Many investment advisory firms became registered with U.S. Commodities Futures Trading Commission (“CFTC”) as a commodity pool operator (“CPO”) and/or a commodity trading adviser (“CTA”) at the end of calendar year 2012, with such registration becoming effective on January 1, 2013.
These advisers now are subject to a number of annual requirements pursuant to the CFTC’s Commodity Exchange Act, other applicable CFTC rules and regulations, and the rules and regulations of the National Futures Association (“NFA”), the self-regulatory agency that regulates the U.S. futures industry. Most CPOs and CTAs that are registered with the CFTC must be NFA Members.
The following is a summary of the annual regulatory requirements applicable to CPOs and/or CTAs. Dually-registered advisers subject to the rules and regulations of the U.S. Securities and Exchange Commission may find similarity in certain of the requirements.
Annual CPO Requirements
1. Payment of Annual Fees. All registered CPOs must pay Annual Membership Dues of $750 and a mandatory $100 Annual Registration Records Maintenance Fee to the NFA by the anniversary of the Firm’s registration with a 30-day grace period.
2. Annual Registration Update. This short online “Annual Update” notifies the NFA that the CPO intends to continue to be registered with the CFTC. Basic questions include changes to the company’s name, address, and/or registered principals. The Annual Update is due within 30 days of the anniversary of the Firm’s registration. The NFA deems that failure to timely file the completed Annual Update is a request to withdraw from NFA membership. The Annual Update is submitted through the NFA’s Online Registration System (“ORS”) found on the NFA Website.
3. Annual NFA Questionnaire. Within 30 days of the anniversary of the NFA Member’s registration with CFTC, Members must file the online “Annual Questionnaire” that provides the NFA with information about the NFA Member and allows the NFA to better understand the overall composition of the NFA’s membership. The NFA deems that failure to timely file the completed Annual Questionnaire is a request to withdraw from NFA membership. The Annual Questionnaire is submitted through the ORS.
4. NFA Self-Examination Questionnaire (CPOs). NFA Members must review their operations on an annual basis using the “Self-Examination Questionnaire” that includes general questions that must be completed by all NFA Members (e.g., CPO, CTA, Futures Commission Merchant or “FCM”) and supplemental questions specific to CPOs. The questions are designed to assist firms in recognizing potential problem areas and to alert them to procedures that need to be revised or strengthened. After reviewing the Self-Examination Questionnaire, an appropriate supervisory person must sign and date a written attestation stating he or she has reviewed and evaluated the Member’s current procedures using the Self-Examination Questionnaire. The Self-Examination Questionnaire and a sample attestation can be found on the National Futures Association website.
5. Business Continuity and Disaster Recovery Plan (“BCP”). On an annual basis, an NFA Member must formally test the Member’s BCP. The NFA expects its Members to provide the name(s) of the individual at the Member who can be contacted in case of an emergency. Some of the essential components of the BCP include establishing back-up facilities at an alternative geographic location, backing up documents and data on a periodic basis, and developing a communication plan with those who may be directly affected by a disaster, such as the Member’s employees, clients, and service providers.
6. Ethics Training. Under NFA Compliance Rule 2-9, the Firm is required to provide ethics training to all employees. The NFA provides guidance on the training procedures, as well as content, format, documentation and suggested frequency. This information can be found by visiting Ethics Training Requirements. The NFA states that Members should decide how frequently ethics training is required based on the Firm’s business model, the composition of the Firm’s sales force, and the format of the training.
7. Annual Pool Financial Statements. CFTC rules require that CPOs distribute to each investor in a commodity pool an “Annual Report” for the commodity pool. Annual Reports must be presented and computed in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) and must be audited and certified by an independent public accountant. CPOs may elect to use the International Financial Reporting Standard (IFRS), but must make a notice filing with the NFA within 90 days of the pool’s fiscal year end. The use of other accounting standards requires CFTC pre-approval.
The Annual Report must include a manually signed oath or affirmation as to their accuracy and completeness. A registered CPO must distribute a commodity pool’s Annual Report within 90 days after the end of the pool’s fiscal year or the cessation of the pool’s trading. A CPO must also electronically file with the NFA a copy of each of its commodity pool’s Annual Reports. The Annual Reports are submitted through the NFA’s EasyFile System.
i. A registered CPO claiming relief under CFTC Rule 4.7 (available only to a CPO that operates a pool comprised solely of persons that the CPO reasonably believes are Qualified Eligible Persons or “QEPs”) with respect to a commodity pool may distribute to each investor in the pool, and file electronically with the NFA, in lieu of an Annual Report, a certified annual report that includes a statement of financial condition as of the close of the year, a statement of operations for that year, appropriate footnote disclosure and a statement that the pool is an exempt pool under CFTC Rule 4.7. Otherwise, CFTC Rule 4.7 annual reports are subject to the same accounting standards affirmation and delivery requirements applicable to Annual Reports. Similar relief is available to a registered CTA with respect to commodity interest trading advice provided to persons that the CTA reasonably believes are QEPs.
8. Periodic Financial Reporting. CPOs must periodically file electronically with the NFA certain systemic risk-related reports promulgated under the Dodd-Frank Act. The size of a CPO and its commodity pools based on aggregated gross pool assets under management (“AUM”) determines the content of the filing requirement and whether or not the filing is required by the CFTC or the NFA.
The NFA’s previous PQR filing was incorporated into the CFTC’s form and there is only one filing for the NFA and the CFTC. A “Small CPO,” one with less than US$150 million AUM, must file Schedule A of CFTC Form CPO-PQR annually within 90 days of the most recent calendar year end and Form NFA PQR (that includes step 6 of CFTC Form CPO-PQR Schedule B (Schedule of Investments). Reports for quarter ending December 31 are due within 90 days of the calendar year end for “Mid-size CPOs” (AUM >$150 million to <$1.5 billion) and within 60 days for “Large CPOs” (AUM>$1.5 billion). All PQR reports must be filed electronically using NFA’s EasyFile system regardless of whether the PQR is being filed for the NFA or the CFTC.
Annual CTA Requirements
Registered CTAs are subject to the requirements above applicable to CPOs. In addition, the following summarizes regulatory requirements specific to CTAs.
1. Payment of Annual Fees. All registered CTAs must pay Annual Membership Dues of $750 and a mandatory $100 Annual Registration Records Maintenance Fee to the NFA within 30 days of the anniversary of the Firm’s registration with a 30-day grace period.
2. Review of Accounts. Annually, the CTA’s FCM will contact the CTA’s clients who have accounts with that particular FCM and review the client’s account information and risk disclosures. The FCM must notify the CTA promptly of any changes. The CTA must then review the customer information and risk disclosures to ensure accuracy.
3. NFA Self-Examination Questionnaire (CTAs). CTAs that are NFA Members must complete the Self-Examination Questionnaire including supplemental questions specific to CTAs.
4. Periodic Financial Reporting. All CTAs are required to file an annual Form NFA-PR within 45 days of the CTA’s calendar year end. Form NFA-PR is submitted through the NFA’s EasyFile System.
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