National Futures Association (NFA), the industry-funded self-regulatory for the futures industry, issued a Notice to Members (Notice) on January 23, 2014, requesting comment on the concept of imposing a capital requirement on commodity pool operator (CPO) and commodity trading advisor (CTA) members and other customer protection measures. CPOs and CTAs have never been required to maintain a minimum amount of capital.
The Notice requests comment on the calculation and amount of capital that should be required, as well as the frequency of reports and the need for a certified annual report. Commenters opposing a minimum capital requirement for CPOs and CTAs are asked to indicate what alternatives, if any, exist for ensuring that CPOs/CTAs have sufficient funds to operate as a going concern.
The Notice also requests comment on other measures that NFA is considering to protect pool participants. The proposed measures are: (1) independent third-party authorization for disbursements of pool funds; (2) independent third-party preparation or verification of net asset value (NAV) computations and account statements; (3) independent third-party preparation or verification of pool performance results; and (4) verification of balances by depositories holding pool funds. In addition, NFA requests comment on whether it should permit inactive CPOs or CTAs to remain NFA members.
The Notice does not distinguish among NFA members that are also registered with the Securities and Exchange Commission as investment advisers, or that advise registered investment companies.
NFA stated that over 90% of its Member Responsibility Actions during the last three years were taken against CPO and/or CTA members, most of which alleged misuse of investor funds and/or misstating NAV and/or performance information.
Comments are due by April 15, 2014. Following a review of the comments, NFA must adopt rules and have them approved by the Commodity Futures Trading Commission (CFTC) before NFA could make them effective. The Notice does not indicate whether NFA would provide an additional comment period on any specific rules that it may develop in the areas described above. The CFTC process for reviewing NFA rules does not require that the rules be published for public comment, but the CFTC may decide to do so in particular cases.