Document ID: SEC-2006-0134-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Futures Association
Posted Date: 2006-02-06T05:00Z

[Federal Register: February 6, 2006 (Volume 71, Number 24)]
[Notices]               
[Page 6119-6122]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06fe06-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53190; File No. SR-NFA-2005-02]

 
Self-Regulatory Organization; National Futures Association; 
Notice of Filing and Immediate Effectiveness of a Proposed Amendment to 
NFA Compliance Rule 2-10 Regarding Recordkeeping

January 30, 2006.
    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 December 6, 2005, 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 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 December 6, 2005, submitted the proposed rule change to the 
CFTC for approval. The CFTC approved the proposed rule change on 
January 5, 2006.\3\
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    \3\ See Letter from Thomas W. Sexton, Vice President and General 
Counsel, NFA, to Elizabeth King, Associate Director, Division of 
Market Regulation, Commission, dated January 26, 2006 (enclosing 
letter from Jean A. Webb, Secretary, CFTC, to Thomas W. Sexton, Vice 
President and General Counsel, NFA, dated January 5, 2006, 
confirming approval of the proposal) (``Confirmation of CFTC 
Approval'').

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[[Page 6120]]

I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    The proposed rule change amends NFA Compliance Rule 2-10 to ensure 
that NFA has effective access to books and records maintained by 
foreign firms or in a foreign language. Section 15A(k) of the Act \4\ 
makes NFA a national securities association 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 
Act.\5\ This rule change will apply to all NFA Members, including 
Members registered under section 15(b)(11).
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    \4\ 4 15 U.S.C. 78o-3(k).
    \5\ 5 15 U.S.C. 78o(b)(11).
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    The text of the proposed rule change is below. Proposed new 
language is italicized.
Text of Proposed Rule Changes
COMPLIANCE RULES
* * * * *
RULE 2-10. RECORDKEEPING
    (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; 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, 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.
* * * * *

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 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. 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
    NFA has seen a marked increase in the number of foreign firms 
applying for Futures Commission Merchant (``FCM'') \6\ registration and 
NFA membership. NFA Compliance Rule 2-10 requires all Members to 
maintain books and records necessary to conduct their business, but 
that requirement is useless if NFA staff cannot audit or understand 
those books and records.
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    \6\ ``Futures Commission Merchant'' means a person who is 
required to register or is registered as a futures commission 
merchant under the Commodities Exchange Act (``CEA'') and CFTC 
rules. NFA Compliance Rule 1-1(o).
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    NFA is concerned about its ability to audit and obtain information 
from foreign FCMs located in countries without regulatory systems 
comparable to that in the U.S. Furthermore, there have been instances 
where promotional materials and other documents prepared by U.S. 
Members were in a foreign language and it fell on NFA to get them 
translated. Amending NFA Compliance Rule 2-10 ensures that NFA has 
effective access to books and records maintained by foreign firms or in 
a foreign language.
    Although NFA has had foreign firms as Members since its inception, 
they have been concentrated in the Commodity Pool Operator (``CPO'') 
\7\ and Commodity Trading Advisor (``CTA'') \8\ categories, with a few 
Introducing Brokers (``IBs'') \9\ sprinkled in. Applications from 
foreign FCMs were rare, and those firms all had a U.S. office by the 
time they became Members. This has changed recently, primarily due to 
membership applications from foreign firms that want to offer retail 
forex to U.S. customers.
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    \7\ ``Commodity Pool Operator'' means a person who is required 
to register or is registered as a commodity pool operator under the 
CEA and CFTC rules. NFA Compliance Rule 1-1(g).
    \8\ ``Commodity Trading Advisor'' means a person who is required 
to register or is registered as a commodity trading advisor under 
the CEA and CFTC rules. NFA Compliance Rule 1-1(h).
    \9\ ``Introducing Broker'' means a person who is required to 
register or is registered as an introducing broker under the CEA and 
CFTC rules. NFA Compliance Rule 1-1(q).
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    As of October 3, 2005, NFA had six foreign FCM Members. Four of the 
foreign FCMs are located in London and the other two are located in 
Ontario, Canada, so they are all subject to established regulatory 
schemes in their home countries. As of that same date, there were three 
firms with pending applications for FCM registration and NFA membership 
and one firm with a pending application for registration only. The four 
pending firms are located in Columbia (two firms), Cyprus, and Israel. 
Within the past few years, NFA has also received applications from 
firms located in Argentina, Jordan, Pakistan, Romania, Russia, and 
Singapore, although those firms

[[Page 6121]]

withdrew their applications before they completed the registration 
process.
    Since December 1987, NFA has required foreign firms to certify that 
they can and will produce their books and records in the U.S. within 72 
hours and that they are not subject to any blocking, privacy, or 
secrecy laws that would interfere with this inspection. NFA shortened 
the response time for FCMs to 24 hours in 2003, after more foreign 
firms started applying for FCM registration.
    NFA audits most foreign firms by asking them to provide copies of 
their books and records, and this procedure has proven workable for 
auditing CPOs, CTAs, and IBs. For the foreign FCMs, NFA sent auditors 
to Canada, and each of the London firms either maintains a U.S. office 
to prepare and maintain the books relating to its U.S.-regulated 
business or provides those books and records through a U.S. agent. As 
the number of foreign FCM applicants grows, however, concerns about 
NFA's ability to conduct efficient and effective audits of these firms 
increase.
    Finally, U.S. firms occasionally provide NFA with documents written 
in foreign languages without also providing a translation. NFA has 
taken at least two disciplinary actions involving foreign-language 
solicitations made to a targeted group within the U.S. In the most 
recent case, a Forex Dealer Member located in California solicited 
Chinese-speaking individuals to trade OTC forex. In the other case, a 
CTA Member located in New York solicited Chinese-speaking individuals 
to trade products on U.S. exchanges. In both cases, NFA bore the onus 
of translating the materials into English. We believe this onus should 
be on the Member rather than on NFA, although NFA would check the 
accuracy of the translations in appropriate circumstances.
    The amendments to NFA Compliance Rule 2-10 add three new sections, 
with the current text becoming section (a).\10\ Section (b) requires 
FCMs to maintain their books and records in an office located in the 
U.S. or a part 30 jurisdiction (e.g., Great Britain, Canada).\11\ 
Section (b) also requires FCMs that do not maintain their books and 
records in the U.S. to reimburse NFA for travel and related expenses if 
travel to a foreign jurisdiction is necessary.
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    \10\ Many of these requirements are taken from NASD Rule 1090 or 
CBOE Rule 3.4 regarding foreign members.
    \11\ See CFTC Rule 30.10 (17 CFR 30.10) and Appendix C to that 
rule. A list of the Part 30 jurisdictions can be found on the CFTC's 
Web site at http://www.cftc.gov.

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    Section (c) applies to all Members subject to minimum capital 
requirements (i.e., FCMs and independent IBs). It requires them to 
prepare financial and other required reports in English, using U.S. 
dollars and U.S. accounting standards, and to maintain a general ledger 
in English using U.S. dollars. Section (d) applies to all Members. That 
section requires them to:
     File documents with NFA in English;
     Maintain English translations of foreign-language 
promotional material;
     Maintain required procedures in English;
     Provide English translations of other documents when 
requested by NFA; and
     Ensure that an English-speaking individual who is 
knowledgeable about the firm's business is available to assist NFA 
during an audit.
2. Statutory Basis
    The rule change is authorized by, and consistent with, section 
15A(k) of the Act.\12\
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    \12\ 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 Act 
and the CEA.\13\
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    \13\ 7 U.S.C. 1.
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C. Self-Regulatory Organization's Statement of 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

    The proposed rule change became effective on January 5, 2006, upon 
approval by the CFTC.\14\ 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.\15\
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    \14\ See Confirmation of CFTC Approval, supra note 3.
    \15\ 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 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 No. SR-NFA-2005-02 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-2005-02. 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 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-2005-02 and should be submitted on or before February 
27, 2006.
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    \16\ 17 CFR 200.30-3(a)(73).

[[Page 6122]]

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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Nancy M. Morris,
Secretary.
[FR Doc. E6-1540 Filed 2-3-06; 8:45 am]

BILLING CODE 8010-01-P