January 2014
Practice Groups:
Investment
Management
Hedge Funds and
Venture Funds
NFA Seeks Comment on Capital Requirements for
CPOs and CTAs
By Cary J. Meer and Lawrence B. Patent
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.
NFA Seeks Comment on Capital Requirements for CPOs
and CTAs
Authors:
Cary J. Meer
cary.meer@klgates.com
+1.202.778.9107
Lawrence B. Patent
lawrence.patent@klgates.com
+1.202.778.9219
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