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June 05, 2014
Proposed Amendments to NFA's Articles of Incorporation to Increase CPO/CTA Representation on NFA's Board of Directors
Important: Ballot Enclosed – Must Be Received by June 30, 2014
On May 15, 2014, NFA's Board of Directors (Board) ratified a proposal to amend Article VII of NFA's Articles of Incorporation (Articles) to increase CPO/CTA representation on the Board. Currently, there are four CPO/CTA representatives on the Board, and at least two of the four representatives must rank in the top 20 percent of funds under management allocated to futures and swaps. The amendment to Article VII increases the number of CPO/CTA representatives from four to five, and requires that at least three representatives of CPOs or CTAs rank within the top 20 percent, one of which must rank within the top 5 percent of CPOs or CTAs reporting any funds under management allocated to futures and swaps (as defined in Article XVIII) on NFA Form PQR and NFA Form PR as of June 30 of the prior calendar year.
EXPLANATION OF AMENDMENTS
Since its initial application to the CFTC in 1981, NFA's Board has recognized several basic principles in structuring NFA's Board, including (1) those who provide the bulk of NFA's funding should be adequately represented on NFA's Board; (2) larger firms may have a different perspective on regulatory issues than smaller firms; (3) each category of Board representation should include both larger and smaller firms; and (4) proportionate representation among NFA's various membership categories based on the number of Members in each category is not appropriate. Based on these principles, since 1994 the Articles have provided that two Board seats should be reserved for CPOs and CTAs with the most funds under management. The cutoff was originally set at firms that rank in the top one-third of CPO and CTA Members in terms of funds under management. In 2001, when NFA dramatically reduced the size of the Board, the Board set that figure at the level in place today, the top 20% of firms with funds under management.
Over the past year, there has been a sharp increase in both the number of CPO/CTA Members and CPO/CTA funds under management. Specifically, in the early 2000s, the CFTC adopted widely-held exemptions from CPO registration. Likely as a result, from 2003 through 2012, total CPO Members dropped by 40% from 1,790 to 1,089. CPO Member numbers rebounded in 2013, increasing to 1,677. During this period, the number of CTA Members remained relatively flat, 1,893 CTA Members in 2003 and 1,910 in 2013.
When considering the amount of funds invested in pools, the certified annual statements that each CPO Member must file with NFA for each of its regulated pools show the total net asset value (NAV) for all pools reported to NFA grew dramatically through 2005, reaching almost $1.4 trillion that year. Presumably as a result of the exemptions from CPO registration, total NAV then dropped steadily to $420 billion in 2012, roughly the same level it was in 2001 when the size of the Board was dramatically reduced. However, given the CFTC's recent rescission of the CPO registration exemptions, the total NAV for all pools has significantly increased. Although approximately 25% of the pool financial statements for 2013 are not yet due, the total NAV for the pool financial statements received to date, however, is approximately $2 trillion. For CPO equity in futures accounts, which is also drawn from the annual certified statements filed with NFA, from 2003 through 2012 the number remained in a band between $26 billion and $41 billion. For the 2013 pool financial statements received to date, the equity in futures accounts is approximately $68 billion.
CTAs began filing quarterly reports with NFA in September 2013 and those reports include information on the total CTA funds allocated to futures and swaps. The most recent CTA quarterly reports reflected a total of over $210 billion.
The Board believes that the growth in the amount of funds under management warrants an additional seat on the Board. CPOs and CTAs ranking in the top 5% in terms of funds allocated to futures and swaps hold far more funds than those that rank in the top 20%. To ensure that larger CPOs and CTAs are adequately represented on the Board, the Board determined to add an additional CPO/CTA representative to the Board that ranks within the top 5%.
THE PROPOSED AMENDMENTS
What follows are the proposed amendments to the Articles (additions are underscored and deletions are
ARTICLES OF INCORPORATION
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ARTICLE VII: BOARD OF DIRECTORS
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Section 2: Composition of Board.
The Board of Directors shall be comprised as follows:
* * *
(c) Commodity Pool Operator and Commodity Trading Advisor Representatives.
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Amendments to NFA's Articles require the affirmative vote of a majority of those Members actually voting in each Member category — Contract Market, FCM/LTM/IB, CPO/CTA, and SD/MSP/RFED.
Should you have any questions, please contact Tom Sexton, NFA's General Counsel, at (312) 781-1413 or at firstname.lastname@example.org.
NATIONAL FUTURES ASSOCIATION
AMENDMENT TO ARTICLE VII
The amendment to Article VII increases the number of CPO/CTA representatives from four to five, and requires that at least three representatives of CPOs or CTAs rank within the top 20 percent, one of which must rank within the top 5 percent of CPOs or CTAs reporting any funds under management allocated to futures and swaps (as defined in Article XVIII) on NFA Form PQR and NFA Form PR as of June 30 of the prior calendar year.
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