We have provided an overview of the major requirements of the new rule and have posted the complete text of the new rule below.

Overview of NFA Rule 2-46

Who has to file?

Generally all registered CPOs will need to file the report with respect to the pools which they manage.  This includes CPOs to both 4.7 and 4.12 funds.  Operators of 4.13 funds will not need to file.

What needs to be filed?

The CPO will need to make a filing which includes the following information:

1. Key Relationships - pool administrators, carrying brokers, trading managers, custodians
2. Statement of Changes in NAV
3. Monthly Rates of Return
4. Schedule of Investments - all pool investments greater than 10% of fund NAV need to be disclosed (even if the positions are not futures/commodities)

When do quarterly reports need to be filed?

The filing must be made within 45 days of the end of each quarter.  The rule is now effective and as such the first filing will be due within 45 days after March 31, 2010.

Where do CPOs file the reports?

The CPO must file on the NFA’s EasyFile system.

Why the new rule?

The NFA wants more information on the trading which is going on, especially with respect to Regulation 4.7 pools which are not required to submit disclosure documents to the NFA.  In the adopting release, the NFA stated:

NFA recently developed a new risk management system designed to assess risks, identify trends and assign audit priorities. NFA is concerned, however, that the current information that we have relating to commodity pools – particularly CFTC Regulation 4.7 exempt pools – may not provide sufficient information for NFA to fully utilize the risk system’s capabilities. The additional limited performance and operational data NFA desires to collect is necessary so that the new risk system can provide an optimal benefit.

The full rule can be found here.

The notice of adoption of the new rule can be found here.

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Rule 2-46. CPO Quarterly Reporting Requirements

Each CPO Member must report on a quarterly basis to NFA, for each pool that it operates and for which it has any reporting requirement under CFTC Regulation 4.22, the following information in a form and manner prescribed by NFA within 45 days after the end of each quarterly reporting period:

(a) The identity of the pool’s administrator, carrying broker(s), trading manager(s); and custodian(s);

(b) A statement of changes in net asset value for the quarterly reporting period;

(c) Monthly performance for the three months comprising the quarterly reporting period;

(d) A schedule of investments identifying any investment that exceeds 10% of the pool’s net asset value at the end of the quarterly reporting period.

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Other related hedge fund law blog posts include:

• CPO Annual Report Filing Overview
• CTA and CPO Registration and Compliance Guide
• How to Register as a CTA or CPO

Mallon P.C. can provide CPOs with comprehensive support during the filing process.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

A bill was recently introduced into the Connecticut General Assembly which would require investment advisers to hedge funds to provide an overview of any conflicts of interests of such investment adviser with respect to its duties to the fund (or its investors).  This new bill comes about a year after another bill was proposed (but not passed) in Connecticut (see New Connecticut Hedge Fund Laws Proposed).

The text of bill is below and can also be found here.

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General Assembly

Raised Bill No. 5053

February Session, 2010

LCO No. 540

*00540_______BA_*

Referred to Committee on Banks

Introduced by: (BA)

AN ACT CONCERNING TRANSPARENCY AND DISCLOSURE.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective October 1, 2010) (a) As used in this section, “hedge fund” means any investment company, as defined in Section 3(a)(1) of the Investment Company Act of 1940, located in this state (1) that claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940; (2) whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act; and (3) that meets any other criteria as may be established by the Banking Commissioner in regulations adopted under subsection (c) of this section. A hedge fund is located in this state if such fund has an office in this state where employees regularly conduct business on behalf of the hedge fund.

(b) Any investment adviser to a hedge fund shall disclose to each investor or prospective investor in such hedge fund, not later than thirty days before any such investment, any financial or other interests the investment adviser may have that conflict with or are likely to impair the investment adviser’s duties and responsibilities to the fund or its investors.

(c) The Banking Commissioner may adopt regulations, in accordance with chapter 54 of the general statutes, to implement the provisions of this section.

This act shall take effect as follows and shall amend the following sections:

Section 1

October 1, 2010

New section

Statement of Purpose:

To ensure transparency by requiring investment advisers to a hedge fund to disclose any potential conflicts of interest or interests that are likely to impair the investment adviser’s duties and responsibilities to the fund or its investors.

[Proposed deletions are enclosed in brackets. Proposed additions are indicated by underline, except that when the entire text of a bill or resolution or a section of a bill or resolution is new, it is not underlined.]

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Other related hedge fund law blog posts include:

• State Hedge Fund Laws
• Hedge Fund Attorney
• How to register as an Investment Advisor
• Overview of the Series 65 exam

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Mallon P.C. He can be reached directly at 415-868-5345.

The San Francisco Futures Professionals Group (LinkedIn Group) will be meeting next week to discuss the most recent NFA Regulatory Seminar.  Bart Mallon of Mallon P.C. will be providing an overview of the major regulatory items discussed at the seminar including the new NFA rule on social media, issues with disclosure documents and performance reporting, and perhaps most, importantly, how to prepare for and deal with an NFA audit.

In addition to Mr. Mallon’s discussion, Bill Grayson has offered to join the group to discuss strategy and capital raising for emerging managers.

The meeting will take place at Mr. Mallon’s office suite (1 Ferry Building, Suite 255) on March 16th at 4pm.  After the discussion the futures professionals group will move to the Slanted Door for continued discussion, drinks and networking.

All bay area futures professionals are invited to attend (please RSVP).  Additionally, Mallon P.C. would like to welcome any bay area forex professionals to attend.  Many forex professionals will need to become NFA members after the CFTC’s proposed forex registration rules are adopted and we recommend that such forex professionals begin preparing for registration.  All bay area forex professionals are encouraged to join the San Francisco Forex Professionals LinkedIn group as well.

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Other related hedge fund law blog posts include:

• CPO Annual Report Filing Overview
• CTA and CPO Registration and Compliance Guide
• How to Register as a CTA or CPO

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Mallon P.C. He can be reached directly at 415-868-5345.

Rule 4.8 should be used sparingly, if ever.  Managers should note that if Rule 4.8 is used prior to approval of the disclosure document the NFA will require the manager to provide investors in the fund with the approved disclosure document and an overview of the revisions which were made.  This creates a potentially awkward situation for both the manager and the investor and may, under certain circumstance, provide the investor with a right of rescission.  As with all maters in the securities industry, it is vital for a manager to provide the investor with all material information and the manager may not make any material omissions.

The full rule is reprinted below and can be found here.

Note: please see disclaimer.  Mallon P.C. is not providing legal advice through this post.

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§ 4.8   Exemption from certain requirements of rule 4.26 with respect to pools offered or sold in certain offerings exempt from registration under the Securities Act.

(a) Notwithstanding paragraph (d) of §4.26 and subject to the conditions specified herein, the registered commodity pool operator of a pool offered or sold solely to “accredited investors” as defined in 17 CFR 230.501 in an offering exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 17 CFR 230.505 or 230.506, may solicit, accept and receive funds, securities and other property from prospective participants in that pool upon filing with the National Futures Association and providing to such participants the Disclosure Document for the pool.

(b) Notwithstanding paragraph (d) of §4.26 and subject to the conditions specified herein, the registered commodity pool operator of a pool offered or sold in an offering exempt from the registration requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 17 CFR 230.505 or 230.506, that is operated in compliance with, and has filed the notice required by §4.12(b) may solicit, accept and receive funds, securities and other property from prospective participants in that pool upon filing with the National Futures Association and providing to such participants the Disclosure Document for the pool.

(c) The relief provided under §4.8 is not available if an enforcement proceeding brought by the Commission under the Act or the regulations is pending against the commodity pool operator or any of its principals or if the commodity pool operator or any of its principals is subject to any statutory disqualification under §§8a(2) or 8a(3) of the Act.

[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60 FR 38182, July 25, 1995; 72 FR 1662, Jan. 16, 2007]

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Aside from providing basic information on the hedge fund, including the name of the fund, the manager, and contact information, the database will usually include performance results, fees, and other additional strategy and structure information.  The extensiveness of the listing, as well as the amount of funds available for viewing, depends on the database.

For hedge fund managers, databases serve as a way to obtain investors and publish their fund’s information to a wider audience.  Most websites require that the manager update their performance reports on a monthly or quarterly basis, and the cost to both list and update information is free.  Often there are also additional requirements for a manager to list a fund, such as a minimum track record or minimum length of active performance, but this also depends on the individual database.

We have compiled a list of popular online databases, which are listed below.  Information on these databases will be updated appropriately as the websites’ policies and fees change throughout the year.

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Database: Hedgefund.net

Leading Source for Hedge Fund Performance, News and Information

UPDATE: Information from below has been deleted because it was not up to date according to a representative at hedgefund.net.

For Managers:

• Requirements (to list fund):
• Minimum Track Record:

For Investors:

• Number of Funds:
• Updated:
• Fee Structure:
• Who Can Subscribe:

Database: Hedgeco.net

The Leading Free Online Hedge Fund Database and Source of News on Hedge Funds

For Managers:

• Requirements: Offering Documents, PPM Documents
• Minimum Track Record: No

For Investors:

• Number of Funds: Around 7,000
• Updated: Daily
• Fee Structure: Offers free Basic Membership and Diamond Membership for $10,000 per year
• Who Can Subscribe: Pension plans, family offices, consultants, funds of funds, banks, insurance companies, foundations, endowments, and qualified private investors

Database: Hedgefundresearch.com

For Analysts and Investors Who Demand Access to the Broadest Universe of Hedge Funds

For Managers:

• Requirements: One month of active performance
• Minimum Track Record: None

For Investors:

• Number of Funds: Over 6,500 funds and fund of funds
• Updated: Bi-weekly
• Fee Structure: Offers HFR Manager Access Package, which includes access to HFR’s five main strategy databses for $2,500, or one year subscription to HFR Database for $7,000
• Who Can Subscribe: Accredited investors

Database: Barclayhedge.com

Research on Hedge Funds, Fund of Funds, and Managed Futures/Alternative Investments

For Managers:

• Requirements: One active month of performance
• Minimum Track Record: None

For Investors:

• Number of Funds: 5,723 (Global); 4,675 (Hedge Fund); 2,846 (Single Manager)
• Updated: Bi-monthly
• Fee Structure: $6,000 for annual subscription (Global); $4,500 (Hedge Fund); $3,500 (Single Manager); and accredited investors or those who work for an accredited institution can use the Barclay DataFinder for Free
• Who Can Subscribe: Accredited investors

Database: Corporate.morningstar.com

A Leading Provider of Independent Investment Research in North America, Europe, Australia, and Asia

For Managers:

• Requirements: Questionnaire, PPM/Offering Documents/DDQ or other fund documents
• Minimum Track Record: None

For Investors:

• Number of Funds: Offers access to 8,000 U.S. and international funds
• Updated: Monthly
• Fee Structure: $179 annual membership, $19.95 monthly membership
• Who Can Subscribe: Fund of funds, family offices, consultants, mutual fund companies, other investment managers

Database: Lipperweb.com

The Leading Independent Industry Source of Hedge Fund Performance Data

For Managers:

• Requirements: Lipper TASS Questionnaire, latest version of Prospectus/Offering Document/PPM, most recent Audited Financial Statements
• Minimum Track Record: None

For Investors:

• Number of Funds: 6,300
• Updated: Daily
• Fee Structure: $8,040 annual subscription
• Who Can Subscribe: Accredited investors

Database: Casamhedge.com

The Oldest CTA and Hedge Fund Database in the Market and the Source of Data for the CASAM and CISDM Indices

For Managers:

• Requirements: None
• Minimum Track Record: None

For Investors:

• Number of Funds: Offers access to 4,500 hedge funds, fund of funds, and CTAs
• Updated: Monthly
• Fee Structure: Free
• Who Can Subscribe: Accredited institutional investors, registered investment advisors

Database: Eurekahedge.com

Provides the Greatest Breadth and Depth of Information on the Global Alternative Fund Industry

UPDATE: Information from below has been deleted because Eurekahedge has problems with how our information was presented.

For Managers:

• Requirements:
• Minimum Track Record:

For Investors:

• Number of Funds:
• Updated:
• Fee Structure:
• Who Can Subscribe:

Database: Hedgefundintelligence.com

The Most Extensive Database of Single-Manager Hedge Funds and Fund of Funds Available

For Managers:

• Requirements: Proof of active performance, signed terms of agreement
• Minimum Track Record: None

For Investors:

• Number of Funds: Over 11,000
• Updated: Daily
• Fee Structure: $3,050 annual subscription for Americas Database
• Who Can Subscribe: Qualified accredited investors

Database: Cogenthedge.com

Intelligent Tools for Informed Decisions

For Managers:

• Requirement: None
• Minimum Track Record: None

For Investors:

• Number of Funds: 6,100 active investments
• Updated: Daily, Real-time basis
• Fee Structure: Free for online research use, $5,000 annual to take off-line and use elsewhere
• Who Can Subscribe: Accredited and qualified investors

Database: Informa Investment Solutions

The Investment World’s Compass

For Managers:

• Requirements: CC Registered
• Minimum Track Record: None

For Investors:

• Number of Funds: Over 12,000 investment products
• Updated: Monthly
• Fee Structure: Free
• Who Can Subscribe: Plan sponsors, investment consultants and brokerages

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Other related hedge fund law articles include:

• Hedge Fund Managers
• Hedge Fund Investors
• Hedge Fund Marketing

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Mallon P.C. He can be reached directly at 415-868-5345.

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March 1-3

• Sponsor: IMN
• Event: Distressed Investment Summit
• Location: Huntington Beach, CA

March 2

• Sponsor: 100 Women in Hedge Funds
• Event: Christy Romero, Chief of Staff, Office of the Special Inspector General - TARP
• Location: Washington, D.C.

March 2

• Sponsor: Advanced Fund Administration
• Event: Advanced Fund Administration - GAIM Cayman Party
• Location: Cayman Islands

March 3

• Sponsor: FTF
• Event: Surviving a Hedge Fund Operational Due Diligence
• Location: Boston, MA

March 3

• Sponsor: 100 Women in Hedge Funds
• Event: A Ringside Seat on Wall Street: Meet Joe Perella
• Location: New York, NY

March 3

• Sponsor: Living Group
• Event: UCITS: Marketing for New Markets
• Location: London

March 4

• Sponsor: FTF
• Event: How to Launch a Hedge Fund
• Location: Boston, MA

March 7-10

• Sponsor: International Bar Association, IBA
• Event: IBA 11th Annual Private Investment Funds Conference
• Location: London

March 10

• Sponsor: FTF
• Event: Understanding the Fixed Income Securities Market
• Location: New York, NY

March 10

• Sponsor: 100 Women in Hedge Funds
• Event: From Washington DC to Wall Street: Robert Wolf, Chairman and CEO, UBS Americas & President, UBS Investment Bank, Member of President Obama’s Economic Recovery Advisory Board
• Location: New York, NY

March 10-12

• Sponsor: Risk magazine
• Event: Risk South Africa
• Location: South Africa

March 10-13

• Sponsor: FIA
• Event: 35th Annual International Futures Industry Conference
• Boca Raton, FL

March 15

• Sponsor: Eureka Financial Ltd.
• Event: UCITS Funds
• Location: London

March 16

• Sponsor: 100 Women in Hedge Funds
• Event: Time to Re-Connect!
• Location: St. Louis Park, MN

March 17-18

• Sponsor: HedgeFund Intelligence
• Event: AsiaHedge Forum 2010
• Location: Hong Kong

March 18

• Sponsor: Fountain Hills Chamber of Commerce
• Event: 2010 Fountain Hills Chamber 2nd Annual Economic Forum
• Location: Phoenix, AZ

March 18

• Sponsor: Morgan Stanley, Schulte Roth & Zabel
• Event: Distribution of Alternative Funds Outside the United States
• Location: New York, NY

March 18

• Sponsor: GoldenNetworking.com
• Event: Hedge Fund Leaders Forum 2010, “Generating Alpha in Challenging Times”
• Location: New York, NY

March 18

• Sponsor: TwistedTree Ltd
• Event: A Successful Risk Management Strategy - for Buy-side Firms
• Location: Virtual event

March 19

• Sponsor: EastEuro Link Ltd
• Event: CEE Private Equity Webinar 2010
• Location: Virtual event

March 19

• Sponsor: Rotterdam School of Management
• Event: 4th One-Day Conference on Professional Asset Management
• Location: Rotterdam, Netherlands

March 22-23

• Sponsor: Financial Times
• Event: Al Noor Financial Times Business of Film Conference
• Location: Doha, Ad Dawhah

March 23-24

• Sponsor: Moneco Ltd.
• Event: Recent and Future Trends in the Financial Industry - Institutions, Infrastructure and Regulation
• Location: Prague

March 23-24

• Sponsor: C5
• Event: 6th Annual CIS Private Equity
• Location: Moscow, Russia

March 23-24

• Sponsor: ALFI
• Event: ALFI Spring Conference 2010
• Location: Luxembourg

March 24

• Sponsor: InvestoRegulation
• Event: SEC Regulation Outside the United States
• Location: Hong Kong

March 24

• Sponsor: DC Finance
• Event: The Tel Aviv Institutional Investment Conference 2010
• Location: Tel Aviv, Israel

March 24-25

• Sponsor: FRA, LLC and the HFBOA
• Event: The Due Diligence Master Class: Bridging the Expectations Gap Between Investors and Asset Managers
• Location: New York, NY

March 25

• Sponsor: Incisive Media
• Event: The Art of Indexing Summit Europe
• Location: Aalen Area, Germany

March 25-26

• Sponsor: IA Watch
• Event: 12th Annual IA Compliance Best Practices Summit 2010
• Location: Washington, D.C.

March 25-26

• Sponsor: HFMWeek
• Event: HFM European Performance Awards
• Location: London

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Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Mallon P.C. He can be reached directly at 415-868-5345.

On Tuesday March 2 the National Futures Association (”NFA”) is hosting a regulatory seminar for members of the commodity and futures markets.  The seminar will focus on a number of important issues including the following:

• Overview and Discussion of Regulatory Changes
• Disclosure Document and Performance Reporting
• Financial Reporting for Commodity Pools
• Sale Practices
• NFA Audit Process

There are a number of items which I am particularly interested in hearing about from the NFA staff.  Specifically, I am interested to hear their thoughts on the disclosure document review process which is no where near uniform or expedient.  I am also eager to hear how the NFA views their audit process as I have seen a few of these lately and have many questions as to why the NFA pursued the matter in certain ways.  One of the biggest issues I believe is uniformity and I think this should be a focus for the NFA in the coming year.  It is always frustrating to have a so-called “moving target” and to not be able to provide clients with better guidance in terms of NFA timing.

Below is a more detailed outline of the seminar which can also be found here.

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Registration for National Futures Association’s

Commodity Pool Operator/Commodity Trading Advisor Regulatory Seminar

Tuesday, March 2, 2010

UBS Conference Center

Chicago, Illinois

In light of the economic upheaval that has dramatically affected the financial markets, the regulatory landscape for Commodity Pool Operators and Commodity Trading Advisors is changing. To help our CPO and CTA Members stay current with their regulatory requirements, NFA will host a CPO/CTA Regulatory Seminar on Tuesday, March 2, 2010 in Chicago. The seminar will be held at the UBS Conference Center, One North Wacker Drive.

The seminar will focus on several CPO/CTA issues, including new and pending legislation, recent additions to financial reporting requirements and common errors made in promotional material and disclosure documents. The seminar will also outline the NFA audit process and discuss common audit deficiencies.

Seminar Agenda (subject to change)

7:30 - 8:30 a.m. Registration and Continental Breakfast

8:30 - 9:30 a.m. Session One: The Current State of CPO/CTA Regulation

A panel of NFA staff and other industry professionals will discuss the results of recent CFTC/SEC harmonization, hedge fund regulation, and the status of pending legislation.

• Moderator: Tom Sexton, Senior Vice-President, General Counsel and Secretary, NFA
• Panelists: Dan Driscoll, Executive Vice-President, Chief Operating Officer, NFA
• David Kavanagh, President, Dearborn Capital Management
• Lance A. Zinman, Partner, Katten Muchin Rosenman LLP

9:30 - 9:45 a.m. Refreshment Break

9:45 - 10:45 a.m. Session Two: Disclosure Document and Performance Reporting

NFA staff will discuss common errors CPOs and CTAs make when filing their Disclosure Documents with NFA, the deficiencies cited in most Disclosure Document comment letters and common performance reporting deficiencies.

• Panelists: David Matteson, Partner, Drinker Biddle & Reath LLP
• Amanda Olear, Attorney-Advisor, CFTC
• Lisa Tamburini, General Counsel, AlphaMetrix LLC
• Patricia Cushing, Associate Director, Compliance, NFA
• Kaitlan Chi, Manager, Compliance, NFA

10:45 - 12:00 p.m. Session Three: Pool Financial Reporting

NFA staff will outline the new expanded reporting requirements and demonstrate how to file the additional information electronically with NFA. This session will also cover the prohibition on general partner loans, CFTC financial reporting rule changes and pool reporting requirements for forex CPOs and CTAs.

• Panelists: Eileen Chotiner, Senior Compliance Analyst, CFTC
• James W. Laures, Director, Deloitte & Touche LLP
• David Young, President, Spectrum Global Fund Administration, LLC
• Tracey Hunt, Senior Manager, Compliance, NFA

12:00 - 1:45 p.m. Lunch

• Keynote Speaker: Michael Dunn, Commissioner, CFTC
• Introduced by: Dan Roth, President and CEO, NFA

1:45 - 2:45 p.m. Session Four: Sales Practices

NFA staff along with other experts will discuss common promotional material deficiencies and the new Social Networking interpretive notice.

• Moderator/Panelist: John Lothian, President & CEO, John J. Lothian & Company, Inc.
• Panelist: Natalie Peters, Director of Investor Relations, DigiLog Capital LLC
• Alexandra Shipovskikh, Manager, Compliance, NFA
• Dorothy Bobak, Senior Analyst, Compliance, NFA

2:45 - 3:00 p.m. Refreshment Break

3:00 - 4:30 p.m. Session Five: The NFA Audit Process

This session will provide an overview of the NFA audit process, highlighting new areas of focus such as FAS 157 hierarchy, valuation policies, side pocket investments, side letters/preferred redemptions and strategy promotion. The panel will also discuss common audit deficiencies.

• Panelist: Roxanne Bennett, Director, Price Asset Management
• Jennifer Sunu, Director, Audits, NFA
• Matt Pendell, Manager, Compliance, NFA

Registration

The fee for attending this seminar is $100 per person for NFA Members and $150 for non-Members. The fee includes all seminar sessions, continental breakfast, refreshment breaks and lunch.

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February 16, 2010

CFTC Commissioner Michael Dunn to be keynote speaker at NFA’s CPO/CTA Regulatory Seminar

CFTC Commissioner Michael Dunn will be the keynote speaker at NFA’s CPO/CTA Regulatory Seminar on Tuesday, March 2 in Chicago. The day-long seminar will focus on several CPO/CTA issues, including new and pending legislation, recent additions to financial reporting requirements and common errors made in promotional material and disclosure documents. The seminar will also outline the NFA audit process and discuss common audit deficiencies.

There’s still time to register to attend the seminar. The cost is $100 for NFA Members and $150 for non-Members. The fee includes all workshop materials, continental breakfast, refreshment breaks and lunch.

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Other related hedge fund law blog posts include:

• CPO Annual Report Filing Overview
• CTA and CPO Registration and Compliance Guide
• How to Register as a CTA or CPO

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Mallon P.C. He can be reached directly at 415-868-5345.

As we’ve discussed in related posts, the CFTC has proposed rules regulating the off-exchange spot forex industry (see Retail FOREX Registration Regulations Proposed).  The CFTC has requested comments from the public and there are currently about 100 public comments on CFTC’s website written in response to the new rule. The comments mainly focus on:

• Leverage reduction rule (approx. 75/100 comments)
• Forex industry becoming inaccessible to smaller traders (approx. 35/100 comments)
• Threat of investors moving their money to offshore firms (approx. 25/100 comments)
• Opposition to government interference/regulation (approx. 20/100 comments)

[Note: over the weekend the CFTC published some of the backlog of comments it received.  Much of this article was written prior to review of these extra comments (which total approximately 3,663).  We will provide an update on such comments in the future.]

To view all of the comments, click here.

The following is our summary of the comments which have been made thus far.

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Leverage Reduction

Approximately 75 of the 100 comments mention a strong or very strong opposition to the new leverage proposal of 10:1. The issue with a reduction of leverage to 10:1 is that investors will have to invest much more money in order to trade what they can currently trade with less capital. Comments regarding leverage include phrases like “strongly object”, “terrible idea”, “unintelligent”, and “strongly oppose”.  The majority opinion is that people should have the freedom and the choice to trade with a higher amount of leverage, and that the federal government’s attempts to lower leverage to 10:1 are “unnecessary” and “intrusive”. John Yeatman Jr. writes,

Please DO NOT reduce leverage in US Forex trading to 10:1…THIS WOULD HAVE A MAJOR IMPACT ON TENS OF THOUSANDS OF TRADERS AND THEIR FAMILIES WHO RELY ON 100:1 LEVERAGE AVAILABILITY TO SUPPORT THEIR FAMILY AND THIS ECONOMY. Please do your part in helping to keep this country great and it’s [sic] freedoms true BY NOT ALLOWING ANYTHING LESS THAN 100:1.

Other comments regarding the leverage proposal include:

• … strongly objects to new leverage of 10:1
• … proposed reduction not consistent with futures, which allow a significantly higher leverage
• … virtually no flexibility trading at 10:1 leverage unless trader has gigantic account balance
• …reduction in leverage not fair to public…bad for America
• … new leverage line “out of line with general idea of protecting consumers”
• …limiting leverage to 10:1 is “a bad idea”
• …current leverage limit is “more than enough”
• … CFTC is “unintelligent” to change leverage to 10:1
• … terrible idea to lower leverage
• … leverage change is “perversion of the free markets”
• …leverage restriction “grave injustice” for many who work to secure the American dream of prosperity for themselves and families
• …leverage limits would delay achievement of financial independence
• …leverage not dangerous; misuse is
• …leverage decrease will kill forex business and worsen economic situation in states and worldwide
• …amount of leverage needs to be at discretion of investors

Smaller Traders

Another argument is that lower leverage will making trading inaccessible for smaller traders but leave the door wide open for larger institutions, since lower leverage requires higher margin (meaning that more money needed to be invested in order to trade). Comments regarding this proposed rules potential affect on smaller traders include:

• …will stamp out small-time investor
• …drive smaller guys out of market or offshore
• …anything lower would be insane for small-time traders
• …gets rid of investors with small capital so rich can stay rich and poor can stay poor
• …pushes out small-time investor
• …denies small trader opportunity
• …disparate and unintended impact on small traders with lower capital
• …leave the small, independent traders alone
• …small businesses are heart of US economy
• …all small-scale actors will be stifled
• …10:1 leverage will have unintended consequence of locking out hundreds or thousands of small traders
• …quit treating the small guy like an idiot
• …are you trying to allow only rich to trade forex?

Government Interference/Regulation

Many of the comments suggest anger with the government for interfering too much with the forex industry. Michael Thomas writes,

I do not live here in this “free” society to have someone from the government babysitting me. The message that your proposed rules send is that 1) we are not free to make our own choices. 2) The federal government believes that we the general public are too stupid to make decisions for ourselves….I don’t need you, or do I want you getting in the way of my being able to trade as I wish in the United States of America.

Other comments regarding an opposition to increased government interference include:

• …don’t add more government
• …not intention of our ancestors to create government which controlled/regulated all aspects of citizens’ lives
• …the government has no right to control my ability to make profit
• …unnecessary for Federal government to regulate against individual’s ability to take risks
• …don’t need government protection; we’re adult traders
• …not responsibility of government to take away choice from consumers
• …”big brother” attempt to protect people from “evil” traders and forex hedge funds
• …stay out of trying to run my personal life

Offshore Threat

In at least 25 of the comments, the public is arguing that the new rules, specifically lower leverage, will drive traders offshore to overseas brokers who may or may not be regulated. Further, a major argument is that the forex industry in the United States will essentially cease altogether as a result of traders moving their forex activities offshore. Comments regarding this offshore threat include:

• …will send business to London and unregulated offshore markets
• …consumers will take accounts offshore
• …will drive smaller guys out of markets entirely or to offshore, unregulated brokers
• …when traders move accounts offshore, CFTC and NFA will have no control of clients’ trading
• …I’ve already moved my account offshore
• …people will do business with offshore brokers

Government Regulation

In terms of the new regulation proposal as a whole, some people support more industry regulation while others are against the idea entirely. Bradford Smith writes,

I feel that regulation of firms is needed…regulation is needed to help people understand the risks such as risk disclosure. [Regulating] the  retail forex market in a similar fashion to how commodities and futures are regulated is a good idea. Stopping companies from trading against their clients is a high priority issue that needs to be stopped.

John M. Bland, on the other hand, who views the proposal as “unfair”,  writes,

…the CFTC has done a lot in recent years to correct many of the problems in the industry…this decision is unfair and anti-competitive.

Other comments regarding opposition to the proposal and/or government interference include:

• …new rules will destroy US financial firms business and lead to loss of thousands of jobs during the worst economy in decades
• …regulation should be aimed at encouraging economic growth and innovation vs. restricting it
• …against proposal
• …how did forex regulation get in the Farm Bill?
• …whoever initiated proposal has no knowledge of forex…this rule is utter nonsense…rules for forex in the USA are already quite strict
• …you are busybody bureaucrats with intrusive minds…you are interested in only one thing: bureaucratic power and complete control of every microscopic aspect of life…you are monsters
• …rules will harm people who make an honest living trading currency
• …important to educate and inform, not regulate and ban
• …proposal is a disaster-in-warning for traders
• …if it ain’t broke, don’t fix it
• …proposal is lunacy-communist-legislation
• …I do not support the proposal…proposal closes doors for forex investors and will make forex market accessible to financial institutions only
• …vehemently against new, narrow-sighted legislation

Agreement/Disagreement with Proposal

Many of the comments discuss that education about forex and trading risk is the best solution. On a similar note, many traders expressed the fact that anyone who trades in the forex market is aware of the inherent risks, so people who decide to trade are willing to take these risks. There is a general consensus that it is the individual’s, and not the government’s, responsibility to evaluate the level of risk that s/he is willing to take. Remember, higher leverage will be reflected in both your profits and your losses. Thus, if you have high leverage and profit, you will profit a lot more than if your trading had not been leveraged. But the same goes for losses; if you lose, you will lose a lot more based on the higher leverage.

Conclusions Thus Far

The biggest concern thus far is the proposed reduction in leverage to 10:1. Almost every comment mentioned a strong opposition to this rule. Furthermore, most people seem to be concerned that the new regulations will significantly decrease forex activity in the US—if not kill it off—and drive most investors overseas to offshore firms. We will continue to monitor comments received until the March 22 due date. Please leave us a comment below with your feedback. Should you feel inclined, you may submit your own comment to the CFTC through the methods listed above.

To view CFTC’s proposed rules, click here.

How to Comment

Comments must be received by March 22, 2010 and can be submitted the following ways:

• Through the Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
• By e-mail: secretary@cftc.gov. Include “Regulation of Retail Forex” in the subject line of the message.
• By fax: (202) 418-5521.
• By mail: Send to David Stawick, Secretary, Commodity Futures Trading Commission, 1155 21st Street, NW., Washington, DC 20581.
• Courier: Same as Mail above.

(Note that all comments received will be posted without change to http://www.cftc.gov, including any personal information provided.)

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Other related CFTC articles include:

• Forex Registration
• Series 34 Exam
• Hedge Fund Law Firm

Bart Mallon, Esq. of runs the Hedge Fund Law Blog and provides forex registration services to forex managers. Mr. Mallon also runs the Forex Law Blog.  He can be reached directly at 415-868-5345.

Commodity Pool Operators (”CPOs”) are required to distribute an Annual Report, certified by an independent public accountant, to each participant in each pool it operates (i.e. the investors in the commodity/futures hedge fund) within 90 days after the pool’s fiscal year-end (normally December 31).  CPOs are also required under the Commodity Exchange Act and commission regulations to file this report electronically with the National Futures Association (”NFA”) through the NFA’s EasyFile system.  Alternate due dates exist for pools that are operated as a “fund of funds“.  CPOs can monitor their filings and review their due dates for each pool in the EasyFile system.  We have included an overview of the requirements and process below and Mallon P.C. would be able to help CPOs to make this filing as well.

Filing Overview

• Who - all CPOs must file the annual financial report unless they are exempt under the CFTC Regulation 4.13.
• What - a certified financial statement (PDF of the exact statement distributed to the pools limited partners) from an auditor needs to be filed with the NFA.  (Please note that CPOs who are exempt under the CFTC Regulation 4.7 does not need to have their statements audited.)
• When - commodity pool annual reports must be distributed to pool participants and filed with the NFA within 90 calendar days of the pool’s fiscal year end.  (Mallon P.C. can also check the due date by logging into the EasyFile system on the Filing Index page.)
• How - CPOs must submit annual reports to NFA electronically in accordance with NFA’s EasyFile electronic filing system and procedures.

NFA EasyFile System

Pool operators should have their NFA login and password to access the EasyFile system.  Submitting pool financial statements using EasyFile involves a three step process:

1. The CPO (or compliance group) will upload a PDF of the identical pool financial statement provided to the pool’s limited partners, including the balance sheet, income statement, schedule of investments, footnotes, and the Independent Auditor’s Opinion, if applicable.
2. The CPO (or compliance group) will then enter approximately 30 key financial balances into an electronic schedule. These balances will be pulled directly from the balance sheet, income statement and statement of changes in net asset value included in the pool’s PDF filing.
3. The CPO (or compliance group) will finally submit the electronic filing, the system will run some basic edit checks. It will also prompt the CPO to read and agree to an electronic oath or affirmation. This oath or affirmation will apply to the information included in the PDF, as well as, the information entered into the schedule of key financial balances.

A common pitfall with this process include miscalculations with the key financial balances. In order to prevent this from occurring, the CPO should make sure the values/balances input into the system correspond with the PDF certified financial statement.  After submission, the CPO should ensure the updated status of the filing becomes “Received” by logging into Pool Index page the in the EasyFile system.  This status should show up within a few days after the filing has been submitted.

Conclusion

In addition to the various yearly compliance measures, such as the NFA Self-Examination Checklist, CPOs should be aware that they need to file their audited reports with the NFA.  This is especially important because the NFA has fined large firms for failing to file on time (see previous NFA Action).  If you need help with filing your annual financials, please contact Mallon P.C. for further information on our commodities and futures compliance services.

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Other related NFA compliance articles include:

• CFTC Provides Annual Guidance to CPOs
• CFTC Amends CPO Reporting Requirements
• CTA Regulatory and Compliance Discussion
• CTA and CPO Registration and Compliance Guide
• Series 3 Exam

Bart Mallon, Esq. runs the Hedge Fund Law Blog and provides hedge fund information and manager registration services through Mallon P.C. He can be reached directly at 415-868-5345.

In an earlier post, we discussed that the passing grades for the Series 65 and 66 have increased.  Below is further information from the Securities Training Corporation on the changes to the securities exams in 2010.

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The Series 63, 65, and 66 Examinations Are Changing

The North American Securities Administrators Association (NASAA), the organization responsible for designing the Series 63, 65, and 66 Examinations, has informed us that the composition of these examinations will change as of January 1, 2010. The most significant impact will be on the Series 66 Examination, in which the balance of the questions will change significantly. In comparison, the changes to Series 63 and Series 65 are relatively minor.

Series 66

The Series 66 Examination currently consists of 100 questions, 80 of which test the candidate’s knowledge of Legal and Regulatory Issues (including Unethical Business Practices). The remaining 20 questions cover Investment Analysis, Recommendations, and Strategies.

The revised Series 66 will still contain 100 questions. As of January 1, 2010, however, there will be 50 questions covering Legal and Regulatory Issues and 50 questions testing Investment Recommendations, Strategies, and Products.

NASAA is also adding new topics to the Series 66 outline concerning specific Investment Products and Strategies, such as Annuities, much of which we already cover in our materials. NASAA stated that these changes are “based on responses to the survey indicating that dually licensed individuals should have enhanced testing in the areas of Economic Factors and Business Information, Investment Vehicle Characteristics and Client Investment Recommendations and Strategies.”

Series 65

The Series 65 Examination currently has 130 questions.  Of these questions, 45 test Legal and Regulatory Issues, while 80 questions cover Economic Concepts, as well as Investment Products, Recommendations, and Strategies. The new examination will still have a total of 130 questions, but the number of questions devoted to Legal and Regulatory Issues will decrease from 45 to 40. In addition, there will be a few questions on Capital Markets Theory and specific types of accounts, such as College Savings Plans.

Series 63

NASAA has not added new topics to the Series 63 Examination, and the test will continue to contain 60 questions. The distribution of these questions, however, will change on January 1, 2010.  There will be 3 more questions covering business practices (now called Ethical Practices and Fiduciary Obligations). There will also be an additional 6 questions devoted to the Registration and Regulation of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives. The number of questions covering the Registration and Issuance of Securities will be decreased correspondingly.

STC will have supplemental material available in late November for students who anticipate taking one of these examinations in January. Our online practice examinations will be updated by January 1.

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Other related hedge fund law articles:

• Series 65 Exam
• Differences between the Series 65 and Series 66 Exam
• Overview of Hedge Fund Investment Advisors

Bart Mallon, Esq. runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.