Tag Archives: NFA

NFA Notice to CPOs with Assets at PFG

Managers Required to Provide Information to NFA Immediately

As has been widely reported, futures FCM PFG has filed for bankruptcy and the CFTC has filed an action against the firm.

Below is a reprinted notice to NFA Members who are commodity pool operators. CPOs must inform the NFA about any accounts held at PFG including information on amount of assets held at PFG and most recent pool NAV. CPOs will need to provide this information to the NFA immediately and there is contact information in the notice below if a CPO has specific questions for the NFA.

If you are a CPO, CTA or IB with assets held at PFG, please contact our firm if you have questions with respect to next steps.


Notice to Members I-12-13

July 10, 2012



On July 9, 2012, National Futures Association (NFA) took an emergency enforcement action against Peregrine Financial Group, Inc. (PFG) and Peregrine Asset Management, Inc. (PAM). NFA deemed this action necessary to protect customers because PFG is unable to demonstrate that it can meet its capital requirements and segregated funds requirements, and because NFA has reason to believe that PFG does not have sufficient assets to meet its obligations to its customers. The CFTC has also filed a complaint in the United States District Court for the Northern District of Illinois against PFG and its owner, Russell R. Wasendorf, Sr. alleging that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the Commission.

In light of these events, NFA is requiring all CPO Members with pool accounts held at PFG to provide NFA with a notice of the following information:

The name of each pool account held at PFG and its NFA Pool ID number;

  • The current dollar amount of pool assets held at PFG for each pool account and the corresponding date;
  • The most recent net asset value for each pool with funds at PFG and the date of the valuation;
  • Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.
  • CPO members must provide this information to NFA by sending an email to [email protected] within 48 hours of receiving this notice.

Any questions regarding this request should be directed to:

Tracey Hunt, Senior Manager, at (312) 781-1284 or at [email protected]

Mary McHenry, Senior Manager, at (312) 781-1420 or at [email protected]

You are receiving this message because you are either a Member of National Futures Association (NFA) or you subscribed to the email subscription list on NFA’s Website. To cancel or change your subscription at any time, visit the Email Subscriptions page on our Website at http://www.nfa.futures.org/news/subscribe.asp.


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations. Bart can be reached directly at 415-868-5345.

Major Futures Industry SROs Call for More FCM Reporting

The NFA released an announcement that the major SROs for the futures industry – the CME, NFA, ICE, KCBOT, and the Minneapolis Grain Exchange – have created a series of recommendations on ways to increase the security of customer deposits with FCMs. I

t is no surprise that the proposed safeguards all involve more oversight by the SROs.

The recommendations can be summed up as follows:

  1. Require FCMs to file daily segregation reports
  2. Require FCMs to file bimonthly reports detailing how segregated funds are invested and where those assets are custodialized
  3. Require more frequent unannounced audits/inspections of the FCM
  4. Require a principal of the FCM to approve a disbursement from the segregated accounts which is in excess of 25% of those accounts

As we discussed in a piece earlier about the changing managed futures regulations, there will be various proposals over the next several months detailing how the futures industry can be better regulated. Many of these proposals mean that FCMs will need to increase compliance and oversight. We believe that a number of the proposals below (and a number which have been suggested by other groups) are reasonable and would increase managed futures customer protection. The question, as with any increase in regulation, is whether the costs of implementing and maintaing these compliance programs outweigh any benefits to customers. We will certainly hear more on these issues in the near term…


Futures industry SRO committee announces initial recommendations to strengthen current safeguards for customer segregated funds

March 12, Chicago – A special committee composed of representatives from the futures industry’s self-regulatory organizations (SRO) has proposed a series of initial recommendations for changes to SRO rules and regulatory practices designed to strengthen current safeguards for customer segregated and secured funds held at the firm level in light of the MF Global bankruptcy.

The four recommendations include:

• Requiring all Futures Commission Merchants (FCM) to file daily segregation and secured reports. This will provide SROs with an additional means of monitoring firm compliance with segregation and secured requirements and a risk management tool to track trends or fluctuations in the amount of customer funds firms are holding and the amount of excess segregated and secured funds maintained by the firms.

• Requiring all FCMs to file Segregation Investment Detail Reports, reflecting how customer segregated and secured funds are invested and where those funds are held. These reports would be filed bimonthly and will enhance monitoring of how FCMs are investing customer segregated and secured funds.

• Performing more frequent periodic spot checks to monitor FCM compliance with segregation and secured requirements. FCMs are audited each year by both their DSRO and their outside accountant.

• Requiring a principal of the FCM to approve any disbursement of customer segregated and secured funds not made for the benefit of customers and that exceed 25% of the firm’s excess segregated or secured funds. The firm would also be required to provide immediate notice to its SROs.

Dan Roth, president of NFA, stated that “The committee believes that these recommendations will provide regulators with better tools to monitor firms for compliance with segregation and secured requirements and strengthen the industry’s customer protection regime. These are our initial recommendations. We will continue to work with the CFTC and the industry as we consider additional improvements.”

The special committee, formed in January 2012 in response to the MF Global bankruptcy, includes representatives from CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.


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


CTA Expo 2011 Chicago

Ronnie Lott Keynote Speaker at CTA Conference

We are gearing up for the CTA Expo in Chicago next month. The CTA Expo, which is also held in New York and London, has become the go-to event for CTAs and others member of the managed futures industry. As always, the NIBA will be having its own conference the day before the CTA Expo and there will be a joint NIBA/CTA Cocktail Party.

The NIBA event will be September 12, 2011 and the agenda includes:

  • Rules, Regulations, Revenue: Round III with Moderator Steve Pherson from Schuyler Roche
  • Grow Your Business by Hiring the Right People by Pat Lunkes of Parkway Consulting Group
  • Marketing Strategy Makeover by Candyce Edelen & Phil Donaldson of Propel Growth
  • A Bubble in Commodities: What to Look for by Darin Newsom of Telvent DTN
  • Anatomy of an Online Marketing Campaign: Generating Leads Online by Shane Stiles of Gate 39 Media

The CTA Expo will be September 13, 2011 and the  agenda includes:

  • Welcoming Remarks by Bucky Isaacson and Frank Pusateri
  • Maximizing the Value of your Conference Attendance by Ron Suber of Merlin Securities
  • Successful Marketing in Asia by Rumi Morales of the CME Group
  • Reputation – Creating Power Through Personal Branding by Lida Citroen
  • Keynote Speach by Ronnie Lott of All Stars Helping Kids<

    /a> – Professional Sports and Business – Lessons Learned

  • Marketing Managed Futures in Europe –

    Tips from the Trenches by Simon Rostron of Rostron Parry

  • The Regulatory Environment in 2011 and Beyond by Dan Driscoll of the National Futures Association
  • The Role of Emerging Managers in a Portfolio by Joseph Schlater of Busara Advisors
  • Institutional Investors and What They Look For in a Manager by Keith Palzer of Bank of America Merrill Lynch
  • The Marketing Impact of a Professional Back Office by Dana Comolli of DMAXX
  • Promoting Managed Futures as an Investment by Mark Melin of High Performance Managed Futures

Cole-Frieman & Mallon LLP has been a sponsor of the CTA Expo since 2009 and this year we will be introducing Ron Suber of Merlin Securities on Tuesday morning.  For more information on the events, please see the CTA Expo program and NIBA Conference schedule.


Cole-Frieman & Mallon LLP provides legal advice to CTAs and CPOs, including NFA compliance and regulatory guidance.  For more information, please see our CTA and CPO Registration and Compliance Guide or call Bart Mallon directly at 415-868-5345.


NFA Provides Guidance for CPOs on Performance Fees

Notice to Members I-11-01

As many CFTC registered entities understand, having disclosure documents approved by the NFA can be a lengthy and frustrating process.  While the NFA has done a decent job explaining to firms that disclosure documents must meet all of the requirements under the CFTC’s Part 4 Regulations, it can feel as though the NFA has a target which is constantly moving.  As we explained earlier in a post describing the NFA Changes after the CFTC audit (see also CFTC Report on NFA Registration Process, the CFTC will occasionally communicate to the NFA certain items which the CFTC would like to see emphasized or changed in the disclosure documents.

Recently, the CFTC provided guidance to the NFA with respect to incentive or performance fee arrangements in CTA and CPO  investment programs.  Essentially the CFTC asked the NFA to make sure that all disclosure documents for programs with performance fees include a discussion of the conflicts of interest involved with performance fee arrangements.  Specifically:

[The CFTC] staff’s guidance prescribes that every CPO or CTA that charges a typical incentive fee include in its Disclosure Document a discussion that the incentive fee may encourage a CPO or CTA to take excessive risks to earn an outsized incentive fee, and that such risk-taking may place the interests of the CPO and CTA in conflict with the interests of its clients. Furthermore, [CFTC staff] has indicated that the fact that Regulations 4.24(i) and 4.34(i) require the disclosure of fees and expenses (from which conflicts of interest frequently arise) does not mitigate or lessen the required discussion of conflicts of interest.

Many firms will have already provided this information in the disclosure documents.  For those groups who have not, this means that the disclosure document will need to be amended and reviewed by the NFA according to normal amendment procedures.

The full notice to members is reprinted below and can be found here.


Notice I-11-01

January 05, 2011

NFA provides guidance for disclosure of conflicts of interests arising from Typical Incentive Fee Arrangements by commodity pool operators and commodity trading advisors

In 1997, the Commodity Futures Trading Commission (CFTC) delegated the review of Disclosure Documents submitted by commodity pool operators (CPO) and commodity trading advisors (CTA) to NFA. The Division levaquin cipro of Clearing and Intermediary Oversight (DCIO) performs periodic oversight of NFA’s implementation of its delegated authority. As part of these reviews, DCIO staff has recently communicated to NFA by letter dated December 2, 2010 its position as to the disclosure of conflicts of interests that arise from typical incentive fee arrangements. NFA is providing the following guidance based upon DCIO’s letter to assist members in complying with the requirements as they relate to the disclosure of conflicts of interests.

CFTC Regulations 4.24(j) and 4.34(j) require CPOs and CTAs to include in their respective Disclosure Documents a “full description of any actual or potential conflicts of interest” regarding “any aspect” of their pools or trading programs as it concerns an enumerated list of entities, including the CPOs and CTAs themselves.

DCIO staff’s guidance relates specifically to the conflicts of interests arising from the collection of incentive fees by CPOs and CTAs. The typical incentive fee collected by a CPO or CTA is usually a fixed percentage of new profits that exceed a pool’s or an account’s previous high-water mark. DCIO stated that from one perspective, the typical incentive fee can be viewed as aligning the interests of the CPOs and CTAs with the interests of their clients as the fee ensures that CPOs and CTAs are compensated in proportion to their clients’ gains, which plainly incentivizes CPOs and CTAs to pursue investment strategies that will seek to maximize returns for their clients. DCIO further states that the typical incentive fee can also be viewed as placing the interests of CPOs and CTAs in conflict with the interests of their clients. From this perspective, the incentive fee could encourage a CPO or CTA to take excessive risks in an attempt to earn an outsized incentive fee. Because the typical fee is generally paid quarterly and is not subject to clawbacks for poor long-term performance, the typical incentive fee can be viewed as an incentive for CPOs and CTAs to take greater short-term risks, which may conflict with their clients’ long-term interests.

DCIO staff’s guidance prescribes that every CPO or CTA that charges a typical incentive fee include in its Disclosure Document a discussion that the incentive fee may encourage a CPO or CTA to take excessive risks to earn an outsized incentive fee, and that such risk-taking may place the interests of the CPO and CTA in conflict with the interests of its clients. Furthermore, DCIO has indicated that the fact that Regulations 4.24(i) and 4.34(i) require the disclosure of fees and expenses (from which conflicts of interest frequently arise) does not mitigate or lessen the required discussion of conflicts of interest.

CPOs and CTAs are encouraged to review their existing Disclosure Documents in light of DCIO’s guidance and make any necessary changes prior to submitting subsequent filings of the document. If you have any questions concerning this notice or Disclosure Documents generally, please contact Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420) or Susan Koprowski, Manager, Compliance ([email protected] or 312-781-1288).


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.

NFA Changes Post CFTC Audit

The results of the CFTC’s audit of the NFA were released a few weeks ago and we have already begun to see a few changes to the way the NFA operates.

Access to BASIC Security Manager

Previously newly formed entities which were registering with the CFTC could start the registration process prior to formally being established.  Now, the NFA must have proof that the entity is in existence prior to granting security manager status.  Accordingly, groups wishing to register must wait until the entity is in existence and then submit the security manager form.  This will usually delay an initial application by about a week. We believe it would be more effective if the NFA made sure that the entity was established prior to submitting a registration application.  Absent such procedures, we believe that the security manager process should be streamlined and that access should be granted next day via email.  There is no good reason to have such a slow process just to access the online registration system.

Client withdrawals from account

Previously it was common for some CTAs to have some sort of lock-up period with respect to a trading program.   Now, the NFA will not allow a CTA to have a lock-up period because the client is always able to go to the FCM and cancel the account.  While from a technical perspective the client always has access to its own account and the CTA can’t control access to the account, many CTAs preferred the implicit protection afforded through the contractual agreement that the account would stay open during the lock-up.   By not allowing the lock-up language, CTAs will potentially be subject to greater and more frequent withdrawals from investors.

Revising Disclosure Documents

Many NFA Member firms will find out about the various new NFA procedures during the disclosure document revision process.  Moving forward, various deficiencies with disclosure documents that have been approved by the NFA in the past will need to be fixed (even though the documents were previously approved) as the managers revise the documents and seek instant filing or regular filing.

Please let us know if you have experienced any other changes with the NFA.


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.

NFA Registration for Forex Managers with a Disciplinary Record

In January 2010, the CFTC proposed rules regarding regulation of retail off-exchange foreign currency (forex) products.  It received over 9,000 comments relating to the forex rules and will start publishing final rules this fall. One component of the proposed rules requires all forex account managers and pool operators to register with the CFTC as forex CTAs and CPOs and to become NFA Members.  For those forex managers with criminal disclosures, a concern is how long it will take to get through the registration process and what registration will entail.

This article describes the registration process for forex managers with disciplinary disclosures and the issues they will likely face.

Anticipated Forex Registration Process

The forex registration procedures are likely going to be the same as those currently in place for regular CPOs and CTAs.  CPOs and CTAs must file the following:

  • a completed online Form 7-R (including NFA membership sections)
  • a non-refundable application fee
  • CPO/CTA Membership Dues

Principals and Associated Persons of a CPO or CTA must also file the following:

  • a completed online Form 8-R
  • Fingerprint Cards
  • Proficiency Requirements (e.g. Series 3)
  • a non-refundable Principal Application Fee
  • a non-refundable Associated Person Application Fee

In addition to providing the application materials discussed above, forex managers will likely have to meet regulatory exam requirements–the Series 34 and Series 3 exams.

Disciplinary Disclosures on Forms 7-R and 8-R

On Forms 7-R and 8-R, the manager must provide disciplinary information for the firm, the Principals, and the Associated Persons.  This includes criminal disclosures, regulatory disclosures, and financial disclosures.  The NFA has indicated that if any of the disciplinary information disclosed is a disqualification from registration under Sections 8a(2) or 8a(3) of the Commodity Exchange Act, the application will probably be reviewed by an internal NFA committee.

Disqualifications under Sections 8a(2) and (3) include, for example:

  • suspension or revocation of prior NFA registration
  • a permanent or temporary injunction from (i) acting as an FCM, IB, floor broker, floor trader, CTA, CPO, associated person, securities broker, etc.; or (ii) activity involving embezzlement, theft, extortion, fraud, misappropriation of funds, etc.
  • a conviction within 10 years for a felony that (i) involves transactions or advice concerning futures contracts; (ii) arises out of the conduct of the business of an FCM, IB, floor broker, CTA, CPO, etc.; or (iii) involves embezzlement, theft, extortion, fraud, misappropriation of funds, securities or property, forgery, etc.
  • a finding, by a federal or state regulatory body, that the manager has violated various securities and commodities laws

It is important to disclose all disciplinary matters.  Failure to disclose such matters could be an additional ground for disqualification from registration.  It is also important that if the forex manager answers “Yes” to any of the disciplinary information questions, he or she provides a written explanation detailing the events and conduct involved.  In addition to this explanation, other documents may also be required by the NFA (e.g. court records).  Failure to provide the additional documentation will inevitably delay the registration process.

Providing Additional Documents for Criminal Matters

If a criminal matter is disclosed, the NFA will want documents that reflect the following information:

  • the complaint;
  • the entry of a plea or plea agreement, or judgement/conviction;
  • the sentence;
  • proof that you completely satisfied your sentence; and
  • the final outcome of the court’s action .

It is probably best to request your entire court file so that the documents are available for the NFA.

Review by an Internal NFA Committee or Scheduling a Hearing

Upon receiving the application materials listed above (and any required supplemental documents (e.g. court records)), the reviewer will forward the case on to the internal NFA committee.  We spoke informally to an NFA reviewer who stated that the committee hears cases once a week, on a first-in, first-out basis.  That committee will review the circumstances of each disqualification independently and decide whether to approve registration or to recommend a proceeding to deny registration.  The NFA reviewer we spoke to said that a decision by this committee is generally made within 24 hours.  Upon approval, the firm will appear on the NFA’s BASIC search engine.  If the application is denied, a denial letter is sent to the manager.  A hearing can then be scheduled with the legal department and additional information regarding the registration may be provided.

At the end of the hearing, the registration is essentially either denied, approved, or approved with conditions.  It is difficult to predict the amount of time it would take for a forex manager with a criminal record to get through the NFA registration process.  If supplemental documents (e.g. court records) are missing, the reviewer will have to send deficiency letters to the manager, which will delay the registration process.


Other related hedge fund law articles:

Cole-Frieman & Mallon LLP provides legal support and forex registration services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

CFTC Issues Report on NFA Registration Process

Report Indicates Many Areas Needing Improvement

The CFTC registration process is handled almost exclusively by the NFA and last year the CFTC audited the NFA to see how successful the organization was at conducting the registration process.  The audit report, issued this week, indicates that the NFA needs to improve on many different areas.  One of the most important items which was mentioned a number of times in the report is that the NFA has not standardized the registration process in some areas.

While the CFTC report focuses only on the registration process, there are a number of other issues with the NFA which should have been highlighted.  The first and most important for many managed futures professionals, is the lack of standardization with respect to the disclosure document review process.  CTAs and CPOs both need to have their disclosure documents reviewed by the NFA and during this review process, depending on which examiner is assigned to the review, the process can be relatively straight-forward or quite difficult.  This obviously increases the time before the disclosure document is approved and most likely increases the legal costs involved.  Because our firm completes a number of CTA and CPO registrations each month we see this first hand.

As an anecdote, I have one CPO group who has two separate programs represented by two separate disclosure documents.  The documents are exactly the same except for slightly different investment programs.  These documents went to the NFA for review at the same time and were assigned to two different examiners.  Each deficiency letter came back with about 16 items that needed to be changed for the next draft – however, only 5 were the same!  The fact that two almost exactly same documents receive such disparate treatment is amazing and shows no standardization.  It also perfectly illustrates the oft said statement that “it depends on who you get” when discussing how long it will take for the disclosure documents to be approved.

Below I have included some of the statements I found in the report as well as the CFTC notice.

CFTC Notice: Press Release

The full report: CFTC Report on NFA Registration Process


Quotes from the Report

The Registration Department does not have a procedures manual that documents all of the procedures followed in processing registrations and withdrawals.

The Registration Department’s procedures manual for the Information Center is, in various areas, incomplete, inconsistent and/or outdated.

[T]he Registration Department tends to concentrate responsibility in a small number of staff members and to depend heavily on these staff members’ institutional knowledge in executing certain registration processing procedures. … This reliance on key persons’ institutional knowledge, coupled with the sparseness of the Registration Department’s documented procedures … interjects an unnecessary level of key person risk to the Registration Department.


June 24, 2010

CFTC Releases Report on the Registration Program of the NFA

Washington, DC – The Commodity Futures Trading Commission (CFTC) Division of Clearing and Intermediary Oversight (Division) today notified the National Futures Association (NFA) of the results of the Division’s “Report on the Registration Program of the NFA”. In the Report, the Division assessed whether the NFA has sufficient procedures to execute the Commission’s delegated registration and fitness functions.

The Division found that NFA has sufficient procedures to execute the Commission’s delegated functions with respect to the vast majority of registrants. However, the Division also identified nine areas in which the Commission’s and/or NFA’s procedures must be improved.

Copies of the Report are available the Commission’s website at www.cftc.gov.
Last Updated: June 24, 2010

Media Contacts

Scott Schneider

R. David Gary

Office of Public Affairs


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.

Disclosure Document Guidance for CTAs and CPOs

NFA Provides Overview of Manager Background (Bio) Disclosure Requirements

CFTC registered CTAs and CPOs need to have their disclosure documents reviewed by the NFA prior to using those documents to solicit clients or investors.  As any manager who has gone through this NFA review process understands, the NFA will take their time to scrutinize the documents.  One issue which comes up again and again is the background information that must be disclosed for any principals or managers disclosed in the disclosure document.  Managers should take note of the following points:

  1. Each bio must include a complete and detailed business background for the last 5 years (any gaps must be explained);
  2. Business background further back than 5 years does not need to be disclosed; and
  3. If a manager chooses to mention anything that happened in the manager’s business background further back than 5 years, the manager must disclose all subsequent employment.

The third point is really the most important for this discussion.  Let’s say a manager makes a general reference that he has been in the investment management business for 16 years – that means that the manager will need to provide a description of each job, including dates of employment (month and year) over the last 16 years.  Because in practice this would lead to ridiculously long bios (for some managers), it is generally recommended to leave the bio to the last 5 years so that the bio is manageable.

The NFA recently released a member notice, reprinted below, discussing this issue and the various questions that arise.  The following NFA Notice can be found here.


Notice I-10-12

May 11, 2010

NFA provides guidance for disclosure of business background information by commodity pool operators and commodity trading advisors

In 1997, the Commodity Futures Trading Commission (CFTC) delegated the review of disclosure documents submitted by commodity pool operators (CPO) and commodity trading advisors (CTA) to NFA. The Division of Clearing and Intermediary Oversight (DCIO) performs periodic oversight of NFA’s implementation of its delegated authority. As part of these reviews, DCIO staff has communicated to NFA its expectations as to the type and breadth of information that must be disclosed regarding the background of CTAs, CPOs, and relevant individuals. NFA is providing the following guidance to clarify the requirements of the applicable regulations regarding the disclosure of business background.

CFTC Regulations 4.24 and 4.34 require that disclosure documents include, for the previous five years from the date of the document, the business backgrounds of the CTA, the CPO, the major CTAs, the CPOs of major investee pools, the pool’s trading manager, and each principal of the foregoing who participates in making trading or operational decisions, or supervises persons so engaged. For each of the persons listed above, the document must include employers, business associations, or ventures (including the starting and ending month and year) for the same five year period, as well as a discussion of the duties performed by the person for each. When disclosing business background information, the discussion must be complete for the entire five year period. Any gaps in time must be explained.

Examples of disclosures within the most recent five year period:

Ms. Smith attended ABC University and graduated in June 2005 with a degree in Economics. In August 2008, she joined XYZ LP as an associated person.

The business background must disclose what Ms. Smith was doing during the period between June 2005 and August 2008. Additionally, if XYZ LP is not the entity for which the disclosure document has been prepared, a description of its main business must be included.

Mr. Jones has been a listed principal of XYZ Company, a commodity trading advisor, since January 2005. In 2007 Mr. Jones began publishing a monthly newsletter entitled “The Trading Corner,” which outlines Jones’ trading research in the energy markets.

The business background must disclose Mr. Jones’ duties at XYZ Company. The month in which Mr. Jones began publishing his newsletter and the name and main business of the employer, if any, for whom the newsletter is being published must also be disclosed.

Mrs. Green was registered as an associated person of LMN LLC, a commodity pool operator from March 2008 until May 2008. In June 2008, she formed PQR Limited Partnership (PQR), a commodity pool operator which became registered on November 1, 2008. Mrs. Green became a registered AP and listed principal of PQR on November 1, 2008.

The business background must be complete for the last five years. Specifically, it must disclose what Mrs. Green was doing prior to March 2008. Mrs. Green’s and PQR’s activities between June 2008 (when she formed PQR) and November 2008 (when she and the firm became registered) must also be disclosed.

As noted above, CFTC Regulations mandate disclosure of business background information for only the last five years from the date of the disclosure document. DCIO has advised NFA, however, that if a CTA or CPO elects to provide business background information beyond the previous five year period it must provide this information in the same level of detail as that required for the last five years. DCIO has further directed that a general reference regarding the length of an entity’s or individual’s experience or involvement in an industry serves to extend the time period for which disclosures must be made.

The following is an example of a disclosure recently submitted to NFA and an explanation as to why it would not comply with the above stated policy:

Example of disclosure beyond the most recent five year period:

Mr. Brown has been in the futures industry since October 1982 or Mr. Brown has over twenty eight years of management experience.

Mr. Brown’s business background must be disclosed from October 1982 to the present. The disclosure must be complete for the entire period including the name and main business of each employer, the nature of the duties performed for each employer, and the starting and ending dates (month and year) of employment, including an explanation of any gaps in employment.

CPOs and CTAs are encouraged to review their existing disclosure documents in light of DCIO’s guidance and make any necessary changes prior to submitting subsequent filings of the document. If you have any questions concerning this notice or disclosure documents generally, please contact Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420) or Kaitlan Chi, Manager, Compliance ([email protected] or 312-781-1219).


Other related hedge fund law blog posts include:

Cole-Frieman & Mallon LLP is a hedge fund law firm which provides CTAs and CPOs with comprehensive formation and regulatory support.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

NFA Announces Effective Date of New CPO Reporting Rule 2-46

First CPO Quarterly Report Due May 17, 2010

As we recently discussed in an earlier article on NFA Compliance Rule 2-46, the NFA has adopted a new compliance rule which will require commodity pool operators to provide certain information to the NFA on a quarterly basis.  In general CPOs will need to provide the NFA with the following information about their pool: the names of certain service providers/ counterparties, change in NAV over the quarter, monthly ROR for the fund, and information on large investments (greater than 10% of the fund’s NAV).

The NFA will be holding a webinar so that members can see how to complete the quarterly filing through the EasyFile system.

The announcement is reprinted in full below and can be found here.


Notice I-10-10

March 17, 2010

Effective Date of NFA Compliance Rule 2-46: CPO Quarterly Reporting Requirements

NFA Compliance Rule 2-46: CPO Quarterly Reporting Requirements will become effective on March 31, 2010. Rule 2-46 requires each CPO Member to report on a quarterly basis to NFA specific information on certain pools that it operates within 45 days after the end of each quarterly reporting period. The CPO must provide the information for each pool that it operates that has a reporting requirement under CFTC regulation 4.22 (which includes exempt pools under CFTC Regulation 4.7). Using a new web-based system that was specifically designed for this rule, the CPO must enter the following information:

(a) the identity of the pool’s administrator, carry broker(s), trading manager(s) and custodian(s);

(b) a statement of changes in net asset value for the quarterly reporting period;

(c) monthly performance for the three months comprising the quarterly reporting period; and

(d) a schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

The first quarterly report will be due by May 17, 2010 for the quarter ended March 31, 2010 and must be filed electronically using NFA’s EasyFile System. In order to ensure that CPO Members understand the new requirements, NFA will host a webinar on April 13, 2010 at 12:00 p.m. (Eastern Time), which will outline the new reporting requirements and how to file using the new system. Click here to register for the webinar. NFA staff will also provide detailed information on the new requirements and filing instructions at NFA’s CPO/CTA Regulatory Seminar being held on April 22, 2010 in New York. Click here to register for the seminar.

More information about NFA Compliance Rule 2-46 can be found in NFA’s August 25, 2009 Submission Letter to the CFTC. Questions concerning the reporting requirements should be directed to Tracey Hunt, Senior Manager, Compliance ([email protected] or 312-781-1284) or Mary McHenry, Senior Manager, Compliance ([email protected] or 312-781-1420).


Other related hedge fund law blog posts include:

Cole-Friman & Mallon LLP can provide CPOs with comprehensive support during the filing process.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

New Forex Regulations: Overview of Public Comments

Leverage, Inaccessibility for Smaller Traders, and Offshore Threat are Focus of Public Comments

As we’ve discussed in related posts, the CFTC has proposed rules regulating the off-exchange spot forex industry (see Retail FOREX Registration Regulations Proposed).  The CFTC has requested comments from the public and there are currently about 100 public comments on CFTC’s website written in response to the new rule. The comments mainly focus on:

  • Leverage reduction rule (approx. 75/100 comments)
  • Forex industry becoming inaccessible to smaller traders (approx. 35/100 comments)
  • Threat of investors moving their money to offshore firms (approx. 25/100 comments)
  • Opposition to government interference/regulation (approx. 20/100 comments)

[Note: over the weekend the CFTC published some of the backlog of comments it received.  Much of this article was written prior to review of these extra comments (which total approximately 3,663).  We will provide an update on such comments in the future.]

To view all of the comments, click here.

The following is our summary of the comments which have been made thus far.


Leverage Reduction

Approximately 75 of the 100 comments mention a strong or very strong opposition to the new leverage proposal of 10:1. The issue with a reduction of leverage to 10:1 is that investors will have to invest much more money in order to trade what they can currently trade with less capital. Comments regarding leverage include phrases like “strongly object”, “terrible idea”, “unintelligent”, and “strongly oppose”.  The majority opinion is that people should have the freedom and the choice to trade with a higher amount of leverage, and that the federal government’s attempts to lower leverage to 10:1 are “unnecessary” and “intrusive”. John Yeatman Jr. writes,

Please DO NOT reduce leverage in US Forex trading to 10:1…THIS WOULD HAVE A MAJOR IMPACT ON TENS OF THOUSANDS OF TRADERS AND THEIR FAMILIES WHO RELY ON 100:1 LEVERAGE AVAILABILITY TO SUPPORT THEIR FAMILY AND THIS ECONOMY. Please do your part in helping to keep this country great and it’s [sic] freedoms true BY NOT ALLOWING ANYTHING LESS THAN 100:1.

Other comments regarding the leverage proposal include:

  • … strongly objects to new leverage of 10:1
  • … proposed reduction not consistent with futures, which allow a significantly higher leverage
  • … virtually no flexibility trading at 10:1 leverage unless trader has gigantic account balance
  • …reduction in leverage not fair to public…bad for America
  • … new leverage line “out of line with general idea of protecting consumers”
  • …limiting leverage to 10:1 is “a bad idea”
  • …current leverage limit is “more than enough”
  • … CFTC is “unintelligent” to change leverage to 10:1
  • … terrible idea to lower leverage
  • … leverage change is “perversion of the free markets”
  • …leverage restriction “grave injustice” for many who work to secure the American dream of prosperity for themselves and families
  • …leverage limits would delay achievement of financial independence
  • …leverage not dangerous; misuse is
  • …leverage decrease will kill forex business and worsen economic situation in states and worldwide
  • …amount of leverage needs to be at discretion of investors

Smaller Traders

Another argument is that lower leverage will making trading inaccessible for smaller traders but leave the door wide open for larger institutions, since lower leverage requires higher margin (meaning that more money needed to be invested in order to trade). Comments regarding this proposed rules potential affect on smaller traders include:

  • …will stamp out small-time investor
  • …drive smaller guys out of market or offshore
  • …anything lower would be insane for small-time traders
  • …gets rid of investors with small capital so rich can stay rich and poor can stay poor
  • …pushes out small-time investor
  • …denies small trader opportunity
  • …disparate and unintended impact on small traders with lower capital
  • …leave the small, independent traders alone
  • …small businesses are heart of US economy
  • …all small-scale actors will be stifled
  • …10:1 leverage will have unintended consequence of locking out hundreds or thousands of small traders
  • …quit treating the small guy like an idiot
  • …are you trying to allow only rich to trade forex?

Government Interference/Regulation

Many of the comments suggest anger with the government for interfering too much with the forex industry. Michael Thomas writes,

I do not live here in this “free” society to have someone from the government babysitting me. The message that your proposed rules send is that 1) we are not free to make our own choices. 2) The federal government believes that we the general public are too stupid to make decisions for ourselves….I don’t need you, or do I want you getting in the way of my being able to trade as I wish in the United States of America.

Other comments regarding an opposition to increased government interference include:

  • …don’t add more government
  • …not intention of our ancestors to create government which controlled/regulated all aspects of citizens’ lives
  • …the government has no right to control my ability to make profit
  • …unnecessary for Federal government to regulate against individual’s ability to take risks
  • …don’t need government protection; we’re adult traders
  • …not responsibility of government to take away choice from consumers
  • …”big brother” attempt to protect people from “evil” traders and forex hedge funds
  • …stay out of trying to run my personal life

Offshore Threat

In at least 25 of the comments, the public is arguing that the new rules, specifically lower leverage, will drive traders offshore to overseas brokers who may or may not be regulated. Further, a major argument is that the forex industry in the United States will essentially cease altogether as a result of traders moving their forex activities offshore. Comments regarding this offshore threat include:

  • …will send business to London and unregulated offshore markets
  • …consumers will take accounts offshore
  • …will drive smaller guys out of markets entirely or to offshore, unregulated brokers
  • …when traders move accounts offshore, CFTC and NFA will have no control of clients’ trading
  • …I’ve already moved my account offshore
  • …people will do business with offshore brokers

Government Regulation

In terms of the new regulation proposal as a whole, some people support more industry regulation while others are against the idea entirely. Bradford Smith writes,

I feel that regulation of firms is needed…regulation is needed to help people understand the risks such as risk disclosure. [Regulating] the  retail forex market in a similar fashion to how commodities and futures are regulated is a good idea. Stopping companies from trading against their clients is a high priority issue that needs to be stopped.

John M. Bland, on the other hand, who views the proposal as “unfair”,  writes,

…the CFTC has done a lot in recent years to correct many of the problems in the industry…this decision is unfair and anti-competitive.

Other comments regarding opposition to the proposal and/or government interference include:

  • …new rules will destroy US financial firms business and lead to loss of thousands of jobs during the worst economy in decades
  • …regulation should be aimed at encouraging economic growth and innovation vs. restricting it
  • …against proposal
  • …how did forex regulation get in the Farm Bill?
  • …whoever initiated proposal has no knowledge of forex…this rule is utter nonsense…rules for forex in the USA are already quite strict
  • …you are busybody bureaucrats with intrusive minds…you are interested in only one thing: bureaucratic power and complete control of every microscopic aspect of life…you are monsters
  • …rules will harm people who make an honest living trading currency
  • …important to educate and inform, not regulate and ban
  • …proposal is a disaster-in-warning for traders
  • …if it ain’t broke, don’t fix it
  • …proposal is lunacy-communist-legislation
  • …I do not support the proposal…proposal closes doors for forex investors and will make forex market accessible to financial institutions only
  • …vehemently against new, narrow-sighted legislation

Agreement/Disagreement with Proposal

Many of the comments discuss that education about forex and trading risk is the best solution. On a similar note, many traders expressed the fact that anyone who trades in the forex market is aware of the inherent risks, so people who decide to trade are willing to take these risks. There is a general consensus that it is the individual’s, and not the government’s, responsibility to evaluate the level of risk that s/he is willing to take. Remember, higher leverage will be reflected in both your profits and your losses. Thus, if you have high leverage and profit, you will profit a lot more than if your trading had not been leveraged. But the same goes for losses; if you lose, you will lose a lot more based on the higher leverage.

Conclusions Thus Far

The biggest concern thus far is the proposed reduction in leverage to 10:1. Almost every comment mentioned a strong opposition to this rule. Furthermore, most people seem to be concerned that the new regulations will significantly decrease forex activity in the US—if not kill it off—and drive most investors overseas to offshore firms. We will continue to monitor comments received until the March 22 due date. Please leave us a comment below with your feedback. Should you feel inclined, you may submit your own comment to the CFTC through the methods listed above.

To view CFTC’s proposed rules, click here.

How to Comment

Comments must be received by March 22, 2010 and can be submitted the following ways:

  • Through the Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
  • By e-mail: [email protected] Include “Regulation of Retail Forex” in the subject line of the message.
  • By fax: (202) 418-5521.
  • By mail: Send to David Stawick, Secretary, Commodity Futures Trading Commission, 1155 21st Street, NW., Washington, DC 20581.
  • Courier: Same as Mail above.

(Note that all comments received will be posted without change to http://www.cftc.gov, including any personal information provided.)


Other related CFTC articles include:

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