Tag Archives: forex hedge fund

CTA and CPO Registration and Compliance Guide

20 Replies

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.

Forex Trading Software | Meta Trader 4

1 Reply

(www.hedgefundlawblog.com)

Meta Trader 4 – Online Forex Trading Platform

Meta Trader 4 is an online trading complex designed to provide broker services to customers at forex, futures and CFD markets.  This is a whole-cycle complex, which means that the trader will not need any other software to organize his/her broker services when using Meta Trader 4. The platform includes all necessary components for brokerage services via internet including the back office and dealing desk.  Currently, over 250 brokerage companies and banks worldwide have chosen this solution to meet their high standards of business performance.

The different functions and options of this system, allow great flexibility in trading. The MetaQuotes Language 4 allows users to incorporate their own strategies through the Expert Advisors, enabling the markets to be monitored automatically so not requiring constant supervision. The standard list of technical indicators may be expanded with the opportunity to add custom indicators as needed,  and real time demos are accessible through more than 35 brokerages free of charge.

Meta Trader 4 attempts to supply the sufficient information and tools in order to make the Forex traders’ decisions more appropriate and easy. The program has a simple and user friendly interface that allows traders to monitor their transactions and their account as well as performing technical analysis and develop Forex trading strategies of their own. In addition, the platform provides continuous real-time information and sophisticated technical analysis tools.

The cost of Meta Trader 4 is substantially lower than the alternative cost of creating a similar product, and is therefore a viable financial proposition to most financial institutions. Installation of the system into the full operational mode will take no more than one day, therefore saving a considerable amount of time for end users.

MetaTrader 4 is a premier business  solution for broker companies, banks, financial companies, and dealing centers. In addition to the points discussed above, the main advantages of the system are:

1.  Coverage of financial markets

  • The trading platform MetaTrader 4 covers all brokerage and trading activities at Forex, Futures and CFD markets.

2.   Multicurrency basis:

  • The system is designed on a multicurrency basis. It means that any currency can serve as a general currency used in the operation of the whole complex in any country and with any national currency.

3.  Economy and productivity:

  • Implemented data transfer and processing protocols are notable for their economy. It makes it possible to support several thousands of traders through a single server with the following configuration: Pentium 4 2 GHz, 512 DDR RAM, 80 GB HDD. New protocols reduce both the demands on datalink and their operational cost.

4.  Reliability:

  • In the case of damage to the historical data, the complex has backup and restoration systems. Also, the implemented synchronization allows to restore damaged historical databases within several minutes with the help of another MetaTrader 4 server.

5.  Safety:

  • To provide safety, all the information exchanged between parts of the complex is encrypted by 128-bit keys. Such solution guarantees safekeeping of information transferred and leaves no chance for a third person to use it. A built-in DDoS-attacks guard system raises the stability of operation of the server and the system as a whole.
    A new scheme of system working operation was created especially for DDoS-attacks resistance. With its help, you can hide the real IP-address of the server behind a number of access points (Data Centers). Data Centers also have a built-in DoS-attacks protection system; they can recognize and block such attacks. During distributed attacks at the system, only Data Centers are attacked; MetaTrader 4 Server continues its operation in regular mode. Thus, Data Centers increase the system’s stability to DoS and DDoS attacks.
    The implemented mechanisms of rights sharing make it possible to organize the security system with more effectiveness and to reduce the probability of ill-intentioned actions of company staff.

6.  Multilingual support:

  • MetaTrader 4 supports different languages, and a MultiLanguage Pack program is included into distributive packages. It provides translation of all program interfaces into any language. With the help of MultiLanguage Pack you can easily create any language and integrate it into the program. This feature of the system will bring MetaTrader 4 nearer to end-users in any country of the world.

7.  Application Program Interfaces:

  • MetaTrader 4 Server API makes it possible to customize the work of platform to meet your requirements. API can solve a wide range of problems:

– creating additional analyzers for finding a trend of monthly increase of traders;
– creating applications of integration into other systems;
– extending the functionality of the server;
– implementing its own system work control mechanisms;
– and do much more.

8.  Integration with web-services:

  • To provide traders with services of higher quality, the system supports the integration with web services (www, wap). This feature allows real-time publishing of quotations and charts on your site, dynamic tables containing contest results and much more.

9.  Flexibility of the system:

  • The platform possesses a wide range of customizable functions. You can set all parameters, from trade session time to detailed properties of financial instruments of each user groups.

10.  Subadministration:

  • Subadministration mechanisms allow leading many Introducing Brokers on one server quite easily. For processing all accounts and orders of the clients of your IBs, you will need one server only.

Overall, the newly released Meta Trader 4 platform is equipped to address a full range of account management needs and serves as a user-friendly front-end trading interface for dealings in the Forex, CFD, and futures markets.


****

Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include:

NFA Discusses Recent Forex Regulations

Leave a reply

Answers Regarding Prohibition of Hedging Spot Forex Transactions

(www.hedgefundlawblog.com)  The NFA has certainly taken a lot of heat over its controversial rule to ban the practice of “hedging” in a single spot forex account.  Many retail investors have already begun establishing brokerage accounts offshore in order to utilize this trading strategy.  I recently talked with a compliance person at the NFA and they said that they are aware that US persons are going to offshore forex brokers in order to utilize this trading strategy.  We will see if in the future the NFA relents on this issue, but for now the NFA has provided guidance on some of the more technical aspects of the new Compliance Rule 2-43.

The NFA guidance is reprinted in full below and can also be found here.

****

NFA Compliance Rule 2-43 Q & A

NFA has received a number of inquiries regarding the application of new NFA Compliance Rule 2-43. This Q & A answers the most common questions.

CR 2-43(a), Price Adjustments[1]

Q. Section (a)(1)(i) of the rule provides an exception from the prohibition on price adjustments where the adjustment is favorable to the customer and is done as part of the settlement of a customer complaint. Does that mean a Forex Dealer Member (“FDM”) can’t make a favorable adjustment if the customer does not complain?

A. It depends on the circumstances. The intent of this provision is to ensure that FDMs can settle customer complaints before or after they end up in arbitration. It was not meant to prohibit FDMs from adjusting prices on customer orders that were adversely affected by a glitch in the FDM’s platform. A firm may not, however, adjust prices on customer orders that benefited from the error (except as provided in section (a)(1)(ii)). Furthermore, an FDM may not cherry-pick which accounts to adjust.

Q. An FDM operates several trading platforms. Two provide exclusively straight-through processing, but one does not. Can the FDM make section (a)(1)(ii) adjustments for trades placed on the two platforms that provide straight-through processing?

A. No. The Board intended to limit the relief to those firms that exclusively operate a straight-through processing business model, and the submission letter to the CFTC uses this language when explaining the rule’s intent. NFA recognizes, however, that the use of the word “platform” in the rule itself may be confusing, and we intend to ask the Board to eliminate that word at its August meeting.

Q. For price adjustments made under section (a)(1)(ii), the rule requires written notification to customers within fifteen minutes. If the liquidity provider informs an FDM of the price change twenty minutes after the orders are executed, can the FDM still make the adjustment?

A. No. The rule provides that customers must be notified within fifteen minutes after their orders are executed, and it was written that way intentionally. Since a customer’s subsequent trading decisions may be based on the customer’s belief that a particular trade was executed at a particular price, the rule provides a narrow window for price adjustments.

________________________________________
[1] For purposes of this discussion, the term “adjustment” also refers to cancellations.

CR 2-43(b), Offsetting Transactions

Q. CR 2-43(b) states that an FDM cannot carry offsetting positions. If a customer with a long position executes a sell order or a customer with a short position executes a buy order, does the FDM have to close the position immediately or can it wait until the end of the day?

A. The FDM may wait until the end of the day to offset the positions, but it must do so before applying roll fees.

Q. The rule provides that positions must be offset on a first-in-first-out (FIFO) basis. If the customer places a stop order on a newer likesize position and the stop is hit, may the FDM offset the executed stop against that position?

A. No. The only exception to the FIFO rule is where a customer directs the FDM to offset a same-size transaction, but even then the offset must be applied to the oldest transaction of that size.
Related Issues

Related Issues

Q. One of an FDM’s platforms is offered exclusively to eligible contract participants (ECPs). Does Rule 2-43 apply to transactions on that platform?

A. No. Rule 2-43 does not apply to transactions with ECPs.

Q. May an FDM transfer foreign customers to a foreign entity that allows customers to carry offsetting positions in a single account?

A. Yes. If done as a bulk transfer, however, the Interpretive Notice to NFA Compliance Rule 2-40 (located at ¶ 9058 of the NFA Manual) requires that the foreign entity must be an authorized counterparty under section 2(c) of the Commodity Exchange Act (CEA).

Q. May an FDM transfer U.S. customers to a foreign entity that allows customers to carry offsetting positions in a single account?

A. Only if the transactions are not off-exchange futures contracts or options. The legal status of “spot” OTC transactions that are continually rolled over and almost always closed through offset rather than delivery is currently unsettled. Therefore, if an FDM chooses to transfer U.S. customers to a foreign entity so they can continue “hedging,” it does so at its own risk. In any event, a bulk transfer can only be made to a counterparty authorized under the CEA.

Q. If the transactions are not futures or options, does that mean none of NFA’s rules apply?

A. Most of NFA’s forex rules do not depend on how the off-exchange transactions are classified. This includes Compliance Rule 2-36(b)(1), which prohibits deceptive behavior, and Compliance Rule 2-36(c), which requires FDMs to observe high standards of commercial honor and just and equitable principles of trade. An FDM that misrepresents the characteristics of “hedging” transactions (e.g., by touting their “benefits”) or NFA’s purpose in banning them or that implies that transferring U.S. customers offshore will make the transactions legal violates those sections of CR 2-36. Furthermore, NFA Compliance Rule 2-39 applies these same requirements to solicitors and account managers.

****

Please feel free to contact us if you are interested in starting a forex hedge fund or a forex managed account.  Other related forex law and regulation articles include:

Offshore Forex Brokers Race To Fill “Hedging” Gap

2 Replies

NFA Compliance Rule 2-43 Outlaws Forex “Hedging” For NFA Registered Forex Dealers

(www.hedgefundlawblog.com) The new forex regulations have affected the industry in a number of ways.  Rule 2-43 especially has been a source of ire for some forex managers who have utilized a “hedging strategy” as part of their investment program.  In the forex hedging strategy a trader will have both a long and a short position in a single currency pair.  While these positions are essentially offsetting, some trend following forex traders will hold such positions in order to profit once a trend has been detected.  This strategy was effectively eliminated by the passage of Rule 2-43 for managers trading with forex firms which are registered with the CFTC and NFA Member firms.

This rule provides an opening for offshore forex dealers (who are not NFA Members) to offer this strategy to forex traders.  What you are likely to see, then, is an exodus of trading capital to those brokers which allow hedging strategies (see the two press releases below).  I can think of no clearer example of how regulation is actually forcing capital to go overseas where forex brokers may face lower levels of regulation.  This in turn may actually make forex traders more susceptible to fraudulent practices at the brokerage level (when they trade in countries with less regulation).  Interestingly enough, this movement of money to offshore forex dealers was predicted by the US forex dealers when the rule was announced.

From NFA Release on Compliance Rule 2-43

Although many of the FDMs admit that customers receive no financial benefit by carrying opposite positions, some FDMs believe that if they do not offer the strategy they will lose business to domestic and foreign firms that do.

While some traders may move money to offshore forex dealers, these traders should, however, beware that by trading forex with a non-NFA member firm, they may become subject to state level regulation (and accordingly CFTC registration).  As this is a developing and complex area of law, I always advise forex managers to discuss their business operations with an experienced forex attorney.

Please contact us if you have a question on this issue or if you would like to start a forex hedge fund.  If you would like more information, please see our articles on starting a hedge fund.

****

InvestTechFX To Continue Forex HEDGING For Traders After NFA Ruling

InvestTechFX released today that the 1 PIP Forex Corporation will continue to allow all types of hedging after the NFA (National Futures Association) ruling against hedging goes into effect on May 15, 2009. As InvestTechFX is not an NFA regulated broker, it is not obligated to adhere to the NFA’s anti-hedging policies. www.investtechfx.com

Toronto, Canada (PRWEB) April 24, 2009 — InvestTechFX the leading 1 PIP Forex Corp commented on the NFA’s new anti-hedging law (NFA Compliance Rule 2-43 regarding Forex orders) currently scheduled to take effect on May 15th, 2009, and released that the No Dealing Desk Forex broker and Software Solutions Corp will be immune to the new law. InvestTechFX’s industry expert noted that the NFA’s move is not entirely unexpected; the spirit of the new regulation is to protect traders from wasteful over-hedging, but the practical implications of the new regulations will likely be counter-productive. Traders who rely on hedging in their strategies will simply take their business to brokers outside the influence of the NFA, such as InvestTechFX. Ironically, the NFA may put US Forex brokers at a disadvantage by barring them from providing the hedging options that their international competitors will not hesitate to offer.

InvestTechFX the leading 1 PIP Forex Corp welcoming hedging explained that “hedging” generally refers to the practice of taking opposite positions against a previous open position in order to reduce risk. In a broader sense, hedged trading means investing to limit exposure and reduce risk. There are several methods of hedging Forex positions, particularly opening short and long positions within the same currency pair at the same time. This type of hedging will be much more difficult after May 15th, 2009, as the new regulations will put strict limits on such strategies. Positions opened prior to May 15th will not be penalized under the new rule, but all positions opened after the initiation date will be effected. Traders who want to continue hedging while staying with an NFA-regulated broker may now have to open separate accounts for their long positions and short positions; something not all traders can afford to do.

InvestTechFX the leading 1 PIP Forex Corp. welcoming hedging strategies noted that new restrictions on hedging are not the only new regulations set forth in the NFA’s new ruling. After May 15th, 2009, all NFA brokers will have to notify traders in writing prior to adjusting or manipulating trades, with the exception of instances in which the adjustment is favorable to a trader or at a trader’s request. Furthermore, the written notification of intent to adjust must take place within 15 minutes or less of the time of execution. This new regulation (Rule 2-43a) will not be going into effect until June 12th, 2009. In regard to customer orders adjusted because of changes in the price structure of a liquidity provider, written notification must be given to customers prior any initial trading (price increases on the account of transaction clearing must be stated before trading takes place, not after or during trading). InvestTechFX’s analyst explained that these new regulations are likely an attempt to increase cost transparency and reduce the hidden fees that many brokers, particularly market makers, rely upon to limit customer profits. Since market makers must always provide the counterparty for a trade (always buy from a seller and sell to a buyer), there is a strong ulterior motive to undercut customer profits, as customer profits always come at the market maker’s expense.

InvestTechFX the leading 1 PIP Forex Corp. welcoming hedging’s analyst elaborated on the threat of expanding regulation in the Forex market, and the unforeseen consequences that well-meaning regulation agencies can impose upon the market. Forex trading is a fast-growing, highly competitive industry, and because of its inherently global nature, traders are not limited to the Forex providers in their own countries. While many would likely work with a local broker, traders can relatively easily move their business abroad if regulation in their own regions becomes more of a burden than a protection. Government guidelines regarding trading clear policies and risk disclosure can serve to keep the industry legitimate and transparent, but regulating hedging in this way borders on telling traders what strategies they can and can’t use. There is ongoing debate over who the NFA is “protecting” with the new policies, as many of the larger regulatory bodies have a reputation for acting out of the long-term interests of companies instead of retail traders. InvestTechFX’s representative explained that the company could not decisively endorse or condemn the use of mirror position hedging, but did state that the position of InvestTechFX is that the decisions regarding trading strategies should be left to the traders, not the regulators.

InvestTechFX the leading 1 PIP Forex Corporation welcoming hedging is a No Dealing Desk Forex Broker and Federal Canadian Corporation. InvestTechFX offers a 1 PIP fixed spread on 6 major currency pairs, along with a comprehensive account groups system, including interest free, scalping, EA, Micro, and VIP accounts. As a No Dealing Desk, InvestTechFX never takes positions against customers, and has no interest or influence over the trades executed by its customers. www.investtechfx.com

****

New Forex Trading Rule by NFA About Hedging Positions Will Change the Trading Game

Forex market is getting revised by continuous trade rule changes. In such uncertain times, Forex Profit Farm may be the perfect solution for people looking to succeed in forex trading.

New York, NY (PRWEB) April 30, 2009 — The forex market is booming with addition of new players every minute because of the high and lucrative potential of making money. Such fast growth poses its own challenges, but at the same time also present with the opportunity to redefine the industry by writing new rules or guidelines.

One such rule that NFA came up with recently is regarding Anti-Hedging. This rule is coming into effect starting 15 may 2009. As per this new law, the trader community cannot create hedged trades.

Rahul Gupta, owner of Forex Profit Farm says, “Currently a forex trader can have two opposite directional trades open at the same time on a single currency pair. So say if you are trading EUR/USD currency pair, you can have short as well as a long trade opened at the same time, which is what is called hedging. The traders do that mostly to judge the direction of the market. Though a hedged open long and short trade on a single currency pair will offset the gain of one position against the other, but when the direction of market trend becomes clear, traders close the losing trade and keep the winning one going. It is a cruel way to trade, but it is very common.”

With that now going to be not possible come May 15, 2009, all traders who use such forex trading practices, will now have to come up with different trading strategies. This is a clear concrete step by NFA to make the forex industry more mature and keep the exponential growth under check.

But Rahul says “Traders who are using best forex trading system don’t have to worry about anything at all. A good trading strategy is independent of such techniques and always remain non-effected from changing rules of similar nature. Traders who use sound trading principles, won’t feel the effect of this new rule at all.”

This is very true because National Future Association (NFA) has passed this new rule to make the unfair practices offered by some of the traders as ineffective, but at the same time preserve the interest of the experienced traders who trade forex for a living.

Like any new rule which is introduced by a governing body, this one also has its share of traders opposing it, but most of the experienced traders see it as a positive step towards regulating the forex trading industry. In such time, a sound trading strategy is all that a trader needs to keep making money by selling one currency against other.

About Forex Profit Farm:

Forex Profit farm is one of the Best forex system available which can help traders achieve the financial independence they always wanted. The system not only comes with an accurate trading strategy with clearly defined instructions on when to enter and when to close the trade, but it also covers the important aspect of trade management that will help traders to make maximum profit from their trades. Covered in multiple manuals and videos, Forex Profit Farm is a must-have system for anyone looking to make money by trading forex.

Series 30 Exam Information

4 Replies

Overview of Series 30 Exam

The Series 30 exam is a National Futures Association sponsored exam which is required for those persons who are branch office managers of a NFA member firm (see our post on CPO and CTA Branch Office Information).  Generally if a NFA Member firm (such as a CPO or CTA) has a branch office (any place of business other than the main office), the firm will need to make sure that a branch office manager is employed at each such branch office.

Exam Specifics

  • Branch Manager Examination.
  • 50 True/False and Multiple Choice questions.
  • One hour long.
  • $70.
  • 70% correct answers required to pass

Signing up for the Exam

The Series 30, like all of the other exams sponsored by the NFA, is administered by FINRA.  Accordingly, an applicant will need to first register to take the exam by completing a FINRA Form U-10.  After the U-10 has been completed, submitted and processed, the applicant will be “in the FINRA system” and will be able to sign up for an exam time at either a Prometric or Pearson testing facility.  Applicants can determine available times and locations by visiting these websites.  The test is generally given a number of times a day, six days a week.

Series 30 Exam Topics

BRANCH MANAGER EXAM—FUTURES

SERIES 30

The following is a general listing of the major subject areas covered by the examination and does not represent an exhaustive list of the actual test questions.

A. General

  • Books and records, preparation and retention
  • Order tickets, preparation and retention
  • Written option procedures
  • Handling of customer deposits
  • NFA Compliance Rule 2-9, supervision of employees
  • Business Continuity and Disaster Recovery Plan
  • Registration requirements—who needs to be registered, sponsor verifi cation, NFA Bylaw 1101, AP termination notices, temporary licenses
  • NFA disciplinary process
  • Reportable positions
  • NFA Arbitration Rules
  • On-site audits of branch offices
  • Bona fide hedging transactions
  • Trading on foreign exchanges

B. CPO/CTA General

  • Registration requirements
  • Books and records to be maintained
  • Reports to customers
  • Bunched orders

C. CPO/CTA Disclosure Documents

  • Management and incentive fees
  • Performance records
  • How long a CPO or CTA can use a disclosure document
  • Conflicts of interest
  • Pool units purchased by principals
  • Business backgrounds of principals
  • Amendments to disclosure documents
  • Disclosure of disciplinary actions
  • NFA review of document before each use

D. NFA Know Your Customer Rule

  • Client information required
  • Responsibility to obtain additional client information
  • Risk disclosures

E. Disclosure by CPOs and CTAs Required for Costs Associated with Futures Transactions

  • Disclosure of upfront fees and expenses
  • Effect of upfront fees and organizational expenses on net performance

F. Disclosure by FCMs and IBs Required for Costs Associated with Futures Transactions

  • Explanation of fees and charges to customers

G. IB General

  • Accepting funds from customers
  • Guarantee agreements
  • Responsibilities of guarantor FCM
  • Minimum net capital requirements
  • Time stamping of order tickets
  • Books and records to be maintained

H. General Account Handling and Exchange Regulations

  • Risk Disclosure Statement
  • Margin requirements
  • Stop loss orders
  • Preparing orders
  • Proprietary accounts
  • Positions limits and reporting requirements
  • Trade confirmations

I. Discretionary Account Regulation

  • Requirements relating to discretionary accounts
  • Supervision and review of discretionary accounts

J. Promotional Material (Compliance Rule 2-29)

  • Definition of promotional material
  • Standardized sales presentations
  • Use of a third-party consulting or advertising firm
  • Reprints of articles from industry publications
  • Recordkeeping of promotional material
  • Past performance
  • Hypothetical trading results
  • Written procedures for promotional material
  • Supervisory review of promotional material

K. Anti-Money Laundering Requirements

  • Developing policies, procedures and internal controls
  • Customer identification program and recordkeeping
  • Detection and reporting of suspicious activity
  • Training staff to monitor trading activity
  • Recordkeeping
  • Designation of individual or individuals (“compliance officer”) to be responsible for overseeing the program
  • Employee training program Independent audit function

Other NFA Information

The NFA also has this to say about the Series 30 exam:

Branch Manager Examination – Futures (Series 30)

NFA must receive evidence that individuals applying to be a branch office manager have passed the Series 30. However, NFA will not require evidence that they have passed the Series 30 if, since the date they last ceased acting as a branch office manager, there has not been a period of two consecutive years during which they have not been registered as an AP. Additionally, individuals whose sponsor is a registered broker-dealer may, in lieu of the Series 30, provide proof that they are qualified to act as a branch office manager or designated supervisor under the rules of FINRA.

Please contact us if you have a question on this issue or if you would like to start a hedge fund, CPO or CTA.  If you would like more information, please see our articles on starting a hedge fund.  Other related hedge fund law articles include:

Discussion with CFTC Regarding Forex Registration

1 Reply

[http://www.hedgefundlawblog.com]

No New Information on Forex Regulations

I have been getting more and more questions regarding forex registration and unfortunately I have not had much to say because there has been little information coming from the CFTC.  The NFA has done a good job of anticipating what those rules will generally look like, but the NFA (like us) must wait for the CFTC to propose (and then adopt) regulations requiring the registration of forex managers.  Accordingly any preliminary guidance from the NFA should be taken as that – preliminary guidance.  The fact that the regulations are coming obviously puts pressure on legal professionals and forex managers alike as we all try to figure out what will need to be done, when and how.

For this reason I have been calling the CFTC to try to figure out when we might hear something.  After calling the CFTC daily for over a week now, today I finally received a call back from a representative of the CFTC’s Division of Clearing and Intermediary Oversight.  Unfortunately, the representative was as tight-lipped about the future regulations as the CFTC has been up to this point.

During the conversation, I asked several questions and did not receive any responses other than what you would expect from a government agency.  The gist of the conversation was that the CFTC is working on the regulations and the reason that it is taking so long is that there are many aspects to the regulations which must be thoroughly reviewed be many different members and parts of the CFTC.   It sounded like the regulations could be quite detailed – the representative stated that it is not just simply these managers with this amount of assets must register, that the regulations will be comprehensive.  Another issue which remains unanswered is whether there will be exemptions from the registration provisions, similar to the current CPO exemptions and CTA exemptions from registration.

So with that being said, there is not much new to report.  Forex managers are still in a bit of a limbo until the CFTC promulgates the proposed regulations.  Until that happens it would be wise for forex managers to consider getting ready for registration by discussing the issue with a forex attorney.  Managers may also decide to move forward and begin taking the Series 3 exam and the Series 34 exam.  Managers (especially forex hedge fund managers) are especially encouraged to talk with their attorney about potential registration requirements under their state commodity codes – I will be posting more on this issue tomorrow.

I know this does not tell you very much, but please feel free to contact me if you have any specific questions or if you would like to find out more about forex CPO, CTA or Introducing Broker registration.

For more articles related to forex law and registration, please visit our forex hedge fund articles page.

Forex Hedge Fund Articles

8 Replies

Below are a list of the articles which are devoted to forex hedge funds and the regulations involved in the off-exchange foreign currency markets.  Please contact us if you would like to start a forex hedge fund or if you would like information related to the forex registration requirements.

Forex Overview

Forex Hedge Funds

Forex Registration

Series 34 Exam


Discussion about Forex Registration and the Series 34 Exam

4 Replies

(www.hedgefundlawblog.com)

Creating Series 34 Exam Prep Materials

One central issue in the investment management industry is increases in regulation of previously unregulated or lightly regulated activities.  The major area which will see direct regulation within the next 12 months is the retail off-exchange foreign currency industry.  As we have discussed, forex managers and those parties which solicit retail forex investors are is expected to have to register with the NFA as forex CPOs, forex CTAs or forex introducing brokers.  As part of this process, individuals subject to registration are going to need to pass the Series 34 exam.  This article will discuss the exam and the new exam prep materials I have been creating to help managers pass the exam.

Overview of the Series 34 Exam

The Series 34 exam is a brand new test created by the NFA at the very end of last year. I have talked with the National Futures Association (which is the self regulatory organization in charge of the forex registration process) and they have told me that individuals can now take the Series 34 exam.  To take this exam individuals are going to need to submit a Form U-10, pay the $70 testing fee and sign up with either Pearson Vue or Prometric to actually take the exam.  The exam is 60 minutes long, has 40 questions and requires 70% correct answers for successful completion.

Series 34 Exam Preparation Materials

There are very few Series 34 materials out there for managers to study from.  I have talked with many different groups and they are planning on potentially releasing a Series 34 exam study guide, but these groups will be waiting until they are able to judge the demand for such a product.  Of course we cannot know the demand for the product until the CFTC proposes its forex registration rules, but it is a safe bet that many forex managers will need to take the exam.  Accordingly, I have started creating a free series 34 exam study guide for the general public.

The free series 34 exam study guide will provide an explanation of all of the major concepts that the NFA has stated will be covered in the exam.  I have provided in depth explanations on the concepts through my own research through many available online resources.  I believe that these materials will be strong, especially with regard to the regulatory requirements for forex managers – I have been reporting on these requirements now for over 6 months and have been able to cull together great resources.

In addition to the free guide, I will also have premium materials available for purchase.  These materials will include an outline, notecards, and practice questions.

  • The series 34 outline will be similar to an outline that you might see prepared for a law school exam – I have taken numerous exams (including many FINRA sponsored exams – Series 3, Series 7, Series 24, Series 63, Series 65) and have found that an outline is a great way to make sure all of the basic concepts are ingrained prior to taking the exam.
  • The series 34 notecards will be an exact replica of the notecards which I will use to study.  You can either print out the notecards and cut them out or you can copy the information onto individual notecards yourself.  I would recommend you write out the information onto individual notecards – in this way you enforce the learning process.  Probably my favorite way of studying is through notecards.  I can take them with me anywhere I am going and then study them when I am in line at a store, on a bus, during a TV commercial, etc.
  • The series 34 practice questions will be similar in style to the questions which you will expect to see on the exam.  I am going to write practice exam questions before I take the exam based on what material I think will be covered in the exam.  I am going to try to write toward areas of expected weakness so I anticipate the questions will be more difficult than those to be seen on the exam.  Additionally, I plan to go back and add more questions after I take the exam to best reflect the nature and difficulty of the questions on the exam.

Information on How to Study for the Series 34 Exam

The ultimate goal of the above exam prep materials is to provide forex managers with the tools they need in order to pass the test on the first try.  It is a waste of time and money to study and then not pass the test on the first time because of lack of preparation or study materials.  If the manager does not pass the exam on the first try, they will need to wait 30 days before they can take it again; if a manager does not pass the exam on the second try, they will need to wait 60 days before they can take it again.

As I have coached managers through the test taking process numerous times before I understand what is needed to pass on the first time – it is simply not enough to only read an exam prep guide.  You must read an exam prep guide and proactively study the concepts which will be tested.  Very smart people have failed the regulatory exams because of not properly studying.   You will need to over-study.

A common joke in the industry is that the perfect score is 70% because it means that you didn’t study too much to pass.  If someone else is paying for you to take the exam, and if you are still considered “on the clock” if you take time off of work to go take the exam, then this thinking may be fine (if you don’t mind taking tests) – however, for busy forex managers your time is too valuable to waste by not passing on the first try.  You should go into the test confident that you will pass and not hoping that you studied “just enough” to pass.

Series 3 Exam – A Pre-Requisite

While anyone can take the Series 34 exam, forex managers will likely need to have passed the Series 3 in addition to the Series 34 exam.  [HFLB Note: the CFTC has not promulgated rules on this issue so this is not a for sure requirement yet.]  I have taken the Series 3 exam and passed and provided more information here (general guidelines on how to study for a FINRA exam can be found here) – please review these articles in addition to the other resources linked on this page.

Timing of Materials Release

I should be able to release the materials later on this week.  I am currently planning to take the exam sometime this week.  I will update this article once the materials have been posted on our other websites.  In the meantime, please feel free to contact us with any questions you might have.

Other related hedge fund law articles:

CFTC Uses New Enforcement Authority to Police Forex

Leave a reply

Forex Firm Caught Operating a Ponzi Scheme

The CFTC just announced that it charged a group out of Atlanta with operating a Ponzi scheme.  This is the first action the CFTC has brought against a forex firm for fraud.  At the beginning of last year Congress passed the Farm Bill which provided the CFTC with more authority for regulating the off-exchange foreign currency markets (also known as the spot forex markets).  This action indicates that the CFTC is serious about cleaning up the forex markets.  As we’ve detailed before, forex registration will be coming shortly.  Continue reading →