Category Archives: NFA

Recent Issues with NFA Annual Questionnaire

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

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

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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.

Retail FOREX Registration Regulations Proposed

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Forex Managers Required to be Registered Under New Regulations

The much anticipated off-exchange retail foreign currency regulations were proposed today by the CFTC. The release announcing the publication in the Federal Register is reprinted below and can be found here. We will be providing an overview of the major provisions shortly.

The full proposed rules are posted here: Proposed Retail Forex Registration Rules

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Release: 5772-10

For Release: January 13, 2010

CFTC Seeks Public Comment on Proposed Regulations Regarding Retail FOREX Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the publication in the Federal Register of proposed regulations concerning off-exchange retail foreign currency transactions. The proposed rules follow the passage of the Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1651, 2189-2204 (2008), also known as the “Farm Bill,” which amended the Commodity Exchange Act in several significant ways. In particular, the Farm Bill:

clarified the scope of the CFTC’s anti-fraud authority with respect to retail off-exchange foreign currency transactions;
provided the CFTC with the authority to register entities wishing to serve as counterparties to retail forex transactions as well as those who solicit orders, exercise discretionary trading authority and operate pools with respect to retail off-exchange foreign currency transactions; and
mandated minimum capital requirements for entities serving as counterparties to such transactions.

“These proposed rules for retail foreign exchange trading are important steps in implementing the additional consumer protections authorized in the 2008 Farm Bill,” CFTC Chairman Gary Gensler said. “The Commission looks forward to receiving and considering the public’s comments on this important issue.”

Pursuant to this authority, the Commission is proposing a comprehensive scheme that would put in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital, and other operational standards. Specifically, the proposed regulations would require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant created by the Farm Bill. Persons who solicit orders, exercise discretionary trading authority and operate pools with respect to retail forex would also be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators, or as associated persons of such entities. As was the case prior to the passage of the Farm Bill, “otherwise regulated” entities such as financial institutions and SEC-registered brokers or dealers remain able to serve as counterparties in such transactions under the oversight of their primary regulators.

The proposed regulations also include financial requirements designed to ensure the financial integrity of firms engaging in retail forex transactions and robust customer protections. For example, FCMs and RFEDs would be required to maintain net capital of $20 million plus 5% of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts would be subject to a 10-to-1 limitation. All retail forex counterparties and intermediaries would be required to distribute forex-specific risk disclosure statements to customers, and comply with comprehensive recordkeeping and reporting requirements.

Comments regarding the proposed regulations may be submitted by any of the means listed in the Federal Register release and should be received by the Commission within 60 days of the date of publication.

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Other related FOREX law articles include:

Bart Mallon, Esq. of runs the Hedge Fund Law Blog and provides forex registration service through Cole-Frieman & Mallon LLP. Mr. Mallon also runs the Forex Law Blog. He can be reached directly at 415-868-5345.

NFA Provides Social Networking Compliance Guidance

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Member Firms Subject to Increased Oversight & Compliance Responsibilities

In early December the National Futures Association (“NFA”) submitted two proposed amendments proposed amendments to the Commodity Futures Trading Commission (“CFTC”) regarding NFA Member Firms and their use of the internet and social media networks. The amendments focus on communications by firms over the internet in various capacities including blogs, chat rooms, forums, and various social media websites (i.e. Facebook, Twitter, etc). While these amendments will increase the oversight responsibilities for Member Firms, it makes sense for the NFA to alert members to their responsibilities with regard to these growing forms of communication. This post describes the two amendments, application to forex managers, the NFA social media podcast and the impact these amendments are likely to have on all NFA Member firms. The NFA’s Notice to Members on this issue is also reprinted at the end of this post.

Overview of Amendments

Amendment to Rule 2-29

Rule 2-29 was broadened by the following changes (underline and strikethrough):

(h) Radio and Television Advertisements.

No Member shall use or directly benefit from any radio or television advertisement or any other audio or video advertisement distributed through media accessible by the public if the advertisement that makes any specific trading recommendation or refers to or describes the extent of any profit obtained in the past that can be achieved in the future unless the Member submits the advertisement to NFA’s Promotional Material Review Team for its review and approval at least 10 days prior to first use or such shorter period as NFA may allow in particular circumstances.

By broadening the rule the NFA effectively is requiring Member Firms to make sure all audio and video internet advertising (i.e. podcasts, youtube, voiceover presentations, etc) be reviewed prior to use. Effectively groups who have used these channels to market their services will need to (i) have all such media reviewed by the NFA or (ii) take all media off of the internet.

Interpretive Notice: Internet Communication & Social Media

This interpretive notice is not so much an amendment of an existing Interpretive Notice as it is simply the creation of a new notice. The full Interpretive Notice can be found in the proposed amendments link above, but I have also reprinted some of the more interesting parts of the notice:

The form of communication does not change the obligations of Members and Associates who host or participate in these groups, and electronic communications must comply with Compliance Rules 2-9, 2-29, 2-36, and 2-39.

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Therefore, content generated by the Member or Associate is subject to the requirements of NFA Compliance Rules 2-29, 2-36, or 2-39. The same is true for futures, options, or forex content written by a Member or Associate and posted on a third party’s site.

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Members should have policies regarding employee conduct. These policies could require employees to notify the employer if they participate in any on-line trading or financial communities and provide screen names so that the employer can monitor employees’ posts periodically. Alternatively, the policy could simply prohibit participation in such communities. The Member must, of course, take reasonable steps to enforce whatever policies it adopts.

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The issue becomes more complicated for user-generated comments responding to a Member or Associate’s blog and for Members and Associates who host chat rooms or forums. What is their responsibility for posts from customers or others over whom the Member or Associate has no direct control? When inadequately monitored, social networking sites may contain misleading information, lure customers into trades that they would not normally make, or be used in an attempt to manipulate prices.

The biggest take-away is that the NFA is expecting NFA Members to integrate a social media awareness into their current compliance program. Accordingly, compliance programs (especially those parts dealing with Compliance Rules 2-9, 2-29, 2-36, and 2-39) will need to be updated appropriately to reflect the requirements of the Interpretive Notice. Member Firms will also need to vigillantly follow their new/revised compliance procedures and monitor their employees – it will be very easy for the NFA to do simple internet searches and potentially “catch” firms who do not adequately comply the Interpretive Release.

Issues for Forex Managers

Forex is specifically discussed throughout the Interpretive Notice so it is clear that the NFA’s intent is to make sure that forex communications, especially, are subject to monitoring and oversight. Currently this rule applies to those firms who are NFA Member Firms (currently registered) and, in the future, after the forex registration rules have been adopted, it will apply to all registered forex firms (CTAs, CPOs, IBs and FDMs/FCMs). The NFA has made it clear before that forex managers/traders are in the NFA’s regulatory cross-hairs and this Interpretive Notice reinforces that impression.

NFA Podcast on Social Media

The NFA has produced a podcast titled “Use and Supervision of Online Social Networking Communication” and can be found with other NFA produced podcasts. This podcast is helpful to provide Member Firms with some helpful guidance on some of the major issues to consider when developing a social media policy to comply with the Interpretive Notice and Rule amendment. There are a number of considerations that firms will need to make and the social media policy must be tailored to the business practices of the firm. There are likely to be a number of hot button issues which will develop regarding Member Firms and this policy, especially concerning oversight of associated persons. The podcast also hints at one of the big compliance issues which managers should be aware of – the reposting of content. Because internet posts are routinely “scraped” from the original website and reposted on other websites, Member Firms should be aware of this issue and create appropriate procedures.

It is recommended that compliance officers listen to this podcast when developing their social media compliance policies and procedures.

Impact on NFA Members

I view these amendments as relatively major – because so many firms use the internet for marketing and because prior NFA rules essentially did not address the issues of social networks there has been a bit of a regulatory gap. However, I do think that the NFA is doing the right thing by publicly notifying Member Firms that this will be a compliance issue going forward – this is much better than a retroactive interpretation of existing NFA compliance rules. One thing I think that member firms should be especially concerned with is potential liability for what 3rd parties do with information which is posted online. On the podcast, the NFA specifically suggested that firms should be policing their content and actively follow how it might be used by 3rd parties which is obviously problematic given the way the internet works.

Because these amendments affect both a current NFA Rule as well as the NFA’s Interpretive Releases, these amendments may make their way (eventually) onto the various exams (Series 3, Series 30, Series 34 especially).

These rules are also likely to create a compliance nightmare for many firms which have utilized the internet previously (and social media specifically).

Compliance Recommendations

The safest approach to social media compliance for all NFA Member Firms is to not allow the use any social media websites or other means of internet communication which would subject the firm to have a robust social media policy (including record retention policy for such media). It will be much less costly to put a blanket prohibition on these types of activities than to develop and monitor such a policy. For those firms who are willing to spend the time and money to implement a policy, such firms should make sure that all major aspects of the amendments are included in the policy. Such items to consider will include: internet and social media content review, recordkeeping and storage, oversight of employees (including spot-checking internet posts and activity), and reposting review procedures, among other issues to consider. It will be absolutely critical to make sure the policy addresses all issues raised in the Interpretive Notice and podcast because the NFA has not minced words – this is going to be a hot-button issue and it will be something the NFA will actively pursue during examinations.

Of course we will be able to provide greater guidance over the next few months as we see how the NFA handles this issue during and outside of examinations.

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Notice to Members I-10-01

January 5, 2010

Effective Dates of NFA Requirements Regarding On-Line Advertising and Social Networking Groups

NFA has received notice from the Commodity Futures Trading Commission (“CFTC”) that NFA may make effective certain proposed amendments regarding the use of internet and on-line social networking groups when communicating with the public. The Interpretive Notice entitled “Use of On-Line Social Networking Groups to Communicate with the Public” makes clear that on-line communications are subject to the same standards as other types of communications with the public and provides guidance to Members to meet their responsibilities in this area. The Interpretive Notice became effective on December 24, 2009.

A related amendment to Compliance Rule 2-29(h) requires that any audio or video distributed through media accessible by the public (e.g., through the internet) that makes any specific trading recommendation or refers to the extent of profit previously obtained or achievable in the future must be submitted to NFA for review and approval at least 10 days prior to first use. In this way the amendment subjects certain on-line advertising to the same requirements as similar television and radio advertising. To allow Members sufficient time to submit these types of advertisements to NFA for approval, the amendment becomes effective as of February 1, 2010. Accordingly, any audio or video advertisements that a Member posts on-line after January 31, 2010, must have been previously reviewed and approved by NFA.

NFA’s December 8, 2009, submission letter to the CFTC contains a more detailed explanation of the changes. You can access an electronic copy of the submission letter at: http://www.nfa.futures.org/news/PDF/CFTC/CR2-29_IntNotc_re_OnLine_Social_Networking_120209.pdf.

Questions concerning these changes should be directed to Sharon Pendleton, Director, Compliance ([email protected] or 312-781-1401) or Michael A. Piracci, Senior Attorney ([email protected] or 312-781-1419).

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Other related hedge fund law blog articles include:

If you are a manager or firm that needs to register as a CTA or CPO, or if you are contemplating registration, please contact Bart Mallon, Esq. of Cole-Frieman & Mallon LLP at 415-868-5345.

CTA Lead List Basics

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By Bart Mallon, Esq. (www.colefrieman.com)

“Purchased Lead Lists and How to Use Them”

A good resource for CTAs that are actively trying to raise money are lead lists – lists of names and contact information of potential future clients or investors. This overview is for the CTA Expo 2009 program entitled Purchased Lead Lists and How to Use Them. The program was sponsored by Patke & Associates and featured Jacques DeRouen of Pinnacle Alternative Investments.

Jacques started off by telling all of the CTAs that they need to get out and market to investors. The point is to get your story to willing listening. He then provided us with a brief background of how he got involved with lists and how he learned to use lists effectively. The biggest takeaway is that getting good at using lead lists takes time and dedication – but don’t let the list intimidate you. From here he discussed a number of items about lead lists in general.

Lead Lists in General

There are many different types of lists and the lists come in a variety of different formats and include various different types of information. CTAs should research exactly what they will get with these lists and some questions which the purchaser should ask include the following:

Has the list maker described their list and what they provide?
What is the reputation of the list maker?
Does the list have references, if no, then why?
Is there a free sample?
What information is on the list – key contact names, size of the investor, email addresses.

CTA managers should think about making some calls to the investors on the sample lists which are released. Basically the manager wants to make sure that the list is not something that was simply culled from the phone book – the leads need to be warmer. If they are providing a general list of investors, this is ok but it will probably take you more time.

Budget

The biggest thing to consider is your budget. If you don’t have money in the budget to buy a list, then don’t buy it. A CTA should always be aware of the fees coming in and be able to justify any expenses, which includes a list.

Prepping an Investor Database

When you get a lead list it will typically be in some sort of spreadsheet like excel and it will be up to the CTA to clean up the data and make it user friendly. There are a number of different ways to establish databases that will work for keeping track of investors contacted and to contact. After formatting a database or input, the CTA should always back-up the new, manipulated data. From here the CTA will want to export the manipulated data to a CRM. There are a number of customer relationship management (CRM) software solutions which allow managers to manipulate large raw sets of data, such as the lead lists. It is very important for the CTA to take good notes about the interactions with the leads.

Notes About Emailing Investors from Lead Lists

Emailing your marketing presentation can be a very effective way to market to some of the investors on the lead lists. However, CTAs should not send every piece of marketing material that they have. A CTA may want to think about emailing a summary presentation with bullett points. A teaser like this sets the plate so that when the CTA follows up with the lead (with a phone call), the lead has a little bit of background on the manager, but is not overwhelmed (or worse, annoyed). CTAs should be aware that even with the best lead lists there is likely to be some email kickback from natural changes in the composition of the company. The best systems are likely to have 2-3% kickback, the middle tiered lists are likely to have 5-10% kickback and the lower quality lists are likely to have much more.

Approaching Fund of Fund Investors

While many fund of fund investors don’t actively advertise that they allocate to emerging managers, they do and CTA firms should be calling these managers. Even if a FOF manager decided not to invest with the CTA manager, calling is still a good way to connect and develop a relationship – potentially that relationship can develop down the line. Fund of fund managers do like CTA and other emerging managers not only because of the potential returns but also because the FOF managers are likely to be able to negotiate carve-outs of the CTA manager’s future capacity.

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This article first appeared in the CTA Expo Blog run by Bart Mallon, Esq. Mr. Mallon also runs the Hedge Fund Law Blog and is committed to providing useful and easy to understand information for CTAs and CPOs which can be found in our CTA and CPO Registration and Compliance Guide. For more information on CTA registration or compliance services please contact Mr. Mallon at 415-868-5345.

CTA Regulatory and Compliance Discussion

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By Bart Mallon, Esq. (www.colefrieman.com)

“Compliance in a Changing Environment”

As we are all well aware both the investing and the regulatory environments have experienced a dramatic refocusing on compliance and related issues in the wake of the 2008 meltdown and the Bernie Madoff affair. This overview is for the CTA Expo 2009 program entitled Compliance in a Changing Environment. The program was sponsored by Woodfield Fund Administration and featured Kate Dressel of Strategic Compliance Solutions as well as Patty Cushing of the National Futures Association.

Ms. Dressel announced that compliance and processes and procedures have become increasingly important, especially since investors are now concerned about fraud. The best defense with regard to fraud, and an theme that pervaded this and other discussions, is that a CTA needs to have a reputable accountant and auditor. Having reputable service providers (including administrators, auditors and legal firms) will help potential investors/clients to feel more comfortable with the CTA and the investment program.

Ms. Cushing, who is the associate director for Risk Management and Member Education at the NFA, began by emphasizing that CTA performance information needs to be accurate. She also mentioned that CTAs really need to be focused on trading and the other business issues, especially accounting and legal, should be done by experienced people or service providers. Ms. Cushing made reference to the NFA’s spreadsheet (although I could not find this on the NFA’s website) as well as an informative webscast by the NFA discussing CTA Performance Reporting webcast. Basically she said that if you don’t want to spend the time making sure that all of the numbers are perfect, then you are going to need to use a consulting firm.

If you self administrer you are going to need to think about an outside administrator so that there will be increased oversight.

Ms. Dressel talked about the current industry buzzword – transparency. Transparency is important, she went on, not just in trading but in all aspects of the CTA business. Compliance and operations, especially, need well ordered and solid procedures in place. Oversight is the key and it is very important that the principals are aware of everything that is going on in the firm.

[Note: Ms. Cushing talked about forex managers and noted that forex managers needed to make sure they were submitting their forex disclosure documents to the NFA for review. I spoke with Ms. Cushing after the session was over to gain clarification over her statement and also discuss the forex registration rules which were supposed to be proposed by the CFTC some time ago. For clarification, I want to point out that forex managers only need to have the NFA review their forex disclosure documents if they are already a member of the NFA – that is, if they are already registered as a CTA or CPO. Forex only managers who are currently not registered with the NFA (and who trade only in the off-exchange spot markets) currently do not need to register with the NFA. I discussed this with Ms. Cushing and asked if she had seen a draft of the registration rules or if she had heard anything from the CFTC as to when the rules might be proposed – she said that the CFTC has been working on the rules but that she has no idea when or if the rules will be proposed. She seemed to be parroting the CFTC on this issue – the agency has told me a number of times that they are working on the rules and that they will be proposed shortly.]

Ms. Cushing mentioned that some CTA firms will actually use a previous NFA audit as a kind of “stamp of approval” by the regulatory agency. Although the NFA audit is only designed for the NFA Member who was subject to the audit, some Members will send these to their clients. Accoring to Ms. Cushing, the NFA is taking no opinion with regard to this practice. She did note, however, that such reports might not be the best source of information regarding a firm’s procedures as it might be out of date.

Ms. Dressel mentioned that mock audits for CTAs are good to pursue – you can contact a number of outside firms like her own that can help a manager through a mock audit. Not only does a mock audit help a firm for an actual NFA audit, but it will also help to identify operational issues which the manager can refocus upon.

One of the most important items that CTAs should be aware of is their marketing materials and disclosure documents. It is imperative that CTA firms make sure that every statement in the disclosure documents and other marketing materials be true. CTA firms should not try to stretch the truth – potential investors are check and there is a whole new paradigm. Any stretched truth will be uncovered during the due diligence process which now includes, for some managers, phorensic accounting to make sure that trading parameters have been consistently adheared to. Investors now need absolute confidence in who you are and what you do.

CTA firms should be vigilant about making sure they stick to the trading parameters in the disclosure documents.

A very good piece of advice is that if there is anything in your disclosure documents which is not true, you need to update your documents. [BM note: and potentially discuss the change with your current investors/clients.]

Ms. Cushing noted that there a number of ways to that your firm can prepare for an NFA audit. The first step is to read and be aware of the NFA’s yearly self-examination checklist. [Note: if you do not know about the self-exam checklist, and if you do not have a compliance program in place, please see a CTA attorney or compliance person immediately to become compliant. The self-exam checklist is a central part of a good compliance program.] Ms. Cushing urged those firms who have questions about the checklist to call the NFA (although, in practice, this is usually an effort in futility as the staff will generally not ask questions and tell firms to consult with an attorney or other compliance professionals).

Questions From Audience

After this we had an opportunity to move onto questions from the attendees. One comment came from Fred Gehm who has worked in due diligence for a fund of funds which allocated to the CTAs through separately managed accounts. He made the statement that if the manager doesn’t have an external administrator the FOF will not allocate to that CTA – even if the CTA has audited returns. He also made the comment that 10-15% of the time CTAs (or other managers) will lie to him and he will catch it. Obviously in these cases the FOF does not allocate to such a group. He said that many times if the manager had been honest about fact in the first place, it would likely have been something that would have been passed over but for the lied.

Ms. Cushing and Ms. Dressel emphasized that the CTA is ultimately responsible for making sure that the books and records are correct – even if there is an outside administrator, the CTA needs to take an active role in this area.

The next questioner noted that family offices and pensions are beginning to get involved in the CTA space and he wondered how smaller CTAs can set up structures to be well positioned for such investors. Ms. Dressel suggested that the CTA manager get as much of the program together as possible – this means the manager should try to get the best administrators, auditors and legal counsel that they can afford. The manager should also be able to completely answer a standard due diligence questionnaire – these questionnaires highlight some of the important structural and governance items that family offices and pensions will be focusing on.

Mr. Gehm mentioned that he is concerned with two central issues when allocating to small CTAs: (1) custody and (2) risk management. With the first, custody, he said he was especially concerned with who signs the checks and where is the dollar control. Fred recommended that CTAs have secondary signer for disbursements. With regard to the second issue, risk management, he said he looked for a structure where someone with independent authority had authority with regard to this issue. The key here is that the risk manager should have no fear of losing his job, that there is contractual safeguards for him doing his risk management.

There were a couple of other brief questions before the session ended. One takeaway with regard to risk management is to think about things throughout the organization – key man provisions and plans for odd eventualities. The more that a CTA manager really thinks about and understands the risk of his business, the better it will be for the investors and the more likely for the CTA manager to have an easier time raising capital.

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This article was first printed on the CTA Expo Blog. This article was contributed by Bart Mallon, Esq. who runs the Hedge Fund Law Blog and is committed to providing useful and easy to understand information for CTAs and CPOs which can be found in our CTA and CPO Registration and Compliance Guide. For more information on CTA registration or compliance services please contact Bart Mallon, Esq. at 415-868-5345.

CFTC Head Addresses Futures Industry in Chicago

CTA Expo 2009

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Commodity Trading Advisor Conference

Next week there will be a conference for Commodity Trading Advisors held in Chicago at the Hotel Monaco. The conference, entitled the CTA Expo 2009, will be held on Wednesday and will feature a variety of topics of interest to CTAs. The agenda includes:

Continental Breakfast
Marketing for Small CTAs
Compliance in a Changing Environment
Purchased Lead Lists and How to Use Them
Web Site Development and Internet Marketing
Marketing to Introducing Brokers
Keynote Speaker
An Outsiders View of Managed Futures
Managing Electronic Executions
Executing on the Electronic Markets
The Media and the CTA
Closing Cocktail Party

I will be representing my firm, Cole-Frieman & Mallon LLP, at the conference and I look forward to meeting with the different traders and service providers at the event. Each entrant will also receive a CTA Directory which will include a “tear sheet” on all of the groups which attended. Please see the Cole-Frieman & Mallon LLP description of CTA services.

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Event information can be found here. There is also a CTA Expo LinkedIn Group.

CTA EXPO 2009
October 21, 2009
Hotel Monaco Chicago, Illinois

CTA EXPO consists of a day of roundtables and seminars for Commodity Trading Advisors on marketing strategy combined with an all day schedule of thirty minute presentations by individual CTAS to small groups of professional money raisers, asset allocators and interested clients who are seeking to identify additional trading talent.

The debut conference in 2008 sold out in advance and was attended by over thirty-five CTAs and over sixty people who registered as professional money raisers and asset allocators. We have increased capacity for 2009 and interest in this year’s event has already been tremendous and we are anticipating another sold out event.

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The hedge fund law blog is committed to providing useful and easy to understand information for CTAs and CPOs which can be found in our CTA and CPO Registration and Compliance Guide. For more information on registration or compliance services please contact Bart Mallon, Esq. at 415-868-5345.

CTA and CPO Registration and Compliance Guide

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Practical guidance for CTA and CPO firms

Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) have been contacting me with greater regularity and we have decided to provide those firms with more detailed information on their registration and compliance requirements. Over the course of the next few weeks we will be continually updating this page with more legal and business guidance for CTAs and CPOs. Specifically, we will be providing information on the following topics:

CTA and CPO Registration – this article discusses the how-to’s of registration with the CFTC. The article details the general requirements for firms, principals, and associated persons. Included in this discussion is information on CTA/CPO exam requirements and an overview of the registration process through the NFA’s electronic registration system.

CTA and CPO Registration Exemptions – while the Commodities Exchange Act will generally require CTA and CPO firms to register with the CFTC, there are some important exemptions from the registration provisions. Review this article to see if your firm might be able to claim an exemption from the registration provisions.

CTA and CPO Compliance Overview – CTAs and CPOs are subject to a number of laws, regulations and rules. Not only must CTAs and CPOs follow CFTC laws and regulations, but as Members of the NFA, these groups must also follow all of the rules developed by the NFA. We will be discussing compliance best practices, major examination issues, major deadlines and the CTA/CPO compliance manual. Being prepared for an NFA examination is of great importance.

Recent NFA Actions against CTA and CPO Managers – the NFA and the CFTC have been quite active lately. In this article we will be discussing some of the most recent actions against NFA member firms. This article will also provide common-sense advice on what managers can do the protect themselves from examination deficiencies.

Important NFA Rules for CTA and CPO Firms – there are a number of rules which the NFA has regarding the conduct of CTAs and CPOs. In general CTAs and CPOs must hold themselves out with the utmost professionalism. This article will detail this and other important NFA rules.

CTA and CPO advertising – there are a number of important rules regarding advertising for CTAs and CPOs. CPOs, especially, must be careful about advertising because of the restrictions under Rule 506 of Regulation D, an exemption that many CPOs utilize in offering their fund interests. Websites will be touched upon in this post and will also be discussed in greater depth in a subsequent posting.

CTA and CPO websites – many CTA firms utilize the internet to advertise their services. CPO firms will also sometimes have a (minimal) internet presence. This article will detail the considerations that both CTA and CPO firms face when creating and maintaining an internet presence and how to deal with internet based inquiries from potential investors.

NFA Exam Requirements for CTAs and CPOs – individuals of NFA member firms will generally need to have a Series 3 exam license and potentially a Series 30 exam. Some individuals may need to have a Series 31 exam license and, potentially in the future, forex CTAs and CPOs will need to have a Series 34 exam license. This article will discuss these exams and the process an individual will go through in order to register to take the exams.

CTA Expo Blog – the unofficial blog of the CTA Expo most recently held in October of 2009. Information for CTA managers on business, legal and compliance issues. Included is a directory of CTA firms and service providers.

Forex CTAs and CPOs – the regulatory light has been focused on retail spot forex managers recently. Read this article to get up to speed on recent CFTC and NFA pronouncements regarding this area of the industry. We will also provide information on Forex IBs and Forex FCMs.

In addition to the above topics we are hoping to add others over time. We welcome all feedback and encourage you to leave comments below. We will also attempt to answer CTA and CPO frequently asked questions.

If you are a manager or firm that needs to register as a CTA or CPO, or if you are contemplating registration, please contact Bart Mallon, Esq. of Cole-Frieman & Mallon LLP at 415-868-5345.