US NFA Seeks Comments on Possible New CPO/CTA Capital Requirements and Customer Protection Measures

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Published Date : January 23, 2014

On January 23, 2014, the US National Futures Association announced that it is seeking comment regarding a possible new requirement that registered commodity trading advisors and commodity pool operators maintain a minimum amount of capital, much like futures commission merchants and non-guaranteed introducing brokers currently are required. Currently CPOs and CTAs are not subject to any capital requirement.
In addition, the NFA seeks advice on a number of other possible new customer protection measures involving CPOs, including whether:

The NFA also seeks views regarding (1) how might pool assets independently be verified in a manner similar to how FCM customer balances at their depositories are now compared daily by NFA or the Chicago Mercantile Exchange with FCM reports to identify discrepancies, and (2) how to handle inactive CPO and CTA members.
Comments are due by April 15, 2014.

According to NFA, it is currently evaluating the effectiveness of its regulatory requirements regarding CPOs and CTAs. Among other matters NFA observes that 92% of all Member Responsibility Actions over the past three years were against CPO and/or CTA members, and most involved the misuse of customer funds, misstated net asset values and/or misstated performance results.

NFA seeks ways to "strengthen the regulatory structure governing CPO operations to provide greater protection for customer funds." In suggesting that it may be appropriate for CPOs and CTAs to be subject to a minimum capital requirement, NFA states that:

"A strong argument can be made that the rationale that requires independent introducing brokers, which are prohibited from holding customer funds, to maintain minimum capital should apply to CPOs, which have control over customer funds, and CTAs, which manage client accounts. CPOs and CTAs act as a fiduciary to their pool participants and clients, respectively, and should have adequate funds to operate and ensure that they are a going concern."

Among the specific areas regarding which NFA is seeking guidance, is how might a minimum capital requirement for CPOs and CTAs be determined, and should the methodology be different for CPOs and CTAs.

Curiously, comments are only sought pro-actively from CPOs and CTAs.

For more information, see the NFA Request for Comment:

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of January 23, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.


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