Download - Supervision Issues for FCMs and IBs
Supervision Issues for FCMs and IBs
Notice-Registered asBroker-Dealers
Introduction
• Supervisory requirements developed with CFTC and SEC
• Significant impact on supervisory issues and requirements
• Rule Amendments– Compliance Rule 2-7– Compliance Rule 2-8– Compliance Rule 2-29– Compliance Rule 2-30
Introduction
• New rule: Compliance Rule 2-37
• Two major changes to supervision rules:– Interpretive notices issued:
• Special supervisory requirements for Members registered as broker-dealers under section 15(b)(11) of the Securities Exchange Act of 1934
• Enhanced supervisory requirements
Supervision Issues
• All 2-9 rules apply to trading security futures
• Will highlight additional supervisory requirements for firms with SF activities
• Two keys
– Designated Security Futures Principal (DSFP)
– Written Supervisory Procedures
Designated Security Futures Principal
• What is a DSFP?– Individual at the location where SF activity
takes place who is responsible for supervising that activity
• Qualifications:– Must meet the requirements of NFA
Compliance Rule 2-7– Testing or training?
Designated Security Futures Principal
• Members must have at least one DSFP at each location that does security futures business
• Lines of supervision clearly defined and communicated (written chain of command)
Written Supervisory Procedures - General
• Members must develop specific written procedures regarding supervision of customer accounts
• Frequent supervisory review
• Incorporate changes
• All locations must have current copy
Discretionary Accounts
• DSFP must review all SF discretionary account activity
• Written record of review must be maintained
Discretionary Accounts
• Review for SF transactions that are excessive in size or frequency
• DSFP must adhere to the rules outlined in the 2-9 Interpretive Notice regarding discretionary accounts
Promotional Material -Correspondence
• Members must comply with the2-9 Interpretive Notice regarding supervision of e-mail and web sites
• Incoming and outgoing correspondence must be reviewed by a DSFP and a record of the review maintained:
• Name of person conducting the review• Name of person preparing outgoing
correspondence
Promotional Material - Correspondence
• Supervision procedures for correspondence must consider:– Structure, size and nature of business– Nature of communication– Level of sophistication of the customer– Training and background of broker
Promotional Material
• Procedures for reviewing SF promotional material must be designed to ensure compliance with all NFA’s promotional content and review requirements
• Amendment to Rule 2-29:– Prior to first use, all material must be reviewed
and approved in writing– If SF material, review and approval must be by
DSFP
Account Approval
• Specific written procedures for account approval include:– Criteria and standards to be used in
evaluating the suitability of customers to trade security futures
– Procedures that require a DSFP to grant written approval to accounts to trade security futures
Account Approval
– DSFP must explain in writing why approval was granted to an account that does not meet its criteria and standards
– Financial requirements for approval and maintenance of SF accounts
Securities Laws
• Compliance with Securities Laws– NFA Compliance Rule 2-37(b):
• Written supervisory procedures must be designed to comply with applicable securities laws
• See “Information for Notice-Registered Broker-Dealers”
Use and Disclosure of Member’s Name
• Must adequately disclose the name of the entity
• Any reference to membership (Exchange, NFA, SIPC) must:– Clearly identify which entity belongs to the
organization
Use and Disclosure of Member’s Name
• No reference to self-conferred degrees
• Bona fide degrees may not be used in a misleading manner
• All aliases or dba’s must be:– Listed on the form 7-R or 3-R
– Clearly identified and not misleading
Branch Offices and Guaranteed IBs
• DSFP must approve, in writing:– Procedures for supervision of all GIBs and
BOs engaging in security futures
• Review must be conducted under the supervision of a DSFP
• On-site review of GIBs and BOs engaging in security futures must be done annually
Hiring Employees
• When hiring employees to engage in security futures, a firm must:– Have a DSFP periodically review hiring
procedures
– Check the CRD for any information on the individual
– Obtain the 8-T or U-5 if the individual was previously registered
Hiring Employees
• The individual must:– Provide the firm with a copy of the 8-T or
U-5 within two days of firm request
– Contact NFA or the NASD and request form 8-T or U-5, and provide a copy to the firm within two days of receiving the copy
Guarantee Agreements
• When entering into Guarantee Agreements an FCM must:– Check the CRD for information relating to
the IB, principals and employees
Meeting with Associated Persons
• A person designated by the firm must meet with all APs engaging in security futures to discuss compliance issues:– Must take place at least once a year and
may take the form of:• Annual group meeting with all employees
• Individual interviews
– May also cover other areas deemed relevant by the firm
Case Study
QUESTIONS?