As your industry advocate, the NIBA provides many services which help your business stay in compliance with NFA rules. "Ask the NFA," is the way you can ask questions about those regulations and compliance requirements without having to call NFA directly.
Just email us at nfacomments@theniba.com and we will get the answers for you. Please keep in mind the purpose of this contact is to keep the lines of communication between NFA and NIBA members open, not to fix any specific individual concerns.
This month's questions were selected from those submitted by NIBA members over the last two months. The answers were supplied by NFA staff.
What IB-relevant rules and regulations apply to the use of a multi-CTA hypothetical composite performance portfolio for use as promotional material?
Any measurement or description of or reference to a composite performance record showing what a multi-advisor account portfolio could have achieved in the past if assets had been allocated among particular trading advisors is considered "hypothetical performance."
As with any piece of promotional material which contains hypothetical performance, IB Members must ensure that the hypothetical disclaimer is included within the material as required by NFA Compliance Rule 2-29(c)(1). Additionally, for material containing multi-advisor based hypothetical performance, a Member must include the disclaimer required by NFA Compliance Rule 2-29(c)(2). Further, the material should clearly identify the performance as hypothetical since the program has never traded in that manner as well as include any assumptions that have been used to compile the performance. The hypothetical performance also needs to be presented net of all fees. Additionally, the hypothetical performance should be representative of the performance experienced by customers of the IB who are actually trading the multi-advisor portfolio.
Please refer to NFA Compliance Rule 2-29, its various Interpretive Notices, and NFA Compliance Rule 2-9's Interpretive Notice relating to the use of web sites.
When qualifying a customer as an ECP, can an IB count current receivables towards assets and what would be considered a current receivable for this test?
Yes, and IB can count current receivables towards assets when qualifying a customer as an ECP. The Commodity Exchange Act's definition of ECP refers to "total assets," and does not state that current receivables cannot be counted in calculating total assets.
Does the NFA have any plans to modify Interpretive Notice 9021 – Enhanced Supervisory Requirements (i.e. the tape recording requirement)?
The short answer is no. NFA considers the Enhanced Supervisory Requirement (ESR) program to be a highly effective enforcement tool and a deterrent against abusive sales practices. A common attribute of firms that engage in abusive sales practices is the employment history and training of their sales forces and principals. For many of these Members, a significant portion of these individuals were previously employed and trained by one or more Member firms that had been disciplined for fraud. NFA believes that the employment history of a Member's APs and principals is a relevant factor to consider in identifying firms with potential sales practice problems and, if necessary, imposing the enhanced supervisory requirements upon their activities.
The number of NFA Members subject to ESR is extremely low. Furthermore, NFA offers Members that trigger the ESRs the opportunity to seek a waiver from the Telemarketing Procedures Waiver Committee, which grants a number of partial or full waivers each year.