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June 09, 2011
Regulatory Reminder to Commodity Trading Advisors of Recordkeeping Requirements
National Futures Association ("NFA") has always been committed to providing guidance to its Members to help them meet their regulatory requirements. At this time, NFA issues this regulatory reminder to CTAs to highlight certain regulatory areas for which NFA has seen recent deficiencies. This reminder is particularly relevant in light of the increase in CTA registrants and NFA Members since mid-October 2010 due to the CFTC's OTC forex registration requirements1. The reminder is primarily aimed at a CTA Member's recordkeeping obligations, including maintaining support for past performance information and obtaining client information and a written authorization to trade.
Performance Reporting. NFA Compliance Rule 2-13 and CFTC Regulations 4.33, 4.35, and 5.4 require each CTA to make and keep books and records in an accurate, current, and orderly manner at its main business office and in accordance with CFTC regulation 1.312. A CTA is required to maintain, among other records, supporting documentation to substantiate its performance records3, copies of all client trade confirmations, purchase and sale statements, and monthly account statements that are received from a Futures Commission Merchant ("FCM"), Retail Foreign Exchange Dealer ("RFED"), or any other eligible forex counterparty firm that carries an account on behalf of the CTA's clients.
Recent NFA examinations have found, however, that many forex CTAs do not maintain the records required and are, therefore, unable to provide support and explain the performance reflected in their disclosure documents and promotional material. Several of these CTAs do not maintain support for performance information and improperly rely upon electronic access to an FCM's or RFED's back office system to obtain their client account statements to substantiate their performance claims. These CTAs' recordkeeping deficiencies are further compounded when the FCM or RFED subsequently restricts or terminates the CTA's access to the client account information leaving the CTA without access to any records necessary to support its performance claims. CTAs are now reminded that they should independently maintain records to support and explain their performance claims, and if they elect to obtain records through a trading platform or similar mechanism, then they must capture and store this information in their own systems so that the records are ultimately under the CTA's control and can be provided to NFA and the CFTC upon request.
Client Information and Written Power of Attorneys. NFA Compliance Rules 2-30 and 2-36 require the NFA Member who solicits an account to obtain specific information from prospective clients such as name, occupation, age, address, financial information, and prior investment and trading experience, and provide adequate risk disclosure to that client based on the information obtained. In practice, some CTAs have been referring their clients to open accounts on-line directly with an FCM or RFED; therefore, although soliciting the client, these CTAs are not obtaining and maintaining the information from the client required pursuant to NFA Compliance Rules 2-30 and 2-36 but are relying on the FCM or RFED to obtain this information and provide the required risk disclosures. Pursuant to NFA Compliance Rules 2-30 and 2-36, CTAs soliciting clients have an independent obligation to obtain the required client information, provide appropriate risk disclosure, and maintain the client information obtained. In these circumstances, CTAs may not rely upon other Members to discharge this obligation.
Moreover, on a related issue, NFA has found that some CTAs do not obtain and maintain executed written trading authorizations from customers and rely upon FCMs or RFEDs to obtain these written authorizations as part of the account opening process. NFA Compliance Rule 2-13 and CFTC Regulations 4.33 and 5.4 require CTAs to maintain this information and firms cannot rely upon FCMs and RFEDs to maintain this information on their behalf.4 Lastly, to the extent a CTA permits clients to partially fund accounts, then the CTA must comply with the disclosure and recordkeeping obligations set forth in NFA Compliance Rule 2-34.
As noted above, NFA offers this regulatory reminder to CTAs to highlight certain areas for which NFA has seen recent deficiencies in regulatory requirements. CTAs should comply with these regulatory requirements or may be subject to disciplinary action.
Anyone needing additional information regarding this notice should contact Vilia Sutkus-Kiela at 312-781-1346 (firstname.lastname@example.org).
1 See CFTC Regulation 5.3.
2 CFTC Regulation 1.31 states that all books and records required to be kept under the Commodity Exchange Act and by the CFTC regulations must be maintained for a period of five years from the date thereof and shall be readily accessible during the first two years. Books and records may be maintained in an acceptable electronic format.
3 With the exception of proprietary trading results, the CTA must disclose the actual performance of all accounts directed by the CTA and by each of its trading principals. All required performance information must be presented for the most recent five calendar years and year-to-date, or for the life of the trading program or account if in existence less than five years. If proprietary results are presented, supporting documentation must be maintained to substantiate the results.
4 These records must also be maintained in accordance with CFTC Regulation 1.31.