notify the Commission of the request;

    (4) to federal, state or local law enforcement or regulatory agencies acting within the scope of their jurisdiction or for their use in meeting responsibilities assigned to them under law (to the same extent that the Commission may disclose such registration information under Sections 8(e) and 8(g) of the Act): Provided, however, that if a request is made in connection with a formal or apparent investigation or proceeding, NFA will notify the Commission of the request;

    (5) pursuant to an order of a court of competent jurisdiction; except that, subpoenas and summonses covering non-public portions of registration records and copies of the non-public records shall be promptly forwarded to the Commission to enable the Commission to consult with NFA on how to proceed;

    (6) otherwise with the authorization of the Assistant Secretary of the Commission for FOI, Privacy and Sunshine Act Compliance or his or her designee, or the General Counsel of the Commission or his or her designee, in accordance with CFTC Regulations 145.7(b), (h) and (i); the Freedom of Information Act, 5 U.S.C. � 552; and the Privacy Act, 5 U.S.C. � 552a; and

    (7) to any individual or firm, or person acting on behalf of the individual or firm, who seeks access to registration records, excluding any records defined under Section (a)(1)(D) above, in connection with that individual's or firm's application for registration: Provided, however, that NFA receives proper verification of the identity and authority of the party requesting the records.

[¶ 8702] RULE 702. CERTIFICATION OF THE AUTHENTICITY OF REGISTRATION RECORDS MAINTAINED BY NFA.
(Click Here to Print this Rule) [Adopted effective April 4, 1988. Effective dates of amendments: September 21, 1993 and May 31, 2002.]

(a) Designation of Custodian and Deputies. The President shall designate an NFA employee to serve as the NFA Record Custodian ("Custodian"). The President also may designate one or more NFA employees to serve as Deputy NFA Record Custodians ("Deputies"). The Custodian and the Deputies shall be responsible for maintaining all registration records in NFA's possession and shall be the legal custodians of these registration records.

(b) Authority of Custodian and Deputies. The Custodian, each of the Deputies, or in their absence, any NFA employee designated by the President, the Custodian or one of the Deputies, is authorized to certify in writing the authenticity of registration records in NFA's possession for purposes of any judicial or administrative proceeding. The Custodian, each of the Deputies or any designated employee also is authorized to certify in writing as to the maintenance and completeness of the registration records in NFA's possession, as well as the thoroughness of NFA's search for requested documents, for purposes of any judicial or administrative proceeding.

(c) Effectiveness of Certification. This written certification shall be effective when executed by the Custodian, one of the Deputies or any designated employee.

(d) Content of Certification. The written certification shall include that, pursuant to Commission authorization, the Custodian has and maintains legal custody of the official registration records that are the subject of the certification.

PART 800. ELECTRONIC FILING OF REGISTRATION FORMS.
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[¶ 8801] RULE 801. ELECTRONIC FILING OF FORMS 7-R, 8-R, 3-R, 7-W AND 8-T.
(Click Here to Print this Rule) [Adopted effective December 16, 1992. Effective dates of amendments: May 31, 2002 and July 21, 2003.]

(a) Unless otherwise provided by these Rules, registrants which are FCMs, IBs, CPOs, CTAs, FBs and FTs, IBs, CPOs and CTAs which are confirmed as exempt from registration pursuant to CFTC Regulation 30.5 and applicants for registration in such categories or for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5 must file their Form 7-Rs and Form 8-Rs; Form 8-Rs for their principals and for registration of their APs; Form 3-Rs for themselves, their APs and principals; Form 7-Ws; and Form 8-Ts electronically by accessing NFA's registration and membership database in the manner provided by NFA. FCM, IB, CPO and CTA registrants or applicants, IBs, CPOs and CTAs that are confirmed as exempt from registration pursuant to CFTC Regulation 30.5 or applicants for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5 may authorize any person to make electronic registration filings on their behalf. FB and FT registrants and applicants may authorize any other person to electronically file Form 3-R's on their behalf but may not authorize any other person to file Form 8-Rs on their behalf. Any electronic registration filing that such an authorized person makes on behalf of the FCM, IB, CPO, CTA, FB or FT registrant or applicant or IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 or applicant for exemption from registration pursuant to CFTC Regulation 30.5 shall be deemed to have been made by the FCM, IB, CPO, CTA, FB or FT registrant or applicant or IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 or applicant for exemption from registration pursuant to CFTC Regulation 30.5 granting the authorization to such person.

(b) Individuals for whom a sponsor has filed a Form 8-R must, if required by these Rules to do so, verify the information electronically by accessing NFA's registration and membership database in the manner provided by NFA. Individuals may not authorize any other person to make such verification on their behalf.

(c) No applicant, applicant for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5, registrant, IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 or principal may access NFA's electronic registration and membership database until NFA has assigned it a unique identifying code and password.

(d) Each applicant, applicant for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5, registrant, IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 and principal is responsible for maintaining the security and confidentiality of its identifying code and password and those of the persons whom it authorizes to make electronic registration filings on its behalf. NFA's electronic registration and membership database shall record and store the identifying code of each person accessing the database and shall logically associate in the database such identifying code with any electronic filing made by the person using such identifying code. The person whose identifying code is used to make an electronic filing will be deemed to have made such filing.

(e) Each registrant or applicant FCM, IB, CPO, CTA, FB or FT or IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5 or applicant for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5 shall make available any person it has authorized to make or actually performing duties related to electronic filings, for testimony in court or before the Commission, NFA, any contract market or any DTF regarding the authentication, integrity or accuracy of any electronic filing.

(f) The ability to electronically access NFA's registration and membership database is a privilege and not a right. NFA may disable any person's identifying code and password and terminate the person's ability to electronically file forms at any time, without notice or a hearing, in NFA's sole discretion, if NFA believes that the person has not complied with this Rule or any procedures that NFA establishes to implement this Rule.

[¶ 8802] RULE 802. CERTIFICATIONS, ACKNOWLEDGEMENTS, AGREEMENTS AND REPRESENTATIONS.
(Click Here to Print this Rule) [Adopted effective May 31, 2002. Effective dates of amendments: September 9, 2002; July 21, 2003 and December 15, 2003.]

(a) The electronic filing of a Form 7-R for registration as an FCM, IB, CPO and CTA or for exemption from registration as an IB, CPO and CTA pursuant to CFTC Regulation 30.5 is deemed to constitute the applicant's:

    (1) certification that the answers and the information provided in the Form 7-R are true, complete and accurate and that in light of the circumstances under which the applicant has given them, the answers and statements in the Form 7-R are not misleading in any material respect;

    (2) certification that the person who electronically files the Form 7-R on behalf of the applicant is authorized by the applicant to file the Form 7-R and to make the certifications, representations, requests, acknowledgements, authorizations and agreements contained in this Rule;

    (3) acknowledgement that the applicant is subject to the imposition of criminal penalties under Section 9(a) of the Act and 18 U.S.C. �1001 for any false statements or omissions made in the Form 7-R;

    (4) acknowledgement that the applicant is responsible at all times for maintaining the information in the Form 7-R in a complete, accurate and current manner by electronically filing updates to the information contained therein;

    (5) acknowledgement that the applicant may not act as an FCM, IB, CPO or CTA until registration has been granted; in the case of an IB, until registration or a temporary license has been granted; or until confirmation of exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5 is granted;

    (6) authorization that NFA may conduct an investigation to determine the applicant�s fitness for registration or for confirmation of exemption from registration as an IB, CPO and CTA pursuant to CFTC Regulation 30.5 and, if applicable, NFA membership and agreement to cooperate promptly and fully, consistent with applicable Federal law, in such investigation, which investigation may include contacting foreign regulatory and law enforcement authorities, including the submission of documents and information to NFA that NFA, in its discretion, may require in connection with the applicant�s application for registration, confirmation of exemption from registration as an IB, CPO and CTA pursuant to CFTC Regulation 30.5 or NFA membership;

    (7) authorization and request that any person, including but not limited to contract markets or DTFs, furnish upon request to NFA or any agent acting on behalf of NFA any information requested by NFA in connection with any investigation conducted by NFA to determine the applicant�s fitness for registration or for confirmation of exemption from registration as an IB, CPO and CTA pursuant to CFTC Regulation 30.5;

    (8) agreement that any person furnishing information to NFA or any agent acting on behalf of NFA in connection with the investigation so authorized is released from any and all liability of whatever nature by reason of furnishing such information to NFA or any agent acting on behalf of NFA;

    (9) agreement that, if the applicant is a foreign applicant:

      (i) the applicant's books and records will be available for inspection by the CFTC, the U.S. Department of Justice ("DOJ") and NFA for purposes of determining compliance with the Act, CFTC Regulations and NFA Requirements;

      (ii) such books and records will be produced on 72 hours notice at the location in the United States stated in the Form 7-R or, in the case of an IB, CPO or CTA confirmed as exempt from registration pursuant to CFTC Regulation 30.5, at the location specified by the CFTC or DOJ; provided, however, if the applicant is applying for registration as an FCM, upon specific request, such books and records will be produced on 24 hours notice except for good cause shown;

      (iii) the applicant will immediately notify NFA of any changes to the location in the United States where such books and records will be produced;

      (iv) the applicant is not subject to any blocking, privacy or secrecy laws which would interfere with or create an obstacle to full inspection of the applicant's books and records by the CFTC, DOJ and NFA; and

      (v) the failure to provide the CFTC, DOJ or NFA with access to its books and records in accordance with this agreement may be grounds for enforcement and disciplinary sanctions; denial, suspension or revocation of registration; withdrawal of confirmation of exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5; and denial, suspension or termination of NFA membership;

      (vi) the applicant for registration shall provide to NFA copies of any audit or disciplinary report related to the applicant for registration issued by any non-U.S. regulatory authority or non-U.S. self-regulatory organization and any required notice that the applicant for registration provides to any non-U.S. regulatory authority or non-U.S. self-regulatory organization. The applicant for registration shall provide these copies both as part of this application and thereafter immediately upon the applicant for registration's receipt of any such report or provision of any such notice; and

    (10)representation that if the applicant is an applicant for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5:

      (i) the applicant does not act as an IB, CPO or CTA, respectively, in connection with trading on or subject to the rules of a designated contract market in the United States by, for or on behalf of any U.S. customer, client or pool;

      (ii) the applicant irrevocably agrees to the jurisdiction of the Commission and state and federal courts located in the U.S. with respect to activities and transactions subject to Part 30 of the CFTC's regulations; and

      (iii) the applicant would not be statutorily disqualified from registration under �8a(2) or �8a(3) of the Act and is not disqualified from registration pursuant to the laws or regulations of its home country.

(b) The electronic filing of a Form 8-R for registration as an FB or FT is deemed to constitute the applicant's:

    (1) certification that the answers and statements in the Form 8-R are true and that in light of the circumstances under which the applicant has given them, the answers and statements in the Form 8-R are not misleading in any material respect;

    (2) acknowledgement that the applicant is subject to the imposition of criminal penalties under Section 9(a) of the Act and 18 U.S.C. �1001 for any false statements or omissions made in the Form 8-R;

    (3) acknowledgement that the applicant is responsible at all times for maintaining the information in the Form 8-R in a complete, accurate and current manner by electronically filing updates to the information contained therein;

    (4) acknowledgement that the business address provided on the Form 8-R may be deemed to be the address for delivery to the applicant of any written communications from the Commission and NFA, including any notice of intent to deny, revoke or otherwise affect the applicant's registration, any summons, complaint, reparations claim, arbitration claim, order, subpoena, request for information, or any other written communication unless the applicant specifies another address for this purpose;

    (5) acknowledgement that the applicant must keep current the business address provided on the Form 8-R while registered and for two years after termination of registration;

    (6) authorization that NFA may conduct an investigation to determine the applicant�s fitness for registration and agreement to cooperate promptly and fully, consistent with applicable Federal law, in such investigation, which investigation may include contacting foreign regulatory and law enforcement authorities, including the submission of documents and information to NFA that NFA, in its discretion, may require in connection with the applicant�s application for registration;

    (7) authorization and request that any person, including but not limited to contract markets or DTFs, furnish upon request to NFA or any agent acting on behalf of NFA any information requested by NFA in connection with any investigation conducted by NFA to determine the applicant's fitness for registration;

    (8) agreement that any person furnishing information to NFA or any agent acting on behalf of NFA in connection with the investigation so authorized is released from any and all liability of whatever nature by reason of furnishing such information to NFA or any agent acting on behalf of NFA; and

    (9) acknowledgement that the applicant is not registered and may not act as an FB or FT until a notice has been issued that registration or a temporary license has been granted.

(c) The electronic filing of a Form 8-R for an AP or for an individual principal is deemed to constitute the sponsor's:

    (1) verification that the answers and statements in the application or Form 8-R are true, complete and accurate and that in light of the circumstances under which the applicant or principal has given them, the answers and statements in the Form 8-R are not misleading in any material respect;

    (2) certification that the AP applicant or principal has authorized the sponsor to electronically file the Form 8-R on the AP applicant's behalf or the principal's behalf and that the sponsor has authorized the person who files the application to file the Form 8-R and to make the certifications, acknowledgements, authorizations, representations, requests and agreements contained in this Rule;

    (3) acknowledgement that the sponsor is subject to the imposition of criminal penalties under Section 9(a) of the Act and 18 U.S.C. �1001 for any false statements or omissions it made in the Form 8-R;

    (4) acknowledgement that while the individual is an AP sponsored by or a principal of the sponsor, the sponsor is responsible for maintaining the information in the Form 8-R in a complete, accurate and current manner by electronically filing updates to the information contained therein;

    (5) certification that the sponsor has communicated or has attempted to communicate with all of the applicant's previous employers and educational institutions for the past three years and has documentation on file with the names of the persons contacted and the dates of contact or, if no contact was made, the reason therefor;

    (6) certification that the applicant has been hired or is employed by the sponsor or that it is the intention of the sponsor to hire or otherwise employ the applicant as an AP within 30 days after receipt of notification that the applicant has received a TL or has been registered;

    (7) certification that the applicant will not be permitted to act as an AP until the applicant has received a TL or has been registered as an AP;

    (8) acknowledgement that it is the duty and obligation of the sponsor not to employ an individual with a statutory disqualification under Section 8a(2) of the Act; to notify the Commission when any individual associated with the sponsor is subject to a statutory disqualification under Section 8a(2) of the Act; and to supervise any individual for whom the sponsor files a Form 8-R, once the sponsor employs him, with a view toward preventing him or her from committing violations of the Act and the rules, regulations and orders thereunder;

    (9) certification, if the sponsor is a new sponsor filing an application for registration of the applicant as an AP pursuant to the provisions of Rule 207(a), that the sponsor has verified that the applicant is not subject to a disqualification from registration under Section 8a(2) of the Act and that the sponsor meets the requirements set forth in Rule 509(b)(5);

    (10) acknowledgement that information contained in the Form 8-R has been supplied to the sponsor for the sole purpose of allowing it to verify the information contained in the Form 8-R;

    (11) representation that the sponsor has taken, and will take, such measures as are necessary to prevent the unwarranted dissemination of any of the information contained in the Form 8-R and the records and documents retained in support of the Form 8-R;

    (12) certification, if the applicant is applying for a TL pursuant to Rule 301(a)(2), that the sponsor has reviewed the information concerning the applicant in NFA's BASIC system and has received a copy of the notice of the institution of any proceeding in the BASIC system:

      (A) that is pending and was brought against the applicant under:

        (i) Sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act;
        (ii) Commission Regulations 3.55 or 3.60; or
        (iii) NFA or exchange rules and; or

      (B) that was instituted in accordance with the procedures provided in CFTC Regulation 3.51 or Part 500 of these Rules and, within the prior 12 months, resulted in the Commission or NFA permitting the withdrawal of such person's application for registration in any capacity; and

    (13) representation, if the applicant is subject to any current NFA or Commission order imposing conditions on the registration of the applicant, that it meets the requirements set forth in Rule 509(b)(5) to sponsor a conditioned registrant; that it has reviewed the conditions contained in any current NFA or Commission order imposing conditions on the registration of the applicant; and that it will supervise the applicant in accordance with the conditions contained in the order.

(d) The electronic verification by an individual of the information contained in the Form 8-R constitutes the applicant's or principal's:

    (1) verification that the answers and statements in the application or Form 8-R are true and that in light of the circumstances under which the applicant or principal has given them, the answers and statements in the Form 8-R are not misleading in any material respect;

    (2) acknowledgement that the applicant or principal is subject to the imposition of criminal penalties under Section 9(b) of the Act and 18 U.S.C. �1001 for any false statements or omissions made in the Form 8-R;

    (3) acknowledgement that the applicant or principal is responsible at all times for maintaining the information in the Form 8-R in a complete, accurate and current manner by promptly notifying the sponsor whenever any of the information on the Form 8-R is no longer complete, accurate or current and authorizing the sponsor to electronically file updates to correct the information;

    (4) certification, if applying for a TL pursuant to the provisions of Rule 301(a)(2), that the applicant has advised the sponsor of and has provided the sponsor with a copy of the notice of the institution of:

      (A) any pending adjudicatory proceeding that was brought against the applicant under:

        (i) Sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act;
        (ii) Commission Regulations 3.55 or 3.60; or
        (iii) NFA or exchange rules; or

      (B) any proceeding that was brought against the applicant under Regulation 3.51 or Part 500 of these Rules and, within the prior 12 months, resulted in the Commission or NFA permitting the withdrawal of such person's application for registration in any capacity;

    (5) acknowledgement that the residential address provided on the Form 8-R may be deemed to be the address for delivery to the applicant or principal of any written communications from the Commission and NFA, including any notice of intent to deny, revoke or otherwise affect the applicant's registration or individual's status as principal, any summons, complaint, reparations claim, arbitration claim, order, subpoena, request for information, or any other written communication unless the applicant or principal specifies another address for this purpose;

    (6) acknowledgement that the applicant or principal must keep current the residential address provided on the Form 8-R while registered as an AP or affiliated as a principal and for two years after termination of registration or affiliation;

    (7) agreement that the applicant submits to the jurisdiction of any contract market or DTF, of which the applicant's sponsor or any current or future guarantor (under CFTC Rule 1.10(j)) of the applicant's sponsor is or may become a member, which has or may adopt rules which apply to the applicant as an associated person, and that the applicant shall abide by all such rules and to comply with, be subject to, and abide by all requirements, rulings, orders, directives and decisions of and any penalties, prohibitions and limitations imposed by any such contract market or DTF;

    (8) authorization that NFA, and any contract market or DTF of which the applicant�s or principal�s sponsor or any current or future guarantor (under CFTC Rule 1.10(j)) of the applicant�s or principal�s sponsor is or may become a member, may conduct an investigation to determine the applicant�s or principal�s fitness for registration, and if applicable, for Associate status, and agreement to cooperate promptly and fully, consistent with applicable Federal law, in such investigation, which may include contacting foreign regulatory and law enforcement authorities, including the submission of documents and information to NFA that NFA, in its discretion, may require in connection with the applicant�s or principal�s fitness for registration or Associate status;

    (9) authorization and request that any person, including but not limited to contract markets, furnish upon request to NFA or any agent acting on behalf of NFA any information requested by NFA in connection with any investigation conducted by NFA to determine the applicant's fitness for registration or fitness of the principal;

    (10) agreement that any person furnishing information to NFA or any agent acting on behalf of NFA in connection with the investigation so authorized is released from any and all liability of whatever nature by reason of furnishing such information to NFA or any agent acting on behalf of NFA; and

    (11) acknowledgement that the applicant is not registered and may not act as an AP until a notice has been issued that registration or a TL has been granted.

(e) The electronic filing of a Form 3-R, 8-T or 7-W is deemed to constitute the sponsor's, applicant's or registrant's:

    (1) certification that the answers and the information provided in the Form 3-R, 8-T or 7-W are true, complete and accurate and that in light of the circumstances under which the sponsor, applicant or registrant has given them, the answers and statements in the Form 3-R, 8-T or 7-W are not misleading in any material respect;

    (2) certification that the person who electronically files the Form 3-R, 8-T or 7-W on behalf of the sponsor, applicant or registrant is authorized by the sponsor, applicant or registrant to file the Form 3-R, 8-T or 7-W and to make the certifications and acknowledgements contained in this Rule; and

    (3) acknowledgement that the sponsor, applicant or registrant is subject to the imposition of criminal penalties under Section 9(a) of the Act and 18 U.S.C. �1001 for any false statements or omissions made in the Form 3-R, 8-T or 7-W.

(f) Retention of Records. In accordance with Commission Regulation 1.31, FCM, IB, CTA, CPO, LTM, FB and FT applicants and registrants and their sponsors, if applicable, applicants for exemption from registration as an IB, CPO or CTA pursuant to CFTC Regulation 30.5 and IBs, CPOs and CTAs confirmed as exempt from registration pursuant to CFTC Regulation 30.5 must retain such records as are necessary to support the certifications required by this Rule.

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Interpretive Notices
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[¶ 9001] RESERVED
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[¶ 9002] REGISTRATION REQUIREMENTS; BRANCH OFFICES
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(Staff, September 6, 1985; revised July 1, 2000 and December 9, 2005)

INTERPRETIVE NOTICE

Form 7-R, Branch Offices

Any location, other than the main business address at which an FCM, IB, CPO or CTA employs persons engaged in activities requiring registration as an AP, is a branch office. This is true even if there is only one person at the location. If the firm has one or more branch offices, NFA's registration records on the firm must include the names of all persons who are branch office managers. Each location must have a branch office manager, and that person's status as a branch office manager should be listed in the Registration Categories section of the person's Form 8-R even if previously listed as a principal in the Registration Categories section of the person's Form 8-R. Each branch office must have a different manager.

The address must also be given for each branch office. A P.O. Box is not sufficient. Anyone with a status as branch office manager must also be currently registered as an AP or have applied for such registration. Whenever a new branch office is established it must be reported, with all the required information, to NFA by filing an update electronically to the firm's Form 7-R. The closing of an existing branch office should also be reported by filing an update electronically to the firm's Form 7-R.

IF YOUR FIRM CURRENTLY HAS PERSONS OPERATING OUT OF LOCATIONS OTHER THAN ITS MAIN BUSINESS ADDRESS, THOSE LOCATIONS MUST IMMEDIATELY BE REPORTED TO NFA BY FILING AN UPDATE ELECTRONICALLY TO THE FIRM'S FORM 7-R AND BY ADDING BRANCH OFFICE MANAGER STATUS ON EACH BRANCH OFFICE MANAGER'S FORM 8-R.

NFA may take disciplinary action against any Member which fails to properly list all of its offices.

An important point to recognize is that a branch office may not itself be a separate corporation or partnership. CFTC Regulation 166.4 requires each branch office to use the name of the firm of which it is a branch for all purposes and to hold itself out to the public under such name. Also, in CFTC Interpretive Letter No. 84-10 (May 29, 1984) it was concluded that a branch office could not maintain a separate identity from the Member. One obvious conclusion to be drawn from this information is that each AP in a branch office must be paid directly by the Member. Payment through any intermediary would lead to the assumption that the intermediary would be required to register as an IB.

The requirement that a branch office hold itself out to the public under the name of the Member is intended to ensure that customers are always aware of the Member with which they are doing business. It is necessary that any branch office AP, even one operating out of a residence or an unrelated place of business, make sure that customers understand who they are doing business with.

[¶ 9003] NFA COMPLIANCE RULE 2-29: COMMUNICATIONS WITH THE PUBLIC AND PROMOTIONAL MATERIAL
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(Board of Directors, effective November 19, 1985; revised July 24, 2000)

INTERPRETIVE NOTICE

I. Introduction

Section 17(p)(3) of the Commodity Exchange Act (7 U.S.C. �21(p)(3)) requires that the rules of a registered futures association such as NFA "establish minimum standards governing the sales practices of its members and persons associated therewith. . . ." NFA has established such minimum standards in the form of its Compliance Rules which, among other things, generally prohibit fraud and deceit and require 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." Although these rules supply the required minimum standard, they are general in nature and may not always provide specific guidance as to what particular conduct may be prohibited. It is expected that more detailed content will be given to those general rules through the work of NFA's Business Conduct Committees, which will issue decisions in disciplinary cases applying the rules to specific conduct. It is also expected that NFA's Advisory Committees, through study and recommendation of rule changes, will further the development of uniform industrywide sales practice standards.

NFA's Board of Directors has adopted and the CFTC has approved a new Compliance Rule, 2-29, which was proposed to the Board by the FCM Advisory Committee ("The Committee"). The Committee published a notice for public comment on its proposed rule on February 21, 1985, and considered the comments received in drafting the final rule.

II. The Contemplated Relationship of Rule 2-29 With Other NFA Rules

Rule 2-29 deals specifically with communication with the public and promotional material prepared and used in the conduct of a Member's or Associate's futures business. However, Member and Associate conduct in that area, as in all others related to futures, is, and under the new rule continues to be, subject to all other NFA requirements. For example, certain other NFA Rules deal specifically with communications with the public and promotional materials in a narrower context. Compliance Rule 2-13, which incorporates CFTC Rule 4.41, regulates the advertising of Commodity Pool Operators ("CPOs") and Commodity Trading Advisors ("CTAs"). In addition, all Member and Associate conduct, including communications with the public, is subject to the requirements of Compliance Rule 2-2 (Fraud and Related Matters) and Compliance Rule 2-4 (Just and Equitable Principles of Trade).

The new Rule is not intended to supplant those or any other NFA Requirements but rather to augment them. Hence, literal compliance with Rule 2-29 will not be a "safe harbor" from NFA disciplinary action if the Member or Associate violates any other NFA Requirement.

III. The Scope of Rule 2-29

Rule 2-29 is intended to apply to all forms of communication with the public by a Member or Associate without exception if the communication relates in any way to solicitation of an account, agreement or transaction in the conduct of the Member's or Associate's business in futures as the term "futures" is now or may be defined.1

However, in drafting the Rule the Committee recognized that some specific standards which would be appropriate for communications prepared in advance of delivery to the public might be unenforceable and even inappropriate in the context of routine day-to-day contact with customers. The Committee was concerned that the free flow of information and advice to customers might be impeded to their detriment if spontaneous communication were subjected to rigorous and detailed content standards.

To address this problem, the final Rule distinguishes routine day-to-day communications with customers and applies a different regulatory standard to such communications. This is accomplished by providing a definition of "promotional material" to identify the kinds of communications with the public which will be subject to specific content standards and other requirements beyond those provided in Section (a) General Prohibition. Therefore, the definition of promotional material (which is a broadened version of the definition of that term in the CFTC's option pilot program rules) is intended to include all kinds of promotional communications with the public, other than routine day-to-day contact with customers. It includes, for example, any kind of written, electronic or mechanically reproduced message or presentation which is directed to any member of the public, whether broadcast over the media, delivered through the mail or presented personally. It also includes any oral presentations or statements to customers or prospective customers, whether delivered over the telephone or in person, the substance of which is outlined or scripted in advance for delivery to such persons.

IV. Section-by-Section Analysis

Section (a) General Prohibition

This Section provides the general rule governing all communications with the public and is the only portion of the Rule applicable to routine day-to-day communication with customers. That means that routine customer contact would not run afoul of Rule 2-29 as long as it is not fraudulent or deceitful, is not high-pressure in nature and does not contain any statement that futures trading is appropriate for all persons. NFA believes that the general prohibition should not hamper free and open communication with individual customers on a day-to-day basis. In that regard, it is expected that Business Conduct Committees would not find such communications to operate as a fraud or deceit in the absence of evidence of such intent or recklessness on the part of the Member or Associate.2

Section (b) Content of Promotional Material

This Section sets out the specific prohibitions and requirements applicable to promotional material, as defined. Subsection (1) bans material likely to deceive the public. Proof of violation of this provision does not require proof of a specific intent to deceive. This Subsection instead places the burden on the Member to determine whether the material is likely to be deceptive in effect. Of course, to find a violation of this Subsection a Business Conduct Committee would have to find that the Member or Associate reasonably should have been able to determine that the material was likely to deceive. The fact that someone was actually deceived would not by itself be enough.

Subsection (2) deals with facts only. It requires that the facts which a Member or Associate chooses to include must be true and that no facts knowingly be left out which are necessary to make the facts stated not misleading. With that exception, this Subsection does not require the disclosure of facts. As with Subsection (1), a negligence standard would be applied in finding violations of Subsection (2) for making material misstatements of fact in promotional material. However, because evaluating omissions is a much more difficult task, this Subsection applies only to knowing omissions (i.e., instances where the person preparing or reviewing the promotional material knew the omitted fact and failed to include it). This knowledge requirement may complicate the proof necessary to establish a violation of this Subsection. However, knowledge can be inferred from a pattern of failures to include a material fact, the omission of which makes the promotional material misleading. Once knowledge is established, the decision whether the failure to include a fact makes the promotional material misleading in violation of Rule 2-29 will be made by a Business Conduct Committee under a standard of reasonableness.

Subsection (3) requires a statement of risk to "balance" any discussion of the possibility of profit. The requirement that the statement of risk have equal prominence is not intended to mean that the reference to risk must be as long as the discussion of the possibility of profit or indeed to impose any unbending measure of prominence. It is intended to mean only that in the context of the particular promotional material the reference to risk of loss must not be downplayed or hidden.

Subsection (4) requires the Member or Associate to make a statement in the promotional material concerning the predictive value of past results if reference is made in the material to past trading results.

Subsection (5) does not require disclosure of past performance of managed accounts.3 It does require that if performance information is given, it must be representative of the actual performance for the same time period of all reasonably comparable accounts. Hence, under Subsection (5) a Member could not advertise the performance of a "model" account unless that performance is representative of all reasonably comparable accounts.4 Subsection (5) also makes explicit in this context the Members' existing responsibility to be able to demonstrate that performance information is accurate and representative.

The use of performance information in promotional material is, of course, subject to all of the content standards of Rule 2-29, and compliance with Subsection (b)(5) will not excuse violations of other Subsections. If in presenting performance information for an account or group of accounts, a Member omits facts about those accounts or the differences between those accounts and the account being promoted, and the omission makes the material misleading, the use of the material violates Subsection (b)(2) even though the performance information given is accurate and is representative of all reasonably comparable accounts in compliance with (b)(5). This interaction of the requirements of Subsections (b)(2) and (b)(5) will come into play whenever a Member chooses to present performance information about an account or program which differs materially from the account or program being promoted; for example, where performance information about a house account is used, or where trading control or strategies, commission rates or account sizes which applied in the account or program for which performance is being shown differ from those which will apply in the account or program for which the customer is being solicited. Under the Rule, a Member is free to use a sales tool performance information about accounts which differ from the accounts being promoted, but must take care to ensure first, that the performance information complies with Subsection (b)(5), and second, that the differences are explained to the extent necessary to make the promotional material not misleading.

Finally, Subsection (5) requires that the rate of return must not be calculated in a manner inconsistent with that required under the CFTC's Part 4 Rules, which define rate of return as the ratio between net performance and beginning net asset value for the period. This is not intended to require that the precise Part 4 formula be used in all cases but rather to prohibit the use of methods which lead to rates of return which are materially higher than those produced by the Part 4 method.

Section (e) Written Supervisory Procedures

In recognition of the fact that promotional material may be prepared by many individuals within a Member's organization, this Section requires that promotional material be reviewed and approved by someone in a supervisory position before it is used. It should be emphasized, however, that even communications with the public which do not fall within the definition of promotional material must be diligently supervised under other existing NFA and CFTC rules.

Section (f) Recordkeeping

This Section is intended to provide a way in which NFA can conduct meaningful sales practice audits which will reveal both the content of promotional material and whether the supervisory procedures required under Section (e) are being carried out. In addition, this Section contains a requirement that Members who use hypothetical performance results be prepared to demonstrate to NFA's satisfaction the basis for such results. This means that Members must maintain the records necessary to document how the hypothetical results were calculated.

[NOTE: This requirement was extended to all performance results effective July 24, 2000.]

Section (g) Filing with NFA

This Section is intended to allow NFA to maintain close review of promotional material in circumstances where special scrutiny is warranted.

[NOTE: This interpretive notice was amended effective July 24, 2000 to conform it to subsequent changes in NFA rules. In particular, the amendments eliminate the discussion of hypothetical results and update section references within Compliance Rule 2-29 based on changes to Compliance Rule 2-29's treatment of hypothetical results; eliminate references to options rules that are no longer in effect; and make other technical amendments to correspond to subsequent changes to other NFA rules. Furthermore, adjudicated disciplinary decisions are now issued by NFA Hearing Panels rather than Business Conduct Committees. Therefore, all references to Business Conduct Committees, while not changed in the notice, now refer to Hearing Panels. In all other respects, this interpretive notice remains an interpretation adopted by the Board of Directors contemporaneously with the adoption of NFA Compliance Rule 2-29.]

1 Article XVIII(k) of NFA's Articles of Incorporation defines futures to include "options contracts traded on a contract market, and such other commodity-related instruments as the Board may from time to time declare by Bylaw to be properly the subject of NFA regulation and oversight." Currently, the only NFA Bylaw expanding that definition is Bylaw 1507, which states that " 'futures' as used in these Bylaws shall include 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." [Bylaw 1507 has since been amended to include foreign futures and options contracts and leverage transactions.]

2 However, it must be noted that much, if not all, of the benefits to customers of the disclosures and cautionary statements required to be included in promotional material by other sections of Rule 2-29 and other disclosure statements required by CFTC and NFA Rules (e.g., the risk disclosure statements required by CFTC Rule 1.55 and NFA Compliance Rule 2-27) can be intentionally diminished in the course of oral communications with customers. To avoid that result it is expected that Business Conduct Committees will presume intentional or reckless deceit in instances where a Member or Associate specifically contradicts or downplays any disclosure statement required to be made by CFTC or NFA rules.

3 CPOs and CTAs are, however, subject to such a requirement through the CFTC's Part 4 Rules.

4 The Committee expects that a Member or Associate could exclude from "reasonably comparable accounts" those that were actually traded pursuant to a different trading strategy or those that were traded independently of the accounts in the program for which performance is cited. With respect to the question of independence the indicia of independence listed in the CFTC's statement of policy concerning when accounts should be aggregated for position limit purposes would be useful guides for Members, Associates and Business Conduct Committees. Statement of Aggregation Policy (1977-80 Transfer Binder) Comm. Fut. L. Rep. (CCH) 20.837 (June 13, 1979); 44 Fed. Reg. 33839.

[¶ 9004] NFA COMPLIANCE RULE 2-30: CUSTOMER INFORMATION AND RISK DISCLOSURE
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(Board of Directors, effective June 1, 1986)

INTERPRETIVE NOTICE

I. Introduction

NFA Compliance Rule 2-4 requires Members to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their futures business. NFA's FCM Advisory Committee ("the Committee") has been considering ways in which the general standard of Rule 2-4 can be further defined in order to develop uniform industrywide standards which will offer guidance to the Members. In the course of its work the Committee noted the increasing level of commentary, in public and regulatory forums, on the absence of a "know your customer" or "suitability" rule in the futures industry and a perception on the part of some that there is a concomitant lack of protection for futures customers. NFA's Executive Committee also became aware of these comments and asked the Committee to study the matter and make appropriate recommendations. Based on its knowledge and experience in the industry, the Committee believed that any careful consideration of this issue would have to take into account the important role that risk disclosure plays whenever a customer opens a futures account or selects a commodity trading advisor, and the extent to which futures professionals were already obtaining information about their customers.

To learn more about the current level of inquiry conducted through the new account opening procedures now being used in the industry, NFA sent a questionnaire to all of its Members. The Committee also reviewed research on the evolution of the suitability and "know your customer" doctrines in the securities industry and noted that although there are several different formulations of the rule, all are based on the same premise: that different types of securities can have widely varying degrees of risk potential and serve very different investment objectives. For that reason, the securities suitability rules are cast in terms of the suitability of a particular transaction.

The Committee noted that the futures industry differs from the securities industry in several crucial ways. Most importantly, futures contracts in general are recognized as highly volatile instruments. It therefore makes little sense to presume that a certain futures trade may be appropriate for a customer while others are not. An appreciation of the risks of futures trading must be gained and a determination of its appropriateness made at the time each customer makes a decision to trade futures in the first place. This is true regardless of whether the customer will rely on recommendations by futures professionals or the customer will make his or her own trading decisions.

The futures industry has traditionally met this need through risk disclosure designed to encourage the customer to make an informed decision as to whether futures trading is suitable for that customer. The Risk Disclosure Statement and the Options Disclosure Statement mandated by CFTC Regulations 1.55 and 33.7, respectively, and the Disclosure Document required by the CFTC Part 4 Regulations each are designed to bring the suitability issue to the customer's attention.1

In the specific area of exchange-traded options, the CFTC has previously noted the importance of risk disclosure and the need for the futures professional to learn enough about the customer in order to provide risk disclosure. When the Options Disclosure Statement requirement was enacted in 1981 as part of the options pilot program, the CFTC stated in its Federal Register release [46 Fed. Reg. 54500 (1980-82 Transfer Binder) Comm. Fut. L. Rep. (CCH) 21,263] that:

    ". . . the FCM must acquaint itself sufficiently with the personal circumstances of each option customer to determine what further facts, explanations and disclosures are needed in order for that particular option customer to make an informed decision whether to trade options . . . . While this requirement is not a "suitability" rule as such rules have been composed in the securities industry, before the opening of an option account the FCM has a duty to acquaint itself with the personal circumstances of an option customer."

The CFTC went on to state that "the extent of the inquiry should be left to the prudent judgment of the FCM."

NFA was concerned that allowing suitability or know your customer standards to develop outside of the self-regulatory framework carried with it the possibility that a poorly defined or inappropriate duty would be fashioned on a case-by-case basis, perhaps by ill-considered analogy to the securities industry rules. Because NFA construes its rules on a case-by-case basis through the decisions of the Business Conduct Committees ("BCCs") which are composed of informed futures professionals, NFA is uniquely positioned to set an ethical business standard which will be construed by Members evaluating the conduct of other Members.

The Committee determined that the exchange of information between a new customer and a futures professional -- the customer providing personal data and the Member providing disclosure about the risks of futures trading -- was the focal point around which to structure a sound customer protection rule. On August 9, 1985, the Committee released for public comment a Proposed Rule on Customer Information and Risk Disclosure. The comments received were considered in the drafting of the Rule in final form, and Rule 2-30 was adopted by NFA's Board of November 21, 1985.

When the CFTC declined in 1978 to adopt a "suitability" rule, after releasing a proposed rule for comment, it stated that it was unable "to formulate meaningful standards of universal application." [43 Fed. Reg. 31886 (1977-1979 Transfer Binder) Comm. Fut. L. Rep. (CCH) 20,642] NFA found the same difficulty, and for that reason the Rule is premised on NFA's conclusion that the customer is in the best position to determine the suitability of futures trading if the customer receives an understandable disclosure of risks from a futures professional who "knows the customer." NFA believes that the approach taken in Rule 2-30 is preferable to one which would erect an inflexible standard that would bar some persons from using the futures markets.

II. Section-by-Section Analysis

Section (a): General Rule

Rule 2-30 is intended to define "high standards of commercial honor and just and equitable principles of trade" as applied to a Member's procedures for exchanging information with new futures customers at the time they become customers2. Section (a) sets forth the basic requirement: obtain information and provide risk disclosure which includes the disclosures required by the Rule plus, in some cases, additional disclosure. Rule 2-30 is a "know your customer" rule; however, it does not require the Member or Associate to make the final determination that a customer should be barred from futures trading on suitability grounds. Some "know your customer" rules in the securities industry (New York Stock Exchange Rule 405, for example) have been construed in that manner; these interpretations do not apply to Rule 2-30.

NFA's enactment of the Rule 2-30 should not be construed to expose Members to increased potential liability for damages in customer litigation or reparation proceedings, for several reasons. First, a business conduct standard promulgated by a self-regulatory organization does not create a private cause of action. Furthermore, Rule 2-30 is not an antifraud rule. In order to prove a violation, there is no requirement to prove any intent on the part of the Member to deceive. Therefore, evidence of a violation of Rule 2-30 would not in and of itself constitute evidence of a violation of any antifraud rule or statute. Finally, to the extent that personal information about a customer is germane to the issues in a reparations or arbitration case, it is undoubtedly already being considered even in the absence of a formal rule requiring Members to obtain it.

Section (a) provides that the Rule applies only to customers who are individuals; this includes individuals who open accounts jointly with others. Although accounts opened by business entities such as corporations and partnerships present other concerns (such as compliance with NFA Bylaw 1101, which prohibits Members from transacting customer business with non-Members who are required to be registered), the scope of Rule 2-30 is limited to natural persons, who may lack the sophistication of institutional customers.

Section (b): New Customers

The Member's obligation to obtain information and provide risk disclosure under the Rule is limited to the first time the customer establishes a futures account with the Member. This limitation was the result of the balancing of the benefits of repeated information exchange against the burden of imposing additional requirements on the already extensive account-opening procedures for subsequent accounts for the same customers3.

Section (c): Information To Be Obtained

Item (1) is essentially the information required by CFTC Regulation 1.37(a), which applies to FCMs and IBs. Item (2) includes estimated annual income and net worth, information which the Committee found is commonly sought from new customers. Item (3), the customer's age, is also a commonly sought item which the Committee thought would be helpful in putting the customer's financial condition, ability to understand and level of sophistication into perspective for the Member. Most Members responding to the questionnaire indicated that they require information about previous futures trading experience; a smaller number responded that they ask about securities or options trading experience. NFA believes that experience with these types of investments may be relevant and has therefore included it.

Information on age, estimated annual income and net worth may be obtained through the use of brackets or "in excess of" descriptions so long as these are reasonably designed to elicit the required information in a meaningful manner.

The information specified in Section (c) is a minimum requirement, intended to serve as a core of basic information that should always be obtained. Some Members routinely elicit additional items, such as liquid net worth, risk capital, or number of dependents, which may be quite useful, and NFA received comments on the Rule when it was drafted suggesting that these items be required by the Rule. NFA concluded, however, that the better approach was to adopt a Rule that would specify the minimum required information and allow Members to obtain other information as they deemed appropriate.

Section (d): Risk Disclosure

The risk disclosures incorporated into this Section are required by CFTC Regulations. (There are other disclosures required by CFTC Regulations, such as the Regulation 32.5 dealer options disclosure statement and the Regulation 190.10(c) disclosure statement for non-cash margin, which may apply to particular accounts.) These disclosures are only the minimum required. NFA believes that the decision with respect to what additional disclosure, if any, should be given to the customer is best left to the Member, whose conduct is subject to review by the BCCs. There may be some customers for whom the additional disclosure will portray futures trading as too risky for that customer. However, NFA believes that a determination of who those customers are cannot be made except on a case-by-case basis, because no objective criteria can be established that will apply to all customers. The essential feature of the Rule is the link between "knowing the customer" and providing risk disclosure. Once that has been done, the customer is free to make the decision whether to trade futures.

Section (e): Introduced and Third-Party Controller Accounts

The purpose of this Section is to place the obligation to obtain information and provide risk disclosure on the Member who deals directly with the customer when an account is introduced to a carrying FCM by an IB or another FCM doing business on a fully disclosed basis, or when a CTA controls the trading in a customer's account pursuant to written authorization. NFA believes that the Member or Associate who solicits the customer and communicates with the customer in the process of the account opening is the appropriate party to comply with the Rule. In some cases, this may be the Member introducing or controlling the account; in other cases, it may be the carrying FCM.

Of course, each Member remains responsible for compliance with all applicable CFTC Regulations and NFA Requirements. For example, an FCM (or, in the case of an introduced account, the IB) must furnish a Regulation 1.55 Risk Disclosure Statement to each customer, including those whose accounts were solicited by and will be traded by CTAs. Similarly, a CTA must deliver a Disclosure Document to each customer, including those who were solicited by the FCM. Section (i), which is discussed below, clarifies each Member's obligation to comply with other requirements.

Section (f): Reliance on the Customer as the Source of the Information

Some Members confirm financial data because of concern about the creditworthiness of the customer. NFA believes, however, that the decision whether to confirm customer data is best left to the Member's sound business judgment and is irrelevant to a customer protection rule aimed at providing information to a customer.

Rule 2-30 contemplates a good faith exchange of information between the customer and the Member or Associate. A customer who gives incorrect information would still receive all the required risk disclosure statements but would have impaired the Member's ability to consider fully the customer's ability to understand the risk disclosures or whether additional disclosure was necessary. However, Section (f) will not operate as a "safe harbor" for a Member or Associate who falsifies information or who induces or suggests falsification by the customer. Information invented by the Member or Associate does not constitute "information about the customer" as required by the general rule. Members and Associates engaging in such conduct will be subject to appropriate disciplinary action.

Section (g): Recordkeeping: Customers Who Decline to Provide Information

In order to allow NFA to audit for compliance with the Rule, Section (g) requires that a timely record be made or obtained which contains the information obtained from the customer. Customers who decline to provide information (beyond that required by CFTC Regulation 1.37(a), which must always be obtained) may still open accounts, but NFA would expect Members to take appropriate action upon learning that an inordinate number of a particular Associate's customers apparently "decline" to provide basis information. Because Section (a) imposes an affirmative duty on Members to obtain information, a Member who engages in (or allows Associates to engage in) a course of conduct which is designed to or has the effect of eliciting or prompting refusals by customers to provide that information would not have discharged that duty and could not use Section (g) as a shield from disciplinary action.

The approval requirement has been broadened to apply to all new accounts. This is consistent with the Member's responsibility to supervise the futures activities of its employees diligently pursuant to NFA Compliance Rule 2-9.

In the case of non-U.S. customers (those who neither reside in nor are citizens of the United States) a record that the customer declined to provide the information need not be made.

Section (h): Review Procedures

The requirement that a Member establish adequate review and compliance procedures provides Members with the flexibility to design procedures that are tailored to the way the Member does business. NFA's audit staff will, in the routine course of an examination, check these procedures for adequacy, taking into account the facts and circumstances of the particular Member.

Section (i): Relationship to Other Requirements

Rule 2-30 incorporates certain CFTC Regulations, but its requirements are in addition to any imposed by those Regulations or other NFA Requirements. For example, the Rule requires a CTA to provide a Disclosure Document, if required to do so by CFTC Regulation 4.31, at the time a customer first authorizes the Member to direct trading in a futures account for the customer.

This is because Rule 2-30 is intended to apply to "account opening" or its equivalent. However, CFTC Regulation 4.31 requires that the Disclosure Document be delivered at the time of solicitation. Other examples of CFTC Regulations which affect the process covered by the Rule have been cited in the discussion of Sections (b), (d), (e) and (g) above. Section (i) serves to clarify the ongoing obligation of Members to comply with all CFTC Regulations and NFA Requirements.

1 The risk disclosure statements required by CFTC Regulations 1.55 and 4.31 direct the customer to "carefully consider whether [futures] trading is suitable for you in light of your financial condition": the one required by CFTC Regulation 33.7 informs the customer that "commodity option transactions are not suitable for many members of the public."

2 NFA Bylaws define "futures" to include domestic exchange-traded options and dealer options. See Compliance Rule 1-1(g).

3 Certain CFTC Regulations and NFA Requirements will apply with respect to each account or interest entered into: the discussion above refers to those aspects of Rule 2-30 which are additional requirements. See Section (i) of the Rule.

[¶ 9005] NFA COMPLIANCE RULE 2-4: GUIDELINES FOR THE DISCLOSURE BY FCMS AND IBS OF COSTS ASSOCIATED WITH FUTURES TRANSACTIONS
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(Board of Directors, effective June 1, 1986; revised July 24, 2000)

INTERPRETIVE NOTICE

National Futures Association ("NFA") Compliance Rule 2-4 provides that "Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business." NFA Compliance Rule 2-4 requires that each FCM Member, or in the case of introduced accounts, the Member introducing the account make available to its customers, prior to the commencement of trading, information concerning the costs associated with futures transactions.1

If fees and charges associated with futures transactions are not determined on a per trade or round-turn trade basis, the Member must provide the customer with a complete written explanation of such fees and charges.

NFA recognizes that FCM and IB Members may employ various arrangements in assessing fees and charges associated with futures transactions to customers. Any such arrangement which is intended to or is likely to deceive customers is a violation of NFA Requirements and will subject the Member to disciplinary action.

1 NFA Bylaws define "futures" to include exchange-traded options. See NFA Compliance Rule 1-1(l).

[¶ 9006] NFA COMPLIANCE RULE 2-13: GUIDELINE FOR THE DISCLOSURE BY CPOS AND CTAS OF "UP FRONT" FEES AND ORGANIZATIONAL AND OFFERING EXPENSES
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(Board of Directors, effective July 1, 1986; revised November 26, 1996.)

INTERPRETIVE NOTICE

Commodity Futures Trading Commission ("CFTC") Regulation 4.24(i) states that the disclosure document of a CPO must contain a description of each expense which has been or is expected to be incurred by the pool. CFTC Regulation 4.34(i) applies to CTAs and requires that the disclosure document of a CTA describe each fee which the CTA will charge the client. In addition, CFTC Regulations 4.24(w) and 4.34(o), respectively, require CPOs and CTAs to disclose all "material" information. These requirements have been incorporated into NFA Compliance Rule 2-13. Because "up front" fees and charges can have a significant impact on the net opening equity of pools and managed accounts, the above NFA rule requires not only disclosure of the existence and the amount of the up front charges but also disclosure of how the up front charges affect the return which must be achieved to break even at the end of an investor's first year or the initial amount of capital available for trading. Furthermore, the impact of the up front charges on net performance must be included in the rate of return figures reflected on a CPO's or CTA's required past performance presentation.

A. Disclosure of Prospective Up Front Fees and Charges

The disclosure document must disclose up front fees and expenses, if any, to participants in a pool or clients in a managed account. NFA's Board of Directors believes that investors should be fully aware of not only the amount of such fees and expenses but also their impact on the return which must be achieved to break even at the end of the investor's first year or the net proceeds that will be available at the outset for futures trading. For a CPO, NFA Compliance Rule 2-13(b) provides that a CPO's disclosure document must include break-even analysis presented in the manner prescribed by NFA's Board of Directors, which is described in a separate interpretive notice. (See Interpretive Notice Compliance Rule 2-13: Break-Even Analysis.) CTAs may provide similar information either through the use of break-even analysis which complies with the requirements of Compliance Rule 2-13(b) and the accompanying interpretive notice or through the use of a dilution table.

If a CTA chooses to use a dilution table, the dilution table should be highlighted in a tabular format on the cover page of the disclosure document. The suggested format for the table would detail a standardized amount of initial investment, all up front fees and charges, including all sales and administrative fees, and the net proceeds that would be available for trading after deducting the up front expenses. If a CTA does not use standardized amounts, minimums or units for initial investments, the required table should be presented showing dilution of an investment of $1,000. Moreover, if the results in the dilution table, without further explanation, could be materially misleading as to the impact of the up front fees and charges on the amount of initial capital available for trading (for example, because the fees as a percentage of the initial investment vary depending on the amount of the investment), then explanatory footnotes should be used.

The extent to which a CTA breaks down the up front expenses into categories, including, but not limited to, fees, sales and administrative fees, is solely within the discretion of the CTA as long as the net proceeds for trading and the portion that is deducted from the initial investment are clearly delineated as such. All fees that are charged up front must be disclosed except that a CTA that charges periodic management fees on the first day of each period, including the initial period, need not describe such fees for the first period in the dilution table.

B. Treatment of Up Front Fees in the Required Past Performance Presentation

In preparing rate of return information, the beginning net asset value of a pool or managed account must be calculated before any up front fees and expenses, including organizational and offering expenses, are deducted. However, a CTA acting as an independent advisor to a commodity pool is not required to include the up front fees or expenses charged by the CPO in beginning net asset value for the purposes of calculating rate of return information for the CTA's own disclosure document. In general, a CTA is acting as an independent advisor if it is not an affiliate of the CPO and does not receive any portion of the up front fee. For these purposes, "affiliate" means any advisor which owns or controls, is owned or controlled by, or is under common ownership or control with the CPO.

All up front fees and organizational expenses must be reflected as a reduction of net performance in the period in which the contribution was made to the pool or client's managed account, unless such fees and expenses can be amortized pursuant to Generally Accepted Accounting Principles.1 If organization or syndication expenses can be, and are, amortized, then net performance shall be reduced each month by the monthly amortizable amount. The monthly amortizable amount shall be calculated by dividing the total amount of amortizable expenses by the total number of months over which such expenses shall be amortized.

1 Section 709 of the Internal Revenue Code, 26 U.S.C. �700, governs whether or not organization or syndication expenses incurred to organize and to promote the sale of interests in a partnership can be amortized.

[¶ 9007] COMPLIANCE WITH NFA BYLAW 1101
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(Staff, March 19, 1987; revised July 1, 2000)

INTERPRETIVE NOTICE

Mandatory membership in NFA is the cornerstone of NFA's regulatory structure. From the earliest stages of its formation, NFA's founders recognized that the creation of a meaningful and effective industrywide self-regulatory organization would be completely impossible unless all persons required to be registered as FCMs, IBs, CPOs or CTAs were required to be Members. The founders of NFA considered the issue to be of such critical importance that they not only prohibited the conduct of customer business with non-Members through NFA Bylaw 1101, but included that prohibition as one of NFA's fundamental purposes in Article III, Section 1(f) of NFA's Articles of Incorporation.

Given the importance of the mandatory membership concept, NFA Bylaw 1101, which tracks the language of Article III, Section 1(f), states the prohibition in the strongest possible terms. [See Bylaw 1101.]

The rule by its terms imposes strict liability on any Member conducting customer business with a non-Member that is required to be registered. The rule does not require proof that the Member firm was at fault or failed to exercise due diligence, simply that it transacted customer business with a non-Member that is required to be registered. NFA Bylaw 1101 requires Members to make two determinations: whether it is doing business with an entity which is required to be registered, and if so, whether that person is a Member of NFA. The second of these determinations is relatively simple. Any Member can check the BASIC system on NFA's web site at www.nfa.futures.org, send a request to NFA through the "contact" feature of the web site, or call NFA's Information Center at a toll-free number (800) 621-3570 to receive current and accurate information concerning the membership status of any person. The determination of whether a particular person is required to be registered can obviously be much more difficult. Any Member could, despite its best efforts, be transacting customer business with a person who is actually required to be registered as an FCM, IB, CPO or CTA. In such a case, the Member is in technical violation of the strict liability terms of NFA Bylaw 1101.

A review of NFA policy, procedures and past disciplinary actions, however, clearly indicates that NFA Bylaw 1101 has not been enforced unreasonably. In making its recommendations in cases involving apparent Bylaw 1101 violations, staff has consistently not relied on the strict liability standard set by the rule itself. Staff has recommended the issuance of complaints in Bylaw 1101 cases in which the evidence indicates that the Member knew or should have known of the violation. Of course, under NFA Compliance Rules, the ultimate decision of whether a particular violation of NFA Rules warrants prosecution rests with the Members of NFA's Business Conduct Committee ("BCC"). BCC Members exercise their informed business judgment in making these decisions, and are certainly aware that some violations of Bylaw 1101 may occur in spite of reasonably diligent efforts to comply with the rule.

The question of whether a Member should have known of a violation of NFA Bylaw 1101 depends in large part on the adequacy of its procedures to prevent such violations. Though it would be impossible to describe all of the situations which should put a Member on notice that a particular person is required to be a Member or NFA, there are certain minimal steps which should be taken to reduce the possibility of a violation of NFA Bylaw 1101:

    1. FCM Members should ensure that all omnibus accounts they carry are held by FCM Members of NFA;

    2. Each Member should review the list of CFTC registrants with which it does business to determine if they are NFA Members. A Member can determine whether a particular entity is a CFTC registrant by checking the BASIC system on NFA's web site located at www.nfa.futures.org, sending a request to NFA through the "contact" feature on the web site, or calling NFA's Information Center toll-free at (800) 621-3570.

    3. Each Member should review its list of customers. If a customer's name indicates that it may be engaged in the futures business, the Member should inquire as to its registration and membership status;

    4. When a FCM or IB Member carries an account controlled by a third party (other than an AP of the FCM or IB or a member of the same family as the account owner), the FCM or IB Member should check to see if the account controller is registered as a CTA and, if not registered, should inquire as to the basis of any exemption and, if applicable, should verify that account controller has made the required filings with the CFTC and NFA;

    5. If any customer is operating a commodity pool but claims to be exempt from registration as a CPO, the Member should verify that the customer has made the required filings with the CFTC and NFA;

    6. Members should ensure that their branch offices are not separately incorporated entities. The CFTC Division of Trading and Markets has issued an interpretive letter stating that branch offices which are separately incorporated entities are required to be registered as introducing brokers; and

    7. FCM Members should determine whether non-Member foreign brokers for whom the Member carries accounts solicit U.S. customers for transactions on U.S. exchanges.

As mentioned above, these suggested steps do not purport to be a dispositive list of internal procedures required to prevent violation of NFA Bylaw 1101. Though under some circumstances a Member following these suggestions could still be found liable for a violation of NFA Bylaw 1101, the suggested procedures should help foster compliance with NFA Bylaw 1101 and greater protection to the investing public.

[¶ 9008] RESERVED
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[¶ 9009] NFA COMPLIANCE RULE 2-29: REVIEW OF PROMOTIONAL MATERIAL PRIOR TO ITS FIRST USE
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(Staff, May 1, 1989; revised July 1, 2000)

INTERPRETIVE NOTICE

As a service to its Members and the investing public, NFA offers a program for the review of promotional material prior to its first use. This program is voluntary and no Member must file promotional material with NFA unless otherwise required to do so by rule or directive. In addition, this program in no way lessens the requirement that Members supervise the preparation of and review all promotional material. Members may not attempt to use NFA staff's review as a substitute for its own.

Members wishing to avail themselves of the pre-review program may submit promotional material to the Compliance Department at least 21 calendar days prior to its first intended use. This material should be directed to:

    National Futures Association
    Compliance Department
    Advertising Regulation Team
    Suite 1800
    300 S. Riverside Plaza
    Chicago, IL 60606

In addition, Members may ask general questions about promotional material or Compliance Rule 2-29 by contacting NFA's Information Center at (312) 781-1410 or (800) 621-370 or through the "contact" feature of NFA's web site at www.nfa.futures.org. Such inquiries will be forwarded to the appropriate personnel for response.

Submitted material must be accompanied by a cover letter signed by a supervisory employee responsible for the review of the Member's promotional material. NFA staff will not pre-review material received directly from APs.

NFA staff will review submissions as expeditiously as possible. If additional information is needed, or the review cannot be completed within the 21 day period, the Member will be so notified. (In our experience, most reviews take far less than 21 days, and reviews take more than 21 days only in highly unusual circumstances.) At the conclusion of the review the comments of NFA staff will be conveyed to the Member, generally by telephone. Obviously NFA staff will not be able to independently verify the accuracy of every statement or numerical claim made in a piece of promotional material within the 21 day review period; that responsibility remains with the Member. Therefore, submitting promotional material to NFA will not provide a "safe harbor" for Members if misstatements or omissions of material facts are discovered subsequently. However, NFA staff review will provide valuable guidance to Members, particularly with regard to such areas as balance and the proper use of disclaimers.

[¶ 9010] INFORMATION AVAILABLE FROM NFA REGARDING BACKGROUND OF PROSPECTIVE EMPLOYEES
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(Staff, August 21, 1989; revised July 1, 2000)

INTERPRETIVE NOTICE

NFA Compliance Rule 2-9 requires Members to supervise diligently the futures-related activities of their employees and agents. Obviously, all Members should carefully screen prospective APs, both to ensure their qualifications and to determine the extent of supervision the prospective AP would require if hired. The purpose of this Notice is to remind you of the information available from NFA to aid Members in that effort.

All applicants for AP registration are required to fill out the Form 8-R, supplying, among other things, information concerning their recent employment history and any disciplinary proceedings against them. What may not be immediately apparent from the face of the application is whether any of the applicant's previous employers have been the subject to disciplinary proceedings by the Commission or by NFA. This information could be helpful to a prospective employer in determining the extent of supervision a particular applicant would require after he is hired. Certainly, if a recently hired AP has received the bulk of his professional training and experience from, for example, a number of firms which have been closed down as a result of disciplinary proceedings brought by the Commission or by NFA, that individual may well require closer supervision for a period of time than other APs.

If you have any questions whether the Commission or NFA has taken any action against a particular firm or individual, check the BASIC system on NFA's web site at www.nfa.futures.org, send a request to NFA through the "contact" feature of the web site, or call NFA's Information Center at (800) 621-3570. Summary information concerning the proceeding is available through BASIC or can be provided over the phone, and copies of any available documents relating to the proceeding can be provided upon request.

Prospective employers are also entitled to any non-public registration records regarding a prospective employee. For example, each applicant for registration as an AP must complete the disciplinary history portion of the Form 8-R, and must supply a detailed explanation of any "yes" answers to those questions. That detailed explanation is treated as non-public but is available to prospective employers under NFA Registration Rule 701(c). Thus, a prospective employer may obtain the non-public supplementary information which the applicant may have submitted in connection with any past registrations.

The supervision of employees must be an issue of paramount concern to all NFA Members. NFA recognizes that certain employees, by virtue of their past training or experience, may need more supervision than others and will gladly supply our Members with whatever information may be available to help identify those employees.

[¶ 9011] NFA BYLAWS 515, 708 AND 802: NFA REQUIREMENTS WHICH CONSTITUTE DISCIPLINARY OFFENSES.
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(As of January 1, 2009)

NFA Bylaws 515, 708 and 802 set qualification standards for individuals serving on the Board, disciplinary committees, and arbitration panels and incorporate the disqualification standards in CFTC Regulation 1.63. Under those Bylaws and CFTC Regulation 1.63, individuals who violate the following rules are automatically disqualified from serving on the Board, disciplinary committees, and arbitration panels for at least three years.

1. Bylaws:

2. Compliance Rules:

3. Financial Requirements:

4. Registration Rules:

[NOTE: Individuals are also disqualified from serving on the Board, disciplinary committees, and arbitration panels if they violated certain requirements that have since been repealed and the disqualification period is still in effect. These requirements are former Compliance Rules 2-15 through 2-17, 2-19 through 2-20, and 2-28 and former Registration Rule 205.]

[¶ 9012] RESERVED
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[¶ 9013] NFA COMPLIANCE RULE 2-30: CUSTOMER INFORMATION AND RISK DISCLOSURE
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(Staff, November 30, 1990; revised July 1, 2000)

INTERPRETIVE NOTICE

NFA's Know-Your-Customer Rule, which deals with customer information and risk disclosure, has been in effect since June 1, 1986. As drafted by NFA's Advisory Committees and approved by the Board of Directors, the Rule was designed to accomplish two primary objectives:

    1. to define "high standards of commercial honor and just and equitable principles of trade" as applied to Member procedures for exchanging information with new customers who are individuals; and

    2. to provide a useful tool to combat any unscrupulous firms attempting to take advantage of unsophisticated investors.

Given these broad purposes, some of the Rule's provisions are very specific, while others, of necessity, are more general. Since some of the Rule's provisions are stated in general terms, Members may understandably seek more specific guidance on some points. The best sources for such guidance are the Interpretive Notice to Rule 2-30 ("Interpretive Notice")1, and the decisions NFA's Regional Business Conduct Committees ("BCCs") and Hearing Panels have made in specific disciplinary cases which allege violations of the Rule. The purpose of this Notice is to provide Members with additional guidance in complying with Rule 2-30 by summarizing how the BCCs have applied Rule 2-30 since the Rule became effective in 1986.

Since Rule 2-30 became effective, a number of complaints have been filed by NFA which allege violations of the Rule. Typical violations of the Rule generally fall into one of three categories.

    1. failing to give additional risk disclosure when required or disguising the fact that additional risk disclosure may be required by inducing customers to provide false information on their account opening papers;

    2. violations of recordkeeping requirements; and

    3. violations of supervisory requirements.

A description of typical violations in each category is set forth below.

Inadequate Risk Disclosure

The heart of Rule 2-30 is the requirement that Members obtain certain basic information from the customer concerning his financial background, analyze that information and ensure that the customer has received adequate risk disclosure information. As discussed in the Interpretive Notice, some customers may require risk disclosure in addition to that specifically prescribed by Rule 2-30(d)2. For example, there may be instances where, for some customers, the only adequate risk disclosure is that futures trading is too risky for that customer. Once adequate disclosure is given, however, the customers are free to decide whether to trade in futures and the Member is free to accept the account. The Rule recognizes that the identification of customers who require additional risk disclosure can only be done on a case-by-case basis and that the determination of whether additional risk disclosure is required for a given customer is best left to the Member firm, subject to review by the BCCs.

The most serious violations of the Rule have involved either failing to provide additional risk disclosures when necessary or inducing customers to provide false information on their account opening forms. A number of the more egregious cases, which have generally resulted in expulsions from NFA membership, are summarized below. The exact factual circumstances vary from case to case, but one common thread in these cases is that the customer had no previous futures trading experience and little, if any, other investment experience. Obviously, these extreme examples do not in any way limit the circumstances which may trigger a need for additional risk disclosures:

  • An AP instructed a customer, who noted on his account opening forms that he had owned his own home for 18 years, to falsify his account application by indicating that he had been involved in real estate development for 18 years.

  • An AP solicited a 52-year-old retired Air Force Colonel who had no prior commodity trading experience. The AP did not advise the customer of any specific numbers to put down on his account opening form regarding his net worth, but told him to make the numbers high enough to get the account approved.

  • An AP solicited a 32-year-old nurse and her husband, a 39-year-old computer operator, neither of whom had any prior investment experience in commodities or securities. The customers repeatedly informed the AP that they could not afford a minimum required investment of $10,000. The AP told them to take out a loan from their credit union and that the required investment amount would then be reduced to $5,000. The customers subsequently took out a $3,000 loan from their credit union and added $2,000 from their savings account to meet the $5,000 minimum investment requirement. The husband then went to the firm's office and signed the account forms during his 30-minute lunch break; however, he did not read the forms, nor were they explained to him by the firm or its AP.

  • An AP instructed a customer to inaccurately complete his account application by stating that he was a foreman rather than a factory laborer, and by indicating that he had liquid assets in the amount of $51,000 instead of $20,000. Another of the firm's APs told a customer that his actual annual income of $12,500 was too low and that if he did not change that figure to read between $20,000 and $40,000, his account would be rejected.

  • A customer who had been unemployed for two years, with a net worth of $30,000 derived from an inheritance and sale of property and no futures trading experience, was instructed by an AP to "put down anything" on the account opening form regarding her employment and income. The customer received no risk disclosure other than the Risk Disclosure Statement required by CFTC Regulation 1.55. In addition, the AP neither explained the account documents to the customer, nor gave her sufficient time to review them.

  • An AP solicited a 77-year-old retired real estate investor with a net worth of $100,000 and a fixed annual income of $20,000. The customer informed the AP that both he and his wife were in ill health and that one of the reasons for his interest in investing in commodity futures contracts was his limited health insurance coverage and a desire to earn enough money to pay for his medical expenses. Rather than providing the customer with risk disclosure in addition to that contained in the risk disclosure statements, the AP informed the customer that the risk of loss involved in futures trading was slight. Another of the firm's APs instructed a customer not to put down "unemployed actor" for his occupation but rather "self-employed." This AP also advised the customer to include a net worth figure on his account forms which was sufficiently high to insure the opening of the account, and for the income figure, to put down his income prior to becoming unemployed.

Again, the cases summarized above illustrate some of the more egregious violations of the Rule involving either inadequate risk disclosure or inducing customers to provide false information on their account opening forms. However, because the determination of whether additional risk disclosure is required for a given customer can be made only on a case-by-case basis, the above scenarios should not be interpreted to limit the circumstances under which additional risk disclosure may be required.

Recordkeeping and Supervisory Requirements

Though risk disclosure is the heart of the Rule, Compliance Rule 2-30 also imposes certain recordkeeping and supervisory requirements. Violations of these requirements typically involve a failure to obtain all of the information required under the Rule (i.e., occupation, current estimated annual income and net worth, approximate age and previous investment and futures trading experience) or a failure to retain the appropriate records. Although the Rule 2-30 recordkeeping violations have never formed the sole basis of disciplinary actions, they generally are indicative of a widespread recordkeeping problem within the firm.

Rule 2-30(h) requires each Member to "establish and enforce adequate procedures to. . . supervise the activities of its Associates in obtaining customer information and providing risk disclosure." One case alleging a violation of Rule 2-30(h) involved the failure of a firm's account opening procedures to require that the firm's APs obtain the necessary information from the customer. Another case involved a firm whose APs failed to follow guidelines provided to the firm by its guarantor in order to determine whether a prospective customer needed additional risk disclosure. Rule 2-30(h) does not require Members to provide their APs with any sort of grid-like formula to identify those customers who require additional risk disclosure; however, the Rule, as applied by the BCCs and Hearing Panels, does require that a firm be able to articulate the general factors its APs are instructed to consider in determining whether additional risk disclosure is required.

In conclusion, NFA recognizes that certain provisions of Compliance Rule 2-30 are stated in general terms. Since the law in this area is developed on a case-by-case basis by NFA's Hearing Panels, no precise formula is available to Members to aid them in their interpretation of the Rule. However, in addition to the Interpretive Notice, Members may obtain guidance regarding the Rule's application by reviewing the case summaries described above. As the case law in this area continues to develop, NFA will keep Members apprised of any changes in the Rule's application.

1 See NFA Manual at 9004.

2 See NFA Manual at 9004.

[¶ 9014] NFA COMPLIANCE RULE 2-4: CONFIDENTIALITY LANGUAGE IN RELEASE AGREEMENTS
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(Staff, February 7, 1991; revised December 17, 2007)

INTERPRETIVE NOTICE

NFA has become aware of a practice utilized in the settlement of customer complaints and arbitration proceedings whereby, as a condition of settlement, a customer is required to sign a release which limits their ability to cooperate with regulatory authorities. The language being utilized goes beyond the general confidentiality language requiring that no public statement be released with respect to the terms of the settlement. Although the scope of the language in each release differs, it is apparent that the language being incorporated by some firms requires the customer to refrain from releasing or disclosing any information to regulatory bodies except as required by court order or as otherwise required by law.

The plain meaning of such language would bar the customer from cooperating with NFA. NFA has encountered this situation in the course of conducting investigations into apparent violations by Members. Customers have been reluctant to provide information and testimony because of this type of confidentiality provision in their agreements, therefore frustrating the effectiveness of the NFA enforcement process.

While the practice of including language prohibiting the disclosure of settlement terms is acceptable, the use of language which clearly bars customer cooperation with NFA is not. Including such language in settlement agreements is viewed by NFA as an unethical practice and a failure to observe high standards of commercial honor and just and equitable principles of trade.

Therefore, NFA staff has recommended and an NFA Regional Business Conduct Committee has charged a violation of NFA Compliance Rule 2-4 when language which prohibits the customer from cooperating with NFA is used as a term of settlement. NFA staff will continue to recommend that a violation of NFA Compliance Rule 2-4 be charged when this language is used.

The Financial Industry Regulatory Authority ("FINRA") has also encountered the use of this language by some of its members. In response, the FINRA issued a notice informing its members that this practice may be viewed as unethical and would constitute a violation of FINRA rules.

An agreement containing language restricting the release of information to regulatory or law enforcement agencies may also be found to be void as against public policy by state courts. The public policy concern is implicated because the scope of this language goes beyond the private rights of the individuals involved by discouraging the release of information and potential evidence and interfering with the process of justice.

While general confidentiality language in release agreements is certainly permissible, NFA staff cautions Members against the use of settlement agreements which include language limiting or prohibiting a customer from providing information and cooperating with NFA. This is not intended to impose an affirmative duty on Members to include language explicitly permitting such cooperation, but merely to avoid explicit language barring it.

[¶ 9015] RESERVED
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[¶ 9016] NFA BYLAW 1301: NFA ASSESSMENT FEE QUESTIONS AND ANSWERS FOR FCMS
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(Staff, revised January 1, 2002; April 1, 2002; July 1, 2002; September 17, 2002; January 1, 2003; January 1, 2005; August 1, 2005; and January 1, 2008).

INTERPRETIVE NOTICE

From time to time NFA receives questions from Members regarding NFA's assessment fees. Areas of frequent inquiry include the manner and frequency of payment, the proper form of invoicing the assessment fee and the applicability of the assessment fee in different situations. Following is a compilation of the most frequently asked questions and their answers. Members may wish to refer to this compilation when a question regarding assessment fees arises.

I. Definitions

    1. Q: What is a futures contract "round-turn"?

    A: The term "round-turn" as used in NFA Bylaw 1301(b) is intended to include all transactions where an actual futures position is closed out or offset. This would include futures positions closed out by delivery, cash settlement, through an exchange for physicals, and as a result of the transfer to the carrying FCM from another FCM of offsetting futures contracts.

    [Note: Although the NFA assessment fee for futures is calculated on a round-turn basis, NFA Bylaws leave Member FCMs free to invoice and accrue the fee at any point in a round-turn or to split the fee among transactions which make up a round-turn.]

    2. Q: What is meant by "per trade" for the options assessment fee?

    A: The term "per trade" as used in NFA Bylaw 1301(b) means a purchase or sale of an option but does not include the exercise or expiration of an option. However, if an option is exercised, NFA's assessment fee will be assessed on the underlying futures transaction on a round-turn basis.

II. Payments

    1. Q: How much is the NFA assessment fee?

    A: The NFA assessment fee, payable by FCMs with respect to futures contracts, is $.02 per round-turn, invoiced to customers. The assessment fee on both exchange-traded and dealer options is $.01 per trade (not per round-turn).

    2. Q: Is the amount of the NFA assessment fee the same for the "mini contracts"?

    A: Yes. Effective January 1, 2008, the assessment fee is $.02 per round-turn futures mini contract and $.01 per option mini contract transaction.

    3. Q: What is the amount of the NFA assessment fee for security futures contracts and to which accounts is it applied?

    A: Effective January 1, 2008, the assessment fee is $.02 per round-turn security futures contract. NFA's assessment fee applies to security futures contracts held in a commodity futures account only.

    4. Q: How much is the NFA assessment fee for TRAKRSsm contracts?

    A: The NFA assessment fee for TRAKRSsm contracts is $.0002 per round-turn. In the event that a customer trades less than 50 contracts, the TRAKRSsm fee shall be $.01. Additionally, the maximum fee for TRAKRSsm is $8. If a computation results in a fraction of a cent, the fee should be rounded to the nearest penny. If the computation results in a fee of a half-cent , then the fee should be rounded up. Some examples follow:

    • Customer A purchases and sells 25 TRAKRSsm contracts. Customer A's round-turn assessment fee is $.01. (25 contracts purchased and sold times $.0002 equals $.005. However, the minimum amount due for a trade of less than 50 contracts is $.01).

    • Customer B purchases and sells 60 TRAKRSsm contracts. Customer B's round-turn assessment fee is $.01. (60 contracts purchased and sold times $.0002 equals $.012. Rounding down to the nearest penny results in an assessment fee due of $.01.).

    • Customer C purchases and sells 10,000 TRAKRSsm contracts. Customer C's round-turn assessment fee is $2.00. (10,000 contracts purchased and sold times $.0002 equals $2.00. No rounding is necessary).

    • Customer D purchases and sells 100,000 TRAKRSsm contracts. Customer D's round-turn assessment fee is $8. (100,000 contracts purchased and sold times $.0002 equals $20. However, the maximum amount of the TRAKRSsm fee is $8.

    5. Q: When is the NFA assessment fee payable?

    A: The assessment fee is payable 30 days following the end of the month for all transactions effected during that month.

    6. Q: Does NFA furnish a form for the monthly payment of NFA assessment fees?

    A: Yes. NFA distributes an FCM Assessment Fee Summary Report each month and worksheets upon request. FCMs are required to remit NFA assessment fees on time regardless of whether forms were received by the FCM.

    7. Q: Must NFA FCM Members submit the FCM assessment fee worksheet and FCM Assessment Fee Summary Report with their payment?

    A: NFA will accept assessment fee formats which vary from the worksheet submitted to Members for their convenience. Members should be able to adequately justify and document reasons for variation from the worksheet. All FCMs are required, however, to submit the FCM Assessment Fee Summary Report without modification.

III. Invoicing

    1. Q: Can an FCM combine the NFA assessment fee with commissions in its statement to customers?

    A: No. Assessment fee amounts must be shown or included in a line item on the customer statement separate from the line item which is used to designate commissions. Such an item may be devoted exclusively to the NFA assessment fee or may include other fees (i.e., a miscellaneous fees category). If, however, the amount indicated in the line is higher than the applicable NFA assessment fee, the customer must receive notice either on the statement or in a separate document of the actual amount of the NFA assessment fee.

    2. Q: Must an FCM invoice to the customer the NFA assessment fee?

    A: Yes. Bylaw 1301(b)(i) requires that the assessment fee be invoiced to customers.

    3. Q: May the assessment fee be invoiced on a monthly statement?

    A: Yes. Although Bylaw 1301(b)(i) requires that an FCM Member invoice assessments to its customers and remit the amount due to NFA, the FCM is given some discretion as to how the customer is invoiced. Invoicing through monthly statements or purchase and sale statements are both acceptable methods.

    4. Q: May the NFA assessment fee on futures transactions be invoiced to customers at the opening of a futures position?

    A: Yes. The invoicing requirement of Bylaw 1301(b) does not restrict or prescribe the timing of the invoicing.

IV. Applicability of NFA Assessment Fee

    1. Q: Does the assessment fee apply to accounts of persons having "privileges of membership" on a contract market?

    A: No. NFA Bylaw 1301(b)(i) makes the NFA assessment fee inapplicable to trades of customers who have "privileges of membership on a contract market where such contract is entered." If the exchange formally recognizes the customer as a member and charges exchange fees at the member rate, the NFA assessment fee does not apply.

    2. Q: Does the assessment fee apply to proprietary accounts?

    A: Generally, accounts belonging to affiliated firms which wholly own, are wholly owned by, or share 100 percent ownership with the FCM are exempt from paying the NFA assessment fee if the transactions are executed on an exchange where the FCM is a member. There are two exceptions to this general rule.

    First, any account that is in the name of a commodity pool operated by an NFA Member CPO is subject to the NFA assessment fee, regardless of affiliations or exchange memberships. Second, any account where someone other than the exchange member FCM or affiliate makes deposits in the account or bears the risk of loss is subject to the assessment fee.

    3. Q: If an FCM carries an omnibus account for another FCM which is an NFA Member, which FCM is liable to NFA for the assessment fee on trades in the omnibus account?

    A: The originating FCM is liable to NFA.

    4. Q: Would an FCM carrying an omnibus account ever be liable to NFA for the assessment fee on trades in the omnibus account?

    A: Yes. If the originating broker is not an FCM Member, the carrying FCM pays the fee. This situation would arise where the originating broker is a foreign broker.

    5. Q: Does an FCM pay an assessment fee on trades on a non-U.S. customer on a domestic exchange?

    A: Yes. The assessment fee applies to trades on domestic exchanges without regard to the nationality or residence of the customer.

    6. Q: Does the assessment fee apply to trades of U.S. customers on foreign exchanges?

    A: Yes. Foreign futures and options are assessed the assessment fee at the same rates applicable to domestic futures and options. However, only the "omnibus account" exemption, discussed under Part IV, question 3, applies to foreign futures and options. (A "U.S. customer" includes any customer who resides in the United States, its territories or possessions.)

    7. Q: Does the assessment fee apply to trades of non-U.S. customers on foreign exchanges?

    A: No. Trades by non-U.S. customers on foreign exchanges are excluded from the definition of "foreign futures and options" and therefore are not subject to the assessment fee.

    8. Q: Does an FCM pay an assessment fee on transactions which are merely bookkeeping entries such as those made to correct errors or to transfer a position from the books of one FCM to the books of another?

    A: No. The term "round-turn" excludes offsets which do not represent an actual transaction but which are merely bookkeeping entries such as those made to correct errors or to transfer a position from the books of one FCM to the books of another.

    9. Q: Concerning linked-market transactions, how do NFA assessment fees apply to futures positions executed on a foreign exchange (e.g., the Singapore International Monetary Exchange ("SIMEX")) to be offset against positions executed on a domestic exchange (e.g., the Chicago Mercantile Exchange ("CME")) and vice versa?

    A: Any futures transaction that is carried as a CME trade by an FCM Member for the account of a customer (except trades which under Bylaw 1301(b) are not assessable) will be subject to an NFA assessment fee upon completion of the round-turn even though one or both sides of the round-turn may have been actually executed on SIMEX. Any transaction that is carried as a SIMEX trade by an FCM Member for the account of a U.S. customer (except trades which under Bylaw 1301(b) are not assessable) will be subject to an NFA assessment fee. Any trade that is executed on the CME but is transferred to a SIMEX member and the SIMEX clearing house through the Mutual Offset System will not be subject to an NFA assessment fee.

    10. Q: Does the NFA assessment fee apply to Over-the-Counter ("OTC") transactions?

    A: If the OTC transaction does not occur on or subject to the rules of a futures exchange, the NFA assessment fee does not apply. InterContinental Exchange ("ICE") trades are examples of OTC transactions that are exempt from the NFA assessment fee.

    11. Q: Does the NFA assessment fee apply to transactions on the International Petroleum Exchange ("IPE")?

    A: Unlike ICE, IPE is a futures market. Consequently, IPE trades are subject to the NFA assessment fee.

    [¶ 9017] NFA BYLAW 1301: FORMS AND PROCEDURES FOR ASSESSMENT FEE COMPUTATION
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    (Staff, revised July 1, 2002)

    INTERPRETIVE NOTICE

    Following are examples of forms and instructions to which Members may wish to refer when calculating NFA assessment fees. Most Members will be sent computer-generated invoices to be completed and returned to NFA. Some Members may wish to use manual systems for calculation of the assessment fee and continue to report on the form set forth below as Schedule I. Members may also wish to refer to Schedules I and II when developing systems to determine the appropriate fee.

    If you will not be remitting an assessment fee to NFA, for example because your firm clears on a fully disclosed basis through another FCM which is remitting fees on your behalf, please complete the computer-generated invoice or Schedule I showing zero volume and fees and return it to NFA by the due date.

    Bylaw 1302 provides that assessments based upon futures transactions shall be payable to NFA within 30 days after the end of each month for the transactions effected during that month.

    Schedule I

    Schedule II

    FCM Assessment Fee Worksheet Instructions

    NFA BYLAW 1301: FORMS AND PROCEDURES FOR ASSESSMENT FEE COMPUTATION
    (Staff, revised November 26, 2001)

    INTERPRETIVE NOTICE

    SCHEDULE I

    National Futures Association
    Box 98383
    Chicago, Illinois 60693-0001

    FCM ASSESSMENT FEE SUMMARY REPORT

    __________________
    NFA ID Number

    ______________________
    FCM Member

    _________________________
    Address

    _________________________________
    City State Zip Code

    _________________
    Month Ended

    __________________________
    Phone

    LINE VOLUME OF
    ASSESSABLE
    TRANSACTIONS    		 FEES ($)
    A. Futures Contracts Traded on
    U.S. Exchanges (Round-Turns)    		 ________ ________
    B. Futures Contracts Traded on
    Foreign Exchanges for
    U.S. Customers (Round-Turns)    		 ________ ________
    C. Options Traded on U.S.
    Exchanges (Number of Trades)    		 ________ ________
    D. Options Traded on Foreign
    Exchanges for U.S. Customers
    (Number of Trades)    		 ________  ________
    E. Total NFA Assessment Fee - Due Within
    30 Days After the End of the Month    		 ________
    F. List FCM Remitting Fees on Your Behalf ________

    If you are not liable for an assessment fee this month, for example, because your firm clears on a fully disclosed basis through another FCM that is remitting fees on your behalf, a Summary Report is still required.

    Please complete this form showing zero volume and fees, sign and return by the due date.

    I certify the above information is true and correct.

      ________________________
    Authorized Signature
    ________________________
    Name
    Please remit to: National Futures Association
    Box 98383
    Chicago, Illinois 60693-0001
    Attn: Treasurer's Office

    NFA BYLAW 1301: FORMS AND PROCEDURES FOR ASSESSMENT FEE COMPUTATION
    (Staff, revised January 1, 2002; April 1, 2002; July 1, 2002; January 1, 2003 and January 1, 2008)

    INTERPRETIVE NOTICE

    SCHEDULE II

    NATIONAL FUTURES ASSOCIATION
    Box 98383
    Chicago, Illinois 60693-0001

    FCM ASSESSMENT FEE WORKSHEET
    MONTH ENDED __ / __ / __

    _________________
    FCM Member

    The information concerning transactions provided on this form will be utilized solely for purposes of computing the applicable NFA Assessment Fee and will be treated as confidential by NFA. This information may be supplied to the CFTC upon its request. However, it is the opinion of NFA that such information my be withheld by the CFTC from public disclosure under applicable provisions of the Freedom of Information Act, 5 U.S.C. � 552.

      Futures Contracts Traded On U.S. Exchanges Total
    1. Total U.S. futures contracts round-turns _____
    2. Less: Round-turns of customers having "privileges of membership" on exchange where contract is executed (_____)
    3. Less: Round-turns in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM (_____)
    4. Less: Round-turns in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf (_____)
    5. Less: Round-turns carried in an account owned by a business affiliate of an FCM executed on an exchange of which the FCM is a member (_____)
    6. Total assessment fees due on futures contracts traded on U.S. Exchanges (Line 1 less Lines 2-5)

    		 _____x$.02=
    $_____
      Futures Contracts Traded On Foreign Exchanges for U.S. Customers  
    7. Total foreign futures contract round-turns _____
    8. Less: Round-turns in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM (_____)
    9. Less: Round-turns in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf (_____)
    10. Assessable volume (Line 7 less Lines 8-9)

    		 _____x$.02=
    $_____
      Options Traded On U.S. Exchanges  
    11. Total U.S. exchange-traded option trades _____
    12. Less: Trades of customers having "privileges of membership" on exchange where contract is executed (_____)
    13. Less: Trades in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM (_____)
    14. Less: Trades in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf (_____)
    15. Less: Trades carried in an account owned by a business affiliate of an FCM executed on an exchange of which the FCM is a member (_____)
    16. Total assessment fees due on options contracts traded on U.S. Exchanges (Line 11 less Lines 12-15)

    		 $_____
      Options Traded On Foreign Exchanges For U.S. Customers  
    17. Total foreign exchange-traded option trades _____
    18. Less: Trades in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM (_____)
    19. Less: Trades in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf (_____)
    20. Assessable volume (Line 17 less Lines 18-19) _____x$.01=
    $_____
    21. Total NFA assessment fee (Lines 6, 10, 16, and 20) $_____

    Transfer the information on Lines 6, 10, 16, 20, and 21 to the FCM Assessment Fee Summary Report.

    NFA BYLAW 1301: FORMS AND PROCEDURES FOR ASSESSMENT FEE COMPUTATION
    (Staff, revised July 1, 2002 and January 1, 2003)

    INTERPRETIVE NOTICE

    NATIONAL FUTURES ASSOCIATION
    FCM ASSESSMENT FEE WORKSHEET INSTRUCTIONS

    The NFA assessment fee is a transaction fee payable on round-turns in commodity futures contracts, trades in exchange-traded options and trades in dealer options. The attached worksheet is intended to assist the FCM Member and NFA in calculating the required payment. The following are instructions for completion of the worksheet.

    Line 1: Total U.S. futures contract round-turns-Provide total round-turn futures transactions (including all mini contracts) closed during the month for all accounts. You must include all transactions on a domestic exchange. You should exclude all transactions placed through another FCM on a fully disclosed basis for which the clearing FCM has collected and remitted the assessment fee to NFA.

    Line 2: Round-turns of customers having "privileges of membership" on exchange where contract is executed-List the number of round-turn transactions for which the account holder was charged a member fee by the domestic exchange.

    Line 3: Round-turns in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM-List the number of round-turn transactions in an omnibus account carried for another FCM Member of NFA for which the other FCM is paying the assessment.

    Line 4: Round-turns in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf-Indicate the number of round-turn transactions in an omnibus account cleared by another FCM which has agreed to remit the NFA Fee. Attach a list of such clearing brokers to the FCM Assessment Fee Summary Report.

    Line 5: Round-turns carried in an account owned by a business affiliate of an FCM executed on an exchange of which the FCM is a member-List the number of round-turn transactions (not included on Line 2) carried for a business affiliate that directly or indirectly owns 100 percent of or is owned 100 percent by or has 100 percent ownership in common with the FCM.

    Line 7: Total foreign futures contract round-turns-Provide total round-turn futures transactions closed during the month for U.S. customers. (A U.S. customer includes any customer who resides in the United States, its territories or possessions.) You should exclude all transactions placed through another FCM on a fully disclosed basis for which the clearing FCM has collected and remitted the assessment fee to NFA.

    Line 8: Round-turns in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM-List the number of round-turn transactions in an omnibus account carried for another FCM Member of NFA for which the other FCM is paying the assessment.

    Line 9: Round-turns in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf-Indicate the number of round-turn transactions in an omnibus account cleared by another FCM which has agreed to remit the NFA Fee. Attach a list of such clearing brokers to the FCM Assessment Fee Summary Report.

    Line 10: Assessable volume-This amount is total foreign futures round-turns less exclusions. The $.02 per round-turn assessment fee is multiplied by this number to arrive at the basic foreign futures contract assessment.

    Line 11: Total U.S. exchange-traded option trades-Provide total trades (purchases or sales, not exercises or expirations) in the month for all accounts. You must include all transactions on a domestic exchange. You should exclude all trades placed through another FCM on a fully disclosed basis for which the clearing FCM has collected and remitted the assessment fee to NFA.

    Line 12: Trades of customers having "privileges of membership" on exchange where contract is executed-List the number of trades for which the account holder was charged a member fee by the domestic exchange.

    Line 13: Trades in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM-List the number of trades in an omnibus account carried for another FCM Member of NFA for which the other FCM is paying the assessment.

    Line 14: Trades in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf-Indicate the number of option trades in an omnibus account cleared by another FCM which has agreed to remit the NFA fee on your behalf. Attach a list of such clearing brokers to the FCM Assessment Fee Summary Report.

    Line 15: Option trades carried in an account owned by a business affiliate of an FCM executed on an exchange of which the FCM is a member-Include all options trades (not included on Line 11) for a business affiliate that directly or indirectly owns 100 percent of or is owned 100 percent by or has 100 percent ownership in common with the FCM.

    Line 17: Total foreign exchange-traded option trades-Provide total trades (purchases or sales, not exercises or expirations) in the month for U.S. customers. (A U.S. customer includes any customer who resides in the United States, its territories or possessions.) You should exclude all trades placed through another FCM on a fully disclosed basis for which the clearing FCM has collected and remitted the assessment fee to NFA.

    Line 18: Trades in an omnibus account carried for another FCM Member for which assessments are payable to NFA by the other FCM-List the number of trades in an omnibus account carried for another FCM Member of NFA for which the other FCM is paying assessment.

    Line 19: Trades in an omnibus account cleared by another FCM Member for which the clearing FCM Member has agreed to pay the NFA assessment fee on your behalf-Indicate the number of option trades in an omnibus account cleared by another FCM which has agreed to remit the NFA fee on your behalf. Attach a list of such clearing brokers to the FCM Assessment Fee Summary Report.

    Line 20: Assessable volume-This amount is total foreign exchange-traded option trades less exclusions. The $.01 per trade assessment fee is multiplied by this figure to arrive at the assessment for foreign exchange-traded options.

    Line 21: Total NFA assessment fee-This is the sum of the futures, exchange-traded option and dealer option Assessment Fees as listed in Lines 6, 10, 16 and 20.

    [¶ 9018] REGISTRATION RULE 402: CPOS OF POOLS TRADING PRIMARILY IN SECURITIES
    (Click Here to Print this Section)
    (Board of Directors, August 1, 1992; revised December 10, 2007)

    INTERPRETIVE NOTICE

    The Board of Directors has granted the Director of Compliance the authority to waive the Series 3 examination for certain individuals who are associated with CPOs who are required to register solely because they operate commodity pools which are principally engaged in securities transactions. The individual or firm requesting the waiver must provide a written description of the facts which qualify the individual for a waiver. The Director of Compliance's decision will be final.

    The Director of Compliance is authorized to waive the Series 3 examination in either of the following situations:

    1. The CPO or the commodity pool is subject to regulation by a federal or state regulator (e.g., the Securities and Exchange Commission, federal bank regulators or state insurance agencies) or the pool is privately offered pursuant to an exemption from the registration requirements of the Securities Act of 1933 and the CPO limits its activities for which registration is required to operating a commodity pool which:

      a. engages principally in securities transactions;

      b. commits only a small percentage of its assets as initial margin deposits and premiums for futures and options on futures; and

      c. uses futures transactions and options on futures only for hedging or risk management purposes.

    2. The individual requesting the waiver is a general partner of a CPO or of a commodity pool which is primarily involved with securities investments; there is at least one registered general partner of the CPO or pool who has taken and passed the Series 3 examination; and the individual requesting the waiver is not involved in soliciting or accepting pool participations, trading futures or options on futures, handling customer funds, supervising any of the above activities or engaging in any other activity that is integral to the operation of the fund as a pool.

    Waiver requests should be directed to:

    Director of Compliance
    National Futures Association
    300 South Riverside Plaza
    Chicago, Illinois 60606

    [¶ 9019] COMPLIANCE RULE 2-9: SUPERVISION OF BRANCH OFFICES AND GUARANTEED IBS
    (Click Here to Print this Section)
    (Board of Directors, October 6, 1992; revised July 24, 2000)

    INTERPRETIVE NOTICE

    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 activities. Rule 2-9 applies not only to the supervision of branch office operations, but also imposes a direct duty on guarantor FCMs to supervise the activities of their guaranteed IBs. NFA Compliance Rule 2-23 provides that a guarantor FCM may be held jointly and severally subject to discipline by NFA for violations of NFA rules committed by the FCM's guaranteed IBs. In practice, NFA's Business Conduct Committee has charged FCMs under Rule 2-23 only where it appears that the guarantor failed to diligently supervise its guaranteed IBs.

    NFA recognizes that, given the differences in the size of and complexity of the operations of NFA Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm. It is NFA's policy to leave the exact form of supervision to the Member, thereby providing the Member with flexibility to design procedures that are tailored to the Member's own situation. Nevertheless, NFA's Board of Directors believes that it is appropriate to provide Members with specific minimum standards for a supervisory program for branch offices and guaranteed IBs ("remote locations") and therefore issues the following Interpretive Notice.

    Though Members may tailor their supervisory procedures to meet their particular needs, any adequate program for supervision must include procedures for performing day-to-day monitoring and surveillance activities, conducting on-site visits of remote locations and conducting ongoing training for firm personnel. The firm's policies and procedures, including those for the supervision of branch offices and guaranteed IBs, should be in written form. Firm personnel and guaranteed IB personnel should be provided a copy of the appropriate policies and procedures relating to their duties, and be aware of the firm's requirements. A copy of all policies and procedures should be on file with the branch office or guaranteed IB. All supervisory personnel should be knowledgeable of the firm's requirements for supervision.

    I. Day-to-Day Monitoring

    On a regular basis a Member should perform a number of supervisory procedures in order to monitor the business being conducted in its remote locations. The extent of the supervision depends on a number of factors, including the volume of trading, the experience of the personnel, the nature of the customers, the trading strategies followed by the office or certain APs, the number of customer complaints and the length of time that the office has conducted business with the firm. Repeated problems in any particular area should heighten the level of scrutiny and follow-up by the main office or guarantor.

    The procedures to review the day-to-day activities of an office should include the following areas.

    Hiring. An adequate program for supervision must include thorough screening procedures for prospective employees to ensure they are qualified and to determine the extent of supervision the person would require if hired. The appropriate documentation to support any "yes" answers on the Form 8-R should be obtained and reviewed for potential disqualifying information. Derogatory information, which the applicant may have submitted in connection with any past regulations, should be obtained from NFA.1 Prior employers should be contacted to confirm the person's previous work experience.

    In connection with the review of the person's prior work experience, a prospective employer should check for any futures-related disciplinary proceedings against the person's prior employer.2 This information should be used by the prospective employer to determine the extent of supervision a particular applicant would require after he or she is hired.

    Due Diligence Check of Guaranteed IBs. Guarantor FCMs must do a due diligence inquiry before entering into a guarantee agreement. The due diligence review must include a check to ensure that the IB is properly registered. The FCM's due diligence review should also include inquiries concerning the disciplinary history of the IB and the disciplinary and employment history of the IB's principals and APs. This type of information could be helpful to a prospective guarantor in determining the types of difficulties, if any, experienced by an IB, its principals and APs in the past and the extent of supervision which may be required of that IB under a guarantee agreement. For example, if the APs at a certain IB have received their futures training and experience at a firm or firms that have been subject to serious disciplinary actions by NFA or the CFTC, that IB may well require more supervision. Both registration and disciplinary information is readily available from NFA.3

    Registration. Records of commissions payable to or generated by the branch office or guaranteed IB should be broken down by sales person and should be frequently reviewed to ensure that no commissions are being paid to unregistered individuals.

    Customer Information. NFA Compliance Rules require each Member to adopt and enforce procedures regarding customer information and risk disclosure. The procedures for opening new accounts should require that the appropriate account documentation, including an acknowledgment of receipt of the required risk disclosure statement, be forwarded to the main office or guarantor.4 The documentation should be reviewed to ensure that the appropriate supervisory personnel approved the account. The information obtained from a customer should be reviewed to determine whether additional risk disclosure should have been provided to the customer. For any customer who should have received additional risk disclosure, the main office or guarantor should ensure that additional disclosure has been given and that such disclosure has been documented. It may also be necessary to contact the customer to verify that the disclosure was provided and that the customer understood its meaning. Notwithstanding these procedures, a firm may wish to require that all new account information and documentation be forwarded to the main office or guarantor for approval before trading commences in the account.

    Account Activity. The trading activity in customer and AP personal accounts should be reviewed and analyzed on a regular basis in order to highlight those accounts which may require further scrutiny. There are a number of calculations and comparisons which can be performed to flag accounts for follow-up or further monitoring. For example, significant losses, commission charges or number of trades should be reviewed for inappropriate trading strategies. The reason for error and correction entries to trading accounts should be investigated, especially if there appears to be a pattern of errors or corrections made by an office. Commission-to-equity ratios should be calculated for discretionary accounts to detect possible excessive trading. In order to identify improper trade allocations for discretionary accounts or front running, the trading results in an AP's personal account should be compared to the trading gains and losses in his or her customer accounts. Profitable customer accounts for a given AP should be reviewed for possible preferential treatment.

    Appropriate supervisory personnel at the remote location should be notified of questionable account activity. Measures should be taken to follow up, such as reviewing order tickets and trade blotters, discussing the activity with the broker or contacting the customer.

    Discretionary Accounts. NFA Compliance Rule 2-8 contains detailed requirements concerning the supervision and review of discretionary accounts. The written customer authorization and customer acknowledgment for third-party account controllers should be forwarded to the main office or guarantor. 5 Confirmation of the registration history of APs of FCMs and IBs exercising discretion should be made to ensure that they have been properly registered for the requisite two-year minimum.

    Promotional Material. NFA Members are required by rule to adopt and enforce procedures regarding communications with the public. All promotional material should be submitted by the branch office or guaranteed IB to the home office or guarantor for review and approval prior to its first use. Review and approval of the material should be documented by the appropriate supervisory personnel.

    Customer Complaints. An adequate system for handling customer complaints should require that a written record of all complaints be maintained, and that complaints which meet certain criteria be sent to the main office or guarantor. Notification of the main office of customer complaints may be based on factors including the seriousness of the allegations of wrong-doing, the monetary amount involved, and which APs or principals are subjects of the complaints. If the remote location is responsible for resolving customer complaints, the home office or guarantor should also be notified of the outcome of resolved complaints. Notwithstanding these criteria, a firm may wish to consider having all customer complaints received by a remote location submitted to the main office.

    The main office or guarantor should review the complaints for possible rule violations. It should also compare the allegations in the complaint for similarity to other complaints received against the same individuals or office. Such a review may detect a pattern of sales practice or other abuses.

    The status of unresolved complaints should be periodically reviewed to ensure that the branch office or guaranteed IB has promptly responded to complainants.

    II. On-Site Visits

    In addition to day-to-day supervisory procedures, adequate supervision of the personnel who do work in the main office must also include periodic on-site inspections. As a general matter, NFA would expect these on-site inspections of guaranteed IBs or branch offices to be performed annually.

    Members should develop written procedures for the on-site review process including detailed steps to be followed during the visit. This will help ensure that the review process is performed in a consistent manner and will not vary due to the involvement of different personnel in the review process. A Member's supervisory procedures should also address the number of visits to be made to a branch office or guaranteed IB. The frequency and nature of the visits, as well as whether the visit will be announced or unannounced, will depend on a number of factors including: the amount of business generated; the number of customer complaints received; the previous training and experience of the branch office personnel; and the frequency and nature of problems or concerns that arise as the result of day-to-day monitoring and surveillance of the office's activities. The personnel who make the visits should be qualified to perform examinations and knowledgeable of the industry and the nature of the firm's business. Such personnel should be able to perform their work with an independent, objective perspective.

    The length of time between visits to the remote location coupled with the size and scope of its operation also plays a role in determining the procedures for on-site review of records and account documentation.6 In reviewing a smaller operation, it is feasible to conduct a comprehensive review of the remote location's records and documents over the entire time period between visits, while reviewing a larger scale operation may require the selection of a sample of records and documents for given time intervals. The selection of samples should be accomplished on a random basis, for example, selecting every third account for review for randomly selected time periods.

    Promptly after the completion of an on-site visit, a written report should be prepared and its findings discussed with the branch office and regional managers or guaranteed IB's principals and supervisory personnel. Follow-up procedures should also be performed to ensure that any deficiencies revealed during an on-site visit are promptly corrected. The written procedures for the on-site examination should include steps to review the following areas:

    Customer Order Procedures. An on-site visit to a remote location should include a review of procedures for handling and recording customer orders. The individuals responsible for accepting customer orders should be identified and a sample of a order tickets should be selected for review. NFA recommends that order tickets be prenumbered and that the on-site review test to ensure that all order tickets within the chosen samples are accounted for. The order ticket review should also confirm that all order tickets are properly time stamped and that all information required by CFTC Regulation 1.35 is included. If option orders are placed by the branch office or guaranteed IB, those order tickets should be reviewed to ensure that they contain the additional information required by CFTC Regulation 1.35.

    Discretionary Accounts. If a branch office or guaranteed IB handles discretionary accounts, the supervisory visit should confirm that the branch office or guaranteed IB identifies discretionary orders as such and that the firm's procedures regarding the supervision of discretionary trading activity are followed. In the event a branch office or guaranteed IB enters block orders, those orders should be reviewed to confirm that customer orders are not included with proprietary orders and that nondiscretionary customer orders are not included with discretionary customer orders. Split fills should be reviewed to ensure that they have been allocated according to established procedures.

    Sales Practices. The on-site visit should include a review of sales solicitation practices as well as any promotional material utilized. A suggested starting point for review of the sales solicitation practices of a branch office or guaranteed IB is to identify the persons involved in sales solicitation and to confirm that they are properly registered. The individuals conducting the on-site review should also monitor sales solicitations while at the branch office or guaranteed IB. Interviews with selected customers should be conducted concerning the solicitation process and the handling of the customer's account. The individuals at the branch office or guaranteed IB responsible for supervising sales solicitations should be identified, and the method by which sales solicitations are supervised should be reviewed for adequacy.

    The branch office or guaranteed IB's promotional material, including sales solicitation scripts, must be approved by appropriate supervisory personnel. Therefore, an on-site visit should be designed to ensure that the branch or guaranteed IB is not using any promotional material that has not received prior approval. If the main office or guarantor has not approved the promotional material, it should be reviewed during the on-site visit.

    Customer Complaints. The on-site review should include steps to confirm that all complaints requiring notification have been reported to the main office.

    Handling of Customer Funds. In order to assure that customer funds are being properly handled by a branch office, the on-site review should determine whether the branch office accepts funds from customers and, if so, whether appropriate bank accounts, including segregated accounts for customer funds, have been established by authorized personnel. In addition, for guaranteed IBs, the on-site review should confirm that if funds are accepted from customers, they are received in the name of the FCM. The branch office or guaranteed IB should make copies of any customer checks that they deposit into a qualifying or branch bank account. The check copies should be reviewed during the visit to ensure that the branch office or guaranteed IB only accepts checks made payable to the FCM. In addition, third-party checks should be scrutinized to ensure that no customers are acting as unregistered FCMs or CPOs. If the guaranteed IB receives customer funds in the FCM's name, the review should confirm that the proper authorization to do so exists, that appropriate bank accounts are maintained and that proper procedures for forwarding the funds have been established and are followed. For both branch offices and guaranteed IBs, the flow of customer funds in a sample of accounts should be reviewed to determine that all funds have been timely transmitted and properly credited.

    Proprietary Trading. To the extent feasible, there should be a separation of duties between persons handling customer orders and firm employees or principals trading for the firm's proprietary accounts or their own accounts to prevent misuse of non-public information or the occurrence of other trading abuses.

    III. Ongoing Training

    A Member's supervisory responsibilities include the obligation to ensure that its employees are properly trained to perform their duties. Procedures must be in place to ensure that employees receive adequate training to abide by industry rules and regulations and to properly handle customer accounts and that APs have completed the ethics training required by CFTC Regulation 3.34. Employees must be educated on developments and changes in the markets, futures products, rules and regulations, technology, and firm policies and procedures. The formality of a training program will depend on the size of the firm and the nature of its business. The individuals responsible for providing the training must be qualified to do so.

    Certain APs may require training for soliciting and handling customer accounts. If an AP has previously worked at firms closed through an enforcement action for sales fraud and has therefore received his or her training from such firms, that AP may need specialized training in proper sales practices.

    This Notice is intended to specify minimum supervisory standards for branch offices and guaranteed IBs. A failure to adhere to the requirements specified in this Notice will be deemed a violation of NFA Compliance Rule 2-9.

    1 The detailed explanation of any "yes" answers on an 8-R is treated as nonpublic information; however, it is available to prospective employers under NFA Registration Rule 701(c). See Interpretive Notice at ¶9010.

    2 Information concerning futures-related disciplinary proceedings can be obtained by checking the BASIC system on NFA's web site at www.nfa.futures.org, sending a request to NFA through the "contact" feature of the web site, or calling NFA's Information Center at (800) 621-3570. See Interpretive Notice at ¶9010.

    3Registration Information is also available by checking the BASIC system on NFA's web site at www.nfa.futures.org, sending a request to NFA through the "contact" feature of the web site, or calling NFA's Information Center at (800) 621-3570. See Interpretive Notice at ¶9007.

    4 NFA Rules require that a guaranteed IB maintain a record of the information obtained from a customer and a copy of the risk disclosure acknowledgment. A branch office may wish to keep copies of this information for its files.

    5 NFA Rules require that a guaranteed IB maintain a record of the written customer authorization and customer acknowledgments for third-party account controllers. A branch office may wish to keep copies of this information for its files.

    6 If a visit is prompted by awareness of a particular problem at a remote location or if a problem is discovered during a routine visit, the Member must ensure that the scope of the review is adequate to thoroughly examine the problem area.

    [¶ 9020] COMPLIANCE RULE 2-9: SELF-AUDIT QUESTIONNAIRES
    (Click Here to Print this Section)
    (Board of Directors, October 6, 1992; revised July 24, 2000)

    INTERPRETIVE NOTICE

    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 activities. NFA recognizes that, given the differences in the size and complexity of the operations of NFA Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm. It is NFA's policy to leave the exact form of supervision up to the Member, thereby providing the Member with flexibility to design procedures that are tailored to the Member's own situation. The Board of Directors adheres to this principle but feels that all Members should regularly review the adequacy of their supervisory procedures.

    The Board of Directors has determined that in order to satisfy their continuing supervisory responsibilities, NFA Members must review on a yearly basis self-audit questionnaires that can be downloaded from NFA's web site at www.nfa.futures.org. The questionnaires must be reviewed by the appropriate supervisory personnel in either the home or branch office. After reviewing the questionnaire, the appropriate supervisory person must sign the questionnaire stating that the Member's operations have been evaluated based on the questionnaire and attesting that the Member's procedures comply with all applicable NFA requirements.

    Members are required to retain the signed questionnaire in their files for a period of five years from the date of review, with the questionnaires being readily accessible during the first two years. In addition, guaranteed IBs must provide and guarantor FCMs must obtain copies of the signed questionnaires. Members must also provide the signed questionnaires for inspection upon request by NFA.

    Review of the questionnaires should aid Members in recognizing potential problem areas and alert them to procedures which need to be revised or strengthened. The questionnaires focus on a Member's regulatory responsibilities and require a review of the adequacy of the Member's internal procedures. For example, the FCM questionnaire requires review of a Member's procedures relating to customer order flow, customer account documentation, risk disclosure, margin policies, option accounts and transactions, customer complaints, advertising, cash flow and compliance with NFA requirements. Similarly, the CPO/CTA questionnaires contain a check-list which will assist CPOs and CTAs in their review of disclosure documents.

    A Member firm that does not comply with this Interpretive Notice will violate NFA Compliance Rule 2-9.

    Questions regarding this Interpretation or the questionnaires should be directed to the Compliance Department at (800) 621-3570 or through the "contact" feature of NFA's web site.

    [NOTE: The self-audit questionnaire is now called the Self-Examination Checklist."]

    [¶ 9021] COMPLIANCE RULE 2-9: ENHANCED SUPERVISORY REQUIREMENTS
    (Click Here to Print this Section)
    (Board of Directors, January 19, 1993; revised August 14, 1996, December 16, 1996; March 10, 1998; July 1, 2000; January 1, 2001; June 1, 2001; August 21, 2001; March 18, 2003; November 9, 2004; February 15, 2006; April 15, 2006; November 1, 2007; December 17, 2007; and September 18, 2008.)

    INTERPRETIVE NOTICE

    I. INTRODUCTION

    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. Subsection (a) of this rule places a continuing responsibility on every Member to diligently supervise 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 requirements to be followed by all NFA Members, NFA's Board of Directors believes that Member firms which are identified as having a sales force and/or principals that have been affected by questionable sales practice training and firms which charge commissions and fees well above the industry norm should be required to adopt enhanced supervisory requirements designed to prevent sales practice abuse. Subsection (b) 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. Subsection (b) covers all activities regulated by NFA, including the off-exchange retail forex activities of Members subject to NFA Compliance Rule 2-36.

    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 which obligate a Member to adopt the enhanced supervisory requirements and to specify the enhanced supervisory requirements 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 disciplined 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 and firm principals. For many of these Members, a significant portion of these individuals were previously employed and trained by one or more Member firms which had been disciplined for fraud. The Board believes that the employment history of a Member's APs and principals is a relevant factor to consider in identifying firms with potential sales practice problems. If a Member firm is disciplined by NFA or the CFTC for fraud related to widespread telemarketing or promotional material problems or by the Financial Industry Regulatory Authority or the SEC for fraud related to its sales practices regarding security futures products as defined in Section 1a (32) of the Commodity Exchange Act ("Act"), it is reasonable to conclude that the training and supervision of its sales force was wholly inadequate or inappropriate. It is also reasonable to conclude that an AP or principal 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 supervisory procedures in place in order to ensure that the improper training its APs and principals have previously received does not taint their sales efforts on behalf of the Member.

    The Board notes further that there have been instances in which Members and Associates have subverted the Board's purpose in imposing the enhanced supervisory requirements by closing a firm once it qualifies for those requirements and opening another firm or firms that have a mix of employees that does not meet the criteria for adopting the requirements. The new firms typically have individuals who have worked for firms that have been disciplined for fraud related to telemarketing or promotional material and who worked at the original qualifying firm, but they are redistributed so as to keep the employee mix below the threshold for becoming subject to the enhanced supervisory requirements. The Board has determined to apply the enhanced supervisory requirements to firms that use this strategy.

    The Board also notes that Members that assess commissions, fees and other charges that total well above the industry norm comprise a disproportionately high share of firms that have been subject to disciplinary action for sales practice abuses. Some of the abuses that have been cited relate to the creation of a misleading impression of the likelihood of achieving profits by investing with a Member through misstatements or material omissions concerning the impact of commissions and fees.

    The Board believes that when a Member charges its customers commissions, fees and other charges that total well above the industry norm it is incumbent on that Member to exercise a very high degree of supervision of solicitations made by its APs so as to ensure that customers are given accurate information regarding the impact of those expenses on the likelihood of achieving profit. Consistent with its approach in other situations involving an increased likelihood of misleading solicitations, the Board believes that the enhanced supervisory requirements provide a practical opportunity for a Member that charges commissions, mark-ups, fees and other charges that are well above the industry norm to monitor solicitations and correct problems with those solicitations in an expeditious manner.

    II. OBLIGATIONS OF MEMBERS SUBJECT TO THE ENHANCED SUPERVISORY REQUIREMENTS

    A. Recording of all conversations with existing and potential customers

    Those Member firms meeting the criteria requiring them to adopt the enhanced supervisory requirements will be required to make complete audio recordings of all telephone conversations that occur between their APs and both existing and potential customers, including existing and potential retail forex customers of Members subject to NFA Compliance Rule 2-36. The Board believes that 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 that are required to record their conversations must retain such recordings for a period of five years from the date each recording is created and the recordings shall be readily accessible during the first two years of the five-year period. In retaining the recorded conversations, Member firms must catalog the recordings 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. Members that are required to record under this Interpretive Notice are further required to promptly provide NFA or the CFTC with appropriate resources for listening to their recordings upon request.

    B. Enhanced capital requirement

    Any Member introducing broker, commodity trading advisor or commodity pool operator meeting the criteria is required to either operate pursuant to a guarantee agreement, as applicable, or maintain adjusted net capital of at least $250,000 during the entire period for which the Member is required to adopt the enhanced supervisory requirements. Eligible guarantor futures commission merchants ("FCM"s) are those that meet the eligibility requirements for executing a Supplemental Guarantor Certification Statement pursuant to NFA Registration Rule 509(b)(5). Any Member opting to maintain the higher level of adjusted net capital shall also be subject to the financial record-keeping and reporting requirements applicable to FCMs.

    Any Forex Dealer Member ("FDM") meeting the criteria is required to maintain adjusted net capital of at least the early warning requirement under CFTC rules. Any FCM Member that is not an FDM is required to maintain adjusted net capital of at least $1,000,000.

    C. Filing promotional material with NFA

    Those Member firms meeting the criteria will be required to file all promotional material, as defined in NFA Compliance Rule 2-29(i), with NFA at least 10 days prior to its first use.

    D. Written supervisory procedures

    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, retail forex 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 file with NFA's Compliance Department a report relating to the Member firm's compliance with the supervisory requirements contained herein within 15 days after the end of each calendar month. 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.

    III. QUALIFICATION FOR THE ENHANCED SUPERVISORY REQUIREMENTS

    A. Definitions, treatment of individuals and firms and exemptions

    1. Definition of Disciplined Firm

    A current list of the firms which meet the definition of a Disciplined Firm is maintained on NFA's Web site at www.nfa.futures.org. For purposes of this Interpretive Notice, a Disciplined Firm is defined very narrowly to include those firms that fall into one of the following two groups:

      a. Firms that have been disciplined by NFA or the CFTC

      Members that qualify as Disciplined Firms based on their disciplinary histories with the CFTC or NFA include those firms for which:

        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 either been permanently barred from the industry at any time as a result of those charges or has been sanctioned in any way within the preceding five years as a result of those charges.

      b. Firms that have been disciplined in connection with sales practices involving security futures products

    Members that qualify as Disciplined Firms based on their disciplinary histories related to sales practices involving security futures products include any broker-dealer that, in connection with sales practices involving the offer, purchase, or sale of any security futures product as defined in Section 1a (32) of the Act has at any time been expelled from membership or participation in any securities industry self-regulatory organization ("Securities SRO") or is subject to an order of the SEC revoking its registration as a broker-dealer or has been sanctioned in any way within the preceding five years in connection with sales practices involving the offer, purchase, or sale of any security futures product as defined in Section 1a (32) of the Act.

    2. Treatment of principals who previously worked at a Disciplined Firm

    For purposes of determining whether a Member will be required to adopt the enhanced supervisory requirements based on the employment histories of its APs and principals, principals of a firm, who are not also APs of that firm and who have been previously employed as an AP by one or more Disciplined Firms, shall be counted as if they were APs of the firm.

    3. Treatment of FCMs that guarantee introducing brokers

    For purposes of determining whether an FCM Member will be required to adopt the enhanced supervisory requirements, an FCM and its guaranteed introducing brokers ("GIBs") will be considered a single firm. Therefore, for FCMs with GIBs, the APs of its GIBs will be treated as APs of the FCM for determining whether the FCM meets the requirements. If the FCM Member firm meets the requirements, then the FCM and all its GIBs shall be required to adopt the supervisory procedures specified herein. Of course, individual FCMs or GIBs will be required to adopt the enhanced supervisory requirements provided the FCM or GIB meets the requirements on its own.

    4. Exemptions from being counted as an AP who worked at a Disciplined Firm

    The Board recognizes that there are identifiable populations of APs who are included in the general population of APs who have worked at Disciplined Firms in the past who, further analysis suggests, do not raise the same concerns regarding their previous supervision and training that are raised by the majority of APs who have worked at Disciplined Firms. Generally, these APs worked at Disciplined Firms fairly long ago and are free of additional factors of concern in their employment histories.

    A number of the APs in this group worked at Disciplined Firms for only a short period of time many years ago and have not worked at a Disciplined Firm since or been personally subject to disciplinary action. Others worked at a single Disciplined Firm for a somewhat lengthier period and have subsequently been employed for a substantial length of time by Members that have not shown a propensity for customer abuse and the AP has not been personally subject to disciplinary action.

    The Board has determined that APs who have not been personally subject to a disciplinary action by NFA or the CFTC and who meet the following criteria shall not be counted by a Member that hires them as having been employed by a Disciplined Firm for purposes of calculating whether the composition of the Member's sales force triggers the enhanced supervisory requirements:

      a. they have been previously employed by Disciplined Firms for a cumulative total of less than 60 days and have not been employed by any Disciplined Firm during the 5 years preceding the determination of whether a Member firm is required to employ the enhanced supervisory requirements established in this Interpretive Notice. In addition, the AP may not have been employed by a Member that has been subject to any sales practice action by NFA or the CFTC, or by any Securities SRO or the SEC in connection with sales practices involving the offer, purchase or sale of any security futures product as defined in Section 1a (32) of the Act since leaving the last Disciplined Firm by which they were employed; or

      b. they worked at only one Disciplined Firm more than 10 years preceding the determination of whether a Member firm is required to employ the enhanced supervisory requirements and they have not been employed by a Member that has been subject to any sales practice action by NFA or the CFTC, or by any Securities SRO or the SEC in connection with sales practices involving the offer, purchase or sale of any security futures product as defined in Section 1a (32) of the Act within the 10 years preceding the determination, and they have been an NFA Member or Associate Member for at least eight of the ten years preceding the determination.

    B. Criteria that obligate a Member to adopt the enhanced supervisory requirements

    Member firms will be required to adopt the enhanced supervisory requirements if they fall into any of the categories described below.

    1. Obligation based on employment histories of APs and principals:

    Firms that meet any of the following numerical criteria are required to adopt the enhanced supervisory requirements:

    • For firms with less than five APs, 2 or more of its APs have been employed by one or more Disciplined Firms;

    • For firms with at least 5 but less than 10 APs, 40 percent or more of its APs have been employed by one or more Disciplined Firms;

    • For firms with at least 10 but less than 20 APs, four or more of its APs have been employed by one or more Disciplined Firms; or

    • For firms with at least 20 APs, 20 percent or more of its APs have been employed by one or more Disciplined Firms.1

    2. Obligation based on affiliations of principals:

    Once a Member firm meets the criteria to adopt the enhanced supervisory requirements, any other Members of which the principals of that Member firm are, or become, principals must also adopt the enhanced supervisory requirements or seek a waiver therefrom.

    3. Obligation based on assessing commissions, fees and other charges well above the industry norm

    Any Member firm that charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract is required to adopt the enhanced supervisory requirements. Any Member that charges 50% or more of its active customers round-turn commissions, fees and other charges in the amount specified above must promptly inform NFA of that fact. In addition, upon request by NFA, Members shall have the burden of demonstrating to NFA that they charge more than 50% of their active customers round-turn commissions, fees and other charges that are less than the specified amounts. The term "active customers" as used in this section means any customers who are entitled to a monthly statement under the provisions of CFTC Regulations Section 1.33(a).

    4. Obligation based on the initiation of disciplinary action

      a. Members that have fulfilled the enhanced supervisory requirements that become subject to subsequent disciplinary action

    Any Member that has previously been required to adopt the enhanced supervisory requirements; has, in fact, fulfilled that requirement either by adopting the enhanced supervisory requirements for a prescribed period or by receiving a full or partial waiver from the enhanced supervisory requirements from the Telemarketing Procedures Waiver Committee; and subsequently becomes subject to a CFTC or NFA enforcement or disciplinary proceeding alleging deceptive sales practices, shall, within 30 days of being served with notice of the action, adopt all of the enhanced supervisory requirements and may not seek a waiver therefrom. This obligation shall continue 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.

      b. Members already subject to the enhanced supervisory requirements

    If an NFA Business Conduct Committee disciplinary proceeding or CFTC enforcement proceeding has been filed against a Member firm required to adopt the enhanced supervisory requirements, then the enhanced supervisory requirements 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.

    IV. WAIVER PROCEDURE

    Any Member required to adopt the enhanced supervisory requirements may seek a waiver by filing a petition with the Telemarketing Procedures Waiver Committee within 30 days of the date of being notified by NFA that it is required to adopt 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 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. Should a Member fail to file a petition seeking a waiver within 30 days or should it file a petition that is denied by the Telemarketing Procedures Waiver Committee, either in whole or in part, the Member may not petition for a full or partial waiver again until at least two years have elapsed since the Member adopted the required enhanced procedures.

    Some of the factors that the three-member Waiver Committee may consider in evaluating a waiver request include:

    • the total number and the backgrounds of APs sponsored by the Member;

    • number of branch offices and GIBs operated by the Member;

    • the experience and background of the Member's supervisory personnel;

    • the number of the Member's APs who had received training from firms which have been closed for fraud, the length of time those APs worked for those firms and the amount of time which has elapsed since those APs worked for the disciplined firms;

    • the results of any previous NFA examinations;

    • the cost effectiveness of the taping requirement in light of the firm's net worth, operating income and related telemarketing expenses;

    • whether the Member assesses commissions, fees and other charges that are based on all of the relevant circumstances, including the expense of executing orders and the value of services the Member renders based on its experience and knowledge; and

    • whether the Member adequately discloses the amount of commissions, fees and other charges before transactions occur in light of a retail customer's trading experience and the impact that the commissions, fees and other charges may have on the likelihood of profit.

    Conditions that the Telemarketing Procedures Waiver Committee shall impose on any Member to which it grants a full or partial waiver include requirements that the firm: notify NFA of any action charging the firm with a violation of CFTC, SEC or Self Regulatory Organization ("SRO") regulations or rules; notify NFA of any customer complaint involving sales practices or promotional material; not change ownership; not have any material deficiencies noted during any SRO examination; not hire additional APs from Disciplined Firms; execute a written acknowledgement that the firm understands the conditions of the waiver; and may include any other conditions deemed by the Committee to be appropriate in consideration of a total or partial waiver from the enhanced supervisory requirements. Violation of any of those conditions may serve as cause for the Telemarketing Procedures Waiver Committee to review and amend or revoke the waiver.

    A Member firm that does not comply with this Interpretive Notice will violate NFA Compliance Rule 2-9(b) and will be subject to disciplinary action.

    1 The Board notes that NFA Registration Rule 206(d) requires sponsors to file a Form 8-T with NFA reporting the termination of an AP within 20 days of their termination. Members should be aware that, notwithstanding that Rule, a Member's obligation to adopt the enhanced supervisory requirements is conclusively established on any day on which its sales force meets one of the listed numerical criteria and that the obligation shall not be extinguished by the effect of the subsequent filing of a Form 8-T for a terminated AP even if the form is filed within 20 days of an AP's termination.

    [¶ 9022] REGISTRATION RULE 402: CTAS TRADING PRIMARILY IN SECURITIES
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    (Board of Directors, September 21, 1993; revised December 10, 2007)

    INTERPRETIVE NOTICE

    The Board of Directors has granted the Director of Compliance the authority to waive the Series 3 examination for certain individuals associated with CTAs who are required to register solely because their securities advisory services include advice on the use of futures and options for risk management purposes. The individual or firm requesting the waiver must provide a written description of the facts which qualify the individual or firm for a waiver. The Director of Compliance's decision will be final.

    The Director of Compliance is authorized to waive the Series 3 examination for a CTA and its APs if: (1) the CTA is subject to regulation by a federal or state regulator; (2) for each customer for whom the CTA provides futures trading advice such advice is incidental to the securities advisory services provided by the CTA to such customer; and (3) the futures trading advice offered by the CTA is for hedging or risk management purposes.

    Waiver requests should be directed to:

    Director of Compliance
    National Futures Association
    300 South Riverside Plaza
    Chicago, Illinois 60606

    [¶ 9023] COMPLIANCE RULE 2-13: BREAK-EVEN ANALYSIS
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    (Board of Directors, August 24, 1995; revised July 24, 2000)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-13 requires, in pertinent part, that each Member CPO which delivers a disclosure document under the CFTC Regulation 4.21 must include in the disclosure document a break-even analysis which includes a tabular presentation of fees and expenses. The break-even analysis must be presented in the manner prescribed by NFA's Board of Directors. The purpose of this requirement is to ensure not only that customers will be clearly informed as to the nature and amount of fees and expenses that will be incurred, but that customers will also be made aware of the impact of those fees and expenses on the potential profitability of their investments. NFA's Board of Directors has adopted the following guidelines which must be adhered to by NFA Member CPOs when preparing the break-even analysis required by Compliance Rule 2-13:

    • If fees are likely to be affected by the size of the offering, then an assumed amount of total funds raised should be stated. The document should also state what the break-even point would be if the minimum or maximum proceeds were raised.

    • If there are redemption fees, they must be clearly shown and considered part of the total cost and reflected in the break-even analysis.

    • Incentive fees should be stated as a percentage of profits, and the method by which profits are calculated should be described.

    • All management, brokerage and other fees should reflect actual experience or contractual charges, if known. If not known, they should be based on good faith estimates. If, for example, CTAs publish their estimated number of round turns/ $1,000,000 then those published estimates should be used for estimating brokerage costs. If this is an on-going fund or if there is evidence supporting other numbers, then the other numbers should be used and explained.

    • If pool participants are to receive some or all of the interest income generated by the pool, the expected interest income should be deducted from the expenses which must be covered by trading profits to return the customer to the level of his initial investment. The estimate of that interest income must include the assumed interest rate, and that rate must reflect current cash market information. If any interest income is to be paid to the pool operator, or to anyone other than the pool participants, that fact and an estimate of the amount must also be clearly disclosed.

    To calculate the break-even point a CPO must first determine the amounts of all fees and expenses, exclusive of incentive fees, that are anticipated to be incurred by the pool during the first year of the investment. The total of these fees and expenses less the amount of interest income expected to be earned by the pool represents the gross trading profits before incentive fees (preliminary gross trading profits) that would be necessary for the pool to retain its initial Net Asset Value per unit at the end of the first year. In some situations the CPO must then calculate the additional trading profit that would be necessary to overcome the incentive fees that would be incurred. This situation will arise whenever the pool expects to incur expenses which would not be deducted from the CTA's net performance in calculating the CTA's incentive fee. That amount can be computed by first determining the incentive fees that would be incurred if the preliminary gross trading profits described above were achieved and then dividing that amount by (1- incentive fee rate); (e.g., if the incentive fee is 25 percent, the denominator would be 1- .25, or .75). A sample break-even presentation is shown below:

    Selling Price per Unit (1) $1,000.00
    Syndication and Selling Expense (1) $50.00
    General Partner's Management Fee (2) 9.50
    Fund Operating Expenses (3) 20.50
    Trading Advisor's and Trading
    Manager's Management Fees (4)    		 28.50
    Trading Advisor's and Trading Manager's
    Incentive Fees on Trading Profits (5)    		 17.17
    Brokerage Commissions and Trading Fees (6) 38.00
    Less Interest Income (7) (28.50)
    Amount of Trading Income Required for
    the Fund's Net Asset Value per Unit
    (Redemption Value) at the End of
    One Year to Equal the Selling Price per Unit     		$135.17
    Percentage of Initial Selling Price per Unit 13.52%

    Explanatory Notes:

      (1) Investors will initially purchase units at $1,000. After the commencement of trading, units will be purchased at the Fund's month-end Net Asset Value per unit. A five percent syndication and selling charge will be deducted from each subscription to reimburse the Fund, the General Partner and/or the Clearing Broker for the syndication and selling expenses incurred on behalf of the Fund.

      (2) Except as set forth in these explanatory notes, the illustration is predicated on the specific rates or fees contracted by the Fund with the General Partner, the Trading Manager, the Trading Advisor, and the Clearing Broker, as described in "Fees, Compensation and Expenses."

      (3) The Fund's actual accounting, auditing, legal and other operating expenses will be borne by the Fund. These expenses are expected to amount to approximately 2.05 percent of the Fund's Net Asset Value.

      (4) The Fund's Trading Advisor will be paid a monthly management fee of 1/12 of two percent of Allocated Net Assets. The fund's Trading Manager will be paid a monthly management fee of 1/12 of one percent of allocated Net Assets.

      (5) The Trading Advisor and Trading Manager will receive incentive fees of 20 percent and five percent, respectively, of Trading Profits exclusive of interest income. The $17.17 of incentive fees shown above is equal to 25 percent of the net of total trading income of $135.17, minus $38 of brokerage commissions and trading fees and $28.50 of management fees.

      (6) Brokerage commissions and trading fees are estimated at four percent of Net Asset Value.

      (7) The Fund will earn interest on margin deposits with its Clearing Broker. Based on current interest rates, interest income is estimated at three percent of Net Asset Value.

    The above break-even analysis is a sample and the fees and expenses included in it may vary from those charged by other commodity pools. The analysis included in an actual disclosure document must include all of the fees and expenses of any type which affect the break-even point of that investment.

    [¶ 9024] RESERVED
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    [¶ 9025] COMPLIANCE RULE 2-29: USE OF PROMOTIONAL MATERIAL CONTAINING HYPOTHETICAL PERFORMANCE RESULTS
    (Click Here to Print this Section)
    (Board of Directors, February 1, 1996; revised August 29, 1996.)

    INTERPRETIVE NOTICE

    Over the years the use of hypothetical performance results has repeatedly produced highly misleading promotional material. By their very nature, such performance results have certain limitations. For example, hypothetical performance results do not represent actual trading and are generally designed with the benefit of hindsight which may under- or over-compensate for the impact of certain market factors, including lack of liquidity and price slippage. Furthermore, since hypothetical trading does not involve financial risk, no hypothetical performance results can completely account for the impact of certain factors associated with risk, including the ability of the customer or the advisor to withstand losses or to adhere to a particular trading program in the face of trading losses. Despite these limitations, there have been numerous instances in which Members in one form or another have attempted to induce customers to place undue reliance on hypothetical results. NFA's Business Conduct Committee has not hesitated to issue charges against Members engaging in such practices and will continue to pay close attention to advertising materials which display hypothetical results.

    The use of hypothetical results has been the subject of regulatory scrutiny before. In 1981, the Commodity Futures Trading Commission ("CFTC" or "Commission") considered a total ban on the use of such results. Ultimately, the Commission determined to require CPOs and CTAs displaying hypothetical results to display the disclaimer set forth in CFTC Regulation 4.41. The Commission noted at the time that it might well impose sterner measures if the disclaimer proved ineffective at preventing abuses. NFA subsequently required all NFA Members and Associates to display Regulation 4.41's disclaimer in any promotional material which contains such results.

    In NFA's experience, however, the use of the mandated disclaimer has not prevented recurring abuses in the presentation of hypothetical results. In some instances Members have touted dramatic hypothetical profits without revealing that their actual performance is much worse. This situation has been addressed by an amendment to NFA Compliance Rule 2-29(c)(2) which requires Members advertising hypothetical results to disclose their actual results as well. In other cases Members have effectively diminished the impact of the disclaimer by grossly over-emphasizing the significance of very dramatic hypothetical profits. For example, some Members have utilized promotional material which presents hypothetical rates of return in large, bold face print while the disclaimer can be read only with a magnifying glass. In other advertising pieces the disclaimer is so far removed from the touted hypothetical profits that customers may never find it. There have also been instances in which Members or Associates have attempted to disguise hypothetical performance results as actual performance results.

    Due to these problems, NFA's Board of Directors recently reviewed whether NFA Members and Associates should be permitted to utilize hypothetical performance results in promotional material. During this review, the Board considered a complete ban on the presentation of these results in promotional material due to its potentially abusive and misleading nature. However, in considering such a ban, the Board also recognized that the presentation of hypothetical performance results in promotional material may have some limited utility in certain circumstances, for example, where a Member has developed a new trading program for which there are no actual trading results. As a result, the Board decided to continue to allow Members and Associates to utilize promotional material containing hypothetical performance results under very stringent restrictions. Hypothetical results will not be allowed, however, for any trading program for which the Member has three months of actual trading results. Any Member or Associate utilizing promotional material which includes hypothetical results shall, at a minimum, adhere to the following requirements.

    First, any Member or Associate utilizing promotional material which presents hypothetical performance results must provide to customers the disclaimer contained in NFA Compliance Rule 2-29(c)(1). The Board has expanded the required disclaimer to provide a more thorough discussion of the limitations of hypothetical results and of the dangers in placing undue reliance upon them. To prevent the over-emphasis of hypothetical performance results, the disclaimer must be displayed as prominently as the hypothetical results themselves. Generally, this would require that the disclaimer be printed in a type size at least as large as that used for the hypothetical results. Similarly, to avoid circumstances where hypothetical performance results are presented in one section of the promotional material with the disclaimer buried in another, the disclaimer must now immediately precede or follow the performance results. Whenever the Member or Associate has less than 12 months of actual results, the disclaimer must immediately precede the hypothetical performance results. Furthermore, if the promotional material contains several pages of hypothetical performance results, then the Member or Associate may need to include this disclaimer more than once in the material.

    Second, any Member or Associate utilizing promotional material which presents hypothetical performance results must also describe in the promotional material all of the material assumptions that were made in preparing the hypothetical results. At a minimum, the description of material assumptions must cover points such as initial investment amount, reinvestment or distribution of profits, commission charges, management and incentive fees, and the method used to determine purchase or sale prices for each trade. Members must also make all material disclosures necessary to place the hypothetical results in their proper context, which in some instances may go well beyond the prescribed disclaimer. Furthermore, Members and Associates must calculate hypothetical performance results in a manner consistent with that required under the CFTC's Part 4 Regulations.

    Third, when any Member or Associate utilizes promotional material which contains both hypothetical and actual performance results, then the actual results must be presented with at least the same prominence devoted to the hypothetical results. Both the hypothetical and actual performance results must be appropriately identified, separately formatted, discussed in an equally balanced manner and calculated pursuant to the same rate of return method. Furthermore, the promotional material must not contain any statement which places undue emphasis on the hypothetical performance results, for example, by discounting or downplaying the significance of any actual performance results.

    NFA's Board of Directors further notes that, as explained above, the preceding requirements also apply to a Member or Associate's use of promotional material containing a composite performance record showing what a multi-advisor managed account or pool could have achieved if the account's or pool's assets had been allocated among particular trading advisors. In the past, Members have often referred to these composite performance records as pro forma results; however, NFA's Board of Directors believes the pro forma label is misleading. Although the performance for each individual trading advisor is based upon actual results, the selection of and allocation among trading advisors has been done with the benefit of hindsight and, thus, the composite performance record is hypothetical in nature. Therefore, in addition to the preceding requirements, Members and Associates must appropriately label any composite performance record for a multi-advisor managed account or pool as hypothetical and not pro forma. Additionally, because the composite performance record is hypothetical in nature, Members must include a description of all the material assumptions noted above and, in this context, also describe the method used to select and allocate assets among particular trading advisors. The Board also notes that if a Member or Associate previously used promotional material containing hypothetical composite performance records for multi-advisor managed accounts or pools and the hypothetical results were substantially higher than the actual results subsequently obtained by the Member or Associate in allocating assets among the multi-advisors, then this fact must be disclosed in the promotional material.

    The presentation of hypothetical performance results in promotional material is, of course, subject to all other NFA Requirements. Pursuant to NFA Compliance Rule 2-29 (b)(1) and (2), the ultimate test of any promotional material is whether the overall impact of the material is misleading or is likely to deceive the public. Although NFA has issued this Interpretive Notice, the Board recognizes that it cannot describe every manner in which promotional material containing hypothetical performance results may be misleading. The fact that an NFA Member or Associate has printed the disclaimer required pursuant to NFA Compliance Rule 2-29 and that the promotional material is in facial compliance with this Interpretive Notice does not ensure that material is not misleading.

    Promotional material which contains hypothetical performance results will continue to be carefully scrutinized by NFA staff. Pursuant to NFA Compliance Rule 2-29(f), Members and Associates presenting hypothetical results in their promotional material must be able to demonstrate to NFA's satisfaction the validity of the presentation of the results. The greater the emphasis on dramatic hypothetical profits, the greater the Member's burden in demonstrating the validity of the presentation.

    Addressing a different concern, the Board of Directors also believes that hindsight analysis may be misleading as applied to the presentation of extracted performance in which a Member or Associate selects one component of its overall past trading results to highlight to customers. In order to prevent the misleading use of such results, the use of extracted performance is permitted only when a CPO's or CTA's previous disclosure documents designated the percentage of assets which would be committed toward that particular component of the overall trading program. For example, if the previous disclosure document stated that 25 percent of a fund's assets would be dedicated to trading financial futures contracts, and if 25 percent of the fund's assets were in fact dedicated to trading financial futures contracts, the CPO would be allowed to present the extracted performance of its financial futures trading based on net asset values equal to 25 percent of the fund's total net asset value. Performance may also be extracted from a managed account program run by an FCM or IB if these same requirements are met. In other words, the FCM or IB must have previously prepared and distributed to all customers participating in the trading program a written report or similar document which designated the percentage of assets which would be committed toward that particular component of the overall trading program. Oral representations, or written documents which were not distributed to the customers, are not sufficient. Furthermore, any promotional material referring to extracted results must clearly label those results as such and must disclose in an equally prominent fashion the overall actual trading results from which the extracted results were drawn.

    Lastly, the Board of Directors believes that the use of pro forma performance histories can present useful information to customers, particularly when used to show how the past performance of a given Member or Associate would have been affected by the commission or fee structure which applies to the futures or options contracts, commodity pool, or trading program the Member or Associate is offering, recommending, or providing information on. Therefore, a Member or Associate may use pro forma results to adjust for differences in commissions and fees as long as the pro forma results are not calculated in a misleading manner.

    [¶ 9026] RESERVED
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    [¶ 9027] RESERVED
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    [¶ 9028] NFA FINANCIAL REQUIREMENTS: THE ELECTRONIC FILING OF FINANCIAL REPORTS
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    (Board of Directors, March 24, 1997; revised July 1, 2000; July 24, 2000 and December 31, 2001)

    INTERPRETIVE NOTICE

    NFA Financial Requirements require each FCM for which NFA is DSRO and each IB which is not operating pursuant to a guarantee agreement to file financial reports with NFA. FCMs must file reports monthly while IBs file on a semi-annual basis. FCMs file reports on CFTC Form 1-FR-FCM while IBs use Form 1-FR-IB. FCMs or IBs which are also registered as securities brokers or dealers may use the SEC FOCUS Report in lieu of the Form 1-FR for their financial reports.

    NFA, in partnership with the Chicago Mercantile Exchange and the Chicago Board of Trade, has developed computer software which allows FCMs and IBs to electronically file financial reports with NFA, the CME, CBOT and the CFTC. This software is being used industry-wide. The software accommodates filing of the Form 1-FR-FCM, Form 1-FR-IB, FOCUS II and FOCUS IIA Reports. All FCMs and IBs for which NFA is the DSRO must file their financial reports electronically using this software.

    NFA's filing software also includes procedures for the appropriate representative of the NFA Member FCM or IB to attest to the completeness and accuracy of the financial report in order to comply with NFA and CFTC certification and attestation requirements. Each authorized signer must apply to NFA for a Personal Identification Number using an application form approved by NFA.

    Full details about the software and electronic filing procedures and the application form for obtaining a PIN number are are available by accessing the Compliance Section, Issues for FCMs and IBs, of NFA's web site at www.nfa.futures.org or by contacting the Information Center at (312) 781-1410. Information is also available on the Joint Audit Committee's web site at www.wjammer.com/jac/.

    [¶ 9029] NFA COMPLIANCE RULE 2-10: THE ALLOCATION OF BUNCHED ORDERS FOR MULTIPLE ACCOUNTS
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    (Board of Directors, June 9, 1997; revised September 15, 2003)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-10 adopts by reference CFTC Regulation 1.35, which, among other things, imposes on FCMs recordkeeping requirements relating to customer orders on futures and options on futures contracts. The purpose of the regulation is to prevent various forms of customer abuse, such as fraudulent allocation of trades, by providing an adequate audit trail that allows customer orders to be tracked at every step of the order processing system. In general, Regulation 1.35 requires a futures commission merchant ("FCM") receiving a customer order to prepare a written record of the order immediately upon receipt, including an appropriate account identifier.

    With respect to bunched orders placed by an account manager on behalf of multiple clients, the CFTC had interpreted Regulation 1.35 to require that, at or before the time the order is placed, the account manager must provide the FCM with information that identified the accounts included in the bunched order and specified the number of contracts to be allotted to each account.1 2 An exception to this requirement was set forth in Regulation 1.35(a-1)(5), which authorized certain eligible account managers to enter bunched orders for a limited class of eligible clients and to allocate them to individual accounts no later than the end of the day ("post-execution allocation procedures").

    How the basic requirements of CFTC Regulation 1.35 applied to bunched orders for multiple accounts had been the source of considerable difficulty and confusion. In June 1997, therefore, NFA published an Interpretive Notice to provide guidance to its Members in complying with these requirements ("1997 Notice"). While this Notice did not attempt to address all of the issues that can arise in this context, it provided guidance on recurring questions.

    The CFTC recently adopted an amendment to Regulation 1.35(a-1)(5). This amendment effectively removes the limitations on the account managers that may take advantage of post-execution allocation procedures as well as the limitations on the types of clients on whose behalf the account managers may employ post-execution allocation procedures. In particular, all registered commodity trading advisors ("CTAs") that are Members of NFA may take advantage of the procedures in Regulation 1.35(a-1)(5) for the accounts of all clients who grant written investment discretion to the CTA.

    The amendment also clarifies the obligations imposed on account managers that wish to take advantage of these post-execution allocation procedures as well as the FCMs that execute or clear these transactions. Among other things, the rule requires that contracts executed pursuant to bunched orders be allocated in a fair and equitable manner so that no account or group of accounts consistently receives favorable or unfavorable treatment over time. The rule further provides that the account manager bears the responsibility for the fair and equitable allocation of bunched orders, while FCMs retain the responsibility to monitor for unusual allocation activity.

    Because all NFA CTA Members may now take advantage of post-execution allocation procedures under Regulation 1.35(a-1)(5), NFA has determined to revise the 1997 Notice. This revised Notice sets out certain core principles that govern all allocation methodologies and the respective responsibilities of CTAs and FCMs that execute or carry the accounts of the CTAs' clients. The Notice then restates certain methodologies described in the 1997 Notice. Although these methodologies were developed to assure compliance with the requirement that a CTA provide allocation instructions at or before the time a bunched order is placed, they also apply to CTAs that elect to use post-execution allocation procedures.

    Core Principles and Responsibilities

    Allocation instructions for trades made through bunched orders for multiple accounts must deal with two separate issues. The first, which arises in all such orders, involves the question of how the total number of contracts should be allocated to the various accounts included in the bunched order. For some CTAs, this allocation may remain relatively constant. For others, although their basic allocation methodology does not change, the specific allocation instructions produced by the methodology may change on a daily basis.

    The second issue involves the allocation of split or partial fills. For example, a CTA may place a bunched order of 100 contracts for multiple accounts. In many instances, however, a market order for 100 contracts may be filled at a number of different prices. Similarly, if an order is to be filled at a particular price, the FCM may be able to execute some but not all of the 100 lot order. In either example, the question arises of how the different prices or the contracts in the partial fill should be allocated among the accounts included in the block order.

    The same set of core principles govern the procedures to be used in handling both of these issues. Any procedure for the general allocation of trades or the allocation of split and partial fills must be:

    • designed to meet the overriding regulatory objective that allocations are non-preferential and are fair and equitable over time, such that no account or group of accounts receive consistently favorable or unfavorable treatment;3

    • sufficiently objective and specific to permit independent verification of the fairness of the allocations over time and that the allocation methodology was followed for any particular bunched order; and

    • timely, in that the CTA must provide the allocation information to FCMs as soon as practicable after the order is filled and, in any event, sufficiently before the end of the trading day to ensure that clearing records identify the ultimate customer for each trade.

    As noted above, the responsibility for allocating contracts executed through a bunched order rests solely with the CTA.4 The CTA must confirm, on a daily basis, that all its accounts have the correct allocation of contracts. A CTA must also analyze each trading program at least once a quarter to ensure that the allocation method has been fair and equitable (i.e., customers in the same trading program achieve similar allocation results over time). Allocation fairness over time, rather than trade-by-trade, is the critical element in this evaluation. If materially divergent performance results exist over time among accounts in the same trading program, such results must be shown to be attributable to factors other than the CTA's trade allocation procedures. Applicable CFTC and NFA interpretations have addressed permitted reasons for divergent performance results among accounts in the same trading program. If those results indicate that the allocation method has not been fair and equitable over time, however, then the CTA must revise its allocation methodology or adopt a different allocation method for application on a prospective basis only. A CTA must document its internal audit procedures and results and maintain these audit procedures and results as firm records subject to review during an NFA audit.

    Although the CTA is responsible for the allocation of each bunched order, the FCM has certain obligations as well. In particular, each FCM must receive from an account manager sufficient information to allow it to perform its functions. For executing FCMs in a give-up arrangement, this includes, at a minimum, information that identifies the account manager at the time the order is placed and instructions, which the FCM may receive following execution of the order, for the contracts to be given up to each clearing FCM. Information concerning the number of contracts to be allocated to each account included in the bunched order along with instructions for the allocation of split and partial fills among accounts must be provided to the clearing FCM.5

    Regulation 1.35(a-1)(5) requires each FCM that executes or carries accounts eligible for post-execution allocation to maintain records that, as applicable, identify each order subject to post-execution allocation and the accounts to which the contracts were allocated. One means by which an FCM can meet this recordkeeping requirement is to maintain a copy of the allocation instructions provided by the account manager by facsimile, e-mail, or other form of electronic transmission. If the allocation is provided orally, however, the FCM must create a written record and maintain that record.

    Also, if the FCM has actual or constructive notice that allocations for its customers may be fraudulent, the FCM must take appropriate action. For example, if an FCM has notice of unusual allocation activity, the FCM must make a reasonable inquiry into the matter and, if appropriate, refer the matter to the proper regulatory authorities (e.g., the CFTC or NFA or its DSRO). Whether an FCM has such notice depends upon the particular facts involved.

    Obviously, one of the most significant factors is the amount of information available to the FCM. An FCM that both executes and clears an entire bunched order will possess more information than an FCM that executes or clears only a portion of an order. Where there are multiple FCMs executing and clearing the bunched order, some FCMs may have more information available than others, and it is likely that no single FCM would have enough information to determine if there is unusual allocation activity. Likewise, in situations where an investment adviser uses bunched orders for hedging purposes, the FCM may not possess adequate information to evaluate the allocation activity. However, if the FCM has actual or constructive notice that the allocations may be fraudulent, the FCM must take appropriate action.

    Examples of Allocation Methodologies

    In the 1997 Notice, NFA set out the following examples of procedures for the allocation of split and partial fills that generally satisfy the core principles described above. These methodologies were the most common that NFA observed in performing audits. NFA believes they are still relevant. However, they are not the exclusive means of achieving compliance with Regulation 1.35(a-1)(5). The appropriateness of any particular method, of course, will depend on the CTA's trading strategy.6

    Example #1 - Rotation of Accounts
    One basic allocation procedure involves a rotation of accounts on a regular cycle, usually daily or weekly, which receive the most favorable fills. For example, if a firm has 100 accounts trading a particular trading program, in the first phase of the cycle, Account #1 receives the best fill, Account #2 the second best, etc. In phase 2 of the cycle, Account #2 receives the best fill and Account #1 moves to the end of the line and receives the least favorable fill.

    Example #2 - Random Allocation
    Some firms prepare on a daily basis a computer generated random order of accounts and allocate the best price to the first account on the list and the worst to the last. This method would satisfy the standards stated above.

    Example #3 - Highest Prices to the Highest Account Numbers
    Some firms rank accounts in order of their account numbers and then allocate the highest fill prices to the accounts with the highest account numbers. Any advantage the higher numbered accounts enjoy on the sell order are theoretically offset by the disadvantage on the buy orders. Although under certain market conditions this may not always be true, the method generally complies with the standards.

    Example #4 - Average Price
    With regard to split fills, firms may have internal programs which calculate the average price for each bunched order. The program will then assign the average price to each allocated contract. In the alternative, the program will allocate the actual fill prices among the accounts included in the order to approximate, as closely as possible, the average fill price. Either average price allocation method offers a consistent non-preferential method for allocating trades.

    If any Member has questions concerning how this Interpretive Notice would apply to its operations, please contact NFA's Compliance Department.

    1Bunched orders can provide customers with the advantages of better pricing and more efficient execution of orders. With the explosive growth of the managed funds business, the frequency of "give-ups" and the increasing use of electronic order entry systems, it is not at all uncommon for some account managers to place bunched orders for hundreds of accounts on markets around the world, with orders executed by one or more FCMs and cleared by other FCMs.
    2Consistent with the provisions of CFTC Regulation 1.35(a-1)(1), account managers that place orders for a single account must still provide account identification information at the time of order entry.
    3Because customers must have access to information that allows them to assess the fairness of the allocation process, CTAs are required to make the following information available to customers upon request: (1) the general nature of the CTA's allocation methodology; (2) whether accounts in which the CTA may have an interest may be included with customer accounts in bunched orders; and (3) summary or composite data sufficient for that customer to compare its allocation results with the allocation results of other comparable customers and, if applicable, any account in which the account manager has an interest.
    4However, NFA rules do not preclude an FCM from agreeing to undertake this responsibility, whether it clears or executes the trades, pursuant to either its own procedures or to those supplied by the CTA. For example, the CTA and FCM may agree that the FCM will allocate a bunched order in accordance with instructions that the CTA files with the FCM either prior to or concurrently with placing the bunched order. Any division of responsibilities agreed to by the FCM and CTA should be clearly documented.
    5As noted, an account manager must provide all of this information to the appropriate FCM as soon as practicable after the order is filled and sufficiently before the end of the trading day during which the order is executed to ensure that clearing records identify the ultimate customer for each trade.
    6For example, certain allocation methodologies may satisfy the general standards for CTAs who trade on a daily basis but be inappropriate for CTAs who trade less frequently.

    [¶ 9030] RESERVED
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    [¶ 9031] STANDARD LIST OF DOCUMENTS TO BE EXCHANGED UNDER SECTION 8 OF NFA'S CODE OF ARBITRATION
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    (Board of Directors, December 1, 1997)

    INTERPRETIVE NOTICE

    Section 8 of NFA's Code of Arbitration requires the parties to automatically exchange certain documents early in the discovery process. Under this procedure, NFA will identify the standard documents that are routinely relevant for the causes of action alleged in a particular case from this list of documents approved by NFA's Board of Directors. NFA will then notify the parties that they must automatically exchange the standard documents with each other no later than 15 days after the last pleading is due. Except for the list showing the customer's investment experience, a party is not required to obtain or exchange any documents that do not exist or that are not in the party's possession or control.

    The parties may ask for other documents and information within 30 days after the last pleading is due. The parties may ask for documents on the list which have not been identified for automatic exchange if they believe those documents are also relevant to the claim or defense.

    A Customer May be Asked to Provide Any or All of the Following:

    • Account opening documents and forms for the customer's account including, but not limited to, account applications, account agreements, acknowledgment forms, margin agreements, option agreements, option disclosure statements, and other risk disclosure statements.

    • Records (including billing records), tapes, notes, and transcriptions of tapes of telephone or in-person conversations between the customer and any party named in the arbitration or any employee of a party named in the arbitration.

    • Any notes made by the customer concerning the customer's account or any transactions in the account.

    • All contracts or written agreements between the customer and any party named in the arbitration.

    • Any correspondence or agreements concerning the strategy to be used in trading the account.

    • All powers-of-attorney giving someone other than the customer the right to trade the account.

    • Daily confirmation statements for the customer's account.

    • Monthly activity statements for the customer's account.

    • A list, to be prepared by the customer, showing the customer's investment experience. For each type of investment the customer has made, the list must contain the type of investment, the names of the firms the customer has done or is doing business with, the account numbers for accounts at each firm, the dates the accounts were opened and, if applicable, the dates the accounts were closed.

    • Research or marketing materials concerning any trading recommendations made to the customer or concerning any transaction made in the customer's account.

    • The disclosure document(s) for any trading advisor trading the account.

    A Member and/or Associate May be Asked to Provide Any or All of the Following:

    • Account opening documents and forms for the customer's account including, but not limited to, account applications, account agreements, acknowledgment forms, margin agreements, option agreements, option disclosure statements, and other risk disclosure statements.

    • Any correspondence or agreements concerning the strategy to be used in trading the customer's account.

    • Daily confirmation statements for the customer's account.

    • Monthly activity statements for the customer's account.

    • Margin calls for the customer's account.

    • All powers-of-attorney giving someone other than the customer the right to trade the account.

    • Records (including billing records), tapes, notes, and transcriptions of tapes of telephone or in-person conversations between the customer and the broker1, other firm personnel, or the trading advisor.

    • Any notes made by the broker concerning the customer's account or any transactions in the account.

    • Registration applications, biographies, resumes or similar documents showing employment history and educational background of the broker and any trading advisor.

    • Floor and office order tickets and any other documents submitted at the time of the transactions for transactions made in the customer's account.

    • Research and marketing materials prepared or distributed by the firm, the broker, or the trading advisor concerning any trading recommendation made to the customer or any transaction made in the customer's account.

    • The index to the firm's compliance manual.

    • Agreements, contracts or other documents, including guarantee agreements, governing the relationship between the firm introducing the account and the FCM carrying the account, or between the trading advisor and either the firm introducing the account or the FCM carrying the account.

    • Commission runs for the broker who serviced the customer's account.

    • The disclosure document(s) for any trading advisor trading the account.

    1 In this context, "broker" refers to the individual AP (or APs) who serviced the account.

    [¶ 9032] STANDARD LIST OF DOCUMENTS TO BE EXCHANGED UNDER SECTION 7 OF NFA'S MEMBER ARBITRATION RULES
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    (Board of Directors, December 1, 1997)

    INTERPRETIVE NOTICE

    Section 7 of NFA's Member Arbitration Rules requires the parties to automatically exchange certain documents early in the discovery process. Under this procedure, NFA will identify the standard documents that are routinely relevant for the causes of action alleged in a particular case from this list of documents approved by NFA's Board of Directors. NFA will then notify the parties that they must automatically exchange the standard documents with each other no later than 15 days after the last pleading is due. A party is not required to obtain or exchange any documents that do not exist or that are not within the party's possession or control.

    The parties may ask for other documents and information within 30 days after the last pleading is due. The parties may ask for documents on the list which have not been identified for automatic exchange if they believe those documents are also relevant to the claim or defense.

    • Records (including billing records), tapes, notes and transcriptions of tapes of telephone or in-person conversations between the parties relating to the matters involved in the dispute.

    • Any memoranda, notes or other correspondence between the parties relating to the matters involved in the dispute.

    • Contracts or written agreements between the parties.

    • Partnership or joint venture agreements.

    • Corporate documents (i.e., articles of incorporation, by-laws, resolutions, minutes of Board meetings).

    • Annual reports and financial statements.

    • Disclosure documents.

    • Authorizations for transferring accounts or positions from one FCM to another.

    • Records of security or guarantee deposits made by one party with or for the benefit of another party.

    • Commission runs.

    • Customer equity runs.

    • Registration applications, biographies, resumes or similar documents showing employment history and educational background of the parties.

    • Employee personnel files, including performance evaluations.

    • Employee handbooks, including amendments.

    • Forms 8-T or U-5 for the parties.

    • Documents showing salary history (including bonuses, commissions and commission pay-outs).

    • The index to a party's procedures manual.

    • If the dispute involves a customer account, copies of the customer's account opening documents and forms, monthly activity statements, and daily confirmation statements.

    [¶ 9033] NFA COMPLIANCE RULE 2-29: DECEPTIVE ADVERTISING
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    (Board of Directors, June 4, 1996)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-29 governs communications between NFA Members and the public. Among other things, the rule prohibits the use of promotional material which is misleading or deceptive. The Board's purposes in adopting this rule were to protect the public from fraudulent advertising and sales solicitations and to provide Members with specific guidance on the standards by which their promotional material would be judged.

    Recently, a relative handful of Members have used strikingly similar promotional materials, usually in the form of radio or television advertising, which clearly violate both the letter and the spirit of NFA Compliance Rule 2-29. The core problem with all of these promotional materials is that they suggest the strong likelihood that customers will reap dramatic profits by investing with the Member firm when, in fact, nothing in the Member's experience provides any basis for those claims. Typically, these commercials employ a variety of techniques to mislead the public:

    • Claims Regarding Seasonal Trades- Some Members have suggested almost certain profits from so-called seasonal trades in, among other things, heating oil and unleaded gas. These ads cite historical data which supposedly shows that certain trades produce dramatic profits year in and year out. Invariably, however, the "historical data" involves different products, different time frames or different fee structures. The most telling point, by far, is that the firm's customers have never experienced the types of profits touted by the Member.

    • Claims Regarding Historic Price Moves- Another frequent theme in these misleading commercials or solicitations is the reference to historic price moves in particular commodities with a suggestion that the same record setting move is likely to occur now. For example, these promotional materials refer to times when sugar traded at $.66 per pound, gold at $800 per ounce and silver at $50 per ounce. By suggesting that a similar movement is imminent, the Member projects that customers can expect to double, triple or quadruple their investments in a short period of time. In point of fact, however, the Member has made similar claims in the past and its customers have never experienced such profits.

    • "Cherry Picked" Trades- Occasionally, Members seek to entice prospective investors by claiming that their customers have made dramatic profits, for example, citing returns of 50 percent or more on particular trades. When asked to support these claims, the Members rely on isolated trades in specific customer accounts. What these Members fail to say in their commercials and solicitations is that those profitable trades are not at all representative of the overall performance either of that customer's account or its other customers and that, in fact, the customer referred to in the commercial has actually lost money overall.

    • Profit Projections- Over and over, some Members claim that, based on current market conditions, customers can "turn $10,000 into $40,000," or profits of a similar magnitude. Again, however, the fact is that the Member has not produced anything like the projected profits for its customers in the past.

    Each of the practices described above presents a distorted and misleading view of the likelihood of customers earning dramatic profits by investing with the Member firm, and each of these practices represents a clear violation of NFA sales practice rules. For those few firms which engage in such practices, the Board wishes to reiterate that Members may not engage in a pattern of advertising or solicitation which makes reference to dramatic profits which could be achieved in the future or could have been achieved in the past by trading futures or options contracts for a particular commodity or in the futures or options markets in general unless the Member can demonstrate to NFA that, based on the past performance of its customers, those claims are not misleading.

    Any Member making the types of claims referred to above must be able to demonstrate to NFA upon request that the actual performance of its customers supports those claims. Failure to provide adequate documentation will constitute prima facie evidence that the promotional material is misleading.

    [¶ 9034] NFA COMPLIANCE RULE 2-29: DECEPTIVE ADVERTISING
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    (Board of Directors, September 2, 1998)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-29 prohibits the use of promotional material which is misleading or deceptive. The purpose of the rule is to protect the public from fraudulent advertising and sales solicitations and provide guidance to Members on the standards by which their promotional material will be evaluated.

    In June 1996, NFA issued a Notice to Members (I-96-11) entitled "Deceptive Advertising." The notice described certain misleading advertising practices that some Members were employing, mainly in radio and TV ads. These included claims suggesting that so-called seasonal trades produce dramatic profits year-in and year-out; claims regarding historic price moves in particular commodities that suggested that the same record setting move was likely to occur again; claims of dramatic profits made by customers based on isolated trades in specific customer accounts (so-called "cherry picked" trades); and claims concerning projected profits, (e.g., "turn $10,000 into $40,000").

    The June 1996 Notice made clear that NFA would regard these types of claims to be misleading and a clear violation of NFA sales practice rules unless the Member can demonstrate that based on the actual performance of its customers those claims are not misleading. Since the issuance of the June 1996 Notice, NFA has brought a number of disciplinary cases against Members who have employed misleading advertising techniques of the type described in the Notice. Recently, however, NFA has encountered variations of these types of advertising problems. Due to these recent developments, NFA considers it advisable to issue this supplemental Notice.

    "MATHEMATICAL EXAMPLES OF LEVERAGE" AND DISCLAIMER STATEMENTS

    NFA has consistently maintained that: 1) it is a violation of NFA's sales practice rules for a Member to mislead customers by suggesting that they have a high probability of achieving dramatic profits trading futures and options unless the Member's customers' performance validates such a claim; and 2) it is permissible for Members to use examples in their advertising to illustrate the effect of leverage in futures and options trading.

    A problem that has developed is that some Members are improperly using "leverage examples" as a means of suggesting that prospective customers are likely to earn large profits trading futures and options when the past performance of the Members' customers does not support this claim. In some cases, Members will include disclaimer statements in their ads indicating that references to future profits are only "mathematical examples" of the effect of leverage and that no representation is made that any of the Member's customers has achieved or is likely to achieve profits similar to those in the example. Notwithstanding these disclaimers, the entire thrust of the ad is to convey exactly the opposite message. In these circumstances, disclaimer statements will not provide a safe harbor or insulate the Member from liability for a misleading ad which presents a distorted picture of the probability of success trading futures and options.

    A variation of this technique involves highlighting the tremendous profits which will result from projected price movements which are characterized, directly or indirectly, as conservative estimates when, in fact, such price movements would be dramatic. Ads that use this technique are highly misleading.

    USING PRICE MOVES FOR ONE PRODUCT TO SOLICIT INVESTORS FOR A DIFFERENT PRODUCT

    An additional problem that NFA has noted with some recent ads, particularly those which refer to seasonal trades and historical prices, is that they refer to historical price data for different products than the investment products being sold. For example, ads for options often cite price data relating not to options but to cash or futures prices of the underlying commodity. This practice can be highly misleading. Options prices do not necessarily move in tandem with cash or futures prices. In fact, in many of these ads, the price of the options which are being sold only move a fraction of the price move in the underlying futures.

    Historical pricing data must be for the product being marketed. Thus, if a Member is soliciting for options, then any pricing data that is used must refer to the historical premium value of the option that most closely resembles the type of option that is being marketed; it would be improper, for example, to cite historical price moves relating to at-the-money options when marketing out-of-the-money options. Promotional material that uses historical price data for a product different from the one being marketed in the promotional material will be considered per se misleading and a violation of NFA's sales practice rules.

    Examples of the types of ads that NFA will regard as misleading include:

    • ads that use pricing data relative to the cash or futures markets to sell options

    • ads that use pricing data for at-the-money options to sell out-of-the-money options

    • ads that use pricing data which does not include commissions and fees comparable to those charged by the Member

    An ad touting seasonal trades can also be misleading, even if it uses historical pricing data for the same product that is being offered for sale, if it cherry picks optimal entry and exit prices and suggests that they demonstrate a consistent price trend when no such consistent price trend exists. For example, it is misleading to claim that heating oil options always go up in value from summer lows to winter highs when heating oil - like all commodity markets - has peaks and valleys and one would incur losses during purported seasonal periods by buying at the high and selling at the low.

    [¶ 9035] RULE 2-35. CPO/CTA DISCLOSURE DOCUMENTS.
    (Click Here to Print this Section)
    (Board of Directors, April 30, 1999)

    INTERPRETIVE NOTICE

    A Disclosure Document should provide essential information about the fundamental characteristics of a pool, and it should provide the information in a way that will assist investors in making informed decisions about whether to invest in the pool. Because investors who rely on the Disclosure Document may not be sophisticated in legal or financial matters, the information in the Disclosure Document should be written in clear, concise, and understandable language using plain English principles. If a Disclosure Document uses frequent technical or legal terminology, complex language, excessive detail, and extended discussions of legal requirements, the Disclosure Document becomes difficult for many investors to understand and may, therefore, defeat its purpose.

    Compliance Rule 2-35 requires the Disclosure Document to be as clear and concise as possible and to use plain English principles. In particular, Disclosure Documents should be written:

    • In the active voice;

    • Using short sentences and paragraphs;

    • Breaking up the document into short sections, using titles and sub-titles that specifically describe the contents of each section;

    • Using words that are definite, concrete, and part of everyday language;

    • Avoiding legal jargon and highly technical terms;

    • Using glossaries to define technical terms that cannot be avoided;

    • Avoiding multiple negatives;

    • Saying something once where it is most important rather than repeating information;

    • Using tables and bullet lists, where appropriate.

    Obviously, these are not hard and fast rules. For example, there may be times when something is so important that it should be said more than once. However, the Disclosure Document should substantially comply with the plain English principles described here.

    Compliance Rule 2-35 also limits the information the CPO can include in the Disclosure Document. The Disclosure Document must include most of the information required by the CFTC's Part 4 Rules. It must also include any other information necessary to understand the fundamental characteristics of the pool or keep the Disclosure Document from being misleading. The Disclosure Document may also include information required by the Securities and Exchange Commission and state securities administrators. Such information currently includes items such as:

      (i) Any cautionary statement required by the Securities and Exchange Commission or a state securities administrator for a state where the pool is required to be registered;

      (ii) A concise description of the investment objectives, policies, and principal strategies of the pool, including a brief discussion of the circumstances under which these objectives or policies can be changed;

      (iii) For a pool that has been in operation for a full fiscal year, the compensation paid to all major CTAs for the most recent fiscal year as a percentage of average net assets. For a pool that has not been in operation for a full fiscal year, a general statement of what the major CTAs' fees will be as a percentage of average net assets. (Major CTAs are defined in CFTC Regulation 4.1((i));

      (iv) A brief description of any services provided by the major CTAs beyond those customarily provided by a CTA;

      (v) The identity of any person who provides significant administrative or business affairs management services to the pool with a brief description of the services provided and the compensation paid for these services;

      (vi) The name and principal address of the selling agent;

      (vii) If the pool has more than one class or series of securities offered or outstanding, a description of the characteristics of each class or series of securities, including dividend rights, liquidation rights, conversion rights, and redemption provisions;

      (viii) A description of how participant inquiries should be made;

      (ix) A description of how an investment in the pool is made, including the identity of the principal underwriter, if applicable;

      (x) The minimum initial or subsequent investment amount;

      (xi) A description of how the price of pool units is determined (if the purchase price of a unit is based on the net asset value at a specified date, it is sufficient to state this); and

      (xii) If applicable, a statement that information about the pool, including the Statement of Additional Information, can be reviewed and copied at the Securities and Exchange Commission's Public Reference Room in Washington, D.C.; that information on the operation of the public reference room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330; that reports and other information about the pool are available on the Securities and Exchange Commission's Internet site at http://www.sec.gov; and that copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the Securities and Exchange Commission, Washington, D.C. 20549-6009.

    The Disclosure Document may not include any additional information. The CPO can, however, provide additional information in a Statement of Additional Information.

    Disclosure Documents for single-advisor pools should usually be 30 pages or less. Disclosure Documents for more complex pools, such as multi-advisor pools or principal-protected pools, should not usually exceed 40 pages. However, longer Disclosure Documents will still comply with Compliance Rule 2-35 if they use the principles listed above and contain only the information allowed by Compliance Rule 2-35(b). And shorter Disclosure Documents will still violate Compliance Rule 2-35 if they are unnecessarily hard to read and understand.

    [¶ 9036] RESERVED
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    [¶ 9037] NFA COMPLIANCE RULE 2-9: SUPERVISORY PROCEDURES FOR E-MAIL AND THE USE OF WEB SITES
    (Click Here to Print this Section)
    (Board of Directors, August 19, 1999)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-9 requires Members and Associates with supervisory duties to diligently supervise employees and agents in the conduct of their commodity futures activities for or on behalf of the Member. The rule is broadly written to provide Members with flexibility in developing procedures tailored to meet their particular needs. On certain issues, however, NFA has issued Notices to Members to provide more specific guidance on acceptable standards for supervisory procedures. Currently, information technology is changing nearly every aspect of how Members conduct business, including how they communicate with their customers. For example, e-mail and internet-based communications have enabled Members and their employees and agents to communicate with customers more frequently and efficiently. Expanded use of this technology, however, also requires Members to re-examine their methods of supervising their communications with the public.

    This Notice addresses the supervisory issues raised by use of e-mail and web sites to conduct futures-related business. Although this Notice does not specifically address every aspect of electronic communication, such as the use of chat rooms to conduct business or after-hours electronic trading activity, this is not intended to suggest that Members have no supervisory obligations regarding these types of activities. Consistent with the approach taken in this Notice, in establishing supervisory procedures for electronic communications, Members may wish to draw from their experience in supervising non-electronic communications.

    E-Mail

    A Member's duty to supervise the use of futures-related e-mail by its employees and agents is basically the same as its duty to supervise other forms of correspondence. NFA would expect each Member to adopt review procedures that are appropriate in light of its business activities, including the structure, size and nature of its business operations. Like other supervisory procedures, a Member's supervisory procedures with respect to e-mail must:

    • be in writing; and

    • identify by title or position the person responsible for conducting the review.

    In addition, firms may wish to consider whether the following procedures would be appropriate as well:

    • specify how and with what frequency e-mails will be reviewed and how that review will be documented; and

    • categorize what type of e-mail will be pre-reviewed or post-reviewed.

    Each Member is free to adopt the specific procedures that it will use to conduct its review. However, those procedures must take into consideration the nature of the communication, the relative sophistication of the recipient and the training and background of the employees and agents. In some instances, spot-checking or sampling e-mail messages representing routine communications between employees or agents and existing customers 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 the routine electronic correspondence to review. On the other hand, firms dealing with individual, relatively unsophisticated retail customers might consider using a larger sample or even reviewing all the routine e-mail. Similarly, a firm may wish to conduct a comprehensive review of employees' and agents' e-mail if they have a disciplinary history involving problems with customers or came from a firm that has been disciplined for fraud.

    Members' procedures should also address whether employees and agents are permitted to use e-mail systems other than the firm's system. If a firm permits them to use other systems for business purposes, whether on their work or home computer, the firm's procedures must treat these off-system e-mails as its own records and must ensure that the firm is capable of adequately reviewing them. Given the supervisory problems which could arise, some firms may choose not to permit their employees and agents to communicate with the public outside of work through an e-mail system that is not linked to the firm's network.

    In many instances e-mails may constitute promotional material. E-mail directed to the public soliciting business constitutes advertising and is subject to the same rules as any other form of promotional material. For example, an e-mail message sent to targeted individuals or groups would be considered promotional material if its ultimate purpose was to solicit funds or orders. A Member's e-mail review procedures must be designed to ensure compliance with NFA's promotional material content and review requirements. These requirements, found in NFA Compliance Rule 2-29, provide, among other things, for prior review of this type of e-mail by appropriate supervisory personnel. Additionally, this type of e-mail is subject to the specific recordkeeping requirements of Compliance Rule 2-29.

    Members should properly educate and train their employees and agents on the firm's policies regarding e-mail communications - particularly on those communications that are not reviewed by supervisory personnel prior to use. Special attention should be given to those employees and agents with previous compliance or disciplinary problems. Finally, Members must periodically evaluate the effectiveness of their e-mail review procedures and modify them as necessary.

    Web Sites

    Both Members and their employees and agents can inexpensively and quickly create web sites to attract business. NFA's Compliance Rule 2-29 establishes the standards that web site content must meet. The procedures that Members adopt to supervise the use of web sites must be designed and enforced to ensure that the web sites comply with these standards. These supervisory procedures must:

    • be written;

    • require prior review and approval of the web site by an appropriate supervisor; and

    • require documentation of the review.

    Because the substantive content of web sites can change frequently, the Member's procedures should address how it will ensure that each substantively new version of a web page will be subject to the review procedures. Members' review procedures should adequately address features unique to electronic communications, e.g., streaming script containing real-time market news, for which neither prior review nor post-review of each bit of information may be possible.

    Unless the web site limits access to a particular target audience, through an acknowledgment by the user or other means, the Member's review procedures should take into consideration the fact that the web site, like other forms of mass media advertising, is available to the public at large. If the firm permits its employees and agents to use personal web sites to attract business for the firm, these web sites will constitute firm promotional material. Consequently, the Member's procedures must be adequate to enable it to properly review the employees' and agents' web sites, including all substantive modifications, according to its procedures. Additionally, to ensure compliance with the recordkeeping requirements, the firm's procedures should provide the means to identify the time frame in which particular versions of the web page are in use. Finally, Members must periodically evaluate and modify as necessary their web site review procedures to ensure their effectiveness.

    As is the case with other media, the use of agents' web sites to solicit leads may subject a firm to liability if the agents' leads were generated through deceptive materials posted on a web site. If a firm (either non-Member or Member) maintains a web site which contains deceptive information regarding futures or options trading and a Member pays that firm to provide a hyperlink to the Member's web site, the Member may well be held accountable for the content of the other firm's web site.

    The fact that a Member creates a hyperlink from its web site to another web site does not, in and of itself, make the Member firm accountable for the content of the other web site. Member firms should bear in mind, though, that their supervisory obligations under Rule 2-9 and Rule 2-29 require them to diligently supervise their employees and agents who are responsible for creating and maintaining the web sites, including hyperlinks to other web sites. Members should consider whether appropriate supervisory procedures include periodic inquiries as to whether their employees and agents are monitoring the general content of the web site to which the Member links. NFA is not suggesting that firms are necessarily responsible for the virtually infinite chain of links from its web site to others. At the same time, Members who seek to circumvent NFA promotional material and supervision rules by using a chain of hyperlinks to a "remote" web site may be held accountable for that "remote" web site's content.

    [¶ 9038] NFA COMPLIANCE RULES 2-29: HIGH PRESSURE SALES TACTICS
    (Click Here to Print this Section)
    (Staff, June 19, 1996)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-29 governs Members' communications with the public and is one of the most important NFA rules in ensuring that Members observe high ethical standards in their dealings with customers. NFA Compliance Rule 2-29(a)(2) prohibits the use of "high-pressure sales practices." The rule itself does not define "high-pressure sales practices." However, there have been a significant number of NFA enforcement cases prosecuted under the rule, and those cases provide guidance to Members on the types of practices which have been found to constitute high-pressure sales practices.

    A common thread in many of the high-pressure sales cases brought by the Business Conduct Committee is the sense of undue urgency which the associated person conveys to the customer. In essence, the AP is asking the customer to act now and think later. This approach can take several different forms. In some cases, the AP rushes the customer through the account opening forms, glossing over the risk disclosure in his haste to open the account. Frequently, an overnight courier service delivers the blank forms to the customer and waits while the customer completes the form. In some cases, APs have actively attempted to dissuade unsophisticated customers from seeking further advice on their investment decision from friends, relatives or advisors or have tried to threaten or intimidate customers. The purpose of NFA's rule is to ensure that the customer makes a fully informed and carefully considered investment decision. Any tactic, such as those outlined above, which presses a customer for a hasty decision will be considered a violation of NFA Compliance Rule 2-29(a)(2).

    Another familiar theme in NFA's high-pressure sales cases involves a pattern of telephone calls which are unusual in their timing or frequency. In several cases, the AP barraged the customer with calls either late at night or early in the morning. In other cases, the AP's telephone solicitations to open an account occurred several times a day, several days a week for weeks on end. Phone calls made at unusual hours and with unusual frequency, unless made at the customer's request, can be an abusive practice, designed to abuse, annoy or harass a customer into opening an account and constituting a violation of NFA Compliance Rules.

    Perhaps the most obvious indicator of a high-pressure sales practice is simply the tone used by the AP to address the customer. In a handful of cases, APs have shouted at customers, used profane language or otherwise berated the customer in an attempt to bully the customer into opening an account. Such conduct clearly violates NFA rules.

    This notice cannot and is not intended to alert Members to all of the factors that may constitute a high-pressure sales practice. Each of the factors highlighted above, however, has frequently been present in the high-pressure sales cases brought by NFA, and Members should certainly be vigilant in preventing and detecting such practices in their own operations.

    [¶ 9039] NFA COMPLIANCE RULES 2-29 AND 2-9: NFA'S REVIEW AND APPROVAL OF CERTAIN RADIO AND TELEVISION ADVERTISEMENTS
    (Click Here to Print this Section)
    (Board of Directors, March 28, 2000)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-29 governs communications between NFA Members and the public. Among other things, the rule prohibits the use of promotional material which is misleading or deceptive. The purpose of this rule is to protect the public from fraudulent advertising and sales solicitations and to provide guidance to Members on the standards by which their promotional material will be evaluated.

    Over the last few years, NFA's Board of Directors ("Board") has become increasing concerned with several types of misleading radio and television advertisements that a small number of Member and non-Member firms are using with greater frequency. Though these problem ads vary somewhat, their consistent theme is that customers are likely to make substantial profits by following the sponsoring firm's recommendations. These advertisements hurt both the customers naive enough to believe the claims and the reputation of the industry. Though NFA's current compliance rules provide a basis for prosecuting the Members who either sponsor such ads or reap any benefits from the ads, the Board has always felt that it is better to prevent than prosecute fraud.

    To achieve this goal, the Board recently amended NFA Compliance Rule 2-29 to add a new subsection (h) to require any Member firm using or directly benefiting from a 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 to submit the advertisement to NFA's Promotional Material Review Team for its review and approval at least 10 days prior to first use. If additional information is needed, or the review cannot be completed within the 10 day period, the Member will be so notified. Obviously, NFA staff will not be able to independently verify the accuracy of every statement made in an advertisement within the 10 day review period; that responsibility remains with the Member. Therefore, submitting promotional material to NFA will not provide a "safe harbor" from NFA actions for Members if misstatements or omissions of material fact are discovered subsequently or NFA otherwise later determines that the material is in violation of standards set forth herein.

    At this time, the Board also wishes to reiterate that two prior Notices to Members dated June 4, 1996 (I-96-11) and September 2, 1998 (I-98-15) describe particular fraudulent techniques that a relative handful of Members use in their radio and television advertisements. NFA's Business Conduct Committee ("BCC") has not hesitated to issue a number of Complaints against Member firms utilizing the techniques mentioned in those Notices. Furthermore, after recently reviewing the particular types of radio and television advertisements forming the basis of these BCC Complaints, the Board has directed staff to be particularly vigilant in reviewing radio and television advertisements containing specific trading recommendations and/or a description of past or future profits. In fact, the Board finds the content of certain advertisements to be inherently misleading and has further directed staff to disapprove of their usage. Typically, these advertisements include one or more of the following practices, each of which is described in the prior Notices:

    • Claims Regarding Seasonal Trades: These ads cite seasonal data which supposedly shows that certain trades produce dramatic profits year in and year out in such products as heating oil in the winter and unleaded gas in the summer.

    • Claims Regarding Historic Price Moves - These ads refer to historic price moves in particular commodities such as sugar when it was trading at $0.66 per pound, gold at $800 per ounce and silver at $50, with a suggestion that the same record setting move is likely to occur again.

    • Claims Regarding Price Movements - These ads highlight the tremendous profits which will result from projected price movements which are characterized, directly or indirectly, as conservative estimates when, in fact, such price movements would be dramatic.

    • Claims Using Certain Pricing Data - These ads use price data for a product different from the one being marketed in the promotional material. Examples of these types of ads include: ads that use pricing data relative to the cash or futures markets to sell options; ads that use pricing data for at-the-money options to sell out-of-the money options; and ads that use pricing data that do not include commissions and fees comparable to those charged by the Member.

    • Claims Containing Profit Projections - These ads claim that customers can turn a $10,000 investment into $25,000 or make similar types of dramatic profit projections.

    • Claims Containing "Cherry Picked" Trades - These ads seek to entice prospective investors by claiming that their customers have made dramatic profits; however, such claims rely on isolated trades in specific customer accounts.

    • Claims Regarding Mathematical Examples of Leverage - These ads improperly use "leverage examples" as a means of suggesting that prospective customers are likely to earn large profits trading futures and options.

    It is important to note that this list of deceptive advertising techniques is not all inclusive. Each of the practices described above presents a distorted and misleading view of the likelihood of customers earning dramatic profits by investing with the Member, and each of these practices represents a clear violation of NFA's sales practice rules.

    Finally, one additional issue relating to advertising occurs when a Member benefits from the use of a "blind ad." Specifically, some Members attempt to evade NFA's advertising requirements by purchasing leads from non-Members that run misleading radio and television commercials basically identical to those prosecuted by NFA's BCC. These ads do not identify any particular Member firm and invite the viewer to call a toll-free number to obtain more information. The non-Member then sells the resulting leads to a Member firm, which then claims that it has no responsibility for the content of the ad. Members can not evade their supervisory responsibilities by buying leads from such firms.

    NFA Compliance Rule 2-9 requires each Member to diligently supervise its employees and agents in the conduct of their commodities futures activities. The CFTC has brought cases against companies that run "blind ads" and has alleged that they are, in fact, soliciting orders and are required to be registered as IBs. In addition to a Member's responsibilities under NFA Bylaw 1101, the Board believes that Member firms have a supervisory duty to ensure, to the extent possible, that their employees and agents are not purchasing leads from non-Members required to be registered and/or using fraudulent advertising practices.

    In many instances, a Member firm will have direct knowledge of the source of leads that the Member purchases. For example, the Member firm purchases leads from a provider that generates leads solely incidental to some other business purpose (e.g., a subscription list). However, in the event a Member firm does not have direct knowledge, then the Member firm has a duty to inquire as to the source of leads. Specifically, under those circumstances, a Member firm has an affirmative duty to determine if the leads were generated from a provider using any type of advertisement soliciting investments in futures, one of whose business purposes is the generation and sale of the leads. If a Member firm purchases leads from such a provider, then the Member must ensure, prior to soliciting any customer with the leads, that the lead provider submitted the advertisement to NFA for review and approval pursuant to Compliance Rule 2-29(h). If the advertisement was not approved by NFA, then the Member is not permitted to solicit any customer with the leads purchased from that provider.

    [¶ 9040] RESERVED
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    [¶ 9041] OBLIGATIONS TO CUSTOMERS AND OTHER MARKET PARTICIPANTS
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    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).

    Since NFA is a registered futures association, the Commodity Exchange Act requires it to have rules designed to promote fair dealing with customers and other market participants for all futures contracts, including security futures.1 Since NFA is a limited purpose NSA, the Exchange Act also requires it to have rules that are designed to promote fair dealing for security futures products.2 All of NFA's rules apply to activities involving security futures products. However, certain additional requirements apply to activities in security futures products by Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates.

    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 all 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, knowingly trading ahead of customer orders in any commodity 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.3 The securities laws, on the other hand, generally do prohibit this conduct. As required by the CFMA, NFA Compliance Rule 2-37(a) prohibits Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates from violating Sections 9(a), 9(b) and 10(b) of the Exchange Act 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).4

    Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates 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 registered as a broker-dealer under Section 15(b)(11) of the Exchange Act or an AP of such a Member, acting 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.5

    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 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. Furthermore, Members registered under Section 15(b)(11) of the Exchange Act and their Associates 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.

    1See Section 17(b)(7) of the Commodity Exchange Act (7 U.S.C. 21(b)(7)).

    2See Section 15A(k)(2)(B) of the Securities Exchange Act of 1934 (15 U.S.C. 78o-3(k)(2)(B)).

    3CFTC 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.

    4Although Compliance Rule 2-37(a) applies only to Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates, all Members and Associates are subject to the securities laws in connection with their security futures activities. Violating any law that applies to a Member or Associate's futures business — including securities laws that apply to security futures activities — is conduct inconsistent with just and equitable principles of trade under NFA Compliance Rule 2-4.

    5Commodity pool operators and commodity trading advisors who engage in similar conduct would violate NFA Compliance Rule 2-4 if they abuse their fiduciary relationship with pool participants or clients.

    [¶ 9042] 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
    (Click Here to Print this Section)
    (Revised December 17, 2007)

    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.1

    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:

    • Specific criteria and standards to be used in evaluating the suitability of a customer to engage in security futures transactions;

    • Specific procedures for approving accounts to engage in security futures transactions, including requiring written approval by a designated security futures principal;

    • A requirement that the designated security futures principal 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.

    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.2 The 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 FINRA (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 FINRA 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-5.3

    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.

    1 This notice does not change the general supervisory responsibilities that Compliance Rule 2-9 imposes on other NFA Members.

    2If the prospective employer does not have direct access to the CRD, it can obtain the information from the Financial Industry Regulatory Authority (FINRA) using FINRA's public disclosure program. FINRA's public disclosure program can be accessed through its web site at www.finra.org.

    3It 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.

    [¶ 9043] NFA COMPLIANCE RULE 2-29: USE OF PAST OR PROJECTED PERFORMANCE; DISCLOSING CONFLICTS OF INTEREST FOR SECURITY FUTURES PRODUCTS
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    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:

    • Promotional material that uses outdated information to support current claims;1

    • Promotional material that makes claims regarding research or other facilities beyond those which the Member or Associate actually possesses or has reasonable capacity to provide.2

    • Promotional material that makes any statement to the effect that any report, analysis, or other service will be furnished free or without any charge unless such report, analysis or other service actually is or will be furnished entirely free and without condition or obligation.3

    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.

    • Performance must be presented in a balanced manner. (See NFA Compliance Rule 2-29(b)(2) and (b)(5).)

    • The promotional material must disclose all relevant costs, including commissions and fees. (See NFA Compliance Rule 2-29(b)(2).)

    • Any discussion of the past performance of recommended transactions must comply with NFA Compliance Rule 2-29(c).

    • For security futures products, the promotional material must indicate the general market conditions during the period covered. (See NFA Compliance Rule 2-29(b)(1) and (2).)

    • Performance information used by FCMs, IBs, and their Associates must include the date of each initial recommendation or transaction; the price at that date; and the date and price at the end of the period or when liquidation was suggested or effected, whichever was earlier. If a summary is used, it must be calculated in a manner consistent with CFTC Regulation 4.25(a)(7)(i)(F). (See NFA Compliance Rule 2-29(b)(2) and (5).)

    • Performance information used by FCMs, IBs, and their Associates must also be current, meaning that it must cover at least the most recent 12-month period or must include the performance in its entirety if less than 12 months. The Member or Associate must disclose more than the last 12 months of performance if the last 12 months is not representative, and the Member or Associate may not include gaps or otherwise cherry-pick the periods for which it discloses performance. (See NFA Compliance Rule 2-29(b)(1) and (2).)

    • The Member or Associate must keep records showing how it calculated the performance numbers used in the promotional material. These records must identify the trades and accounts that were used in calculating performance, describe how and why those transactions and accounts were selected, and demonstrate how the results are representative of all reasonably comparable accounts. (See NFA Compliance Rule 2-29(f).)

    • A person who is authorized to approve the promotional material must determine that the performance information is accurate and is presented in a manner that is not misleading. (See NFA Compliance Rules 2-9(a) and 2-29(e).)

    Promotional material that discusses projected performance must also meet a number of standards.

    • The promotional material must disclose, and the projected performance must be adjusted for, all relevant costs, including commissions and fees. (See NFA Compliance Rule 2-29(b)(2).)

    • The projected performance must have a reasonable basis in fact. (See NFA Compliance Rule 2-29(d).)

    • All material assumptions made in projecting performance must be clearly identified. (See NFA Compliance Rule 2-29(b)(2).)

    • The risks must be discussed and balanced with the discussion of projected profits. (See NFA Compliance Rule 2-29(b)(3).)

    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:

    • The Member and/or its officers or partners own options, rights, or warrants to purchase any of the securities of the issuer whose securities underlie the security futures product being recommended, unless the ownership is nominal; and

    • Within the last three years, the Member was manager or co-manager of a public offering of any securities of the issuer whose securities underlie the security futures product being recommended.

    1 See, 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.

    2See, 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).

    3 See, In re Filler Zaner & Associates, NFA Case No. 89-BCC-32 (BCC, Nov. 30, 1989).

    [¶ 9044] NFA COMPLIANCE RULE 2-4: BROKER-DEALER REGISTRATION REQUIREMENTS FOR SECURITY FUTURES PRODUCTS
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    INTERPRETIVE NOTICE

    The Commodity Futures Modernization Act of 2000 (CFMA), which was signed into law on December 21, 2000, amended the Commodity Exchange Act (CEA) to lift the ban on single-stock futures and narrow-based security indices ("security futures products"). Under the CFMA, security futures products are securities as well as futures and, therefore, trading in these products is subject to regulatory schemes in both the futures and securities industries, including registration requirements. As a result, NFA Member FCMs and IBs that solicit or accept orders or carry accounts for security futures products are also required to be registered as broker-dealers under the Securities Exchange Act of 1934 (Exchange Act). NFA Member FCMs and IBs that are not fully registered broker-dealers may fulfill the broker-dealer registration requirement through notice registration by filing Form BD-N with NFA.

    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 the requirement that Members abide by all applicable state and federal laws and regulations governing their commodity futures business, including security futures products. It is a violation of NFA Compliance Rule 2-4 for an NFA Member FCM or IB to solicit or accept orders, carry accounts, or otherwise act as a broker-dealer for security futures products unless the Member is properly registered either as a full broker-dealer under Section 15(b)(1) or as a notice registered broker-dealer under Section 15(b)(11) of the Exchange Act.

    [¶ 9045] NFA COMPLIANCE RULE 2-9: FCM AND IB ANTI-MONEY LAUNDERING PROGRAM
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    (Revised November 16, 2006; January 15, 2008; and March 28, 2008)

    INTERPRETIVE NOTICE

    The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 ("Title III"),1 which was signed into law on October 26, 2001, imposed significant new anti-money laundering requirements on all "financial institutions," as so defined under the Bank Secrecy Act (BSA),2 including FCMs.3 In particular, Section 352 of Title III and NFA Compliance Rule 2-9(c) requires all financial institutions to establish anti-money laundering (AML) programs which, at a minimum, must include internal policies, procedures and controls; a designated compliance officer to oversee day-to-day operations of the program; an ongoing training program for employees; and an independent audit function to test the program.

    NFA's Board of Directors adopted NFA Compliance Rule 2-9(c) to impose these requirements on NFA Member FCMs and IBs.4 NFA recognizes, of course, that the exact form of program adopted by a Member will vary based on a Member's type of business, the size and complexity of its operations, the breadth and scope of its customer base, the number of firm employees, its risks and vulnerabilities to money-laundering and the firm's resources. Nevertheless, the Board believes that certain minimum standards must be a part of any adequate program. The purpose of this interpretive notice (Notice) is to highlight those minimum standards and provide Members with additional guidance on satisfying the requirements of Compliance Rule 2-9(c). Members must be aware, however, that the laws in this area are changing rapidly and that they need to conduct a regular review of their anti-money laundering program to ensure that the program is in compliance with any subsequent changes to the federal law or NFA Rules.

    Many of the procedures discussed in the Notice are practices that firms may already employ in their businesses. In particular, bank or bank holding company-owned FCMs or IBs are already required to comply with certain components of the anti-money laundering programs of the banks. FCMs should also have procedures in place related to deposits of cash or cash-like instruments and procedures to obtain identifying information on customers. FCMs and IBs should use their existing programs and procedures as the building blocks for their anti-money laundering compliance programs. Moreover, FCMs and IBs that are registered as broker-dealers under the federal securities laws are subject to similar anti-money laundering requirements. In most cases, programs that comply with requirements applicable to the securities industry will comply with the requirements of this Notice.

    Money laundering occurs when funds from an unlawful activity are moved through the financial system in such a way as to make it appear that the funds have come from legitimate sources. Money laundering usually follows three stages. First, cash or cash equivalents are placed into the financial system. Second, the money is transferred or moved to other accounts (e.g. futures accounts) through a series of financial transactions designed to obscure the origin of the money (e.g. executing trades with little or no financial risk or transferring account balances to other accounts). Finally, the funds are reintroduced into the economy so that the funds appear to have come from legitimate sources (e.g. closing a futures account and transferring the funds to a bank account). Trading accounts that are carried by FCMs are one vehicle that can be used to launder illicit funds. In particular, a trading account could be used to execute financial transactions that help obscure the origin of the funds. FCMs and IBs need to be aware of potential money laundering abuses that could occur in a customer account and implement a compliance program to, among other things, deter, detect and report potentially suspicious activity.

    DEVELOPING POLICIES, PROCEDURES AND INTERNAL CONTROLS

    The starting point for an FCM and IB is to adopt a policy statement that clearly outlines the firm's policy against money laundering and its commitment to follow all applicable laws and regulations to ensure that its business is not used to facilitate money laundering. The policy statement should also make clear that all employees of the firm have a responsibility to follow the firm's written anti-money laundering procedures and controls, and to abide by all applicable laws and regulations involving anti-money laundering programs. The policy statement also should discuss the consequences of not following these procedures. The firm's procedures and controls should enable appropriate personnel to form a reasonable belief that they know the true identity of each customer; recognize suspicious customers and transactions; and require personnel to report suspicious or unusual activity to appropriate supervisory personnel, including senior management, and to FinCEN when appropriate. The firm's procedures and controls should also ensure that the firm maintains an adequate audit trail to assist law enforcement agencies in any investigation. The key components of these policies, procedures and controls are discussed below.

    A. Customer Identification Program

    As part of its AML program, each FCM and IB Member must adopt a written customer identification program (CIP) that meets the requirements of the BSA.5 For purposes of the CIP requirements, a customer includes individuals or entities opening new accounts6 as of October 1, 2003. FCMs and IBs do not have to apply the CIP requirements to existing customers7 opening additional accounts provided the FCM or IB has a reasonable belief that it knows the true identity of the customer.8 FCMs and IBs should consider the following guidelines when determining whether it is required to apply its CIP requirements:

    • For an omnibus account where the intermediary is the account holder, the FCM should treat the intermediary as the customer and does not have to apply its CIP requirements to the underlying beneficiaries. See FIN-2006-G004, Frequently Asked Question Regarding Customer Identification Programs for Futures Commission Merchants and Introducing Brokers (31 CFR 103.123), February 14, 2006.

    • If an intermediary opens an account in the name of a collective investment vehicle such as a commodity pool, the FCM or IB is not required to apply its CIP to the pool's underlying participants.

    • In a give-up arrangement, the clearing FCM, not an FCM acting solely as an executing broker, is required to apply its CIP to the customer. See FIN-2007-G001, Application of the Customer Identification Program Rule to Futures Commission Merchants Operating as Executing and Clearing Brokers in Give-Up Arrangements, April 20, 2007.

    As discussed more fully below, the CIP must include the following elements:

    • Required Identifying Information and Identity Verification Procedures
    • Recordkeeping Procedures
    • Comparison with Government List Procedures
    • Customer Notice Procedures
    • Reliance on Other Financial Institutions Procedures (if applicable)

    Required Identifying Information and Identity Verification Procedures - These procedures should be designed to enable the FCM or IB to form a reasonable belief that it knows the true identity of each customer. In designing the procedures, the FCM or IB should consider the various types of accounts it maintains, the various account opening methods it uses, the various types of identifying information available and the firm's size, location and customer base.

    Each CIP must specify the identifying information the FCM or IB will require from each customer. Although the type of identifying information a firm may require will vary based on, among other things, the nature of the firm's business and the type of customer, all firms must obtain certain minimum information prior to opening an account. For all customers, a firm must obtain the customer's name. For an individual, the firm must obtain the customer's date of birth and a residential or business address9 and for non-natural persons, the customer's principal place of business, local office or other physical location. For a U.S. person, a firm must obtain the customer's social security number or taxpayer identification number (TIN). For a non-U.S. person, the firm must obtain one or more of the following: a TIN, a passport number and country of issuance, an alien identification card number, or the number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. For a non-U.S., non-natural person, the firm must obtain a government issued identification number.10 A firm may also choose to include procedures that provide for an exception for a person who has applied for a TIN. The CIP must include procedures to confirm that the application was filed before the customer opens the account and to obtain the TIN within a reasonable period of time after the account is opened.

    The CIP must also include risk-based procedures to verify the identity of each customer to the extent reasonable and practicable. Verification may occur within a reasonable time before or after the customer's account is opened.11 Accounts may be verified using documentary methods, non-documentary methods or a combination of both. The CIP, however, must describe under what circumstances the firm will use each of these methods. In addition, the CIP must identify situations where the firm will require additional verification based on the FCM's or IB's risk assessment of the new account.

    Each firm's CIP should identify the documents that will be used for documentary verification. These documents may vary from firm to firm based on the firm's own risk-based analysis of the types of documents that it believes will enable it to verify customer identity. A firm is encouraged, however, to obtain more than one type of documentary verification to ensure that it has a reasonable belief that it knows its customer's true identity. Documents that would be appropriate for verification include, for an individual, an unexpired government-issued identification that evidences nationality or residence and bears a photograph or similar safeguard (e. g. driver's license or passport); and for a non-individual (e.g. corporation, partnership or trust), documents that show the existence of the entity, such as certified articles of incorporation, a government issued business license, a partnership agreement or a trust instrument. In most instances, once an FCM or IB verifies the identity of a customer through documentary evidence, the FCM or IB does not have to determine whether the document is valid. However, if the document shows an obvious indication of fraud, then the FCM or IB must determine whether the document is sufficient for the firm to form a reasonable belief that it knows the customer's true identity.

    In some situations, it may be appropriate to use non-documentary methods in addition to or in lieu of documentary methods. For example, a firm may want to use non-documentary methods in addition to documentary methods when a firm is not familiar with the documentary evidence provided. Non-documentary methods in lieu of documentary methods may be appropriate when the account is opened over the Internet or telephone. If a firm will rely on non-documentary methods, the firm's CIP must describe the non-documentary methods that will be used. These procedures must address situations where an individual is unable to present an unexpired government issued identification document that bears a photograph or similar safeguard; the FCM or IB is not familiar with the documents presented; the account is opened without obtaining documents; the customer opens the account without appearing in person; or where the FCM or IB is otherwise presented with circumstances that increase the risk that the FCM or IB will be unable to verify the identity of a customer through documents. Appropriate non-documentary methods include contacting a customer; independently verifying the customer's identity through the comparison of information provided by the customer with information obtained from a consumer reporting agency, public database or other source; checking references with other financial institutions; or obtaining a financial statement. A firm may also want to examine whether there is a logical consistency between the customer's name, street address, ZIP code, telephone number, date of birth and social security number.

    A firm's procedures should also include a mechanism to identify potentially high-risk accounts in the account opening process. Although attempts to launder money or finance terrorism can come from numerous sources, FCMs and IBs should be aware that certain types of entities or entities or individuals from certain geographic locations may pose a greater risk. FCMs and IBs should consult the Financial Action Task Force's (FATF) list of non-cooperative countries and territories (NCCT list)12 to determine whether a customer is from one of those countries or territories. If the customer is from one of the countries/territories identified on the NCCT list, the FCM or IB should determine what, if any additional due diligence is necessary in deciding whether to open the account, and if the account is accepted, what if any additional monitoring of the account activity is appropriate.

    Accounts opened in the name of a corporation, partnership or trust that is created or conducts substantial business in a jurisdiction that has been designated by Treasury as a primary money laundering concern or has been designated as non-cooperative by FATF may pose additional risks. An FCM's and IB's CIP must also include additional procedures that address under what circumstances the firm will require, for a customer that is not an individual, information about individuals with authority or control over the account in order to verify the customer's identity. These procedures would be used only in situations where the FCM or IB is unable to adequately verify the customer's identity after using documentary and non-documentary methods.

    Finally, there may be situations where an FCM or IB cannot form a reasonable belief that it knows the true identity of the customer. The firm's CIP must include procedures for handling this situation. At a minimum, these procedures should address: (1) when an account should not be opened; (2) the terms under which a customer may conduct transactions while the FCM or IB attempts to verify the customer's identity; (3) when an account should be closed after attempts to verify a customer's identity have failed; and (4) when the FCM or IB should file a Suspicious Activity Report (SAR) in accordance with applicable law and regulation.13

    Recordkeeping Procedures - The firm's CIP must also describe the firm's recordkeeping policies regarding information and documents obtained during the identification and verification process. At a minimum, the CIP must require that a record be kept for: (1) all identifying information obtained from a customer; (2) either a copy or a description of any document that was relied on to verify identity, noting the type of document, any identification number contained in the document, the place of issuance, and if any, the date of issuance and expiration date; (3) a description of the non-documentary verification methods or additional verification methods used and the results; and (4) a description of the resolution of each substantive discrepancy discovered when verifying the identifying information obtained. Although firms are required to keep a record of the identifying information, they do not have to maintain copies of the documents used to verify identity. However, if a firm elects to maintain copies of documents, then the copies themselves may serve as records of the identifying information that was relied upon to verify a customer's identity.

    The CIP should also outline the firm's procedure for retaining records. FCMs and IBs must maintain a record of the identifying information collected from a customer for five years after the account is closed, and records of the description of the documents used to verify identity, description of the non-documentary methods or additional verification methods used and the results, and the resolution of any discrepancies for five years after the record is made.

    Comparison with Government Lists Procedures - The firm's CIP must also include procedures for determining whether a customer appears on any list of known or suspected terrorists or terrorist organizations issued by any Federal government agency and designated as such by Treasury in consultation with the Federal functional regulators. The firm's procedures must require the FCM or IB to make this determination within a reasonable period of time after the account is opened or earlier if required by another Federal law or regulation or Federal directive issued in connection with the applicable list. The CIP must also require the FCM or IB to follow all Federal directives issued in connection with such lists. No lists have yet been designated under the CIP rules.14

    Customer Notice Procedures - An FCM's and IB's CIP must also include procedures that require the firm to provide customers with adequate notice that the firm is requesting information to verify their identity. An adequate notice describes the identification requirements of the final rule and provides notice in a manner reasonably designed to ensure that a customer is able to view the notice, or is otherwise given notice, before opening the account. For example, depending on how an account is opened, notice could be provided by the firm posting notice in its office lobby or on its website, including the notice on its account application or using other forms of oral or written notice.15

    Reliance on Other Financial Institutions' Procedures - An FCM or IB may share a customer relationship with one or more financial institutions. For example, in the FCM/IB relationship, although the customer is a customer of both the FCM and IB, the IB often has primary contact with the customer. This type of relationship may give rise to circumstances where it would be appropriate for an FCM or IB to reasonably rely on the customer identification and verification procedures of another financial institution that has an account or similar relationship with the customer. If an FCM or IB intends to reasonably rely on another financial institution, it must specify in its CIP when the firm will satisfy its obligations by relying upon another financial institution (including an affiliate).

    An FCM or IB may rely on another financial institution if: (1) the reliance is reasonable under the circumstances; (2) the other financial institution is subject to an AML compliance program requirement under the BSA and is regulated by a Federal functional regulator;16 and (3) the other financial institution enters into a contract requiring it to certify annually to the FCM or IB that it has implemented an AML program and that it will perform the specified requirements of its own CIP. If the FCM or IB meets these requirements, it will not be held responsible for the failure of the other financial institution to adequately fulfill the FCM's or IB's CIP obligations.

    An FCM or IB may also delegate some or all CIP implementation to a third party service provider or an agent. In those instances, the FCM or IB should have a written agreement with the other entity outlining the other entity's responsibilities. Under these circumstances, however, the FCM or IB remains solely responsible for assuring compliance with the CIP requirements. As a result, if an FCM or IB delegates any of its CIP responsibilities, it should actively monitor the delegation, assure that the procedures are being conducted in an effective manner and ensure that NFA and other appropriate regulatory bodies are able to obtain information and records relating to the CIP.

    B. Detection and Reporting of Suspicious Activity

    Another essential component of an effective anti-money laundering compliance program is a set of systems and procedures designed to detect and report suspicious activity. As with most components of a firm's compliance program, the manner in which a firm monitors for suspicious activity will vary based on the firm's size and the nature of its business.

    For some firms, appropriate manual monitoring of transactions in excess of a certain dollar amount may constitute acceptable review for suspicious transactions, while other firms may need to implement an automated monitoring process. Although in some instances the carrying FCM may be in the best position to monitor accounts for suspicious transactions, an FCM or IB that is involved in the account opening process or the order flow process should be alert to suspicious transactions and, where appropriate, refuse to open an account or accept a suspicious order and report such suspicious activity to the carrying FCM and FinCEN where required.

    Examples of suspicious transactions are those that have no business or apparent lawful purpose, are unusual for the customer, or lack any reasonable explanation. As discussed above, recognizing suspicious transactions requires familiarity with the firm's customers, including the customer's business practices, trading activity and patterns. What constitutes a suspicious transaction will vary depending on factors such as the identity of the customer and the nature of the particular transaction.

    Since suspicious transactions may occur at the time an account is opened or at any time throughout the life of an account, FCMs and IBs must train appropriate staff to identify suspicious behavior during the account opening process and monitor cash activity and trading activity in order to detect unusual transactions. Identifying suspicious activity may prove difficult and often requires subjective evaluation because the activity may be consistent with lawful transactions.

    One area that firms should give heightened scrutiny is wire transfer activity. Monitoring of this area should include review of unusual wire transfers, including those that involve an unexpected or extensive number of transfers by a particular customer during a particular period and transfers involving certain countries identified as high risk or non-cooperative.17

    Firms should provide employees with examples of behavior or activity that should raise a "red flag" and cause further inquiry. These "red flags" may alert employees to possible suspicious activity. Some examples of "red flags" that could cause further investigation include:18

    • A customer exhibits an unusual level of concern for secrecy, particularly with regard to the customer's identity, type of business or source of assets;

    • A corporate customer lacks general knowledge of its own industry;

    • A customer is unconcerned with risks, commissions or other costs associated with trading;

    • A customer appears to be acting as an agent for another entity or individual but is evasive about the identity of the other entity or individual (except situations involving the identity of ownership interests in a collective investment vehicle);

    • A customer is from, or has accounts in a country identified as, a haven for bank secrecy, money laundering or narcotics production;

    • A customer engages in extensive, sudden or unexplained wire activity (especially wire transfers involving countries with bank secrecy laws);19

    • A customer engages in transactions involving more than $5,000 in currency or cash equivalents (in one transaction or a series of transactions in one or more days and in any number of accounts); and20

    • A customer makes a funds deposit followed by a request that the money be wired out or transferred to a third party, or to another firm, without any apparent business purpose.

    Monitoring accounts for suspicious activities is a fruitless activity without timely and effective follow-up and investigative procedures. Although the internal structure for reporting suspicious activities will vary from firm to firm, each firm's compliance program must require employees to promptly notify identified firm personnel of any potential suspicious activity. Appropriate supervisory personnel must evaluate the activity and decide whether the activity warrants reporting to FinCEN. In making this determination, an IB should consult with its carrying FCM.21

    For transactions occurring after May 18, 2004, FCMs and IBs22 are required23 to file form SAR-SF24 with FinCEN to report suspicious transactions that are conducted, or attempted by, at, or through an FCM or IB, involve an aggregate of at least $5,000 in funds or other assets (not limited to currency), and the FCM or IB knows, suspects or has reason to suspect that the transaction or pattern of transactions:

    • Involves funds that come from illegal activity or are part of a transaction designed to conceal that the funds are from illegal activity;

    • Is designed, such as through structuring, to evade the reporting requirements of the BSA;

    • Does not appear to serve any business or apparent lawful purpose; or

    • Involves the use of the FCM or IB to facilitate a criminal transaction. 25

    FCMs and IBs are not required to file form SAR-SF for activity related to a robbery or burglary, provided the activity is reported to the appropriate law enforcement agency. FCMs and IBs are also relieved of the filing requirement for a violation of the Commodity Exchange Act, CFTC Regulations, Exchange or NFA rules that is otherwise required to be reported under the Commodity Exchange Act, CFTC regulations, Exchange or NFA rules committed by the FCM/IB or any of its officers, directors, employees or associated persons, provided that the activity is properly reported to the appropriate regulatory authority. If this activity also involves a violation of the BSA, a firm must file the form SAR-SF with FinCEN regardless of whether it has reported the activity to the CFTC or other appropriate regulator. If more than one FCM and/or IB is involved in a particular situation, firms may satisfy the filing requirement by filing one form, provided that the form contains all relevant information. The two firms involved in the transaction may consult with each other and share information, including the SAR-SF itself, to enable the firms to file a single report.26

    Although the BSA and the implementing regulations prohibit an FCM or IB from sharing both the SAR itself and the fact that a SAR has been filed,27 firms may share a SAR with parent entities, both domestic and foreign, for the purpose of the parent entity fulfilling its obligation to review compliance by its subsidiaries in meeting the legal requirements to identify and report suspicious activity. FCMs and IBs, however, must have written confidentiality agreements or other arrangements in place specifying that the parent entity (or entities) must protect the confidentiality of the SARs through appropriate internal controls.28

    C. Section 314(a) Information Requests29

    FCM Members are also required to develop procedures to access and respond to FinCEN's 314(a) subject lists that are published bi-weekly on FinCEN's secure web-site.30 These lists identify individuals, entities or organizations that are suspected by various law enforcement agencies of engaging in money laundering or terrorist financing. FCMs are required to access FinCEN's secure website to obtain the most recent lists and search their records for any current accounts and accounts maintained by a named subject during the preceding 12 months and for transactions not linked to an account conducted by a named subject during the preceding 6 months. FCMs must report any matches to FinCEN through the web based system within the required time-frames (generally within 14 days of the lists being posted on the secure web-site). For matches involving an introduced account, FCMs should inform FinCEN or the appropriate law enforcement agency that the match involves an introduced account (and identify the IB) during any follow up conducted by FinCEN or the law enforcement agency. FCMs are not required to respond to FinCEN if no matches are found.

    FCMs should maintain the following records to verify that they are complying with 314(a) request requirements: a record of the date of the request, the tracking numbers within the request, and the date the request was searched; and for positive matches, the date the match was reported to FinCEN. FCMs should also maintain information concerning the identified accounts and transactions in a positive match in a manner that can be easily accessed when requested by law enforcement.

    FCMs are required to designate a point of contact (POC) person(s) for matters involving 314(a) and provide NFA with that information. Any changes to POC information must be immediately reported to NFA.31

    D. Section 312 Foreign Private Banking and Correspondent Accounts

    FCMs and IBs are also required to establish due diligence programs for correspondent accounts established or maintained for foreign financial institutions (correspondent account rule) and private banking accounts established or maintained for non-U.S. persons (private banking rule). 32

    Correspondent Account Rule - As part of its anti-money laundering program, FCMs and IBs must establish a due diligence program that includes appropriate, specific, risk based, and where necessary, enhanced policies, procedures and controls that are reasonably designed to enable the FCM/IB to detect and report, on an ongoing basis, any known or suspected money laundering activity conducted through or involving any correspondent account33 established, maintained, administered or managed by the FCM or IB in the United States for a foreign financial institution. However, an IB that only solicits or accepts orders for the purchase or sale of commodity futures contracts does not establish, maintain or administer a correspondent account for the foreign financial institution and therefore is not subject to the requirements of Section 312 (including the enhanced due diligence requirements for certain foreign banks described below) with respect to correspondent accounts. To the extent an IB performs additional services for the account, the IB may be administering or managing the correspondent account and would be subject to Section 312. Similarly, for give-up transactions involving correspondent accounts, the carrying FCM, and not the executing FCM, is subject to compliance with the due diligence provisions of the correspondent account rule.34

    In assessing the risk presented by a correspondent account, FCM and IBs should consider a number of factors, as appropriate. These factors include: (1) the nature of the foreign financial institution's business and the markets it serves; (2) the type, purpose and anticipated activity of the correspondent account; (3) the nature and duration of the FCM's or IB's relationship with the foreign financial institution; (4) the anti-money laundering and supervisory regime in which the foreign financial institution is chartered or licensed; and (5) information known or reasonably available to the FCM or IB about the foreign financial institution's anti-money laundering record.35 The due diligence program should also require the FCM or IB to conduct a periodic review of the activity in the correspondent account.

    FCMs and IBs36 are required to apply enhanced due diligence measures to correspondent accounts maintained for a foreign bank operating under an offshore banking license, under a license issued by a country designated as being non-cooperative with international money laundering principles by FATF (and the U.S. concurs with the designation)37, or under a license issued by a country that has been designated by the Secretary of Treasury as a primary money laundering concern and as warranting special measures under Section 311. At a minimum, these measures must include taking reasonable steps to (1) conduct risk-based enhanced scrutiny of correspondent accounts established or maintained for this type of foreign bank to guard against money laundering and to identify and report suspicious activity, (2) determine whether any such foreign bank maintains correspondent accounts for other foreign banks that enable those other foreign banks to gain access to the foreign bank's correspondent account with the FCM or IB, and if so, to take reasonable steps to obtain information to assess and mitigate the money laundering risks associated with such accounts, and (3) identify the owners of the foreign bank if the bank's shares are not publicly traded, and the nature and extent of each owner's ownership interest.

    Enhanced scrutiny should require the FCM or IB, (1) to obtain and consider information related to the anti-money laundering program of the foreign bank to assess the risk of money laundering presented by the bank's correspondent account in appropriate circumstances; (2) to monitor transactions to, from or through the correspondent account in a manner reasonably designed to detect money laundering and suspicious activity; and (3) to obtain information from the foreign bank about the identity of any person with authority to direct transactions through any correspondent account that is a payable-through account, and the sources and beneficial owner of the funds and other assets in the payable-through account.

    An FCM/IB's due diligence program should include procedures for situations where the FCM/IB cannot perform the enhanced due diligence, including when the FCM/IB should refuse to open an account, suspend transaction activity, file a suspicious activity report or close the account.

    Private Banking Rule - FCMs and IBs must also include in their AML program a due diligence program that includes policies, procedures and controls that are reasonably designed to detect and report any known or suspected money laundering or suspicious activity conducted through or involving any private banking account38 that is established, maintained, administered, or managed in the United States by the financial institution for a non-U.S. person. The due diligence program should ensure that FCMs and IBs take reasonable steps to (1) ascertain the identity of all nominal and beneficial owners of a private banking account; (2) ascertain whether any owner of the account is a senior foreign political figure; (3) ascertain the source(s) of funds deposited into a private banking account and the purpose and expected use of the account; and (4) review the activity of the account to ensure that it is consistent with the information obtained about the client's source of funds and with the stated purpose and expected use of the account.39

    An FCM's/IB's due diligence program must include procedures for enhanced scrutiny of a private banking account where a senior foreign political figure is a nominal or beneficial owner. This scrutiny must be reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption.

    An FCM's/IB's due diligence program should also include procedures for situations where the FCM/IB cannot perform appropriate due diligence with respect to a private banking account, including when the FCM/IB should refuse to open the account, suspend transaction activity, file a SAR or close the account.

    E. Ongoing Compliance Responsibilities

    Office of Foreign Assets Control - FCMs and IBs, like other financial institutions, also have obligations under regulations issued by the Office of Foreign Assets Control (OFAC). FCMs and IBs are currently restricted from engaging in certain transactions with individuals or entities located in countries that are under a sanction program administered by OFAC. If the customer is located in one of these countries, the FCM or IB needs to review the sanctioning document or contact OFAC to determine the breadth of the restrictions.40 FCMs and IBs are also required to block funds from individuals or entities identified on OFAC's list of Specially Designated Nationals and Blocked Persons (SDN list).41 If the customer's name appears on this list, the firm should immediately notify OFAC.42 To avoid violating the economic sanctions laws administered by OFAC, FCMs and IBs need to check the OFAC lists for new customers and also recheck their existing customer base against the lists when the lists are updated and new countries or Specially Designated Nationals and Blocked Persons are added to the lists. Otherwise FCMs and IBs risk violating the laws by engaging in prohibited transactions with persons who were not subject to sanction when they became customers, but became subject to sanctions later.

    Section 311 Special Measures - Section 311 of the USA Patriot Act gives the Secretary of the Treasury the authority to designate a foreign jurisdiction, institution(s), class(es) of transactions, or type(s) of account(s) as a "primary money laundering concern" and to impose certain "special measures" with respect to such jurisdiction, institution(s), class(es) of transaction, or type(s) of account(s). FCMs and IBs should monitor FinCEN's website (www.fincen.gov) for information on foreign jurisdiction(s), institution(s), class(es) of transactions, or type(s) of account(s) that have been designated as a primary money laundering concern and any special measures that have been imposed.

    F. Hiring Qualified Staff

    It is also important for the firm to ensure that the individuals that staff areas that are susceptible to money-laundering schemes are trained to work in these areas. A firm may also want to conduct background checks on key employees to screen employees for criminal or disciplinary histories.

    G. Recordkeeping

    An adequate compliance program for money laundering must also include written requirements on the types of records that should be maintained. The program also must specify where the records should be maintained and that, unless the BSA rules otherwise require, the records must be maintained in accordance with CFTC recordkeeping and record retention requirements under Regulation 1.31 (e.g., maintained for five years and be readily accessible for the first two years). The ultimate goal of the recordkeeping requirements is to provide an adequate audit trail for law enforcement officials investigating potential money laundering schemes.

    DESIGNATION OF A COMPLIANCE OFFICER

    NFA Compliance Rule 2-9(c) also requires that FCMs and IBs designate an individual or individuals to oversee the anti-money laundering program, including the firm's CIP. This person may be the compliance officer that is responsible for other compliance areas of the firm. Although the compliance officer need not be a designated principal or Associate Member, the person should ultimately report to the firm's senior management.

    The firm must provide this compliance officer with sufficient authority and resources to effectively implement the firm's anti-money laundering program. Among other duties with respect to the firm's CIP and suspicious activity reporting, this person should:

    • Receive reports of suspicious activity from firm personnel;
    • Gather all relevant business information to evaluate and investigate suspicious activity; and
    • Determine whether the activity warrants reporting to senior management, and, if authorized to do so, the firm's DSRO or FinCEN.

    Obviously, the person responsible for overseeing the anti-money laundering procedures should not be the same employee responsible for the functional areas where money-laundering activity may occur.

    EMPLOYEE TRAINING PROGRAM

    Another important component of NFA Compliance Rule 2-9(c) is the requirement that FCM and IB Members provide ongoing education and training for all appropriate personnel. This training program should include annual training on the firm's policies and procedures, the relevant federal laws and NFA guidance issued in this area. Firms should also maintain records to evidence their compliance with this requirement.

    INDEPENDENT AUDIT FUNCTION

    NFA Compliance Rule 2-9(c) also requires that FCM and IB Members43 provide for independent testing of the adequacy of their anti-money laundering compliance programs. Most FCMs and IBs must conduct this independent testing annually. FCMs and IBs that engage solely in proprietary trading or are inactive, however, may satisfy this requirement by conducting the independent test every two years. All firms, however, are required to test the adequacy of their AML program more frequently than the minimum requirements if circumstances warrant.

    A firm may satisfy the independent testing requirement with its own personnel (such as an internal audit staff) or others who do not perform or oversee AML functions.44 In either circumstance, the audit function should test all affected areas to ensure that personnel understand and are complying with the anti-money laundering policies and procedures and that these policies and procedures are adequate. The results of any audit should be documented and reported to the firm's senior management or an internal audit committee or department, and follow up should be done to ensure that any deficiencies in the firm's anti-money laundering program are addressed and corrected.

    ALLOCATION OF COMPLIANCE PROGRAM RESPONSIBILITIES45

    NFA Compliance Rule 2-9(c) requires all FCMs and IBs to establish and implement anti-money laundering compliance programs. NFA recognizes, however, that given the inter-business relationships between and among some Members, the interests of business efficiency and anti-money laundering effectiveness may be best served if Members cooperate with each other in order to meet their respective obligations. Members may allocate between themselves elements of their anti-money laundering compliance programs. Any allocation agreement, however, must be clearly set forth in writing and any Member allocating anti-money laundering responsibilities to another Member must have a reasonable basis for believing that the other party is properly performing the required functions. Members should keep in mind, however, that Treasury takes the position that these allocation arrangements do not relieve an FCM or IB Member from its independent obligation to comply with anti-money laundering requirements.

    CONCLUSION

    Money-laundering schemes in the financial services industry lessen the public's faith in the integrity of the system. Therefore, NFA Members must ensure that they take adequate steps to identify and verify the identity of their customers and to detect, deter and report suspicious transactions that could be part of a money-laundering scheme. The guidelines set forth in this Notice should provide FCMs and IBs with the tools needed to develop an effective anti-money laundering program. Member firms should keep in mind, however, that this is an evolving area and NFA expects to provide further guidance as additional requirements in this area are imposed.


    1 Pub. L. 107-56, 115 Stat. 296, 324 (2001). This Act is Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.

    2 31 U.S.C. 5311 et seq. (2000). Title III amended the BSA, adding certain entities to the definition of financial institution. Regulations implementing the BSA can be found in Part 103 of Title 31 of the Code of Federal Regulations.

    3 Title III also defines CPOs and CTAs as "financial institutions" under the BSA; however, the Secretary of the Treasury (Treasury) temporarily deferred application of these requirements to certain financial institutions, including CTAs and CPOs, pending further review and analysis of the money laundering risks posed by these entities. On September 26, 2002, Treasury issued a proposed regulation that would require certain unregistered investment companies to develop and implement a written anti-money laundering program. Commodity pools are included in the definition of unregistered investment companies. See 67 FR 60617 (September 26, 2002). A final rule has not been issued. In addition, on May 5, 2003, Treasury issued a proposed regulation concerning anti-money laundering programs for certain CTAs. See 68 FR 23640 (May 5, 2003). A final rule has not yet been issued. NFA will issue separate anti-money laundering program guidance for CPOs and CTAs, at such time as they become subject to the requirements of section 352.

    4 Although IBs are not explicitly defined as "financial institutions" under the BSA, Treasury has clarified that IBs fall within the BSA's "financial institution" definition, which includes "a broker or dealer in securities or commodities." See 68 FR 25149 n.3 (May 9, 2003).

    5 See 31 U.S.C. 5318(l) and the implementing regulation jointly promulgated by Treasury and the CFTC at 31 CFR 103.123.

    6 See 31 CFR 103.123(a)(1)(i)-(ii) for a definition of what does and does not constitute an account.

    7 For purposes of these requirements, a customer with an existing securities account with a dually registered securities broker-dealer and FCM who elects to open a futures account with the dually registered firm may be treated as an existing customer of the firm.

    8 See 31 CFR 103.123(a)(5)(i) for the complete definition of who is and who is not a customer. The rule specifically excludes (1) financial institutions regulated by a Federal functional regulator; (2) banks regulated by a state bank regulator; and (3) persons described in 31 CFR 103.123(d)(2)(ii)-(iv) (entities such as governmental agencies and instrumentalities and the domestic operations of a publicly traded company).

    9 For an individual that does not have a residential or business street address, an Army Post Office or Fleet Post Office box number, or the residential or business street address of a next of kin or another contact individual should be obtained.

    10 In situations where a foreign business or enterprise does not have an identification number, an FCM or IB must request alternative government issued documentation certifying the existence of the business or enterprise.

    11 A reasonable amount of time may depend on various factors such as the type of account opened, whether the customer opens the account in person, and the type of identifying information that is available. A firm may choose to place limits on an account, such as restricting the number of transactions or the dollar value of transactions, until a customer's identity is verified. See Customer Identification Program for Futures Commission Merchants and Introducing Brokers, 67 FR 48328, 48333 (July 23, 2002). A firm should also keep in mind the regulations of Treasury's Office of Foreign Assets Control (OFAC) (see 31 CFR Part 500 et.seq.) prohibiting transactions involving designated foreign countries, their nationals, and other specially designated persons. See Customer Identification Programs for Futures Commission Merchants and Introducing Brokers, 68 FR 25149, 25154 (May 9, 2003).

    12 FATF is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering. FATF publishes a list of non-cooperative countries/territories in the fight against money laundering. This list can be found at http://www.fatf-gafi.org.

    13 See Section B of this Notice for details regarding SARs.

    14 Firms are required to comply with OFAC's list of blocked persons, restricted countries and specially designated nationals, for example, which can be found at www.ustreas.gov/ofac. Firms should also establish policies and procedures for consulting such lists and other publicly available information as part of their anti-money laundering programs. See, e.g., In the Matter of the Federal Branch of Arab Bank PLC, No. 2005-2 at 5,7, available at www.fincen.gov/reg-enforcement.html . However, firms do not have an affirmative duty to seek out the lists of known or suspected terrorists or terrorist organizations issued by the Federal government under the CIP rules. Firms will receive notification by separate guidance regarding the lists they must consult for CIP purposes.

    15 If appropriate, an FCM or IB may use the following sample language to provide notice to its customers:

      Important Information About Procedures For Opening a New Account

      To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account.

      What this means for you: When you open an account, we will ask you for your name, address, date of birth and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents.

    16 Currently, these financial institutions include banks, broker-dealers, FCMs and IBs. Regulations have been proposed that would require CTAs and IAs to adopt an AML compliance program. FCMs and IBs may rely upon these financial institutions to carry out the CIP pending the issuance of final CTA and IA AML program rules provided that the other reliance requirements noted above are satisfied. (See CFTC No Action Letter 05-50 (March 14, 2005)).

    17 See supra note 12.

    18 Each firm should determine whether it needs to develop additional "red flags" based on the nature of its customers and its business.

    19 Although alternative means of funding an account, such as credit cards and non-bank online remittance systems, e.g. PayPal, are not common in the futures industry, firms that accept such forms of payment should determine if their use by a customer, like suspicious wire activity, raises a "red flag" that should cause further inquiry.

    20 FinCEN has added FCMs and IBs to the "financial institution" definition in the rules under the BSA, thereby making them subject to the requirement to file currency transaction reports in lieu of Form 8300, See 68 FR 65392 (November 20, 2003). FCMs and IBs are also required to comply with BSA recordkeeping and reporting requirements set forth in 31 CFR 103.33, including the requirements regarding requests by customers for transfers and transmittals of funds in the amount of $3,000 or more.

    21 FCMs and IBs that comply with 31 CFR 103.110, which includes an annual notice filing and verification requirement, are immune from civil liability for sharing information for the purpose of detecting, identifying, or reporting activities involving possible money laundering or terrorist activities. This notice can be accessed at http://www.fincen.gov/fi_infoappb.html.

    22 Broker dealers that are notice registered for purposes of offering security futures products are required to comply with the broker-dealer reporting requirements in the securities industry. Dually registered broker-dealers may comply with the SAR requirements in the futures industry or the securities industry's requirements. See 68 FR 65392 (November 20, 2003).

    23 Firms are encouraged to file form SAR-SF for suspicious activity that is not required to be reported (e.g. a transaction falling below the $5,000 threshold).

    24 A copy of form SAR-SF and the filing instructions are available at www.fincen.gov.

    25 See 31 CFR 103.17 for a copy of the final regulation.

    26 Firms jointly filing a single SAR-SF are immune from liability with respect to such filing as provided at 31 CFR 103.17(f).

    27 FCMs and IBs are not prohibited from sharing or disclosing the existence of a SAR to appropriate law enforcement agencies or regulatory agencies, including the CFTC, NFA and other self-regulatory organizations of which they are members, as provided by the suspicious activity reporting rules. In addition, when requested by one of these agencies, FCMs and IBs are required to provide these agencies with any supporting documentation to a SAR. (See FIN-2007-G003, Suspicious Activity Report Supporting Documentation, June 13, 2007.)

    28 FCMs and IBs may not share SARs with non-parent entity affiliates. FinCEN and the CFTC, however, are expected to issue additional guidance on this matter in the future.

    29 Although Section 314(a) applies to IBs, FinCEN currently does not routinely require IBs to conduct 314(a) searches. FinCEN has the authority to require IBs to comply with Section 314(a) in whole or with respect to a particular request. If FinCEN requests IBs to begin conducting 314(a) searches or to comply with a particular request, IBs would be required to conduct the search or searches.

    30 If a firm does not have electronic access to FinCEN's secure web-site, FinCEN faxes the subject lists to the firm on a bi-weekly basis. This firm is required to conduct the same searches and report any matches to FinCEN via fax.

    31 FCMs are directed to follow the detailed instructions and frequently asked questions concerning these information requests that have been issued directly to them by FinCEN.

    32 See 71 Fed. Reg. 496 (January 4, 2006). See also FIN-2006-G009 - Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to Securities and Futures Industries. May 10, 2006.

    33 Correspondent accounts include accounts for foreign financial institutions to engage in futures or commodity options transactions, funds transfers, or other financial transactions, whether for the financial institution or principal or for its customers. An account includes any formal relationship established by an FCM to provide regular services, including but not limited to, those established to effect transactions in contracts of sale of a commodity for future delivery, options on a commodity or options on futures. 31 CFR 103.175(d)(2)(iii).

    34 See FIN-2206-G011, Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to Certain Introduced Accounts and Give-Up Arrangements in the Futures Industries, June 7, 2006.

    35 See 31 CFR 103.176(a)(2).

    36 As previously noted, as a general rule, the FCM establishing and maintaining the account is subject to the enhanced due diligence requirements of Section 312. An IB that only solicits or accepts orders for the purchase or sale of commodity futures contracts is not subject to the enhanced due diligence requirements of Section 312.

    37 The final rule refers to being designated by an intergovernmental group or organization of which the United States is a member. Currently, FATF is the only such group.

    38 A private banking account is an account (or any combination of accounts) that (1) requires a minimum aggregate deposit of funds or other assets of not less than $1,000,000; (2) is established on behalf of one or more individuals who have a direct or beneficial ownership interest in the account; and (3) is assigned to, or is administered or managed by, in whole or in part, an officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account.

    39 See 31 CFR 103.178(b).

    40 OFAC administers sanction programs against a number of foreign countries. A list of these countries and the sanctioning documents can be found at http://www.ustreas.gov/offices/enforcement/ofac

    41 OFAC's SDN list identifies individuals and entities owned or controlled by, or acting for or on behalf of targeted countries, or known or suspected terrorists or terrorist organizations. This list and information on how to handle matches can be found at http://www.ustreas.gov/offices/enforcement/ofac.

    42 In addition, if a customer attempts to wire transfer money to or receive money from a country under a sanction program or an entity or individual on the SDN list, the firm should contact OFAC immediately.

    43 Although guarantor FCMs may conduct this audit for any of their guaranteed IBs, the IB's senior management must review the scope of the audit and its findings and take corrective action where necessary.

    44 For small firms with limited staff, the audit function can be accomplished by a staff person who is not involved in the anti-money laundering program.

    45 This discussion does not apply to reliance arrangements that meet the requirements discussed under the customer identification program section of this interpretive notice.

    [¶ 9046] COMPLIANCE RULE 2-9: SUPERVISION OF THE USE OF AUTOMATED ORDER-ROUTING SYSTEMS
    (Click Here to Print this Section)
    (Revised December 12, 2006)

    INTERPRETIVE NOTICE

    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 activities. The rule is broadly written to provide Members with flexibility in developing procedures tailored to meet their particular needs. On certain issues, however, NFA has issued Interpretive Notices to provide more specific guidance on acceptable standards for supervisory procedures.

    Currently, information technology is changing nearly every aspect of how Members conduct business, including how customer orders are transmitted. The Board of Directors firmly believes that supervisory standards do not change with the medium used. How those standards are applied, however, may be affected by technology. Therefore, in order to fulfill their supervisory responsibilities, Members must adopt and enforce written procedures to examine the security, capacity, and credit and risk-management controls provided by the firm's automated order-routing systems (AORSs).1

    NFA recognizes that, given the differences in the size, complexity of operations, and make-up of the customers serviced by NFA Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm. It is NFA's policy to leave the exact form of supervision up to the Member, thereby providing the member with flexibility to design procedures that are tailored to the Member's own situation. It is also NFA's policy to set general standards rather than to require specific technology. Therefore, other procedures besides the ones described in this Interpretive Notice may comply with the general standards for supervisory responsibilities imposed by Compliance Rule 2-9.

    The procedures discussed in this Interpretive Notice assume that customers have access to the AORS without human intervention. Systems used by Members to transmit customer orders from the firm to the exchange vary significantly, and certain of the procedures discussed in this Notice may not be needed when only firm personnel can enter orders into the system.

    This Interpretive Notice applies to AORSs that are within a Member's control, including AORSs that are provided to the Member by an application service provider or an independent software vendor. While a Member is not, of course, responsible for an AORS chosen by the customer and outside of the Member's control - such as direct access systems provided by exchanges - the Member is nevertheless responsible for adopting procedures reasonably expected to address the trading, clearing, and other risks attendant to its customer relationship.2

    Security
    General Standard. Members who accept orders must adopt and enforce written procedures reasonably designed to protect the reliability and confidentiality of customer orders and account information at all points during the order-routing process. The procedures must also assign responsibility for overseeing the process to one or more individuals who understand how it works and who are capable of evaluating whether the process complies with the firm's procedures.

    Authentication. The AORS, or other systems the customer must go through to access the AORS, should authenticate the user. Authentication can be accomplished through a number of methods, including, but not limited to, the following:

    • Passwords;
    • Authentication tokens, such as SecurID cards; or
    • Digital certificates.

    Encryption. The system should use encryption or equivalent protections for all authentication and for any order or account information that is transmitted over a public network, a semi-private network, or a virtual private network.3 Encryption is less important for a private network that uses dedicated lines and is controlled by the Member (although it can still be a valuable protection). If more appropriate and effective security procedures are developed or identified, the use of those procedures would comply with this standard.

    Firewalls. Firewalls or equivalent protections should be used with public networks, semi-private networks, and virtual private networks. The system should log the activities that pass through a firewall, and the log should be reviewed regularly for abnormal activity. If more appropriate and effective security procedures are developed or identified, the use of those procedures would comply with this standard.

    Authorization. Although it is the customer's responsibility to ensure that only authorized individuals access the AORS using the customer's facilities and authentication devices (e.g., passwords), the Member's procedures should, as appropriate, provide customers with a means to notify the Member that particular individuals are no longer authorized or to request that authentication devices be disabled. Customers should be informed about the notification process.4

    Periodic Testing. The Member should conduct and evidence periodic,reasonable reviews designed to assess the security of the AORS using an independent internal audit department, a qualified outside party, or other appropriate means.

    Administration. The Member should adopt and enforce written procedures assigning the responsibility for overseeing the security of the AORS to appropriate supervisory personnel. The procedures should also provide that appropriate personnel keep up with new developments, monitor the effectiveness of the system's security, and respond to any breaches, and that the firm update the system as needed so that the AORS maintains the appropriate level of security.

    Capacity
    General Standard. Members who accept orders must adopt and enforce written procedures reasonably designed to maintain adequate personnel and facilities for the timely and efficient delivery of customer orders and reporting of executions. The procedures must also be reasonably designed to handle customer complaints about order delivery and reporting in a timely manner.

    Members may not misrepresent the services they provide or the quality of those services. If a Member represents that it maintains a particular capacity or performance level, it must take the measures necessary to achieve that level.5

    Capacity Reviews.

    The Member should adopt and enforce written procedures to regularly evaluate the capacity of the AORS and to increase capacity when needed. The procedures should also provide that the system will be subjected to an initial stress test. Such test may be conducted through simulation or other available means. Thereafter, the system should be subject to periodic reviews by using an independent internal audit department, or a qualified outside party, or using other appropriate means.

    The Member should monitor both capacity (how much volume the system can handle before it is adversely impacted or shuts down) and performance (how much volume the system can handle before response time materially increases), and should assess the AORS�s capacity and performance levels based on the major strains imposed on the system. The Member should establish acceptable capacity and performance levels for its AORS. The Member�s procedures should be reasonably designed to provide adequate capacity to meet estimated peak volume needs based on past experience, present demands, and projected demands.

    The procedures should also provide for the Member to follow-up on customer complaints about access problems, system slowdowns, or system outages. This follow-up should include identifying the cause of the problem, if any, and taking action to correct it, and/or evaluating ways to prevent it from re-occurring.

    Disaster Recovery and Redundancies. The Member should have contingency plans reasonably designed to service customers if either the system goes down or activity exceeds reasonably expected peak volume needs. The Member should use redundant systems or be able to quickly convert to other systems if the need arises. These backup systems can include facilities for accepting orders by telephone or reliance on third-party brokers or clearing firms.

    When operational difficulties occur, the Member should provide prompt and effective notification to customers affected by the operational difficulties. Notification can be made by a number of methods, including, but not limited to, the following:

    • a message on the Member's web site;
    • e-mails or instant messages;
    • a recorded telephone message for customers on hold; and/or
    • a recorded telephone message on a line dedicated to providing information to AORS customers.

    Advance Disclosure. The Member should disclose, in advance, the factors that could reasonably be expected to affect materially the system's performance (e.g., periods of stress). The Member should also educate customers on alternative ways to enter orders when the system goes down or reaches an unacceptable performance level. This disclosure may be made in the account agreement, on the Member's web site, or in any other manner designed to provide this information to current customers before problems occur.

    Credit and Risk-Management Controls
    General Standard. Members who accept orders must adopt and enforce written procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Member or the Member's other customers.6

    Pre-Execution Controls.7 An AORS should allow the Member to set limits for each customer based on commodity, quantity, and type of order or based on margin requirements. It should allow the Member to impose limits pre-execution and to automatically block any orders that exceed those limits.8

    The Member does not have to impose pre-execution controls on all customers, however. The Member should review the customer's sophistication, credit-worthiness, objectives, and trading practices and strategies when determining whether to impose controls pre-execution or post-execution and deciding what levels to use when setting limits.

    Post-Execution Controls. For customers subject to post-execution controls, the Member should have the ability to monitor trading promptly.9 This ability can be provided by the AORS or through other risk-management systems. The AORS should generate alerts when limits are exceeded through that system. The system should also allow the Member to block subsequent orders, either in their entirety or by kind (e.g., to block orders that create a new position or increase an existing position but not orders that liquidate some or all of an existing position).

    Direct Access Systems. When authorizing (qualifying a customer for) use of a direct access system that does not allow the Member to monitor trading promptly, the Member should utilize pre-execution controls, if available, to set pre-execution limits for each customer, regardless of the nature of the customer.10 Where the limits are set should be based on the customer's sophistication, credit-worthiness, objectives, and trading practices. Members should also consider any other relevant information when deciding whether to authorize a customer to use a direct access system.

    Review. Members should use AORSs in conjunction with their credit-review/risk-management systems and should evaluate the controls imposed on each customer as part of their regular credit and risk-control procedures.

    * * *

    NFA Compliance Rule 2-9 requires NFA Members to meet the standards for security, capacity, and credit and risk-management controls that are set out in this Interpretive Notice. It is NFA's policy to leave the exact form of supervision up to the Member, thereby providing the Member with flexibility to design procedures that are tailored to the Member's own situation.

    1The written procedures do not, however, have to contain technical specifications or duplicate procedures that are documented elsewhere.

    2An AORS may also be outside an IB Member's control if it is provided by the FCM.

    3 This notice only applies to AORSs. It does not, for example, require Members to encrypt account information provided to customers electronically under CFTC Rule 1.33(g).

    4For purposes of this notice, the term "customer" includes CTAs except when referring to credit-worthiness and ability to accept risk. In those instances, the term "customer" is limited to the owner of the account.

    5Misrepresenting capacity or performance levels or other material information regarding a Member's order-routing system is a violation of NFA Compliance Rule 2-29.

    6NFA Compliance Rule 2-30 also requires Members to consider an individual customer's ability to accept risk.

    7Pre-execution controls include both credit and "fat-finger" protections.

    8The ability to impose pre-execution controls does not, however, have to be built into a system that will only be used by customers subject to post-execution controls.

    9"Promptly" means as soon as practical under the circumstances. Obviously, Members can review trades of customers who engage in simple strategies on only one market much more quickly than they can review trades of customers who execute complex strategies on multiple markets. In the latter case, a Member may not have all of the relevant information until the end of the day.

    10 Customers may have a choice of direct access systems, some of which are better suited to their trading needs than others. While this interpretation does not dictate which system the customer uses, the Member should have the ability to either set pre-execution controls or monitor trading promptly.

    [¶ 9047] NFA COMPLIANCE RULE 2-37: FAIR COMMISSIONS
    (Click Here to Print this Section)
    (Revised December 17, 2007)

    INTERPRETIVE NOTICE

    Under Section 15A(k) of the Securities and Exchange Act of 1934 (Exchange Act), NFA is a national securities association for the limited purpose of regulating the activities of Members who are registered as brokers and 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). Section 15A(k) also requires NFA to impose customer protection requirements reasonably comparable to those of national securities associations registered under Section 15A(a) of the Exchange Act. One of these requirements relates to the amount of commissions these Members may charge for security futures transactions.

    NFA Compliance Rule 2-37(g) prohibits Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act from charging more than a fair commission for security futures transactions. That rule also provides that what is a fair commission depends on all of the relevant circumstances, including the expense of executing the order and the value of any service the Member may have rendered based on its experience and knowledge.

    The vast majority of NFA Members charge fair commissions, and Compliance Rule 2-37(g) will not require them to make any changes to their commission practices for security futures products. Commissions for futures transactions have been set competitively since the 1970s. They are usually based on the Member's costs plus a reasonable profit. Commission rates also vary based on the services provided by the Member. Additionally, Members who deal with institutional customers often negotiate commissions based on volume or similar measures. All of these practices continue to be acceptable for security futures products.1

    NFA has occasionally encountered retail firms that have charged fees significantly out-of-line with the Member's costs and services and the industry norm. In most of these cases, customers have been misled as to either the amount of the commission, the effect of the commission on profitability, or how the commission rate compares with other firms in light of the services offered. High commissions also have a significant effect on commission-to-equity ratios and increase the likelihood that the Member will churn accounts over which they or their Associates have discretionary authority or de facto control. As a result, NFA has consistently responded to unreasonably high commission rates by charging the firms and their Associates with violating NFA Compliance Rule 2-2(a) and/or NFA Compliance Rule 2-29, and NFA will continue to do so. 2

    NFA Compliance Rule 2-37(g) and this interpretive notice do not relieve Members of their obligation to make the applicable per trade or round-term commission charges available to customers prior to the commencement of trading and to fully explain any fees and charges that are not determined on a per trade or round-turn basis. 3

    1 NFA does not believe it is appropriate to apply a guideline similar to the Financial Industry Regulatory Authority's 5% guideline for securities mark-ups. The cost of executing orders in the futures markets tends to have little correlation with either the notional value of the contract or the amount of margin. Although nothing prohibits NFA Members from setting commissions for security futures contracts based on the notional value of the contract or the amount of margin, those commissions must be reasonable in light of all of the circumstances, including the Member's expenses and the value of the Member's services.

    2 See, e.g., In re Bachus & Stratton Commodities, Inc., NFA Case No. 92-BCC-15 (Hearing Panel, Feb. 18, 1993), aff'd, NFA Case No. 93-APP-2 (App. Comm., Nov. 11, 1993); In re Churchill Group, Inc., NFA Case No. 90-BCC-12 (BCC, Sep. 5, 1990) (settlement); In re The Siegel Trading Co., Inc., NFA Case No. 97-BCC-7 (Hearing Panel, Jan. 4, 1999) (settlement).

    3 See Interpretation of NFA Compliance Rule 2-4: Guideline for the Disclosure by FCMs and IBs of Costs Associated With Futures Transactions, 9005, NATIONAL FUTURES ASSOCIATION MANUAL.

    [¶ 9048] NFA COMPLIANCE RULE 2-4: THE BEST EXECUTION OBLIGATION OF NFA MEMBERS REGISTERED AS BROKER-DEALERS UNDER SECTION 15(b)(11) OF THE SECURITIES EXCHANGE ACT OF 1934
    (Click Here to Print this Section)

    INTERPRETIVE NOTICE

    Under Section 15A(k) of the Securities Exchange Act of 1934 ("Exchange Act"), NFA is 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 (i.e. FCMs and IBs that passport in to broker-dealer registration because they limit their securities activities to security futures products). NFA Compliance Rule 2-4 requires Members and Associates to observe high standards of commercial honor and just and equitable principles of trade. This rule imposes an obligation on all Members and Associates to put their customers' interests before their own when soliciting and executing futures transactions. To this end, in executing security futures transactions, Members and Associates have an obligation to use reasonable diligence to ensure that customer orders receive the most favorable terms under the circumstances.

    When a customer's order may be executed on only one exchange, Members do not have to decide where to route the order and, consequently, satisfying their best execution obligation is simpler than when Members must consider the relative merits of routing an orders to two or more markets. In those cases where a customer's order may be executed on two or more markets trading security futures contracts that are not materially different, Members and Associates have an obligation to use reasonable diligence to ascertain the market in which the customer's security futures order will receive the most favorable terms and, in particular, the best price available under prevailing market conditions. This notice provides guidance on how to fulfill that obligation.

    First, it should be clear that if a customer or customer's designee1 requests that a security futures order be directed to a particular market, or specifies the purchase or sale of a particular security futures product that trades on only one market, then the Member or Associate is required to follow the customer's or designee's instructions. In this particular case, a Member does not have an obligation to ascertain the best market for a customer's security futures order.

    A Member or Associate must consider the relevant facts and circumstances including, at a minimum, the following factors in discharging its obligation to use reasonable diligence in ascertaining where a customer's security futures order will receive the most favorable execution available:

    • The character of the market including, but not limited to, price, volatility, liquidity, depth, speed of execution, and pressure on available communications;

    • The size and type of transaction, including the type of order; and

    • The location, reliability and accessibility to the customer's intermediary of primary markets and quotation sources.

    Members and Associates must also consider differences in the fees and costs to customers ( e.g. transaction fees, clearing costs and expenses) associated with executing transactions in each market. Unless specifically instructed by a customer or customer's designee or necessary to obtain the execution of an order, a Member shall not channel an order through a third party unless the Member can show that by doing so the total cost or proceeds of the transaction were better than if the Member decided not to channel the order through the third party. Moreover, a Member through whom a retail order is channeled and who knowingly is a party to an arrangement whereby the initiating Member firm has not fulfilled its best execution obligation will also be deemed to have violated NFA Compliance Rule 2-4. Members should be aware that channeling orders through a third party to receive reciprocation for service or business will not relieve a Member of its best execution obligation. Likewise, Members should not allow an order routing inducement, such as payment for order flow, to interfere with a Member's duty of best execution.

    Failure of Member firms to maintain or adequately staff an order room or other department assigned to execute customer orders cannot be considered justification for executing away from the best available market. NFA recognizes that it may be impracticable for Members and Associates to make order routing decisions for retail orders on an order-by-order basis. Members and Associates that do not make order routing decisions for retail orders on an order-by-order basis should, at a minimum, consider the above factors and the materiality of any differences among contracts traded on different markets when establishing their retail order-routing practices and perform a regular and rigorous review of those practices to ensure that their best execution obligation is fulfilled.

    This notice describes the best execution obligation of Members that are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act for transactions in security futures products only and does not impose such an obligation upon Members for transactions in other products. By necessity, this notice is general in nature since it is issued before security futures products have begun trading. NFA will provide further guidance if necessary as the markets for security futures products evolve.

    1A person that exercises discretion over a customer's account.

    [¶ 9049] NFA COMPLIANCE RULES 2-7 AND 2-24 AND REGISTRATION RULE 401: PROFICIENCY REQUIREMENTS FOR SECURITY FUTURES PRODUCTS
    (Click Here to Print this Section)
    (Effective Dates of Amendments: May 5, 2003; revised December 4, 2006; and December 17, 2007.)

    INTERPRETIVE NOTICE

    The Commodity Futures Modernization Act of 2000 amended the Securities Exchange Act of 1934 to require NFA to "have rules that ensure that members and natural persons associated with members meet such standards of training, experience, and competence necessary to effect transactions in security futures products and are tested for their knowledge of securities and security futures products."1 NFA is in the process of updating the Series 3 examination to include questions applicable to security futures products. However, current registrants, and persons who become registered before the Series 3 examination is updated, will be allowed to meet the proficiency requirements by taking an appropriate training course before they engage in activities involving security futures products. This notice describes the conditions under which Members and Associates can substitute training for testing.

    Current NFA Members and Associates will be able to satisfy their proficiency requirements for security futures by taking any training program that covers the subject matter included in a content outline that has been jointly developed by NFA, the Financial Industry Regulatory Authority, and a number of securities and futures exchanges. A copy of that outline can be found on NFA's website at www.nfa.futures.org. New registrants can also qualify through training if they take the Series 3 examination and apply for registration before the revised examination becomes available. THE TRAINING MUST BE COMPLETED BEFORE AN INDIVIDUAL REGISTRANT ENGAGES IN ACTIVITIES INVOLVING SECURITY FUTURES PRODUCTS. Any registrant who is eligible to qualify through training has until December 31, 2009 before that eligibility lapses. Registrants who subsequently decide to engage in security futures activities will be required to take the relevant examination.2

    NFA, in partnership with the Financial Industry Regulatory Authority and the Institute for Financial Markets, has developed a web-based training program that will satisfy the training requirement. That program can be accessed at www.nfa.futures.org. There is no charge for completing this training program.

    NFA is also in the process of updating the Series 30 examination to include questions regarding security futures for persons who are designated security futures principals under NFA Compliance Rule 2-7. In order to qualify as a designated security futures principal, current supervisors may take a portion of the training program devoted to supervisory issues as well as the portions intended for all Associates as long as they do so before the revised Series 30 examination becomes available. After the revised Series 30 becomes available, only individuals who were qualified as branch office managers before that date may qualify as security futures principals by taking the training program in lieu of taking a supervisory proficiency exam, and those individuals must take the training program by December 31, 2009.

    NFA Members and Associates are not required to notify NFA that they have completed a training program. However, Members must be able to demonstrate to NFA during an audit that those registered individuals who are engaging in security futures activities have completed the necessary training. For example, Members could keep records of Associates who attend internal training programs or require Associates to provide certificates of completion for outside training programs.

    1 Section 15A(k)(2)(D) of the Securities Exchange Act of 1934.

    2 Securities registrants will be subject to these same standards, although the examinations that qualify them to trade security futures products will be different.

    [¶ 9050] NFA COMPLIANCE RULE 2-30(B): RISK DISCLOSURE STATEMENT FOR SECURITY FUTURES CONTRACTS
    (Click Here to Print this Section)
    (Revised December 12, 2002; and December 17, 2007)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-30(b) requires Members and Associates who are registered as brokers or dealers under Section 15(b)(11) of the Securities Exchange Act of 1934 to provide a disclosure statement for security futures products to a customer at or before the time the Member approves the account to trade security futures products.1

    NFA Compliance Rule 2-30(j)(1) requires these Members and Associates to make a record of when the disclosure statement was provided, and Compliance Rule 2-29(j)(12) prohibits them from including anything other than basic information in promotional material unless the promotional material is preceded or accompanied by the disclosure statement.2 The disclosure statement for security futures products referred to in these Rules is a uniform statement that has been jointly developed by NFA, the Financial Industry Regulatory Authority, and a number of securities and futures exchanges.

    The uniform disclosure statement, which is titled "Risk Disclosure Statement for Security Futures Contracts," can be downloaded from NFA's web site at www.nfa.futures.org/compliance/publications/sfp_disclosure.asp. Copies are also available by calling NFA's Information Center at 800-621-3570.3

    Members must be able to demonstrate to NFA, during an audit, that they provided the disclosure statement as required. Members are not, however, required to obtain a written acknowledgment from the customer regarding the disclosure statement.

    * * *

    RISK DISCLOSURE STATEMENT FOR SECURITY FUTURES CONTRACTS

    This disclosure statement discusses the characteristics and risks of standardized security futures contracts traded on regulated U.S. exchanges. At present, regulated exchanges are authorized to list futures contracts on individual equity securities registered under the Securities Exchange Act of 1934 (including common stock and certain exchange-traded funds and American Depositary Receipts), as well as narrow-based security indices. Futures on other types of securities and options on security futures contracts may be authorized in the future. The glossary of terms appears at the end of the document.

    Customers should be aware that the examples in this document are exclusive of fees and commissions that may decrease their net gains or increase their net losses. The examples also do not include tax consequences, which may differ for each customer.

    Section 1 – Risks of Security Futures

    1.1. Risks of Security Futures Transactions
    Trading security futures contracts may not be suitable for all investors. You may lose a substantial amount of money in a very short period of time. The amount you may lose is potentially unlimited and can exceed the amount you originally deposit with your broker. This is because futures trading is highly leveraged, with a relatively small amount of money used to establish a position in assets having a much greater value. If you are uncomfortable with this level of risk, you should not trade security futures contracts.

    1.2. General Risks

    • Trading security futures contracts involves risk and may result in potentially unlimited losses that are greater than the amount you deposited with your broker. As with any high risk financial product, you should not risk any funds that you cannot afford to lose, such as your retirement savings, medical and other emergency funds, funds set aside for purposes such as education or home ownership, proceeds from student loans or mortgages, or funds required to meet your living expenses.

    • Be cautious of claims that you can make large profits from trading security futures contracts. Although the high degree of leverage in security futures contracts can result in large and immediate gains, it can also result in large and immediate losses. As with any financial product, there is no such thing as a "sure winner."

    • Because of the leverage involved and the nature of security futures contract transactions, you may feel the effects of your losses immediately. Gains and losses in security futures contracts are credited or debited to your account, at a minimum, on a daily basis. If movements in the markets for security futures contracts or the underlying security decrease the value of your positions in security futures contracts, you may be required to have or make additional funds available to your carrying firm as margin. If your account is under the minimum margin requirements set by the exchange or the brokerage firm, your position may be liquidated at a loss, and you will be liable for the deficit, if any, in your account. Margin requirements are addressed in Section 4.

    • Under certain market conditions, it may be difficult or impossible to liquidate a position. Generally, you must enter into an offsetting transaction in order to liquidate a position in a security futures contract. If you cannot liquidate your position in security futures contracts, you may not be able to realize a gain in the value of your position or prevent losses from mounting. This inability to liquidate could occur, for example, if trading is halted due to unusual trading activity in either the security futures contract or the underlying security; if trading is halted due to recent news events involving the issuer of the underlying security; if systems failures occur on an exchange or at the firm carrying your position; or if the position is on an illiquid market. Even if you can liquidate your position, you may be forced to do so at a price that involves a large loss.

    • Under certain market conditions, it may also be difficult or impossible to manage your risk from open security futures positions by entering into an equivalent but opposite position in another contract month, on another market, or in the underlying security. This inability to take positions to limit your risk could occur, for example, if trading is halted across markets due to unusual trading activity in the security futures contract or the underlying security or due to recent news events involving the issuer of the underlying security.

    • Under certain market conditions, the prices of security futures contracts may not maintain their customary or anticipated relationships to the prices of the underlying security or index. These pricing disparities could occur, for example, when the market for the security futures contract is illiquid, when the primary market for the underlying security is closed, or when the reporting of transactions in the underlying security has been delayed. For index products, it could also occur when trading is delayed or halted in some or all of the securities that make up the index.

    • You may be required to settle certain security futures contracts with physical delivery of the underlying security. If you hold your position in a physically settled security futures contract until the end of the last trading day prior to expiration, you will be obligated to make or take delivery of the underlying securities, which could involve additional costs. The actual settlement terms may vary from contract to contract and exchange to exchange. You should carefully review the settlement and delivery conditions before entering into a security futures contract. Settlement and delivery are discussed in Section 5.

    • You may experience losses due to systems failures. As with any financial transaction, you may experience losses if your orders for security futures contracts cannot be executed normally due to systems failures on a regulated exchange or at the brokerage firm carrying your position. Your losses may be greater if the brokerage firm carrying your position does not have adequate back-up systems or procedures.

    • All security futures contracts involve risk, and there is no trading strategy that can eliminate it. Strategies using combinations of positions, such as spreads, may be as risky as outright long or short positions. Trading in security futures contracts requires knowledge of both the securities and the futures markets.

    • Day trading strategies involving security futures contracts and other products pose special risks. As with any financial product, persons who seek to purchase and sell the same security future in the course of a day to profit from intra-day price movements ("day traders") face a number of special risks, including substantial commissions, exposure to leverage, and competition with professional traders. You should thoroughly understand these risks and have appropriate experience before engaging in day trading. The special risks for day traders are discussed more fully in Section 7.

    • Placing contingent orders, if permitted, such as "stop-loss" or "stop-limit" orders, will not necessarily limit your losses to the intended amount. Some regulated exchanges may permit you to enter into stop-loss or stop-limit orders for security futures contracts, which are intended to limit your exposure to losses due to market fluctuations. However, market conditions may make it impossible to execute the order or to get the stop price.

    • You should thoroughly read and understand the customer account agreement with your brokerage firm before entering into any transactions in security futures contracts.

    • You should thoroughly understand the regulatory protections available to your funds and positions in the event of the failure of your brokerage firm. The regulatory protections available to your funds and positions in the event of the failure of your brokerage firm may vary depending on, among other factors, the contract you are trading and whether you are trading through a securities account or a futures account. Firms that allow customers to trade security futures in either securities accounts or futures accounts, or both, are required to disclose to customers the differences in regulatory protections between such accounts, and, where appropriate, how customers may elect to trade in either type of account.

    Section 2 – Description of a Security Futures Contract

    2.1. What is a Security Futures Contract?
    A security futures contract is a legally binding agreement between two parties to purchase or sell in the future a specific quantity of shares of a security or of the component securities of a narrow-based security index, at a certain price. A person who buys a security futures contract enters into a contract to purchase an underlying security and is said to be "long" the contract. A person who sells a security futures contract enters into a contract to sell the underlying security and is said to be "short" the contract. The price at which the contract trades (the "contract price") is determined by relative buying and selling interest on a regulated exchange.

    In order to enter into a security futures contract, you must deposit funds with your brokerage firm equal to a specified percentage (usually at least 20 percent) of the current market value of the contract as a performance bond. Moreover, all security futures contracts are marked-to-market at least daily, usually after the close of trading, as described in Section 3 of this document. At that time, the account of each buyer and seller reflects the amount of any gain or loss on the security futures contract based on the contract price established at the end of the day for settlement purposes (the "daily settlement price").

    An open position, either a long or short position, is closed or liquidated by entering into an offsetting transaction (i.e., an equal and opposite transaction to the one that opened the position) prior to the contract expiration. Traditionally, most futures contracts are liquidated prior to expiration through an offsetting transaction and, thus, holders do not incur a settlement obligation.

    Examples:

      Investor A is long one September XYZ Corp. futures contract. To liquidate the long position in the September XYZ Corp. futures contract, Investor A would sell an identical September XYZ Corp. contract.

      Investor B is short one December XYZ Corp. futures contract. To liquidate the short position in the December XYZ Corp. futures contract, Investor B would buy an identical December XYZ Corp. contract.

    Security futures contracts that are not liquidated prior to expiration must be settled in accordance with the terms of the contract. Some security futures contracts are settled by physical delivery of the underlying security. At the expiration of a security futures contract that is settled through physical delivery, a person who is long the contract must pay the final settlement price set by the regulated exchange or the clearing organization and take delivery of the underlying shares. Conversely, a person who is short the contract must make delivery of the underlying shares in exchange for the final settlement price.

    Other security futures contracts are settled through cash settlement. In this case, the underlying security is not delivered. Instead, any positions in such security futures contracts that are open at the end of the last trading day are settled through a final cash payment based on a final settlement price determined by the exchange or clearing organization. Once this payment is made, neither party has any further obligations on the contract.

    Physical delivery and cash settlement are discussed more fully in Section 5.

    2.2. Purposes of Security Futures
    Security futures contracts can be used for speculation, hedging, and risk management. Security futures contracts do not provide capital growth or income.

    Speculation

    Speculators are individuals or firms who seek to profit from anticipated increases or decreases in futures prices. A speculator who expects the price of the underlying instrument to increase will buy the security futures contract. A speculator who expects the price of the underlying instrument to decrease will sell the security futures contract. Speculation involves substantial risk and can lead to large losses as well as profits.

    The most common trading strategies involving security futures contracts are buying with the hope of profiting from an anticipated price increase and selling with the hope of profiting from an anticipated price decrease. For example, a person who expects the price of XYZ stock to increase by March can buy a March XYZ security futures contract, and a person who expects the price of XYZ stock to decrease by March can sell a March XYZ security futures contract. The following illustrates potential profits and losses if Customer A purchases the security futures contract at $50 a share and Customer B sells the same contract at $50 a share (assuming 100 shares per contract).

    Price of XYZ at Liquidation Customer A Profit/Loss Customer B Profit/Loss
    $55 $500 - $500
    $50 0 0
    $45 - $500 $500

    Speculators may also enter into spreads with the hope of profiting from an expected change in price relationships. Spreaders may purchase a contract expiring in one contract month and sell another contract on the same underlying security expiring in a different month (e.g., buy June and sell September XYZ single stock futures). This is commonly referred to as a "calendar spread."

    Spreaders may also purchase and sell the same contract month in two different but economically correlated security futures contracts. For example, if ABC and XYZ are both pharmaceutical companies and an individual believes that ABC will have stronger growth than XYZ between now and June, he could buy June ABC futures contracts and sell June XYZ futures contracts. Assuming that each contract is 100 shares, the following illustrates how this works.

    Opening Position Price at Liquidation Gain or Loss Price at Liquidation Gain or Loss
    Buy ABC at 50 $50 $300 53 $300
    Sell XYZ at 45 $46 - $100 $50 - $500
    Net Gain or Loss $200   - $200

    Speculators can also engage in arbitrage, which is similar to a spread except that the long and short positions occur on two different markets. An arbitrage position can be established by taking an economically opposite position in a security futures contract on another exchange, in an options contract, or in the underlying security.

    Hedging

    Generally speaking, hedging involves the purchase or sale of a security future to reduce or offset the risk of a position in the underlying security or group of securities (or a close economic equivalent). A hedger gives up the potential to profit from a favorable price change in the position being hedged in order to minimize the risk of loss from an adverse price change.

    An investor who wants to lock in a price now for an anticipated sale of the underlying security at a later date can do so by hedging with security futures. For example, assume an investor owns 1,000 shares of ABC that have appreciated since he bought them. The investor would like to sell them at the current price of $50 per share, but there are tax or other reasons for holding them until September. The investor could sell ten 100-share ABC futures contracts and then buy back those contracts in September when he sells the stock. Assuming the stock price and the futures price change by the same amount, the gain or loss in the stock will be offset by the loss or gain in the futures contracts.

    Price in
    September    		 Value of 1,000
    Shares of ABC    		 Gain or Loss
    on Futures    		 Effective
    Selling Price
    $40 $40,000 $10,000 $50,000
    $50 $50,000 $ 0 $50,000
    $60 $60,000 -$10,000 $50,000

    Hedging can also be used to lock in a price now for an anticipated purchase of the stock at a later date. For example, assume that in May a mutual fund expects to buy stocks in a particular industry with the proceeds of bonds that will mature in August. The mutual fund can hedge its risk that the stocks will increase in value between May and August by purchasing security futures contracts on a narrow-based index of stocks from that industry. When the mutual fund buys the stocks in August, it also will liquidate the security futures position in the index. If the relationship between the security futures contract and the stocks in the index is constant, the profit or loss from the futures contract will offset the price change in the stocks, and the mutual fund will have locked in the price that the stocks were selling at in May.

    Although hedging mitigates risk, it does not eliminate all risk. For example, the relationship between the price of the security futures contract and the price of the underlying security traditionally tends to remain constant over time, but it can and does vary somewhat. Furthermore, the expiration or liquidation of the security futures contract may not coincide with the exact time the hedger buys or sells the underlying stock. Therefore, hedging may not be a perfect protection against price risk.

    Risk Management
    Some institutions also use futures contracts to manage portfolio risks without necessarily intending to change the composition of their portfolio by buying or selling the underlying securities. The institution does so by taking a security futures position that is opposite to some or all of its position in the underlying securities. This strategy involves more risk than a traditional hedge because it is not meant to be a substitute for an anticipated purchase or sale.

    2.3. Where Security Futures Trade
    By law, security futures contracts must trade on a regulated U.S. exchange. Each regulated U.S. exchange that trades security futures contracts is subject to joint regulation by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

    A person holding a position in a security futures contract who seeks to liquidate the position must do so either on the regulated exchange where the original trade took place or on another regulated exchange, if any, where a fungible security futures contract trades. (A person may also seek to manage the risk in that position by taking an opposite position in a comparable contract traded on another regulated exchange.)

    Security futures contracts traded on one regulated exchange might not be fungible with security futures contracts traded on another regulated exchange for a variety of reasons. Security futures traded on different regulated exchanges may be non-fungible because they have different contract terms (e.g., size, settlement method), or because they are cleared through different clearing organizations. Moreover, a regulated exchange might not permit its security futures contracts to be offset or liquidated by an identical contract traded on another regulated exchange, even though they have the same contract terms and are cleared through the same clearing organization. You should consult your broker about the fungibility of the contract you are considering purchasing or selling, including which exchange(s), if any, on which it may be offset.

    Regulated exchanges that trade security futures contracts are required by law to establish certain listing standards. Changes in the underlying security of a security futures contract may, in some cases, cause such contract to no longer meet the regulated exchange's listing standards. Each regulated exchange will have rules governing the continued trading of security futures contracts that no longer meet the exchange's listing standards. These rules may, for example, permit only liquidating trades in security futures contracts that no longer satisfy the listing standards.

    2.4. How Security Futures Differ from the Underlying Security
    Shares of common stock represent a fractional ownership interest in the issuer of that security. Ownership of securities confers various rights that are not present with positions in security futures contracts. For example, persons owning a share of common stock may be entitled to vote in matters affecting corporate governance. They also may be entitled to receive dividends and corporate disclosure, such as annual and quarterly reports.

    The purchaser of a security futures contract, by contrast, has only a contract for future delivery of the underlying security. The purchaser of the security futures contract is not entitled to exercise any voting rights over the underlying security and is not entitled to any dividends that may be paid by the issuer. Moreover, the purchaser of a security futures contract does not receive the corporate disclosures that are received by shareholders of the underlying security, although such corporate disclosures must be made publicly available through the SEC's EDGAR system, which can be accessed at www.sec.gov. You should review such disclosures before entering into a security futures contract. See Section 9 for further discussion of the impact of corporate events on a security futures contract.

    All security futures contracts are marked-to-market at least daily, usually after the close of trading, as described in Section 3 of this document. At that time, the account of each buyer and seller is credited with the amount of any gain, or debited by the amount of any loss, on the security futures contract, based on the contract price established at the end of the day for settlement purposes (the "daily settlement price"). By contrast, the purchaser or seller of the underlying instrument does not have the profit and loss from his or her investment credited or debited until the position in that instrument is closed out.

    Naturally, as with any financial product, the value of the security futures contract and of the underlying security may fluctuate. However, owning the underlying security does not require an investor to settle his or her profits and losses daily. By contrast, as a result of the mark-to-market requirements discussed above, a person who is long a security futures contract often will be required to deposit additional funds into his or her account as the price of the security futures contract decreases. Similarly, a person who is short a security futures contract often will be required to deposit additional funds into his or her account as the price of the security futures contract increases.

    Another significant difference is that security futures contracts expire on a specific date. Unlike an owner of the underlying security, a person cannot hold a long position in a security futures contract for an extended period of time in the hope that the price will go up. If you do not liquidate your security futures contract, you will be required to settle the contract when it expires, either through physical delivery or cash settlement. For cash-settled contracts in particular, upon expiration, an individual will no longer have an economic interest in the securities underlying the security futures contract.

    2.5. Comparison to Options
    Although security futures contracts share some characteristics with options on securities (options contracts), these products are also different in a number of ways. Below are some of the important distinctions between equity options contracts and security futures contracts.

    If you purchase an options contract, you have the right, but not the obligation, to buy or sell a security prior to the expiration date. If you sell an options contract, you have the obligation to buy or sell a security prior to the expiration date. By contrast, if you have a position in a security futures contract (either long or short), you have both the right and the obligation to buy or sell a security at a future date. The only way that you can avoid the obligation incurred by the security futures contract is to liquidate the position with an offsetting contract.

    A person purchasing an options contract runs the risk of losing the purchase price (premium) for the option contract. Because it is a wasting asset, the purchaser of an options contract who neither liquidates the options contract in the secondary market nor exercises it at or prior to expiration will necessarily lose his or her entire investment in the options contract. However, a purchaser of an options contract cannot lose more than the amount of the premium. Conversely, the seller of an options contract receives the premium and assumes the risk that he or she will be required to buy or sell the underlying security on or prior to the expiration date, in which event his or her losses may exceed the amount of the premium received. Although the seller of an options contract is required to deposit margin to reflect the risk of its obligation, he or she may lose many times his or her initial margin deposit.

    By contrast, the purchaser and seller of a security futures contract each enter into an agreement to buy or sell a specific quantity of shares in the underlying security. Based upon the movement in prices of the underlying security, a person who holds a position in a security futures contract can gain or lose many times his or her initial margin deposit. In this respect, the benefits of a security futures contract are similar to the benefits of purchasing an option, while the risks of entering into a security futures contract are similar to the risks of selling an option.

    Both the purchaser and the seller of a security futures contract have daily margin obligations. At least once each day, security futures contracts are marked-to-market and the increase or decrease in the value of the contract is credited or debited to the buyer and the seller. As a result, any person who has an open position in a security futures contract may be called upon to meet additional margin requirements or may receive a credit of available funds.

    Example:

      Assume that Customers A and B each anticipate an increase in the market price of XYZ stock, which is currently $50 a share. Customer A purchases an XYZ 50 call (covering 100 shares of XYZ at a premium of $5 per share). The option premium is $500 ($5 per share X 100 shares). Customer B purchases an XYZ security futures contract (covering 100 shares of XYZ). The total value of the contract is $5000 ($50 share value X 100 shares). The required margin is $1000 (or 20% of the contract value).

      Price of
      XYZ at
      expiration      		 Customer A
      Profit/Loss      		 Customer B
      Profit/Loss
      65 1000 1500
      60 500 1000
      55 0 500
      50 -500 0
      45 -500 -500
      40 -500 -1000
      35 -500 -1500

      The most that Customer A can lose is $500, the option premium. Customer A breaks even at $55 per share, and makes money at higher prices. Customer B may lose more than his initial margin deposit. Unlike the options premium, the margin on a futures contract is not a cost but a performance bond. The losses for Customer B are not limited by this performance bond. Rather, the losses or gains are determined by the settlement price of the contract, as provided in the example above. Note that if the price of XYZ falls to $35 per share, Customer A loses only $500, whereas Customer B loses $1500.

    2.6. Components of a Security Futures Contract
    Each regulated exchange can choose the terms of the security futures contracts it lists, and those terms may differ from exchange to exchange or contract to contract. Some of those contract terms are discussed below. However, you should ask your broker for a copy of the contract specifications before trading a particular contract.

    2.6.1. Each security futures contract has a set size. The size of a security futures contract is determined by the regulated exchange on which the contract trades. For example, a security futures contract for a single stock may be based on 100 shares of that stock. If prices are reported per share, the value of the contract would be the price times 100. For narrow-based security indices, the value of the contract is the price of the component securities times the multiplier set by the exchange as part of the contract terms.

    2.6.2. Security futures contracts expire at set times determined by the listing exchange. For example, a particular contract may expire on a particular day, e.g., the third Friday of the expiration month. Up until expiration, you may liquidate an open position by offsetting your contract with a fungible opposite contract that expires in the same month. If you do not liquidate an open position before it expires, you will be required to make or take delivery of the underlying security or to settle the contract in cash after expiration.

    2.6.3. Although security futures contracts on a particular security or a narrow-based security index may be listed and traded on more than one regulated exchange, the contract specifications may not be the same. Also, prices for contracts on the same security or index may vary on different regulated exchanges because of different contract specifications.

    2.6.4. Prices of security futures contracts are usually quoted the same way prices are quoted in the underlying instrument. For example, a contract for an individual security would be quoted in dollars and cents per share. Contracts for indices would be quoted by an index number, usually stated to two decimal places.

    2.6.5. Each security futures contract has a minimum price fluctuation (called a tick), which may differ from product to product or exchange to exchange. For example, if a particular security futures contract has a tick size of 1�, you can buy the contract at $23.21 or $23.22 but not at $23.215.

    2.7. Trading Halts
    The value of your positions in security futures contracts could be affected if trading is halted in either the security futures contract or the underlying security. In certain circumstances, regulated exchanges are required by law to halt trading in security futures contracts. For example, trading on a particular security futures contract must be halted if trading is halted on the listed market for the underlying security as a result of pending news, regulatory concerns, or market volatility. Similarly, trading of a security futures contract on a narrow-based security index must be halted under such circumstances if trading is halted on securities accounting for at least 50 percent of the market capitalization of the index. In addition, regulated exchanges are required to halt trading in all security futures contracts for a specified period of time when the Dow Jones Industrial Average ("DJIA") experiences one-day declines of 10-, 20- and 30-percent. The regulated exchanges may also have discretion under their rules to halt trading in other circumstances – such as when the exchange determines that the halt would be advisable in maintaining a fair and orderly market.

    A trading halt, either by a regulated exchange that trades security futures or an exchange trading the underlying security or instrument, could prevent you from liquidating a position in security futures contracts in a timely manner, which could prevent you from liquidating a position in security futures contracts at that time.

    2.8. Trading Hours
    Each regulated exchange trading a security futures contract may open and close for trading at different times than other regulated exchanges trading security futures contracts or markets trading the underlying security or securities. Trading in security futures contracts prior to the opening or after the close of the primary market for the underlying security may be less liquid than trading during regular market hours.

    Section 3 – Clearing Organizations and Mark-to-Market Requirements

    Every regulated U.S. exchange that trades security futures contracts is required to have a relationship with a clearing organization that serves as the guarantor of each security futures contract traded on that exchange. A clearing organization performs the following functions: matching trades; effecting settlement and payments; guaranteeing performance; and facilitating deliveries.

    Throughout each trading day, the clearing organization matches trade data submitted by clearing members on behalf of their customers or for the clearing member's proprietary accounts. If an account is with a brokerage firm that is not a member of the clearing organization, then the brokerage firm will carry the security futures position with another brokerage firm that is a member of the clearing organization. Trade records that do not match, either because of a discrepancy in the details or because one side of the transaction is missing, are returned to the submitting clearing members for resolution. The members are required to resolve such "out trades" before or on the open of trading the next morning.

    When the required details of a reported transaction have been verified, the clearing organization assumes the legal and financial obligations of the parties to the transaction. One way to think of the role of the clearing organization is that it is the "buyer to every seller and the seller to every buyer." The insertion or substitution of the clearing organization as the counterparty to every transaction enables a customer to liquidate a security futures position without regard to what the other party to the original security futures contract decides to do.

    The clearing organization also effects the settlement of gains and losses from security futures contracts between clearing members. At least once each day, clearing member brokerage firms must either pay to, or receive from, the clearing organization the difference between the current price and the trade price earlier in the day, or for a position carried over from the previous day, the difference between the current price and the previous day's settlement price. Whether a clearing organization effects settlement of gains and losses on a daily basis or more frequently will depend on the conventions of the clearing organization and market conditions. Because the clearing organization assumes the legal and financial obligations for each security futures contract, you should expect it to ensure that payments are made promptly to protect its obligations.

    Gains and losses in security futures contracts are also reflected in each customer's account on at least a daily basis. Each day's gains and losses are determined based on a daily settlement price disseminated by the regulated exchange trading the security futures contract or its clearing organization. If the daily settlement price of a particular security futures contract rises, the buyer has a gain and the seller a loss. If the daily settlement price declines, the buyer has a loss and the seller a gain. This process is known as "marking-to-market" or daily settlement. As a result, individual customers normally will be called on to settle daily.

    The one-day gain or loss on a security futures contract is determined by calculating the difference between the current day's settlement price and the previous day's settlement price.

      For example, assume a security futures contract is purchased at a price of $120. If the daily settlement price is either $125 (higher) or $117 (lower), the effects would be as follows:

      (1 contract representing 100 shares)
      Daily
      Settlement
      Value      		 Buyer's
      Account      		 Seller's
      Account
      $125 $500 gain
      (credit)      		 $500 loss
      (debit)
      $117 $300 loss
      (debit)      		 $300 gain
      (credit)

    The cumulative gain or loss on a customer's open security futures positions is generally referred to as "open trade equity" and is listed as a separate component of account equity on your customer account statement.

    A discussion of the role of the clearing organization in effecting delivery is discussed in Section 5.

    Section 4 – Margin and Leverage

    When a broker-dealer lends a customer part of the funds needed to purchase a security such as common stock, the term "margin" refers to the amount of cash, or down payment, the customer is required to deposit. By contrast, a security futures contract is an obligation and not an asset. A security futures contract has no value as collateral for a loan. Because of the potential for a loss as a result of the daily marked-to-market process, however, a margin deposit is required of each party to a security futures contract. This required margin deposit also is referred to as a "performance bond."

    In the first instance, margin requirements for security futures contracts are set by the exchange on which the contract is traded, subject to certain minimums set by law. The basic margin requirement is 20% of the current value of the security futures contract, although some strategies may have lower margin requirements. Requests for additional margin are known as "margin calls." Both buyer and seller must individually deposit the required margin to their respective accounts.

    It is important to understand that individual brokerage firms can, and in many cases do, require margin that is higher than the exchange requirements. Additionally, margin requirements may vary from brokerage firm to brokerage firm. Furthermore, a brokerage firm can increase its "house" margin requirements at any time without providing advance notice, and such increases could result in a margin call.

    For example, some firms may require margin to be deposited the business day following the day of a deficiency, or some firms may even require deposit on the same day. Some firms may require margin to be on deposit in the account before they will accept an order for a security futures contract. Additionally, brokerage firms may have special requirements as to how margin calls are to be met, such as requiring a wire transfer from a bank, or deposit of a certified or cashier's check. You should thoroughly read and understand the customer agreement with your brokerage firm before entering into any transactions in security futures contracts.

    If through the daily cash settlement process, losses in the account of a security futures contract participant reduce the funds on deposit (or equity) below the maintenance margin level (or the firm's higher "house" requirement), the brokerage firm will require that additional funds be deposited.

    If additional margin is not deposited in accordance with the firm's policies, the firm can liquidate your position in security futures contracts or sell assets in any of your accounts at the firm to cover the margin deficiency. You remain responsible for any shortfall in the account after such liquidations or sales. Unless provided otherwise in your customer agreement or by applicable law, you are not entitled to choose which futures contracts, other securities or other assets are liquidated or sold to meet a margin call or to obtain an extension of time to meet a margin call.

    Brokerage firms generally reserve the right to liquidate a customer's security futures contract positions or sell customer assets to meet a margin call at any time without contacting the customer. Brokerage firms may also enter into equivalent but opposite positions for your account in order to manage the risk created by a margin call. Some customers mistakenly believe that a firm is required to contact them for a margin call to be valid, and that the firm is not allowed to liquidate securities or other assets in their accounts to meet a margin call unless the firm has contacted them first. This is not the case. While most firms notify their customers of margin calls and allow some time for deposit of additional margin, they are not required to do so. Even if a firm has notified a customer of a margin call and set a specific due date for a margin deposit, the firm can still take action as necessary to protect its financial interests, including the immediate liquidation of positions without advance notification to the customer.

    Here is an example of the margin requirements for a long security futures position.

    A customer buys 3 July EJG security futures at 71.50. Assuming each contract represents 100 shares, the nominal value of the position is $21,450 (71.50 x 3 contracts x 100 shares). If the initial margin rate is 20% of the nominal value, then the customer's initial margin requirement would be $4,290. The customer deposits the initial margin, bringing the equity in the account to $4,290.

    First, assume that the next day the settlement price of EJG security futures falls to 69.25. The marked-to-market loss in the customer's equity is $675 (71.50 - 69.25 x 3 contacts x 100 shares). The customer's equity decreases to $3,615 ($4,290 - $675). The new nominal value of the contract is $20,775 (69.25 x 3 contracts x 100 shares). If the maintenance margin rate is 20% of the nominal value, then the customer's maintenance margin requirement would be $4,155. Because the customer's equity had decreased to $3,615 (see above), the customer would be required to have an additional $540 in margin ($4,155 - $3,615).

    Alternatively, assume that the next day the settlement price of EJG security futures rises to 75.00. The mark-to-market gain in the customer's equity is $1,050 (75.00 - 71.50 x 3 contacts x 100 shares). The customer's equity increases to $5,340 ($4,290 + $1,050). The new nominal value of the contract is $22,500 (75.00 x 3 contracts x 100 shares). If the maintenance margin rate is 20% of the nominal value, then the customer's maintenance margin requirement would be $4,500. Because the customer's equity had increased to $5,340 (see above), the customer's excess equity would be $840.

    The process is exactly the same for a short position, except that margin calls are generated as the settlement price rises rather than as it falls. This is because the customer's equity decreases as the settlement price rises and increases as the settlement price falls.

    Because the margin deposit required to open a security futures position is a fraction of the nominal value of the contracts being purchased or sold, security futures contracts are said to be highly leveraged. The smaller the margin requirement in relation to the underlying value of the security futures contract, the greater the leverage. Leverage allows exposure to a given quantity of an underlying asset for a fraction of the investment needed to purchase that quantity outright. In sum, buying (or selling) a security futures contract provides the same dollar and cents profit and loss outcomes as owning (or shorting) the underlying security. However, as a percentage of the margin deposit, the potential immediate exposure to profit or loss is much higher with a security futures contract than with the underlying security.

    For example, if a security futures contract is established at a price of $50, the contract has a nominal value of $5,000 (assuming the contract is for 100 shares of stock). The margin requirement may be as low as 20%. In the example just used, assume the contract price rises from $50 to $52 (a $200 increase in the nominal value). This represents a $200 profit to the buyer of the security futures contract, and a 20% return on the $1,000 deposited as margin. The reverse would be true if the contract price decreased from $50 to $48. This represents a $200 loss to the buyer, or 20% of the $1,000 deposited as margin. Thus, leverage can either benefit or harm an investor.

    Note that a 4% decrease in the value of the contract resulted in a loss of 20% of the margin deposited. A 20% decrease would wipe out 100% of the margin deposited on the security futures contract.

    Section 5 – Settlement

    If you do not liquidate your position prior to the end of trading on the last day before the expiration of the security futures contract, you are obligated to either 1) make or accept a cash payment ("cash settlement") or 2) deliver or accept delivery of the underlying securities in exchange for final payment of the final settlement price ("physical delivery"). The terms of the contract dictate whether it is settled through cash settlement or by physical delivery.

    The expiration of a security futures contract is established by the exchange on which the contract is listed. On the expiration day, security futures contracts cease to exist. Typically, the last trading day of a security futures contract will be the third Friday of the expiring contract month, and the expiration day will be the following Saturday. This follows the expiration conventions for stock options and broad-based stock indexes. Please keep in mind that the expiration day is set by the listing exchange and may deviate from these norms.

    5.1. Cash settlement
    In the case of cash settlement, no actual securities are delivered at the expiration of the security futures contract. Instead, you must settle any open positions in security futures by making or receiving a cash payment based on the difference between the final settlement price and the previous day's settlement price. Under normal circumstances, the final settlement price for a cash-settled contract will reflect the opening price for the underlying security. Once this payment is made, neither the buyer nor the seller of the security futures contract has any further obligations on the contract.

    5.2. Settlement by physical delivery
    Settlement by physical delivery is carried out by clearing brokers or their agents with National Securities Clearing Corporation ("NSCC"), an SEC-regulated securities clearing agency. Such settlements are made in much the same way as they are for purchases and sales of the underlying security. Promptly after the last day of trading, the regulated exchange's clearing organization will report a purchase and sale of the underlying stock at the previous day's settlement price (also referred to as the "invoice price") to NSCC. If NSCC does not reject the transaction by a time specified in its rules, settlement is effected pursuant to the rules of NSCC within the normal clearance and settlement cycle for securities transactions, which currently is three business days.

    If you hold a short position in a physically settled security futures contract to expiration, you will be required to make delivery of the underlying securities. If you already own the securities, you may tender them to your brokerage firm. If you do not own the securities, you will be obligated to purchase them. Some brokerage firms may not be able to purchase the securities for you. If your brokerage firm cannot purchase the underlying securities on your behalf to fulfill a settlement obligation, you will have to purchase the securities through a different firm.

    Section 6 – Customer Account Protections

    Positions in security futures contracts may be held either in a securities account or in a futures account. Your brokerage firm may or may not permit you to choose the types of account in which your positions in security futures contracts will be held. The protections for funds deposited or earned by customers in connection with trading in security futures contracts differ depending on whether the positions are carried in a securities account or a futures account. If your positions are carried in a securities account, you will not receive the protections available for futures accounts. Similarly, if your positions are carried in a futures account, you will not receive the protections available for securities accounts. You should ask your broker which of these protections will apply to your funds.

    You should be aware that the regulatory protections applicable to your account are not intended to insure you against losses you may incur as a result of a decline or increase in the price of a security futures contract. As with all financial products, you are solely responsible for any market losses in your account.

    Your brokerage firm must tell you whether your security futures positions will be held in a securities account or a futures account. If your brokerage firm gives you a choice, it must tell you what you have to do to make the choice and which type of account will be used if you fail to do so. You should understand that certain regulatory protections for your account will depend on whether it is a securities account or a futures account.

    6.1. Protections for Securities Accounts
    If your positions in security futures contracts are carried in a securities account, they are covered by SEC rules governing the safeguarding of customer funds and securities. These rules prohibit a broker/dealer from using customer funds and securities to finance its business. As a result, the broker/dealer is required to set aside funds equal to the net of all its excess payables to customers over receivables from customers. The rules also require a broker/dealer to segregate all customer fully paid and excess margin securities carried by the broker/dealer for customers.

    The Securities Investor Protection Corporation (SIPC) also covers positions held in securities accounts. SIPC was created in 1970 as a non-profit, non-government, membership corporation, funded by member broker/dealers. Its primary role is to return funds and securities to customers if the broker/dealer holding these assets becomes insolvent. SIPC coverage applies to customers of current (and in some cases former) SIPC members. Most broker/dealers registered with the SEC are SIPC members; those few that are not must disclose this fact to their customers. SIPC members must display an official sign showing their membership. To check whether a firm is a SIPC member, go to www.sipc.org, call the SIPC Membership Department at (202) 371-8300, or write to SIPC Membership Department, Securities Investor Protection Corporation, 805 Fifteenth Street, NW, Suite 800, Washington, DC 20005-2215.

    SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. For example, if a customer has 1,000 shares of XYZ stock valued at $200,000 and $10,000 cash in the account, both the security and the cash balance would be protected. However, if the customer has shares of stock valued at $500,000 and $100,000 in cash, only a total of $500,000 of those assets will be protected.

    For purposes of SIPC coverage, customers are persons who have securities or cash on deposit with a SIPC member for the purpose of, or as a result of, securities transactions. SIPC does not protect customer funds placed with a broker/dealer just to earn interest. Insiders of the broker/dealer, such as its owners, officers, and partners, are not customers for purposes of SIPC coverage.

    6.2. Protections for Futures Accounts
    If your security futures positions are carried in a futures account, they must be segregated from the brokerage firm's own funds and cannot be borrowed or otherwise used for the firm's own purposes. If the funds are deposited with another entity (e.g., a bank, clearing broker, or clearing organization), that entity must acknowledge that the funds belong to customers and cannot be used to satisfy the firm's debts. Moreover, although a brokerage firm may carry funds belonging to different customers in the same bank or clearing account, it may not use the funds of one customer to margin or guarantee the transactions of another customer. As a result, the brokerage firm must add its own funds to its customers' segregated funds to cover customer debits and deficits. Brokerage firms must calculate their segregation requirements daily.

    You may not be able to recover the full amount of any funds in your account if the brokerage firm becomes insolvent and has insufficient funds to cover its obligations to all of its customers. However, customers with funds in segregation receive priority in bankruptcy proceedings. Furthermore, all customers whose funds are required to be segregated have the same priority in bankruptcy, and there is no ceiling on the amount of funds that must be segregated for or can be recovered by a particular customer.

    Your brokerage firm is also required to separately maintain funds invested in security futures contracts traded on a foreign exchange. However, these funds may not receive the same protections once they are transferred to a foreign entity (e.g., a foreign broker, exchange or clearing organization) to satisfy margin requirements for those products. You should ask your broker about the bankruptcy protections available in the country where the foreign exchange (or other entity holding the funds) is located.

    Section 7 – Special Risks for Day Traders

    Certain traders who pursue a day trading strategy may seek to use security futures contracts as part of their trading activity. Whether day trading in security futures contracts or other securities, investors engaging in a day trading strategy face a number of risks.

    • Day trading in security futures contracts requires in-depth knowledge of the securities and futures markets and of trading techniques and strategies. In attempting to profit through day trading, you will compete with professional traders who are knowledgeable and sophisticated in these markets. You should have appropriate experience before engaging in day trading.

    • Day trading in security futures contracts can result in substantial commission charges, even if the per trade cost is low. The more trades you make, the higher your total commissions will be. The total commissions you pay will add to your losses and reduce your profits. For instance, assuming that a round-turn trade costs $16 and you execute an average of 29 round-turn transactions per day each trading day, you would need to generate an annual profit of $111,360 just to cover your commission expenses.

    • Day trading can be extremely risky. Day trading generally is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance. You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day trading activities with funds that you cannot afford to lose.

    Section 8 – Other

    8.1. Corporate Events
    As noted in Section 2.4, an equity security represents a fractional ownership interest in the issuer of that security. By contrast, the purchaser of a security futures contract has only a contract for future delivery of the underlying security. Treatment of dividends and other corporate events affecting the underlying security may be reflected in the security futures contract depending on the applicable clearing organization rules. Consequently, individuals should consider how dividends and other developments affecting security futures in which they transact will be handled by the relevant exchange and clearing organization. The specific adjustments to the terms of a security futures contract are governed by the rules of the applicable clearing organization. Below is a discussion of some of the more common types of adjustments that you may need to consider.

    Corporate issuers occasionally announce stock splits. As a result of these splits, owners of the issuer's common stock may own more shares of the stock, or fewer shares in the case of a reverse stock split. The treatment of stock splits for persons owning a security futures contract may vary according to the terms of the security futures contract and the rules of the clearing organization. For example, the terms of the contract may provide for an adjustment in the number of contracts held by each party with a long or short position in a security future, or for an adjustment in the number of shares or units of the instrument underlying each contract, or both.

    Corporate issuers also occasionally issue special dividends. A special dividend is an announced cash dividend payment outside the normal and customary practice of a corporation. The terms of a security futures contract may be adjusted for special dividends. The adjustments, if any, will be based upon the rules of the exchange and clearing organization. In general, there will be no adjustments for ordinary dividends as they are recognized as a normal and customary practice of an issuer and are already accounted for in the pricing of security futures.

    Corporate issuers occasionally may be involved in mergers and acquisitions. Such events may cause the underlying security of a security futures contact to change over the contract duration. The terms of security futures contracts may also be adjusted to reflect other corporate events affecting the underlying security.

    8.2. Position Limits and Large Trader Reporting
    All security futures contracts trading on regulated exchanges in the United States are subject to position limits or position accountability limits. Position limits restrict the number of security futures contracts that any one person or group of related persons may hold or control in a particular security futures contract. In contrast, position accountability limits permit the accumulation of positions in excess of the limit without a prior exemption. In general, position limits and position accountability limits are beyond the thresholds of most retail investors. Whether a security futures contract is subject to position limits, and the level for such limits, depends upon the trading activity and market capitalization of the underlying security of the security futures contract.

    Position limits apply are required for security futures contracts that overlie a security that has an average daily trading volume of 20 million shares or fewer. In the case of a security futures contract overlying a security index, position limits are required if any one of the securities in the index has an average daily trading volume of 20 million shares or fewer. Position limits also apply only to an expiring security futures contract during its last five trading days. A regulated exchange must establish position limits on security futures that are no greater than 13,500 (100 share) contracts, unless the underlying security meets certain volume and shares outstanding thresholds, in which case the limit may be increased to 22,500 (100 share) contracts.

    For security futures contracts overlying a security or securities with an average trading volume of more than 20 million shares, regulated exchanges may adopt position accountability rules. Under position accountability rules, a trader holding a position in a security futures contract that exceeds 22,500 contracts (or such lower limit established by an exchange) must agree to provide information regarding the position and consent to halt increasing that position if requested by the exchange.

    Brokerage firms must also report large open positions held by one person (or by several persons acting together) to the CFTC as well as to the exchange on which the positions are held. The CFTC's reporting requirements are 1,000 contracts for security futures positions on individual equity securities and 200 contracts for positions on a narrow-based index. However, individual exchanges may require the reporting of large open positions at levels less than the levels required by the CFTC. In addition, brokerage firms must submit identifying information on the account holding the reportable position (on a form referred to as either an "Identification of Special Accounts Form" or a "Form 102") to the CFTC and to the exchange on which the reportable position exists within three business days of when a reportable position is first established.

    8.3. Transactions on Foreign Exchanges
    U.S. customers may not trade security futures on foreign exchanges until authorized by U.S. regulatory authorities. U.S. regulatory authorities do not regulate the activities of foreign exchanges and may not, on their own, compel enforcement of the rules of a foreign exchange or the laws of a foreign country. While U.S. law governs transactions in security futures contracts that are effected in the U.S., regardless of the exchange on which the contracts are listed, the laws and rules governing transactions on foreign exchanges vary depending on the country in which the exchange is located.

    8.4. Tax Consequences
    For most taxpayers, security futures contracts are not treated like other futures contracts. Instead, the tax consequences of a security futures transaction depend on the status of the taxpayer and the type of position (e.g., long or short, covered or uncovered). Because of the importance of tax considerations to transactions in security futures, readers should consult their tax advisors as to the tax consequences of these transactions.

    Section 9 – Glossary of Terms

    This glossary is intended to assist customers in understanding specialized terms used in the futures and securities industries. It is not inclusive and is not intended to state or suggest the legal significance or meaning of any word or term.

    Arbitrage – taking an economically opposite position in a security futures contract on another exchange, in an options contract, or in the underlying security.

    Broad-based security index – a security index that does not fall within the statutory definition of a narrow-based security index (see Narrow-based security index). A future on a broad-based security index is not a security future. This risk disclosure statement applies solely to security futures and generally does not pertain to futures on a broad-based security index. Futures on a broad-based security index are under exclusive jurisdiction of the CFTC.

    Cash settlement – a method of settling certain futures contracts by having the buyer (or long) pay the seller (or short) the cash value of the contract according to a procedure set by the exchange.

    Clearing broker – a member of the clearing organization for the contract being traded. All trades, and the daily profits or losses from those trades, must go through a clearing broker.

    Clearing organization – a regulated entity that is responsible for settling trades, collecting losses and distributing profits, and handling deliveries.

    Contract – 1) the unit of trading for a particular futures contract (e.g., one contract may be 100 shares of the underlying security), 2) the type of future being traded (e.g., futures on ABC stock).

    Contract month – the last month in which delivery is made against the futures contract or the contract is cash-settled. Sometimes referred to as the delivery month.

    Day trading strategy – an overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.

    EDGAR – the SEC's Electronic Data Gathering, Analysis, and Retrieval system maintains electronic copies of corporate information filed with the agency. EDGAR submissions may be accessed through the SEC's Web site, www.sec.gov.

    Futures contract – a futures contract is (1) an agreement to purchase or sell a commodity for delivery in the future; (2) at a price determined at initiation of the contract; (3) that obligates each party to the contract to fulfill it at the specified price; (4) that is used to assume or shift risk; and (5) that may be satisfied by delivery or offset.

    Hedging – the purchase or sale of a security future to reduce or offset the risk of a position in the underlying security or group of securities (or a close economic equivalent).

    Illiquid market – a market (or contract) with few buyers and/or sellers. Illiquid markets have little trading activity and those trades that do occur may be done at large price increments.

    Liquidation – entering into an offsetting transaction. Selling a contract that was previously purchased liquidates a futures position in exactly the same way that selling 100 shares of a particular stock liquidates an earlier purchase of the same stock. Similarly, a futures contract that was initially sold can be liquidated by an offsetting purchase.

    Liquid market – a market (or contract) with numerous buyers and sellers trading at small price increments.

    Long – 1) the buying side of an open futures contact, 2) a person who has bought futures contracts that are still open.

    Margin – the amount of money that must be deposited by both buyers and sellers to ensure performance of the person's obligations under a futures contract. Margin on security futures contracts is a performance bond rather than a down payment for the underlying securities.

    Mark-to-market – to debit or credit accounts daily to reflect that day's profits and losses.

    Narrow-based security index – in general, and subject to certain exclusions, an index that has any one of the following four characteristics: (1) it has nine or fewer component securities; (2) any one of its component securities comprises more than 30% of its weighting; (3) the five highest weighted component securities together comprise more than 60% of its weighting; or (4) the lowest weighted component securities comprising, in the aggregate, 25% of the index's weighting have an aggregate dollar value of average daily trading volume of less than $50 million (or in the case of an index with 15 or more component securities, $30 million). A security index that is not narrow-based is a "broad based security index." (See Broad-based security index).

    Nominal value – the face value of the futures contract, obtained by multiplying the contract price by the number of shares or units per contract. If XYZ stock index futures are trading at $50.25 and the contract is for 100 shares of XYZ stock, the nominal value of the futures contract would be $5025.00.

    Offsetting – liquidating open positions by either selling fungible contracts in the same contract month as an open long position or buying fungible contracts in the same contract month as an open short position.

    Open interest – the total number of open long (or short) contracts in a particular contract month.

    Open position – a futures contract position that has neither been offset nor closed by cash settlement or physical delivery.

    Performance bond – another way to describe margin payments for futures contracts, which are good faith deposits to ensure performance of a person's obligations under a futures contract rather than down payments for the underlying securities.

    Physical delivery – the tender and receipt of the actual security underlying the security futures contract in exchange for payment of the final settlement price.

    Position – a person's net long or short open contracts.

    Regulated exchange – a registered national securities exchange, a national securities association registered under Section 15A(a) of the Securities Exchange Act of 1934, a designated contract market, a registered derivatives transaction execution facility, or an alternative trading system registered as a broker or dealer.

    Security futures contract – a legally binding agreement between two parties to purchase or sell in the future a specific quantify of shares of a security (such as common stock, an exchange-traded fund, or ADR) or a narrow-based security index, at a specified price.

    Settlement price – 1) the daily price that the clearing organization uses to mark open positions to market for determining profit and loss and margin calls, 2) the price at which open cash settlement contracts are settled on the last trading day and open physical delivery contracts are invoiced for delivery.

    Short – 1) the selling side of an open futures contract, 2) a person who has sold futures contracts that are still open.

    Speculating – buying and selling futures contracts with the hope of profiting from anticipated price movements.

    Spread – 1) holding a long position in one futures contract and a short position in a related futures contract or contract month in order to profit from an anticipated change in the price relationship between the two, 2) the price difference between two contracts or contract months.

    Stop limit order – an order that becomes a limit order when the market trades at a specified price. The order can only be filled at the stop limit price or better.

    Stop loss order – an order that becomes a market order when the market trades at a specified price. The order will be filled at whatever price the market is trading at. Also called a stop order.

    Tick – the smallest price change allowed in a particular contract.

    Trader – a professional speculator who trades for his or her own account.

    Underlying security – the instrument on which the security futures contract is based. This instrument can be an individual equity security (including common stock and certain exchange-traded funds and American Depositary Receipts) or a narrow-based index.

    Volume – the number of contracts bought or sold during a specified period of time. This figure includes liquidating transactions.

    1Since CTAs are not required to provide the disclosure statement for security futures products, the Member carrying the account must provide that statement to customers whose accounts are solicted by CTAs.

    2 Financial Industry Regulatory Authority ("FINRA") members are subject to equivalent FINRA requirements.

    3 There is a small charge for bulk orders.

    [¶ 9051] NFA COMPLIANCE RULE 2-9: ETHICS TRAINING REQUIREMENTS
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    (Board of Directors, July 1, 2003)

    INTERPRETIVE NOTICE

    In October 2001, the CFTC issued a Statement of Acceptable Practices ("Statement") for ethics training. This Statement replaces the Commission's prescriptive ethics training rule and allows flexibility in the format, frequency and providers of ethics training, permitting each firm to tailor its training program to better suit its own operations. By the same token, this shifted the responsibility to each firm to adopt and implement an appropriate ethics training scheme. The Commission intended that the compliance with the Statement's principles would serve as a "safe harbor" concerning acceptable procedures for ethics training programs and topics that ethics training programs should address. Because the Statement is fairly general in nature, however, Members have requested that NFA provide additional information to assist them to comply with their ethics training requirement.

    Ethics training is one of a Member's supervisory obligations under NFA's Compliance Rule 2-9. The repeal of the specific regulations relating to ethics training does not diminish Members' and Associates' obligation to diligently supervise its employees. Professional ethical standards remain an essential element of each Member's business model. The use of well-designed ethics training programs supports each Member's supervision of its employees and business activities. Like any other business process, remaining aware of changing industry standards and ensuring high ethical standards is an on-going effort. Developments in technology, commercial practices and regulations and other changes will have ethical ramifications associated with them. Good business practice dictates that employees receive periodic training to keep them cognizant of these developments and their ethical implications.

    PROCEDURES
    The first thing that all firms should have is written procedures that outline their ethics training program. Acceptable procedures will address:

    1. the topics that will be included in the training program;

    2. by whom the training will be provided;

    3. the format of the training, e.g., classroom instructions, software, etc.;

    4. the frequency with which the Member expects its employees to obtain ethics training; and

    5. how the firm will document that it has followed its written procedures.

    CONTENT
    The Statement lists the following as topics that an ethics training program should address:

    1. An explanation of the applicable laws and regulations and rules of self-regulatory organizations or contract markets and registered derivatives transaction execution facilities;

    2. The registrant's obligation to the public to observe just and equitable principles of trade;

    3. How to act honestly and fairly and with due skill, care and diligence in the best interest of customers and the integrity of the markets;

    4. How to establish effective supervisory systems and internal controls;

    5. Obtaining and assessing the financial situation and investment experience of customers;

    6. Disclosure of material information to customers; and

    7. Avoidance, proper disclosure and handling of conflicts of interest.

    TRAINING PROVIDERS
    It is still acceptable to obtain ethics training sponsored by independent persons, firms, or industry associations. Each Member should ensure that its selected provider is qualified and obtain proof that the provider has completed relevant proficiency testing and has three years of relevant industry experience, or similar experience. NFA's Vice President of Registration may waive the testing requirement where the provider demonstrates competency comparable to satisfying proficiency testing requirements. Firms should only use providers that they reasonably in good faith believe are not subject to any investigations or bars from registration. In-house training is also acceptable; however, firms should apply these same criteria to any in-house training personnel. NFA's BASIC system, which can be found on our website, is an excellent resource to check registration and disciplinary history of providers.

    TRAINING FORMAT
    Ethics training may be provided through a variety of media, including the Internet, audiotapes, computer software, and videotapes, as well as in-person courses. Less formal methods of training are also permitted, including distribution of periodicals, legal cases and advisories. Each Member should choose a format or formats that best suit its business operations and the nature of its workforce. For example, firms that have a high percentage of APs with disciplinary histories or who come from firms with disciplinary histories may well decide that more structured, formal training is appropriate.

    FREQUENCY
    Like format, Members should decide how frequently ethics training is required based on the business model, the composition of their sales force and the format of the training. For example, firms that opt for less formal training such as distribution of pertinent written materials should consider keeping the training on a more on-going basis. More formal training, such as classroom instruction, could appropriately be offered less frequently but on a periodic basis.

    DOCUMENTATION
    Maintaining documentation that the Member has complied with its procedures is a critical element of an acceptable ethics training program because it enables the Member to be certain that it is actually implementing the policies it has deemed necessary and appropriate for its business. The appropriate documentation will vary depending on the firm's overall ethics training program. Firms that distribute written materials should maintain documentation showing what materials were distributed, who selected them and when and to whom they were circulated. Firms that utilize more formal training programs should keep records showing who obtained the training, the date of training, and any materials used.

    FUTURES EXCHANGE REQUIRMENTS
    The futures exchanges have taken a variety of approaches to ethics training. Members are urged to review the ethics training requirements of the exchanges of which they are members.

    CONCLUSION
    Members that establish a corporate culture of high ethical behavior will provide the best service for their customers. Remaining aware of changing industry standards and adopting an appropriate ethics training program will help ensure that Members and their Associates continually adhere to the high ethical standards that the Members set for themselves.

    [¶ 9052] NFA COMPLIANCE RULE 2-38: BUSINESS CONTINUITY AND DISASTER RECOVERY PLAN
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    INTERPRETIVE NOTICE

    Since the events of September 11, 2001, the financial services industry has devoted increased attention to issues relating to disaster recovery plans. NFA's Board of Directors (Board) believes that disaster recovery and business continuity issues are of utmost importance and that NFA should be proactive in ensuring that its Members have adequate disaster recovery plans in place. As a result, NFA's Board recently adopted NFA Compliance Rule 2-38 to require all Members to adopt a business continuity and disaster recovery plan (Plan).

    Compliance Rule 2-38 is broadly written to provide Members with the flexibility to adopt a Plan tailored to their individual needs. NFA recognizes that the exact form of the Plan adopted by a Member will vary based on a number of factors, including the size and complexity of the Member's business and the firm's resources. Nevertheless, the Board believes Members need additional guidance on the essential components of a Plan and what is required to maintain a Plan. This interpretive notice provides that guidance.

    Essential Components
    Compliance Rule 2-38 requires Members to have a Plan reasonably designed to enable them to continue operating, to reestablish operations, or to transfer their business to other Members with minimal disruption to their customers, other Members, and the commodity futures markets. A Plan should address the following, as applicable:

    • Establishing back-up facilities, systems, and personnel that are located in one or more reasonably separate geographic areas from the Member's primary facilities, systems, and personnel (e.g. primary and back-up facilities should be located in different power grids and different telecommunication vendors should be used), which may include arrangements for the temporary use of facilities, systems, and personnel provided by third parties;

    • Backing up or copying essential documents and data (e.g. general ledger) on a periodic basis and storing the information off-site in either hard-copy or electronic format;

    • Considering the impact of business interruptions encountered by third parties and identifying ways to minimize that impact; and

    • Developing a communication plan to contact essential parties such as employees, customers, carrying brokers, vendors and disaster recovery specialists.

    These components are minimum areas that should be addressed in Members' Plans. A Member's Plan should also address any other areas that are essential to its business operations. An effective Plan will be designed to meet the Member's individual situation and needs.

    Maintaining the Plan
    In order for a Member's Plan to remain effective, the Member must update its Plan as necessary to respond to material changes in the Member's operations. Each Member must also periodically conduct and evidence reasonable reviews designed to assess the Plan's effectiveness.

    Even the best Plan is useless if it is not available when needed. Therefore, each Member should distribute and explain the Plan to its key employees and communicate the essential components of the Plan to all employees. Each Member should also maintain copies of the Plan at one or more off-site locations that are readily accessible to key employees.

    NFA Compliance Rule 2-38 requires NFA Members to establish and maintain business continuity and disaster recovery plans that are consistent with this interpretive notice. The Rule provides Members with flexibility in developing those Plans, and each Member should adopt a Plan that meets its individual situation and needs.

    [¶ 9053] FOREX TRANSACTIONS
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    (Revised November 9, 2004; June 13, 2005; September 15, 2005; November 30, 2005; April 30, 2006; July 31, 2006; October 1, 2006; February 13, 2007; March 7, 2007; March 9, 2007; March 31, 2007; May 7, 2007; June 5, 2007; July 1, 2007; September 21, 2007; October 1, 2007; October 25, 2007; December 17, 2007; December 21, 2007; June 1, 2008; July 1, 2008; October 31, 2008; and April 1, 2009.)

    INTERPRETIVE NOTICE

    The Commodity Exchange Act (CEA or Act) gives the Commodity Futures Trading Commission (CFTC or Commission) limited jurisdiction over off-exchange foreign currency transactions offered to or entered into with retail customers. As a result of those provisions, certain firms primarily engaged in the retail forex business have registered with the CFTC and become Members of NFA. NFA has adopted several requirements to govern the conduct of these firms and their associated persons.

    As described below, NFA Bylaw 306 creates a Forex Dealer Member category for certain NFA Members who act as counterparties to forex transactions with retail customers. This category allows NFA to exercise appropriate regulatory jurisdiction over the retail forex activities of these Members without imposing unnecessary, and potentially duplicative, regulatory burdens on Members that are otherwise subject to regulatory oversight for their activities.

    NFA Bylaw 1507(b) defines forex as foreign currency futures and options and any other agreement, contract, or transaction in foreign currency that is offered or entered into on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis that are:

    • offered to or entered into with persons that are not eligible contract participants as defined in Section 1a(12) of the Act (retail customers); and

    • not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade.1

    Bylaw 1507(b) also excludes the following from the forex definition if the transaction is not a futures or options contract:

    • securities (other than security futures products);

    • any contract of sale that results in actual delivery within two days; and

    • any contract of sale that creates an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business.

    Given the differences between off-exchange transactions and traditional exchange-traded futures and options, the Board of Directors does not believe that it is appropriate to apply the full array of NFA's futures rules to forex transactions. Therefore, rather than simply incorporating forex transactions into the definition of "futures," NFA adopted NFA Compliance Rule 2-36 to govern these transactions.

    In developing its forex requirements, NFA's primary concern was to ensure that they provide adequate protection for retail customers without imposing undue burdens on NFA Members. NFA also believes that its requirements should, where consistent with customer protection, promote innovation and competition. In order to provide Members with as much flexibility as possible, NFA has chosen to deal with a number of issues by providing guidance under NFA Compliance Rule 2-36 instead of by adopting additional rules.

    NFA Compliance Rule 2-36 sets out the general standards that apply to Forex Dealer Members and their Associates in connection with forex transactions. Subsection (b) prohibits Forex Dealer Members and their Associates from engaging in fraudulent activities, subsection (c) requires Forex Dealer Members and their Associates to observe high standards of commercial honor and just and equitable principles of trade in connection with their forex business, and subsection (e) requires Forex Dealer Members and their Associates with supervisory duties to supervise their employees and agents. Other subsections address a Forex Dealer Member's responsibility for its unregulated affiliates and third-party solicitors and make Forex Dealer Members subject to discipline for the conduct of certain non-Members with which they do business.

    This notice has three sections. The first section explains who qualifies as a Forex Dealer Member under NFA Bylaw 306, the second section provides additional guidance about the requirements in Compliance Rule 2-36, and the third section covers other miscellaneous requirements.

    A. BYLAW 306

    In general, Forex Dealer Members are NFA Members who act as counterparties to forex transactions. This is a self-executing requirement, which means that any Member who qualifies is automatically a Forex Dealer Member. There is no application form and no approval requirement.

    Members who do not act as counterparties are not Forex Dealer Members, even if they introduce or manage forex accounts. Under NFA Compliance Rule 2-39, however, most Members who introduce or manage forex accounts are required to comply with subsections (a), (b), (c), and (e) of NFA Compliance Rule 2-36.

    Bylaw 306(b) excludes Members that are otherwise subject to regulatory oversight for their forex activities, which means that these Members are not Forex Dealer Members and do not have to comply with Compliance Rule 2-36. 2 The exclusions mostly follow Section 2(c)(2)(B)(ii) of the CEA, although the exclusions for broker-dealers and their affiliates are conditioned on the Financial Industry Regulatory Authority ("FINRA") membership. In particular, the following entities are not Forex Dealer Members:

    • financial institutions (e.g., banks and savings associations);
    • certain insurance companies and their regulated subsidiaries or affiliates;
    • financial holding companies;
    • investment bank holding companies;
    • registered broker-dealers that are members of FINRA; 3 and
    • Material Associated Persons of registered broker-dealers that are members of FINRA. 4

    B. COMPLIANCE RULE 2-36

    As noted above, this section provides additional guidance on what Compliance Rule 2-36 requires. Certain sections specifically refer to Forex Dealer Members. Except for Members that meet the criteria in Bylaw 306(b), all other provisions of this notice also apply to Members and their Associates who solicit, introduce or manage forex accounts.

    1. Disclosure - Members must provide forex customers with understandable and timely disclosure on essential features of forex trading.

    At or before the time a customer first engages in a forex transaction, a Forex Dealer Member and its Associates should provide the customer sufficient information concerning the characteristics and particular risks of entering into forex transactions. Members and Associates introducing or managing accounts should know what information has been provided and should supplement it when necessary.

    This information must include the following statement prominently displayed:

      The transactions you are entering into with [Member] are not traded on an exchange. Therefore, under the U.S. Bankruptcy Code, your funds may not receive the same protections as funds used to margin or guarantee exchange-traded futures and options contracts, which receive a priority in bankruptcy. Since that same priority has not been given to funds used for off-exchange forex trading, if [Member] becomes insolvent and you have a claim for amounts deposited or profits earned on transactions with [Member], your claim may not receive a priority. Without a priority, you are a general creditor and your claim will be paid, along with the claims of other general creditors, from any monies still available after priority claims are paid. Even customer funds that [Member] keeps separate from its own operating funds may not be safe from the claims of other general and priority creditors.

    At or before the time a customer first engages in a forex transaction, a Member and its Associates should disclose how the Member will be compensated for the services it will provide to the customer.

    Additionally, a Forex Dealer Member must describe to the customer the nature of these foreign currency transactions. Therefore, a Forex Dealer Member must provide, and the customer must separately acknowledge receipt of, either the following disclosure language or other appropriate language (based upon the Forex Dealer Member's business model) approved by NFA staff, which must be prominently displayed in all uppercase letters and in 10 point size type or larger but in any event no smaller than any surrounding type:

      THE FOREIGN CURRENCY TRADING YOU ARE ENTERING INTO IS NOT CONDUCTED ON AN EXCHANGE. [MEMBER] IS ACTING AS A COUNTERPARTY IN THESE TRANSACTIONS AND, THEREFORE, ACTS AS THE BUYER WHEN YOU SELL AND THE SELLER WHEN YOU BUY. AS A RESULT, [MEMBER]'S INTERESTS MAY BE IN CONFLICT WITH YOURS. UNLESS OTHERWISE SPECIFIED IN YOUR WRITTEN AGREEMENT OR OTHER WRITTEN DOCUMENTS [MEMBER] ESTABLISHES THE PRICES AT WHICH IT OFFERS TO TRADE WITH YOU. THE PRICES [MEMBER] OFFERS MIGHT NOT BE THE BEST PRICES AVAILABLE AND [MEMBER] MAY OFFER DIFFERENT PRICES TO DIFFERENT CUSTOMERS.

      IF [MEMBER] ELECTS NOT TO COVER ITS OWN TRADING EXPOSURE, THEN YOU SHOULD BE AWARE THAT [MEMBER] MAY MAKE MORE MONEY IF THE MARKET GOES AGAINST YOU. ADDITIONALLY, SINCE [MEMBER] ACTS AS THE BUYER OR SELLER IN THE TRANSACTION, YOU SHOULD CAREFULLY EVALUATE ANY TRADE RECOMMENDATIONS YOU RECEIVE FROM [MEMBER] OR ANY OF ITS SOLICITORS.

    Forex Dealer Members should provide both the bid and the offer when the customer enters an order.

    Members should update any material information that has changed prior to entering into new transactions with current customers if failing to update the information would make it misleading.

    2. Reporting - Forex Dealer Members must provide forex customers with timely and accurate notice of the status of their accounts.

    Forex Dealer Members should provide written confirmations within one business day after any activity in the customer's account, including offsetting transactions, rollovers, and deliveries. The confirmation should include the details of the transaction as well as all commissions, costs, fees and other charges incurred by the customer in connection with the transaction, including commissions and similar charges collected on behalf of third-parties who introduce business to or manage accounts carried by the Forex Dealer Member.

    Forex Dealer Members should provide regular monthly summaries of all forex transactions and other account activity to customers for all accounts that have open positions at the end of the month or changes in the account balance since the prior statement. Forex Dealer Members should provide summaries at least quarterly for all other open accounts.

    With the customer's consent, confirmations and monthly summaries may be transmitted by electronic means.

    As of June 1, 2009, 2. Reporting will read:

    2. Reporting - Forex Dealer Members must provide forex customers with timely and accurate notice of the status of their accounts.

    Forex Dealer Members should provide written confirmations within one business day after any activity in the customer's account, including offsetting transactions, rollovers, deliveries, option exercises, option expirations, trades that have been reversed or adjusted, and monetary adjustments. The confirmation should include the information required by Compliance Rule 2-44.

    Forex Dealer Members should provide regular monthly statements showing all forex transactions and other account activity to customers for all accounts that have open positions at the end of the month or changes in the account balance or equity since the prior statement. Forex Dealer Members should provide statements at least quarterly for all other open accounts. The monthly or quarterly statements should include the information required by Compliance Rule 2-44.

    Confirmations and monthly/quarterly statements may be provided on-line or transmitted by other electronic means if the customer consents to the specific method used.

    3. Supervision - Members and their Associates having supervisory responsibilities must diligently supervise the Member's forex business, including the activities of the Member's Associates and agents. Members must establish, maintain, and enforce written supervisory procedures.

    NFA has provided Members with guidance on minimum standards of supervision through interpretive notices issued under NFA Compliance Rule 2-9. 5 In these interpretive notices NFA recognized that, given the differences in the size of and complexity of the operations of NFA Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm. This principle also applies to the supervision of a Member's forex business.

    Although Members have the flexibility to design procedures that are tailored to their own situation, an adequate program for supervision would include procedures for performing day-to-day monitoring. These procedures would include:

    • screening employees who will solicit transactions from or provide advice to customers or manage customer accounts to see if they are subject to any of the statutory disqualifications in Section 8a of the CEA and, if so, to determine the extent of supervision they will require;
    • monitoring communications with the public, including sales solicitations and web sites, and approving promotional material;
    • reviewing the information obtained from and the information provided to customers solicited by the firm and its employees to ensure that the necessary account information has been obtained and the appropriate information provided; and
    • handling and resolving customer complaints.

    For Forex Dealer Members, these procedures would also include:

    • screening prospective Associates to ensure that they are registered with the Commodity Futures Trading Commission as associated persons; 6
    • screening persons who introduce customer business or manage customer accounts to see if the firm or any of its principals is subject to a statutory disqualification under Section 8a of the CEA and, if so, determining if the Forex Dealer Member should perform additional due diligence on that person; 7
    • reviewing disclosures given to customers to ensure they are understandable, timely, and provide sufficient information;
    • reviewing and analyzing the forex activity in customer accounts, including discretionary customer accounts; and
    • handling customer funds, including accepting security deposits.

    A Forex Dealer Member and a listed principal that is also a registered associated person (see Financial Requirements 15(c)) must supervise the preparation of a Forex Dealer Member's financial books and records. Diligent supervision includes hiring and retaining qualified staff. In determining whether an individual responsible for preparing the Member's financial books and records is qualified, the firm and its financial principal should consider the following:

    • Is the individual qualified for the position by experience or training?
    • Does the individual exercise independent judgment?
    • Has the individual ever been sanctioned or refused membership or licensing by NFA, the CFTC, the SEC, NASD or FINRA, the Public Company Accounting Oversight Board, or any other financial regulator?
    • Has the individual ever been sanctioned or refused membership by the American Institute of Certified Public Accountants or any other accounting organization?
    • Has any firm for which the individual performed auditing, accounting, or bookkeeping been subject to an emergency action or sanctioned by NFA, the CFTC, the SEC, NASD or FINRA, the Public Company Accounting Oversight Board, or any other financial regulator for failure to comply with financial requirements or for having inadequate books and records while the individual was engaged in those activities?
    • Are there any pending actions against the individual or a firm for which the individual performed auditing, accounting, or bookkeeping?

    This is not an exclusive list. If the individual or a firm for which the individual worked (either as an independent contractor or an employee) was subject to an emergency action, sanctioned by a financial regulator, or is subject to a pending action, the FDM and the listed principal/registered AP responsible for the FDM's financial books and records should consider the nature and seriousness of the conduct (or alleged conduct) and the individual's role in it. An NFA Member Responsibility Action or an emergency action by another financial regulator is always an extremely serious matter.

    The Forex Dealer Member and its financial principal must also conduct due diligence and consider analogous information when selecting an independent public accountant to certify the firm's annual financial statements.

    An adequate supervisory program should also include periodic on-site visits to branch offices, guaranteed introducing brokers, and otherwise unregulated affiliates that conduct forex business on behalf of the Member. The Member needs to determine the frequency and nature of these visits. The number of visits will depend on the amount of business generated, the number of customer complaints received, the training and experience of the office personnel, and the frequency and nature of problems that arise from the office.

    Finally, a Member's supervisory responsibilities include the obligation to ensure that its employees are properly trained to perform their duties. The formality of a training program will depend on the size of the firm and the nature of its business. Procedures should be in place to ensure that supervisory personnel know and understand the firm's supervisory procedures and that employees receive adequate training to abide by NFA requirements and to properly handle customer accounts.

    4. Recordkeeping - Members must keep books and records relating to their forex operations for a period of five years from the date thereof and shall keep them readily accessible during the first 2 years of the 5-year period. All such books and records shall be open to inspection by NFA.

    Members should adopt and enforce reasonable procedures to create current and accurate books and records and to keep them from being altered or destroyed. Such records must include, among other things, financial records substantiating a Members assets and liabilities, including liabilities owed to customers and receivables from other persons. The Member should be able to promptly produce its records in a format that NFA can read and reproduce.

    Forex Dealer Members should adopt and enforce a written policy detailing the procedures it follows to calculate rollover or interest charges and payments. The policy must include the factors that are considered as well as the names of any sources for these factors. The Member should document the underlying factors reviewed in completing the calculation, including any related transactions entered into by the Forex Dealer Member, so it can be replicated.

    5. Communications with the Public and Promotional Material - No Member or Associate shall make any communication with potential or current customers that operates as a fraud or deceit; uses a high-pressure approach; or implies that forex transactions are appropriate for all persons.

    Promotional material used by the Member or Associate shall not:

    • Deceive the public or contain any material misstatement of fact or omit a fact that makes the promotional material misleading;8

    • Include any statements of opinion unless they are clearly identified as such and have a reasonable basis in fact;

    • Mention the possibility of profit unless accompanied by an equally prominent statement of the risk of loss;

    • Include any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results;

    • Include any statistical or numerical information about past performance of actual accounts unless the Member can demonstrate that the performance is representative of actual performance of all reasonably comparable accounts for the same period (calculated in accordance with the formula in CFTC Regulation 4.35(a)(6) and NFA Compliance Rule 2-34); or

    • Include testimonials unless they are representative of all reasonably comparable accounts, the material prominently states that the testimonial is not indicative of future performance or success, and the material prominently states that they are paid testimonials (if applicable).

    No Member or Associate may represent that forex funds deposited with a Forex Dealer Member are given special protection under the bankruptcy laws. No Member or Associate may represent or imply that any assets necessary to satisfy its obligations to customers are more secure because the Member keeps some or all of those assets at a regulated entity in the United States or a money center country.

    No Member or Associate may represent that its services are commission free without prominently disclosing how it is compensated in near proximity to that representation.

    No Member or Associate may represent that it offers trading with "no-slippage" or that it guarantees the price at which a transaction will be executed or filled, unless:

    • It can demonstrate that all orders for all customers have been executed and fulfilled at the price initially quoted on the trading platform when the order was placed;9 and

    • No authority exists, pursuant to a contract, agreement, or otherwise, to adjust customer accounts in a manner that would have the direct or indirect effect of changing the price at which an order was executed.10

    Members and Associates may not solicit customers based on the leverage available unless they balance any discussion regarding the advantages of leverage with an equally prominent contemporaneous disclosure that increasing leverage increases risk.

    No Member shall use or directly benefit from any radio or television advertisement that recommends specific forex transactions or describes the extent of any profit obtained in the past or that can be obtained 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 its first use or such shorter period as NFA may allow.11

    Every Member should adopt and enforce written procedures to supervise communications with potential and current customers and promotional material. A supervisory employee that is, or is under the ultimate supervision of, a listed principal who is also an NFA Associate should review and approve all promotional material and make a written record of such review and approval.12

    All promotional material should be maintained by each Member and be available for examination for the periods specified in the recordkeeping section of this notice, measured from the date of last use.

    6. Know Your Customer - Members and Associates have a duty to acquaint themselves sufficiently with the personal and financial circumstances of each forex customer to determine what further facts, explanations and disclosures are needed in order for the customer to make an informed decision on whether to enter into forex transactions.

    Every Member should determine what information it will obtain from a prospective forex customer. At a minimum, the Member soliciting the customer to engage in forex transactions should obtain the customer's name, address, principal occupation or business, current estimated annual income and net worth, approximate age, and an indication of the customer's previous investment and trading experience. Members and their Associates need to ensure that each customer they solicit has received adequate information concerning the risks of forex transactions so that the customer can make an informed decision as to whether forex transactions are appropriate for the customer. These obligations fall on the Forex Dealer Member when a non-Member solicits the customer.

    7. Doing Business with Non-Members - Forex Dealer Members are subject to discipline for the activities of most non-Members who solicit or introduce forex customers to the Forex Dealer Member or manage accounts for those customers.

    If a customer is solicited or introduced by a non-Member of NFA, or if the customer's account is managed by a non-Member, the Forex Dealer Member is subject to discipline for the non-Member's conduct if that conduct would violate NFA requirements when engaged in by an NFA Member. In other words, a Forex Dealer Member is subject to an NFA disciplinary action for the non-Member's activities when soliciting, introducing, or managing accounts for the Forex Dealer Member's customers even if the non-Member was not the Forex Dealer Member's agent.

    The rule allows NFA to bring a disciplinary action even if the Forex Dealer Member acts diligently and has no knowledge of the third-party's conduct. As a practical matter, however, NFA will not take disciplinary action unless the Forex Dealer Member knew or should have known of the third-party's conduct or failed to exercise due diligence when establishing and maintaining the relationship with the third party.

    A Forex Dealer Member should adopt and enforce written procedures to review the activities of non-Member third parties. The procedures should include, among other things, a regular review of the trading being conducted in the accounts solicited, introduced, or managed by these non-Members. The Member should also have procedures for following up on any customer complaints received by the firm, including a written description of the investigation made by the Member and any resolution of the complaint. Further, supervisory procedures should include a regular review of all promotional material used by any non-Member third-party. The member should maintain copies of all promotional materials reviewed, along with a written record of the review conducted and any deficiencies corrected, and make them available for examination for the periods specified in the recordkeeping section of this notice. A supervisory employee that is, or is under the ultimate supervision of, a listed principal who is also an NFA Associate should conduct the review of the non-Member's activities.

    The Forex Dealer Member is not subject to discipline for the actions of non-Members who are described in NFA Bylaw 306(b). It is also not subject to discipline for the actions of non-Members who would be exempt from Commission registration if they were acting in the same capacity in connection with exchange-traded futures contracts, such as foreign persons that solicit, introduce, or manage accounts for foreign customers only. 13 The Forex Dealer Member does, of course, have certain basic duties to its customers, including a duty to supervise its own activities in a way designed to ensure that it treats its customers fairly. Specifically, the Forex Dealer Member would violate this duty if it has actual or constructive notice that one of these entities engaged in fraudulent conduct and fails to take appropriate action.

    8. Affiliates - Forex Dealer Members must supervise and are subject to discipline for the activities of affiliates that are authorized to engage in forex transactions solely by virtue of their affiliation with a Forex Dealer Member.

    The CEA authorizes affiliates of FCMs to act as counterparties to forex transactions if the affiliate directly or indirectly controls, is controlled by, or is under common control with the FCM and the FCM makes and keeps records regarding the financial activities of the affiliate for purposes of the Commission's risk assessment requirements. 14 If a Forex Dealer Member has one or more affiliates that act as counterparty to forex customers solely on the basis of that affiliation, the Forex Dealer Member must supervise the affiliate's forex activities and is subject to discipline for that affiliate's activities. 15 The Forex Dealer Member must also make these affiliates' books and records available to NFA upon request. Additionally, the Forex Dealer Member must assure that its affiliates do not act as counterparties to forex transactions unless they are authorized to do so under the Act.

    9. BASIC Disclosure - Members must provide forex customers with information on NFA's BASIC system.

    NFA Compliance Rule 2-36(g) requires Forex Dealer Members to provide customers with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address 16. This information must be provided when the customer first opens an account and at least once a year thereafter.

    Forex Dealer Members may provide the information electronically but must do it in a way that ensures each customer is aware of it. For example, merely having the information on the Member's web site is not adequate, but sending customers an e-mail including a link to that information and explaining what the link is would be sufficient in most circumstances.

    10. Discretion - No Forex Dealer Member, or Associate of a Forex Dealer Member acting in such capacity, may exercise discretionary trading authority over a customer account for which the Forex Dealer Member is, or is offering to be, the counterparty to the transactions in the customer account.

    C. OTHER REQUIREMENTS

    This section of the notice provides guidance on dues, capital requirements, and security deposits. These requirements apply only to Forex Dealer Members.

    1. Bylaw 1301

    NFA Bylaw 1301(e) requires Forex Dealer Members to pay annual dues that are graduated according to the firm's gross annual revenue from customers (e.g., commissions, mark-ups, mark-downs) for its forex activities. Profits and losses from proprietary trades are not to be included. To calculate dues:

    • Start with the FCM dues imposed by NFA Bylaw 1301(b)(ii);

    • Add $44,375 if the Forex Dealer Member's gross annual revenue from forex transactions is $500,000 or less;

    • Add $69,375 if the Forex Dealer Member's gross annual revenue from forex transactions is more than $500,000, but not more than $2,000,000;

    • Add $94,375 if the Forex Dealer Member's gross annual revenue from forex transactions is more than $2,000,000, but not more than $5,000,000; or

    • Add $119,375 if the Forex Dealer Member's gross annual revenue from these activities is more than $5,000,000.

    The following table shows the dues to be assessed for Forex Dealer Members:

    Amount of annual Gross Revenue From Forex Transactions Dues if NFA is the DSRO Dues if NFA is not the DSRO
    $500,000 or less $50,000 $45,875
    More than $500,000, but not more than $2 million $75,000 $70,875
    More than $2 million, but not more than $5 million $100,000 $95,875
    More than $5 million $125,000 $120,875

    These dues apply when the Forex Dealer Member offers to be a counterparty to a forex transaction or accepts a forex trade (whichever is earlier), and NFA will send the Member an invoice for the minimum dues ($50,000 or $45,875) minus any amount already paid for that membership year. Thereafter, the dues will be assessed on the firm's membership renewal date and will be based on the Forex Dealer Member's latest certified financial statement.

    Under NFA Compliance Rule 2-36(d), a Forex Dealer Member is subject to discipline for the activities of any person that solicits or introduces a customer to the Member or manages a customer's account unless that person is a Member or Associate of NFA, is otherwise regulated based on the criteria in Bylaw 306(b), or would be exempt from CFTC registration if it were acting in the same capacity in connection with exchange-traded futures contracts. Any Forex Dealer Member that is responsible under Compliance Rule 2-36(d) for solicitors and account managers is required to pay a separate annual fee on the firm's annual renewal date based on the number of unregulated solicitors and account managers. In determining whether this fee applies, the Forex Dealer Member should take the highest number of separate legal entities, including individuals acting as sole proprietors, that it was responsible for at any one time during the year. The following table shows this graduated fee.

    Number of Unregulated Entities Annual Fee
    0$         0
    1-4$  5,000
    5-19$10,000
    20-99$25,000
    100 or more$50,000

    Each Forex Dealer Member is also required to pay an assessment of .0001% on the notional value of each forex transaction (as forex is defined in Bylaw 1507(b)). This equates to $.01 for each $10,000. For transactions with a notional value less than $10,000, the firm may aggregate separate transactions and pay $.01 on each multiple of $10,000. For transactions of $10,000 or above, the firm should round to the nearest cent.

    This assessment is due only on initiating transactions. There is no assessment on rollovers, offsetting transactions, option expirations, or option exercises that do not result in new positions. The Member must remit the assessment to NFA within 30 days after the end of the month in which the transaction was initiated.

    2. Financial Requirements Section 11(b)

    Section 11(b) prohibits a Forex Dealer Member from including assets held by an affiliate (unless approved) or an unregulated person in the firm's current assets for purposes of determining its adjusted net capital under CFTC Rule 1.17. This means an FDM may not count any part of those assets for capital purposes.17

    An unregulated person is any person that is not:

      (i) a financial institution regulated by a U.S. banking regulator;

      (ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of FINRA;

      (iii) a futures commission merchant registered with the U.S. Commodity Futures Trading Commission and a Member of NFA;

      (iv) an insurance company regulated by any U.S. state;

      (v) an entity regulated as a foreign equivalent of any of the above if regulated in a money center country as defined in CFTC Regulation 1.49; or

      (vi) any other entity approved by NFA.

    Any Forex Dealer Member may ask NFA to approve an otherwise unregulated person for purposes of Financial Requirements Sections 11(b) and (c). In determining whether to approve an unregulated person that is not an affiliate, NFA will consider a number of factors, including:

    • Whether the person is regulated in another jurisdiction and, if so, the type and extent of regulation;

    • The person's capital; and

    • The person's credit rating.

    NFA's approval of a particular person means that all unaffiliated Forex Dealer Members may treat that person as regulated under Sections 11(b) and (c). NFA may also approve categories of counterparties (e.g., banks regulated in a particular jurisdiction or with a particular credit rating).

    A Forex Dealer Member may not engage in Section 11(b) or (c) transactions with a regulated affiliate without NFA's approval. The Member may, however, ask NFA to authorize it to cover its positions with specified affiliates (including unregulated affiliates). An affiliate is any entity that controls, is controlled by, or is under common control with the Forex Dealer Member. The standards for approving affiliated persons are significantly higher than those for unaffiliated persons. For example, NFA will also consider:

    • The parent company's and affiliated person's capital;

    • Whether the parent company and the affiliated person are regulated entities;

    • Whether the parent company will guarantee the obligations of the affiliated person (unless the parent company and the affiliated person are the same entity);

    • The parent company's credit rating;

    • Whether the affiliated person has strong risk-management policies to limit its value-at-risk; and

    • For purposes of Section 11(c), whether the affiliated person limits the amount of offsetting transactions it enters into with unregulated counterparties.

    3. Financial Requirements Section 11(c)

    Section 11(c) prohibits Forex Dealer Members from using affiliates (unless approved) and unregulated persons to cover their foreign currency positions for purposes of CFTC Rule 1.17(c)(5).

    The rule does not prohibit Forex Dealer Members from entering into positions with unregulated or unapproved counterparties. They may not, however, count positions with those counterparties when calculating their covered positions for purposes of CFTC Rule 1.17(c)(5).

    For purposes of Section 11(c), Forex Dealer Members have four different types of counterparties. In particular:

    • Account holders are those counterparties for whom it carries accounts and includes both retail customers and eligible contract participants.

    • Trading partners are counterparties with whom the Member trades but who do not have accounts with the Member. For purposes of the calculations under Section 11(c), this category does not include affiliates (approved or unapproved) or regulated counterparties.

    • Affiliates are entities that control, are controlled by, or are under common control with the Forex Dealer Member. For purposes of Section 11(c) only, this category does not include affiliates who have been approved by NFA under Section 11(b).

    • Regulated entities are those counterparties that meet the definition in Section 11(b) and include entities-including affiliates-approved by NFA under that Section.

    A Forex Dealer Member may net its exposure across account holders, across trading partners, and across affiliates, but it may not net its exposure between these categories. The Member may, however, net its exposure in any of these categories against regulated counterparties. Here is the information in chart form.

    Type of Counterparty Account Holders Trading Partners Affiliates Regulated Entities
    Account Holders Yes No No Yes
    Trading Partners No Yes No Yes
    Affiliates No No Yes Yes
    Regulated Entities Yes Yes Yes Yes

    A Forex Dealer Member is required to take a charge on the larger of its unnetted long or short position but not on both.

    Example

    Assume a Forex Dealer Member has the following Euro positions:

    Type Long Short Net Long Net Short
    Account Holders 11,154,912 6,011,794 5,143,118
    Trading Partners 4,987,345 7,299,886 2,312,541
    Affiliates 3,790,754 2,640,553 1,150,201
    Regulated Entities 1,280,555 4,125,018 2,844,463

    In determining the uncovered amount for purposes of the 6% haircut, the Forex Dealer Member can offset its net long position with account holders against the net short position with regulated entities but cannot offset its position with its trading partners or its position with unapproved affiliates against any category except regulated entities.

    The math works this way (using only absolute numbers):

      Net long position with account holders 5,143,118
      Minus net short position with regulated entities -2,844,463
      2,298,655
      Uncovered long position with account holders 2,298,655
      Plus net long position with affiliates +1,150,201
      Total uncovered long position 3,448,856
      Net short position with trading partners 2,312,541
      Larger of net long or short position 3,448,856
      Haircut on Euros (3,448,856 X .06) $206,931

    4. Financial Requirements Section 12

    Forex Dealer Members must collect security deposits from forex customers equal to 1% of the notional value of transactions in specified foreign currencies and 4% of the notional value of all other transactions. Where the two currencies are in different categories, the Forex Dealer Member must collect the higher amount. If the transaction pairs a foreign currency with the U.S. dollar, the security deposit is based on the foreign currency. If the transaction pairs a currency that qualifies for a 1% deposit with a currency that does not, the Forex Dealer Member must collect a 4% security deposit for the entire transaction. For example:

    Currency Pair Security Deposit
    EUR/USD 1%
    CND/JPY 1%
    CND/BRL 4%
    USD/MXN 4%
    BRL/MXN 4%
    For short options, the Forex Dealer Member must collect this amount plus the premium the customer received. For long options, the Forex Dealer Member must simply collect the entire premium from the customer.

    This requirement does not apply to any Forex Dealer Member that consistently maintains adjusted net capital equal to or in excess of 150% of the greater of the amount required by Section 11(a)(i) or (ii) of the Financial Requirements. A Forex Dealer Member claiming the exemption must file advance written notice with NFA. If a firm that claims the exemption falls below 150% of its capital requirement under Section 11(a)(i) and (ii), it must immediately notify NFA. If the firm does not come back into compliance within 48 hours, it must collect the required security deposits on all customer positions and may not claim the exemption for six months. A firm that claims the exemption but falls below the required capital amount three times within 90 days may not claim the exemption for six months.18

    1 The Board of Directors has declared that these transactions are a proper subject of NFA regulation and oversight under Article XVIII, paragraph (k).

    2 Compliance Rule 2-39 excludes these same entities when they introduce or manage forex accounts.

    3 Bylaw 306(b)(ii) excludes broker-dealers that are members of any fully-registered national securities association and FCMs that are members of another registered futures association. At this time, however, FINRA is the only fully-registered national securities association and NFA is the only registered futures association.

    4 These are affiliates of broker-dealers for which the broker-dealer makes and keeps records under the Securities and Exchange Commission's risk assessment requirements. See Section 17(h) of the Securities Exchange Act of 1934 and SEC Rule 17h-1T.

    5 See, for example, Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs, NFA Manual paragraph 9019; Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Sites, NFA Manual paragraph 9037; Compliance Rule 2-9: Supervision of the Use of Automated Order-Routing Systems, NFA Manual paragraph 9046. These interpretive notices do not directly apply to forex activities, but the principles included in these notices are equally applicable to those activities.

    6 The Commodity Futures Trading Commission has stated that all employees of an FCM who solicit or accept orders for forex transactions from retail customers must be registered with the Commission as an associated person of the FCM. See Division of Trading and Markets Advisory Concerning Foreign Currency Trading by Retail Customers (March 2002).

    7 The screening process should include 1) checking BASIC and any other readily available sources and 2) asking the third-party to represent that neither it nor any of its principals is subject to a statutory disqualification or to identify and explain any statutory disqualifications.

    8 Through interpretive notices issued under NFA Compliance Rule 2-29, NFA has provided Members with guidance on what activities are deceptive and misleading. See, for example, NFA Compliance Rule 2-29: Deceptive Advertising, NFA Manual paragraph 9033; NFA Compliance Rule 2-29: Deceptive Advertising, NFA Manual paragraph 9034; Compliance Rule 2-29: High Pressure Sales Tactics, NFA Manual paragraph 9038; and NFA Compliance Rules 2-29 and 2-9: NFA's Review and Approval of Certain Radio and television Advertisements, NFA Manual paragraph 9039. Although these interpretive notices do not directly apply to forex activities, the principles included in them with regard to what is deceptive or misleading are equally applicable to those activities.

    9 The Forex Dealer Member is not required to give the customer a price that is no longer reflected on the platform at the time the order reaches it. The Forex Dealer Member is not responsible for transmission delays outside its control. If an Forex Dealer Member, however, advertises "no-slippage" or that it guarantees fill prices, it must prominently disclose that transmission delays might result in customer orders being executed at a price other than that seen by the customer.

    10 This includes force majeure provisions.

    11 Submission of promotional materials for NFA review is not a substitute for a Member's own responsibility to review promotional material. NFA staff will not independently verify the accuracy of statements made in an advertisement; that responsibility remains with the Member. Submitting promotional material to NFA will not provide a "safe harbor" from NFA actions for Members if misstatements or omissions of material fact are discovered subsequently or NFA otherwise later determines that the material is in violation of any applicable standards.

    12 Under traditional legal principles, Members can also be liable for promotional material promoting forex trading systems developed by third-parties. For example, a Member has direct responsibility for misleading promotional material if the Member prepares or distributes it; has agency responsibility if the system developer is an agent of the Member under established principles of agency law; and has supervisory responsibility if the Member fails to supervise its own employees when linking to a third-party trading system developer's web site, recommending a third-party's trading system, or entering into a referral agreement with a third-party system developer. See Interpretive Notice titled "NFA Bylaw 1101, Compliance Rules 2-9 and 2-29: Guidelines Relating to the Registration of Third-Party Trading System Developers and the Responsibility of NFA Members for Promotional Material That Promotes Third-Party Trading System Developers and their Trading Systems," NFA Manual, paragraph 9055.

    13 For this purpose, foreign persons and foreign customers are 1) natural persons who are not residents of the United States or 2) legal entities (other than passive investment vehicles) that are organized under the laws of a country other than the United States, do not have their principal place of business in the United States, and do not conduct their retail forex activities from a location in the United States. Those terms do not include a passive investment vehicle that is more than 10% owned by United States persons or that solicits United States persons who are not eligible contract participants as defined in Section 1a(12) of the Act. "United States" includes U.S. territories and possessions.

    14 See Sections 2(c)(2)(B)(ii)(III) and 4f(c)(2)(B) of the CEA and CFTC Regulations 1.14 and 1.15.

    15 Obviously, the Forex Dealer Member must also ensure that no entity with common ownership engages in the forex business unless it is authorized to do so.

    16 Forex Dealer Members can comply with this requirement by providing customers with a copy of NFA's brochure entitled "Background Affiliation Status Information Center (BASIC): An Information Resource for the Investing Public," which is available in print and on NFA's website at www.nfa.futures.org.

    17 Where the CFTC's requirements for holding current assets are more stringent, those requirements apply.

    18 For this purpose, underages within the same U.S. calendar day are one occurrence.

    [¶ 9054] COMPLIANCE RULE 2-34: PERFORMANCE REPORTING AND DISCLOSURES
    (Click Here to Print this Section)

    (Board of Directors, November 20, 2003; effective May 1, 2004)


    INTERPRETIVE NOTICE

    In July 2003, the Commodity Futures Trading Commission adopted a core principle for calculating rate of return (ROR) for partially-funded accounts. The Commission noted, however, that its core principle approach would not preclude NFA from developing more explicit guidance or performance standards.

    NFA's Board of Directors believes that Member CTAs should use a uniform calculation to make it easier for clients to compare the performance of different CTAs. The Board also believes that ROR should be based on the amount that is the basis for the CTA's trading decisions so that ROR measures the CTA's true performance rather than its client's various cash management practices. Therefore, NFA's Board has adopted NFA Compliance Rule 2-34 to provide performance standards for Member CTAs and to require certain disclosures to ensure that clients understand the consequences of partially funding their accounts. The Board has also adopted this Interpretive Notice to provide additional guidance to CTA Members regarding performance reporting and disclosure.

    CTAs will not be required to restate their previous performance, although they may choose to do so. As with any other information, however, a CTA must make any additional disclosures that are necessary to ensure that its performance record is not misleading.

    Documenting the Nominal Account Size

    The Board recognizes a client may elect to partially fund its account by depositing less funds with the FCM carrying its account than the client has directed the CTA trading the account to use as the basis for trading decisions. The Board believes that the nominal account size should be documented to provide "discipline in the denominator" by assuring that the client and the CTA have agreed on the account size before the account begins trading. This documentation will also provide an objective audit trail to verify past performance records.

    Compliance Rule 2-34(b) requires the CTA to document the trading program and nominal account size for each client who partially funds its account by either receiving a written confirmation from or providing a written confirmation to the client with the required information. For example, the information could be included in the advisory agreement or delivered to the client as a separate document. Although NFA assumes that most CTAs will receive or provide this confirmation at the same time the CTA enters into an advisory agreement to direct or guide the client's account, NFA Compliance Rule 2-34(b) only requires that it occur before the CTA places the first trade.

    The Rule does not require the CTA to get the client's written acknowledgement to a confirmation provided by the CTA, although the CTA may choose to do so. If the CTA does not require a written acknowledgement, the confirmation should inform the client that the client must notify the CTA, within a reasonable period specified in the confirmation, if the client does not agree with the terms included in the confirmation. The confirmation may be delivered in any manner consistent with CFTC requirements for delivery of account statements by commodity pool operators under CFTC Regulation 4.22(i).

    Disclosure

    Compliance Rule 2-34(c) requires CTAs to provide certain information to clients with partially-funded accounts if those clients are not QEPs. This information is designed to ensure that less sophisticated customers understand the effects of partial funding so that they can make informed decisions when funding their accounts.

    Subsection (c)(2) requires the CTA to explain how each element of cash additions, cash withdrawals, and net performance will affect the nominal account size. If these items will not affect the nominal account size, the CTA may make an affirmative statement to that effect.

    Under Compliance Rule 2-34(c)(5), the CTA must provide a description, by example or formula, of the effect of partial funding on ROR and drawdown percentages. A CTA may provide this information by example using a simple matrix showing the effect of partial funding at different funding levels. In the alternative, it may provide the client with the formula for converting ROR percentages based on the nominal account size to ROR percentages based on the partial funding level, e.g.:

      (nominal account size / actual funds) * n = a

      where n is the ROR percentage based on the nominal account size and a is the ROR percentage based on actual funds

    This same formula may, of course, be used to convert any other information that is given as a percentage of the nominal account size, such as estimated commissions and fees.

    The disclosures required by Compliance Rule 2-34(c) can be included in the CTA's disclosure document or the advisory agreement. They can also be provided in a separate document delivered to the client before the CTA places the first trade for the client.

    Actual Funds

    Compliance Rule 1-1(b) defines actual funds as the equity in a commodity trading account over which a CTA has trading authority and funds that can be transferred to that account without the client's consent to each transfer. Funds that are not in the trading account, often referred to as committed funds, qualify as actual funds only if they meet the following four tests:1

    1. The ownership of the accounts must be identical;

    2. The funds must be available for transfer (e.g., free credit balances that are not committed to another CTA's trading program);

    3. The client must agree in writing that the FCM can transfer the funds to the managed account at the CTA's request; and

    4. The CTA must be able to verify the amount of these funds.2

    Materiality Standards

    As a general rule, accounts in the same trading program will be included in the same composite performance capsule.3 Since Compliance Rule 2-34(a) requires ROR to be calculated on nominal account size, the RORs for these accounts should be materially the same. Accounts with materially different RORs should not, however, be included in the same performance capsule.4

    Whether RORs are materially the same may vary depending on the circumstances. However, as long as the accounts are part of the same trading program, the following test provides a safe harbor for determining whether the accounts have materially the same ROR.5

    • If the composite ROR including the account and the composite ROR excluding the account average 10 percent or more, they are materially the same if the difference between the two RORs is less than 10 percent of their average.
    • If the composite ROR including the account and the composite ROR excluding the account average less than 10 percent and greater than 5 percent, they are materially the same if the absolute difference between the two RORs is no more than 1.5 percent.
    • If the composite ROR including the account and the composite ROR excluding the account average 5 percent or less, they are materially the same if the absolute difference between the two RORs is no more than 1 percent.

    The primary reason for this materiality test is to objectively demonstrate that each account included in the performance capsule is part of the same trading program. For that reason, the materiality test should use gross trading profits and losses rather than net performance. If a particular account in the capsule has a material effect on the capsule's net performance due to account-specific factors (e.g., commissions or interest), the CTA may continue to include that account in the capsule if it meets the materiality test using gross trading profits and losses.6 However, the CTA should disclose the difference in net performance and identify the factors that are responsible for that difference.

    Additions and Withdrawals

    Large additions and withdrawals during the reporting period may distort ROR. A CTA is not required to adjust its ROR calculation unless those additions and withdrawals have a material effect on ROR under the above test.7 If they do have a material effect, however, the CTA must use an approved method to minimize the distortion. Appendix B to the CFTC's Part 4 Rules describes two methods that CTAs can use to adjust for additions and withdrawals when calculating ROR: the compounded rate of return method and the time-weighted method. These methods are available to all CTAs under the terms described in Appendix B.

    CTAs may also use a third method that adjusts for additions and withdrawals by temporarily excluding certain accounts when calculating ROR.8 This method can be used if the following conditions are met:

    1. As with any performance information, all of the accounts - whether included in or excluded from the ROR calculation - are part of the same trading program;

    2. Excluding the accounts does not result in the systematic exclusion of any material costs (e.g., accounts with withdrawals or that are closed during the reporting period must be included in ROR if there is a significant exit fee that is only charged when funds are withdrawn or accounts are closed);

    3. Only accounts that meet one of the following requirements are excluded:

    • The account was opened during the reporting period,

    • The account was closed during the reporting period,

    • The account had no open positions and did not trade during the reporting period because it has not yet been approved for trading or because the client intended to - and did - close the account shortly after the reporting period ended,9 or

    • The net additions and withdrawals in the account exceeded 10% of the beginning net nominal account value for the period for that individual account;

    4. Use of this method does not produce an ROR that is materially different from the ROR expected to be produced by either the compounded rate of return method or the time-weighted method over time; and

    5. The method does not exclude a significant percentage of the accounts in the trading program.

    In general, the CTA should use one method consistently except where that method would produce results that are materially different from the actual experience of accounts in the trading program.10 The CTA should disclose the method that is consistently used and, if the CTA uses a different method for a particular reporting period, the CTA should disclose the method actually used for that reporting period and describe why that method was used.11

    CTAs may use any of these three methods without obtaining prior approval from NFA or the CFTC. Appendix B to Part 4 states that "a commodity pool operator or commodity trading advisor may present to the Commission proposals regarding any alternative method of addressing the effect of additions and withdrawals on the rate of return computation, including documentation supporting the rationale for use of that alternative method." Therefore, a CTA may use another method if the CTA can demonstrate to the CFTC, prior to use, that the alternate method provides an accurate picture of the CTA's ROR and is more appropriate for that CTA.

    * * * * *

    All performance information must be presented in a manner that is balanced and is not misleading. CTAs have an obligation to disclose all material information even if it is not specifically required by CFTC or NFA rules. Compliance Rule 2-34 and this Interpretive Notice do not relieve CTAs of that obligation.

    1 These tests are derived from CFTC Advisory 87-2, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) paragraph 23,624 (June 2, 1987).

    2 Compliance Rule 2-34(a) provides that Member CTAs may include interest earned on actual funds but may not impute interest on other funds when calculating net performance. The CTA must be able to verify the amount of interest earned on the funds if the CTA includes that interest as part of its net performance.

    3 Accounts in the same trading program generally have the same pattern of trading.

    4 Accounts that use different trading strategies should not be included in the same performance capsule even if their RORs are materially the same.

    5 This same materiality test can be used in other contexts. For example, NFA's interpretive notice entitled "NFA Compliance Rule 2-10: The Allocation of Bunched Orders for Multiple Accounts" (paragraph 9029) requires CTAs to modify their allocation methods if accounts in the same trading program have materially different performance results. This is another instance where materiality would be measured using gross trading profits and losses.

    6 As with the test for material differences in trading results, whether the account has a material effect on net performance is determined by comparing the net performance of the composite with and without the account.

    7 A CTA is also not required to adjust its ROR calculation if additions and withdrawals are each less than 10% of the beginning net nominal account value for the period.

    8 The accounts can only be excluded when calculating ROR. They must be included in the CTA's capsule performance for other purposes.

    9 An account that was open for the entire reporting period and had open positions or trading activity during the reporting period cannot be excluded even if it has not yet caught up to the performance of the other accounts in the program (unless its net additions and withdrawals exceeded 10% of its beginning net nominal account value for the period). An account with a trading pause cannot be excluded solely because of the trading pause, especially if the program dictated the trading pause. If the trading pause results from client-imposed restrictions that cause the account to be idle or traded differently from the other accounts in the trading program, however, the account may belong in a different performance capsule.

    10 These instances should be rare. If the CTA's principal method frequently produces results that are materially different from the actual experience of accounts in the trading program, the CTA should change to a more consistent method.

    11 This information should be included in a footnote to the performance capsule. If the trading program experienced an unusual change in the number or size of additions, withdrawals, accounts opened, or accounts closed during the reporting period, the CTA should also highlight that change in a footnote and should describe the reason for the change, if known.

    [¶ 9055] NFA BYLAW 1101, COMPLIANCE RULES 2-9 AND 2-29: GUIDELINES RELATING TO THE REGISTRATION OF THIRD-PARTY TRADING SYSTEM DEVELOPERS AND THE RESPONSIBILITY OF NFA MEMBERS FOR PROMOTIONAL MATERIAL THAT PROMOTES THIRD-PARTY TRADING SYSTEM DEVELOPERS AND THEIR TRADING SYSTEMS
    (Click Here to Print this Section)
    (Board of Directors, August 19, 2004; effective January 10, 2005)

    INTERPRETIVE NOTICE

    In recent years, there has been a significant increase in the number of futures trading systems being marketed to the public. These trading systems typically are computerized programs that generate signals as to when to buy and sell commodity futures and options contracts.

    A number of NFA Member firms offer trade execution services to customers who use these computerized trading systems, many of which are developed by third-party trading system developers ("third-party system developers"), who are neither NFA members nor registered with the CFTC. Typically, in these situations, the customer will execute a Letter of Direction that directs the Member to place trades for the customer in strict accordance with the signals generated by the trading system. In some cases, the Letter of Direction is more limited and includes instructions to follow only certain signals (e.g., signals in given contracts or signals that meet particular parameters). In almost all cases in which a Letter of Direction is used, the Member is not permitted to use any judgment when placing orders for the customer.

    This notice is designed to provide guidance as to the circumstances which may give rise to liability on the part of the Member, under NFA Bylaw 1101, for providing execution services to users of computerized trading systems developed by non-Member third-party system developers. This notice will also discuss the factors that may cause a Member to be responsible, under NFA Compliance Rule 2-29, for promotional material which promotes these trading systems and the Member's supervisory obligations under NFA Compliance Rule 2-9.

    REGISTRATION REQUIREMENTS FOR
    THIRD-PARTY SYSTEM DEVELOPERS

    Section 1a (6) of the Commodity Exchange Act ("CEA") defines a CTA as any person who for compensation or profit, engages in the business of advising others, directly or through publications, writings, or electronic media, as to the value of or the advisability of trading commodity futures. Generally, Section 4m of the CEA requires individuals who fall within this definition to register with the CFTC. In March 2000, the CFTC adopted CFTC Rule 4.14(a)(9) to create an exemption from the CEA's registration requirements for CTAs that provide standardized advice by means of media such as newsletters, pre-recorded telephone hotlines, Internet web sites, and non-customized computer software.

    To qualify for the exemption, under Rule 4.14(a)(9)(i) a CTA may not direct client accounts. As defined by Commission Rule 4.10(f), ``[d]irect, as used in the context of trading commodity interest accounts, refers to agreements whereby a person is authorized to cause transactions to be effected for a client's commodity interest account without the client's specific authorization.'' In a Commission Staff letter issued in May 2003, Commission Staff indicated that an agreement authorizing a person to direct a client's account - and, thus, requiring the person to be registered as a CTA - may be an informal agreement. The fact pattern addressed by the Commission's Staff letter involved a developer of a computerized trading system who was registered as an associated person ("AP") of an introducing broker ("IB"). The AP's activities on behalf of the IB consisted solely of soliciting clients to use his trading program. Such clients executed a "letter of direction" providing that the IB should execute trades for the clients' accounts and "follow [the trading program] signals as close as reasonably possible."

    In analyzing the above fact pattern, Commission Staff concluded that, since the clients' contact with the AP/trading system developer included not only the trading program, but also the opening of a trading account that would be traded pursuant to a "letter of direction," there was an "informal arrangement", for which the exemption provided under Rule 4.14(a)(9) was not intended. After specifically noting that the "whole of [the AP/trading system developer's] activities as an AP of the IB consisted of the solicitation of clients for the trading program, CFTC staff determined that registration as a CTA was required of either the IB or the AP. (See CFTC staff letter, No. 03-26, May 30, 2003, re Section 4m - Interpretation with regard to Commodity Trading Advisor Registration.)

    Rule 4.14(a)(9)(ii) also provides that, to qualify for the exemption, a CTA may not provide "commodity trading advice based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients." So long as the CTA's advice is based on or tailored to such information, the CTA is required to register even if it gives the same advice to groups of similarly situated clients.

    In determining whether advice is "based on or tailored to" within the meaning of 4.14 (a)(9)(ii), the context of the advice will be taken into account. For example, if the advice is provided in a book or a periodical, that factor may weigh against a finding that the CTA is providing advice "based on or tailored to" the characteristics of particular clients. On the other hand, if the advice is provided to a particular client in a face-to-face communication or over the telephone, that factor may weigh in favor of a finding that the CTA's advice is "based on or tailored to" that particular customer's characteristics, since such a context suggests that the CTA is being responsive to the client's individual needs.1

    Whether a third-party system developer is required to be registered as a CTA still depends on the particular facts of each case. In some cases, the third-party system developer - or any third-party, for that matter - may be required to register as an IB, if it refers customers to an NFA Member and receives compensation for the referrals. Members who have questions concerning the application of Rule 4.14 are urged to seek advice from the CFTC.

    Regardless of whether a third-party system developer is required to register as a CTA, the question sometimes arises whether the IBs involved must also register as CTAs. If the IB and the third-party system developer are operated as wholly independent entities and the IB has no authority to deviate from the third-party system developer's recommendations, generally the IB need not also register as a CTA. This is clearly the case where a customer independently selects a trading system and the IB does not solicit discretionary trading authority. However, if any of these factors change (e.g., the IB has authority to deviate from the trading system by selecting only some of the trades generated by the system), the IB may be required to register as a CTA, unless the IB is otherwise exempt because its activities related to placing trades based on the recommendations of the trading system are "solely in connection with its business as an IB."

    NFA Bylaw 1101 provides, in pertinent part, that no Member may carry an account, accept an order or handle a transaction in commodity futures on behalf of any non-Member that is required to be registered as a CTA or in some other capacity. Therefore, if it appears that a third-party system developer, with whom an NFA Member does business, is required to be registered as a CTA or in some other capacity, the Member should request that the third-party system developer provide a letter from counsel stating the reasons why registration is not required.2 In the absence of such a letter, the Member should request that the third-party system developer apply for registration and NFA membership. If the third-party system developer fails or refuses to register and become an NFA Member, the Member should terminate its relationship with the third-party system developer to avoid liability under NFA Bylaw 1101.

    A MEMBER'S RESPONSIBILITY FOR MISLEADING
    PROMOTIONAL MATERIAL WHICH PROMOTES A
    THIRD-PARTY SYSTEM DEVELOPER'S TRADING PROGRAM

    NFA has encountered, with increasing frequency in recent years, misleading promotional material promoting trading systems developed by third-party system developers, who are not NFA Members, and for which an NFA Member provides trade execution services. Often this promotional material uses hypothetical or simulated results - which are trading results not achieved by an actual account - that are not clearly identified as hypothetical and show impressive gains, when customers actually using the trading system have suffered substantial losses. In this and other contexts, both NFA and the Commission have brought numerous enforcement actions charging fraud in the use of such promotional material.

    Following are several examples of situations where Members may be held accountable under Compliance Rules 2-29 and 2-9 for misleading promotional material that promotes third-party trading system developers and their trading systems.

    Direct Responsibility

    If an NFA Member or its Associates prepare or distribute the promotional material, the Member will be responsible for its misleading content under NFA Compliance Rule 2-29, which prohibits a Member from using misleading or deceptive promotional material.

    Agency Responsibility

    NFA's Business Conduct Committee has always recognized that each Member is responsible for the acts of its agents. This certainly applies to the preparation of advertising material. Thus, an NFA Member may be responsible, under NFA Compliance Rule 2-29, for misleading promotional material prepared and disseminated by a third-party trading system developer, whether or not the third-party trading system developer is an NFA Member or not, if there is an agency relationship between the NFA Member and the third-party trading system developer. (Of course, if the third-party trading system developer is also an NFA Member, it too would be responsible under NFA Compliance Rule 2-29 for the misleading promotional material that it prepared and distributed.)

    In determining whether there is an agency relationship between the Member and the third-party system developer, which would trigger liability under NFA Compliance Rule 2-29, the central inquiry focuses on the nature of the business relationship between the parties and whether the parties have expressly or implicitly agreed that one may act for the other. As the CFTC has held, whether an agency relationship exists turns "on an overall assessment of the totality of the circumstances in each case." The more limited the contacts are between the third-party system developer and the NFA Member, the more likely it is that an agency relationship will not be found to exist between the parties.

    If there is an agency relationship between the Member and the third-party system developer, then the Member has an affirmative duty, under NFA Compliance Rule 2-9, to supervise the activities of the third-party system developer/agent.

    Supervisory Responsibility Under NFA Compliance Rule 2-9

    Even where no agency relationship exists, a Member whose web site links to or otherwise refers customers to a third-party system developer or has a referral agreement with a third-party trading system developer should conduct a due diligence inquiry into the system developer's advertising practices with a view towards identifying and avoiding the misleading advertising practices described earlier, i.e., the use of exaggerated profit claims, and hypothetical or simulated results which are not clearly identified as hypothetical, or which show highly profitable performance when actual customers trading the system have sustained significant losses.3

    The fact that a Member creates a hyperlink from its web site or otherwise refers customers to a third-party system developer or has a referral agreement with a third-party system developer does not, in and of itself, make the Member firm accountable for the third-party system developer's web site or promotional material. Member firms should bear in mind, though, that their supervisory obligations under Rule 2-9 and Rule 2-29 require them to diligently supervise their employees and agents who are responsible for creating and maintaining hyperlinks to web sites of third-party system developers; or establishing referral agreements with third-party system developers. Members should consider whether appropriate supervisory procedures include periodic inquiries as to whether their employees and agents are conducting due diligence with respect to the third-party system developer's web site or advertising, and taking appropriate steps if deficiencies are found in such web site or advertising. A Member's failure to supervise its employees and agents in this regard will constitute a violation of NFA Compliance Rule 2-9 on the part of the Member. Moreover, in these situations, Member firms should not seek to circumvent NFA's promotional material requirements by relying upon the unregistered status of the third-party trading system developer.

    1 The Commission gives a number of examples, which illustrate the application of Rule 4.14(a)(9) in specific situations, in the Rule's publication in the Federal Register. (Federal Register: March 10, 2000 (Volume 65, Number 48, pages 12938-12943.)

    2 Member firms may rely in good faith upon a copy of a letter from counsel. However, in some cases, a Member may have to perform additional due diligence to ascertain whether a third-party system developer is required to be registered.

    3 See also NFA's interpretive notice entitled "NFA Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Sites" (paragraph 9037).

    [¶ 9056] NFA COMPLIANCE RULE 2-6: CONDUCTING COMMODITY FUTURES BUSINESS WITH AN EXPELLED OR SUSPENDED MEMBER OR ASSOCIATE
    (Click Here to Print this Section)
    (Board of Directors, May 19, 2005; effective July 20, 2005)

    INTERPRETIVE NOTICE

    In the last several years, NFA has encountered several instances where brokers, who have been barred from NFA membership as a result of an NFA disciplinary action, have continued to work at a Member firm. NFA Compliance Rule 2-6 provides that no Member or Associate shall conduct commodity futures business with a person who has been expelled or suspended or is subject to a similar sanction by NFA in a proceeding brought pursuant to Part 3 of NFA's Compliance Rules that temporarily or permanently prohibits the person from NFA membership or affiliation in any capacity with an NFA Member during the period the sanction is in effect unless authorized by the Business Conduct Committee, Hearing Committee or the Appeals Committee.

    The purpose of this Rule is to address the problem described above. The phrase "commodity futures business", as used in Compliance Rule 2-6, means any and all activities performed by such persons on behalf of, and in connection with, an NFA Member's futures business. Therefore, a Member firm is prohibited from allowing a person who has been expelled or suspended or is subject to a similar sanction by NFA that temporarily or permanently prohibits the person from NFA membership or affiliation in any capacity with an NFA Member to perform any activities for or on its behalf regardless of whether such activities require registration or NFA membership. Member firms are also prohibited from having such persons acting for or on behalf of the firm in connection with its futures business, including as employees, consultants, independent contractors, agents or unpaid volunteers. Moreover, absent extraordinary circumstances, Member firms should not have such persons physically present in their offices.

    [¶ 9057] COMMISSIONS, FEES AND OTHER CHARGES
    (Click Here to Print this Section)
    (Board of Directors, August 17, 2006; effective November 1, 2006)

    INTERPRETIVE NOTICE

    National Futures Association ("NFA") Compliance Rule 2-4 provides that Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business. NFA Compliance Rule 2-36(c) similarly provides that Forex Dealer Members and their Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their forex business. Over the years, NFA's Board of Directors ("Board") has provided guidance on certain issues to ensure that Members and Associates understand their responsibilities to observe just and equitable principles of trade and to act honestly, fairly and in the best interests of their customers.

    For example, in 1986, the Board issued an Interpretive Notice to provide Members with guidelines relating to the disclosure by FCMs and IBs of costs associated with futures transactions. The Board stated that Compliance Rule 2-4 requires that each FCM Member, or in the case of introduced accounts, the Member introducing the account make available to its customers, prior to commencement of trading, information concerning the costs associated with futures transactions.

    NFA's 1986 Notice also recognized that Members may employ various arrangements in establishing their commissions, fees and other charges associated with futures transactions to customers. Typically, commissions for futures transactions have been set competitively since the 1970s, and Members usually base these charges on their costs plus a reasonable profit, and the services provided by the Member. The vast majority of NFA Members impose commission charges in a manner commensurate with their costs and the services provided by the Member, and adequately disclose and explain to customers commission rates, fees and other charges.

    The Board has also previously recognized, however, that any fee arrangement which is intended to or is likely to deceive customers is a violation of NFA Requirements (e.g., NFA Compliance Rules 2-2 and 2-29(a)) and will subject the Member to disciplinary action. Over the years, NFA's Business Conduct Committee ("BCC") has charged several Members and their Associates with violating NFA sales practice requirements because they misled customers as to either the amount of commissions or the significant impact of the commission charges on the likelihood of obtaining any profit. Most of these cases have involved the sale to retail customers of commodity options and forex. 1

    The Board believes that it is appropriate at this time to provide guidance on the types of sales practices specifically relating to commissions, fees and other charges that have been found to be deceptive and misleading, and violate commercial honor and just and equitable principles of trade.2 Therefore, the following are relevant factors regarding commissions, fees and other charges in determining whether a Member or Associate has presented retail customers with a distorted and misleading view of the likelihood of earning profits by investing with a Member:

    • Whether the Member or Associate adequately disclosed the amount of commissions, fees and other charges before the transaction occurred. In evaluating the adequacy of disclosure, the Member or Associate should consider whether the retail customer has little or no experience trading futures, options, and forex, the customer's estimated annual income and net worth, and prior investment experience.

    • Whether the Member or Associate downplayed the significance of the commissions, fees and other charges, especially in connection with any suggestion that the retail customer is likely to reap profits.

    • If the Member or Associate solicits retail customers to engage in commodity option transactions and charges commissions and fees well above the industry norm, what, if any, break-even analysis or additional disclosure has been provided about the significant impact that these commissions and fees have on the likelihood of profit.

    • If the Member or Associate solicits retail customers to engage in forex transactions and charges commissions and fees well above the industry norm, what, if any, break-even analysis or additional disclosure has been provided about the significant impact that commissions, fees, mark-ups and other charges have on the likelihood of profit.

    • Whether the Member or Associate engages in trading practices or recommends transactions or strategies to retail customers that are intended to increase the amount of commissions and fees generated, without serving any economic or other purpose for the customers. For example, a few Members have used large spread positions, butterfly spreads or deep out-of-the money options in an apparent scheme to maximize commissions, without regard to the customers' best interests.

    In conclusion, this Notice cannot and is not intended to alert Members and Associates to all of the factors regarding commissions, fees and other charges that may be considered in determining whether they have presented retail customers with a distorted and misleading view of the likelihood of earning profits by investing with a Member. Each of the factors noted above regarding commissions, fees and other charges, however, have frequently been present in sales practice cases brought by NFA, and Members and Associates should certainly be vigilant in preventing and detecting such practices.

    1 See, e.g., In re Qualified Leverage Providers, Inc., NFA Case No. 05-BCC-003; In re Calvary Financial Group LLC, NFA Case No. 02-BCC-005; In re The Siegel Trading Co., Inc., NFA Case No. 97-BCC-007; In re Bachus & Stratton Commodities, Inc., NFA Case No. 92-BCC-015 aff'd, NFA Case No. 93-APP-002; and In re Churchill Group, Inc., NFA Case No. 90-BCC-012.

    2 This Notice does not apply to security futures products, which are governed by NFA Compliance Rule 2-37(g) and its Interpretive Notice relating to fair commissions. See NFA Manual paragraph 9047.

    [¶ 9058] NFA COMPLIANCE RULE 2-40: PROCEDURES FOR THE BULK ASSIGNMENT OR LIQUIDATION OF FOREX POSITIONS; CESSATION OF CUSTOMER BUSINESS
    (Click Here to Print this Section)
    (Board of Directors, November 16, 2006; effective February 16, 2007)

    INTERPRETIVE NOTICE

    A Forex Dealer Member ("FDM") must follow these procedures when seeking to employ a bulk assignment or liquidation of its customer's positions or a bulk transfer of customer accounts. NFA may waive or modify any of these procedures or impose additional requirements if doing so is in the FDM's customers' best interest or if the circumstances otherwise require.

    BULK ASSIGNMENTS AND TRANSFERS

    Permitted Assignees

    An FDM must notify NFA's Compliance Department ("Compliance") prior to any bulk assignment of customer positions or bulk transfer of customer accounts. An FDM may only assign open positions to an entity that is an authorized counterparty enumerated in Section 2(c)(2)(B)(ii) of the Act. Prior to the assignment or transfer, the FDM must conduct a reasonable investigation and determine that the assignee intends and is financially able to honor its commitments to the FDM's customers as a result of the assignment or transfer. The FDM must document this investigation and provide this information to NFA.

    Written Consent or Prior Notice

    An FDM may assign customer positions and transfer customer accounts to an authorized counterparty with the express written consent of its customers. Alternatively, an FDM may assign open positions and transfer accounts by providing its customers with prior notice. The FDM must send NFA's Compliance Department a copy of this notice before the notice is sent to customers.

      Notice to Customers

      The notice should be sent to the customer's independent e-mail address (not a dedicated address provided by the Forex Dealer Member) and by postal mail (at least first class delivery). Generally, the FDM must provide this notice at least seven calendar days before the assignment or transfer. In rare and unusual circumstances, NFA's Compliance Department might determine that a shorter notice period is appropriate. Additionally, there might be circumstances in which the Compliance Department determines that a longer notice period is required.

      The notice should include any information that is material based upon the specific circumstances of the assignment or transfer. At a minimum, the notice must include:

        1. The reason for the assignment/transfer;

        2. A clear and concise statement that as of a particular date (the assignment/transfer date, which should not be less than seven calendar days after the date of the notice) the FDM will no longer be the counterparty to the customer's positions and will not service the customer's account;

        3. The name, NFA ID (if applicable), postal and e-mail addresses, and telephone number of the proposed assignee/transferee as well as the name of an individual at the assignee/transferee the customer can contact about the proposed assignment/transfer;

        4. A statement that the customer is not required to accept the proposed assignment/transfer but may direct the assignor/ transferor FDM to liquidate the customer's positions;

        5. The name, postal and e-mail address, and telephone number of an individual at the assignor/transferor FDM the customer can contact with questions or to liquidate positions; and

        6. A statement that failure to respond to the notice within a specified period of time, not less than seven days from the date of the notice, will result in a default action, which must be either (A) assigning the customer's positions and transferring account balances to the assignee (if authorized by contract) or (B) liquidating the customer's positions and returning the remaining funds, whichever is the case.

      Where the customer positions and accounts are being assigned/transferred to a firm that is not an NFA Member, the notice must include the following disclosure:

        YOUR POSITIONS AND ACCOUNT WILL BE ASSIGNED TO A FIRM THAT IS NOT A MEMBER OF NATIONAL FUTURES ASSOCIATION (NFA), IS NOT REGULATED BY NFA, AND IS NOT REQUIRED TO COMPLY WITH NFA's RULES.

      Where the customer positions and accounts are being assigned/transferred to a firm that is an NFA Member but is not an FDM, the notice must include the following disclosure:

        YOUR POSITIONS AND ACCOUNT WILL BE ASSIGNED TO A FIRM WHOSE OFF-EXCHANGE FOREX ACTIVITIES ARE NOT REGULATED BY NATIONAL FUTURES ASSOCIATION.

    BULK LIQUIDATIONS

    An FDM must notify NFA's Compliance Department prior to any bulk liquidation of customer positions. An FDM may liquidate customer positions with the express written consent of its customers. Alternatively, an FDM may liquidate customer positions by providing its customers with prior notice of the liquidation. The FDM must send NFA's Compliance Department a copy of this notice before the notice is sent to customers.

      Notice to Customers

      The notice should be sent to the customer's independent e-mail address (not a dedicated address provided by the Forex Dealer Member) and by postal mail (at least first class delivery). Generally, the FDM must provide this notice at least seven calendar days before the liquidation. In rare and unusual circumstances, NFA's Compliance Department might determine that a shorter notice period is appropriate. Additionally, there might be circumstances in which the Compliance Department determines that a longer notice period is required.

      The notice should include any information that is material based upon the specific circumstances of the liquidation. At a minimum, the notice must include:

        1. The reason for the liquidation;

        2. A clear and concise statement that as of a particular date (the liquidation date, which should not be less than seven calendar days after the date of the notice) the FDM will liquidate all open positions in the customer's account and close the account; and

        3. The name, postal and e-mail address, and telephone number of an individual at the FDM the customer can contact with questions regarding the liquidation.

    RECORDS

    For a bulk assignment, liquidation, or transfer, the FDM should provide NFA's Compliance Department with all pertinent records pertaining to the transaction. At a minimum, the FDM should provide the following records.

    At the time that the FDM first contacts NFA's Compliance Department, the FDM must provide:

      1. representative copies of the customer agreements;
      2. a list of the affected accounts, including:
        a. customer names;
        b. account numbers; and
        c. account values as of the end of the previous day;
      3. if an assignment or transfer, documentation regarding the assignor FDM's investigation of the assignee's status as an authorized counterparty and its financial ability to honor its commitments to the customers.

    Immediately after the bulk assignment, liquidation, or transfer, the FDM must provide a list of the affected accounts and the value of each account as of the date of the transaction.

    [¶ 9059] NFA COMPLIANCE RULE 2-4: DISCLOSURE GUIDELINES FOR FCMS OFFERING SWEEP ACCOUNTS
    (Click Here to Print this Section)
    (Board of Directors, February 15, 2007; effective July 1, 2007)

    INTERPRETIVE NOTICE

    Due to the increasingly competitive industry environment, Futures Commission Merchants ("FCMs") may seek to develop and offer to customers sweep account programs to manage cash balances. These sweep account programs transfer a customer's excess funds from a regulated commodity account (whether a customer segregated or secured account) to a non-regulated account for the customer at the FCM, an affiliate of the FCM or another entity so that the customer can obtain a higher investment return than maintaining the funds in the FCM's customer regulated commodity accounts.

    Given disclosure concerns regarding these programs, NFA's Board of Directors believes that FCMs offering sweep account programs should adopt certain disclosure guidelines. The guidelines contained in this Notice apply only to sweep account programs offered by an FCM, including those regularly recommended by the FCM. In other words, if a customer elects on its own to transfer funds to a particular sweep account program that is not offered by the FCM, then the FCM does not have any disclosure obligations pursuant to this Notice. Additionally, this Notice's disclosure guidelines are inapplicable to transfers made pursuant to an FCM's customer agreement's provisions whereby a customer authorizes the transfer of funds from a regulated commodity account to any other account maintained by the customer at the FCM or one of its affiliates as may be necessary to avoid a margin call or to reduce the debit balance in the other account, or to satisfy any other obligation to the FCM or its affiliates.

    Failure to follow the disclosure guidelines contained in this Notice may be deemed conduct inconsistent with a Member's obligation under NFA Compliance Rule 2-4 to observe high standards of commercial honor and just and equitable principles of trade in the conduct of its commodity futures business. NFA recognizes, however, that FCMs offering these sweep account programs may have to modify these guidelines to address their particular programs.

    Initially, FCMs should identify the entity maintaining the sweep account and whether that entity is subject to regulation, and should disclose any material terms and conditions, risks and features of their offered programs. In addition, FCMs should advise customers of any conflicts of interest in connection with the offered programs, including whether the FCM receives compensation or other benefits for customer balances maintained in the sweep account, and the FCM should advise the customer which entity to contact to gain access to any swept funds. An FCM should make these disclosures at the time a sweep account program is offered to a customer and, of course, the disclosures should be updated for participants if any material changes are made to an existing sweep program. The Board believes that if a customer elects to participate in a sweep program offered by the FCM, then the FCM must obtain the customer's written consent prior to any funds being transferred pursuant to the program.

    The Board also believes that FCMs should advise customers of the consequences of transferring monies from the FCM's customer regulated accounts. Specifically, the FCM should disclose that by transferring excess funds from an FCM's customer regulated commodity accounts, the customer will not receive the preferential treatment afforded funds held in a customer regulated commodity account pursuant to Part 190 of the CFTC's Regulations and the U.S. Bankruptcy Code. The Board recognizes, however, that an FCM may offer programs that transfer monies to an account whereby customers receive certain protections (e.g. SIPC or FDIC) in the event of a bankruptcy. In this case, the FCM should disclose the nature and extent of the protection available, including any applicable SIPC or FDIC coverage. If the FCM's programs transfer funds to a non-regulated account that does not offer protections comparable to those afforded funds held in a customer regulated commodity account, then the FCM must clearly disclose this fact and describe the impact upon customer funds in the unlikely event that the entity maintaining the sweep account files for bankruptcy.

    [¶ 9060] COMPLIANCE RULE 2-36(e): SUPERVISION OF THE USE OF ELECTRONIC TRADING SYSTEMS
    (Click Here to Print this Section)
    (Board of Directors, November 16, 2006; effective July 1, 2007; October 15, 2007; and December 17, 2007.)

    NFA Compliance Rule 2-36(e) places a continuing responsibility on every Forex Dealer Member (FDM) to diligently supervise its employees and agents in all aspects of its forex activities, and Compliance Rule 2-39 applies this same requirement to certain Members who solicit, introduce, or manage forex customer accounts.1 These rules are broadly written to provide Members with flexibility in developing procedures tailored to meet their particular needs, so NFA uses interpretive notices to provide more specific guidance.2

    Although the Board of Directors firmly believes that supervisory standards do not change with the medium used, technology may affect how those standards are applied. The forex markets are highly automated, with virtually all trading done on electronic platforms. Most orders are also placed electronically, usually entered directly with the platform via the Internet. Therefore, in order to fulfill their supervisory responsibilities, Members must adopt and enforce written procedures to address the security, capacity, credit and risk-management controls, and records provided by the firm's electronic trading systems.3 This includes electronic trading platforms, order-routing systems incorporated into electronic trading platforms, and separate order-routing systems (AORSs).4 For an electronic trading platform, the procedures must also address the integrity of the trades placed on it.

    NFA recognizes that Members who solicit or manage accounts may not have control over the electronic platform where the customer places its trades. Nonetheless, if these Members are subject to NFA Compliance Rule 2-39 and are dealing with a counterparty that is not an FDM, they have a supervisory responsibility to conduct a reasonable investigation regarding security, capacity, credit and risk-management, records, and integrity of trades on the platform prior to entering into a relationship with that counterparty and periodically thereafter. Therefore, while they are not subject to the more specific requirements of this Notice, they should adopt written procedures addressing the steps they will take to investigate the platform and how they will respond if they have reason to believe that the platform does not meet the general standards set out after each major heading.5

    The specific requirements of this Notice do, however, apply to any FDM that uses another entity's trading platform through a "white-labeling" arrangement.6 If the entity providing the platform (the white labeler) is also an FDM, the FDM using the platform (the sponsor) may rely on the white labeler to comply with most of these requirements. The sponsor must, however, adopt and enforce written procedures to:

    • Provide required notifications and disclosures to customers;
    • Maintain records; and
    • Respond to situations where it has reason to believe the white labeler is not complying with the Notice.

    If the white labeler is not an FDM, the sponsor and the white labeler may agree by contract that the white labeler will comply with the Notice, but the sponsor FDM will still be liable if the requirements are not met.7

    Given the differences in NFA Members' size, complexity of operations, and business activities, they must have some flexibility in determining what constitutes "diligent supervision" for their firms. NFA's policy is to leave the exact form of supervision up to each Member, thereby providing the Member with flexibility to design procedures tailored to its own situation. It is also NFA's policy to set general standards rather than to require specific technology. Therefore, other procedures besides the ones described in this Interpretive Notice may comply with the general standards for supervisory responsibilities imposed by Compliance Rules 2-36 and 2-39.8

    Security

    General Standard. Members who handle customer orders must adopt and enforce written procedures reasonably designed to protect the reliability and confidentiality of customer orders and account information. The procedures must also assign responsibility for overseeing the process to one or more individuals who understand how it works and who are capable of evaluating whether the process complies with the firm's procedures.

    Authentication. Electronic trading systems, or other systems the customer must go through to access electronic trading systems, should authenticate the user. Authentication can be accomplished through a number of methods, including:

    • Passwords;
    • Authentication tokens, such as SecurID cards; or
    • Digital certificates.

    Encryption. The system should use encryption or equivalent protections for all authentication and for any order or account information that is transmitted over a public network (including the Internet), a semi-private network, or a virtual private network. If more appropriate and effective security procedures are developed or identified, the use of those procedures would comply with this standard.

    Firewalls. Firewalls or equivalent protections should be used with public networks, semi-private networks, and virtual private networks. The system should log the activities that pass through a firewall, and the log should be reviewed regularly for abnormal activity. If more appropriate and effective security procedures are developed or identified, the use of those procedures would comply with this standard.

    Authorization. Although it is the customer's responsibility to ensure that only authorized individuals have access to the electronic trading system using the customer's facilities and authentication devices (e.g., passwords), the Member's procedures should, as appropriate, provide customers with a means to notify the Member that particular individuals are no longer authorized or to request that authentication devices be disabled. Customers should be informed about the notification process.9

    Periodic Testing. The Member should conduct periodic reviews designed to assess the security of the electronic trading system. An independent internal audit department or a qualified outside party should conduct these reviews at least annually. The results of the review should be documented and reported to the firm's senior management or an internal audit committee or department. The Member should follow up to ensure that any deficiencies are addressed and corrected and should document the corrective action taken.

    Administration. The Member should adopt and enforce written procedures assigning the responsibility for overseeing the security of the electronic trading system to appropriate supervisory personnel. The procedures should also provide that appropriate personnel keep up with new developments, monitor the effectiveness of the system's security, and respond to any breaches. Additionally, the procedures should provide for updating the system as needed to maintain the appropriate level of security.

    Capacity

    General Standard. Members who handle customer orders must adopt and enforce written procedures reasonably designed to maintain adequate personnel and facilities for the timely and efficient delivery of customer orders and reporting of executions. Members who operate trading platforms must adopt and enforce written procedures reasonably designed to maintain adequate personnel and facilities for the timely and efficient execution of customer orders. The procedures must also be reasonably designed to handle customer complaints about order delivery, execution (if applicable), and reporting and to handle those complaints in a timely manner.

    Members may not misrepresent the services they provide or the quality of those services. If a Member represents that it maintains a particular capacity or performance level, it must take the measures necessary to achieve that level.10

    Capacity Reviews. The Member should adopt and enforce written procedures to regularly evaluate the capacity of each electronic trading system and to increase capacity when needed. The procedures should also provide that each system will be subjected to an initial stress test. Such test may be conducted through simulation or other available means. Thereafter, the system should be subject to periodic reviews by using an independent internal audit department or a qualified outside party. The reviews should be conducted whenever major changes are made to the system or the Member projects a significant increase in volume and should occur at least annually. The results of each review should be documented and reported to the firm's senior management or an internal audit committee or department. The Member should follow up to ensure that any deficiencies are addressed and corrected and should document any corrective action taken.

    The Member should monitor both capacity (how much volume the system can handle before it is adversely impacted or shuts down) and performance (how much volume the system can handle before response time materially increases), and should assess the electronic trading system's capacity and performance levels based on the major strains imposed on the system. The Member should establish acceptable capacity and performance levels for each of its electronic trading systems. The Member's procedures should be reasonably designed to provide adequate capacity to meet estimated peak volume needs based on past experience, present demands, and projected demands.

    The procedures should also provide for the Member to follow up on customer complaints about access problems, system slowdowns, system outages, or other problems that may be related to capacity.11 The Member should identify the cause of any problem and take action to prevent it from re-occurring.

    Disaster Recovery and Redundancies. The Member should have contingency plans reasonably designed to service customers if either the system goes down or activity exceeds reasonably expected peak volume needs. The Member should use redundant systems or be able to quickly convert to other systems if the need arises. These backup systems can include facilities for accepting orders by telephone.

    When operational difficulties occur, the Member should provide prompt and effective notification to customers affected by the operational difficulties. Notification can be made by a number of methods, including:

    • a message on the Member's web site;
    • e-mails or instant messages;
    • a recorded telephone message for customers on hold; and/or
    • a recorded telephone message on a line dedicated to providing system bulletins to existing customers.

    Advance Disclosure. The Member should disclose, in advance, the factors that could reasonably be expected to materially affect the system's performance (e.g., periods of stress). The Member should also educate customers on alternative ways to enter orders when the system goes down or reaches an unacceptable performance level. This disclosure may be made in the account agreement, on the Member's web site, or in any other manner designed to provide this information to current customers before problems occur.

    Credit and Risk-Management Controls

    General Standard. Members who handle customer orders must adopt and enforce written procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Member or the Member's other customers.12

    Account Controls. An electronic trading system should be designed to allow the Member to set limits for each customer based on the amount of equity in the account or the currency, quantity, and type of order, and the Member should utilize these controls. The system should automatically block any orders that exceed the pre-set limits.13

    If the trading platform automatically liquidates positions, the FDM should set the liquidation levels high enough so that the positions will be closed out at prices that will prevent the account from going into a deficit position under all but the most extraordinary market conditions.14 The FDM's platform must automatically liquidate positions, and it must set its liquidation levels to comply with this requirement, if its customer agreement or promotional material states or implies that customers cannot lose more than they invest.

    An electronic trading platform that does not automatically liquidate positions should generate an immediate alert when an account is in danger of going into a deficit position. Firm personnel should monitor those alerts throughout the day and take action when necessary.

    Review. A Member should conduct periodic system reviews designed to assess the reliability of its credit and risk-management controls. An independent internal audit department or a qualified outside party should conduct the reviews at least annually. The results of each review should be documented and reported to the firm's senior management or an internal audit committee or department. The Member should follow up to ensure that any deficiencies are addressed and corrected and should document the corrective action taken.

    Recordkeeping

    General Standard. Members who handle orders must adopt and enforce written procedures reasonably designed to record and maintain essential information regarding customer orders and account activity.

    Transaction Records. Electronic trading systems should record the following information for each transaction:

    • Date and time the order is received by the system;
    • Price (or premium for an option) at which the order is placed;
    • Price (or premium for an option) quoted on the trading platform when the order was placed (if the system is a trading platform);
    • Account identification;
    • Currency pair;
    • Size;
    • Buy or sell;
    • Type of order (if not a straight market order);
    • Date and time the order is transmitted to the trading platform (if the system is an AORS);
    • Date and time of execution (if the system is a trading platform);
    • Size and price (or premium) at which the order is executed;
    • Date and time the execution information is received (if the system is an AORS); and
    • Date and time the execution information is reported by the system.

    For options, the system should record the following additional information:

    • Put or call;
    • Strike price; and
    • Expiration date.

    All times must be recorded to the nearest second. The system must also record any other necessary information (e.g., requotes, that the platform did not execute the order because the customer had insufficient equity in its account). If the transaction is not subject to daily rollovers, the system must also record the expiration date of the transaction, if any.

    The system should record this same information for liquidating orders. If customers place them as liquidating orders, the system should identify them as liquidating orders. If they are generated by the system because there is insufficient equity in the account, the system should record that information. If customers enter them as new orders, however, they need not be identified as liquidating orders in the order information even if they result in offset.

    Electronic trading platforms should record the following information for rollovers:

    • Account identification;
    • Currency pair;
    • Size;
    • Long or short;
    • Date and time of the rollover;15
    • Price of the position after the rollover;
    • Bid and ask prices quoted on the platform when the rollover occurred;
    • Amount of interest credited or debited to the account, if any;
    • Any other fees charged for the rollover.

    An electronic trading platform should be programmed to provide this information for each individual order or account. It should also be programmed to provide a report, upon request, showing the following information for all transactions other than rollovers executed on that day: time, price (or premium), quantity, long or short, currency pair, account identification, and, for options, strike price, put or call, and expiration date.

    Account Records. Electronic trading platforms should create and maintain daily records containing the following information:

    • Account identification;
    • Funds in the account (net of any commissions and fees);
    • Open trade equity (the net profits and losses on open trades); and
    • Account balance (funds in the account plus or minus open trade equity).

    For open option positions, the account balance should be adjusted for the net option value and the daily record should include the following additional information:

    • Long option value;
    • Short option value; and
    • Net option value.

    Time and Price Records. Electronic trading platforms should create daily logs showing each price change on the platform, the time of the change to the nearest second, and the trading volume at that time and price.

    Exception Reports. Electronic trading platforms should generate daily exception reports showing all price adjustments and all orders filled outside the price range displayed by the system when the order was placed.16 Management should review these reports for suspicious or unjustifiable activity.

    Assessment Fee Reports. Electronic trading platforms should generate month-end assessment fee reports for each FDM using the platform. The report should summarize the number of forex transactions executed during the month and the size of those transactions.17

    Retention. Members must maintain this information for five years from the date created, and it must be readily accessible during the first two years. These records must be open to inspection by NFA, and copies must be provided to NFA upon request.

    Trade Integrity

    General Standard. FDMs must adopt and enforce written procedures reasonably designed to ensure the integrity of trades placed on their trading platforms.

    Pricing. Trading platforms must be designed to provide bids and offers that are reasonably related to current market prices and conditions. For example, bids and offers should increase as prices increase, and spreads should remain relatively constant unless the market is volatile.18 Furthermore, if an FDM advertises a particular spread (e.g., 1 pip) for certain currency pairs or provides for a particular spread in its customer agreement, the system should be designed to provide that spread.19

    Slippage. An electronic trading platform should be designed to ensure that any slippage is based on real market conditions. For example, slippage should be less frequent in stable currencies than in volatile ones, and prices should move in customers' favor as often as they move against it.

    The firm's written procedures should require management approval for all adjustments to customer fill prices except those made according to objective criteria identified in the procedures. Firm personnel should document the reason for all price adjustments (regardless of whether they require management approval).20

    If a Forex Dealer Member advertises "no slippage," the electronic trading platform should be designed to execute a market order at the price displayed when the order is entered and to execute a stop order at the stop price.21 The FDM's procedures should also prohibit personnel from adjusting prices for any reason once the order reaches the platform.22

    Rollovers. If an electronic trading platform automatically rolls over open positions, the trading platform should be designed to ensure that the rollover complies with the terms disclosed in the customer agreement, including those provisions dictating how the rollover price is determined.

    Certification

    Each FDM - including each FDM that provides a trading platform to its customers through a white-labeling arrangement - must certify annually that these requirements have been met. The certification must be signed by a principal who is also a registered AP and must be filed with NFA.

    Members who solicit or introduce forex customers or manage forex customer accounts must provide annual certifications if they use an electronic trading platform offered by a counterparty that is not an FDM or if they provide or endorse a separate AORS. The certification must be signed by a principal who is also a registered AP and must be filed with NFA. The certification may, however, be limited to the applicable requirements.

    1 Compliance Rule 2-39 and this Interpretive Notice apply to all Members except those who are described in Bylaw 306(b). It does not apply to Members who are registered as broker-dealers and members of the Financial Industry Regulatory Authority.

    2 For purposes of this Notice, the term "Forex Dealer Member" has the same meaning as in Bylaw 306, the term "forex" has the same meaning as in Bylaw 1507(b), and the term "customer" has the same meaning as in Compliance Rule 2-36(i).

    3 The written procedures do not, however, have to contain technical specifications or duplicate procedures that are documented elsewhere.

    4 A trading platform executes a customer's trade by assigning the other side of the trade to a counterparty. An order-routing system transmits orders to a trading platform (or to another system or individual). In most instances, the same trading system will perform both functions. NFA understands that separate systems are extremely rare in the forex markets. Nonetheless, since most of the same principles apply, these separate systems are included in this Notice.

    5 If the Member provides or endorses a separate AORS, however, the Member is responsible for meeting all of the applicable requirements in connection with that system.

    6 White labeling refers to the practice of leasing the right to place the lessee's name on and market another firm's trading platform as its own and then passing the trades through to the lessor. In the typical while labeling arrangement, the lessee's customers do not have a contractual relationship with, and in fact may be unaware of, the firm that owns and operates the platform. For regulatory purposes, the lessee is the counterparty to the customer's trades and the corresponding transactions with the lessor are separate transactions between the lessee and the lessor to hedge the lessee's customer obligations.

    7 As a practical matter, NFA will not take disciplinary action unless the sponsor knew or should have known that the white labeler was not meeting its contractual obligation to comply with this Notice or the sponsor failed to exercise due diligence when establishing and maintaining the relationship with the white labeler.

    8 For example, an FDM that negotiates prices with its customers may have different procedures to satisfy this Notice's record-keeping requirements outside of the platform.

    9 For purposes of this notice, the term "customer" includes CTAs entering orders for forex customers except when referring to credit-worthiness and ability to accept risk. In those instances, the term "customer" is limited to the owner of the account.

    10 Misrepresenting capacity or performance levels or other material information regarding a Member's electronic systems is a violation of NFA Compliance Rule 2-36(b) or 2-39(a).

    11 For example, lack of capacity might result in excessive slippage.

    12 A Member should assess each individual customer's ability to accept risk as part of the Member's obligation to know its customers. (See NFA Interpretive Notice entitled "Forex Transactions," NFA Manual, paragraph 9053).

    13 An AORS used to access an electronic trading platform need not include pre-execution and post-execution controls if the Member providing or sponsoring the AORS has determined, after a reasonable investigation, that the trading platform complies with those requirements and that the Member who controls the trading platform effectively utilizes its controls.

    14 If the FDM unconditionally guarantees customers against deficits it should, of course, take any loss that occurs beyond the amount of equity in the account even when the deficit occurs because of those extraordinary market conditions. Misrepresenting the potential for customer losses is a violation of NFA Compliance Rule 2-36(b) or 2-39(a).

    15 If the system treats the rollover as two transactions, it should provide the date and time of each transaction.

    16 Obviously, this requirement does not include limit orders that are not executable when placed. The FDM should, however, have procedures for reviewing limit orders that are executed at prices inconsistent with their terms.

    17 The report should exclude transactions by eligible contract participants as that term is defined in Section 1a(12) of the CEA.

    18 Management should approve each fill outside the price range displayed by the system when a market order was placed and should document the reason for the fill price.

    19If the FDM's customer agreement provides for exceptions in volatile or illiquid markets and those exceptions are prominently disclosed, the system may be programmed to be consistent with the agreement's terms.

    20 An unreasonable price adjustment violates NFA Compliance Rule 2-36(c).

    21 The FDM is not required to give the customer a price that is no longer reflected on the platform at the time the order reaches it. The FDM is not responsible for order transmission delays outside its control.

    22 Members may not, of course, advertise "no slippage" if these conditions are not met. (See NFA Interpretive Notice entitled "Forex Transactions," NFA Manual, paragraph 9053, for a more detailed discussion of this requirement.)

    As of June 1, 2009, the entire Interpretive Notice will read:

    [¶ 9060] COMPLIANCE RULE 2-36(e): SUPERVISION OF THE USE OF ELECTRONIC TRADING SYSTEMS
    (Board of Directors, November 16, 2006; effective July 1, 2007; October 15, 2007; December 17, 2007; and June 1, 2009.)

    INTERPRETIVE NOTICE

    NFA Compliance Rule 2-36(e) places a continuing responsibility on every Forex Dealer Member (FDM) to diligently supervise its employees and agents in all aspects of its forex activities, and Compliance Rule 2-39 applies this same requirement to certain Members who solicit, introduce, or manage forex customer accounts.1 These rules are broadly written to provide Members with flexibility in developing procedures tailored to meet their particular needs, so NFA uses interpretive notices to provide more specific guidance.2

    Although the Board of Directors firmly believes that supervisory standards do not change with the medium used, technology may affect how those standards are applied. The forex markets are highly automated, with virtually all trading done on electronic platforms. Most orders are also placed electronically, usually entered directly with the platform via the Internet. Therefore, in order to fulfill their supervisory responsibilities, Members must adopt and enforce written procedures to address the security, capacity, credit and risk-management controls, and records provided by the firm's electronic trading systems.3 This includes electronic trading platforms, order-routing systems incorporated into electronic trading platforms, and separate order-routing systems (AORSs).4 For an electronic trading platform, the procedures must also address the integrity of the trades placed on it.

    NFA recognizes that Members who solicit or manage accounts may not have control over the electronic platform where the customer places its trades. Nonetheless, if these Members are subject to NFA Compliance Rule 2-39 and are dealing with a counterparty that is not an FDM, they have a supervisory responsibility to conduct a reasonable investigation regarding security, capacity, credit and risk-management, records, and integrity of trades on the platform prior to entering into a relationship with that counterparty and periodically thereafter. Therefore, while they are not subject to the more specific requirements of this Notice, they should adopt written procedures addressing the steps they will take to investigate the platform and how they will respond if they have reason to believe that the platform does not meet the general standards set out after each major heading.5

    The specific requirements of this Notice do, however, apply to any FDM that uses another entity's trading platform through a "white-labeling" arrangement.6 If the entity providing the platform (the white labeler) is also an FDM, the FDM using the platform (the sponsor) may rely on the white labeler to comply with most of these requirements. The sponsor must, however, adopt and enforce written procedures to:

    • Provide required notifications and disclosures to customers;
    • Maintain records; and
    • Respond to situations where it has reason to believe the white labeler is not complying with the Notice.

    If the white labeler is not an FDM, the sponsor and the white labeler may agree by contract that the white labeler will comply with the Notice, but the sponsor FDM will still be liable if the requirements are not met.7

    Each FDM must notify NFA of the trading platform it uses. The platform must identify the platform's owner and developer (if different than the owner) and must state whether the platform is proprietary, used under a white-labeling arrangement, or leased from a third-party under other terms. The FDM must also notify NFA when it changes its trading platform, adds a new trading platform, or drops a trading platform.

    Each FDM must also provide NFA with a copy of the written procedures this Notice requires it to maintain. The procedures must assign the responsibility for complying with this Notice to individuals who are under the ultimate supervision of an Associated Person who is also a listed principal.

    Given the differences in NFA Members' size, complexity of operations, and business activities, they must have some flexibility in determining what constitutes "diligent supervision" for their firms. NFA's policy is to leave the exact form of supervision up to each Member, thereby providing the Member with flexibility to design procedures tailored to its own situation. It is also NFA's policy to set general standards rather than to require specific technology. Therefore, other procedures besides the ones described in this Interpretive Notice may comply with the general standards for supervisory responsibilities imposed by Compliance Rules 2-36 and 2-39.8

    Security

    General Standard. Members who handle customer orders must adopt and enforce written procedures reasonably designed to protect the reliability and confidentiality of customer orders and account information. The procedures must also assign responsibility for overseeing the process to one or more individuals who understand how it works and who are capable of evaluating whether the process complies with the firm's procedures.

    Authentication. Electronic trading systems, or other systems the customer must go through to access electronic trading systems, should authenticate the user. Authentication can be accomplished through a number of methods, including:

    • Passwords;
    • Authentication tokens, such as SecurID cards; or
    • Digital certificates.

    Encryption. The system should use encryption or equivalent protections for all authentication and for any order or account information that is transmitted over a public network (including the Internet), a semi-private network, or a virtual private network. If more appropriate and effective security procedures are developed or identified, the use of those procedures would comply with this standard.

    Firewalls. Firewalls or equivalent protections should be used with public networks, semi-private networks, and virtual private networks. The system should log the activities that pass through a firewall, and the log should be reviewed regularly for abnormal activity. If more appropriate and effective security procedures are developed or identified, the use of those procedures would comply with this standard.

    Authorization. Although it is the customer's responsibility to ensure that only authorized individuals have access to the electronic trading system using the customer's facilities and authentication devices (e.g., passwords), the Member's procedures should, as appropriate, provide customers with a means to notify the Member that particular individuals are no longer authorized or to request that authentication devices be disabled. Customers should be informed about the notification process.9

    Periodic Testing. The Member should conduct periodic reviews designed to assess the security of the electronic trading system.

    Administration. The Member should adopt and enforce written procedures assigning the responsibility for overseeing the security of the electronic trading system to appropriate supervisory personnel. The procedures should also provide that appropriate personnel keep up with new developments, monitor the effectiveness of the system's security, and respond to any breaches. Additionally, the procedures should provide for updating the system as needed to maintain the appropriate level of security.

    Capacity

    General Standard. Members who handle customer orders must adopt and enforce written procedures reasonably designed to maintain adequate personnel and facilities for the timely and efficient delivery of customer orders and reporting of executions. Members who operate trading platforms must adopt and enforce written procedures reasonably designed to maintain adequate personnel and facilities for the timely and efficient execution of customer orders. The procedures must also be reasonably designed to handle customer complaints about order delivery, execution (if applicable), and reporting and to handle those complaints in a timely manner.

    Members may not misrepresent the services they provide or the quality of those services. If a Member represents that it maintains a particular capacity or performance level, it must take the measures necessary to achieve that level.10

    Capacity Reviews. The Member should adopt and enforce written procedures to regularly evaluate the capacity of each electronic trading system and to increase capacity when needed. The procedures should also provide that each system will be subjected to an initial stress test. Such test may be conducted through simulation or other available means. Capacity reviews should be conducted whenever major changes are made to the system or the Member projects a significant increase in volume and should occur at least annually.

    The Member should monitor both capacity (how much volume the system can handle before it is adversely impacted or shuts down) and performance (how much volume the system can handle before response time materially increases), and should assess the electronic trading system's capacity and performance levels based on the major strains imposed on the system. The Member should establish acceptable capacity and performance levels for each of its electronic trading systems. The Member's procedures should be reasonably designed to provide adequate capacity to meet estimated peak volume needs based on past experience, present demands, and projected demands.

    The procedures should also provide for the Member to follow up on customer complaints about access problems, system slowdowns, system outages, or other problems that may be related to capacity.11 The Member should identify the cause of any problem and take action to prevent it from re-occurring.

    Disaster Recovery and Redundancies. The Member should have contingency plans reasonably designed to service customers if either the system goes down or activity exceeds reasonably expected peak volume needs. The Member should use redundant systems or be able to quickly convert to other systems if the need arises. These backup systems can include facilities for accepting orders by telephone.

    When operational difficulties occur, the Member should provide prompt and effective notification to customers affected by the operational difficulties. Notification can be made by a number of methods, including:

    • a message on the Member's web site;
    • e-mails or instant messages;
    • a recorded telephone message for customers on hold; and/or
    • a recorded telephone message on a line dedicated to providing system bulletins to existing customers.

    An FDM must notify NFA as soon as reasonably possible, but no more than 24 hours, after operational difficulties occur. The notice should include the date, time, length, and cause of the outage or disruption; what the FDM did to remedy the situation in the short term; what steps the FDM will take to guard against future occurrences; the number of customers affected; and any actions the FDM took to adjust customer trades or accounts.

    Advance Disclosure. The Member should disclose, in advance, the factors that could reasonably be expected to materially affect the system's performance (e.g., periods of stress) and the means available for contacting the Member during a system outage or slow-down. This disclosure should be provided to each customer at the time the customer opens an account using a method reasonably calculated to ensure that the customer becomes aware of it.12 The disclosure should also be prominently displayed on the Member's web site. The Member should also educate customers on alternative ways to enter orders when the system goes down or reaches an unacceptable performance level. This disclosure may be made in the account agreement, on the Member's web site, or in any other manner designed to provide this information to current customers before problems occur.

    Credit and Risk-Management Controls

    General Standard. Members who handle customer orders must adopt and enforce written procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Member or the Member's other customers.13

    Account Controls. An electronic trading system should be designed to allow the Member to set limits for each customer based on the amount of equity in the account or the currency, quantity, and type of order, and the Member should utilize these controls. The system should automatically block any orders that exceed the pre-set limits.14

    If the trading platform automatically liquidates positions, the FDM should set the liquidation levels high enough so that the positions will be closed out at prices that will prevent the account from going into a deficit position under all but the most extraordinary market conditions.15 The FDM's platform must automatically liquidate positions, and it must set its liquidation levels to comply with this requirement, if its customer agreement or promotional material states or implies that customers cannot lose more than they invest.

    An electronic trading platform that does not automatically liquidate positions should generate an immediate alert when an account is in danger of going into a deficit position. Firm personnel should monitor those alerts throughout the day and take action when necessary.

    Review. A Member should conduct periodic system reviews designed to assess the reliability of its credit and risk-management controls.

    Recordkeeping

    General Standard. Members who handle orders must adopt and enforce written procedures reasonably designed to record and maintain essential information regarding customer orders and account activity.

    Transaction Records. Electronic trading systems should record the following information for each transaction:

    • Date and time the order is received by the system;
    • Price (or premium for an option) at which the order is placed;
    • Price (or premium for an option) quoted on the trading platform when the order was placed (if the system is a trading platform);
    • Account identification;
    • Currency pair;
    • Size;
    • Buy or sell;
    • Type of order (if not a straight market order);
    • Date and time the order is transmitted to the trading platform (if the system is an AORS);
    • Date and time of execution (if the system is a trading platform);
    • Size and price (or premium) at which the order is executed;
    • Date and time the execution information is received (if the system is an AORS); and
    • Date and time the execution information is reported by the system.

    For options, the system should record the following additional information:

    • Put or call;
    • Strike price; and
    • Expiration date.

    All times must be recorded to the nearest second. The system must also record any other necessary information (e.g., requotes, that the platform did not execute the order because the customer had insufficient equity in its account). If the transaction is not subject to daily rollovers, the system must also record the expiration date of the transaction, if any.

    The system should record this same information for liquidating orders. If customers place them as liquidating orders, the system should identify them as liquidating orders. If they are generated by the system because there is insufficient equity in the account, the system should record that information. If customers enter them as new orders, however, they need not be identified as liquidating orders in the order information even if they result in offset.

    Electronic trading platforms should record the following information for rollovers:

    • Account identification;
    • Currency pair;
    • Size;
    • Long or short;
    • Date and time of the rollover;16
    • Price of the position after the rollover;
    • Bid and ask prices quoted on the platform when the rollover occurred;
    • Amount of interest credited or debited to the account, if any;
    • Any other fees charged for the rollover.

    An electronic trading platform should be programmed to provide this information for each individual order and account. It should also be programmed to provide a report, upon request, showing the following information for all transactions other than rollovers executed on that day: time, price (or premium), quantity, long or short, currency pair, account identification, and, for options, strike price, put or call, and expiration date.

    Account Records. Electronic trading platforms should create and maintain daily records containing the following information:

    • Account identification;
    • Funds in the account (net of any commissions and fees);
    • Open trade equity (the net profits and losses on open trades); and
    • Account balance (funds in the account plus or minus open trade equity).

    For open option positions, the account balance should be adjusted for the net option value and the daily record should include the following additional information:

    • Long option value;
    • Short option value; and
    • Net option value.

    Time and Price Records. Electronic trading platforms should create daily logs showing each price change on the platform, the time of the change to the nearest second, and the trading volume at that time and price. Upon request by a customer, FDMs should provide time and price records covering all executed transactions for the same currency pair or option during the time period in which the customer's order was or could have been executed.

    Profit and Loss Reports. Electronic trading platforms should be able to produce, upon request, a report showing monthly and yearly realized and unrealized profits and losses by customer. The report should be sortable by the person soliciting, introducing, or managing the account.

    The system should generate year-end reports for each customer showing the realized profits and losses incurred during the calendar year and the unrealized profits and losses on open positions. The FDM must distribute these reports to customers by January 31st.17

    Exception Reports. Electronic trading platforms should generate daily exception reports showing all price adjustments and all orders filled outside the price range displayed by the system when the order was placed.18 Management should review these reports for suspicious or unjustifiable activity.

    Assessment Fee Reports. Electronic trading platforms should generate month-end assessment fee reports for each FDM using the platform. The report should summarize the number of forex transactions executed during the month and the size of those transactions.19

    Retention. Members must maintain this information for five years from the date created, and it must be readily accessible during the first two years. These records must be open to inspection by NFA, and copies must be provided to NFA upon request.

    Reviews. The FDM should conduct periodic reviews designed to ensure that the electronic trading platform maintains the data and is capable of generating the reports required by this Notice.

    Trade Integrity

    General Standard. FDMs must adopt and enforce written procedures reasonably designed to ensure the integrity of trades placed on their trading platforms.

    Pricing. Trading platforms must be designed to provide bids and offers that are reasonably related to current market prices and conditions. For example, bids and offers should increase as prices increase, and spreads should remain relatively constant unless the market is volatile.20 Furthermore, if an FDM advertises a particular spread (e.g., 1 pip) for certain currency pairs or provides for a particular spread in its customer agreement, the system should be designed to provide that spread.21

    Slippage. An electronic trading platform should be designed to ensure that any slippage is based on real market conditions. For example, slippage should be less frequent in stable currencies than in volatile ones, and prices should move in customers' favor as often as they move against it.

    If an FDM advertises "no slippage," the electronic trading platform should be designed to execute a market order at the price displayed when the order is entered and to execute a stop order at the stop price.22 The FDM's procedures should also prohibit personnel from adjusting prices for any reason once the order reaches the platform.23

    Settlement. An electronic trading platform should be designed to calculate uniform settlement prices. An FDM must have written procedures describing how settlement prices will be set using objective criteria.

    Rollovers. If an electronic trading platform automatically rolls over open positions, the trading platform should be designed to ensure that the rollover complies with the terms disclosed in the customer agreement, including those provisions dictating how the rollover price is determined.

    Periodic Testing. The FDM should conduct periodic reviews designed to ensure that an electronic trading platform complies with the requirements in this section and otherwise protects the integrity of trades placed on it.

    Periodic Reviews and Annual Certification

    For electronic trading platforms, a qualified outside party must conduct an independent annual review within twelve months after the FDM begins trading on that platform or within twelve months after the firm becomes an FDM, whichever is later.24 Thereafter, an independent review must be conducted at least annually, and a qualified outside party must conduct the review every other year. The remaining annual reviews and any additional reviews (which should be performed when needed) may be conducted by either an independent internal audit department or a qualified outside party. For pure order-routing systems, the required reviews may be conducted by an independent internal audit department or a qualified outside party and must be done at least annually.

    The reviews should audit the system for compliance with the requirements in this Notice. The results should be documented and reported to the firm's senior management or to an internal audit committee or department. The Member should follow up to ensure that any deficiencies are addressed and corrected and should document the corrective action taken.

    Each FDM - including each FDM that provides a trading platform to its customers through a white-labeling arrangement - must certify annually that the requirements in this Notice have been met and that the written procedures required by this Notice are up-to-date. The certification must be signed by a principal who is also a registered AP and must be filed with NFA.

    Members who solicit or introduce forex customers or manage forex customer accounts must provide annual certifications if they use an electronic trading platform offered by a counterparty that is not an FDM or if they provide or endorse a separate AORS. The certification must be signed by a principal who is also a registered AP and must be filed with NFA. The certification may, however, be limited to the applicable requirements.

    1 Compliance Rule 2-39 and this Interpretive Notice apply to all Members except those who are described in Bylaw 306(b). It does not apply to Members who are registered as broker-dealers and members of the Financial Industry Regulatory Authority.

    2 For purposes of this Notice, the term "Forex Dealer Member" has the same meaning as in Bylaw 306, the term "forex" has the same meaning as in Bylaw 1507(b), and the term "customer" has the same meaning as in Compliance Rule 2-36(i).

    3 The written procedures do not, however, have to contain technical specifications or duplicate procedures that are documented elsewhere.

    4 A trading platform executes a customer's trade by assigning the other side of the trade to a counterparty. An order-routing system transmits orders to a trading platform (or to another system or individual). In most instances, the same trading system will perform both functions. NFA understands that separate systems are extremely rare in the forex markets. Nonetheless, since most of the same principles apply, these separate systems are included in this Notice.

    5 If the Member provides or endorses a separate AORS, however, the Member is responsible for meeting all of the applicable requirements in connection with that system.

    6 White labeling refers to the practice of leasing the right to place the lessee's name on and market another firm's trading platform as its own and then passing the trades through to the lessor. In the typical while labeling arrangement, the lessee's customers do not have a contractual relationship with, and in fact may be unaware of, the firm that owns and operates the platform. For regulatory purposes, the lessee is the counterparty to the customer's trades and the corresponding transactions with the lessor are separate transactions between the lessee and the lessor to hedge the lessee's customer obligations.

    7 As a practical matter, NFA will not take disciplinary action unless the sponsor knew or should have known that the white labeler was not meeting its contractual obligation to comply with this Notice or the sponsor failed to exercise due diligence when establishing and maintaining the relationship with the white labeler.

    8 For example, an FDM that negotiates prices with its customers may have different procedures to satisfy this Notice's record-keeping requirements outside of the platform.

    9 For purposes of this notice, the term "customer" includes CTAs entering orders for forex customers except when referring to credit-worthiness and ability to accept risk. In those instances, the term "customer" is limited to the owner of the account.

    10 Misrepresenting capacity or performance levels or other material information regarding a Member's electronic systems is a violation of NFA Compliance Rule 2-36(b) or 2-39(a).

    11 For example, lack of capacity might result in excessive slippage.

    12 A Member could, for example, provide the disclosure in a separate e-mail to an address provided by the customer. Burying the disclosure in the account opening documents is not sufficient.

    13 A Member should assess each individual customer's ability to accept risk as part of the Member's obligation to know its customers. (See NFA Interpretive Notice entitled "Forex Transactions," NFA Manual, paragraph 9053).

    14 An AORS used to access an electronic trading platform need not include pre-execution and post-execution controls if the Member providing or sponsoring the AORS has determined, after a reasonable investigation, that the trading platform complies with those requirements and that the Member who controls the trading platform effectively utilizes its controls.

    15 If the FDM unconditionally guarantees customers against deficits it should, of course, take any loss that occurs beyond the amount of equity in the account even when the deficit occurs because of those extraordinary market conditions. Misrepresenting the potential for customer losses is a violation of NFA Compliance Rule 2-36(b) or 2-39(a).

    16 If the system treats the rollover as two transactions, it should provide the date and time of each transaction.

    17 FDMs can use Form 1099-B to satisfy this requirement.

    18 Obviously, this requirement does not include limit orders that are not executable when placed. The FDM should, however, have procedures for reviewing limit orders that are executed at prices inconsistent with their terms.

    19 The report should exclude transactions by eligible contract participants as that term is defined in Section 1a(12) of the CEA.

    20 Management should approve each fill outside the price range displayed by the system when a market order was placed and should document the reason for the fill price.

    21If the FDM's customer agreement provides for exceptions in volatile or illiquid markets and those exceptions are prominently disclosed, the system may be programmed to be consistent with the agreement's terms.

    22 The FDM is not required to give the customer a price that is no longer reflected on the platform at the time the order reaches it. The FDM is not responsible for order transmission delays outside its control.

    23 Members may not, of course, advertise "no slippage" if these conditions are not met. (See NFA Interpretive Notice entitled "Forex Transactions," NFA Manual, paragraph 9053, for a more detailed discussion of this requirement.)

    24 For purposes of this Notice, "qualified outside party" means an unaffiliated individual or entity that, through experience or training, understands complex IT systems and is able to test the firm's systems for compliance with the requirements in the Notice.

    [¶ 9061] NFA COMPLIANCE RULE 2-4: MISUSE OF TRADE SECRETS AND PROPRIETARY INFORMATION
    (Click Here to Print this Section)
    (Board of Directors, August 16, 2007; effective September 5, 2007; and December 11, 2007)

    INTERPRETIVE NOTICE

    National Futures Association ("NFA") Compliance Rule 2-4 provides that Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business. Over the years, NFA's Board of Directors ("Board") has provided guidance on certain issues to ensure that Members and Associates understand their responsibilities to observe just and equitable principles of trade and to act honestly, fairly, and in the best interests of customers.

    Compliance Rule 2-4 prohibits Members and Associates from knowingly obtaining or seeking to obtain another Member's or Associate's confidential information or trade secrets without that person's permission. It also prohibits Members and Associates from knowingly or recklessly misusing confidential information or trade secrets in their possession. Although that rule does not seek to regulate business disputes between Members or to extend beyond commodity futures activities, it does reach conduct that could potentially harm futures customers.

    Conduct that may violate Compliance Rule 2-4 includes:

    • Misusing sensitive personal information, such as a social security number or purposefully or recklessly violating the firm's privacy policy;

    • Disclosing customer orders prior to execution (except as permitted by exchange rules); or

    • Obtaining or attempting to obtain information disclosing a CTA's historical trading positions without the CTA's permission.

    These are merely examples of conduct that could potentially harm customers. Any Member or Associate that knowingly obtains or seeks to obtain confidential information or trade secrets of another Member or Associate without that person's permission or that knowingly or recklessly misuses trade secrets and/or proprietary information in the conduct of its commodity futures business violates Compliance Rule 2-4.
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