Document ID: SEC-2008-1374-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Futures Association
Posted Date: 2008-10-08T04:00Z

[Federal Register: October 8, 2008 (Volume 73, Number 196)]
[Notices]               
[Page 59011-59013]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08oc08-112]                         

[[Page 59011]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58709; File No. SR-NFA-2008-02]

 
Self-Regulatory Organizations; National Futures Association; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Technical Amendments to the Interpretive Notice Regarding 
Compliance Rule 2-9: Enhanced Supervisory Requirements

October 1, 2008.
    Pursuant to Section 19b(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on September 5, 2008, the 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 prepared by the NFA.\3\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons. NFA also has filed this proposed rule 
change concurrently with the Commodity Futures Trading Commission 
(``CFTC'').
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
    \3\ NFA filed a letter from the CFTC notifying the NFA that it 
had determined not to review the proposed rule change. See note 4.
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    On September 5, 2008, the NFA requested that the CFTC make a 
determination that review of the proposed rule change is not necessary. 
On September 18, 2008, the CFTC notified the NFA that the CFTC has 
determined not to review the proposed rule change.\4\
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    \4\ See letter from William Penner, Deputy Director, CFTC, to 
Thomas W. Sexton, III, Esq., General Counsel, NFA, dated September 
18, 2008.
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I. Self-Regulatory Organization's Description and Text of the Proposed 
Rule Change

    The NFA's Board of Directors (``Board'') adopted two revisions to 
NFA Compliance Rule 2-9's Interpretive Notice entitled ``Enhanced 
Supervisory Requirements'' (``Notice''). The changes include a limited 
expansion of an existing exemption for some associated persons 
(``APs'') who worked at a Disciplined Firm more than ten years ago from 
being counted for purposes of calculating whether a Member that hires 
such an individual is required to adopt the enhanced supervisory 
procedures. The second change is to the language in the Notice 
describing the enhanced capital component to change the requirement for 
Forex Dealer Members (``FDMs'') from a fixed amount to 150 percent of 
their capital requirement to cover recent changes to capital 
requirements and to make the provision more flexible in addressing 
future changes to capital requirements.

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

    NFA has prepared statements concerning the purpose of, and basis 
for, the proposed rule change, burdens on competition, and comments 
received from members, participants, and others. The text of these 
statements may be examined at the places specified in Item IV below. 
These statements are set forth in Sections A, B, and C below.

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 \5\ 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.\6\ NFA's Interpretive Notice entitled 
``Compliance Rule 2-9: Enhanced Supervisory Requirements'' applies to 
all Members who meet the criteria in the Interpretive Notice and could 
apply to Members registered under Section 15(b)(11).
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    \5\ 15 U.S.C. 78o-3(k).
    \6\ 15 U.S.C. 78o(b)(11).
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    NFA's Board of Directors first adopted the Notice in January 1993. 
It requires a Member to undertake enhanced supervisory requirements if 
its sales force includes a specified number of individuals who have 
worked at Disciplined Firms, or if a principal of the firm has been a 
principal of another firm that has been subject to the enhanced 
supervisory requirements, or, under certain circumstances, when a 
Member becomes subject to a disciplinary action.
    The Board has amended the Notice from time to time based on various 
changes affecting the membership and on practical lessons learned from 
administering the Notice. Over the past several years, the Board has 
recognized that some APs who were counted as having worked at a 
Disciplined Firm under the original version of the Notice had personal 
employment histories that indicated that they posed no more risk to the 
public than the AP population at large. The Board recognized that 
employers may be wary of hiring such individuals despite years of 
Associate membership without disciplinary problems. This is 
particularly true with small firms, where hiring one of these 
individuals might trigger the enhanced supervisory procedures and 
require the firm to apply for a waiver. In addition, some firms are 
simply loath to hire any individual who would be counted as having come 
from a Disciplined Firm, even if doing so would not trigger the 
enhanced supervisory procedures.
    Currently, the Notice provides for two types of exemptions, which 
focus on an AP's length of employment at a Disciplined Firm (i.e., less 
than sixty days) and the time since an AP has been employed at a 
Disciplined Firm (i.e., more than ten years). The Board decided to 
grant relief to these defined groups because staff's analysis showed 
that given their background they pose minimal risk. With regard to the 
second type of exemption, the Notice currently provides that APs are 
exempt from being counted as having worked at a Disciplined Firm if: 
(1) They worked at only one Disciplined Firm; (2) that employment 
terminated more than ten years ago; (3) they have not personally been 
subject to a disciplinary action by NFA or the CFTC; (4) they have been 
registered as APs and Associate Members of NFA for eight of the last 
ten years; and (5) since working for the Disciplined Firm they have not 
worked for any other firm that has been subject to a sales practice 
action.
    In practice, this latter condition acts as a de facto perpetual bar 
to receiving the exemption even if the AP's employment at the second 
firm subject to a sales practice action also occurred many years in the 
past.
    The NFA performed an analysis of the effect of applying a ten-year 
time limit not only to the length of time since an AP was employed at a 
Disciplined Firm but also to the condition that the AP not work at a 
firm that had a sales practice action since being employed at the 
Disciplined Firm. This analysis showed that the current exemption could 
prudently be revised to include APs who met the other existing 
criteria, and who had worked more than ten years ago at a firm that was 
subject to a sales practice action. This change would afford this 
exemption to approximately 85 additional individuals who, based upon 
their employment histories, do not appear to pose any greater risk of 
using fraudulent sales tactics than the general population of APs.\7\
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    \7\ There are more than 13,000 individuals who have ever worked 
as an AP at a Disciplined Firm. Approximately 2,100 of those 
individuals are exempted from having to be included in a firm's 
calculation of whether it has triggered enhanced supervision under 
the current exemptions provided for in the Notice.

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[[Page 59012]]

    Excluding these APs from the calculation that triggers a firm's 
obligation to comply with the enhanced supervisory procedures is 
consistent with the reasoning behind the existing exemptions. 
Ultimately, the proposed expanded exemption would have the effect of 
removing some non-problematic individuals and Member firms from the 
waiver process.
    The Notice also provides that one of the enhanced supervisory 
requirements is an increased adjusted net capital (``ANC'') level. The 
Notice currently provides that FDMs that are required to undertake the 
enhanced supervisory requirements are obligated to maintain ANC of at 
least $2,000,000. When the Board adopted that provision, FDMs that were 
not subject to the enhanced supervisory requirements had a minimum ANC 
of $1,000,000. However, revisions to NFA Financial Requirements Section 
11 in December 2007 raised the required minimum level of ANC for all 
FDMs to $5,000,000, thus rendering the $2,000,000 requirement 
irrelevant. Furthermore, the CFTC Reauthorization Act of 2008 further 
increases the ANC for FDMs, phasing in the increase to an eventual $20 
million.
    The proposed revisions to the enhanced supervisory requirements 
would reinstate an increased ANC level for FDMs and make the provision 
more flexible in addressing future changes. These revisions tie the 
enhanced ANC level for FDMs to the early warning requirement under CFTC 
rules, which is currently 150 percent of the required ANC.
    Under the proposal (and assuming the CFTC's early warning 
percentage remains unchanged), a triggering FDM would currently have to 
maintain an enhanced ANC of $7,500,000, increasing to $30,000,000 as 
the minimum ANC for FDMs increases from $5,000,000 to $20,000,000 over 
the next year. This revision would not only have the effect of bringing 
the current enhanced ANC obligation into harmony with the revisions 
made to NFA Financial Requirements Section 11 in December 2007, it 
would also keep the obligation in harmony with any future changes to 
the level of ANC required of FDMs without requiring further amendments 
to the Notice.
    Amendments to the Notice were previously filed in SR-NFA-2001-01, 
SR-NFA-2002-07, SR-NFA-2003-01, SR-NFA-2005-01, SR-NFA-2006-01, SR-NFA-
2007-03, 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.\8\ 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 and advertising of security futures products. 
The proposed rule change accomplishes this by imposing enhanced 
supervisory requirements on firms at risk for sales practice fraud, and 
the proposed rule change makes technical amendments to conform the 
Notice to NFA's experience with the rule and to upcoming changes to the 
capital requirements.
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    \8\ 15 U.S.C. 78o-3(k)(2)(B).
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    This proposed rule change is not designed to regulate, by virtue of 
any authority conferred by the Act, matters not related to the purposes 
of the Act or the administration of the association. To the extent that 
this proposal regulates activities and transactions other than security 
futures, the authority for regulating those activities and transactions 
comes from the Commodity Exchange Act rather than the securities laws.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The changes to the events that trigger application of the rule will 
lessen the burden on competition by exempting additional firms and 
individuals from the enhanced supervision requirements, which are 
imposed on NFA Member firms that hire a significant amount of their 
sales force from firms that have been barred from the industry for 
sales practice fraud. This part of the rule change should decrease the 
number of firms who are subject to the requirements.
    The changes to the capital requirement will impose additional 
burdens on firms subject to the rule. However, the primary impetus for 
this change is Congressional legislation raising the capital 
requirement for firms that act as counterparties to retail off-exchange 
foreign currency transactions to an amount far in excess of the 
requirement currently set by the rule. While a small number of those 
firms may be registered as brokers or dealers under Section 15(b)(11) 
of the Act, the capital requirement is based on activities unrelated to 
that registration. Furthermore, the Board has considered the burden on 
competition and has determined a larger capital requirement is 
necessary and appropriate to protect customers from unethical practices 
by firms subject to the rule.

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

    NFA did not publish the rule changes to the membership for comment. 
NFA did not receive comment letters concerning the rule changes.

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

    On September 18, 2008, the CFTC notified the NFA that it had 
determined not to review the proposed rule change and, therefore, NFA 
was permitted to make the amendments effective as of this date.\9\ 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.
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    \9\ See note 4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change conflicts with the Exchange 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-2008-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NFA-2008-02. 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

[[Page 59013]]

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 inspection and copying in the Commission's Public 
Reference Section, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 am and 3 pm. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the 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 available publicly. All submissions should refer to 
File Number SR-NFA-2008-02 and should be submitted on or before October 
29, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(73).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23840 Filed 10-7-08; 8:45 am]

BILLING CODE 8011-01-P