The NFA requested comments from NFA members and the general public concerning the adoption of possible minimum net capital requirements for CPOs and CTAs. The request also sought comments on other customer protection measures including possibly requiring the authorization of an independent third party for the disbursement of any pool funds, and requiring the preparation or verification of investor statements and performance results by an independent third party. The request also sought comments on whether NFA should permit CPOs and CTAs that are inactive to be able to remain NFA Members.
In support of its request, NFA stated in the past three years, it has issued 26 Member Responsibility Actions (MRAs) and 92% of those MRAs have been against CPOs and CTAs. An MRA is an emergency action that NFA may bring to protect the futures markets, customers or other Members pursuant to NFA Rule 3-15. In an MRA, NFA usually seeks to prevent a NFA Member from doing business or otherwise seeks to restrict such NFA Member’s ability to do business until such time that it has demonstrated compliance with NFA Rules and CFTC Regulations. In the Request, NFA stated that most of the recent MRAs involving CPOs and CTA have stemmed from the misuse of customer funds or the misstatement of performance results.
Currently, CPOs and CTAs are not subject to minimum net capital requirements. NFA sought comments on, among other things, whether a flat or scaled net capital requirement should be required, whether firms should have an obligation to report their net capital, and how often net capital should be reported. The request also asked whether NFA members currently utilize an independent third party to review and authorize disbursements from pools and whether CPOs and CTAs utilize an independent third party to prepare performance results. In light of the recent MRAs and the request, it is apparent that NFA is seriously contemplating some type of additional compliance requirements for CPOs and CTAs, whether they be net capital requirements or the required involvement of third party administrators.