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News Facts Actions - Fall 2005

In this issue:

Board Report

NFA's Board of Directors took the following actions at a meeting on August 18, 2005 in Chicago, IL:

The Board approved amendments to the Audit Committee's Charter. The amendments grant the Audit Committee explicit authority to engage external auditors without prior approval from the board; provide the Audit Committee with the authority to hire outside counsel without prior approval from the Board; make clear that the Audit Committee's consent is required before staff engages NFA's external auditor for non-audit work; and provide that the Audit Committee will formally review its charter at least annually.

The Board approved the following committee appointments:

  • Finance Committee - Paul J. Georgy (IB representative), Robert E. Murray (CPO/CTA representative), Joseph J. O'Neill (contract market representative) and Susan M. Phillips (public representative).
  • Hearing Committee - Gena Kusiak (Deerfield Capital Management LLC) and William F. McCoy (Morgan Stanley Dean Witter, Inc.).
  • Education/Testing Advisory Committee - L. Peter Alonzi, Associate Professor of Economics and Finance with the Dominican University.

The Board approved amendments to NFA Financial Requirements Section 11. The amendments require Forex Dealer Members to calculate option value by multiplying the notional value of the underlying contract by the option's delta, subject to a minimum delta of .25. Forex Dealer Members are also required to submit the methodology they use to calculate the deltas to NFA prior to use and to maintain records of the deltas used in the capital computations.

The Board approved amendments to the NFA Interpretive Notice "Compliance Rule 2-9: Enhanced Supervisory Requirements." The amendments are designed to further prevent abusive sales practices by placing additional supervisory requirements upon Members whose sales force includes a specific number of associated persons who have worked at Disciplined Firms.

The Board approved a resolution to submit to the CFTC a Petition for Rulemaking. The Petition asks the CFTC to amend Regulations 4.22 and 4.7 to eliminate the requirement that CPOs file manually signed pool financial statements with NFA and replace it with a requirement that CPOs electronically file these statements and affirm the content in accordance with NFA's electronic filing system (EasyFile).

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CFTC approves new NFA forex rule

The Commodity Futures Trading Commission has approved a new NFA Compliance Rule and several amendments to existing rules designed to protect retail customers in the off-exchange foreign currency (forex) markets. The new rule, Compliance Rule 2-39, as well as some of the rule amendments became effective on September 15. The remaining rule amendments will be effective on November 30.

Compliance Rule 2-39 prohibits NFA Members who introduce retail forex customers to or manage retail forex accounts with any counterparty from engaging in illegal off-exchange transactions, fraud or conduct inconsistent with just and equitable principles of trade. The rule also requires these Members to supervise their employees and agents.

"These requirements previously applied only to Members who were doing business with Forex Dealer Members," says NFA President Dan Roth. "They now apply to Members doing business with any counterparty, regulated or unregulated."

For example, a Member that introduces business to a foreign bank or manages retail forex accounts carried by a broker-dealer or its affiliate must comply with Rule 2-39 unless the Member is subject to another regulatory scheme.

The CFTC also approved amendments to NFA Compliance Rule 2-36, which will require Forex Dealer Members to provide their customers with written information regarding NFA's Background Affiliation Status Information Center (BASIC) system, including the Web site address, when the customer first opens an account and at least once a year thereafter. BASIC contains current and historical registration information concerning all current and former CFTC registrants, including name, business address and registration history in the futures industry. It also provides information concerning disciplinary actions taken by NFA, the CFTC and all the U.S. futures exchanges.

NFA also amended Sections 11 and 12 of its Financial Requirements and a related Interpretive Notice to strengthen its capital requirements for Forex Dealer Members. Specifically, the amendments remove affiliates from the calculation for the Forex Dealer Member's 1% minimum net capital requirement and impose a concentration charge on material transactions with affiliates and unregulated entities.

"These new rules are the result of recommendations from our Special Committee on Customer Protection Issues," says NFA President Dan Roth. "This Special Committee has worked diligently to help NFA increase its ability to protect retail forex customers."

A Notice to Members explaining the new forex requirements is available on NFA's Web site ( Anyone with questions concerning any of the new requirements should contact Sharon Pendleton, associate director of Compliance at or (312) 658-6540 or Cheryl Tulino in NFA's New York office at or (212) 658-1476.

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CPO requirement to file pool financial statements using EasyFile becomes effective at year-end

Beginning with statements dated December 31, 2005, NFA Member Commodity Pool Operators will be required to file their pool financial statements with NFA electronically, using the EasyFile system. EasyFile is a Web-based filing system accessed through NFA's Web site (

NFA launched EasyFile in 2004 to allow Non-Broker/Dealer Introducing Brokers to submit their 1-FR-IB unaudited financial statements to NFA electronically. In January 2005, NFA began a pilot program for CPOs to use EasyFile to submit their pool financial statements. During the pilot program over 15% of the 2004 statements were filed through EasyFile, and NFA received very positive feedback from the CPOs who used the system.

"As the name implies, EasyFile is easy to use," says Vice President of Compliance Regina Thoele. "There is no software to download or install, and you can submit files from anywhere you have Internet access."

Another benefit of EasyFile is that it immediately notifies the sender that the statement has been received. Firms also have the ability to view and/or print previous statements.

Over the past few weeks, NFA has offered several opportunities for CPOs to learn how to use EasyFile, including workshops, in-person demonstrations and a Web seminar. An archived version of the Web seminar, "Fulfilling Your Regulatory Responsibilities More Efficiently with NFA's EasyFile, Online Registration System and Other Electronic Filing Systems," can be accessed through NFA's Web site.

For additional information regarding EasyFile, contact Patricia Cushing at (312) 658-6747 or Lisa Marlow at (312) 658-6525.

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News Briefs

NASD announces increase in Series 3 exam fee
The NASD has informed NFA that effective January 1, 2006, the Series 3 examination fee will be $95, an increase of $5. Individuals who are applying for NFA membership as a sole proprietor FCM, IB, CPO, CTA or for registration as an AP of any of these categories must satisfy proficiency requirements. Generally, they must have passed the National Commodity Futures Examination (NCFE or Series 3) within the two years preceding their application.

The Series 3 exam is conducted by the NASD, and the testing application form (U10) can either be downloaded or completed online by visiting the NASD's Web site ( NFA publishes a study outline on its Web site ( to help individuals prepare for the exam.

NFA develops forex online learning program
NFA is developing an online learning program for potential investors to learn more about the retail off-exchange foreign currency (forex) market. The program will launch a new Investor Learning Center section of NFA's Web site ( and will debut in early 2006.

"The retail forex markets continue to attract new investors," says Karen Wuertz, senior vice-president of Strategic Planning and Communications. "We are developing this online program to help people who are considering entering the market to understand how the market works and the risks involved in forex trading."

The interactive online program will contain examples of forex trading, a glossary of forex terms and quizzes to help the investor assess what s/he has learned. Wuertz stresses the new program should be just one element of an investor's due diligence before entering the retail forex market.

NFA also publishes a brochure, "Trading in the Retail Off-Exchange Foreign Currency Market: What Investors Need to Know," which can be downloaded from NFA's Web site.

NFA participates in series of investor conferences
Larry Dyekman, director of Communications and Education, recently addressed attendees at the American Association of Individual Investors conference in Las Vegas on November 2-4. Dyekman discussed "What Individual Investors Need to Know Before Trading Futures."

Sharon Pendleton, associate director of Compliance, will participate in panel discussions at both the upcoming Forex Trading Expo and the International Traders Expo. Panelists at both events will discuss "Forex Regulation: What is Being Done to Protect Your Account." The Forex Trading Expo will be held on November 19-20 and the International Traders Expo will be held on December 14-16. Both events are in Las Vegas.

NFA will also sponsor exhibit booths at all three conferences. NFA staff will distribute investor education materials and demonstrate how to conduct a background check using NFA's Web-based Background Affiliation Status Information Center (BASIC).

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NFA responds to Refco revelations

In the days and weeks following Refco, Inc.'s announcement of accounting irregularities and its subsequent bankruptcy filing, NFA has taken several steps to gauge the financial impact on NFA Member firms and to ensure that any risks are disclosed to customers.

"The Chicago Mercantile Exchange is the Designated Self-Regulatory Organization for Refco LLC, the regulated FCM subsidiary of Refco, Inc.," says NFA's Vice-President of Compliance Regina Thoele, "and has been closely monitoring the firm's activities. Our focus has been on our Members who conducted business with Refco, Inc. and the unregulated affiliates named in the October 17 bankruptcy filing."

On October 13, NFA sent audit teams to the offices of three Refco-affiliated Member Commodity Pool Operators to review each firm's operations.

"At the same time, we sent a 'Request for Information' to all of our Forex Dealer Members asking them to contact us if they were utilizing Refco Capital Markets LLC or Refco FX to hedge customer positions," says Thoele.

On October 18, the day following Refco, Inc.'s bankruptcy filing, NFA sent a Notice to Members asking Member CPOs to contact NFA if they had conducted transactions with any unregulated Refco affiliate.

"Once we determined which CPO Members were operating pools with investments at an unregulated Refco affiliate, we sent them an Advisory outlining the information they needed to disclose to their pool participants," says Thoele. "Our primary concern is to ensure that pool participants are made aware of the potential impact on the operation of the pool."

In addition, NFA is collaborating with the CFTC to determine what guidance we can give CPOs on how to value a pool's investments with the Refco-affiliated entities named in the bankruptcy filing in their account statements.

"As the Refco situation continues to unfold, NFA will take whatever steps are necessary to fulfill our regulatory responsibilities to the markets and to investors," says Thoele.

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NFA issues Member Responsibility Action against CPO and its principal

On September 14, NFA issued a Member and Associate Responsibility Action (MRA) against commodity pool operator/commodity trading advisor Member Lake Dow Capital, LLC of McDonough, Georgia and Lake Dow's president and sole associated person, Tyrone Edwards.

The MRA suspended Lake Dow and Edwards from NFA; prohibited them from soliciting or accepting additional funds and from placing trades except for liquidation of existing positions; prohibited them from disbursing or transferring any funds without NFA's prior approval; and required them to provide copies of the MRA to all customers and pool participants.

"We issued the MRA because our investigations revealed that Lake Dow and Edwards distributed statements to participants in a pool named the Aurora Investment Fund L.P. (Aurora Fund) that showed profitable trading without providing supporting documentation," says Ron Hirst, NFA associate general counsel. "They also failed to maintain and/or produce books and records, and they used an outdated and incomplete disclosure document for the Aurora Fund."

NFA closely collaborated with the CFTC during the investigation, and on October 24, the CFTC announced that a U.S. District Court had issued a restraining order freezing the assets of Lake Dow Capital, LLC and Edwards.

As of November 15, 2005, the MRA remains in effect because Edwards and Lake Dow have not yet demonstrated compliance with NFA requirements.

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