Category Archives: Commodities and Futures

MarketsWiki Interview on Managed Futures Mutual Funds and CFTC Rule 4.5

Bart Mallon discusses Managed Futures Mutual Funds

As we discussed earlier, the CFTC has rescinded the Section 4.13(a)(4) exemption from commodity pool operator (“CPO”) registration. The CFTC also proposed changes to CFTC Rule 4.5 which would essentially require those managers to managed futures mutual funds to register with the CFTC as CPOs. Below is our discussion with MarketsWiki about Rule 4.5 and other issues affecting the managed futures industry.

Please contact us if you have any questions on Rule 4.5.



Cole-Frieman & Mallon LLP provides managed futures legal services. Bart Mallon can be reached directly at 415-868-5345.

CTA Expo Program in New York 2012

The CTA Expo is probably the best series of events for CTAs in the United States (and now in London) and the New York event is coming up soon. The managed futures industry will be in New York on April 18th for the NIBA Conference event and on April 19th for the CTA Expo. Both events will be at the NYMEX building. As we have for the last few years, Cole-Frieman & Mallon will be a sponsor of the NIBA event and will be attending the expo on the next day. We look forward to seeing everybody there.


April 18, 2012

4:30 – 6:00 Joint NIBA/CTAEXPO Cocktail Party, Sponsored by Telvent DTN

April 19, 2012

8:30 – 9:30 Continental Breakfast

Sponsored by DMAXX

9:15 – 9:30 Welcoming Remarks

Bucky Isaacson and Frank Pusateri

9:30 – 10:00 An Insider’s View of Marketing

Elaine Llyod | Axion Services Group

Sponsored by BNY Mellon

10:00 – 10:30 How Family Offices Select Managers

Audie Apple | Bessemer Trust

Sponsored by Horizon Cash Management

10:30 – 11:00 Coffee Break

Sponsored by Credit Suisse

11:00 – 11:30 Marketing in Latin America

Todd Scanlon | Bank of America Merrill Lynch

11:30 – 12:15 KEYNOTE SPEAKER

Bob Swarup | PIC

Sponsored by Trading Technologies

12:15 – 1:15 Lunch

Sponsored by ICE


Chuck Johnson | Tano Capital

Sponsored by Eurex

2:00 – 2:30 Marketing in Asia

Ilsoo Moon | Quark Capital

Sponsored by Dorman Trading

2:30 – 3:00 Compliance Issues in Today’s Regulatory Environment

Kate Dressel | Strategic Compliance Solutions LLC

David Matteson | Drinker Biddle & Reath LLP

Sponsored by Symphono

3:00 – 3:30 Coffee Break

Sponsored by Patsystems

3:30 – 4:00 Press Panel

Ron Weiner | RDM Inc.

Sandra Smith | FOX Business Network

Moderator: John Conolly | CME Group

Sponsored by Gemini Fund Services

4:00 – 4:30 The Psychology of Successful Trading

Denise Schull | Trader Psyches

Sponsored by Investor Analytics

4:30 – 6:00 Closing Cocktail Party

Sponsored by NYSE Liffe US and NYSE Liffe


Cole-Frieman & Mallon LLP provides legal and compliance support to CTAs and CPOs. Please feel free to contact us directly or reach out to Bart Mallon at 415-868-5345.


CFTC Rescinds 4.13(a)(4) CPO Registration Exemption

Increases Other Compliance Obligations for CPOs and CTAs 

The CFTC recently adopted final rules amending regulations applicable to both CPOs and CTAs. The CFTC also proposed rules with respect to Regulation 4.5 that would require managers to managed futures mutual funds to register as CPOs. Some of the other changes included:

  • CPOs subject to “lite-touch” regulation under the 4.7 exemption must now provide annual audited returns to investors in their funds
  • Changes the 4.5 exemption from CPO registration for managers to managed futures mutual funds
  • Requires CTAs and CPOs who file exemptions under 4.5, 4.13 and 4.14 to reconfirm the exemption on a yearly basis
  • Adds new Regulation 4.27 requiring CTAs and CPOs to file Form PFForm CPO-PQR and From CTA-PR
  • Requires CTAs and CPOs to provide investors with new disclosures regarding swap transactions, if applicable

Additionally, the CFTC has proposed regulations with respect to harmonizing CFTC regulations and SEC regulations with respect to managed futures mutual funds.  We will be providing additional information on these proposals in the coming days and weeks.

The full CFTC notice can be found here.

The final CFTC regulations can be found here: CPO & CTA Compliance Final Rules

Fact sheet: CTA & CPO Compliance Fact Sheet

Proposed Regulations for Managed Futures Mutual Funds: Proposed CPO Registration Requirement for Mutual Fund Managers


Cole-Frieman & Mallon LLP provides legal services to the managed futures industry.  Bart Mallon can be reached directly at 415-868-5345.

Managed Futures Regulation Post-MF Global Bankruptcy

Below is an article I wrote about how the managed futures industry is likely to react after the MF Global bankruptcy. I originally began drafting the article at the end of 2011 and finished it in the first week of January 2012.  As we have already seen, the industry is in fact moving towards addressing some of these issues and ultimately I believe that regulatory and other changes will increase the vitality of the managed futures industry.

The article was originally published as part of the Marcum Private Investment Forum newsletter and can be found here.  Please feel free to contact us if you have any questions or comments on the article.


MF Global Bankruptcy to Shape Managed Futures Regulation in 2012

By Bart Mallon, Esq. Partner, Cole-Frieman & Mallon LLP

It was a combination of the Lehman bankruptcy and the Madoff fraud that led an angry and embarrassed Congress to publicly castigate the SEC for not properly doing its job. What came to bear was the passage of the Dodd-Frank Act which ushered in new laws for the SEC and the CFTC to implement in short order and with limited budgets. The CFTC is in the middle of a similar event which saw the 8th largest bankruptcy in U.S. history as MF Global (MFG) declared bankruptcy on October 31, 2011. The biggest revelation, however, might have been that $1.2 billion of customer money was missing. The fact that there was the potential for a “shortfall” in a managed futures account was shocking – the industry that had prided itself so much on the sacrosanct customer account was now trying to make sense of how something like this happened.

While the various investigators, including the FBI, are trying to figure out where the money is and what transactions are valid, Congress and others are debating the future of regulation for the industry. The Commodity Futures Trading Commission (CFTC), the governmental agency which oversees the managed futures industry, is dealing with not only the MFG bankruptcy but a whole host of other issues. The MFG bankruptcy has brought to light issues with the regulation of the managed futures industry – (1) the practice of utilizing self regulatory organizations (SROs) to oversee important entities within the industry, (2) no “insurance” for margin in managed futures customer accounts and (3) lack of proper funding for the CFTC. Ultimately these issues will need to be addressed and will shape how the industry is regulated moving forward.

Self-Regulation – Is the Fox Watching the Henhouse?

Prior to MFG bankruptcy, the managed futures industry prided itself on the fact that “not a single cent” was ever lost in a customer account due to theft from a futures commission merchant (FCM). Perhaps because of this, the industry seemed unconcerned about the hodge-podge of government agency oversight combined with self-regulation over the managed futures participants. The central SRO for MFG was the CME Group, the world’s largest futures exchange which includes the CME, CBOT, NYMEX and COMEX exchanges. The CME Group is a publicly traded company subject to oversight by the CFTC with respect to its own operations and is also subject to oversight of its supervision of MFG.

MFG ran most of its clearing business through the CME. This means that while the CME derived substantial revenue from MFG, it also was in charge of overseeing MFG to make sure the laws and regulations under the Commodities Exchange Act (CEA) were being followed. While it seems like this will be a conflict of interest on its face, this is how the futures industry works. The argument for having the CME Group act as the SRO to MFG is that as the central exchange, it was in the best position to regulate MFG. The futures industry is an altogether different beast from the securities industry and the CME Group, because of its understanding of the relationships between the firms, was in the best position to oversee MF Global and make sure the firm was complying with all of the requirements of the Commodities Exchange Act. The CME Group is now being investigated – what did it know about MFG’s shortfall and when?

It is easy to paint MFG as simply the bad actor by hiding transactions from the CME Group. But we will learn more as the investigation moves on and if we find that the CME Group was deficient in its oversight of MFG, the SRO model (especially in instances where there is potential conflicts of interest) will need to be reexamined. If it is discovered that there were deficiencies with the SRO oversight of MFG, this will likely create liabilities for the CME Group and may change which SROs can oversee which organizations.

No Insurance for Futures Accounts

The second issue which the MFG bankruptcy highlighted is that there is no insurance for managed futures accounts. In the segregated account structure, the margin required for each futures contract is supposed to be kept in the customer’s name. With respect to the MFG bankruptcy, the $1.2 billion in missing customer assets meant that when customer accounts were transferred from MFG to the various other FCMs only a certain percentage of the margin was transferred to the new FCM, initiating additional margin calls at the new FCM. Many investors were not able to meet the additional margin calls at the new FCM and thus their positions were liquidated. Forced liquidations left a number of investors either unhedged or worse. Small farmers that held accounts at MFG for hedging their crops were especially hard hit.

On the securities side there is the Securities Investor Protection Corporation (SIPC) which provides insurance coverage of up to $500,000 of securities and up to $250,000 in cash in the event that a broker-dealer fails. During the Lehman bankruptcy and Madoff fraud investigation, the SIPC was available to assuage the fears of smaller investors by acting as a backstop to potential losses. Indeed, the SIPC was formed for events just like Lehman. There is no similar insurance program for the margin held in segregated accounts at FCMs.

There have been calls for creating an insurance-like mechanism for futures accounts. The benefits are clear – a guarantee of customer accounts will protect the smaller investors like the farmers and other smaller hedgers. However, there are cost issues to consider and the creation of an SIPC-like mechanism for the managed futures industry needs to be initiated at the Congressional level. The managed futures industry will likely push back any such proposal because of the significant costs involved with implementing such a structure. Timing may also be an issue – the CFTC faces a funding shortfall in addition to Dodd-Frank mandates and other proposed rulemaking functions.

CFTC Funding Issues Present Big Problems for Industry

The CFTC lacks proper funding to adequately protect investors and maintain the integrity of the managed futures industry. The Congressional appropriations process is obviously a political game at which both the SEC and CFTC have failed. The two federal agencies charged with maintaining the integrity of the investment universe are woefully underfunded given their mandates. It is this underfunding that is perhaps the biggest issue for the integrity of the managed futures industry which is why the CFTC needs more money from Congress. More money also helps the CFTC to properly implement parts of the Dodd-Frank Act as well as other adopted and/or proposed regulations.

Dodd-Frank & Swaps Clearing

One of the central pieces of the Dodd-Frank Act is the requirement that swaps be traded and cleared on exchanges. The multi-trillion dollar industry has been unregulated – making counterparties liable to one another and subject to counterparty risk. The intermediation of a clearing house not only creates logistical issues (who, how, when, at what price) but also requires complex, detailed regulations. The CFTC, in conjunction with the SEC with respect to certain matters, was tasked with creating these regulations from scratch. This will be the largest undertaking for the CFTC in 2012 and will likely consume more resources than the MFG investigation.

Other Regulatory Proposals

In addition to the swaps regulations, there are a number of other important regulatory proposals which, if implemented, drastically changes how the managed futures industry operates.

Repeal of Regulation 4.5

CFTC Regulation 4.5 essentially exempts certain mutual funds that invest in managed futures from the commodity pool operator (CPO) registration provisions. This means that mutual funds that are essentially publicly traded commodity pools are only regulated by the SEC, who has no experience dealing with the ultimate underlying investments.

In January of 2011 the CFTC proposed repealing Regulation 4.5. If this proposal is adopted as written, managers to managed futures mutual funds need to register as CPOs with CFTC (and become members of the NFA, subject to NFA oversight). This requirement increases the cost burden for these mutual funds and subjects them to great regulatory oversight.

Repeal of Regulation 4.13(a)(4) and 4.13(a)(3)

Regulation 4.13(a)(4) provides an exemption from CPO registration to those managers who provide advice to a fund (commodity pool) which only has investors who are qualified eligible persons (QEPs). In general, QEPs are investors who meet a higher net worth requirement than accredited investors.

The CFTC also proposed the repeal of Regulation 4.13(a)(3) which provides a “de minimis” exemption from CPO registration to those commodity pool (i.e. hedge fund) managers who only trade a small amount of futures in addition to securities. If 4.13(a)(3) was repealed, all fund managers who trade any amount of futures will be required to become registered as a CPO. It seems that right now this proposal will likely fail, leaving hedge fund managers with the possibility of escaping CPO registration.

Proposed with the Regulation 4.5 repeal, the Regulation 4.13(a)(4) and (a)(3) repeal requires a large number of managers who are not currently registered with the CFTC to register and become NFA members. Again, this will increase the number of firms subject to NFA (and ultimately CFTC) oversight.

Position Limits

Dodd-Frank Act mandated for the CFTC to impose position limits across different markets, including traditional futures markets, option on futures or commodities traded on a regulated exchange, and trading in swaps. These position limits will not apply to bona fide hedging transactions and counterparties to a bona fide hedge may also be eligible for an exemption. In general, position limits set at 25% of estimated physical deliverable supply for spot-month positions and, with respect to non spot-months, at 10% of open interest (based on futures open interest, cleared swap open interest, and uncleared swaps open interest) in the first 25,000 contracts and 2.5% above that level. There will also be additional reporting requirements for traders exceeding a non-spot-month position visibility level in energy and metal contracts. The industry is vehemently fighting this proposal.

Other Proposals

in addition to these proposals, the CFTC has other standard enforcement and regulatory issues that have become focus areas. These include high frequency trading and co-location.

It seems clear that given the Dodd-Frank Act’s inclination toward more oversight and regulation of the investment management industry, as well as the recent regulatory fumbles involving MFG, some of these proposals are likely to be adopted. Therefore, managers are going to be required to register as CPOs and the NFA will be the watchdog. But, the NFA, like the CFTC, is a resource limited organization and the ability to effectively monitor member firms will depend on the NFA’s ability to scale to meet the regulatory requirements.


Over the next several months and potentially years the MFG bankruptcy will be sorted out, and hopefully investors will be made whole. During the process of rebuilding the industry to handle the managed futures markets in a time of significant growth in trading and technology, the focus should be on doing whatever is necessary to bring confidence back into the managed futures markets. This will include examining the role of the SRO industry moving forward, examining an insurance SIPC-like program for futures customers and providing more resources for the CFTC. Moving forward it will be Congress who will need to show leadership and provide the CFTC with the funding it will need and the appropriate legislative tools to make sure the industry becomes safer. Hopefully, that will be the good which arises from the unfortunate events that led to the MFG bankruptcy.


Bart Mallon is a Partner at Cole-Frieman & Mallon LLP where his practice focuses on the investment management industry, specifically working with hedge fund managers and groups in the managed futures industry. Mr. Mallon also founded and runs the widely-read Hedge Fund Law Blog.

CFTC May Consider Vote on CPO Registration for Mutual Fund Managers

Three days ago, reports came out that the CFTC could be putting to a private vote the requirement that managed futures mutual funds be subject to marketing and registration rules when they use derivatives tied to commodities, which include commodity futures, options and swaps.  According to individuals who spoke on anonymity, the proposed regulation has been circulated for a vote by the CFTC’s five commissioners.  The commissioners could end up voting on the proposed regulation or deciding to hold a public vote.  If the proposal passes as adopted, managers to managed futures mutual funds would be required to register as commodity pool operators (CPOs) with the CFTC.

Background on CFTC Rule 4.5

As previously discussed in an earlier article on CFTC Rule 4.5, the issue of requiring mutual funds to register with the CFTC has been on the Commission’s radar for a long time.  In part because of pressure from the NFA, the CFTC proposed changes to Rule 4.5 in February of 2011 which would require CPO registration for most managers to managed futures mutual funds. While the current rule exempts managers from the registration requirements, prior to 2003 mutual fund managers were required to register as CPOs unless they:

  1. restricted their commodities and futures marketing activity,
  2. limited commodity futures or options activity to bona fide hedging transactions, and
  3. limited the aggregate futures margins and/or options premiums for non-hedging positions to 5% of the liquidating value of the entity’s portfolio (after taking into account unrealized profits and losses).

When the CFTC amended Rule 4.5 in 2003, it eliminated the trading and marketing restrictions and as a result managed futures mutual funds currently market participation in their funds as managed futures funds and have more than 5% direct exposure to managed futures for speculative purposes.  The February proposal seeks to reinstate the pre-2003 language in Rule 4.5.

Wholly-Owned Subsidiaries

It is important to note that the 5% limit in the proposed Rule 4.5 would apply to the entity filing for the Rule 4.5 exemption, not subsidiaries. Managed futures mutual funds are currently structured so that the managed futures investments are made through wholly-owned subsidiaries.  Wholly-owned subsidiaries would not qualify for the 4.5 exemption unless each subsidiary independently met all the requirements set forth in the proposed amendment. Therefore, mutual funds (i) with an investment objective to provide exposure to physical commodities as an asset class and (ii) that do so by investing in commodity futures, options, and swaps via wholly-owned subsidiaries, must make sure that those subsidiaries qualify for Rule 4.5 as well.


If the CFTC approves the proposed regulation, it would subject many mutual funds to CFTC registration and oversight by the NFA.


Cole-Frieman & Mallon LLP provides advice to managers in the managed futures industry.  The firm also has a robust alternative mutual fund practice led by Aisha Hunt.  Bart Mallon can be reached directly at 415-868-5345.  Aisha Hunt can be reached directly at 415-762-2854.


NIBA Petitions For Release of Segregated Funds to MF Global Customers

The National Introducing Brokers Association (NIBA) has started a petition asking the judge in the MF Global bankruptcy proceeding to release customer segregated funds.  Below we have provided the full text of the petition which members of the community can sign by going here.  It is unclear how this would work in conjunction with the CME’s promise to guarantee up to $300M of the missing $650M or so (for more information on this, please see the CME release).

Below the reprint of the petition, we have also posted a recent statement by the FIA on MF Global.


Release remaining cash balances of former MF Global customers

Greetings NIBA members and supporters,

We urge you to sign the following petition in order for the bankruptcy court to have a chance to hear from you – the broker, the trading advisor, the IB – directly. Some of you have the resources to pursue your interests individually, that’s great. But, the court needs to hear from all of you. Our voice is much stronger if we are unified; acting collectively, we can make a difference. This is one of the reasons you belong to and support the NIBA. We are standing up for the rights of all our members. Please sign regardless of whether you cleared with MFG.


Honorable Martin Glenn
U.S. Bankruptcy Court, Courtroom 501
One Bowling Green
New York City, NY 10004

The National Introducing Brokers Association (NIBA) submits this Petition urging you to exercise your authority and immediately, to the extent it does not hinder the bankruptcy process, permit the release of the remaining cash balances of liquidating and transferred customers of MF Global, and of customers who were included in the bulk transfer process. To the extent there are sufficient “segregated” funds available, they are the assets of the customers. Further, those funds are absolutely vital for the marketplace to function fully. The result of withholding these funds is affecting the ability of customers to maintain and trade their positions, and will impact liquidity and trading volume – absolutely necessary for an efficient market.

The NIBA is a 20-year old non-profit association of registered Introducing Brokers, Commodity Trading Advisors and Associated Persons who transact business for customers in the retail sector of the futures industry, as well as in managed futures. Our membership includes professionals associated with MF Global, as well as IBs, CTAs and APs at the receiving futures commission merchants. Our customers include individuals and entities as diverse as farmers, pension funds and users of energy and metals.

Customers and futures professional alike are suffering under the current scheme. We urge you to heed Petition and release these funds. We want to get back to work.

Respectfully, The National Introducing Brokers Association




[Your name]


FIA Issues Statement Regarding MF Global

WASHINGTON, D.C. ―Nov. 9, 2011― The Futures Industry Association issued the following statement in response to the events involving the bankruptcy of MF Global.

The Futures Industry Association (FIA) is deeply troubled by the failure of MF Global (MFG) and the financial distress that the apparent shortfall in customer segregated funds has caused our members’ customers and the markets generally. Segregation of customer funds is the cornerstone that assures the financial integrity of our markets and any violation of these segregation requirements cannot be tolerated.

Since the appointment of a Trustee for MFG on October 31, FIA member firms have been working closely with all affected stakeholders, including the CME Group, ICE Clear US, ICE Clear Europe and other relevant derivatives clearing organizations, to effect the prompt and orderly transfer of customer positions to other futures commission merchants (FCMs).

FIA supports a full review of the circumstances that led to the failure of MFG and, in particular, the apparent shortfall in customer segregated funds. FIA recognizes that this apparent shortfall will delay the date by which customers will receive all of the funds that were on deposit with MFG. Futures customers cannot afford to have the funds they had deposited to support their positions held up while the claims process runs its course. FIA strongly encourages the Trustee, with the assistance of the Commodity Futures Trading Commission and the clearing organizations, to complete an interim accounting and facilitate the prompt return of all customer funds.

The FIA is the primary industry association for centrally cleared futures and swaps. Its membership includes the world’s largest derivatives clearing firms as well as derivatives exchanges from more than 20 countries. For more information, please contact Joanne Morrison ([email protected]) at 202.466.5460 or visit our website at


Cole-Frieman & Mallon LLP provides legal services to the managed futures community.  Please contact us if you have questions or call Bart Mallon directly at 415-868-5345.

Reminder to CPOs re: Quarterly Rule 2-46 Filing

Quarterly CPO Filing Due by November 14

For those commodity pool operators who are registered with the NFA, there is a quarterly reporting requirement under Rule 2-46.  This filing must be submitted to the NFA by November 14 through the NFA’s EasyFile system.  Today the NFA sent the following reminder email to those managers who have not yet completed this filing.  If you have questions on the filing, please feel free to contact us.


November 7, 2011

Reminder to CPOs regarding upcoming due date for quarterly pool report

This is a reminder that the September 30th quarterly pool report required by NFA Compliance Rule 2-46 is due to NFA on November 14, 2011. You are receiving this message because NFA’s records indicate that you have not yet completed the filing requirement for one or more of your pools. Please note that each Member CPO is required to file a quarterly report for each active pool that it operates as long as the pool has a reporting requirement under CFTC Regulation 4.22.

The report itself covers the three-month calendar quarter ending September 30, 2011 and it must be filed electronically through NFA’s EasyFile System. You can view a list of your pools and the applicable report due dates by logging onto EasyFile using this link: PLEASE NOTE THAT IF YOU HAVE A QUALIFYING POOL THAT DID NOT OPERATE BEFORE OR DURING THE QUARTER ENDING SEPTEMBER 30, 2011, YOU MUST STILL ACCESS THE EASYFILE SYSTEM AND DELETE THE POOL’S QUARTERLY STATEMENT CALL USING THE DELETE ICON ON THE MAIN POOL INDEX LISTING.

Please ensure that the September quarterly reports are filed by the due date. Failure to file this report, and/or previous quarterly reports timely, is an apparent violation of NFA Rules, that could subject your firm to disciplinary action. Questions concerning the reporting requirements should be directed to NFA’s Information Center at 312-781-1410 or 800-621-3570.***


Cole-Frieman & Mallon LLP is a boutique law firm focused on the investment management industry.  The firm provides legal advice to CPOs and CTAs.  Bart Mallon can be reached directly at 415-868-5345.

Announcing Alternative Mutual Funds Practice


Cole-Frieman & Mallon LLP is pleased to announce the addition of an alternative mutual funds practice led by new partner Aisha Hunt.  Below is our press release announcing Aisha’s affiliation as well as the new practice area.  We all look forward to continuing to provide top-tier legal services to the investment management industry.

– Karl Cole-Frieman & Bart Mallon



Aisha Hunt, former in-house counsel at Wells Fargo and Dodge & Cox joins as Partner to run the practice

SAN FRANCISCO, CA – November 1, 2011 – Cole-Frieman & Mallon LLP, a leading boutique investment management law firm, is proud to announce the addition of Aisha Hunt as a Partner to head the firm’s growing Alternative Mutual Fund Practice in San Francisco. Ms. Hunt has represented some of the most prominent investment managers and mutual fund families in the United States, including the Wells Fargo Advantage Funds and the Dodge & Cox Funds.

By bringing on Ms. Hunt, the firm now offers clients a broader suite of investment management legal services, including a ’40 Act practice focused on alternative mutual funds. She has extensive legal experience counseling emerging and established investment managers to separate accounts, hedge funds, UCITS funds and mutual funds. Ms. Hunt holds a B.S. in Business Administration from U.C. Berkeley’s Haas School of Business and a J.D. from Stanford Law School.

“We are very excited that Aisha has joined the firm to launch our new Alternative Mutual Fund Practice,” said Karl Cole-Frieman. “Our clients will greatly benefit from her wide-ranging mutual fund knowledge, as well as her experience advising hedge fund managers.”

“Few law firms with hedge fund practices have the necessary ’40 Act expertise to advise on the unique regulatory and structural requirements of alternative mutual funds,” said Darren Day, Managing Director at Concept Capital Markets, LLC, a prime brokerage firm which services alternative mutual funds. “With the addition of a ’40 Act practice, Cole-Frieman & Mallon LLP is well positioned to help investment managers meet the growing demand for alternative mutual funds.”

Cole-Frieman & Mallon Partner, Bart Mallon, added “Launching an alternative mutual fund is complex and requires highly specialized legal counsel to help navigate the regulatory landscape. Our Alternative Mutual Fund Practice is specifically tailored to help investment managers meet the growing demand and opportunities for these new products.”

“One of the best things about Aisha is that she understands investment managers must contain costs yet receive a premier value-added service. It is impressive that she can help managers analyze the cost-benefit ratio to raising assets on an alternative mutual fund platform,” said Nancy Kazdan, Managing Partner at Market Share International.

About Cole-Frieman & Mallon LLP

Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP has an international practice that services both start-up investment managers, as well as multi-billion dollar firms. The firm provides a full suite of legal services to the investment management community, including: hedge fund, private equity fund, venture capital fund, mutual fund and UCITS fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog (, which focuses on legal issues that impact the hedge fund community. For more information please visit us at:


Cole-Frieman & Mallon provides legal services to the investment management community and has an alternative mutual funds practice.

Bart Mallon can be reached at 415-868-5345.

Kartl Cole-Frieman can be reached at 415-762-2841.

Aisha Hunt can be reached at 415-762-2854.

Enhanced Supervisory Requirements for NFA Member Firms

NFA Interpretive Notice 9021

CPOs and CTAs generally must be members of the National Futures Association (“NFA”) and all NFA Member firms have certain compliance obligations.  An important compliance obligation of any firm is to know whether it will be subject to enhanced supervisory requirements.  In general, if a certain percentage of a firm’s APs or Principals has worked at other firms which have been disciplined in the past, then the NFA may require that the firm adopt enhanced supervisory requirements (“ESRs”).  In addition to having a robust NFA compliance program, firms should actively monitor the employment history of any new hire to make sure that either ESRs are not required or, if required, that appropriate compliance procedures have been implemented.


Authority Under NFA Rule 2-9 & Adopting Supervisory Procedures

NFA Rule 2-9 prohibits deceptive sales practices and authorizes the NFA's Board of Directors to require Member firms which meet certain criteria established by the Board, to adopt specific supervisory procedures to prevent abusive sales practices.  [Note: for more on NFA Rule 2-9, please see NFA Social Media Compliance.]

The Board believes that the employment history of the firm’s APs and Principals is relevant to identifying firms that may have problematic sales practices and, accordingly, have instituted more strict supervisory procedures to ensure that APs and Principals that may have received improper training in the past (from their employment with disciplined firms, discussed below), do not commit the same problematic sales practices at their new firm.

In addition, the Board believes that Member firms that charge commissions or fees above the industry norm also should be required to adopt more strict supervisory procedures.

Interpretive Notice 9021

Pursuant to NFA Compliance Rule 2-9(b), the Board issued Interpretive Notice 9021 which sets forth the criteria used to determine whether a Member firm must adopt ESRs.  In general, a firm must adopt ESRs if:
  • its APs and Principals were previously employed with a “Disciplined Firm,” or
  • its Principals are affiliated with other firms that must adopt ESRs, or
  • it charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract, or
  • it becomes subject to NFA or CFTC enforcement or disciplinary proceedings.

The NFA defines a “Disciplined Firm” as one that has been sanctioned by the NFA or the CFTC during the last 5 years or permanently barred by the NFA or the CFTC based on a formal charge of sales practice or promotional material violations.  The definition also includes a firm that has been sanctioned for sales practices involving the offer, purchase or sale of security futures products.  The NFA maintains a list of Disciplined Firms that can be found through the Report Center on the NFA’s Online Registration System (ORS).  A firm’s disciplinary history can also be found on BASIC.

Requirements for Adopting ESRs

Effective January 3, 2011, NFA Member firms that meet the following criteria are required to adopt ESRs.

Obligations based on employment histories of APs and Principals.  A firm will need to adopt ESRs if:
  • it has less than 5 APs and 2 or more APs have been employed by one or more current Disciplined Firms;
  • it has between 5 and 10 APs and 40% or more of the APs have been employed by one or more current Disciplined Firms;
  • it has between 10 and 20 APs and 4 or more of the APs have been employed by one or more current Disciplined Firms; or
  • it has at least 20 APs and 20% or more of the APs have been employed by one or more current Disciplined Firms.
Obligations based on affiliation of Principals.  A firm will generally need to adopt ESRs or obtain a waiver (discussed [here]) if any of its Principals are also Principals of any other firm that is required to adopt ESRs However, the Board has identified and carved out certain situations in which a Member firm will not be required to adopt ESRs based on specific Principal's affiliations, including:
  • the Principal has not personally been subject to a disciplinary action by the NFA or the CFTC;
  • the Principal has been a Principal of only one other firm that is required to adopt ESRs;
  • the Principal has never been a Principal or an AP of a current Disciplined Firm;
  • the Principal is affiliated with only one other firm that has been required to adopt ESRs and that firm has received a full waiver from the ESRs or abided by the ESRs for at least 2 years and is no longer required to have them; and
  • the Principal is affiliated with only one other firm has been required to adopt ESRs and that firm has not become subject to a sales practice or promotional material based disciplinary action by the NFA or the CFTC since it was required to adopt the ESRs.

Obligation based on assessing commissions, fees and other charges well above the industry norm.  A firm will need to adopt ESRs if it charges 50% or more of its active customers round-turn commissions, fees and other charges that total $100 or more per futures, forex or option contract.

Obligation based on the initiation of disciplinary action.  A firm will need to adopt ESRs if:

  • the firm has fulfilled previously required ESRs (or received a full or partial waiver from the ESRs) and becomes subject to a subsequent NFA or CFTC enforcement or disciplinary proceeding alleging deceptive sales practices.  The firm must adopt all of the ESRs until after the proceeding is closed and all appeals (if any) are completed and the firm may not seek a waiver.
  • the firm, which is required to adopt ESRs, becomes subject to an NFA or CFTC enforcement or disciplinary proceeding.  The adopted ESRs will remain in effect.

Enhanced Supervisory Requirements

Firms that are subject to ESRs because they fall into one of the categories above, must adopt additional requirements in order to comply with their supervisory duties.  Such additional requirements can include:

  • tape-recording sales solicitations,
  • increased capital requirements,
  • filing all promotional material with the NFA, and
  • filing reports with the NFA.

It is also important to note that once a firm meets these criteria, changing the composition of the firm’s personnel (e.g. terminating an AP who was previously employed with a disciplined firm) will not remove the requirement to adopt ESRs.


It is important that firms review their compliance programs to make sure they have adequately addressed this issue.  The issue will also need to be reviewed, on at least an annual basis, through the NFA Self-Exam Checklist (for 2010).  In the event that a firm is subject to an NFA audit, the firm will need to show it has complied with the ESRs or that it is not subject to ESRs.


Cole-Frieman & Mallon LLP provide NFA registration and compliance support to CTAs, CPOs, IBs (guaranteed & introducing) and FCMs.  Cole-Frieman & Mallon LLP is also able to help firms draft and implement enhanced supervisory procedures.  Please contact Bart Mallon directly at 415-868-5345.


CFTC Form 40 – Statement of Reporting Trader

Managers Must File CFTC Form 40 for Reportable Futures Positions

Managers who maintain large positions in certain futures instruments will need to be aware of the speculative position limits with respect to the instruments.  In the event a position reaches a certain level, the CFTC will request more information about the position from the manager.  For managers which are registered with the NFA as either a commodity pool operator (CPO) or commodity trading adviser (CTA), the CFTC may send a request for the manager to complete and file a Form 40 – Statement of Reporting Trader.  This request is also referred to as a “Special Call” and CFTC regulations require every trader that holds or controls a reportable futures and option position to file Form 40 when they receive the CFTC request. CFTC Form 40 allows the CFTC to compile information to assess whether a trader’s activities could potentially impact the market and whether traders are complying with speculative position limits.

This post provides a brief description of Form 40, the reasons a CPO/CTA may receive a Special Call, as well as how to appropriately respond to the request.

Definitional Aspects of Form 40

Form 40 needs to be completed by the trader of the reportable position.  A trader is “a person who, for his own account or for an account which he controls, makes transactions in commodity futures or options, or has such transactions made.” For most commodity pools, the trader would be the manager of the fund—the CPO.

In the event there is a reportable postion, the CFTC will issue a Special Call based on information provided by futures commission merchants, clearing members and foreign brokers (collectively, “reporting firms”). If, at the daily market close, a reporting firm has a customer with a position at or above the reportable position level in any single futures or option expiration month (a “special account”), the reporting firm must send a report to the CFTC with that customer’s entire position in all futures and options expiration months in that commodity. A “special account” is any commodity futures or option account in which there is a reportable position.

A reportable position that may trigger the Special Call is defined as:

“any open contract position that at the close of the market on any business day equals or exceeds the quantity specified in CFTC Regulation 15.03 in either:

  • Any one future of any commodity on any one reporting market, excluding future contracts against which notices of delivery have been stopped by a trader or issued by the clearing organization of a reporting market; or
  • Long or short put or call options that exercise into the same future of any commodity, or long or short put or call options for options on physicals that have identical expirations and exercise into the same physical, on any one reporting market.”

Reporting Levels for Form 40

Reporting levels vary and can range from 25 contracts for smaller markets to 125,000 contracts for the largest market – for a full description of the reporting requirements, please see the full text of CFTC Regulation 15.03. Reporting thresholds cover the following categories:

  • Agricultural;
  • Broad-based security indexes;
  • Financial;
  • Hedge Street products;
  • Natural resources;
  • Security futures products;
  • TRAKRS; and
  • All other commodities.

Once a reporting threshold is crossed, the fund’s FCM will submit a form to the CFTC which may then prompt a Special Call to the CPO/CTA.

Receiving the Special Call and How to Respond 

When a CPO receives the Special Call, it must complete the Form 40 by the date specified in the letter. Form 40 is comprised of three parts.

Part A requests the following information:

  • Name and address of the CPO;
  • Principal business and occupation of the CPO;
  • Type of entity;
  • Whether the CPO is registered under the Commodity Exchange Act;
  • Whether the CPO controls the futures or option trading for any other person;
  • Whether any other person controls the CPO;
  • Names and locations of all firms at which futures or option trading accounts are carried;
  • Whether any other persons guarantee the futures or option trading accounts of the CPO or have a financial interest of 10% or more in the CPO or the futures or option accounts of the CPO;
  • Whether the CPO guarantee or has a financial interest of 10% or more in futures or option accounts not in the CPO’s name or has a financial interest of 10% or more in another futures or option trader; and
  • Whether the CPO represents a foreign government.

Part B must be completed if the CPO is an individual, joint tenant, or partnership.

Part C must be completed if the CPO is corporation, association, trust, or “other” type of trader. These sections request information that allows the CFTC to aggregate related accounts controlled or held by the CPO. They also request information about whether the CPO is engaged in activities hedged by the use of futures or option markets.

Schedule A requests information about the types of futures/options in which the CPO hedges or covers risk exposure, the CPO’s merchandising or marketing activities, all futures/option markets used, and all cash commodities hedged or risk exposure covered.


If you receive a Special Call from the CFTC, it is important that you respond by the date listed on the letter. The information provided should be for the person or entity that makes transactions in commodity futures or options. For funds, the CPO should complete Form 40 as the trader. A link to the form can be found here (

For more information, please see the CFTC’s discussion on market surveillance and large trader reporting.


Cole-Frieman & Mallon LLP provide legal advice to CPOs, CTAs and traders in the managed futures space.  Bart Mallon can be reached directly at 415-868-5345.