[Federal Register Volume 75, Number 153 (Tuesday, August 10, 2010)]
[Notices]
[Pages 48393-48395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19658]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62651; File No. SR-NFA-2010-03]
Self-Regulatory Organizations; National Futures Association;
Notice of Filing and Immediate Effectiveness of Proposed Change to
Compliance Rule 2-30 and the Related Interpretive Notice Regarding
Customer Information and Risk Disclosure
August 4, 2010.
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 July 13, 2010, 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 substantially prepared by the NFA. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons. On March 8, 2010, NFA also filed this proposed
rule change with the Commodity Futures Trading Commission (``CFTC'')
requesting that it review and approve the proposed rule change. On June
28, 2010, the CFTC notified the NFA that the CFTC had approved the rule
change.\3\
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\1\ 15 U.S.C. 78s(b)(7).
\2\ 17 CFR 240.19b-7.
\3\ See letter from David A. Stawick, Secretary, U.S. Commodity
Futures Trading Commission to Thomas W. Sexton, III, General
Counsel, National Futures Association dated June 28, 2010.
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I. Self-Regulatory Organization's Description and Text of the Proposed
Rule Change
The amendments to NFA Compliance Rule 2-30 and the Related
Interpretive Notice expand the customers covered by the rule to reach
not just individuals, but all non-Eligible Contract Participants
(``ECPs''); require futures commission merchants (``FCMs'') Members to
request at least annually that active customers update information
obtained from the customer pursuant to NFA Compliance Rule 2-30(c), if
there are any material changes to the information, and require the FCM,
introducing broker (``IB''), or commodity trading advisor (``CTA'')
Member, or one of their Associates, that currently solicits and
communicates with the customer to determine if additional risk
disclosure is required to be provided based on any changed information;
and prohibit Members and Associates from making individualized
recommendations to those customers whom the Member or Associate has or
should have advised that futures trading is too risky for them.
The text of the proposed rule change is available on NFA's Web site
at http://www.nfa.futures.org, at the principal office of NFA and at
the Commission's Public Reference Room.
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 included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. 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
Section 15A(k) of the 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 under
Section 15(b)(11) of the Act.\5\ NFA Compliance Rule 2-30(c) and the
related Interpretive Notice apply to all Members, including those who
are registered as security futures brokers or dealers under Section
15(b)(11).
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\4\ 15 U.S.C. 78o-3(k).
\5\ 15 U.S.C. 78o(b)(11).
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In early September 2009, the CFTC and SEC held joint public
meetings to discuss regulatory harmonization. At these meetings, one of
the many issues discussed related to the similarities and differences
between the futures industry's know-your-customer requirements and the
securities industry's suitability requirements.
Due, in part, to these harmonization discussions and in light of
changes in the futures industry, NFA's Executive Committee asked NFA's
Member Advisory Committees to consider whether NFA Compliance Rule 2-30
could be amended to further enhance customer protection. In their
review, the Executive and Advisory Committees noted that the futures
industry differs from the securities industry in several crucial ways.
Most importantly, futures contracts in general are recognized as highly
volatile instruments. It therefore makes little sense to presume that a
certain futures trade may be appropriate for a customer while others
are not. An appreciation of the risks of futures trading and its
appropriateness for a particular customer must be made at the time the
customer makes a decision to trade futures in the first place.
Therefore, the Committees fully supported maintaining the essential
character of NFA Compliance Rule 2-30's know-your-customer requirement
as a customer-by-customer determination.
The Committees also generally agreed that NFA Compliance Rule 2-30
currently works well and provides strong customer protection. Further,
they believed that NFA's know-your-customer requirements and FINRA's
suitability rules address the same concerns and achieve substantially
the same results and any differences between them are largely semantic.
The Committees noted, however, that certain modifications would provide
increased customer protection and, therefore, they supported the
following changes.
The amendments to NFA Compliance Rule 2-30 and its related
Interpretive Notice will: (1) Expand the customers covered by the rule
to reach not just individuals but all non-ECPs; (2) require FCM Members
to request at least annually that active customers update information
obtained from the customer pursuant to NFA Compliance
[[Page 48394]]
Rule 2-30(c) if there are any material changes to the information, and
require the FCM, IB, or CTA Member, or one of their Associates, that
currently solicits and communicates with the customer to determine if
additional risk disclosure is required to be provided based on any
changed information; and (3) prohibit Members and Associates from
making individualized recommendations to those customers whom the
Member or Associate has or should have advised that futures trading is
too risky for them.
The burden of the update process will fall on the FCM Member that
carries the customer account to request updated information at least
annually. FCM Members may satisfy this requirement by contacting the
customer in writing (by electronic or any other means reasonably
designed to reach the customer) and requesting that the customer notify
the Member of any material changes to the information previously
provided. If the customer informs the FCM that he/she cannot verify the
information because the information previously provided to the carrying
FCM is not currently available to the customer, then the carrying FCM
shall promptly provide any necessary information to the customer.
Absent advice to the contrary from the customer, the information
previously provided is deemed verified.
Whenever the customer notifies the FCM Member carrying the
customer's account of any material changes to the information (whether
through the update process or through the customer's own initiative), a
determination must be made as to whether additional risk disclosure is
required to be provided to the customer based on the changed
information. If another FCM or IB introduces the customer's account on
a fully disclosed basis or a CTA directs trading in the account, then
the carrying FCM must notify that Member of the changes to the
customer's information. The Member or Associate who currently solicits
and communicates with the customer is responsible for determining if
additional risk disclosure is required to be provided based on the
changed information. In some cases, this may be the Member introducing
or controlling the account; in other cases, it may be the carrying FCM.
Amendments to NFA Compliance Rule 2-30 and the related Interpretive
Notice regarding Customer Information and Risk Disclosure were
previously filed with the SEC in SR-NFA-2001-01, SR-NFA-2002-06 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.\6\ 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 of security futures products. NFA believes
the proposed rule change accomplishes this by requiring Members to
request updated information from customers and, where appropriate,
provide additional disclosures based on the updated information. The
proposed rule change also prohibits making individualized
recommendations for certain customers for whom futures trading is too
risky.
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\6\ 15 U.S.C. 78o-3(k)(2)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change will require FCMs to request updated
information from customers at least annually. The Member Advisory
Committees sought to minimize any burden this requirement might have by
permitting the request to be made by electronic or any other means
reasonably designed to reach the customer. Additionally, if a customer
receiving the request for updated information does not indicate to the
contrary, the information previously provided is deemed verified.
Another burden imposed regards a determination of whether additional
disclosure should be provided to a customer that notifies the FCM of
any material changes. The rule change places this burden with the
Member or Associate that currently solicits and communicates with the
customer, and therefore, knows the customer best. The burdens imposed
by the rule change are necessary and appropriate to ensure that
customers have full and appropriate disclosures of the risks of futures
trading.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
NFA worked with its Member Advisory Committees in developing the
rule change. NFA did not, however, 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
On June 28, 2010, the CFTC notified NFA that it had approved the
rule change, and therefore, NFA is permitted to make the amendments
effective as of this date.
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.
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 [email protected]. Please include
File Number SR-NFA-2010-03.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NFA-2010-03. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing
[[Page 48395]]
also will be available for inspection and copying at the principal
office of 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
publicly available. All submissions should refer to File Number SR-NFA-
2010-03 and should be submitted on or before August 31, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(73).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19658 Filed 8-9-10; 8:45 am]
BILLING CODE 8010-01-P