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NFA Interpretive Notice - Forex Transactions -

Bylaw 306:

Forex Dealer Member (FDM) = NFA member who acts a counterpart to forex transaction.  Self-executing – no application, no approval requirement.  If you do not act as a counterparty to a forex transaction (IB, CTA or CPO) then not a FDM, but may be subject to parts of Rule 2-36 pursuant to Rule 2-39.

Not FDM and not subject to 2-36:

• financial institutions (e.g., banks and savings associations);
• certain insurance companies and their regulated subsidiaries or affiliates;
• financial holding companies;
• investment bank holding companies;
• registered broker-dealers that are members of FINRA; 3 and
• Material Associated Persons of registered broker-dealers that are members of FINRA.

Compliance rule 306  - Applies to Disclosure:

General:

• Disclosure of characteristics and risks of forex transactions (members and associates should know what information has been provided to the customer)

Specific:

• disclaimer regarding non-protection under the Bankruptcy Code
• manner in which member will be compensated for services
• 2 paragraph uppercase disclaimer re: trading not conducted on exchange, conflict of interest, trading exposure
•  disclose bid and offer when customer enters an order
• duty to update information if a material change would make prior information misleading (member)

Reporting:

General:

•  NFA is concerned that the customer receives timely and accurate notice of account status

Current:

• Confirmations - Written confirmation w/in 1 business day of any account activity (including offsetting transactions, rollovers, deliveries, etc.).  Information should include all costs, fees, commission, third party fees, etc.
• Monthly/Quarterly Summaries – If (1) there has been activity in an account during the month or (2) there are any open positions in the account at the end of the month, the FDM will need to provide a monthly summary of all forex transactions and other account activity to the customer. For customer accounts not fitting within the above, summaries should be provided quarterly.
• Delivery – both confirmation and summaries may be transmitted by electronic means.

Future (as of June 1, 2009)

Supervision:
Recordkeeping:

• Books and records include(not an exhaustive list): financial records of the member (assets and liabilities) , liabilities owed to customers, recievables from other persons

In general:

• Members must keep all Books and Records for 5 years
• Members must keep the Books and Records in a readily accessible place during the first 2 years
• All such records shall be open to inspection by the NFA; must be in a format NFA can read and reproduce
• Written compliance procedures should be established by Members to make sure books and records are current, accurate, not alterd, not destroyed.

Future (as of April 1, 2009):

• FDM must have written policies in place detailing the procedures it follows to calculate rollover or interest charges and payments. 
• All information relating to the calculation, including any factors and the sources of any factors which are used in the calculation.  The procedures must be able to be replicated.

Communication with Public:

General:
Specific:

• Do not deceive the public (including, misstatements of fact or omitting facts which makes material misleading)
• state opinions

Exception: ok if (1) clearly identified and (2) reasonable basis in fact

• Mention possibility of profit unless accompanied by an equally prominent statement of risk of loss
• Mention past trading profits without disclosing that past results are not necessarily indicative of future results
• Provide statistical information regarding the past performance of actual accounts

Exception: ok if member can demonstate the performance is representative of actual performance of all reasonable comparable accounts for the same period

• Information must be calculated with the formula in CFTC Regulation 4.35(a)(6) and NFA compliance rule 2-34 [BM to include these rules in an appendix]
• Include testimonials

Exception: testimonial is representative of all reasonably comparable accounts AND prominent disclaimer that testimony is not indicative of future performance AND (if applicable) states that the testimony was paid for

• Represent that forex funds receive special protection under the bankruptcy laws
• Represent that assets are more secure b/c customer keeps assets at a regulated entity in the US or similar money center
• State that services are commission free without disclosing how it is compensated. 
• The disclosure must be near the commission free representaitoon.

Specific:

• “no slippage” claim

General:

• discussion regarding leverage should be balanced.  No undue weight should be given to the advantages of leverage without discussing (in an equal manner) the increased risk involved

No radio or TV ads unless approved by NFA at least 10 days in advance (or shorter if NFA allows):

• Cannot benefit from such ads even if you did not submit
• Written compliance procedures should be established by Members to supervise both communications and promotional material
• Supervisory employee that is a listed principal, or under the ultimate supervision of a listed principal (who is an NFA associate), should review and approve all promotional material
• A written record should be kept of the review and approval
•  All promotional material should be maintained by each Member and be available for examination for the periods specified in the recordkeeping section of this notice, measured from the date of last use.

Know Your Customer:

• Members and APs have a duty to make sure customer makes informed decision with regard to forex transactions (FDMs have this duty if non-member solicits customer)
• Should consider personal and financial circumstances
• Should provide additional facts, explanations, disclosures if necessary
• Members must decide what information to request from a customer
• Minimumum information –  customer’s name, address, principal occupation or business, current estimated annual income and net worth, approximate age, and an indication of the customer’s previous investment and trading experience

Doing Business with Non-Members:

• FDMs subject to discipline for activities of non-Members introducing forex customers
• Non-Member activity can include soliciting, introducing, or managing accounts for the Forex Dealer Member’s customers
• Strict liability, but NFA will proceed with an action usually only if FDM knew or should have known of improper conduct by non-member.
• FDM should adopt procedures to deal with activities of non-member 3rd parties; procedures for customer complaints with regard to these groups

Procedures should include:

• review of trading being conducted in the accounts solicited, introduced, or managed by these non-Members
• regular review of all promotional material used by any non-Member third-party   
• maintain copies of all promotional materials reviewed, along with a written record of the review conducted and any deficiencies corrected, and make them available for examination for the periods specified in the recordkeeping section of this notice
• No liability for non-Members described in Bylaw 306(b)

Affiliates:

• FDM is subject to discipline for activities of its affiliates (those groups which engage in forex transactions based solely on the affiliation with the FDM)
• the Forex Dealer Member must supervise the affiliate’s forex activities
• must make these affiliates’ books and records available to NFA upon request
• must assure that its affiliates do not act as counterparties to forex transactions unless they are authorized to do so under the Act.

BASIC Disclosure:

• FDM must provide customer with written information regarding NFA BASIC system
• Information must be provided (i) when customer opens account and (ii) at least once a year thereafter
• Can provide information in an email

Discretion (to be added 04/1/09):

• No discretionary authority over customer account for which the FDM is, or is offering to be, the counterparty to the transaction in the customer account

REQUIREMENTS WITH REGARD TO FDMs:

Bylaw 1301: Three basic fees a FDM must pay:

• Base Fee
  (e) – requires FDMs to pay annual dues based on annual revenue
• Minimum of 50k or 45,875
• Apply when the FDM accepts a forex trade; dues due on membership reneal date thereafter; fees based on latest certified financial statement
• Additional Fee for Supervising Unregulated Entities
• Additional annual fee if FDM is responsible for unregulated entities under Compliance rule 2-36(d)

Chart:

• 1-4  —  5k
• 5-19  —   10k
• 20-99  —  25k
• 100+  —  50k

Assesement:

FDM must pay 0.0001% on the notional value of each forex transaction (see Bylaw 1507(b)) – this is equal to $.01 for each $10,000 traded.  Transactions under 10k can be aggregated.  Transactions above 10k should be rounded to nearest penny.  Assesment only on initial transaction (no assessment on rollovers, offsetting transactions, or other transactions that do not result in new positions).  Assement must be paid to NFA within 30 days after the end of the month in which the transaction was initiated.

Section 11(b)
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Section 12 – Security Deposits:

• FDM must collect securities deposits from forex customers equal to at least 1% of the notional value of the transaction, and for many currencies, it will need to be 4%
• For crosses which include a currency subject to 4% deposit the 4% must be used
• This requirement does not apply to FDMs which consistently maintain 150% of greater amount required under
• Section 11(a)(i) or (ii) of the financial requirements
• Must file advance written notice to the NFA
• If FDM falls below 150% of net capital, must immediately notify NFA  
• If do not get back up above 150% w/in 48 hours
•  Must collect required security deposits on all customer positions
• May not claim exemption for 6 months
• If FDM falls below 150% mark 6 times within 90 days, the FDM may not claim exemption for 6 months

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