Release: #4558-01
For Release: August 21, 2001

CFTC Approves NFA Rules on Single-Stock Futures

Washington, D.C. -- The Commodity Futures Trading Commission (CFTC) has approved amendments to the rules of the National Futures Association (NFA) as part of ongoing efforts to fully implement the Commodity Futures Modernization Act of 2000 (CFMA), which authorizes trading in futures contracts based on individual securities and on narrow-based security indices (together, security futures products or SFPs) after an almost twenty-year ban.

Because SFPs are considered to be both securities and futures contracts, an entity that wishes to trade them must be registered with both the CFTC and the Securities and Exchange Commission (SEC). Accordingly, the CFMA directs these agencies to change their respective rules to permit an intermediary that is already registered with one agency to “notice-register” with the other agency, without unreasonable restraints or redundant requirements, for the limited purpose of trading SFPs. The CFTC adopted such rule changes on August 13, 2001.

As with many other aspects of the futures and securities markets, front-line supervision of SFP participants will be performed by self-regulatory organizations (SROs). The CFMA amends the Securities Exchange Act of 1934 (Exchange Act) to permit registered futures associations to become registered national securities associations for the limited purpose of serving as SRO for members who become notice-registered with the SEC to trade SFPs. (NFA is currently the only registered futures association.) Such limited-purpose national securities associations must have anti-fraud, anti-manipulation, and customer protection rules applicable to SFPs that are reasonably comparable to those of fully-registered national securities associations. And they must ensure that their members, and individuals associated with their members, meet standards of training, experience, and competence necessary to effect transactions in SFPs and are tested for their knowledge of SFPs.

The rule changes approved by the CFTC were proposed by the NFA to ensure that its rules are comparable to those of fully-registered national securities associations. Changes that apply to members conducting SFP activities include: requiring each member firm to designate an SFP principal who has passed the Futures Branch Manager Examination (Series 30) and will be responsible for reviewing discretionary trades, approving promotional materials, and the opening of customer accounts; requiring that promotional materials provide adequate information and are not misleading; requiring firms to make available to customers supporting documentation for all claims, comparisons, and statistics that may be presented in promotional materials; requiring disclosure of conflicts of interest; requiring that mass media advertising be submitted to NFA for review and approval; and implementing a customer suitability rule for SFPs.

Copies of the Commission's approval letter can be obtained by contacting the Office of the Secretariat, Three Lafayette Centre, 1155, 21st Street, N.W., Washington, DC 20581, (202) 418-5100 or by accessing the Commodity Futures Trading Commission web site.