As your industry advocate, the NIBA provides many services which help your business stay in compliance with NFA regulations. "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. The answers were supplied by NFA staff.
My Introducing Broker operates a Branch Office. The Branch Office's futures related activities is limited to opening 3rd party CTA managed accounts. This branch does not have its own website, nor does it produce its own promotional material. The Branch Office will not provide trading advice to clients. Does my Introducing Broker have to tape record oral communications as required by CFTC Regulation 1.35(a)? Am I required to tape record oral communications at the Branch Office?
In 2012, the CFTC amended Regulation 1.35 to require Introducing Brokers to keep all oral and written communications provided or received that lead to the execution of a transaction. However, when amending CFTC Regulation 1.35, the CFTC determined to exclude IBs that had generated $5 million or less in aggregate gross revenue from its IB operations over the preceding 3 years from this requirement. The account opening and resulting account maintenance and administrative services provided by the Branch Office as described above would likely be deemed as having led to the "execution of a transaction." Provided that the Introducing Broker has generated $5 million over the preceding three years in aggregate gross revenues from its activities as an Introducing Broker, the Branch Office must comply with CFTC Regulation 1.35. If the Introducing Broker has not generated $5 million over the preceding three years in aggregate gross revenues, tape recordings of the Branch Office may not have to be maintained.
I have heard spoofing cases are being referred to the federal regulatory and law enforcement authorities. Is this true? If so, why is this a serious offense?
Yes. As evidenced by recent regulatory and law enforcement actions by the U.S. Department of Justice, CFTC and others, spoofing cases appear to be a priority.
NFA Interpretive Notice 9039 discusses NFA Members' responsibilities when it comes to the purchase of leads. Whether a lead provider is required to be registered as an IB depends on how it generates the leads. If the provider is not a registered IB and an NFA Member, the Member purchasing the lead lists must understand how the leads are generated and ensure that agents are not purchasing leads from non-Members required to be registered and/or using fraudulent advertising practices.
In many instances, a Member firm will have direct knowledge of the source of leads that the Member purchases. For example, the Member firm purchases leads from a provider that generates leads solely incidental to some other business purpose (e.g., a subscription list). However, in the event a Member firm does not have direct knowledge, then the Member firm has a duty to inquire as to the source of leads. Specifically, under those circumstances, a Member firm has an affirmative duty to determine if the leads were generated from a provider using any type of advertisement soliciting investments in futures, one of whose business purposes is the generation and sale of the leads. If a Member firm purchases leads from such a provider, then the Member must ensure, prior to soliciting any customer with the leads, that the lead provider submitted the advertisement to NFA for review and approval pursuant to Compliance Rule 2-29(h). If the advertisement was not approved by NFA, then the Member is not permitted to solicit any customer with the leads purchased from that provider.