The Commodity Futures Modernization Act of 2000 (CFMA) lifted the ban on the trading of futures on single securities and on narrow-based security indices (security futures). Security futures are regulated both as securities and as future contracts, and must be traded on trading facilities and through intermediaries registered with both the SEC and CFTC.
Security futures involve a high degree of risk and are not suitable for all investors. The possibility exists that your customers holding security futures could lose a substantial amount of money in a very short period of time because security futures are highly leveraged. The amount they could lose is potentially unlimited and can exceed the amount they originally deposited with your firm.
There are no trading strategies that can eliminate the risk in security futures. Strategies using combinations of positions, such as spreads, may be as risky as outright long or short futures positions. Trading in security futures requires knowledge of both the securities and futures markets.
Continuing Education (CE) Requirements
The CFMA requires FINRA and the National Futures Association (NFA) to develop proficiency requirements related to security futures products. FINRA requires registered persons who intend to engage in a security futures business to complete a Firm Element continuing education program covering security futures.
FINRA and the NFA, in partnership with the Institute for Financial Markets, have developed a Web-based, Firm Element continuing education program focusing on essential information that should be known by persons who offer and sell security futures and those who supervise such persons. Interested members should review the training requirements and content outlines for more details.
In addition, firms should be aware that adding a security futures business may constitute a material change in business operations for purposes of NASD Rule 1017. This would require a firm to file a continuing membership application and obtain prior approval from FINRA before engaging in a security futures business. Firms should review the guidance provided by FINRA in Notice to Members 02-73 to assist in determining whether adding a security futures business constitutes a “material change in business operations.”
Security Futures Risk Disclosure Statement
In 2002, FINRA and NFA, with significant assistance from other futures and securities self-regulatory organizations, jointly developed a uniform security futures risk disclosure statement (Disclosure Statement) that, in general, provides customers with disclosures regarding the characteristics and potential risks of investing in standardized security futures contracts traded on regulated U.S. exchanges.
FINRA Rule 2370(b)(11)(A) requires a firm to deliver the Disclosure Statement to each customer at or prior to the time a customer’s account is approved for trading security futures. Thereafter, a firm must distribute each new or revised Disclosure Statement to each customer having an account approved for such trading or, in the alternative, not later than the time a confirmation of a transaction is delivered to each customer that enters into a security futures transaction. A firm may separately distribute new supplements to such customers; a firm is not required to redistribute the entire Disclosure Statement or the earlier supplements.
In 2010 and 2014, FINRA, in coordination with NFA, updated various sections of the Disclosure Statement and released those changes through supplements, and additional updates to specified sections were made in 2018. All cumulative updates made to date are incorporated into the Disclosure Statement.
- Security Futures Risk Disclosure Statement (Updated 2018)
Firms with customers who may still refer to the Disclosure Statement in its original 2002 language have the option to use a supplement to meet their obligations under the rule. The supplement reflects only those sections of the Disclosure Statement that have been updated to date.
- 2018 Supplement to the 2002 Security Futures Risk Disclosure Statement (Sections 2.4, 5.2, 6.1, 8.1 and 8.2)
Additional copies of these documents may be obtained by contacting FINRA MediaSource at (240) 386-4200.
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see FINRA OGC Interpretative Guidance for more information.