Proposed Rule

NFA's Articles currently provide that the Board must include three CPO and three CTA directors. Article VI provides that a Member registered in two or more categories may only vote for representatives in its primary category of business or be elected to the Board only in its primary business category. These restrictions impact CPOs and CTAs more than any other category because of the substantial overlap in these two categories. While these distinctions may have made sense when NFA was first formed, our experience over the last 18 years shows that the distinctions between CPOs and CTAs for purposes of Board representation are outmoded, inflexible and, possibly, unfair.

Approximately 70 percent of all registered CPOs currently operating at least one pool are or have been registered as CTAs. Similarly, 70 percent of all registered CTAs with money under management are or have been registered as CPOs. In addition, all six of the current CPO and CTA directors are dually registered, and 17 of the 18 individuals who have served as CPO and CTA directors since 1983 were dually registered. Our experience also shows that CPOs and CTAs share many of the same concerns and that CPO and CTA directors have never differed on category lines on any NFA issue. The reality is that the six CPO and CTA directors effectively represent the views and interests of both categories, and the current bright line distinction between them does not reflect that reality.

The current structure is unnecessarily complex, limits the flexibility of the Nominating Committee in choosing qualified CPO and CTA directors, and effectively disenfranchises CPO and CTA Members from voting for half of their representatives. Merging the two registration categories for purposes of Board representation would eliminate these drawbacks and provide all CPO and CTA Members the opportunity to vote for the best qualified individuals to represent their interests.

The amendment to Article VII merges the CPO and CTA categories for purposes of Board representation. It does not totally eliminate the distinction because it preserves the requirement that one director be from a CPO within the top third of CPOs in terms of funds under management and one director be from a CTA within the top third of CTAs in terms of funds under management. However, the remaining four directors can be from any CPO or CTA, providing the Nominating Committee with more flexibility in filling those positions. The changes also franchise all CPOs and CTAs to vote for both CPO and CTA representatives elected each year.

Merging the CPO and CTA categories for directors also requires changes in the requirements for Executive Committee and Nominating Committee representation. First, Article VIII was amended to give the CPO/CTA directors the ability to elect any two of the six directors to the Executive Committee. This increases the flexibility the CPO and CTA directors have when electing their representatives to the Executive Committee. Second, Article X was amended to merge the two CPO and CTA subcommittees of the Nominating Committee. It would not, however, totally eliminate the distinction between the two categories. The amendment requires one member of the merged subcommittee to primarily act as a CPO and one member to primarily act as a CTA. The third member can, however, come from either primary membership category.

Finally, two technical amendments were made to the definitions in Article XVIII. The amendment to Article XVIII(m) revises the definition of "Industry Participant" to harmonize it with the language of Article VII(c)(i), as revised. Staff also noticed that the definition of "Public Representative" in Article XVIII(r) was not updated when Article VII was amended to move commercial firm and commercial bank representatives from the Industry Participant category to the Public Representative category. A technical amendment to Article XVIII(r) makes it consistent with the description of public representatives found in Article VII(c)(ii).

As mentioned earlier, NFA intends to make the amendments to Articles VII, VIII, X and XVIII effective 10 days after receipt of this submission by the Commission unless the Commission notifies NFA within the 10-day period that the Commission has determined to review the amendments for approval.