NFA IN BRIEF
NFA is a not-for-profit membership corporation formed in 1976 to become a futures industry's self-regulatory organization under Section 17 of the Commodity Exchange Act. Section 17 was added to the Commodity Exchange Act by Title III of the Commodity Futures Trading Commission ("CFTC") Act of 1974 and provides for the registration and CFTC oversight of self-regulatory associations of futures professionals. NFA's formal designation as a "registered futures association" was granted by the CFTC on September 22, 1981 and the first of NFA's regulatory operations began on October 1, 1982.
The final NFA plan, as approved by the CFTC in 1981 and made operational in 1982, provided for a phase-in of NFA programs. This plan evolved from numerous meetings and discussions among NFA organizers, futures industry leaders and CFTC officials, from legislative efforts in 1978 to perfect Section 17, and from a sober and realistic assessment by NFA organizers of both the benefits and limitations of a registered futures association (See Organizing Efforts below and Genesis of the NFA Concept, Preliminary Statement to NFA's March 16, 1981 Application for Registration Under Section 17 of the Commodity Exchange Act, and NFA Organizing Committee.).
NFA performs several regulatory activities:
- Auditing and surveillance of Members to enforce compliance with NFA financial requirements;
- establishing and enforcing rules and standards for customer protection;
- providing an arbitration forum for futures and forex-related disputes;
- screening to determine fitness to become or remain an NFA Member.
NFA's programs are operational for Futures Commission Merchants ("FCMs"), Introducing Brokers ("IBs"), Commodity Trading Advisors ("CTAs"), Commodity Pool Operators ("CPOs"), and Retail Foreign Exchange Dealers ("RFEDs").
In addition, as authorized under Section 17, NFA performs registration functions under the Commodity Exchange Act — functions previously performed by the CFTC.
NFA Membership is open to any person registered (or exempt from registration) with the CFTC and all futures exchanges provided that the applicant meets NFA's membership qualification standards.
The CFTC has also authorized NFA to process CFTC registration applications by screening applicants, and where appropriate, granting or denying registration applications in all categories.
By virtue of NFA Bylaw 1101 and CFTC Rule 170.15, membership is mandatory in NFA for any FCM, IB, CTA and CPO that transacts futures business with the public. Similarly, by virtue of Compliance Rule 2-36(d) and CFTC Rule 5.22, NFA membership is mandatory for any FCM, RFED, IB, CTA and CPO that transacts forex transactions with the public.
From the beginning, NFA's leadership recognized that NFA must benefit both the public and the futures industry to reach its full potential. To accomplish this, two basic objectives were set, which are incorporated in NFA rules approved by the CFTC:
- More effective policing by the futures industry itself of those segments operating outside the system of exchange standards and surveillance.
- Better cost control over regulatory expenses by eliminating duplication, overlap and conflict between existing governmental and self-regulatory programs, and by facilitating a reduction in the cost of federal regulation for the benefit of taxpayers in general and market users in particular.
The driving force behind NFA was an organizing committee (See NFA Organizing Committee) formed in 1976 by futures industry officials from Chicago and New York City, with broad experience in exchange operations, brokerage house management, commodity merchandising, and trade association activities. Each member of the organizing committee conferred individually with other futures industry leaders, and formal meetings of the organizing committee with industry representatives were held on a number of occasions. These meetings continued into 1981 when NFA formally applied for registration by the CFTC.
Early in its deliberations, the organizing committee reached certain important conclusions. First, substantial cost savings could best be realized from a single organization representing all futures industry segments nationwide, rather than a separate futures association for each segment or region. Second, industry segments could not be successfully self-regulated unless they joined NFA and could not freely resign from it to avoid compliance with ethical and financial rules. Accordingly, the organizing committee decided that membership in NFA should be open to everyone in the futures industry, and that membership in NFA should be mandatory for those who handle transactions directly with the trading public.
In February 1977 the organizing committee appeared before the CFTC to explain its preliminary proposal. In response, the CFTC announced that the NFA proposal was "a valuable first step toward implementing the purposes" of a registered futures association. Moreover, the CFTC offered "to work with the representatives of the NFA to establish a viable organization" and "to find solutions to problems and to seek alternatives where required." In June 1977, the NFA organizing committee presented to the CFTC its plan for uniform required membership, whereby industry segments doing a direct public business would have to be members of NFA, and the CFTC "approved in principle" this concept of mandatory NFA membership.
During 1978, the organizing committee focused its attention on proposed amendments to the Commodity Exchange Act. Three amendments sought by NFA were adopted by Congress in the Futures Trading Act of 1978. These amendments dealt with the mandatory membership question as well as the streamlining of costly programs. Additional perfecting amendments were enacted by the Futures Trading Act of 1982, including an expansion of NFA's authority to assume all registration responsibilities under the Commodity Exchange Act. In addition, Congress again affirmed the principle of mandatory NFA membership.
During its organizational period, NFA received funds from futures exchanges to use to further its efforts and gained tax-exempt status under the Internal Revenue Code. NFA also published and distributed a handbook and a brochure explaining the NFA concept in detail. NFA also participated in the rulemaking which resulted in the adoption by the CFTC of Part 170 of its rules, which governs registered futures associations. A provisional board of directors consisting of the members of the organizing committee was elected by the incorporators of NFA, and temporary officers of NFA were appointed for administrative purposes.
NFA's formal application for registration was filed with the CFTC on March 16, 1981. Following hearings and review of extensive public commentary, the CFTC registered NFA on September 22, 1981. An acting executive director was named in December 1981 and temporary offices were opened in January 1982.
During the remainder of 1982, NFA's full-time president was appointed; experienced administrative, legal, compliance, audit and registration staff were hired; systems were designed and implemented; membership enrollment began; a transitional board of directors was named; and permanent offices in Chicago and New York were opened. The first of NFA's regulatory programs (FCMs) was initiated on October 1, 1982. NFA's first Member-elected Board of Directors assumed office in February 1983, marking the end of an extraordinary organizational effort that had spanned more than six years.
1 A detailed description of the genesis of the NFA concept appears at 1005. Knowledge of the history and development of NFA is useful in understanding fully NFA's functions and present and anticipated role in the futures industry.