Tag Archives: cta disclosure documents

NFA Provides Guidance to CTAs re: MF Global

Trading Program Performance Presentation FAQs

Managers registered with the CFTC as either CTAs or CPOs are required to file a disclosure document with the NFA for review by the NFA prior to using the documents to solicit clients/investors.  The disclosure documents are required to conform with certain NFA rules.  The NFA previously provided guidance to CPOs with respect to disclosures regarding the MF Global bankruptcy.  Specifically, the NFA provides guidance with respect to the manner in which CTAs provide trading program performance information in their disclosure documents.  The NFA’s guidance provides CTAs with a reasonable way to deal with describing performance if assets were held at MF Global and then transferred after the bankruptcy.

CTAs should remember that disclosure documents must be update (and reviewed by the NFA) every nine months.  If you are a CTA that needs help updating your disclosure documents, please contact us.

The full NFA release is reprinted in full below.


Notice to Members I-12-04
January 27, 2012

Frequently Asked Questions – Trading Program Performance Calculations and Presentation by CTAs with Client Assets held at MF Global, Inc.

As a result of the October 31, 2011 bankruptcy proceeding involving MF Global, Inc. (MFG), NFA has received a number of questions from CTAs regarding how to calculate and present performance information for Trading Programs with client managed accounts that were affected by the MFG bankruptcy proceeding. NFA is issuing this notice to address those frequently asked questions.

1. All of my managed client accounts were held at MFG. The open positions in those accounts were subsequently transferred to another FCM. After the transfer, I continued to trade the accounts according to the trading program. How do I reflect the performance results?

Results should be based upon the assets under the CTA’s control. Any customer assets that were not included in the transfer may not be included in assets under management for purposes of calculating the trading program’s rate of return. The trading program’s capsule performance must include appropriate footnote disclosure (See question 5 below).

2. All of my managed client accounts were held at MFG. The open positions in those accounts were subsequently transferred to another FCM. After the transfer, all positions in those accounts were liquidated, and I did not resume trading these accounts in accordance with the trading program. How do I reflect the performance results after the transfer?

For November 2011, the performance capsule for that trading program should reflect NT to indicate that the program did not trade during the month. The trading program’s performance capsule must include appropriate footnote disclosure (See question 5 below).

3. My managed client accounts that were held at MFG and the open positions in those accounts were subsequently transferred to another FCM. After the transfer, I was able to continue trading those accounts. I have notional funding agreements with those accounts. Should I continue to include the amount of notional funds under the agreement in assets under management for purposes of calculating rate of return?

If you are trading the managed client accounts pursuant to an active notional funding agreement, you should continue to calculate rates of return using nominal account size as the denominator.

4. I have some managed client accounts held at MFG (with open positions that were subsequently transferred) and other managed client accounts held at other FCMs that are trading the same program. Since I did not have full control over the assets held at MFG, the rates of return for those accounts are materially different than the rates of return for accounts held at an FCM other than MFG. How do I reflect the performance results of the program?

For the month of November 2011, you should exclude the accounts that were held at MFG from the performance capsule. You do not have to prepare a separate capsule for these accounts. However, the trading program’s performance capsule must include appropriate footnote disclosure (See question 5 below), including the range of the rates of return for those accounts.

5. What information should I include in the footnote disclosure?

At a minimum, the footnote disclosure should:

      • Explain that as a result of the MFG bankruptcy proceeding, certain client managed accounts were not fully under the control of the CTA and therefore were excluded in whole or in part from the monthly performance calculation;
      • Indicate the number of client accounts excluded;
      • Indicate the amount of assets that were excluded;
      • Indicate the percentage that the excluded assets represent of total assets under management for that program as of October 31, 2011.

6. Do I need to amend my disclosure document to reflect this information?

CTAs that plan to solicit new clients must ensure that all material information in their disclosure documents has been updated including, but not limited to, changes to assets under management, past performance results, and the firm’s carrying broker relationships. As a reminder, all amended disclosure documents must be submitted to NFA for review prior to use.

Any questions regarding these disclosure issues should be directed to:

Susan Koprowski, Manager, at (312) 781-1288 or at [email protected]
Kaitlan Chi, Manager, at (312) 781-1219 or [email protected]
Mary McHenry, Senior Manager, at (312) 781-1420 or at [email protected]


Cole-Frieman & Mallon LLP works with CTA and CPOs and provides managed futures legal and compliance services.  Bart Mallon can be reached directly at 415-868-5345.


Litigation Statement for CTA and CPO Disclosure Documents

One of the more important requirements with respect to drafting the CTA and CPO Disclosure Documents is making sure that all appropriate litigation statements are included in the documents.  Under CFTC Regulations 4.24 (CPOs) and 4.34 (CTAs) the manager is required to disclose the litigation history of: (i) the management company, (ii) principals of the management company and (iii) the FCM and IB.  While (i) and (ii) are generally going to be easy to prepare, getting the litigation history for the FCM and IB will be dependent on the FCM and IB providing the manager or the manager’s attorney with a litigation statement.  Some FCMs and IBs do not have a litigation history and a statement to that effect will need to be included in the disclosure documents.

Below we have included more information on this requirement from the NFA Disclosure Document Guide and we have included the text of the CFTC Regulations.


From the NFA guide to disclosure documents:


The Document must disclose any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against the following persons (a concluded action that resulted in adjudication on the merits in favor of such person need not be disclosed):

• The pool’s FCM and IBs, if any.

With respect to an FCM or an IB, an action is material if:

• The action would be required to be disclosed in the notes to the FCM’s or IB’s financial statements prepared pursuant to generally accepted accounting principles;

• The action was brought by the Commission (unless the action was concluded, did not result in civil monetary penalties exceeding $50,000, and did not involve allegations of fraud or other willful misconduct); or

• The action was brought by any other federal or state regulatory agency, a non-United States regulatory agency or a self-regulatory organization and involved allegations of fraud or other willful misconduct.

Where a matter is material, its description must include a recital of the nature of the action, the parties involved, the allegations or findings, the status of the action and the size of any fine or settlement.

Source: pages 34 and 35 of the disclosure document guide.

CFTC Regulation 4.24(l)


(1) Subject to the provisions of §4.24(l)(2), any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against any of the following persons; Provided, however, that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:

(i) The commodity pool operator, the pool’s trading manager, if any, the pool’s major commodity trading advisors, and the operators of the pool’s major investee pools;

(ii) Any principal of the foregoing; and

(iii) The pool’s futures commission merchants and introducing brokers, if any.

CFTC Regulation 4.34(k)


(1) Subject to the provisions of §4.34(k)(2), any material administrative, civil or criminal action, whether pending or concluded, within five years preceding the date of the Document, against any of the following persons; Provided, however, that a concluded action that resulted in an adjudication on the merits in favor of such person need not be disclosed:

(i) The commodity trading advisor and any principal thereof:

(ii) Any futures commission merchant with which the client will be required to maintain its commodity interest account; and

(iii) Any introducing broker through which the client will be required to introduce its account to the futures commission merchant.


Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides comprehensive hedge fund start up and regulatory support for commodity pool operators.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

CTA and CPO Foreign Language Disclosure Documents

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.


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.

CTA Regulatory and Compliance Discussion

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.


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.

CPOs and CTAs Now Submit Disclosure Documents Electronically

NFAs Electronic Filing System Went Live Yesterday

The NFAs new electronic filing system for CPO and CTA disclosure documents went live yesterday.  All NFA members are required to use the electronic system for filing their disclosure documents.   While I have not yet used the new system, it is expected to be a big improvement over the previous system which relied on emails to an anonymous system.  The NFA says that this new system should help both the NFA and the Member Firm by speeding up and streamlining the disclosure document approval process.

I will provide an update on whether this system does in fact make the process more efficient.  Also, I will provide updates on how this system works with the new forex registration requirements.  It is expected that forex CPOs and forex CTAs will also use this same electronic submission process for their forex disclosure documents.


Notice I-09-09

March 26, 2009

Using NFA’s Electronic Disclosure Document Filing System becomes mandatory for CPOs and CTAs
Effective April 6, 2009, CPOs and CTAs filing a disclosure document with NFA for review will be required to submit the filing through NFA’s Electronic Disclosure Document Filing System. NFA will not accept any disclosure document filings through any other mode (i.e., email, fax, or regular mail) after this date. CPOs and CTAs are encouraged to begin using the new system prior to the effective date to make the transition as smooth as possible.

This new system will benefit NFA’s CPO and CTA Members by creating a more efficient document review process. Electronic filing will allow NFA to identify issues sooner in the review process. Firms will also be able to track the status of their submissions online, in real-time, and will have instantaneous access to NFA’s comment and acceptance letters. Additionally, all correspondence, including filed disclosure documents and NFA’s comment or acceptance letters, will be archived in the system, creating an electronic file cabinet that will be easily accessible to CPOs and CTAs at any time.

To use the new electronic system, a security manager entering the system for the first time must designate himself as a disclosure document user in NFA’s Online Registration System (“ORS”). The security manager can also designate additional users to file disclosure documents through the system. Filers can access the system at https://www.nfa.futures.org/appentry/Redirect.aspx?app=DDOC. Once in the system, filers will be required to enter certain information specific to the filing and to upload the filing in either a PDF or Word format.

NFA also has prepared a web seminar to assist users with the new system. This online seminar is entitled “How to File CPO and CTA Disclosure Documents Electronically with NFA” and is available at: http://video.webcasts.com/events/pmny001/viewer/index.jsp?eventid=29268.
If you have any questions about the new filing system, please contact Susan Koprowski at [email protected] or (312) 781-1288 or Mary McHenry at [email protected] or (312) 781-1420.


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