Supervision Issues for FCMs and IBs

1. Supervision Issues for FCMs and IBs Notice-Registered asBroker-Dealers

2. 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

3. 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

4. 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

5. 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?

6. 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)

7. 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

8. Discretionary Accounts • DSFP must review all SF discretionary account activity • Written record of review must be maintained

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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”

16. 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

17. 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

18. 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

19. 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

20. 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

21. Guarantee Agreements • When entering into Guarantee Agreements an FCM must: • Check the CRD for information relating to the IB, principals and employees

22. 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

23. Case Study

24. QUESTIONS?