RCA - Winter 2002 - Recent Amendments to Rule 3010 (Supervision)

In connection with developing new rules to address trading in security futures, NASD has made amendments to Rule 3010 (Supervision) that apply generally to all NASD members. NASD wishes to emphasize that these important changes apply to all members whether or not they conduct a business in security futures. As further discussed below, NASD has amended Rule 3010(e) to require an NASD member to review a job applicant's Commodity Futures Trading Commission (CFTC) Form 8-T, Notice of Termination of Associated Person (Form 8-T), from the applicant's most recent employer that was a member of a registered futures association and was notice registered as a broker/dealer with the Securities and Exchange Commission (SEC) to engage in a securities futures business, if any.1 NASD also has amended Rule 3010(b)(2) (referred to as the "Taping Rule") to include as "Disciplined Firms" for purposes of the Rule those Futures Commission Merchants (FCMs) and Introducing Brokers (IBs) that have a certain disciplinary history with the CFTC or a registered futures association.


The legislation authorizing the trading of security futures,2 defines "security futures" as both securities under the federal securities laws3 and as futures contracts for purposes of the Commodity Exchange Act (CEA).4 The legislation also sets forth a regulatory model in which the SEC and the CFTC jointly have jurisdiction over the intermediaries and markets that trade security futures. Broker/dealers that wish to conduct a business in security futures are required to notice register with the CFTC as FCMs or IBs.5 Similarly, FCMs and IBs are required to notice register with the SEC as broker/dealers if they wish to conduct a business in security futures.6 Firms that are fully registered as both FCMs or IBs and broker/dealers may engage in a security futures business without any notice registration.


The addition of FCMs and IBs engaging in a securities business, albeit only a security futures business, prompted certain changes to Rule 3010 discussed below.


Qualifications Investigated

Rule 3010(e) requires that members investigate "the good character, business repute, qualifications, and experience" of a job applicant before the member applies to register that applicant with NASD. Because some individuals will now be engaging in a securities business in notice registered broker/dealers (limited to security futures), NASD believes that members should consider these activities in determining whether to sponsor these individuals for registration. Accordingly, in connection with sponsoring an individual for registration, all NASD members must review a copy of CFTC Form 8-T from an applicant's most recent previous employer that was a member of a registered futures association and was notice registered as a broker/dealer with the SEC to engage in a securities futures business, if any. Please note that this requirement is in addition to the existing requirement to review a Form U-5 from the applicant's most recent previous NASD member employer. The information on Form 8-T is essentially the same information contained in Form U-5. NASD believes that an individual's prior experience at an FCM or IB that conducts a security futures business may have particular bearing on his or her fitness to be sponsored by an NASD member. Members will be able to review the Form 8-T by requesting it from the applicant or the applicant's previous employer.


Taping Rule

Rule 3010(b)(2), known as the "Taping Rule," requires that members that hire a certain percentage of registered persons that have been employed by a Disciplined Firm must establish, maintain, and enforce special written procedures for supervising the telemarketing activities of their registered persons. NASD members subject to the Taping Rule are required to tape record "all telephone conversations between the member's registered persons and both existing and potential customers."


Again, because certain FCMs and IBs will now be engaging in a securities business (limited to security futures), NASD has determined that the definition of "Disciplined Firm" should be expanded to include such firms if they have certain disciplinary history. In the futures industry, the National Futures Association (NFA) has a taping rule that is similar to NASD's rule. NASD has incorporated the NFA's definition of "Disciplined Firm" into Rule 3010(b)(2)(J) with the further limitation that the disciplinary action must pertain to security futures activities. Thus, NASD's definition of "Disciplined Firm" now includes a notice registered broker/dealer that:

  1. has been formally charged by either the CFTC or a registered futures association with deceptive telemarketing practices or promotional material relating to security futures, those charges have been resolved, and the FCM or IB has been closed down and permanently barred from the futures industry as a result of those charges; or

  2. an FCM or IB that, in connection with sales practices involving the offer, purchase, or sale of security futures is subject to an order of the SEC revoking its registration as a broker or dealer.

This revised definition of "Disciplined Firm" is relevant to all NASD members, not just those engaging in a security futures business. An NASD member that does not engage in a security futures business may nevertheless trigger the requirements of the Taping Rule by hiring employees from a firm that meets the definition of Disciplined Firm by virtue of having been disciplined for violations committed in connection with its security futures activities.


Questions about this article may be directed to Gary Goldsholle, Office of General Counsel, NASD Regulatory Policy and Oversight, at (202) 728-8104, or Patricia Albrecht, Office of General Counsel, NASD Regulatory Policy and Oversight, at (202) 728-8026.

 


1 15 U.S.C. 78o(b)(11).


2 Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. No. 106-554, 114 Stat. 2763.


3 See, e.g., Securities Exchange Act of 1934 (Exchange Act) Section 3(a)(10) (15 U.S.C. 78c(a)(10)).


4 The term "security future" is defined in CEA Section 1a(31) (7 U.S.C. 1a(31)) as a contract of sale for future delivery of a single security or a narrow-based security index. Under CEA Section 1a(33) (7 U.S.C. 1a(33)), the term "security futures product" is defined as a security future or an option on a security future.


5 CEA Section 4f(a)(2) (7 U.S.C. 6f(a)(2)); 66 FR 43080 (August 17, 2001).


6 Exchange Act Section 15(b)(11)(a)(i) (15 U.S.C. 78o(b)(11)(a)(i)); 66 FR 45138 (August 27, 2001).