Patricia Cushing
Associate Director, Compliance, National Futures Association
The recent amendments to NFA’s Compliance Rule 2-30 (often referred to as the “Know Your Customer” rule), the proposed changes to CFTC Regulations 4.5 and 4.13 and the increasing demands of supervising the use of social media are all contributing to an increase in an IB’s regulatory obligations. However, by making some enhancements to their policies and procedures, IB’s should be able to meet these obligations with little disruption to their operations.
NFA Compliance Rule 2-30
One of the changes to NFA Compliance Rule 2-30 that became effective in January 2011 requires FCMs to contact their active customers, at least annually, to verify that the "Know Your Customer" information obtained from that customer remains materially accurate. For accounts that are introduced to the FCM through an IB, the responsibility to verify the information remains with the FCM. However, whenever the customer notifies the FCM of any material changes to the information, the FCM is required to contact the IB who introduces the account so that the IB can reanalyze the information. The IB who currently solicits and communicates with the customer is responsible for determining if additional risk disclosure is required to be provided to the customer based on the changed information.
CFTC Regulations 4.5 and 4.13
As part of its Dodd-Frank rule making efforts, the CFTC has proposed changes to CFTC Regulations 4.5 and 4.13 that would require the registration of entities previously considered to be exempt from CPO registration. The proposals would implement a marketing restriction and trading limitation on otherwise regulated funds (e.g. registered investment companies or mutual funds) under 4.5 and would completely rescind the exemptions available to funds that trade a deminimus amount of futures under 4.13(a)(3) and funds that are offered solely to qualified purchasers under 4.13(a)(4). Since NFA Bylaw 1101 requires all NFA Members to ensure that they are only doing business with entities that are properly registered or exempt from registration, IBs should review their list of current customers to determine if any are currently operating pursuant to one of these exemptions. If the CFTC issues final rules as proposed, IBs will then need to ensure that these customers are properly registered in order to continue to introduce the account for futures trading. It is not yet known when the CFTC will issue final rules in this area.
Social Media
In February, 2010, NFA issued its interpretive notice, titled "Use of On-Line Social Networking Groups to Communicate with the Public." The notice addressed the growing use of social networking groups such as blogs, chat rooms and forums to communicate with and solicit customers. It discusses a Member or Associate's responsibilities in connection with electronic communications, including developing procedures for employee use of social networking and outlining the steps the Member should take to supervise and enforce whatever policies it adopts. The interpretive notice makes clear that online communications are subject to the same standards as other types of communications with the public and provides guidance to Members to meet their responsibilities in this area. Since that time, the use of social media to communicate with potential and current customers has continued to explode.
During our examinations, NFA has seen two very different approaches to the use of this medium by NFA Members. On one hand, we have seen firms implement a strict policy against the use of any social media for business purposes. And on the other hand, we have seen firms that have embraced social media and established a comprehensive policy to cover the related supervision and recordkeeping issues. These policies establish what forums are allowed to be used, what type of content will be posted, who at the firm is allowed to post where, who will supervise, what type of supervision will be implemented, and how the records will be maintained. For example, if every broker at the firm is allowed to post to their own LinkedIn, Facebook, Twitter page, etc., will the content be preapproved? Has a supervisor been "friended" so that the content can be regularly checked? And how will the firm maintain a record of these communications with the public? If postings will be limited to specific firm-sponsored sites and updated by a firm principal, then it may be appropriate to approve the general content and have less frequent subsequent reviews of the sites. If the firm will host a chat room, the policy should also discuss who will monitor the content posted by others outside of the firm and in what circumstances unacceptable information will be taken down and users blocked.
Using Twitter to solicit a customer or trade poses its own challenges due to the limited number of characters allowed in each "tweet". Since NFA's rules require that any discussion of potential profit also include an equal discussion of the risk of loss and any actual past performance discussion include the disclaimer that past performance is not necessarily indicative of future results, firms tend to keep the "tweets" more general and direct subscribers to their websites for the full discussion. For example, rather than posting a tweet that states "ABC Trading Advisor was up 7.2% in September" – which would need a past performance disclaimer that in and of itself exceeds the number of characters available, the IB might post "September performance figures are in! Check out ABC Trading Advisor at www.IBwebsite.com"
NFA is available to help you meet your regulatory responsibilities. For example if you are considering branching out into the world of Twitter and want some guidance on your proposed content for compliance with NFA rules, take advantage of NFA's voluntary pre-review program and submit materials to art@nfa.futures.org before you post. If you have any other questions, please do not hesitate to contact NFA's Information Center at (800) 621-3570 or consult the many resources that are available on NFA's website at www.nfa.futures.org.
