Thu, Oct 17, 2019

NFA Issues Updated Interpretive Notice Regarding the Supervision of Branch Offices and Guaranteed Introducing Brokers (IBs)

Due to advances in electronic trading, electronic communications and other technologies and to incorporate references to existing anti-money laundering, information systems security program and bunched order requirements, the National Futures Association (NFA) has updated the interpretive notice for Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs.

The updated interpretive notice can be immediately operationalized, will replace the prior notice and becomes mandatory on January 1, 2020. The notice has been divided into three sections: due diligence reviews, written supervisory policies and procedures and ongoing training.

Due Diligence Reviews

This section addresses the due diligence reviews necessary to determine whether to establish or modify a branch office or guaranteed IB relationship and the appropriate supervision required. One of the substantive changes in this section requires members to ensure that one or more individuals at the branch office or guaranteed IB are knowledgeable about and will track developments related to the Commodity Exchange Act, Commodity Futures Trading Commission (CFTC) regulations and NFA rules.

Written Supervisory Policies and Procedures

This section addresses the supervisory policies and procedures and the annual inspection requirement for branch offices and guaranteed IBs. Such policies and procedures must include routine surveillance and supervision designed to identify and address potential issues as they arise, and periodic inspections designed to perform a more comprehensive and detailed review of a branch office or guaranteed IB's business. The updated section includes substantive changes such as:

  • Providing members with the flexibility to both implement supervisory processes and perform routine supervision and surveillance at intervals designed to meet the specific needs of their business.
  • Detailing two exceptions to the annual on-site branch office and guaranteed IB inspection requirement. The first exception requires members to promptly perform a branch office or guaranteed IB onsite inspection if it becomes aware of any irregularities. The second exception allows members to determine if it is appropriate to perform a remote annual inspection for certain branch offices and guaranteed IBs every other year rather than an onsite annual inspection based on certain factors including those set out in the notice. Members that perform remote inspections must have sufficient information and technology to complete a robust remote inspection and document the rationale to support that it is appropriate to perform a remote inspection of a branch office or guaranteed IB.
  • Requiring policies and procedures to mandate that an associated person notify the member if any new circumstances arise that may require disclosure on the CFTC's Form 8-R and address when the member will escalate any significant issues uncovered through surveillance or periodic inspection to the NFA or other appropriate regulators.

Ongoing Training

The updated interpretive notice requires members to implement policies and procedures designed to ensure that branch office and guaranteed IB personnel receive adequate training to ensure they follow industry rules and regulations, properly handle customer accounts and satisfy ethics training requirements.

Financial Services Compliance and Regulation

End-to-end governance, advisory and monitorship solutions to detect, mitigate, drive efficiencies and remediate operational, legal, compliance and regulatory risk.

Retained Compliance Support and Managed Services

With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.