Alert August 31, 2010

NFA Announces Effective Date of Know-Your-Customer Requirements

The National Futures Association (the “NFA”) announced that the amendments to Compliance Rule 2-30 and its associated Interpretive Notice will become effective January 3, 2011.  Compliance Rule 2-30 addresses “know-your-customer” and certain risk disclosure requirements for firms that are members of the NFA.  Generally, Compliance Rule 2-30 requires NFA Members to obtain information about their futures customers and provide each customer with appropriate risk disclosure prior to the time the customer opens a futures trading account or authorizes the NFA Member to direct trading in their account.

Once effective, the amendments to Compliance Rule 2-30 will broaden the scope of the Rule through a number of changes.  In addition to the individual customers currently covered by the Rule, the amendments will also cause the Rule to apply to each entity customer that is not an “eligible contract participant” as defined under Section 1a(12) of the Commodity Exchange Act (the “CEA”).  Generally, to qualify as an eligible contract participant an entity must be (i) an investment company, as defined under the Investment Company Act of 1940, (ii) a financial institution, (iii) an insurance company regulated by a state or foreign government, (iv) a commodity pool (a) with more than $5 million in assets and (b) operated by a person regulated under the CEA, or (v) a corporation, limited partnership or other entity with more than $10 million in assets.  The amendment will not affect NFA Members whose customers are eligible contract participants.

The amendments will require each NFA Member to request, annually, that each customer covered by Compliance Rule 2-30 notify the FCM of any material changes to the information previously obtained from the customer.  Further, after January 3, 2011, an NFA Member that currently solicits, and communicates with, a customer will be required to determine if additional risk disclosure is required to be provided based on any changed information from that customer.  Finally, an NFA Member will be prohibited from making customized trading recommendations to those customers whom the NFA Member has advised, or should have advised, that futures trading is too risky for them.