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Overview of Forex Registration & Compliance Issues

By Bart Mallon, Esq.

In preparation for the implementation of the new retail forex regulations, the NFA recently conducted a retail forex registration and compliance workshop in Las Vegas at the Trader’s Expo.  The workshop covered a number of topics which the NFA views as especially important for forex managers.  I attended the workshop and the following discussion is based on my notes of the conference as well as collateral material provided by the NFA.

This overview will cover the various sessions throughout the day including:

• Registration
• General Compliance
• Net Capital, Recordkeeping & Reporting Requirements
• Discussion/ Individual Consultations

[Note: this article currently only has the summary of the registration session.  I will be adding the additional summaries directly to this page over the next few days.]

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Registration Session

Firm Registration & Exemption Requirements

This first part discusses the various registration categories and the potential exemptions and other pertinent information.

RFED & FCMs

• These are entities which execute forex trades for managers.  We will not go into the registration and compliance requirements for these groups in this overview and will instead focus on forex managers and introducing brokers.

Commodity Trading Adviser (CTA)

• Definition: a firm which is compensated for providing advice with respect to forex transactions, usually by having power of attorney (POA) to trade a client’s account held at an FCM or RFED.  Groups that provide individualized advice without a POA may also be considered to be a CTA.
• Exemptions: a firm is exempt from CTA registration if the firm (i) provides advice to less than 15 people over the past 12 months and (ii) does not generally hold itself out to the public as a CTA. Managers should note that this exemption is narrowly construed by the CFTC and that very few forex managers will  fit within the exemption.  This exemption is self-executing and so the firm will not need to make a filing with the CFTC or NFA if they are claiming this exemption.  There are additional exemptions which are available but not often used by most forex managers.
• Costs:
  • Firm – $200 non-refundable registration fee
  • APs/Principals – $85 registration fee (for each individual)
  • NFA Membership Fee – $750 (yearly)
  • Exam Fess – varies with respect to exam
• Principal/AP Requirement: each firm must have at least one Principal listed and at least one Associated Person registered with the firm (see discussion below).  Each Principal and AP will need to have (i) fulfilled the proficiency (exam) requirements and (ii) provided the NFA with fingerprint cards for the FBI background check.
• Disclosure Documents: CFTC regulations require each forex CTA disclosure document to include the following information:
  • Basic Background Information on the CTA
  • Information on the Trading Program
  • Discussion of the Risk Factors
  • Discussion of Conflicts of Interest
  • Litigation Information (see NFA Litigation Statement Requirement)
  • Certain Performance Reports
  • Supplemental information
• Timing: with respect to the actual registration of the entity and the Principals/APs, this can usually be done quickly.  In most cases, after all fees have been paid and a Principal has submitted fingerprint cards and has completed all necessary exam requirements, the registration will be complete in about two days.  While the registration is done quickly, the disclosure document acceptance process can be lengthy.  For a normal CTA it will usually take about 5-10 weeks to get the document accepted, however this will depend on a number of items including the NFA examiner you are assigned and the work load of the NFA.

Commodity Pool Operator (CPO)

• Definition: a firm which is compensated for providing advice to a pooled investment vehicle.  The investment vehicle (colloquially known as a “hedge fund”) is deemed to be a “commodity pool” and the firm providing advice is the operator or CPO.
• Exemptions: there are a number of CPO exemptions which are potentially available for forex managers.  We have detailed these requirements before in our list of CPO exemptions.
• Costs:
  • Firm – $200 non-refundable registration fee
  • APs/Principals – $85 registration fee
  • NFA Membership Fee – $750 (yearly)
  • Exam Fess – varies with respect to exam
• Principal/AP Requirement: same as above.
• Disclosure Documents: the requirement is generally the same as for CTAs.  However, CPO disclosure documents are usually much longer and deal with a number of other federal laws.  CPO disclosure documents must be drafted by an attorney.
• Timing: generally timing will be similar to the above.

Guaranteed Introducing Broker

• Definition: generally a firm which introduces client accounts to an FCM or RFED.  These brokers might include groups that license EA software and receive per trade compensation from a broker.  A guaranteed IB is a firm which only introduces to one FCM or RFED and who enters into a guarantee agreement with the FCM or RFED.
• Exemptions: generally there are no exemptions.  Firms should note that the exact manner in which the firm is compensated (e.g. for use of the EA software) may make a difference in whether the firm will need to be registered wellbutrin buy as an introducing broker with the NFA.
• Costs:
  • Firm – $200 non-refundable registration fee
  • APs/Principals – $85 registration fee
  • NFA Membership Fee – $750 (yearly)
  • Exam Fess – varies on exams (see below)
  • Other – written guarantee agreement with the FCM or RFED must be executed prior to registration
• Principal/AP Requirement: same as above.

Independent Introducing Broker

• Definition: definition is same as above, except an independant IB may introduce to any number of FCMs or RFEDs and does not need to enter into a guarantee agreement.  The independent IB will need to maintain a certain net capital.
• Exemptions: generally there are no exemptions.  As above, the manner of compensation will determine whether the firm is an IB.
• Costs:
  • Firm – $200 non-refundable registration fee
  • APs/Principals – $85 registration fee
  • NFA Membership Fee – $750 (yearly)
  • Exam Fess – varies on exams (see below)
• Other: must maintain net capital of $45,000 subject to CFTC regulations.  NFA rules require an extra $5,000 buffer.
• Principal/AP Requirement: same as above.

Discussion of Principals and Associated Persons

Principals

Principals generally mean persons who meet any of the following:

• Certain title: Director, President, usually any “Chief” role
• Ownership: generally owners with 10% or more interest, including owners which are entities and owners of those entities (there are also look-through rules for entities)
• Other: Individuals with management and supervisory authority

Associated Person

Generally any partner, officer, employee, consultant, or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves:

• the solicitation of funds, securities, or property for participation in a commodity pool or
• the supervision of any person or persons so engaged.

Firms should note that while the definition of AP does not include a person who acts solely as a trader, the NFA highly recommends that such persons become registered as APs.  If a firm decides that such person does not need to register with the NFA, the firm must be extra careful that the trader does not perform any functions of an AP.  This will likely be an issue which the NFA will examine closely during any audit.

Other Important Discussion Items

Soliciting Clients after October 18, 2010

Forex managers who currently are managing client accounts but are not registered with the NFA, will need to be registered by the October 18th deadline and continue to manage accounts for current clients.  However, these managers will not be able to accept new money from existing clients or new clients until the disclosure document is accepted by the NFA.

Managers with a Disciplinary History

Individuals who have certain criminal or regulatory issues in their background will need to make sure that they are able to produce records of the issue.  For persons with these issues, the NFA will require full records and will review those records prior to deciding whether to allow the person to register as an AP.  For more information, please see our discussion of registration issues for managers with disciplinary history.

Heightened Supervisory Procedures

Many forex managers and introducing brokers will need to implement heightened supervisory procedures because they will have Principals/APs which were either subject to prior NFA disciplinary actions or worked for firms subject to NFA disciplinary actions.  Almost every single forex broker has been subject to NFA disciplinary actions so persons who come from these firms will need to be aware of this fact and firms may need to augment their employee base to fit within certain guidelines.  This issue will most likely be identified by NFA staff during the registration process and may delay a registration.

Branch Office

Firms which have more than one office must designate a main office.  All of the other offices will be deemed to be banch offices and each of these branch offices will need to have a branch office manager (who has passed the Series 30 exam).

Firms often wonder whether a home office will count as a branch office.  Generally, it will depend on the exact facts of the situation, but if any person is acting as an AP at the home office, then it will be deemed to be a branch office.

While it does not cost extra to have a branch office, firms must make sure that they institute certain oversight procedures with respect to the branch office.  This means that compliance policies and procedures must be implemented.  This is likely to be another issue which the NFA will examine closely during an audit.

For more information, please see our article on the NFA Branch Office Designation.

Forex Exams

Overview – we have discussed the various exam requirements for forex managers a number of times.  For full information, please see our overview of the forex exams.  We also have specific information on the Series 3 exam, Series 30 exam, and how to pass the Series 34 exam.

Grandfather Provisions – For persons who were registered on May 22, 2008 as an AP (and have remained continuously registered as an AP with the CFTC), such persons will not be required to pass the Series 34 exam prior to providing advice to customers with respect to forex transactions.

Discretionary Waiver – some persons who would normally be required to complete the proficieny requirements may be able to apply for a waiver of the requirements from the NFA.  Such waiver is rarely granted.  For more information, please see NFA Rule 402.

Overview of Registration Process

At this point during the presentation the NFA staff took us completely through the registration process on the NFA’s online registration system.  In general the process is fairly straightforward and the NFA has provided a number of resources on their website which are designed to help managers navigate the process.  In general the process includes the following steps:

• Obtain Security Manager Access
• Pay Registration Fees
• Complete Form 7-R for Firm Application
• Complete Form 8-R for all Principals and APs

General Compliance Session

[To be forthcoming…]

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Other related hedge fund law articles:

• NFA Forex Disclosure Document Requirements
• Foreign Language Disclosure Documents
• NFA Social Networking Compliance

Bart Mallon, Esq. runs the hedge fund law blog and provides forex registration and compliance services to forex managers through Cole-Frieman & Mallon.  He can be reached directly at 415-868-5345.