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News Facts Actions - Spring 2005

In this issue:

NFA President Takes Forex Case to Congress

At recent Congressional hearings, NFA President Dan Roth presented NFA's views on several issues facing Congress as it begins the CFTC reauthorization process, focusing on retail off-exchange foreign currency (forex) markets. Testifying in March before the U.S. House of Representatives' Subcommittee on General Farm Commodities and Risk Management Committee on Agriculture, and before the U.S Senate's Committee on Agriculture, Nutrition and Forestry, Roth stressed NFA's intent to be an active participant in cultivating solutions to these issues that are resulting in fraudulent activity in the derivatives industry.

Roth began his testimony by discussing the level of success that self-regulation has achieved in the U.S. futures industry.

"The process of self-regulation has been the subject of a great deal of criticism over the last several years," stated Roth. "The problems in the securities industry have been well publicized. But in the futures industry, volume has increased by more than 1200% since NFA began operations in 1982, and during the same time period customer complaints are down almost 75%. Self-regulation, both by NFA and the futures exchanges has served this industry very well for a very long time."

Roth then described the current forex conundrum -- "In the Commodity Futures Modernization Act (CFMA), Congress attempted to clarify that the CFTC does have jurisdiction to protect customers investing in foreign currency futures by stating that retail customers were covered by the Commodity Exchange Act (CEA) unless the counterparty was an 'otherwise regulated entity' such as a bank, a broker-dealer or an FCM."

Unfortunately, as Roth further explained, "this creates the possibility that an FCM, for example, might be the counterparty but the firm that actually does the telemarketing for these products is completely unregistered and unregulated. There are literally hundreds of these unregulated firms doing telemarketing of off-exchange forex transactions to retail customers, and in some instances the people making the sales pitches have been barred from the futures industry for sales practice fraud."

In an attempt to resolve this issue, Roth informed Congress that NFA would support amending the Act so it clearly states that the people actually selling these products to retail customers must be "otherwise regulated entities."

Another cause of the uncertainty of the CFTC's jurisdiction originates from the Zelener case, where the District Court found that the retail customers were defrauded, but that the CFTC had no jurisdiction because the forex contracts were not futures. The Seventh Circuit affirmed that decision.

"The bottom line is that the Zelener decision makes it much harder for the Commission to prove that contracts sold to retail customers to speculate in commodity prices are futures, makes it easier for the unscrupulous to avoid CFTC regulation and creates a real, live customer protection issue," Roth explained to the legislators. "Unsophisticated retail customers are going to be victimized by high-pressured sales pitches for futures look-alike products. These retail customers are the ones who most need regulatory protection and that protection should not be stripped from them because a clever lawyer finds a loophole in the law." Roth went on to state NFA's view that Congress should address this issue.

Roth then moved to another forex issue -- the section in the CEA that "could be read to allow unregulated affiliates of FCMs to act as counterparties to retail customers if the FCM makes and keeps records of the affiliates under the CEA's risk-assessment provisions."

Unfortunately, firms have taken advantage of this provision by creating "shell" FCMs who do not do any futures business or any retail forex business. Rather, they exist simply to establish affiliates that do retail forex business in a completely unregulated environment. Roth hopes that NFA can solve the "shell" FCM problem by implementing a rule recently adopted by NFA's Board that raises the minimum capital requirement for FCMs with retail forex affiliates from $250,000 to $5 million.

In addition to forex issues, Roth also addressed the recent SEC rule that requires advisors of certain hedge funds to register under the Investment Advisors Act of 1940, pointing out the "real danger of duplication of effort regarding the CPOs and CTAs that are already regulated by the CFTC and NFA." He went on to mention that "according to recent rankings by Institutional Investor, 18 of the top 25 and 63 of the top 100 hedge fund complexes are operated by NFA Member CPOs and their affiliates."

Roth expressed hope that the CFTC and SEC will be able to work together to make the regulatory process as efficient as possible, but he urged the Subcommittee to use its oversight function to ensure that this cooperation occurs.

A complete copy of Roth's testimony can be found on NFA's Web site at

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NFA distributes $1.8 million through restitution program in 2004

Returning money to victims of commodity fraud is a challenging but ultimately rewarding task. Since 1988, NFA has provided a restitution service to help investors get back some of the money they have lost, and in calendar year 2004, NFA issued $1.8 million in restitution funds to 1,300 customers.

"Although most of the respondents in these cases are non-registrants and not Members of NFA, we initiated this program to help investors and to provide a valuable service to the futures industry," says NFA President Dan Roth.

NFA's restitution program usually applies to judgments awarded in cases brought by the CFTC involving commodity fraud. As part of the resolution of the case, NFA is named to administer the restitution process. In most cases, the CFTC has already identified the investors, how much money they have lost and the amount of their pro rated share. NFA makes sure that the terms of the order are fulfilled.

"Under normal circumstances, court-appointed receivers administer the return of money to harmed investors and charge their fees to the cases, reducing the amount available for distribution," says Roth. "Because NFA does not charge any fees for administering the restitution service, we are able to return as much money as possible to the victims."

Due to the success of the program, the number of restitution cases the CFTC asks NFA to administer has increased over the past few years.

"We are currently monitoring more than 100 cases that may require restitution services," says Shelly Hawrysz, Senior Manager, Registration. "Because of the increase in cases, we realized that we needed to develop a computer system that would take on many of the tasks we have been doing manually."

The newly implemented restitution management system creates and tracks case events (such as when a tax refund is filed, when payments are due, etc.), enters and tracks respondents and investors, and tracks the distribution of restitution to investors. The system also allows NFA to image and track case documents.

NFA also is able to correspond more frequently with the investors. Investors are first notified when NFA receives the case. They then receive periodic letters updating them on the progress of the case, and a final letter when the case is closed.

"The system has provided us with the tools we need to manage restitution cases more efficiently and keep investors better informed during the entire process," says Hawrysz.

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NFA's Information Center: A Valuable Resource for NFA Members

They handle approximately 4,500 telephone calls every month, more than 60% of which come from NFA Members. They answer questions ranging from "How do I register?" to "What are my regulatory requirements?" They are knowledgeable, patient, good listeners and problem solvers. They are NFA's Information Center Representatives.

"One of the Information Center's primary objectives is to help Members fulfill their regulatory obligations," says Yvette Christman, who supervises the Information Center. "Members can get a lot of valuable information from our Web site, but sometimes they just need to talk to someone."

Information Center Representatives go through an extensive training period before answering their first telephone calls. They also attend periodic training sessions to keep up-to-date on NFA's regulatory programs and services.

"Because the Information Staff is able to respond to a wide range of inquiries, many callers, including those with multiple questions, have their calls handled by one person without having to be transferred from department to department," says Christman. "We're proud of the fact that we handle approximately 85% of the calls ourselves."

NFA's Information Center Representatives are always willing to help, and they have some suggestions for Members to help them make their calls to the Information Center more efficient and productive. For example:

  • Always have your NFA ID number handy when you call.
  • Use the Online Registration System (ORS) Tutorial to help you understand the registration process. You'll find the answers to many of your questions online.
  • Make it a habit to check the ORS News Page for important information. Then call the Information Center if you need clarification.

"Working together, we can provide you with the information and assistance you need as quickly as possible," says Christman. "We also appreciate the valuable feedback from our Members who call the Information Center. Many of the enhancements NFA makes to the Online Registration System, for example, come from Member feedback."

The Information Center is available toll-free at 800-621-3570 from 8:00 a.m. to 5:00 p.m. CST, Monday through Friday. You can also send questions to the Information Center via e-mail at

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Board Report

NFA's Board of Directors took the following actions at the February 17, 2005 meeting in Chicago:

The Board elected Michael R. Schaefer to serve a one-year term as chairman and Douglas O. Kitchen to serve a one-year term as vice-chairman. Mr. Schaefer is a managing director at Citigroup Global Markets, Inc. Mr. Kitchen is a managing director at Rosenthal Collins Group LLC.

The Board elected Thomas W. Ewing and Silas Keehn to two-year terms as public directors. The Board also appointed Charles P. Nastro as Immediate Past Chairman. Mr. Nastro served as NFA's as NFA's chairman from February 1998 to February 2002.

The Board elected the following individuals to serve one-year terms on NFA's Executive Committee: Bruce Cleland, Campbell and Company; George E. Crapple, The Millburn Corporation; Bernard W. Dan, Chicago Board of Trade; W. Robert Felker, J.P. Morgan Futures, Inc.; Douglas O. Kitchen, Rosenthal Collins Group LLC; Bonnie Litt, Goldman Sachs and Co.; James E. Newsome, New York Mercantile Exchange; and Todd E. Petzel, Azimuth Trust Company, LLC. Board Chairman Michael R. Schaefer and NFA President Dan Roth also serve on the Executive Committee.

The Board approved the following committee appointments:

Appeals Committee: Jeffrey C. Borchardt, George E. Crapple, Thomas W. Ewing and Bonnie Litt.

Membership Committee: W. Robert Felker, Mark J. Hawley, Lou Illes, Silas Keehn, David M. Kozak, Robert E. Murray and Charles P. Nastro.

Business Conduct Committee: Michael T. Gorham and James P. O'Hara.

Hearing Committee: Armando T. Belly, Stephen T. Bobo, Charles S. Collier, Martin F. Doyle, Richard A. Driver, Bryan T. Durkin, Joseph S. Geisel, Sr., Pamela Klein-Kurland, Dennis J. Klejna, Robert A. Kruchoski, Kent Lawrence, Doris Lindbergh, William T. Maitland, Barry J. Mandel, Gloria J. Matthews (Harris), Charles R. Mills, Paul O'Kelley, Joseph W. Ott, William H. Pauly, Anne S. Polaski, Susan M. Schultz, Michael G. Tannenbaum, David J. Vogel and Cynthia L. Zeltwanger.

FCM Advisory Committee: Bruce A. Beatus, Clarence Delbridge, III, and Robert F. Klein.

CPO/CTA Advisory Committee: Craig L. Caudle, Ernest L. Jaffarian and Mark H. Mitchell.

IB Advisory Committee: John W. Crane and Samuel Israel, III.

Educational/Testing Advisory Committee: Carla J. Eyre.

Telemarketing Procedures Waiver Committee: Calogero B. Carcione, Terrence B. Clarke and Franklin A. Gelber.

The Board approved several rule amendments related to off-exchange foreign currency (forex) trading. The changes will extend the reach of NFA's forex sales practice rules and strengthen the forex capital requirements. For more information on NFA's forex rule amendments, see the article in the Winter 2005 edition of News,Facts,Actions. NFA has also published the proposed amendments on its Web site (

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News Briefs

NFA to host reception in Washington, DC
NFA is hosting a reception from 6:00 p.m. to 8:00 p.m. on May 19, 2005, at the Sewall-Belmont House and Museum in Washington, DC. NFA's Board of Directors meeting, usually held in New York in May, will be held in Washington to coincide with the reception.

"With Congress in the midst of the CFTC reauthorization process, we felt this was a good time to remind the Washington community of the important role NFA plays in the regulation of the futures industry," says Sr. Vice President of Strategic Planning and Communications Karen Wuertz. "This reception provides us with an opportunity to meet with congressional staff members, representatives from government agencies and other industry professionals."

NFA Members who plan to be in Washington on May 19 and would like to attend the reception should contact Chris Makino at (312) 781-1391.

NFA President moderates panel discussion at CFTC Roundtable
NFA President Dan Roth moderated one of five panel discussions at the CPO and Commodity Pool Roundtable hosted by the CFTC on April 6. Roth's panel, "Regulation of CPOs and Commodity Pools", discussed how the regulatory structure of hedge funds may change in light of the SEC's new rule requiring hedge funds to register as investment advisors.

Also on the panel were John Torell, CFO & managing Director, Tudor Investment Corp.; Armando Belly, General Counsel, Soros Fund Management LLC; James P. O'Hara, Director of Operational Due Diligence, Lighthouse Partners; Cynthia M. Fornelli, Securities Regulation and Conflicts Management, Bank of America; and Mark Silber, Vice President, Renaissance Technologies.

The day-long roundtable focused on the growth, innovation and regulation of the commodity pool industry over the last 30 years and the challenges and issued faced by the industry. The five panels, composed of regulators, industry participants, investors and academics, examined different topics and issues facing the commodity pool industry.

NFA schedules Member meeting in New York
NFA's next "Issues and Answers" Member meeting will be held on Tuesday, May 3, from 2:00 p.m. to 4:00 p.m. at the Embassy Suites, 102 North End Ave., in New York. NFA Executive Vice-President and COO Dan Driscoll will lead a panel of NFA staff members in a question and answer session covering a variety of regulatory issues, including anti-money laundering, supervision requirements, promotional material and recordkeeping.

There is no charge to attend the meeting. Individuals can register to attend at NFA's Web site.

CFTC approves NFA arbitration rule amendments
The CFTC recently approved amendments to NFA's Code of Arbitration and Member Arbitration Rules. The amendments were made to reflect amendments the CFTC adopted to Part 171 that state that it will not review NFA membership suspensions based solely on a Member's or Associate's failure to pay a settlement or arbitration award. NFA's Code of Arbitration and Member Arbitration Rules previously stated that a Member or Associate could appeal these suspensions to the CFTC. The amendments, which became effective on March 10, 2005, eliminate the references to CFTC review. The entire text of the amendments can be found on NFA's Web site at

CFTC approves NFA Interpretive Notice regarding third-party trading systems
In January, the CFTC approved NFA's Interpretive Notice relating to the registration of third-party trading system developers and the responsibility of NFA Members for promotional material that promotes third-party trading system developers and their trading systems. The notice became effective on January 10, 2005.

The notice provides guidance as to the circumstances which may give rise to liability on the part of the Member, under NFA Bylaw 1101, for providing execution services to users of computerized trading systems developed by non-Member third-party system developers. The notice also discusses the factors that may cause a Member to be responsible, under NFA Compliance Rule 2-29, for promotional material which promotes these trading systems and the Member's supervisory obligations under NFA Compliance Rule 2-29.

The entire text of the notice can be found on NFA's Web site.

NFA staff to participate in FIA's Law & Compliance 2005 conference
Three NFA staff members are scheduled to be panelists at various sessions of the FIA's Law & Compliance 2005 conference, May 11-13, in Baltimore, Maryland. NFA's General Counsel Tom Sexton will be a panelist on the "Hot New Trends in FCM Compliance" panel on May 11. The panel will provide an overview of rules that have been finalized since May 2004 with an emphasis on what an FCM must do to remain in compliance. Sexton will also be a panelist at the "Litigation and Enforcement" session on May 12. The session will summarize significant futures and derivatives industry case law and enforcement actions since May 2004.

Also on May 12, Senior Vice President of Compliance Yvonne Downs will be a panelist at the "Technology and Futures" session. The session will address recent developments regarding the global implications of the use of e-mail, instant messaging and text messaging, as well as e-trading restrictions that still exist among countries and exchanges. The recent developments in patent law relating to trading systems will also be addressed.

Assistant General Counsel Carol Wooding will be a panelist at the "Anti-Money Laundering" session on May 12. The session will provide an update on regulatory developments in the U.S. and overseas in connection with anti-money laundering regulations, with a particular focus on customer identification programs and suspicious activity reports.

For additional information on the conference, visit FIA's Web site at

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