CFTC LAW » NFA Proposals

NFA guidelines on the use of social networking groups

Felix Shipkevich — Wed, 09 Dec 2009 02:40:46 +0000

On-line Social Networking Groups – Proposed Amendments to NFA’s Compliance Rule 2-29(h) and Adoption of Interpretive Notice

On-line social networking groups have changed the way people make trading decisions. A number of NFA Members sponsor blogs, chat rooms, and forums (also called message or bulletin boards), and some use sites like Facebook or Twitter for business purposes. Associates may also sponsor or participate in these groups. Unfortunately, these on-line communities provide opportunities for posters to spread unsubstantiated rumors and intentional misrepresentations. The form of communication does not change the obligations of Members and Associates who host or participate in these groups, and electronic communications must comply with Compliance Rules 2-9, 2-29, 2-36, and 2-39.

NFA’s interpretive notice entitled NFA Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Site,” (NFA Manual, ¶ 9037) provides guidance on how NFA’s promotional material and supervision rules relate to email and web sites but does not specifically address other types of electronic communications. This notice discusses a Member or Associate’s responsibilities in connection with on-line social networking facilities such as blogs, chat rooms, forums, Facebook, and Twitter.

Obviously, any electronic content that can be viewed by the general public, or even by a more closed community that includes current and potential customers, can be promotional material. For example, blogs dealing with commodity futures or options are promotional material when written by an NFA Member or Associate, and forex blogs are promotional material when written by a Member or Associate subject to the forex rules.

Therefore, content generated by the Member or Associate is subject to the requirements of NFA Compliance Rules 2-29, 2-36, or 2-39. The same is true for futures, options, or forex content written by a Member or Associate and posted on a third party’s site.

The issue becomes more complicated for user-generated comments responding to a Member or Associate’s blog and for Members and Associates who host chat rooms or forums. What is their responsibility for posts from customers or others over whom the Member or Associate has no direct control? When inadequately monitored, social networking sites may contain misleading information, lure customers into trades that they would not normally make, or be used in an attempt to manipulate prices.

If a Member or Associate hosts a blog, a chat room, or a forum where futures or forex are discussed, the Member or Associate is required to supervise the use of that community. This requires, at a minimum, that the Member or Associate regularly monitor the content of the sites it hosts, take down any misleading or otherwise fraudulent posts, and ban users for egregious or repeat violations. Not only are these actions required by NFA’s supervision rules, they are both common sense and common practice. Similar requirements apply to Facebook and other sites that allow others to post to the Member or Associate’s “wall” or other assessable area.

Audio pod-casts and videos on the Internet—whether on the Member or Associate’s Web site or on an independent site such as You-Tube—are similar to radio and television advertisements. If they make specific trading recommendations or refer to profits that have been obtained in the past or can be

NFA proposes amendments to the Interpretive Notice regarding Forex Transactions

Felix Shipkevich — Fri, 04 Dec 2009 02:09:09 +0000

NFA Bylaw 1301(e) requires Forex Dealer Members to pay annual dues that are
graduated according to the firm’s gross annual revenue from customers (e.g.,
commissions, mark-ups, mark-downs) for its forex activities. Profits and losses
from proprietary trades are not to be included. To calculate dues:
• Start with the FCM dues imposed by NFA Bylaw 1301(b)(ii);
• Add $44,375 if the Forex Dealer Member’s gross annual revenue from
forex transactions is $500,000 or less;
• Add $69,375 if the Forex Dealer Member’s gross annual revenue from
forex transactions is more than $500,000, but not more than $2,000,000;
• Add $94,375 if the Forex Dealer Member’s gross annual revenue from
forex transactions is more than $2,000,000, but not more than $5,000,000;
or
• Add $119,375 if the Forex Dealer Member’s gross annual revenue from
these activities is more than $5,000,000.

These dues apply when the Forex Dealer Member offers to be a counterparty to
a forex transaction or accepts a forex trade (whichever is earlier), and NFA will
send the Member an invoice for the minimum dues ($50,000 or $45,875) minus
any amount already paid for that membership year. Thereafter, the dues will be
assessed on the firm’s membership renewal date and will be based on the Forex
Dealer Member’s latest certified financial statement.

(proposed amendment)
The only exception to the dues set forth above is a situation in which NFA does
not serve as the DSRO for a Forex Dealer Member and the DSRO has agreed to
examine the Forex Dealer Member’s forex activities. In this case, the surcharge
paid by the Forex Dealer Member, regardless of gross annual revenue, is
$12,000. Accordingly, for such a Forex Dealer Member the dues to be assessed
at the time it offers to be a counterparty to a forex transaction or accepts a forex
trade (whichever is earlier), and on its membership renewal date thereafter, will
be $13,500.

NFA proposes amendments to Financial Requirements Section 15 regarding FDM internal financial controls

Felix Shipkevich — Fri, 04 Dec 2009 01:59:19 +0000

Financial Requirements Section 15 currently requires firms to provide NFA with an internal control report prior to acting as an FDM. This report must be prepared by an independent public accountant registered with the Public Company Accounting Oversight Board and must include representations by the accountant that the FDM’s internal financial controls have no material weaknesses. NFA adopted this rule after taking a number of Member Responsibility Actions against FDMs with inadequate internal financial controls.
Additionally, reputable public accounting firms have informed NFA that AICPA auditing standards require accountants to test live transactions before making representations about the adequacy of internal controls, and they cannot do this testing for firms that have not yet begun business. Therefore, the amendments to Section 15 eliminate the specific requirement for an internal control report prior to acting as an FDM and replace it with a more general requirement that the Member must demonstrate that it has adequate internal financial controls. This requirement will continue to put the burden on the Member but will provide more flexibility. Section 15 will continue to authorize NFA to require any FDM to provide an internal control report if NFA believes that the Member’s controls are inadequate:

-If NFA believes that a Member’s internal controls are inadequate at any time, NFA’s Compliance Director may require it to provide to NFA an internal control report that is prepared and certified by an independent public accountant who is registered under Section 102 of the Sarbanes-Oxley Act. -

Congress Urged to Close Zelener Loophole

Felix Shipkevich — Thu, 04 Jun 2009 17:05:19 +0000

NFA President Daniel Roth and Executive Vice President Daniel Driscoll urged Congress to close the Zelener loophole for non-forex products. In the CFTC vs. Zelener case, the U.S. Court of Appeals for the Seventh Circuit concluded that the rolling spot contracts in question did not qualify as futures contracts and that the CFTC therefore lacked the jurisdiction to regulate them. While the loophole created by the decision was partially closed by congress in 2008, the fix only applies to forex. Similar practices in retail OTC commodities trading remain virtually unregulated.

Prohibition of loans by commodity pools to CPOs and affiliates

Felix Shipkevich — Wed, 27 May 2009 13:38:39 +0000

NFA Compliance Rule 2-45 prohibits direct or indirect loans or any advance of pool assets between a pool and its CPO or any other affiliated person or entity, though participants, including a CPO’s principal, may barrow against their equity interests in a pool. Exemptions are to be handled on a case by case basis.

New security deposit requirements cap leverage

Felix Shipkevich — Mon, 23 Feb 2009 13:26:26 +0000

FDMs must collect security deposits of 1% of notional value on major currency pairs and 4% on other currency pairs. FDMs that maintain 150% of their capital requirement will be exempted. The Interpretive Notice cites customer safety as a reason for the leverage restrictions. It also notes that the new standards bring security deposit requirements in the retail forex industry more in line with typical IMM margins.

New capital requirements for FDMs

Felix Shipkevich — Mon, 23 Feb 2009 13:03:15 +0000

In addition to the $20 million required by the CFTC Reauthorization Act of 2008, FDMs with over $10 million in customer liabilities and will be subject to capital requirements that take into account their total liabilities. FDMs that execute customer transactions exclusively via STP will be exempted. In general, the following formula will apply:

Amount required by (a)(i) + .05(customer liabilities – $10,000,000

CFTC/NFA forum

Felix Shipkevich — Wed, 27 Aug 2008 22:48:32 +0000

NFA Announcement: Definition of a Forex Dealer Member:

Proposed Amendments to NFA Bylaw 306, NFA Financial Requirements
Section 11(a), and the Interpretive Notice Regarding Forex Transactions

http://www.nfa.futures.org/news/PDF/CFTC/Bylaw306_FR11a_c082208.pdf

NFA Announcements

Felix Shipkevich — Fri, 08 Aug 2008 15:29:12 +0000

NFA Announces Increase to FDM Capital Requirements

On August 27, 2008, NFA announced that the capital requirements for Forex Dealer Members (FDMs) imposed by CFTC Reauthorization were approved by NFA’s Board of Directors. Particularly Section 1, 11, and 12 will be modified pursuant to CFTC approval.

http://www.nfa.futures.org/news/PDF/CFTC/FR1_11a_12_082208.pdf