Disclosure Document Guidance for CTAs and CPOs

NFA Provides Overview of Manager Background (Bio) Disclosure Requirements

CFTC registered CTAs and CPOs need to have their disclosure documents reviewed by the NFA prior to using those documents to solicit clients or investors.  As any manager who has gone through this NFA review process understands, the NFA will take their time to scrutinize the documents.  One issue which comes up again and again is the background information that must be disclosed for any principals or managers disclosed in the disclosure document.  Managers should take note of the following points:

  1. Each bio must include a complete and detailed business background for the last 5 years (any gaps must be explained);
  2. Business background further back than 5 years does not need to be disclosed; and
  3. If a manager chooses to mention anything that happened in the manager’s business background further back than 5 years, the manager must disclose all subsequent employment.

The third point is really the most important for this discussion.  Let’s say a manager makes a general reference that he has been in the investment management business for 16 years – that means that the manager will need to provide a description of each job, including dates of employment (month and year) over the last 16 years.  Because in practice this would lead to ridiculously long bios (for some managers), it is generally recommended to leave the bio to the last 5 years so that the bio is manageable.

The NFA recently released a member notice, reprinted below, discussing this issue and the various questions that arise.  The following NFA Notice can be found here.

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Notice I-10-12

May 11, 2010

NFA provides guidance for disclosure of business background information by commodity pool operators and commodity trading advisors

In 1997, the Commodity Futures Trading Commission (CFTC) delegated the review of disclosure documents submitted by commodity pool operators (CPO) and commodity trading advisors (CTA) to NFA. The Division of Clearing and Intermediary Oversight (DCIO) performs periodic oversight of NFA’s implementation of its delegated authority. As part of these reviews, DCIO staff has communicated to NFA its expectations as to the type and breadth of information that must be disclosed regarding the background of CTAs, CPOs, and relevant individuals. NFA is providing the following guidance to clarify the requirements of the applicable regulations regarding the disclosure of business background.

CFTC Regulations 4.24 and 4.34 require that disclosure documents include, for the previous five years from the date of the document, the business backgrounds of the CTA, the CPO, the major CTAs, the CPOs of major investee pools, the pool’s trading manager, and each principal of the foregoing who participates in making trading or operational decisions, or supervises persons so engaged. For each of the persons listed above, the document must include employers, business associations, or ventures (including the starting and ending month and year) for the same five year period, as well as a discussion of the duties performed by the person for each. When disclosing business background information, the discussion must be complete for the entire five year period. Any gaps in time must be explained.

Examples of disclosures within the most recent five year period:

Ms. Smith attended ABC University and graduated in June 2005 with a degree in Economics. In August 2008, she joined XYZ LP as an associated person.

The business background must disclose what Ms. Smith was doing during the period between June 2005 and August 2008. Additionally, if XYZ LP is not the entity for which the disclosure document has been prepared, a description of its main business must be included.

Mr. Jones has been a listed principal of XYZ Company, a commodity trading advisor, since January 2005. In 2007 Mr. Jones began publishing a monthly newsletter entitled “The Trading Corner,” which outlines Jones’ trading research in the energy markets.

The business background must disclose Mr. Jones’ duties at XYZ Company. The month in which Mr. Jones began publishing his newsletter and the name and main business of the employer, if any, for whom the newsletter is being published must also be disclosed.

Mrs. Green was registered as an associated person of LMN LLC, a commodity pool operator from March 2008 until May 2008. In June 2008, she formed PQR Limited Partnership (PQR), a commodity pool operator which became registered on November 1, 2008. Mrs. Green became a registered AP and listed principal of PQR on November 1, 2008.

The business background must be complete for the last five years. Specifically, it must disclose what Mrs. Green was doing prior to March 2008. Mrs. Green’s and PQR’s activities between June 2008 (when she formed PQR) and November 2008 (when she and the firm became registered) must also be disclosed.

As noted above, CFTC Regulations mandate disclosure of business background information for only the last five years from the date of the disclosure document. DCIO has advised NFA, however, that if a CTA or CPO elects to provide business background information beyond the previous five year period it must provide this information in the same level of detail as that required for the last five years. DCIO has further directed that a general reference regarding the length of an entity’s or individual’s experience or involvement in an industry serves to extend the time period for which disclosures must be made.

The following is an example of a disclosure recently submitted to NFA and an explanation as to why it would not comply with the above stated policy:

Example of disclosure beyond the most recent five year period:

Mr. Brown has been in the futures industry since October 1982 or Mr. Brown has over twenty eight years of management experience.

Mr. Brown’s business background must be disclosed from October 1982 to the present. The disclosure must be complete for the entire period including the name and main business of each employer, the nature of the duties performed for each employer, and the starting and ending dates (month and year) of employment, including an explanation of any gaps in employment.

CPOs and CTAs are encouraged to review their existing disclosure documents in light of DCIO’s guidance and make any necessary changes prior to submitting subsequent filings of the document. If you have any questions concerning this notice or disclosure documents generally, please contact Mary McHenry, Senior Manager, Compliance (mmchenry@nfa.futures.org or 312-781-1420) or Kaitlan Chi, Manager, Compliance (kchi@nfa.futures.org or 312-781-1219).

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Cole-Frieman & Mallon LLP is a hedge fund law firm which provides CTAs and CPOs with comprehensive formation and regulatory support.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

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