Appendix B to Part 3 - Statement of Acceptable Practices With Respect to Ethics Training
17:1.0.1.1.3.7.7.1.5 : Appendix B
Appendix B to Part 3 - Statement of Acceptable Practices With
Respect to Ethics Training
(a) The provisions of Section 4p(b) of the Act (7 U.S.C. 6p(b)
(1994)) set forth requirements regarding training of registrants as
to their responsibilities to the public. This section requires the
Commission to issue regulations requiring new registrants to attend
ethics training sessions within six months of registration, and all
registrants to attend such training on a periodic basis. The
awareness and maintenance of professional ethical standards are
essential elements of a registrant's fitness. Further, the use of
ethics training programs is relevant to a registrant's maintenance
of adequate supervision, a requirement under Rule 166.3.
(b)(1) The Commission recognizes that technology has provided
new, faster means of sharing and distributing information. In view
of the foregoing, the Commission has chosen to allow registrants to
develop their own ethics training programs. Nevertheless, futures
industry professionals may want guidance as to the role of ethics
training. Registrants may wish to consider what ethics training
should be retained, its format, and how it might best be
implemented. Therefore, the Commission finds it appropriate to
issue this Statement of Acceptable Practices regarding appropriate
training for registrants, as interpretative guidance for
intermediaries on fitness and supervision. Commission registrants
may look to this Statement of Acceptable Practices as a “safe
harbor” concerning acceptable procedures in this area.
(2) The Commission believes that section 4p(b) of the Act
reflects an intent by Congress that industry professionals be
aware, and remain abreast, of their continuing obligations to the
public under the Act and the regulations thereunder. The text of
the Act provides guidance as to the nature of these
responsibilities. As expressed in section 4p(b) of the Act,
personnel in the industry have an obligation to the public to
observe the Act, the rules of the Commission, the rules of any
appropriate self-regulatory organizations or contract markets
(which would also include registered derivatives transaction
execution facilities), or other applicable federal or state laws or
regulations. Further, section 4p(b) acknowledges that registrants
have an obligation to the public to observe “just and equitable
principles of trade.”
(3) Additionally, section 4p(b) reflects Congress' intent that
registrants and their personnel retain an up-to-date knowledge of
these requirements. The Act requires that registrants receive
training on a periodic basis. Thus, it is the intent of Congress
that Commission registrants remain current with regard to the
ethical ramifications of new technology, commercial practices,
regulations, or other changes.
(c) The Commission believes that training should be focused to
some extent on a person's registration category, although there
will obviously be certain principles and issues common to all
registrants and certain general subjects that should be taught.
Topics to be addressed include:
(1) An explanation of the applicable laws and regulations, and
the rules of self-regulatory organizations or contract markets and
registered derivatives transaction execution facilities;
(2) The registrant's obligation to the public to observe just
and equitable principles of trade;
(3) How to act honestly and fairly and with due skill, care and
diligence in the best interests of customers and the integrity of
the market;
(4) How to establish effective supervisory systems and internal
controls;
(5) Obtaining and assessing the financial situation and
investment experience of customers;
(6) Disclosure of material information to customers; and
(7) Avoidance, proper disclosure and handling of conflicts of
interest.
(d) An acceptable ethics training program would apply to all of
a firm's associated persons and its principals to the extent they
are required to register as associated persons. Additionally,
personnel of firms that rely on their registration with other
regulators, such as the Securities and Exchange Commission, should
be provided with ethics training to the extent the Act and the
Commission's regulations apply to their business.
(e) As to the providers of such training, the Commission
believes that classes sponsored by independent persons, firms, or
industry associations would be acceptable. It would also be
permissible to conduct in-house training programs. Further,
registrants should ascertain the credentials of any ethics training
providers they retain. Thus, persons who provide ethics training
should be required to provide proof of satisfactory completion of
the proficiency testing requirements applicable to the registrant
and evidence of three years of relevant industry or pedagogical
experience in the field. This industry experience might include the
practice of law in the fields of futures or securities, or
employment as a trader or risk manager at a brokerage or end-user
firm. Likewise, the Commission believes that registrants should
employ as ethics training providers only those persons they
reasonably believe in good faith are not subject to any
investigations or to bars to registration or to service on a
self-regulatory organization governing board or disciplinary
panel.
(f)(1) With regard to the frequency and duration of ethics
training, it is permissible for a firm to require training on
whatever periodic basis and duration the registrant (and relevant
self-regulatory organizations) deems appropriate. It may even be
appropriate not to require any such specific requirements as, for
example, where ethics training could be termed ongoing. For
instance, a small entity, sole proprietorship, or even a small
section in an otherwise large firm, might satisfy its obligation to
remain current with regard to ethics obligations by distribution of
periodicals, legal cases, or advisories. Use of the latest
information technology, such as Internet websites, can be useful in
this regard. In such a context, there would be no structured
classes, but the goal should be a continuous awareness of changing
industry standards. A corporate culture to maintain high ethical
standards should be established on a continuing basis.
(2) On the other hand, larger firms which transact business with
a larger segment of the public may wish to implement a training
program that requires periodic classwork. In such a situation, the
Commission believes it appropriate for registrants to maintain such
records as evidence of attendance and of the materials used for
training. In the case of a floor broker or floor trader, the
applicable contract market or registered derivatives transaction
execution facility should maintain such evidence on behalf of its
member. This evidence of ethics training could be offered to
demonstrate fitness and overall compliance during audits by
self-regulatory organizations, and during reviews of contract
market or registered derivatives transaction execution facility
operations.
(g) The methodology of such training may also be flexible.
Recent innovations in information technology have made possible
new, fast, and cost-efficient ways for registrants to maintain
their awareness of events and changes in the commodity interest
markets. In this regard, the Commission recognizes that the needs
of a firm will vary according to its size, personnel, and
activities. No format of classes will be required. Rather, such
training could be in the form of formal class lectures, video
presentation, Internet transmission, or by simple distribution of
written materials. These options should provide sufficiently
flexible means for adherence to Congressional intent in this
area.
(h) Finally, it should be noted that self-regulatory
organizations and industry associations will have a significant
role in this area. Such organizations may have separate ethics and
proficiency standards, including ethics training and testing
programs, for their own members.
[66 FR 53521, Oct. 23, 2001]