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NFA 2011 Annual Regulatory Reminder

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Earlier this year we provided a general overview of the annual compliance requirements for CPOs and CTAs.  The NFA has just released their annual reminder for all CFTC registratants (including IBs, FCMs and RFEDs).  The NFA notice, reprinted below in full, provides a good overview of what CFTC registered firms need to be focusing on during the next month or so.

CFTC registered firms are reminded that now is a good time to review and revise their compliance manuals and complete the NFA self-examination process.

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Notice I-11-06
February 03, 2011

Annual Regulatory Reminder

National Futures Association has always been committed to providing our Members with the resources they need to meet their regulatory obligations as efficiently as possible. Therefore, we are providing you with an annual reminder regarding certain requirements that are not part of your day-to-day operations. This list does not capture all of your responsibilities for the upcoming year, but it should help remind you of certain non-routine requirements.

Within the next 12 months you will be required to:

  1. Complete the Annual Update process on the anniversary date of your firm’s registration. This process includes (1) completing the electronic Annual Registration Update; (2) electronically submitting the firm’s Annual Questionnaire on NFA’s website and (3) paying your annual registration fees and NFA dues.  Failure to satisfy all of the requirements in the annual update process within 30 days of your anniversary date will result in the withdrawal of your firm’s NFA registration and/or Membership. NFA’s BASIC system displays information reflecting whether or not firms are actively engaged in futures-related business activity or retail off-exchange foreign currency activities. If you commence operations, you should update your Questionnaire in order to change how your status is displayed in BASIC.
  2. Complete NFA’s Self-Examination Checklist located on NFA’s website at http://www.nfa.futures.org/NFA-compliance/publication-library/self-exam-checklist.HTML.
  3. Send your firm’s Privacy Policy to every current customer, client and pool participant (in addition to sending it to every new customer when the customer opens an account, enters into an advisory agreement, or purchases a subscription). For guidance in preparing your policy, please consult NFA’s Privacy Policy questionnaire (Appendix D of the Self-Exam Checklist).
  4. Test your Disaster Recovery Plan and make any necessary adjustments. For guidance in preparing your plan, please consult NFA’s Business Continuity and Disaster Recovery Plan questionnaire (Appendix B of the Self-Exam Checklist).
  5. Provide Ethics Training as outlined in your firm’s written Ethics Training Procedures. For guidance in developing your procedure, please consult NFA’s Ethics Training Policy questionnaire (Appendix C of the Self-Exam Checklist).
  6. Supervise the operations of any Branch Offices, including conducting an annual onsite inspection of every Branch Office.

If you are a registered Commodity Trading Advisor, you will also be required to:

  1. File any new exemption notices electronically through NFA’s Exemption System.
  2. If soliciting new clients, distribute a Disclosure Document that is no more than 9 months old and that has been reviewed and accepted by NFA. Ensure that the document includes a complete business background and discloses all potentialconflicts of interest in accordance with NFA’s recent guidance. Disclosure Documents should be filed electronically throughNFA’s Disclosure Document System.
  3. If placing bunched orders, analyze each trading program at least quarterly to ensure that the order allocation method has been fair and equitable and document this analysis.
  4. The FCM that carries your client accounts will be contacting your clients to verify that the information obtained under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the client with an opportunity to correct and complete the information. If the FCM notifies you of any material changes to the information, assess whether additional risk disclosure is required to be provided to the client based on the changed information.

If you are a registered Commodity Pool Operator, you will also be required to:

  1. File any new exemption notices electronically through NFA’s Exemption System.
  2. If soliciting new pool participants, distribute a Disclosure Document that is no more than 9 months old and that has been reviewed and accepted by NFA. Ensure that the document includes a complete business background and discloses all potential conflicts of interest in accordance with NFA’s recent guidance. Disclosure Documents should be filed electronically through NFA’s Disclosure Document System.
  3. Update your CPO Questionnaire on NFA’s website for any pools that have liquidated.
  4. Submit to NFA through NFA’s EasyFile system, and distribute to current participants, a certified Annual Report for each pool as of the close of the pool’s fiscal year. CFTC Regulations require Commodity Pool Operators to follow strict deadlines and filing requirements, and failing to meet those deadlines may result in a disciplinary action against a CPO. To learn more about EasyFile, go to NFA’s website and access the seminar at http://www.nfa.futures.org/NFA-compliance/NFA-education-training/webinars.HTML. Since NFA acts as the CFTC’s delegate when NFA receives and reviews Annual Reports, the reports are subject to requests under FOIA. CPOs may request confidential treatment of Annual Reports but must strictly follow the CFTC procedures contained in CFTC Regulation 145.9 for filing such requests. For information on how to request confidential treatment of Annual Reports filed with NFA, consult the information on NFA’s website at http://www.nfa.futures.org/NFA-compliance/NFA-commodity-pool-operators/cpo-confidential-treatment-requests.HTML.  When preparing pool Annual Reports, refer to the CFTC’s annual letter for useful tips.
  5. Within 45 days after the end of each quarter, submit to NFA through NFA’s EasyFile system, a Pool Quarterly Report for each pool that you operate. Information required to be filed includes: (a) the identity of the pool’s administrator, carrying broker(s), trading manager(s) and custodian(s); (b) a statement of changes in net asset value; (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.

If you are a registered Introducing Broker, you will also be required to:

  1. Conduct Anti-Money Laundering (“AML”) training for relevant employees and complete an audit of your AML procedures and training. For guidance in developing your AML procedures, use NFA’s AML Procedures System.
  2. The FCM that carries your customer accounts will be contacting your customers to verify that the information obtained under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the customer with an opportunity to correct and complete the information. If the FCM notifies you of any material changes to the information, assess whether additional risk disclosure is required to be provided to the customer based on the changed information.
  3. If you are not operating pursuant to a guarantee agreement, submit a certified annual report within 90 days after the firm’s fiscal year end. IBs that are also registered as Broker/Dealers (“BDs”) must submit the report within 60 days after the firm’s fiscal year end. IBs that are not also registered as BDs must file this certified statement via NFA’s EasyFile system.
  4. If you are not operating pursuant to a guarantee agreement, submit semi-annual 1-FR-IB filings via EasyFile within 17 business days of the date of the statement (in addition to completing and maintaining monthly net capital computations). IBs also registered as BDs may file via WinJammer and must also file with NFA all statements required by FINRA. All financial statements should be prepared using the accrual basis of accounting as required by Generally Accepted Accounting Principles.

If you are a registered Futures Commission Merchant or Retail Foreign Exchange Dealer, you will also be required to:

  1. Conduct Anti-Money Laundering (“AML”) training for relevant employees and complete an audit of your AML procedures and training. For guidance in developing your AML procedures, use NFA’s AML Procedures System.
  2. Review your Point of Contact information for USA PATRIOT Act 314(a) information requests and notify NFA of any changes (FCMs only).
  3. Supervise the operations of any GIBs, including conducting an annual onsite inspection of every GIB.
  4. Contact active customers who are individuals, at least annually, to verify that the information obtained from that customer under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the customer with an opportunity to correct and complete the information. If the customer notifies you of any material changes to the information, assess whether additional risk disclosure is required to be provided to the customer based on the changed information. However, if another FCM or IB introduces the customer’s account on a fully disclosed basis or a CTA directs trading in the account, then notify that Member of the changes to the customer’s information.
  5. Submit a certified annual report within 90 days after the firm’s fiscal year end, or if your firm is also registered as a Broker/Dealer, within 60 days after the fiscal year end (in addition to submitting the firm’s monthly Focus II/I-FR-FCM with NFA via WinJammer).
  6. For firms that offer off-exchange foreign currency futures and options contracts (FOREX) to retail customers, provide written information regarding NFA’s Background Affiliation Status Information Center (BASIC), including the website address to every current customer (in addition to sending it to every new customer when the customer opens an account).
  7. For firms that offer FOREX to retail customers, review the security, capacity, credit and risk-management controls, and records provided by your electronic trading systems and certify that the requirements outlined in NFA Interpretive Notice 2-36(e) have been met. Prepare a certification, signed by a principal who is also a registered AP, and provide a hardcopy to NFA with the submission of your annual audited financial statement.

If your firm or its clients trade security futures products (futures whose underlying instrument is either a single security or a narrow-based security index), consult NFA’s website for a comprehensive listing of your requirements athttp://www.nfa.futures.org/NFA-compliance/NFA-general-compliance-issues/security-futures-products.HTML.

We recommend that you keep this email as a reference guide to ensure that all requirements are completed on time throughout the year.

We also want to remind you again: Every firm that is required to be registered as an FCM, RFED, IB, CPO or CTA in connection with its FOREX activity must be approved by NFA as a FOREX firm. NFA Members are prohibited from engaging in retail Forex transactions with these firms unless the firm has received this designation. In addition, FOREX firms must have at least one principal who is registered as an Associated Person (AP) and is approved as a FOREX AP. All individuals who solicit retail FOREX business or who supervise that activity must have taken and passed two exams — the National Commodity Futures Examination (Series 3) and the Retail Off Exchange Forex Examination (Series 34), which is a new exam focusing exclusively on Forex-related questions. However, individuals who were registered as APs, sole proprietors or floor brokers on May 22, 2008, do not need to take the Series 34 exam unless there has been a

two year gap in their registration since that date.

As always, if you need assistance with these or any other NFA requirements, please contact NFA’s Information Center at (800) 621-3570.

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Cole-Frieman & Mallon LLP provides comprehensive compliance and regulatory support for CTAs and CPOs.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

NFA Annual Questionnaire

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Reminder to NFA Member Firms

As part of the annual processes and procedures NFA Members will need to make sure that they complete the NFA Annual Questionnaire.  As discussed below in the NFA’s most recent notice to members, it is important that NFA Members complete the questionnaire because some of the answers will appear as BASIC entries sometime within the first half of 2010 (for an image of this, please see Notice to Members I-10-02, reprinted in full below).  Below we have provided an overview of the major items which are addressed on the questionnaire.  NFA Members are urged to complete the NFA’s Self Exam Checklist prior to logging in to complete the questionnaire.

Questionnaire Items

The annual questionnaire actually requires the NFA Member to provide fairly detailed information on the nature of the Member’s business and the extent in which the Member participates in certain aspects of the industry such as trading in the forex markets.  Each firm will need to complete a section called “Firm & DR Information” as well as one section (or multiple sections if applicable) devoted to CTA, CPO, IB, or FCM specific questions.  Below we’ve outlined the major categories.

CTA Questionnaire

The central part of the CTA questionnaire focuses on information related to the trading program.  Such information requested includes: nominal AUM, forex account information, number of accounts trading Securities Futures Products (SFPs)*, most recent disclosure document date, whether any exemptions exist, types of investors, etc.

* A securities futures contract is a legally binding agreement between two parties to purchase or sell in the future a specific quantity of shares of a single equity security or narrow-based securities Index (e.g. products traded on One Chicago or NQLX). It does not include broad-based indices such as the S&P 500 or Dow.

CPO Questionnaire

The central part of the CPO questionnaire focuses on information related to the commodity pool.  Such information requested includes: pool trading information, question on restrictions (if any), forex trading information (if applicable), SFP trading (if applicable), most recent disclosure document date, whether any exemptions exist, etc.

Firm & DR Information

In the Firm & DR Information section you will need to include certain information on the preparer (name, title, phone, email) and you will need to complete firm information and disaster recovery information.

Firm Information

For the firm information there are a number of questions regarding the number of accounts to which the firm is currently providing advice, whether the firm is engaged in forex activities, the extent to which the firm utilizes advertising (tv/radio, print, internet), and/or whether the firm is registered in other capacity.  Importantly, there is a question regarding whether the firm has completed the self-exam checklist within the last 12 months.

Disaster Recovery Information

All NFA Member firms are required to have addressed disaster recovery.  For the purposes of the questionnaire, Members are required to provide primary and secondary contact information.  Specifically, the instructions are as follows:

For purposes of business continuity and disaster recovery, members are required to provide NFA with the name and contact information for one or two persons who NFA can contact during an emergency. Since this information will serve as an alternative contact in the event you are unable to continue doing business at your main location, the contact information that you provide should be different from that of your main location.

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Notice to Members I-10-02

January 6, 2010

Reminder to all Members to complete new questions in Annual Questionnaire assessing Member’s futures-related and off-exchange forex business

On November 30, 2009, NFA issued Notice to Members I-09-21 [HFLB Note: reprinted directly below] requesting all Members to complete a series of new questions located in the Annual Questionnaire assessing their futures-related business. Although some NFA Members have complied with this request, many have not. It is critical that Members access and complete questions in the Firm and DR Information section of the Annual Questionnaire as soon as possible. This applies not only to Members trading on-exchange futures products but also Members trading in the off-exchange foreign currency (forex) market.

Beginning in early 2010 NFA’s BASIC system will display information reflecting whether firms are actively engaged in futures-related business activity or not. If the questions are not answered, the answers will default to no activity, which is what will be displayed in BASIC, as illustrated below.

For additional information and instructions on accessing the Annual Questionnaire, click here.

If you have any questions, please contact NFA’s Information Center at 800-621-3570 or 312-781-1410.

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Notice I-09-21

November 30, 2009

NFA adds new questions to Annual Questionnaire to assess Member’s futures-related business

NFA has approximately 500 firms that are NFA Members but have represented to NFA via their Annual Questionnaire that they are not doing any business that requires membership (“Inactive firms”). Almost universally, these Members indicate that they maintain their membership because they may do business in the future.

Since 2006, NFA has taken several Member Responsibility Actions against Member firms that had told NFA they were inactive. These actions were taken after NFA obtained information from reviewing the internet, through contacts with other NFA Members, and by receiving customer complaints suggesting that these firms were in fact active.

Due to these disciplinary actions, NFA’s Board of Directors requested that beginning in early 2010 NFA’s BASIC system display information reflecting whether firms are actively engaged in futures-related business activity or not. Presumably, if a Member is identified in BASIC as not conducting futures-related business, this will raise a “red flag” to potential customers who are being solicited by an Inactive Firm.

Specifically, BASIC will contain information regarding whether or not the Member has on-exchange customer accounts, manages customer accounts, operates pools, is engaged in retail off-exchange foreign currency activities and/or is soliciting customer business. This information will be based solely on information that Member firms provide in their responses to the questions in the Firm and DR Information section of the Annual Questionnaire.

NFA has re-designed this portion of the Annual Questionnaire by adding new questions and moving certain questions from other sections. Firms may update the answers in the Firm and DR Information section of the Annual Questionnaire at any time.

It is critical that Members access and complete questions in the Firm and DR Information section of the Annual Questionnaire as soon as possible. If the questions are not answered, the answers will default to no activity, which is what will be displayed in BASIC.

Please follow these instructions to access the Annual Questionnaire and provide the required information.

1. Open the Questionnaire system using this link: https://www.nfa.futures.org/AppEntry/Redirect.aspx?app=SPECIAL_QUESTION

2. Enter your ORS ID and password to logon.

3. From the “Online Questionnaire Index” screen, select “Firm and DR Information” under “Questionnaire Type.” (In addition, if you have not completed your most recent Questionnaire, you should update the previous version at this time.)

4. Update the Preparer Information on the next screen, if necessary, and then click “Next.”

5. To respond to this special request,

a. Answer the questions listed at the top of the screen under the heading “Please address the following questions regarding you firm’s business operations”.

b. After answering the applicable question(s), scroll to the bottom of the screen and click the “Submit Filing” button.

c. The system will then confirm that you submitted the updated Questionnaire to NFA.

If you have any questions about this Notice, please contact NFA’s Information Center at 800.621.3570 or 312.781.1410.

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Other articles related to CTAs and CPOs include:

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