For many years National Futures Association (“NFA”) has had in place an enhanced supervisory requirement (“ESR”) for firms deemed to be high risk to the industry. This NFA rule is one of the most dreaded in the space. Its application is not uniform, and the obligations placed on small to medium sized firms can be profound. NFA member FCM, IB, CTA, and CPO members must be diligent in monitoring and keeping track of their respective “disciplined broker count”. Turnkey has found that most firms are not even aware of their obligations in this area. This has resulted in firms inadvertently hiring or removing brokers placing firms unwittingly in NFA’s ESR program.

Do You Know Your Firm’s “Count”?

Did you know that brokers and traders can be subject to NFA’s ESR obligation even if no disciplinary action has ever been taken against them? Unfortunately, ESR can be triggered solely based upon the number of staff a company has and how many of those staff members have been disciplined. In certain instances staff can be qualified for ESR if they previously worked for a disciplined firm but never were named in any disciplinary matter.

All CFTC registrants and NFA members would be wise to be aware of the following:

  • For firms with less than five APs, 2 or more of its APs have been employed by one or more current Disciplined Firms will be considered eligible for ESR;
  • For firms with at least 5 but less than 10 APs, 40 percent or more of its APs have been employed by one or more current Disciplined Firms will be considered eligible for ESR;
  • For firms with at least 10 but less than 20 APs, four or more of its APs have been employed by one or more current Disciplined Firms will be considered eligible for ESR; or
  • For firms with at least 20 APs, 20 percent or more of its APs have been employed by one or more current Disciplined Firms will be considered eligible for ESR.

Identifying and Evaluating Staff

In order to ensure a firm does not exceed its respective “count” level, compliance staff will need to regularly utilize a security manager log in to access the NFA online registration system (“ORS”). This should be done when a new hire is made or when a broker leaves the firm.  Once logged into ORS, staff will then need to select “View Registration Information”.  After arriving at the main menu that follows, “Registration History” should be selected at the top right of the page.

On the “Registration History” page staff should now input the NFA ID of the broker they want to review.  Brokers with a disciplinary mark on their license should be identified by NFA. This will be evident as their broker profile will have bold black letters at the top of the page after inputting the registrant’s NFA ID.  Brokers with no record should have no notice on their registration history page.   For those who have never seen a disciplined broker profile, the following is what is typically presented for a disciplined broker:

“This individual has been a principal of a Member firm that has been required to adopt the enhanced supervisory requirements prescribed by NFA’s Board of Directors and, pursuant to the Board’s direction, any Member of which this individual becomes a principal shall itself become subject to the enhanced supervisory requirements. Click here to view the Board of Directors’ Interpretive Notice establishing the enhanced supervisory requirements.”

Note: Compliance staff should also be aware that the NFA system has had problems in the past with respect to being incorrect on which firms and brokers have disciplinary designations.  Staff will want to go through the list of firms an individual has worked for and collect the ID numbers for each one.  After these numbers have been collected staff should use the same “Registration History” screen and input them one by one. While tedious, unfortunately this is the only fail-safe approach to ensure disciplined firms and brokers are properly identified.

In the event staff finds a marked company or broker company principals should determine if the individual qualifies as a “tagged” broker. If there is any doubt those doubts should be alleviated by contacting NFA for assistance.

Finalizing the Official Count

After evaluating disciplined broker information compliance staff can then officially determine count thresholds prior to adding or removing new APs.

To accomplish this:

  • Compliance staff will need to log into the NFA ORS system using a security manager account. Once logged in they should go to “Entity Profile Information” at the top of the main ORS dashboard.  After this a screen will come up with several menus.  One of these menus is titled “Disciplined Employee Summary.” Employees will need to select this menu.
  • On the Disciplined Employee Summary page staff will be able to determine how many APs count towards NFAs enhanced supervision A firm principal should be notified if the firm is within 1 AP of the following “count” ratios relative to total number of APs. If a company exceeds the threshold for even a moment ESR will be triggered.

If a firm or broker history cannot be verified via ORS, a firm principal should contact NFA for assistance before registering a new hire or removing an AP from the company. By following the aforementioned steps and being aware of your “count” firms can avoid the costly mistake of triggering ESR inadvertently.

About Turnkey

Regulated brokerage and trading firms have their work cut out for them in keeping up with the latest compliance obligations. Turnkey Trading Partners is an award winning firm that provides customized support to the brokerage and trading industry. We can assist Commodity Trading Advisors (“CTA”), Commodity Pool Operators (“CPO”), Introducing Brokers (“IB”), and Futures Commission Merchant’s (“FCM’s”) working within the alternative investments space.  Our team is well versed in both operational and regulatory matters relating to commodity futures, equities, bonds, options, swaps, forex, digital currency, cash and physical trading, as well as several other specialized financial markets transaction types.