On January 3, 2011, amendments will become effective to NFA Compliance Rule 2-30, commonly referred to as the Know-Your-Customer Rule. (See also NFA website and Notice to Members I -10-15 dated July 28, 2010).
Hopefully, everyone is well versed with the current rule which requires NFA Members to obtain information about their customers and provide appropriate risk disclosures. Note, however, that the forthcoming amendments will broaden your responsibilities. The changes to the Rule can be summarized as follows:
- The Rule will soon apply not just to individual customers, but ALL non-ECP customers;
- FCM Members must annually request that active customers notify them of any material changes to the information previously provided by the customer. (Like a negative consent letter, if the customer does not respond, the information on file is deemed verified. If, though, the customer provides material changes to the information, any FCM, IB or CTA Member that solicits/communicates with that client must determine if additional risk disclosure to the client is required); and
- The Rule prohibits Members from making individualized trading recommendations to customers whom the Member has, or should have, advised that futures trading is too risky for them.
In sum, these rule changes impact Members generally, and particularly increase the hands-on responsibilities of our IB community. Especially in these uncertain economic times, customer’s personal financial situations are volatile and subject to material changes. So, going forward, make sure you continue to Know-Your-Customer and protect your business with procedures to insure that customers remain properly advised of the risks of trading as their individual circumstances fluctuate.
NIBA CONFERENCE NOTE: This will be one of the issues to be discussed at the 2010 NIBA Conference Chicago, November 2, 2010.
Steven P. Pherson is an Attorney with Schuyler, Roche & Crisham P.C. with extensive experience in commercial & employment litigation and securities & commodities litigation. Steve can be contacted at: 312.565.8373 or spherson@SRCattorneys.com.