Document ID: SEC-2006-0442-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Futures Association
Posted Date: 2006-04-04T04:00Z

[Federal Register: April 4, 2006 (Volume 71, Number 64)]
[Notices]               
[Page 16850-16852]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ap06-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53568; File No. SR-NFA-2006-01]

 
Self-Regulatory Organization; National Futures Association; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Interpretive Notice to Compliance Rule 2-9

March 29, 2006.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-7 under the Exchange Act,\2\ notice 
is hereby given that on February 27, 2006, National Futures Association 
(``NFA'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change described in

[[Page 16851]]

Items I, II, and III below, which Items have been prepared by NFA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. NFA also has filed the 
proposed rule change 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.
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    NFA, on February 27, 2006, requested that the CFTC make a 
determination that review of the proposed rule change is not necessary. 
By letter dated March 8, 2006, the CFTC notified NFA of its 
determination not to review the proposed rule change.\3\
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    \3\ See Letter from Lawrence B. Patent, Deputy Director, CFTC, 
to Thomas W. Sexton, III, Esq., General Counsel, NFA (Mar. 8, 2006).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    Section 15A(k) of the Exchange 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 in security futures products under Section 15(b)(11) of the 
Exchange Act.\5\ NFA's Interpretive Notice titled ``Compliance Rule 2-
9: Enhanced Supervisory Requirements'' (``Interpretive Notice'') 
applies to all Members, including Members registered under Section 
15(b)(11), who meet the criteria specified in the Interpretive Notice.
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    \4\ 15 U.S.C. 78o-3(k).
    \5\ 15 U.S.C. 78o(b)(11).
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    The proposed rule change, which would modify the Interpretive 
Notice, would exempt certain associated persons (``APs'') from being 
counted in the calculation for determining whether a Member is 
required, pursuant to NFA Compliance Rule 2-9(b) (discussed below), to 
adopt the enhanced supervisory procedures described in the Interpretive 
Notice. In particular, the proposed rule change would exclude from the 
calculation the individuals who meet all of the following criteria:
     The AP has only worked for one Disciplined Firm; \6\
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    \6\ For purposes of the Interpretive Notice, a Disciplined Firm 
is defined as one that meets the following three criteria: (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 been permanently 
barred from the industry as a result of those charges. In addition, 
a Disciplined Firm is defined to 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 CEA has been expelled from membership or participation in any 
securities industry self-regulatory organization or is subject to an 
order of the SEC revoking its registration as a broker-dealer. See 
Interpretive Notice, p. 4.
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     The AP has not worked for a Disciplined Firm in more than 
ten years;
     The AP has not worked for a Member that has been subject 
to a sales practice action by NFA or the CFTC since leaving the 
Disciplined Firm;
     The AP has not been personally subject to a disciplinary 
action by NFA or the CFTC; and
     The AP has been an NFA Member or Associate Member for at 
least eight of the preceding ten years.

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
    NFA Compliance Rule 2-9, titled ``Supervision,'' provides in 
paragraph (b) that the NFA's Board of Directors (``Board'') may require 
Members that meet specific criteria established by the Board, relating 
to the employment history of their APs, to adopt supervisory procedures 
specified by the Board for the supervision of telemarketing. The 
Interpretive Notice describes these enhanced supervisory procedures and 
provides that a Member would be required to undertake these procedures 
if its sales force included a specified number of APs who have 
previously worked at Disciplined Firms. The Interpretive Notice and an 
enabling provision of NFA Compliance Rule 2-9(b) provide that affected 
Members may petition the Telemarketing Procedures Waiver Committee 
(``Waiver Committee'') for relief from the enhanced supervisory 
procedures.
    From time to time, the Board has amended the Interpretive Notice's 
numerically-based criteria to exempt certain APs who have worked at 
Disciplined Firms from having to be counted for purposes of determining 
whether a Member that hires them is required to adopt the enhanced 
supervisory procedures. According to NFA, these exempted APs, based 
upon their history, are not likely to pose a risk to the public.\7\
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    \7\ For example, in 2003, the Interpretive Notice was amended to 
exempt APs who had worked at Disciplined Firms for less than sixty 
days more than ten years ago. Securities Exchange Act Release No. 
47533 (Mar. 19, 2003); 68 FR 14733 (Mar. 26, 2003). Last year the 
Board amended the Interpretive Notice to reduce this period from ten 
years to five years, while retaining the requirement that the 
individual must have worked at such a firm for less than sixty days. 
Securities Exchange Act Release No. 52808 (Nov. 18, 2005); 70 FR 
71347 (Nov. 28, 2005).
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    APs who may not pose a risk to the public remain in the population 
of APs who could trigger enhanced supervisory procedures. For example, 
a prospective AP who worked at one Disciplined Firm for more than sixty 
days a number of years ago but who otherwise had an unblemished 
personal and employment history in the industry would currently be 
afforded relief only if the firm seeking to hire the AP applied for a 
waiver. NFA's Waiver Committee often takes these individual factors 
into consideration when deciding whether to grant a waiver to a firm.
    Without an exemption, these individuals may not ever reach the 
Waiver Committee. Employers, and small firms in particular, may be wary 
of hiring these individuals merely because their hiring might trigger 
enhanced supervisory procedures and require the firm to apply for a 
waiver. In addition, some firms are simply loath to hire an individual 
who would be counted on their staff as having come from a Disciplined 
Firm even if hiring them would not trigger enhanced supervisory 
procedures.
    NFA performed an analysis of registration and disciplinary data and 
found that a significant number of currently active APs who have long 
tenures in the industry meet the criteria proposed for the exemption. 
Specifically, applying the proposed criteria would exempt 82 currently 
active APs, who are employed by 67 Member firms, from being counted as 
APs who had worked at a Disciplined Firm for purposes of determining 
whether their current sponsor or any prospective sponsors would trigger 
an obligation to undertake the enhanced supervisory procedures.
    NFA believes that adding these exemptions will reduce the burden on 
the membership while still imposing enhanced supervision on firms that 
cause concern. Exempting APs who worked at a single Disciplined Firm 
more than ten years ago, have since been employed by compliant Members, 
and have good personal compliance histories could help to make the 
Waiver Committee more efficient since an increased number of non-
problematic

[[Page 16852]]

firms and individuals will be removed from the waiver process.
2. Statutory Basis
    The rule change is authorized by, and consistent with, Section 
15A(k) of the Exchange Act.\8\
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    \8\ 15 U.S.C. 78o-3(k).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The rule change will not impose any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the 
Exchange Act and the Commodity Exchange Act (``CEA''). In fact, it will 
lessen the burden on competition by exempting additional firms and 
individuals from the enhanced supervision requirement.

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 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

    NFA submitted, on February 27, 2006, the proposed amendments to the 
Interpretive Notice regarding NFA Compliance Rule 2-9 to the CFTC for 
approval. NFA invoked the ``ten-day'' provision of Section 17(j) of the 
CEA, stating that it intended to make the proposed amendments effective 
ten days after receipt of the proposals by the CFTC, unless the CFTC 
determined to review the proposed amendments for approval and notified 
NFA of this determination. By letter dated March 8, 2006, the CFTC 
notified NFA of its determination not to review the proposed rule 
change.\9\ The proposed rule change has become effective on March 8, 
2006.
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    \9\ See Letter, supra note 3.
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    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 Exchange Act.\10\
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    \10\ 15 U.S.C. 78s(b)(1).
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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 No. SR-NFA-2006-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-NFA-2006-01. 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 inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also 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 No. SR-NFA-2006-01 and should be submitted on or before April 25, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(73).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-4830 Filed 4-3-06; 8:45 am]

BILLING CODE 8010-01-P