Article by Bart Mallon (www.forexregistration.com)
This is part one of a two part discussion. This article will provide an overview of the likely requirements for Forex Disclosure Documents. The items in this Forex Disclosure Document Overview are based on the items discussed in “Disclosure Documents – A Guide for CPOs and CPAs” provided by the NFA and based on CFTC rules and regulations.
Please note that these are only likely requirements as proposed and final rules have not yet been released. For those managers which will be managing forex hedge funds, the disclosure document requirements are in addition to the requirements imposed by other securities laws (please see hedge fund offering documents or a more detailed explanation of the forex hedge fund offering document requirements). Additionally, if the Forex CPO or CTA also trades other instruments besides spot forex then the document will need to address those items as well – your hedge fund forex attorney will be able to help you draft these items.
Who must prepare a Forex Disclosure Document?
The NFA has discussed a new category of CPO and CTA whose business involves retail off-exchange foreign exchange (forex) contracts. These new categories of registered persons, as provided by the NFA, are called “Forex CPOs” and “Forex CTAs.” Like the CPO and CTA disclosure documents, it is likely that both Forex CPOs and Forex CTAs will need to deliver a disclosure document to prospective investors. The Forex CPO or Forex CTA will need to make delivery at the same time or before the delivery of the Forex Pool’s offering documents or the Forex Program’s advisory agreement. The Forex CPO or CTA will need to receive signed acknowledgement by the investor that they have received the disclosure document.
We do not yet know if there are any exceptions to Forex Disclosure Document delivery requirements. One question that the CFTC will need to answer is whether Forex CPOs and CTAs will be able to fall within the 4.7 exemption like traditional CPOs and CTAs.
The Basics of the Forex Disclosure Document
Cover Page. The Forex Disclosure Document will probably need to have a CFTC mandated disclaimer which basically states that the CFTC has not reviewed the disclosure document for the merits of the trading program.
Front Cover Disclaimer. Inside the front cover the Forex disclosure document there will need to be a few paragraphs that serve as a general disclaimer of risk disclosure statement. This disclaimer will be based on a uniform template for all Forex disclosure documents.
Table of Contents. A basic table of contents will be required.
Basic Background Information. The beginning part of the document will need to include such basic information as name of the Forex CPO or CTA, addresses, phone numbers, etc. The business background of each principal (each a “Forex Associated Person” or “Forex AP”) as well as the officers and directors of the firm will need to be provided. The information each of the people will need to provide includes: date of NFA membership, date of CFTC registration, and dates of employment for last five years.
Forex Dealer Member. For Forex CTAs, if the program requires an investor to maintain an account with a Forex Dealer Member (“FDM”) then the name of the FDM must be disclosed. For Forex CPOs, the document should disclose who will be the fund’s FDM.
Forex Introducing Brokers. For Forex CTAs, if the program requires an investor to have an account introduced by a Forex Introducing Broker (“Forex IB”), then the name of the Forex IB must be disclosed.
Principal Forex Risk Factors. For both Forex CPOs and Forex CTAs the document must include a discussion of the main risks involved in the Forex program. Such risks are expected to include: country or sovereign risk, credit risk, exchange rate risk, interest rate risk, liquidity risk, market risk, operational risk, settlement risk and Herstaat risk. In addition, for Forex CPOs, there are other risks involved in the structure of the investment vehicle which will need to be disclosed.
Forex Trading Program. All aspects of the proposed trading program must be disclosed and discussed. A Forex trading program will usually include information on the investment object and the investment strategies as well as a discussion of the risk management procedures the Forex manager will utilize. This area of the program may also discuss the Forex manager’s investment philosophy.
Forex Fees. All aspects of the fee structure of the Forex hedge fund or Forex separately managed account must be discussed. This will include both management fees and performance fees (if applicable) as well as the methods for calculating the fees. The rules require specificity here so this will be one area where precise information is required.
Conflicts of Interest. This will be very important information and the Forex manager will want to discuss this section thoroughly with its attorney or compliance professional. All actual or potential conflicts of interest must be disclosed. All fee and business arrangements must be disclosed. For example, if the forex manager will have any sort of pip sharing arrangement with the Forex Dealer Member, this will need to be disclosed.
Litigation. If any of the persons or entities involved in the trading program have been subject to “material administrative, civil or criminal” actions within the past five years, all information regarding the action must be disclosed. Disclosure is required for the Forex CTA, Forex CPO, Forex IB, Forex Dealer Member or FCM, and any principles of the Forex CPO or CTA. Oftentimes the FCM (with regard to CPO and CTA disclosure documents) must disclose a lengthy list of actions.
Trading Forex for Own Account. The disclosure document must disclose whether the Forex manager and/or any employees will be trading for their own accounts. If the Forex manager and/or any employees will be trading for their own accounts then the document must disclose whether the manager or employees will allow investors to review the trading records of the manager or employees.
Forex Disclosure Documents Overview Part II will be released tomorrow and will cover the following items: Performance Disclosures, Other General Items, Material Information and Supplemental Information.
Please see other related HFLB articles: