[Federal Register Volume 68, Number 11 (Thursday, January 16, 2003)]
[Notices]
[Pages 2383-2384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-914]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47147; File No. SR-NFA-2002-07]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Futures 
Association Regarding the Interpretive Notice to NFA Compliance Rule 2-
9 Concerning Enhanced Supervisory Procedures

January 9, 2003.
    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 2, 2002, the National Futures Association (``NFA'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule changes described in Items I, II, and 
III below, which Items have been prepared by the NFA. The Commission is 
publishing this notice to solicit comments on the proposed rule changes 
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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    On November 27, 2002, NFA requested that the CFTC make a 
determination that review of the proposed rule change is not necessary. 
The CFTC made such a determination on December 9, 2002.

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

    Section 15A(k) of the Act \3\ 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

[[Page 2384]]

Act.\4\ Some of the firms that are affected by this rule change could 
be broker-dealers registered under Section 15(b)(11).
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    \3\ 15 U.S.C. 78o-3(k).
    \4\ 15 U.S.C. 78o(b)(11).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    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. 
These statements are set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In 1993, NFA's Board adopted an Interpretive Notice to NFA 
Compliance Rule 2-9 that requires firms that employ a significant 
number of Associated Persons (``APs'') who have previously worked at a 
Disciplined Firm to adopt enhanced supervisory procedures, including 
tape recording all conversations between APs and customers. Since 1993, 
the Interpretive Notice has defined a Disciplined Firm as one that 
meets the following three criteria:
    1. The firm has been formally charged by either the CFTC or NFA 
with deceptive telemarketing practices or promotional material;
    2. Those charges have been resolved; and
    3. The firm has been closed down and permanently barred from the 
industry as a result of those charges.
    Last month, the question was raised as to the proper interpretation 
of the phrase ``closed down and permanently barred,'' as used in the 
third criterion. This issue arose in the context of a settlement of an 
NFA Business Conduct Committee (``BCC'') sales practice complaint 
alleging telemarketing fraud against a south Florida firm.
    The firm went out of business in February 2001 and withdrew its NFA 
membership and CFTC registration in April 2001. Although NFA had 
informed the firm that it was under investigation in the spring of 
2001, the BCC issued the sales practice Complaint against the firm in 
October 2001 and the Complaint was settled in October 2002. Under the 
terms of the settlement, the firm agreed to be permanently barred from 
NFA membership.
    The firm maintains that it should not be considered a ``Disciplined 
Firm,'' under the Interpretive Notice, because it does not meet the 
third criterion listed above. Specifically, the firm argues that it was 
not ``closed down'' as a result of the charges in the recent BCC 
Complaint since it had already gone out of business and withdrawn its 
CFTC registration and NFA membership when the Complaint was issued.
    NFA staff does not agree with the firm's position. NFA has always 
taken the view that ``closed down'' and ``permanently barred'' describe 
the same thing, namely, a final resolution in a sales practice case 
which results in a permanent bar and closure of a firm. Although it is 
true that, in this case, the firm ceased operations and withdrew its 
NFA membership prior to the issuance of the Complaint, there was 
nothing to prevent the firm from reapplying for NFA membership and 
resuming business. It was not until the firm agreed to be permanently 
barred from NFA membership in settlement of the BCC Complaint that the 
firm was finally and irreversibly ``closed down and permanently 
barred'' as contemplated by the Interpretive Notice.
    If the firm's interpretation were to prevail, any firm that is the 
subject of a sales practice investigation could merely cease 
operations, prior to the issuance of a Complaint, reopen under a 
different name and, thereby, avoid being designated as a ``Disciplined 
Firm.'' Such a result would neutralize the Interpretive Notice and 
render it useless. Therefore, NFA's Board determined to clarify the 
interpretive notice by deleting the phrase ``closed down'' from the 
third criterion.
2. Statutory Basis
    The rule change is authorized by, and consistent with, Section 
15A(k) of the Act.\5\
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    \5\ 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 Commodity Exchange Act.\6\
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    \6\ 7 U.S.C. 1.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    NFA did not publish the rule changes to the membership for comment. 
NFA did not receive comment letters concerning the rule changes.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Pursuant to Section 19(b)(7)(B) of the Act,\7\ the proposed rule 
change became effective on December 9, 2002.
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    \7\ 15 U.S.C. 78s(b)(7)(B).
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    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.\8\
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    \8\ 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 conflicts with the Act. Persons making written submissions 
should file nine copies of the submission with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Comments also may be submitted electronically to the 
following e-mail address: [email protected]. 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 these filings also will be available 
for inspection and copying at the principal office of NFA. 
Electronically submitted comments will be posted on the Commission's 
Web site (http://www.sec.gov). All submissions should refer to File No. 
SR-NFA-2002-07 and should be submitted by February 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(75).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-914 Filed 1-15-03; 8:45 am]
BILLING CODE 8010-01-P