The Commodity Futures Trading Commission (CFTC) has approved National Futures Association (NFA) Compliance Rules 2-41 and 2-42 that will be effective Nov. 30, 2008. The new rules apply to NFA members that manage accounts on behalf of customers or offer pools that trade off-exchange contracts in foreign currencies (“forex”) and that file their disclosure documents with NFA. Under the new rules, the disclosure document must provide the information required under CFTC Part 4 regulations, as well as the additional disclosure related to forex. In addition, an NFA member that operates a pool subject to the new rules must provide periodic (monthly or quarterly) account statements and an annual report to the pool participants in the same manner that would be applicable to pools that trade on-exchange futures contracts.
The new rules do not apply if the pool or the account that trades forex is an eligible contract participant (ECP) as defined in Section 1a(12) of the Commodity Exchange Act (the Act).* An ECP includes many types of entities, including (a) financial institutions, (b) insurance companies, (c) regulated investment companies under the Investment Company Act of 1940, (d) commodity pools with at least $5 million in assets operated by a person regulated under the Act or a similar foreign regulation, (e) entities with at least $10 million in assets, and (f) certain ERISA plans with at least $5 million in assets.
Since most pools that trade even a small amount of forex have at least $5 million in assets, and therefore qualify as an ECP, the new Rules will not apply to most commodity pool operators.
In addition, NFA Rules 2-41 and 2-42 will not apply to you if:
- you are not an NFA member;
- you are an NFA member, but the pool you manage does not trade forex;
- you are an NFA member, but the pool you manage has filed an exemption, such as is available under CFTC Regulation 4.13, that exempts the pool from the requirement to provide investors with a CFTC Part 4 disclosure document.
- * There are two categories of ECP that do not qualify for the carve-out under the new rules: (a) an entity, the obligations of which under an agreement, contract or transaction are guaranteed or otherwise supported by a letter of credit or keepwell, support, or other agreement by certain specified entities, and (b) an entity that has a net worth in excess of $1 million that enters into an agreement in connection with conducting the entity’s business or managing the risk, liability or potential liability associated with an asset owned or incurred in connection with the conduct of the entity’s business.