Facebook Faceoff; Regulators Tackle Social Media

For the past several years’ social media sources such as Facebook, MySpace, and YouTube have been the centers of attention for marketers the world over.  Beyond the so called “big three” social media players, similar more user specific sites like Twitter, LinkedIn, and other various industry blog networks have also emerged as useful tools for promoting a business or brand.  As a financial firm there is no doubt that your company has used, or at the very least considered, any number of social media venues to grow market share.  Although these media resources continue to gain in popularity one nagging question still remains; can they be used in the financial industry without breaking the established public solicitation rules? 

Earlier this month the National Futures Association (“NFA”) submitted a rule amendment to the Commodity Futures Trading Commission (“CFTC”) regarding online media.  Specifically the rule submission was intended to voice NFA’s opinion about what is, and is not acceptable use of social media venues for its member firms.  This submission marked the first time that NFA has publicly written its position on the topic and their response affects all commodity and forex firms.  Furthermore with this rule NFA also invoked its “Ten Day” rule submission authority with the CFTC.  This means that the CFTC had ten days to notify the NFA if it wanted to further review the amendment; no notice was provided.  Thus, as the request was submitted on December 8^th, 2009 the amended Rule 2-29(h) was put into place just before Christmas of this year.

What the Rule Amendment Means

NFA Rule 2-29(h) was originally created to provide guidance to firms that engage in certain radio and/or television advertising.  Specifically, the rule requires that television and radio ads be submitted to NFA’s promotional review team at least ten days ahead of their intended use.   After last week’s amendment, this rule now includes all forms of audio and/or video advertisements which may be distributed through any type of media accessible to the public. 

What this means is that 2-29(h) now covers all forms of electronic media not previously included as radio or television (i.e. the internet).  Due to this change any online videos, tutorials, audio recordings, webinars, or other type of electronic media which may discuss trading recommendations, profit targets, or general trading results must be submitted for pre-review to NFA before public use.

For Further Consideration

At the same time 2-29(h) was amended, NFA also published an “Interpretive Notice” regarding the use of social networking groups.  The notice discusses a variety of scenarios that arise when NFA members utilize social networks to communicate with public investors.  The most important of these scenarios is NFA’s call for member firms to develop specific social networking procedures; something not previously required.  Through this literature NFA has made public their feeling that social networking sites in most instances will be considered promotional material and will be subject to NFA Rules 2-9, 2-29, 2-36, and/or 2-39.  According to the interpretive notice, NFA is requiring firms to address the following communication channels and provide methods by which they will handle supervising them via a new set of mandatory procedures.  Specifically these new procedures must address the following items:

1.  Chat Rooms

2.  Forums (Bulletin/Message Boards)

3.  Blogs

4.  Social networking sites (i.e. Facebook, Twitter, MySpace etc.)

5.  Audio/Video Sites (i.e. YouTube, MP3’s, Podcasts etc.)

6.  Hyperlinks to third party resources

How to comply with 2-29(h)

The procedures mentioned above are required for all NFA member firms regardless of what types of promotional material they create.  If your firm utilizes any type of electronic media or form of social networking it is imperative to create procedures that address the points above immediately.  After doing this it is then critical that a full review of company promotional materials be completed by appropriate firm personnel.  After that it must be determined if all promotional materials published adhere to the new policies and procedures which were created to address NFA’s newest rule amendment and interpretive notice.

Also please be advised that at this time NFA has not provided guidance as to what is required of video and audio materials created prior to the 2-29(h) amendment.  More specifically, at present there is no way to know if your old video and/or audio materials will be grandfathered in to the previous rule or have become subject to pre-review submission under the amendment.  Due to this lack of clarity it would be best to appeal to NFA in writing for further guidance if your firm has large amounts of outstanding audio or video materials in use.

As with most regulatory obligations determining how to remain compliant can be a daunting task for a trading company.  The intricacies of creating new procedures that adhere to the rules can be difficult and cumbersome to work through.  More importantly though, ensuring that all existing company policies and procedures meld together with the latest requirements will require a great deal of regulatory knowledge and ongoing monitoring.  In a world of ever changing rules, the best next step decision most firms can make will be to seek professional regulatory help. 

_________________________________

James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, Commodity News Center and many other highly acclaimed investment publications.  He has also authored two highly sought after informational pamphlets regarding futures and forex registration which are available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you. 

Marketing Your Trading Program

Have you ever considered why large, established, Commodity Trading Advisors and Hedge Funds still employ marketing directors or hire marketing agencies? It’s easy to imagine that once a manager had developed an established and successful track record investors would come knocking on their doors; yet, this scenario rarely happens. More often than not, trading firms continue to market their programs so that they can be sure that they are in front of the right investor at the right time.

Indeed, PR and marketing are components of the CTA and Hedge Fund industry that are often overlooked. There are probably several reasons why this is the case. The first has to do with the previously mentioned misconception that performance numbers alone will ultimately attract capital. While performance is definitely a key factor in raising assets it will not guarantee that investors invest in your program. There are countless examples of firms that have had to shut-down their successful trading programs because they were unable to raise enough money.

A second reason has to do with the lack of knowledge surrounding marketing in this highly regulated industry space. Many traders are overwhelmed with the compliance and regulatory requirements surrounding hedge fund and CTA marketing, that they ultimately decide “no marketing” is the best road to take.

A final reason that many fund managers skip the marketing component of their business is that they cannot afford to hire a full-time marketing director. As a result, many firms either attempt to take “marketing” in their own hands or they simply decide that they will hire a marketer once they grow their assets under management.

At Turnkey Trading Partners, we understand the financial constraints of start-up and emerging managers as well as the time burden of making sure that your marketing material, pitch book, factsheet, website, and pr are compliant with regulatory standards.  However, we also realize that importance of marketing your program to potential investors from the early stages of your business.  As a result, we have created several turnkey marketing packages that can fit most any budget.  To learn more about what we have to offer please contact us through our webform or give us a call to see how we can assist you with your marketing and PR needs.

-TTP’s Marketing Team

Forex IB’s Need Disclosure Documents; Offering Memorandum’s

Your firm has finally decided to become a CFTC registered, NFA member forex broker (“IB”) or money manager (“CTA” or “CPO”).  Congratulations, I salute you for making the right choice, but now what?  It should come as no surprise that your firm will now have to adhere to a plethora of regulatory requirements, but are you prepared?  To further educate you about your obligations as a regulated company let’s take some time to discuss a largely misunderstood NFA compliance rule that could greatly affect your business.

NFA Compliance Rule 2-41

NFA compliance rule 2-41 was put on the books in November of 2008 and became effective as of December 8^th, 2008.  Since that time there has been little written on this rule and the word on the street is that enforcement efforts related to it will be stepped up heavily during 2010.  Assuming this rule will be pushed to the forefront of regulation during the next year what can your firm do to prepare?  As with all regulatory obligations one must first understand what is required to comply with a rule so let’s start there.  Briefly NFA Rule 2-41 states the following for most forex firms:

Forex Pool Operators & Funds- Are required to prepare a disclosure document and file it with NFA 21 days prior to soliciting the funds first potential pool participant.  This document must then be supplied to the client prior to them receiving an account subscription agreement and depositing funds to a pool.  In addition if a firm will trade futures and forex products or just forex products, 2-41 requires very specific risk disclaimers.

Trading Advisors- Are required to prepare a disclosure document and file it with NFA 21 days prior to soliciting the first potential pool participant.  This document must then be supplied to the client prior to them receiving the subscription agreement and determining to follow a specific trading strategy.  In other words, before an advisor can take discretion over an account and guide client trading a disclosure document must be provided.  This disclosure document must be written in nearly an identical fashion to documents required for on-exchange traded products under CFTC 4.34, 4.35, and 4.36.  Also, just as with fund managers, in this instance a specific risk disclosure related to discretionary forex trading is required.

What this Means for Forex IB’s and CTA’s

If your forex firm is currently registered as a CTA or CPO then this rule probably isn’t that surprising to you.  However, if your company is registered as an IB you may be in for quite the shock.  Notice above that I said “Trading Advisors” not CTA’s or CPO’s; I wrote this intentionally because of the way the rule is written.  Based on the language included in 2-41, depending on a firms unique business circumstances, it is possible that introducing brokers may be required to prepare a disclosure document for their customers.  If this is the case for your company not having supplied a disclosure document to clients, or even worse, not having a document prepared altogether could be disastrous to your business operations.  Now that you know you may need such a document, the next question your firm should be asking is: “How can we determine if we are required to write and provide a disclosure document to our customers?”

Determining your Obligation

I have put together the following guidelines to help your firm in its attempts to determine if a disclosure document is needed.  When reading this list please keep in mind that all brokerages have very specific and unique business circumstances.  As a result this simple process should only be used as a tool to determine your potential obligations under NFA Rule 2-41.  If you have any doubts about your obligations you should seek proper advice from a regulatory professional.

Step 1:  Your company must first determine if its clients would be considered eligible contract participants or “ECP’s” as defined by the Commodity Exchange Act’s Section 1a (12).  In almost all retail forex circumstances the accounts you’ll be handling will not qualify as ECP’s.  Thus, for most reading this article it would be wise to move on to step two.  More specifically if you trade with ECP’s you probably are already well aware of the fact that they are qualified as such.

Step 2:  Evaluate the business model utilized by your brokerage.  Does your firm take discretion over customer trades?  Do your accounts trade in a self directed manner?  Do you promote an electronic trading strategy and require a power of attorney or letter of direction to execute trade signals on a client’s behalf?  The answer to these questions should give you more insight into whether or not you will need a disclosure document.  Generally, if you are taking discretion over client accounts and making all or the majority of trading decisions on behalf of your clients you will likely need a disclosure document.  If your accounts are self directed it is likely you will not be considered a trading advisor in the context of Rule 2-41.  Evaluating the mechanics of how electronic trading systems operate is difficult.  In my opinion there is no hard and fast way to know for certain if this type of trading would require a disclosure document.  In order to determine your obligation in this instance it would be best to hold a detailed discussion of such a system with a regulatory professional.

Step 3:  Consider how your company is being compensated by its FDM and/or its clients on account activity.  Are you paid a standard pip rebate or commission on the forex transactions running through your business?  Are you paid some type of variable performance or management fee?  The answer to these questions when considered in conjunction with step 2 above are critical to whether or not your business will need a disclosure document.  Generally when a performance or management fee is paid it is a good sign that you are operating in a manner that will require additional disclosure under 2-41. Conversely, if your firm is being paid strictly on a transactional basis and is making no trade decisions for customers it is less likely that it will be required to produce further disclosure.

Finding out for Sure, What to do if a Disclosure Document is needed

If it appears your firm will need a disclosure document or if you are unsure about your company’s obligations, what is the next step?  The next step is that your firm should contact a regulatory professional to further assist in evaluating your unique business situation.  Seeking professional help in this matter will be the only option if your firm is unable to determine its requirement under rule 2-41 on by itself.  Seeking council from NFA could be an option; however they will not be able to further assist you in the creation of a document if your company does in fact need one.  As a result your business will likely end up requiring private regulatory assistance at some point anyhow so starting there just makes the most sense.

When looking for a regulatory professional it is critical to understand that the forex trading community operates in a manner which is drastically different from that of the futures and or securities market spaces.  The forex industry is evolving almost on a daily basis, many of the rules are slightly more than a year old, and not that many firms are familiar with them.  I mention this because standard service providers are likely to improperly guide you if they apply futures and securities specific rules and regulations to your unique forex questions.  Therefore, unless you’re willing to become a guinea pig, it is imperative that you utilize a firm that is familiar with all of NFA’s forex rules.  A misstep in the way of improper customer disclosure could be devastating to your business and if the rumors are true, 2010 could bring about a very painful and long year dealing with the CFTC and NFA.

James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, Commodity News Center and many other highly acclaimed investment publications.  He has also authored two highly sought after informational pamphlets regarding futures and forex registration which are available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

Forex Registration Almost Here

By: James Bibbings – For years traders, brokers, and money managers have been able to operate within the over-the-counter retail foreign currency markets (“forex”) with very little regulation.  As a result, trillions of dollars and millions of clients have traded within the industry with little standardization or legal oversight; that is until now.  As of the date of this article the industry is mere inches away from being entirely revamped and standardized through regulation.  The passage of the Farm Bill in May of 2008 eventually will mean mandatory registration with the Commodity Futures Trading Commission (“CFTC”) and membership with the National Futures Association (“NFA”) for nearly all forex professionals.  Have you and your firm considered what are you going to do about this?  Determining what steps you should take today may in fact determine whether or not you will still have a business tomorrow.

To Register or Not to Register

In order to gain knowledge of where the current forex regulatory environment is heading one has to understand where it has been.   Prior to May of 2008 forex solicitors and money managers were not required to be registered.  As a bit of a history lesson, in what is now an infamous 7^th Circuit Court of Appeals decision, the CFTC lost a forex fraud case commonly referred to as “Zelener.”  To be incredibly brief, the court ruled in this case that over the counter retail transactions were not futures, and thus could not be regulated by the CFTC.  To learn more on the history of this event a nice summary is available at the National Futures Association’s website from June of 2009.     

Since this landmark forex court decision, many in the regulatory industry have lobbied for the CFTC’s authority to be amended by an act of congress to include the aforementioned retail financial transactions.  This lobbying effort finally paid off during the early summer of 2008 when congressional representatives acted on their requests.  In May of 2008, HR 6124, which is commonly referred to as the “Farm Bill” was passed.  Within this bill were provisions which amended the Commodity Exchange Act to give the CFTC authority to apply its anti-fraud provisions to certain off-exchange retail foreign currency transactions (“forex”).  In addition, these provisions also created a specific registration category for retail currency brokers which solicit for and/or exercise discretion over retail forex transactions.  Sounds simple enough, everyone is required to get registered as of May 2008 right?  Well not exactly.

Am I Required to Register?

You might be wondering: “If the farm bill has passed, how come I am not yet required to be registered?”  The reason is that the farm bill has yet to be ratified and thus has not been enacted into law.  Due to this fact its forex provisions are also not yet enforceable for the CFTC.  It is this realization that has lead some in the industry to think that they do not have to become registered and created a great deal of regulatory uncertainty.  So what’s the truth of the matter in this situation?

The truth is that even though forex contracts were not seen as being futures by the US court system, there has been little doubt that over the counter forex market makers were acting in a capacity similar to futures clearing firms or leveraged transaction merchants.   As a result, forex dealers have been required to be registered and to join the membership of at least one self regulatory organization (“SRO”) for quite some time.  This is crucial to your understanding of the registration debate and determining if you must become a member of an SRO.

Since a forex dealer is required to become a registrant and to be a member of an SRO, these firms must also adhere to the rules of their specific SRO.  Here it is crucial to recognize that there is a difference between “regulations” and “rules” although it may not seem like it.  As a result of the CFTC’s inability to federally regulate forex transactions, the responsibility of governing forex has fallen squarely on the largest SRO’s (FINRA and NFA*) and their rules.  SRO rules apply solely to the respective members of a particular SRO and are not considered to be hard and fast law. 

*Since NFA has emerged as the most prevalent regulatory authority in the forex market space, I will focus primarily on the rules their membership must adhere to for the remainder of this article.

How Do NFA’s Rules Affect You? 

NFA has worked diligently to adapt their membership rules to handle the regulation of all forex transactions.  Based on the information presented above, NFA has gone about this through the creation of stringent new rules for their Forex Dealer Members (“FDM’s”).  Of these rules most require FDM’s to more adequately supervise and monitor the forex agents that they do business with.  This has been necessary as neither the CFTC nor NFA has any legal authority over those entities.  Although rules for forex IB’s, CPO’s, and CTA’s have also been created, they are often more vague, ineffective, and inconsistent with respect to how they are applied due to this lack of disciplinary authority.  Thus, with no available CFTC support until the farm bill is ratified, NFA will continue to pressure the industry into compliance through its FDM membership, regardless of how efficient that methodology may be.

Thus, as an unregistered forex IB, CTA, or CPO it is currently true that you do not have to register with the CFTC or become an NFA member.  However, if you choose not to do so you could be making one of the poorest decisions of your business career.  At some point in the near future you will be pressured or forced into becoming a member not only by NFA, but also by your respective FDM.  Further still as soon as the farm bill is ratified you will be required under US Federal law, through CFTC regulation, to become a member.  So rather than fighting the inevitable, it is a necessity that you ask yourself what steps you or your firm must take in order to meet your unique regulatory obligations.

Getting Registered, Becoming and NFA Member

Since registration is all but required, how do you take the next steps?  For starters you should contact a regulatory professional to assist you in further evaluating your unique business situation.  I wrote on the reasons this is a good idea for any CFTC registered, NFA member previously when I touched on the “Three Common Mistakes New CTA’s Make.”  Since I wrote on this previously, step one would be to review that article.  After this, it is critical to understand that the forex trading community operates in a manner which is drastically different from that of the futures and or securities market spaces.  The forex industry is evolving almost on a daily basis, many of the rules are slightly more than a year old, and not that many people are familiar with them.  I mention this because standard service providers are likely to improperly guide you if they apply futures and securities specific rules and regulations to your unique forex questions.  Therefore, unless you’re willing to become a guinea pig, it is imperative that you utilize a firm that is familiar with all of NFA’s forex rules to ensure your registration process goes as smoothly as possible. 

But how do you know if a firm of this type knows the forex industry?  For starters they should be able to readily assist you in ensuring you have the proper policies, procedures, and business practices in place to adhere to NFA’s forex rules.  In particular any firm you select must be intimately familiar with all of the requirements included in NFA’s “Forex Transactions Regulatory Guide”.  They should also know what is required of your operations from the ground up, that is they should readily be able to address any questions you might have about any of the following areas:  NFA Rule 2-41, NFA Rule 2-36, the Series 34 Examination, Bylaw 1101, if you’ll need a disclosure document, what your federal anti-money laundering (“AML”) requirements might be, your supervisory requirements, how to manage your solicitation practices, how you handle customer orders, and any other questions that relate to NFA’s requirements of its forex membership.  In general if you’d like more information on how to get started my company is offering a free forex start-up guide that details your route to registration.  If you’re interested in receiving this material sign up via the link above and I’d be more than happy to personally send additional information.

As you can see becoming a registered entity and member of an SRO can be a complicated process, especially if you already have an established business.  It is for this reason you should not go through the process of becoming an NFA member and CFTC registrant alone.   There is no time to waste as the regulatory risks to your current business grow by the day.  The time for you and or your firm to become an NFA member is now, but whatever you decide to do be sure you understand the ramifications of your actions.  For if you choose to remain unregulated, when the moment comes, your decision could literally mean life or death for your business.

-James Bibbings

James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, Commodity News Center and many other highly acclaimed investment publications.  If you have any questions for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

Three Common Mistakes New CTAs Make

By James Bibbings – Over the past four years I have worked with countless CTAs to steer them through a variety of regulatory and business problems. Whether I spent time working with them as a regulatory auditor at the National Futures Association, as an institutional accounts manager, or through my independent consulting firm, I have seen nearly everything the managed futures trading industry has to offer. At the same time, I’ve also seen the most common mistakes new CTAs make, a few of which I’ve outlined below.

Before we get started, I would like to make clear that commodity rules and regulations should be looked at on a case by case basis by a qualified professional. It is important to keep in mind that many times in regulation there is not an all encompassing answer to even the most basic questions. Simply put, the way US commodity laws and rules are structured allows room for one off, sometimes subjective, decisions to be made by NFA or the CFTC. Thus, the following points hold true most of the time, however depending on your specific circumstances, these rules and examples may be applied differently.

Mistake Number One: Not All Exemptions Apply To Standard US-Based CTAs

In my dealings with private clients, and through my experiences as a regulator, I have been asked with alarming frequency about the CFTC’s part four exemptions and how they relate to CTAs (click here for a link to part 4). For a myriad of reasons, people generally seem to want to avoid as much regulation as possible. To an extent this is understandable, especially given the cost and complexity of trying to navigate all of the requirements that come from having any form of oversight. However, it is equally important to recognize that regulation within the marketplace is not something to be feared. In fact, in many ways regulation is necessary to protect public interest and raise investor confidence; two things that benefit us all. Therefore, it is truly important to understand the exemptions which are available to CTAs and the reasons behind them.

At this time the following exemptions are the only ones which are available to standard, US based, CTA registrants:

Briefly:

1. CFTC Regulation 4.7: Provides relief from certain part 4 requirements to commodity trading advisors that deal with only qualified eligible participants (“QEP”). In this instance a QEP is defined by specific financial requirements spelled out by the CFTC and may include individuals or institutions. To read up on the specifics of QEP eligibility requirements follow the link provided above.

2. CFTC Regulation 4.14: Offers complete relief from registration as a commodity trading advisor. This exemption is used when the activities conducted by a commodities business do not meet the definitional guidelines set forth by the CFTC to be considered a CTA. To find out more about the eligibility requirements for this exemption follow the link above as well.

As I suggested with most regulations, things are generally never cut and dry. That being said, I will add that it is possible to petition the CFTC for a special exemption on a case by case basis. It is however impractical to discuss all of the terms of this process within a brief article such as this. Therefore, for all intents and purposes the provisions of parts 4.7 and 4.14 are all that are available to standard CTAs doing business within the US, and servicing US clients at this time. All other part four exemptions apply to commodity pool operators (“CPO”) or combination CTA/CPOs.

Mistake Number Two: Ongoing Regulatory Requirements

Once an individual or company has applied to become a trading advisor and has been accepted by NFA, the regulatory road does not stop there. Although CTAs do not have a capital requirement, and are considered by many to be the “simplest” registration category, as an NFA member and CFTC registration there are still many requirements which must be upheld. I often find that people are dumbfounded by the amount of regulatory work that must be completed to keep a CTA operating. It seems that most believe only registration and a disclosure document is required for operations. In my experience, a vast majority of people do not fully understand, or are not aware, of the other requirements that go into running a regulated business.

Based on this misconception the following are some of the major requirements that must be upheld in order to operate and maintain a fully compliant CTA:

Financially

Your CTA must maintain accurate financial books and records. This means that your business will need to maintain a basic accounting system. You will be required to keep track of your cash receipts and disbursements, maintain a general ledger, and properly report your company’s liabilities. Although your CTA will not have a statuary capital requirement, it is wise to be able to prepare an NFA/CFTC compliant balance sheet. At a bare minimum you will need to review and update your accounting on a monthly basis and have accurate records available upon request.

In addition to this, as a CTA you will be required to properly calculate all of your trading performance and present it appropriately. This may seem easy, but I can assure you, is the number one trouble spot for the new CTA’s that I work with today. To learn more about your performance reporting requirements I would recommend reviewing NFA’s compliance rule 2-34 and the CFTC’s Regulation 4.35.

Procedurally

As a CTA you will also be required to maintain the following procedures and policies:

General Business, Account Opening, Supervisory, Privacy, Disaster Recovery, Ethics Training guidelines, Ethics, Order Handling, and Promotional Material.
Within each of these documents you will be required to implement policies which are tailored to keep your CTA in compliance with all applicable CFTC regulations and NFA rules. Here it should be noted that across firms, procedural manuals may vary to accommodate differing business models and staffing situations. However, each CTA must evaluate their operations and ensure that the documents they have on file are adequate. Further still, once each of these documents has been created, appropriate personal will need to review and enforce the requirements listed. These same staff members will also be required to attest to these reviews in writing. Any and all documentation related to procedural compliance is then required to be kept on file and available for review upon request.

Your Disclosure Document

As most people know, you will be required to maintain an accurate and up to date disclosure document. This document must be specific and unique to each trading program that will be offered by your CTA. In addition, your disclosure document will have a laundry list of regulatory requirements which are subject to your trading practices. To see firsthand what is required within a disclosure document, visit the NFA’s CTA disclosure document guide.

As a piece of advice, it is almost never in your best interest to try and include hypothetical performance results within your document. NFA and CFTC restrictions in this area are very stringent and getting to the point of appropriate presentation can be incredibly time consuming and costly. It would also not be wise to seek outside help with your disclosure document from a third party that does not have extensive experience in commodities regulation.

Mistake Number Three: Ongoing Disclosure Document Maintenance

Once you have properly implemented your accounting system, developed acceptable procedures, and sent your disclosure document to NFA for acceptance what’s next? At this time you will be ready to look for client funds and try to start trading profitably for them. Assuming this goes well for you, at some point you will trade client accounts for an entire month; what do you do then? What you will do, if you are actively soliciting for new funds, is to update your disclosure document and re-file it with NFA.

Furthermore, once you are actively trading for client accounts it is required that any material changes to your trading program be included in your disclosure document. Under this requirement, at the end of each month it is necessary that you update your document by including material program changes and inputting all applicable information into your performance capsulation.

For reference a standard performance capsule looks like this:

• Name of CTA (or person trading the account): Sample CTA
• Name of Trading Program: Offered Trading Program
• Inception of Trading by CTA (or person trading the account): January 1, 1986
• Inception of Trading in Offered Program: January 1, 1989
• # of accounts currently traded pursuant to the program: 123
• Total nominal assets under management: $30,673,000
• Total nominal assets traded pursuant to the program: $21,746,000
• Largest monthly draw-down: 16.87%/December 2004
• Worst peak-to-valley draw-down: 31.60%/May 2004 –April 2005
• Number of profitable accounts that have opened and closed: 32
• Range of returns experienced by profitable accounts: 1.32% – 19.78%
• Number of losing accounts that have opened and closed: 7
• Range of returns experienced by unprofitable accounts: -0.43% – -24.53%

 

The capsule also includes simple performance figures which must be presented in gridded chart format. Typically, within this chart, the months traded will run down the vertical axis while years run across the top. To see a performance table, review the disclosure document guide link I provided you above.

After you have updated your document, your CTA is then required to re-file it with NFA. Then, after NFA sends you notice of acceptance, any new client that you solicit must also be given your most recent disclosure document. In addition to providing new clients with your updated document, under the material change requirement, it may also be necessary for you to supply your existing customers with an amended document for their re-approval.

Instances which would require you to send a new document to your current customers may include but are not limited to: Your CTA hiring a new trader, changing clearing firms where accounts are held, having a change in commission rates, after adjusting performance and/or management fees, if your CTA encounters a material business event that alters trading performance, or in any other instance which may reasonably alter a person’s investment decisions with your company.

How to Avoid These Mistakes and Others like Them

As you can see from the limited number of examples I have provided above, becoming a CTA can be a complex process. Operating efficiently and appropriately, while staying within the regulations takes a great deal of foresight and research. While it is possible to manage CTA compliance on your own; through many hours of reading, writing, and direct communication with NFA or the CFTC, I would recommend not doing so. Remember, that as a CTA your customers are with you because of your trading knowledge. They want you to be the best trader and financial steward of their hard earned money that you can possibly be. Let’s face it; trading successfully is tough enough, so why have regulation on your plate as one more thing to worry about?

It is my opinion that the biggest mistake any aspiring CTA can make is to journey down the regulatory road alone. So for my last bit of advice, as you begin to explore the possibilities of starting your own CTA, leave the regulation up to a qualified and experienced professional. From a cost perspective the amount of time you’ll save and the sheer headaches you’ll avoid will more than offset the costs. Further still, and this is one thing almost everyone forgets, once you begin operations it is imperative that you free your mind as much as possible. Although you can never be entirely free from regulatory burdens, you’ll certainly want to focus as much of your effort as possible on your trading and your customers.

James Bibbings is the CEO of Turnkey Trading Partners (“TTP”).  Prior to starting TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.