Document ID: SEC-2010-1220-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Futures Association
Posted Date: 2010-08-10T04:00Z

[Federal Register: August 10, 2010 (Volume 75, Number 153)]
[Notices]               
[Page 48393-48395]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au10-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62651; File No. SR-NFA-2010-03]

 
Self-Regulatory Organizations; National Futures Association; 
Notice of Filing and Immediate Effectiveness of Proposed Change to 
Compliance Rule 2-30 and the Related Interpretive Notice Regarding 
Customer Information and Risk Disclosure

August 4, 2010.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on July 13, 2010, National Futures Association (``NFA'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change described in Items I, II, and III below, which 
Items have been substantially prepared by the NFA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons. On March 8, 2010, NFA also filed this proposed 
rule change with the Commodity Futures Trading Commission (``CFTC'') 
requesting that it review and approve the proposed rule change. On June 
28, 2010, the CFTC notified the NFA that the CFTC had approved the rule 
change.\3\
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
    \3\ See letter from David A. Stawick, Secretary, U.S. Commodity 
Futures Trading Commission to Thomas W. Sexton, III, General 
Counsel, National Futures Association dated June 28, 2010.
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I. Self-Regulatory Organization's Description and Text of the Proposed 
Rule Change

    The amendments to NFA Compliance Rule 2-30 and the Related 
Interpretive Notice expand the customers covered by the rule to reach 
not just individuals, but all non-Eligible Contract Participants 
(``ECPs''); require futures commission merchants (``FCMs'') Members to 
request at least annually that active customers update information 
obtained from the customer pursuant to NFA Compliance Rule 2-30(c), if 
there are any material changes to the information, and require the FCM, 
introducing broker (``IB''), or commodity trading advisor (``CTA'') 
Member, or one of their Associates, that currently solicits and 
communicates with the customer to determine if additional risk 
disclosure is required to be provided based on any changed information; 
and prohibit Members and Associates from making individualized 
recommendations to those customers whom the Member or Associate has or 
should have advised that futures trading is too risky for them.
    The text of the proposed rule change is available on NFA's Web site 
at http://www.nfa.futures.org, at the principal office of NFA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for the Proposed Rule Change

    In its filing with the Commission, NFA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NFA has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for the Proposed Rule Change

1. Purpose
    Section 15A(k) of the Act \4\ makes NFA a national securities 
association for the limited purpose of regulating the activities of NFA 
Members (``Members'') who are registered as brokers or dealers under 
Section 15(b)(11) of the Act.\5\ NFA Compliance Rule 2-30(c) and the 
related Interpretive Notice apply to all Members, including those who 
are registered as security futures brokers or dealers under Section 
15(b)(11).
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    \4\ 15 U.S.C. 78o-3(k).
    \5\ 15 U.S.C. 78o(b)(11).
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    In early September 2009, the CFTC and SEC held joint public 
meetings to discuss regulatory harmonization. At these meetings, one of 
the many issues discussed related to the similarities and differences 
between the futures industry's know-your-customer requirements and the 
securities industry's suitability requirements.
    Due, in part, to these harmonization discussions and in light of 
changes in the futures industry, NFA's Executive Committee asked NFA's 
Member Advisory Committees to consider whether NFA Compliance Rule 2-30 
could be amended to further enhance customer protection. In their 
review, the Executive and Advisory Committees 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 and its 
appropriateness for a particular customer must be made at the time the 
customer makes a decision to trade futures in the first place. 
Therefore, the Committees fully supported maintaining the essential 
character of NFA Compliance Rule 2-30's know-your-customer requirement 
as a customer-by-customer determination.
    The Committees also generally agreed that NFA Compliance Rule 2-30 
currently works well and provides strong customer protection. Further, 
they believed that NFA's know-your-customer requirements and FINRA's 
suitability rules address the same concerns and achieve substantially 
the same results and any differences between them are largely semantic. 
The Committees noted, however, that certain modifications would provide 
increased customer protection and, therefore, they supported the 
following changes.
    The amendments to NFA Compliance Rule 2-30 and its related 
Interpretive Notice will: (1) Expand the customers covered by the rule 
to reach not just individuals but all non-ECPs; (2) require FCM Members 
to request at least annually that active customers update information 
obtained from the customer pursuant to NFA Compliance

[[Page 48394]]

Rule 2-30(c) if there are any material changes to the information, and 
require the FCM, IB, or CTA Member, or one of their Associates, that 
currently solicits and communicates with the customer to determine if 
additional risk disclosure is required to be provided based on any 
changed information; and (3) prohibit Members and Associates from 
making individualized recommendations to those customers whom the 
Member or Associate has or should have advised that futures trading is 
too risky for them.
    The burden of the update process will fall on the FCM Member that 
carries the customer account to request updated information at least 
annually. FCM Members may satisfy this requirement by contacting the 
customer in writing (by electronic or any other means reasonably 
designed to reach the customer) and requesting that the customer notify 
the Member of any material changes to the information previously 
provided. If the customer informs the FCM that he/she cannot verify the 
information because the information previously provided to the carrying 
FCM is not currently available to the customer, then the carrying FCM 
shall promptly provide any necessary information to the customer. 
Absent advice to the contrary from the customer, the information 
previously provided is deemed verified.
    Whenever the customer notifies the FCM Member carrying the 
customer's account of any material changes to the information (whether 
through the update process or through the customer's own initiative), a 
determination must be made as to whether additional risk disclosure is 
required to be provided to the customer based on the changed 
information. If another FCM or IB introduces the customer's account on 
a fully disclosed basis or a CTA directs trading in the account, then 
the carrying FCM must notify that Member of the changes to the 
customer's information. The Member or Associate who currently solicits 
and communicates with the customer is responsible for determining if 
additional risk disclosure is required to be provided based on the 
changed information. In some cases, this may be the Member introducing 
or controlling the account; in other cases, it may be the carrying FCM.
    Amendments to NFA Compliance Rule 2-30 and the related Interpretive 
Notice regarding Customer Information and Risk Disclosure were 
previously filed with the SEC in SR-NFA-2001-01, SR-NFA-2002-06 and SR-
NFA-2007-07.
2. Statutory Basis
    The rule change is authorized by, and consistent with, Section 
15A(k)(2)(B) of the Act.\6\ That section requires NFA to have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest, including rules 
governing sales practices of security futures products. NFA believes 
the proposed rule change accomplishes this by requiring Members to 
request updated information from customers and, where appropriate, 
provide additional disclosures based on the updated information. The 
proposed rule change also prohibits making individualized 
recommendations for certain customers for whom futures trading is too 
risky.
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    \6\ 15 U.S.C. 78o-3(k)(2)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will require FCMs to request updated 
information from customers at least annually. The Member Advisory 
Committees sought to minimize any burden this requirement might have by 
permitting the request to be made by electronic or any other means 
reasonably designed to reach the customer. Additionally, if a customer 
receiving the request for updated information does not indicate to the 
contrary, the information previously provided is deemed verified. 
Another burden imposed regards a determination of whether additional 
disclosure should be provided to a customer that notifies the FCM of 
any material changes. The rule change places this burden with the 
Member or Associate that currently solicits and communicates with the 
customer, and therefore, knows the customer best. The burdens imposed 
by the rule change are necessary and appropriate to ensure that 
customers have full and appropriate disclosures of the risks of futures 
trading.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    NFA worked with its Member Advisory Committees in developing the 
rule change. NFA did not, however, publish the rule change to the 
membership for comment. NFA did not receive comment letters concerning 
the rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    On June 28, 2010, the CFTC notified NFA that it had approved the 
rule change, and therefore, NFA is permitted to make the amendments 
effective as of this date.
    At any time within 60 days of the date of effectiveness of the 
proposed rule change, the Commission, after consultation with the CFTC, 
may summarily abrogate the proposed rule change and require that the 
proposed rule change be refiled in accordance with the provisions of 
Section 19(b)(1) of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NFA-2010-03.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NFA-2010-03. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing

[[Page 48395]]

also will be available for inspection and copying at the principal 
office of NFA. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available. All submissions should refer to File Number SR-NFA-
2010-03 and should be submitted on or before August 31, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(73).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19658 Filed 8-9-10; 8:45 am]
BILLING CODE 8010-01-P