Proposed Rule

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During the past two years, NFA has noted a significant increase in the number of commodity trading advisor ("CTA") Members that deal exclusively in forex. Under the current forex regulatory structure, CFTC and NFA rules regarding disclosure documents do not apply to these firms.

Although not required to file disclosure documents, an increasing number of these CTA firms are voluntarily filing materials with NFA that they characterize as disclosure documents. In the past three years, NFA has received 99 disclosure documents from 43 different Member CTAs regarding exclusively forex trading programs. In fiscal year 2007 alone, NFA received 47 disclosure documents from 27 different Members. Furthermore, based on anecdotal information from futures commission merchants, unregulated commodity pool operators ("CPOs") and CTAs are a fast growing segment of the forex industry.

CFTC and NFA rules and regulations regarding the filing and specific content of CTA disclosure documents do not apply to persons managing off-exchange retail forex accounts. Due to the lack of content requirements, it is sometimes difficult for NFA to require account managers to disclose information that would otherwise have to be included if the disclosure document related to on-exchange trading. These items include, for example, background information about the CTA and its principals, potential conflicts of interest, past performance results, and relevant prior disciplinary actions.1

Another issue that has recently emerged, and which NFA expects to continue, is that traditional CTAs are offering forex trading programs alongside on-exchange programs. This presents the added problem of reviewing a disclosure document for which certain parts are subject to the requirements under Part 4 of the CFTC regulations while others are only subject to NFA Compliance Rule 2-39's anti-fraud standard.

The new rules would require Members that manage forex accounts on behalf of customers or offer pools that trade forex to provide prospective clients and pool participants with a disclosure document and to file it with NFA prior to use. Additionally, any trading program or pool that includes forex trading would have to provide disclosures similar to those currently required under CFTC Part 4 regulations. Finally, similar to traditional CPOs, a Member operating a pool trading forex would be required to provide periodic (monthly or quarterly) account statements and an annual report to the pool participants. These rules, which are supported by NFA's CPO/CTA Advisory Committee, merely impose the same requirements for off-exchange forex that currently exist for on-exchange transactions.

1 To date, NFA has received only three disclosure documents from CPO Members for pools exclusively trading forex. These disclosure documents have the same issues as the CTA disclosure documents, however.

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