Category Archives: cftc

CFTC Issues No-Action Letters for CPO Registration Relief

Hedge Fund General Partner CPO Registration Relief

In a series of no-action letters issued in March, the CFTC has granted no-action relief from registration as a commodity pool operator (“CPO”) for a general partner of a fund (or a managing member, if the fund is an LLC) that delegates its entire management authority over the fund to another entity – typically an “investment manager” entity – that is under common control with the general partner. Under this relief, the investment manager is required to register as a CPO, but the general partner is relieved from the CPO registration requirement.

Background on CPO Registration

Based on the legal structure of a fund organized as a limited partnership or limited liability company, typically the general partner or managing member (respectively) has the operational authority over the fund that makes CPO registration process necessary. Under the Commodity Exchange Act of 1936 (the “Act”), an entity that engages in the following activities on behalf of a fund (a “pool” in CFTC parlance) is generally required to register as a CPO:

“any person engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests.” See text here.

In some fund structures, however, the general partner may wish to delegate its CPO responsibilities to an investment manager. This is often (but not exclusively) done in the context where a fund’s performance allocation is paid to the general partner, in order to obtain favorable tax treatment, but the investment manager runs the fund on a day-to-day basis, often receiving management fees as compensation. In this situation, it would be costly and burdensome to register both the general partner and the investment manager as separate CPOs of the fund, so it may be worthwhile to request CFTC no-action relief.

Requirements for No-Action Relief

The CFTC issued four no-action letters outlining the general guidelines for how to take advantage of the CPO registration relief described in this article: CFTC Letter No. 13-17, CFTC Letter No. 13-18, CFTC Letter No. 13-19, and CFTC Letter No. 13-20. Although the facts of each no-action letter differ somewhat, the following basic requirements apply. The general partner and investment manager should be able to make representations to the CFTC with respect to each of the following:

• Common Ownership and Control. The general partner entity and the investment manager entity should have the same owners and be subject to the control of the same persons.

• Delegation Agreement – All Management Authority. The general partner and investment manager should enter into a “Delegation Agreement” whereby all of the CPO-related authority of the general partner is delegated to the investment manager.

• Soliciting Clients and Managing Assets. The general partner must not engage in the solicitation of investors to the fund, and must not manage the property of the fund.

• Books and Records. All books and records related to the CPO activities should be maintained at the offices of the investment manager.

• CPO Registration. The investment manager must be registered or be in the process of registering as a CPO, and must maintain its registration on an ongoing basis.

• Employees and Agents. The general partner must not have any employees or others acting on its behalf, and must not engage in any other activities that would subject it to the Act or the CFTC’s regulations.

• Joint & Several Liability. The general partner and investment manager entities must agree to be jointly and severally liable for any violation of the Act or the CFTC’s regulations.

• Statutory Disqualification. The general partner cannot be subject to statutory disqualification from CPO registration under section 8a(2) or 8a(3) of the Act.

How to Apply for No-Action Relief

If you wish to apply for the no-action relief described above, you will need to draft a letter to the CFTC to request the relief. This letter should comply with the requirements of CFTC Regulation 140.99. Please reach out to us if you would like any assistance with drafting such a letter.

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Cole-Frieman & Mallon LLP acts as legal counsel to the investment management industry. If you have questions on the above please contact us or call Bart Mallon directly at 415-868-5345.

CFTC Proposed Regulation 1.71 Article Published in NIBA Journal

Just a quick note that we had an article published in the June issue of the NIBA Journal titled How will the Proposed Swaps Regulations Affect IBs? In the article we discuss how the OTC derivatives regulations have essentially overshadowed some of the CFTC's other rulemaking initiatives like Proposed Regulation 1.71. Proposed Regulation 1.71 would essentially require certain CFTC registered firms, inc

luding introducing brokers, to implement certain compliance procedures to separate research activities from execution activities. Proposed Regulation 1.71 has not yet been finalized by the CFTC and we provide updates if new rules are adopted.

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Cole-Frieman & Mallon LLP provides legal services to the managed futures industry including CTA, CPO, and Introducing Broker registration and compliance services. Bart Mallon can be reached directly at 415-868-5345.

Dodd-Frank Establishes New Laws Regarding Spot Commodities and Spot Forex

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The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) has changed a number of laws in all of the securities acts including the Commodity Exchange Act. Two specific changes deal with certain transactions in commodities on the spot market. Specifically, Section 742 of the Act deals with retail commodity transactions. In this section, the text of the Commodity Exchange Act is amended to include new Section 2(c)(2)(D) (dealing with retail commodity transactions) and new Section 2(c)(2)(E) (prohibiting trading in spot forex with retail investors unless the trader is subject to regulations by a Federal regulatory agency, i.e. CFTC, SEC, etc.). According to a congressional rulemaking spreadsheet, these are effective 180 days from the date of enactment.

We provide an overview of the new sections and have reprinted them in full below.

New CEA Section 2(c)(2)(D) – Concerning Spot Commodities (Metals)

The central import of new CEA Section 2(c)(2)(D) is to broaden the CFTC’s power with respect to retail commodity transactions. Essentially any spot commodities transaction (i.e. spot metals) will be subject to CFTC jurisdiction and rulemaking authority. There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period (see here).

It is likely we will see the CFTC propose regulations under this new section and we will keep you updated on any regulatory pronouncements with respect to this new section.

New CEA Section 2(c)(2)(E) – Concerning Spot Forex

The central import of new CEA Section 2(c)(2)(E) is to regulate the spot forex markets. While the section requires the CFTC to finalize regulations with respect to spot forex (which were proposed earlier in January), it also, interestingly, provides oversight of the markets to other federal regulatory agencies such as the CFTC. This means that in the future, different market participants may be subject to different regulatory regimes with respect to trading in same underlying instruments. A Wall Street Journal article discusses the impact of this with respect to firms which engage in other activities in addition to retail forex transactions. The CFTC’s proposed rules establish certain compliance parameters for retail forex transactions, requires registration of retail forex managers and requires such managers to pass a new regulatory exam called the Series 34 exam. We do not yet know whether the other regulatory agencies will adopt rules similar to the CFTC or if they will write rules from scratch.

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CEA Section 2(c)(2)(D)

‘‘(D) RETAIL COMMODITY TRANSACTIONS.—

‘‘(i) APPLICABILITY.—Except as provided in clause (ii), this subparagraph shall apply to any agreement, contract, or transaction in any commodity that is—

‘‘(I) entered into with, or offered to (even if not entered into with), a person that is not an eligible contract participant or eligible commercial entity; and

‘‘(II) entered into, or offered (even if not entered into), on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis.

‘‘(ii) EXCEPTIONS.—This subparagraph shall not apply to—

‘‘(I) an agreement, contract, or transaction described in paragraph (1) or subparagraphs (A), (B), or (C), including any agreement, contract, or transaction specifically excluded from subparagraph (A), (B), or (C);

‘‘(II) any security;

‘‘(III) a contract of sale that—

‘‘(aa) results in actual delivery within 28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved; or

‘‘(bb) creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with the line of business of the seller and buyer; or

‘‘(IV) an agreement, contract, or transaction that is listed on a national securities exchange registered under section 6(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or

‘‘(V) an identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C.27(b)).

‘‘(iii) ENFORCEMENT.—Sections 4(a), 4(b), and 4b apply to any agreement, contract, or transaction described in clause (i), as if the agreement, contract, or transaction was a contract of sale of a commodity for future delivery.

‘‘(iv) ELIGIBLE COMMERCIAL ENTITY.—For purposes of this subparagraph, an agricultural producer, packer, or handler shall be considered to be an eligible commercial entity for any agreement, contract, or transaction for a commodity in connection with the line of business of the agricultural producer, packer, or handler.’’.

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CEA Section 2(c)(2)(E)

‘‘(E) PROHIBITION.—

‘‘(i) DEFINITION OF FEDERAL REGULATORY AGENCY.—In this subparagraph, the term ‘Federal regulatory agency’ means—

‘‘(I) the Commission;

‘‘(II) the Securities and Exchange Commission;

‘‘(III) an appropriate Federal banking agency;

‘‘(IV) the National Credit Union Association; and

‘‘(V) the Farm Credit Administration.

‘‘(ii) PROHIBITION.—

‘‘(I) IN GENERAL.—Except as provided in subclause (II), a person described in subparagraph (B)(i)(II) for which there is a Federal regulatory agency shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency described in subparagraph (B)(i)(I) except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe.

‘‘(II) EFFECTIVE DATE.—With regard to persons described in subparagraph (B)(i)(II) for which a Federal regulatory agency has issued a proposed rule concerning agreements, contracts, or transactions in foreign currency described in subparagraph (B)(i)(I) prior to the date of enactment of this subclause, subclause (I) shall take effect 90 days after the date of enactment of this subclause.

‘‘(iii) REQUIREMENTS OF RULES AND REGULATIONS.—

‘‘(I) IN GENERAL.—The rules and regulations described in clause (ii) shall prescribe appropriate requirements with respect to—

‘‘(aa) disclosure;

‘‘(bb) recordkeeping;

‘‘(cc) capital and margin;

‘‘(dd) reporting;

‘‘(ee) business conduct;

‘‘(ff) documentation; and

‘‘(gg) such other standards or requirements as the Federal regulatory agency shall determine to be necessary.

‘‘(II) TREATMENT.—The rules or regulations described in clause (ii) shall treat all agreements, contracts, and transactions in foreign currency described in subparagraph (B)(i)(I), and all agreements, contracts, and transactions in foreign currency that are functionally or economically similar to agreements, contracts, or transactions described in subparagraph (B)(i)(I), similarly.’’.

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CFTC Launches New Website

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(www.hedgefundlawblog.com)

In a move that has been long overdue, the CFTC has launched a new website which was designed to make getting to CFTC information easier. We have had a chance to explore the new site and believe that it is a significant improvement over the old site, even if the new colors (orange) and flash are a bit distracting.

Some of the interesting things about the new website:

RSS feeds added – this is probably the best update. Previously the CFTC did not have an RSS feed for its news. This new feature is great, however it is only for general press releases, enforcement press releases and Speeches & Testimony. It would have been nice to an RSS feed for other parts of the website like staff interpretations.
Follow us feature – yes, the CFTC is now on facebook, flickr and youTube. Now you can follow the CFTC through social media…what use this is, I am not sure.
Easy navigation – the navigation is improved by about 1000%. I found it very easy to get to Financial Data for FCMs.
Plug for CCH? One of the pictures on website is of a book published by CCH on the Commodities Exchange Act. I didn’t think the government was allowed to endorse one product over another so I am not sure why this picture is there. CCH is probably ecstatic that they get this sort of free advertising by the government – I would imagine that West, Lexis, and other groups are not happy and will be asking the CFTC to replace the picture.

Overall the new website is probably a good step forward for the CFTC even if the orange color is distracting.

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CFTC Launches New Website Designed to Improve Access to Market and Agency Information

New site is available at www.cftc.gov.

WASHINGTON – The United States Commodity Futures Trading Commission (CFTC) today launched a new website designed to enhance access to important market and agency information through CFTC.gov. The new site is part of the agency’s ongoing effort to promote transparency.

“Both the markets and the government serve the public best when they are transparent and easy to navigate,” CFTC Chairman Gary Gensler said. “The CFTC’s new website enhances the public’s ability to find the most important information on our homepage, including market reports, agency reports and agency news, and helps fulfill our ongoing efforts to bring sunshine to both the markets and the government.”

Important website enhancements include:

• Improving the website’s homepage to make it easier to access the most relevant information on CFTC.gov. The new site also includes drop-down navigation to enhance usability of the site with fewer clicks.

• Consolidating and simplifying the public comments section of the website by creating a page where members of the public can find every item that is open for public comment, including rulemakings, industry filings and other issues.

• Enhancing the look and feel of the website to make the homepage more usable and easier to navigate.

To improve the agency’s ability to disseminate important information to the broadest audience, CFTC.gov now incorporates videos and other imagery, as well as social media through Facebook, Flickr and YouTube.

Last Updated: April 2, 2010

Media Contacts
Scott Schneider
202-418-5174

R. David Gary
202-418-5085

Office of Public Affairs

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Other related hedge fund law blog posts include:

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole-Frieman & Mallon LLP He can be reached directly at 415-868-5345.

NFA Announces Effective Date of New CPO Reporting Rule 2-46

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First CPO Quarterly Report Due May 17, 2010

As we recently discussed in an earlier article on NFA Compliance Rule 2-46, the NFA has adopted a new compliance rule which will require commodity pool operators to provide certain information to the NFA on a quarterly basis. In general CPOs will need to provide the NFA with the following information about their pool: the names of certain service providers/ counterparties, change in NAV over the quarter, monthly ROR for the fund, and information on large investments (greater than 10% of the fund’s NAV).

The NFA will be holding a webinar so that members can see how to complete the quarterly filing through the EasyFile system.

The announcement is reprinted in full below and can be found here.

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Notice I-10-10

March 17, 2010

Effective Date of NFA Compliance Rule 2-46: CPO Quarterly Reporting Requirements

NFA Compliance Rule 2-46: CPO Quarterly Reporting Requirements will become effective on March 31, 2010. Rule 2-46 requires each CPO Member to report on a quarterly basis to NFA specific information on certain pools that it operates within 45 days after the end of each quarterly reporting period. The CPO must provide the information for each pool that it operates that has a reporting requirement under CFTC regulation 4.22 (which includes exempt pools under CFTC Regulation 4.7). Using a new web-based system that was specifically designed for this rule, the CPO must enter the following information:

(a) the identity of the pool’s administrator, carry broker(s), trading manager(s) and custodian(s);

(b) a statement of changes in net asset value for the quarterly reporting period;

(d) a schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

The first quarterly report will be due by May 17, 2010 for the quarter ended March 31, 2010 and must be filed electronically using NFA’s EasyFile System. In order to ensure that CPO Members understand the new requirements, NFA will host a webinar on April 13, 2010 at 12:00 p.m. (Eastern Time), which will outline the new reporting requirements and how to file using the new system. Click here to register for the webinar. NFA staff will also provide detailed information on the new requirements and filing instructions at NFA’s CPO/CTA Regulatory Seminar being held on April 22, 2010 in New York. Click here to register for the seminar.

More information about NFA Compliance Rule 2-46 can be found in NFA’s August 25, 2009 Submission Letter to the CFTC. Questions concerning the reporting requirements should be directed to Tracey Hunt, Senior Manager, Compliance ([email protected] or 312-781-1284) or Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420).

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Other related hedge fund law blog posts include:

Cole-Friman & Mallon LLP can provide CPOs with comprehensive support during the filing process. Bart Mallon, Esq. can be reached directly at 415-868-5345.

New Forex Regulations: Overview of Public Comments

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Leverage, Inaccessibility for Smaller Traders, and Offshore Threat are Focus of Public Comments

As we’ve discussed in related posts, the CFTC has proposed rules regulating the off-exchange spot forex industry (see Retail FOREX Registration Regulations Proposed). The CFTC has requested comments from the public and there are currently about 100 public comments on CFTC’s website written in response to the new rule. The comments mainly focus on:

Leverage reduction rule (approx. 75/100 comments)
Forex industry becoming inaccessible to smaller traders (approx. 35/100 comments)
Threat of investors moving their money to offshore firms (approx. 25/100 comments)
Opposition to government interference/regulation (approx. 20/100 comments)

[Note: over the weekend the CFTC published some of the backlog of comments it received. Much of this article was written prior to review of these extra comments (which total approximately 3,663). We will provide an update on such comments in the future.]

To view all of the comments, click here.

The following is our summary of the comments which have been made thus far.

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Leverage Reduction

Approximately 75 of the 100 comments mention a strong or very strong opposition to the new leverage proposal of 10:1. The issue with a reduction of leverage to 10:1 is that investors will have to invest much more money in order to trade what they can currently trade with less capital. Comments regarding leverage include phrases like “strongly object”, “terrible idea”, “unintelligent”, and “strongly oppose”. The majority opinion is that people should have the freedom and the choice to trade with a higher amount of leverage, and that the federal government’s attempts to lower leverage to 10:1 are “unnecessary” and “intrusive”. John Yeatman Jr. writes,

Please DO NOT reduce leverage in US Forex trading to 10:1…THIS WOULD HAVE A MAJOR IMPACT ON TENS OF THOUSANDS OF TRADERS AND THEIR FAMILIES WHO RELY ON 100:1 LEVERAGE AVAILABILITY TO SUPPORT THEIR FAMILY AND THIS ECONOMY. Please do your part in helping to keep this country great and it’s [sic] freedoms true BY NOT ALLOWING ANYTHING LESS THAN 100:1.

Other comments regarding the leverage proposal include:

… strongly objects to new leverage of 10:1
… proposed reduction not consistent with futures, which allow a significantly higher leverage
… virtually no flexibility trading at 10:1 leverage unless trader has gigantic account balance
…reduction in leverage not fair to public…bad for America
… new leverage line “out of line with general idea of protecting consumers”
…limiting leverage to 10:1 is “a bad idea”
…current leverage limit is “more than enough”
… CFTC is “unintelligent” to change leverage to 10:1
… terrible idea to lower leverage
… leverage change is “perversion of the free markets”
…leverage restriction “grave injustice” for many who work to secure the American dream of prosperity for themselves and families
…leverage limits would delay achievement of financial independence
…leverage not dangerous; misuse is
…leverage decrease will kill forex business and worsen economic situation in states and worldwide
…amount of leverage needs to be at discretion of investors

Smaller Traders

Another argument is that lower leverage will making trading inaccessible for smaller traders but leave the door wide open for larger institutions, since lower leverage requires higher margin (meaning that more money needed to be invested in order to trade). Comments regarding this proposed rules potential affect on smaller traders include:

…will stamp out small-time investor
…drive smaller guys out of market or offshore
…anything lower would be insane for small-time traders
…gets rid of investors with small capital so rich can stay rich and poor can stay poor
…pushes out small-time investor
…denies small trader opportunity
…disparate and unintended impact on small traders with lower capital
…leave the small, independent traders alone
…small businesses are heart of US economy
…all small-scale actors will be stifled
…10:1 leverage will have unintended consequence of locking out hundreds or thousands of small traders
…quit treating the small guy like an idiot
…are you trying to allow only rich to trade forex?

Government Interference/Regulation

Many of the comments suggest anger with the government for interfering too much with the forex industry. Michael Thomas writes,

I do not live here in this “free” society to have someone from the government babysitting me. The message that your proposed rules send is that 1) we are not free to make our own choices. 2) The federal government believes that we the general public are too stupid to make decisions for ourselves….I don’t need you, or do I want you getting in the way of my being able to trade as I wish in the United States of America.

Other comments regarding an opposition to increased government interference include:

…don’t add more government
…not intention of our ancestors to create government which controlled/regulated all aspects of citizens’ lives
…the government has no right to control my ability to make profit
…unnecessary for Federal government to regulate against individual’s ability to take risks
…don’t need government protection; we’re adult traders
…not responsibility of government to take away choice from consumers
…”big brother” attempt to protect people from “evil” traders and forex hedge funds
…stay out of trying to run my personal life

Offshore Threat

In at least 25 of the comments, the public is arguing that the new rules, specifically lower leverage, will drive traders offshore to overseas brokers who may or may not be regulated. Further, a major argument is that the forex industry in the United States will essentially cease altogether as a result of traders moving their forex activities offshore. Comments regarding this offshore threat include:

…will send business to London and unregulated offshore markets
…consumers will take accounts offshore
…will drive smaller guys out of markets entirely or to offshore, unregulated brokers
…when traders move accounts offshore, CFTC and NFA will have no control of clients’ trading
…I’ve already moved my account offshore
…people will do business with offshore brokers

Government Regulation

In terms of the new regulation proposal as a whole, some people support more industry regulation while others are against the idea entirely. Bradford Smith writes,

I feel that regulation of firms is needed…regulation is needed to help people understand the risks such as risk disclosure. [Regulating] the retail forex market in a similar fashion to how commodities and futures are regulated is a good idea. Stopping companies from trading against their clients is a high priority issue that needs to be stopped.

John M. Bland, on the other hand, who views the proposal as “unfair”, writes,

…the CFTC has done a lot in recent years to correct many of the problems in the industry…this decision is unfair and anti-competitive.

Other comments regarding opposition to the proposal and/or government interference include:

…new rules will destroy US financial firms business and lead to loss of thousands of jobs during the worst economy in decades
…regulation should be aimed at encouraging economic growth and innovation vs. restricting it
…against proposal
…how did forex regulation get in the Farm Bill?
…whoever initiated proposal has no knowledge of forex…this rule is utter nonsense…rules for forex in the USA are already quite strict
…you are busybody bureaucrats with intrusive minds…you are interested in only one thing: bureaucratic power and complete control of every microscopic aspect of life…you are monsters
…rules will harm people who make an honest living trading currency
…important to educate and inform, not regulate and ban
…proposal is a disaster-in-warning for traders
…if it ain’t broke, don’t fix it
…proposal is lunacy-communist-legislation
…I do not support the proposal…proposal closes doors for forex investors and will make forex market accessible to financial institutions only
…vehemently against new, narrow-sighted legislation

Agreement/Disagreement with Proposal

Many of the comments discuss that education about forex and trading risk is the best solution. On a similar note, many traders expressed the fact that anyone who trades in the forex market is aware of the inherent risks, so people who decide to trade are willing to take these risks. There is a general consensus that it is the individual’s, and not the government’s, responsibility to evaluate the level of risk that s/he is willing to take. Remember, higher leverage will be reflected in both your profits and your losses. Thus, if you have high leverage and profit, you will profit a lot more than if your trading had not been leveraged. But the same goes for losses; if you lose, you will lose a lot more based on the higher leverage.

Conclusions Thus Far

The biggest concern thus far is the proposed reduction in leverage to 10:1. Almost every comment mentioned a strong opposition to this rule. Furthermore, most people seem to be concerned that the new regulations will significantly decrease forex activity in the US—if not kill it off—and drive most investors overseas to offshore firms. We will continue to monitor comments received until the March 22 due date. Please leave us a comment below with your feedback. Should you feel inclined, you may submit your own comment to the CFTC through the methods listed above.

To view CFTC’s proposed rules, click here.

How to Comment

Comments must be received by March 22, 2010 and can be submitted the following ways:

Through the Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
By e-mail: [email protected]. Include “Regulation of Retail Forex” in the subject line of the message.
By fax: (202) 418-5521.
By mail: Send to David Stawick, Secretary, Commodity Futures Trading Commission, 1155 21st Street, NW., Washington, DC 20581.
Courier: Same as Mail above.

(Note that all comments received will be posted without change to http://www.cftc.gov, including any personal information provided.)

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CPO Annual Financial Report Filing

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Information on Filing Annual Report with NFA

Commodity Pool Operators (“CPOs”) are required to distribute an Annual Report, certified by an independent public accountant, to each participant in each pool it operates (i.e. the investors in the commodity/futures hedge fund) within 90 days after the pool’s fiscal year-end (normally December 31). CPOs are also required under the Commodity Exchange Act and commission regulations to file this report electronically with the National Futures Association (“NFA”) through the NFA’s EasyFile system. Alternate due dates exist for pools that are operated as a “fund of funds“. CPOs can monitor their filings and review their due dates for each pool in the EasyFile system. We have included an overview of the requirements and process below and Cole-Frieman & Mallon LLP would be able to help CPOs to make this filing as well.

Filing Overview

Who – all CPOs must file the annual financial report unless they are exempt under the CFTC Regulation 4.13.
What – a certified financial statement (PDF of the exact statement distributed to the pools limited partners) from an auditor needs to be filed with the NFA. (Please note that CPOs who are exempt under the CFTC Regulation 4.7 does not need to have their statements audited.)
When – commodity pool annual reports must be distributed to pool participants and filed with the NFA within 90 calendar days of the pool’s fiscal year end. (Mallon P.C. can also check the due date by logging into the EasyFile system on the Filing Index page.)
How – CPOs must submit annual reports to NFA electronically in accordance with NFA’s EasyFile electronic filing system and procedures.

NFA EasyFile System

Pool operators should have their NFA login and password to access the EasyFile system. Submitting pool financial statements using EasyFile involves a three step process:

The CPO (or compliance group) will upload a PDF of the identical pool financial statement provided to the pool’s limited partners, including the balance sheet, income statement, schedule of investments, footnotes, and the Independent Auditor’s Opinion, if applicable.
The CPO (or compliance group) will then enter approximately 30 key financial balances into an electronic schedule. These balances will be pulled directly from the balance sheet, income statement and statement of changes in net asset value included in the pool’s PDF filing.
The CPO (or compliance group) will finally submit the electronic filing, the system will run some basic edit checks. It will also prompt the CPO to read and agree to an electronic oath or affirmation. This oath or affirmation will apply to the information included in the PDF, as well as, the information entered into the schedule of key financial balances.

A common pitfall with this process include miscalculations with the key financial balances. In order to prevent this from occurring, the CPO should make sure the values/balances input into the system correspond with the PDF certified financial statement. After submission, the CPO should ensure the updated status of the filing becomes “Received” by logging into Pool Index page the in the EasyFile system. This status should show up within a few days after the filing has been submitted.

Conclusion

In addition to the various yearly compliance measures, such as the NFA Self-Examination Checklist, CPOs should be aware that they need to file their audited reports with the NFA. This is especially important because the NFA has fined large firms for failing to file on time (see previous NFA Action). If you need help with filing your annual financials, please contact Cole-Frieman & Mallon LLP for further information on our commodities and futures compliance services.

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Other related NFA compliance articles include:

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

NFA Self-Examination Checklist 2010 | FCMs, IBs, CPOs and CTAs

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Easy Step by Step Guide for NFA Member Firms

NFA Member Firms are all required to complete a yearly self-examination checklist to ensure that the Member Firm is complying with all the NFA Rules (as well as the CFTC Regulations and other applicable laws). The NFA has provided some resources on their website. We believe that the resources are good, but they are not easy to use for NFA Member Firms. Accordingly, Mallon P.C. has reworked the forms into a more easy-to-use format. Below is a description on how you should proceed with this process along with the various checklists that each Member Firm should print off and complete.

All of the checklists below are based on, and contain the same information, as the NFA checklists which can be found here.

Overview of Process

The whole process should take anywhere from 1 to 3 hours (or more) depending on the exact structure of the NFA Member Firm. Firm authorized personnel should complete the following steps:

Print off the General Checklist
Print off the Registration Specific Checklist
Print off the Attestation Sheet
Go through the checklists step by step and write notes and initial the appropriate areas. If a certain area is not applicable, write N/A.
Sign the Attestation Sheet
File the Checklists according to the Firm’s internal compliance procedures

If there are compliance issues which arise during the course of the self-examination process, please record the issue and how the issue has been or will be addressed. Do not try to cover up the issue – the NFA is more interested in the fact that a firm identifies and appropriately deals with compliance issues than a firm that has a perfect self-exam checklist (through a cover-up). Do not be afraid to take ample notes in the appropiate places on the checklist – this will show the NFA examiners that the Firm is committed to thinking about the relevant compliance issues.

* Note: there are other yearly compliance procedures that a firm will need to complete in addition to the self-examination checklist. For more information, please see the Mallon P.C. NFA Compliance Guide or contact your compliance consultant. Please note that the compliance guide may not cover all compliance requirements.

Checklists

Each Member Firm will need to complete at least two checklists – (1) a general NFA Member Firm checklist and (2) a specific registration category checklist (i.e. FCM, IB, CPO, CPA).

General Checklist

NFA Self-Exam Checklist (General – All Firms)

Registration Specific Checklist

Attestation

Each Member Firm will need to complete an attestation sheet which acknowledges that the Firm has completed the annual self-examination checklists.

NFA 2010 Checklist Attestation

Appendices

Each of the checklists makes reference to certain appendices. Below we have created links to those appendices.

Appendix A – General, FCM, IB
Appendix B – General
Appendix C – General
Appendix D – General

Acronyms

Each of the checklists include acronyms. We have listed them below for your convenience.

AML – Anti-Money Laundering
AP – Associated Person
BASIC – Background Affiliation Status Information Center
BSA – Bank Secrecy Act
CIP – Customer Identification Program
CRD – Central Registration Depository
DSRO – Designated Self-Regulatory Organization
FATF – Financial Action Task Force
FIFO – First-in, First-out
FinCEN – Financial Crimes Enforcement Network
NAV – Net Asset Value
NCCT – Non-Cooperative Countries and Territories
OFAC – Office of Foreign Assets Control
SAR – Suspicious Activity Report
SDN – Specially Designated Nationals
SPAN – Standard Portfolio Analysis

Rules & Regulations

Some of the checklists have references to certain CFTC Regulations and NFA Rules. We have listed them below for your convenience.

CFTC Part 4 Regulations
CFTC Regulation 160
CFTC Interpretation #10
NFA Compliance Rule 2-7
NFA Compliance Rule 2-29
NFA Compliance Rule 2-30
NFA Bylaw 1301
Securities Exchange Act of 1933 – Sections 9(a), 9(b), 10(b)

Forms

Some of the checklists have references to forms and these are included below.

CFTC Form 40
CFTC Form 8-T
Form U5

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Other related NFA compliance articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345

CFTC Provides Annual Guidance to CPOs

2 Replies

Annual Report Guidance for Commodity Pool Operators

In a recent release, which we have reprinted in full below, the CFTC reminds CPOs of their annual reporting requirements under Regulation 4.22. The release includes a link to the 2010 CPO Annual Guidance Letter. In general the letter provides another reminder to CPOs to file their annual reports with the NFA and provide a copy to the investors in the pool. I have outlined below the major parts of the letter.

General Issues to consider

Commodity pool annual reports must be distributed to pool participants within 90 calendar days of the pool’s fiscal year end. For most funds this means by March 31, 2010.
Commodity pool annual reports must be filed with the NFA within 90 clendar days of the pool’s fiscal year end. For most funds this means by March 31, 2010.
All documents must be filed electronically through the NFA’s filing system.
Extensions are available in certain circumstances.

Other Issues

For groups which have different or more complex structures, additional considerations need to be addressed. Such groups include:

Master/feeder commodity pool structures
Commodity pool fund of funds
Offshore commodity pools
CPOs claiming an exemption under Regulation 4.13
Reports of commodity pools which are liquidating
Commodity pools established as a series structure (such as a series LLC)
Commodity pools which invest in non-exchange traded instruments may have additional issues

Moreover, the letter includes references to the recently amended CPO relations.

If a CPO will not be able to file on time, the CPO should file for an extension. “Automatic” extensions can be granted to CPOs to fund of fund structures. If you have questions with making a filing, please feel free to contact Cole-Frieman & Mallon LLP. The following press release can be found here.

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CFTC’s Division of Clearing and Intermediary Oversight Provides Annual Report Guidance to Commodity Pool Operators

Washington, DC — The Commodity Futures Trading Commission’s Division of Clearing and Intermediary Oversight has issued its annual guidance letter to registered commodity pool operators (CPOs). The letter is intended to assist CPOs and their public accountants in complying with the Commission’s regulations on the preparation and filing of commodity pool annual financial reports.

The highlights contained in this year’s letter include:

Recent amendments to Commission regulations pertaining to various reporting issues;
Annual report filing procedures and due dates;
Special considerations that apply to filings made for Master/Feeder and Fund of Funds structures;
Use of International Financial Reporting Standards in lieu of U.S. generally accepted accounting principles;
Reporting requirements for pools in liquidation;
Reporting requirements for series funds with limitation of liability among the different series; and
Various accounting developments that may impact report preparation.

For more information on CPO Annual Guidance Letter 2009, please see the Related Documents link.

Copies of the letter also may be obtained by contacting the Commission’s Office of the Secretariat, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, (202) 418-5100.

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Other related compliance articles for CPOs and CTAs include:

Bart Mallon, Esq. runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

CTA and CPO Foreign Language Disclosure Documents

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Translating a Disclosure Document to Another Language is Fine

NFA Member Firms are required to have their disclosure documents reviewed by the NFA generally before such firms can distribute the documents to potential investors. One issue which sometimes arises is when the firm (generally either a CTA or CPO) has potential clients/investors who are non-U.S. citizens and do not speak English. In these cases the question arises as to whether the CTA or CPO can translate their disclosure documents into another language.

I just recently spoke with a compliance representative at the NFA and the answer I received is: Yes, the CTA or CPO can have the document translated into another language. The big issue obviously is that the NFA Member Firm must be able to represent to the NFA that the translation is exact and the firm must generally make the translated copy available to the NFA during examination. Also, there are two central ways which firms will typically approch this situation:

Disclose to NFA – some firms will proactively disclose to the NFA that they have translated a disclosure document into another language. This can be done in a number of ways including: (i) providing a note to the NFA during the document submission or (ii) calling the NFA directly and talking with a representative or compliance manager.

Do not disclose to the NFA – some firms will not disclose to the NFA that a document has been translated. According to my phone conversation, this is fine, but the Member Firm will need to have a copy of the translated document and verify to the NFA that the translated version is exactly the same as the English language based version.

NFA Compliance Issues

Compliance. CTAs and CPOs must remember that, as Member Firms, there are ongoing recordkeeping responsibilities. Accordingly, the firm should have policies and procedures in place that address the issue of having translated disclosure documents. Additionally, firms should remember that disclosure documents are usually good for nine (9) months and must be updated thereafter (or if there are any material changes to the document which must be disclosed) – this means that the translated copy should also be appropriately updated.

Forex. These same rules will also apply to Forex CTAs and Forex CPOs. The CFTC just recently announced that forex managers will need to register with the CFTC and become NFA member firms. When forex managers register then, this will apply to them and they will need to follow these rules as well.

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Other articles applicable to NFA member firms include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.