[Federal Register Volume 68, Number 58 (Wednesday, March 26, 2003)]
[Notices]
[Pages 14733-14735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7115]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47533; File No. SR-NFA-2003-01]


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 Requirements

March 19, 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 March 6, 2003, 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 March 5, 2003, 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 March 17, 2003.

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

    The proposed rule change makes two amendments to NFA's Interpretive 
Notice to NFA Compliance Rule 2-9 Concerning Enhanced Supervisory 
Requirements. The first amendment refines the triggering criteria to 
eliminate associated persons who worked at a Disciplined Firm for less 
than 60 days more than 10 years ago. The second amendment expands the 
definition of Disciplined Firm to include firms that are barred by the 
SEC or NASD because of deceptive sales practices involving security 
futures contracts.
    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 Act.\4\ Some of the firms that 
are affected by this rule change are 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
    The Interpretive Notice entitled ``Compliance Rule 2-9: Enhanced 
Supervisory Requirements'' (``Notice'') was originally issued in 1993 
and has been amended and revised from time to time since then. On 
February 15, 2001, NFA's Board of Directors (``Board'') adopted changes 
to the Notice to impose enhanced supervisory requirements on

[[Page 14734]]

firms that had previously been exempted because they had fewer than 
five APs. The revised Notice also treated FCMs and all of their 
guaranteed IBs as a single firm for purposes of determining whether the 
enhanced supervision requirements are triggered. In addition, the 
definition of a Disciplined Firm was expanded to include firms that 
have been closed down or permanently barred from the industry solely as 
a result of promotional material violations.
    The Board's 2001 changes to the Notice have achieved their desired 
effect of adding a number of potentially problematic firms to the group 
of Members that are required to tape record all conversations with 
customers and prospects. However, NFA's Telemarketing Procedures Waiver 
Committee (``Waiver Committee'') has granted waiver requests made by 
several of the newly included firms because the Committee felt that, 
under their particular circumstances, those firms did not pose a threat 
to the public and should not be subject to mandatory taping.
    Some waivers have been granted in cases where the AP whose prior 
employment at a Disciplined Firm triggered enhanced supervisory 
requirements had worked at such a firm for only a short period of time 
or a long time ago. NFA staff reviewed the employment histories of APs 
who have worked at Disciplined Firms with regard to their tenure at and 
the passage of time since such employment to determine if the current 
triggering criteria can be further refined so as to affect the fewest 
number of Members while capturing the problem firms that concern the 
Board.
    NFA staff studied a variety of data related to the employment 
histories of APs who worked for Disciplined Firms. The data was broken 
down to identify APs with a cumulative tenure of fewer than 60 days 
with a Disciplined Firm as well as those with fewer than 30 days. Other 
tables identified APs for whom at least 5, 7 or 10 years had passed 
since they had last worked at such a firm. Staff also considered the 
backgrounds of other firms that the APs had worked at and the APs' 
personal disciplinary histories.
    After analyzing this data, it became apparent that when a 
cumulative tenure of less than 60 days at Disciplined Firms was 
combined with the passage of more than 10 years since employment with a 
Disciplined Firm, the resulting group of APs did not have an atypical 
number of disciplinary actions taken against them and they tended to 
currently work for firms that did not cause concerns about sales 
practice training and experience. Currently, 27 active APs fit the 
profile of those that have been employed for a cumulative total of less 
than 60 days at a Disciplined Firm more than 10 years ago and of these 
27, only 2 have worked at any other firms that have been charged with 
violations related to sales practices or promotional material. Both of 
those actions resulted in settlements in which the firm paid a fine. 
Not one of the active APs has ever personally been the subject of any 
disciplinary action by NFA, the CFTC or an Exchange.
    Based upon this data, the Board felt that the triggering criteria 
in the Notice can be further refined while still achieving the Board's 
desire to impose supervisory enhancements on firms that cause concern. 
Not including these APs for purposes of calculating whether a Member 
was subject to enhanced supervision would serve the efficiency and 
fairness of the Waiver Committee's function by altogether removing some 
non-problematic firms from the waiver process. The Board, therefore, 
amended the Notice so that APs who have been employed for a cumulative 
total of less than 60 days at a Disciplined Firm more than 10 years ago 
would not be included in the triggering criteria.
    The Board also amended the term ``Disciplined Firm'' in the Notice. 
Currently, the term Disciplined Firm as it is defined in the Notice 
includes Members that have been barred by NFA or the CFTC for deceptive 
sales practices or promotional material. With the advent of trading in 
security futures products and at the request of the Securities and 
Exchange Commission, the Board amended the definition of a Disciplined 
Firm set out in the Notice to include broker-dealers that have been 
barred from doing business by the SEC or NASD because of deceptive 
sales practices involving security futures. The Board felt that 
including these firms would promote NFA's mandate of customer 
protection and is consistent with the Board's reason for establishing 
enhanced supervisory requirements. Under the proposed expanded 
definition of a Disciplined Firm, a Member would be required to count 
individuals who have been trained at and worked for either Member or 
non-Member broker-dealers that have been barred by the NASD and SEC for 
using dishonest sales practices to market security futures products 
when determining whether the composition of the Member's sales force 
triggers an obligation to tape and to abide by the other enhanced 
supervisory requirements established in the Notice.
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.

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,\6\ the proposed rule 
change became effective on March 17, 2003.
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    \6\ 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.\7\
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    \7\ 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

[[Page 14735]]

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-2003-01 
and should be submitted by April 16, 2003.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(75).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7115 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P