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_____________________________ James Bibbings is the President and CEO of North America’s Best Regulatory Advisory Turnkey Trading Partners (TTP) as named by Hedgeweek in 2013. TTP supports CFTC and NFA regulated firms with all of their commodity, forex, and swap specific regulatory and business... More
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  • End Of An Era, CFTC Exemptions Rescinded

    Earlier this year the Commodity Futures Trading Commission (CFTC) adopted final rules amending certain registration and compliance obligations of commodity pool operators (CPOs) and commodity trading advisors (CTAs). Among other changes, the CFTC's final rules rescind various exclusions from CPO registration, increase disclosure requirements for CTAs and CPOs, and increase various reporting requirements by registrant firms. This article will summarize what we perceive to be the most important provisions contained in the CFTC's final rules affecting CTAs and CPOs. Except where otherwise noted, compliance with the following rule amendments is required by December 31, 2012. We encourage you to seek assistance if you have any questions regarding how these final rules might affect your CTA or CPO. The information set forth in this guide is not intended to be all-inclusive and does not constitute legal advice.

    What Implications Do the Final Rules Have on CPOs and CTAs?

    The CFTC's final rules make the following amendments to the registration and compliance obligations of CTAs and CPOs under Part 4 of the CFTC Regulations:

    • Thresholds & Restrictions Under 4.5. Reinstates a trading threshold and marketing restriction for registered investment companies claiming exclusion from the definition of a CPO under CFTC Regulation 4.5. The purpose of this rule change is to curb what the CFTC perceives to be the occurrence of certain registered investment companies offering interests in de facto commodity pools while still claiming the 4.5 exclusion from registration. All firms must be in compliance with the new rule by the later of December 31, 2012 or 60 days after the date on which CFTC regulations defining the term "swap" become effective. For more information regarding this CPO exclusion for investment companies, please see our previous article entitled: (embed link) End of Commodity Fund and Advisor Exemptions?

     

    • Rescission of 4.13(a)(4). Rescinds the exemption from CPO registration under CFTC Regulation 4.13(a)(4) for interests offered only to qualified purchasers. All pools currently relying on this exemption must either be registered or discontinue their activities by December 31, 2012. For more information regarding this exemption, please see our previous articles entitled: (embed link) Money Manager and Fund Regulatory Exemptions and End of Commodity Fund and Advisor Exemptions?
    • 4.7 Annual Report Certification. Requires the certification of annual reports for pools operating under CFTC Regulation 4.7 for interests offered to qualified eligible participants (QEPs). For more information regarding this limited purpose exemption, please see our previous article entitled: (embed link) Money Manager and Fund Regulatory Exemptions.
    • Accredited Investor Definition Revision. Incorporates the U.S. Securities and Exchange Commission's (SEC) recently amended "accredited investor" definition into CFTC Regulation 4.7 for pools offering interests only to QEPs. For more information regarding changes to the accredited investor definition, please see our previous article entitled: (embed link) Obama Threatens Forex; Says Goodbye to OTC Gold Trading.
    • Renewal of Exclusion and Exemption Filings. Requires all pools claiming relief under CFTC Regulations 4.5, 4.13 or 4.14 to file an annual renewal confirming their claim for the applicable exemption or exclusion from registration. For more information regarding these exclusions and exemptions, please see our previous articles entitled: (embed link) Money Manager and Fund Regulatory Exemptions and End of Commodity Fund and Advisor Exemptions?
    • Increased Swap Disclosures. Increases the risk disclosure requirements for disclosure documents of CTAs and CPOs that engage in swap transactions as part of their trading program. For a more complete description of the increased swap disclosure requirements, please refer to the CFTC's final rules. Link to the CFTC's final rules provided here.
    • Increased 4.27 Reporting Requirements. Requires CTAs and CPOs to report additional information under CFTC Regulation 4.27 regarding their trading practices and to also complete new Forms CTA-PR and CPO-PQR, respectively. The additional information to be provided to the CFTC by CTAs and CPOs includes information concerning the amount of assets under management, the use of leverage, counterparty credit risk exposure, and trading and investment positions for pools. These new 4.27 rule amendments go into effect on July 2, 2012. The reporting compliance dates vary depending on the entity involved and assets under management (AUM).

    Further Guidance

    CPOs and CTAs, as well as non-registered firms relying on the above exclusions and exemptions from registration, should keep themselves informed on developments in this area. It would be prudent to contact a regulatory professional like Turnkey Trading Partners (NYSE:TTP) to assist you in understanding and complying with the new rules. TTP has the business acumen, as well as relationships with law firms, such as Henderson & Lyman, to provide you with the guidance you need to tackle these new final rules.

    -James Bibbings and Nicole Kuchera

    -----------------

    James Bibbings is the President and CEO of Turnkey Trading Partners (TTP), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association ("NFA") as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations. Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements. He has also provided financial markets content for Financial Times, Bloomberg, MSN, Yahoo, FinAlternatives, The Wall Street Journal's Market Watch, Forex Journal, FX Street, and many other highly acclaimed investment publications. Two highly sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website. If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

    Nicole Kuchera, JD, LLM is an Associate in Henderson & Lyman's Financial Services Practice Group. She concentrates her legal practice on transactional and litigation support for securities, futures, forex and derivatives industry clients, such as Introducing Brokers, Commodity Trading Advisors, Commodity Pool Operators, Broker-Dealers, Investment Advisers, Futures Commission Merchants, Hedge Funds and Forex Dealer Members. Ms. Kuchera counsels clients regarding a wide range of compliance and regulatory matters involving the rules and regulations of the SEC and the CFTC, as well as self-regulatory organizations and exchanges. She also represents financial services industry clients in a wide range of litigation matters in various forums, including state and federal courts and in industry arbitrations and mediations. Ms. Kuchera also represents clients in general corporate matters, such as business formation, licensing and industry registration.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 31 2:24 PM | Link | 1 Comment
  • The End Of PAMM Forex Allocations?

    During the last quarter of 2011, the National Futures Association (NFA) quietly submitted to the Commodity Futures Trading Commission (CFTC) a proposed Interpretative Notice to NFA Compliance Rule 2-10. NFA's notice commented on, and proposed changing, the allocation of bunched orders for multiple accounts traded by spot forex (NYSE:FX) commodity trading advisors (CTAs). If approved by the CFTC, NFA's Interpretative Notice would effectively prohibit the use of most PAMM trade allocation software programs by retail forex CTAs.

    NFA contends that many individually managed forex trading accounts being executed through a PAMM arrangement more closely resemble commodity pools than separately managed individual accounts. The regulatory agency further believes firms executing orders in this fashion are allowing CTAs to effectively operate as pools without having the proper forex commodity pool operator (CPO) registration. NFA is not alone in its thinking.

    Recently, some states, such as Pennsylvania, have come down hard on PAMM allocation models. At the state level, PAMM execution in over-the-counter (OTC) FX has been characterized as a mechanism used to create a "synthetic securities product." More specifically, in Pennsylvania, state securities regulators determined that the use of PAMM allocation systems creates "securities," which are subject to their state securities laws. This interpretation, coupled with NFA's notice to the CFTC, has cast a dark shadow over the future of PAMM execution in the United States.

    The following is a brief summary of NFA's proposed Interpretative Notice, and related state enforcement actions concerning the treatment of PAMM execution models. We encourage you to seek compliance assistance if you have any questions regarding how these proposed rules (and current state or federal laws) might affect your forex CTA, IIB, CPO or FCM/RFED. The information set forth in this guide is not intended to be all-inclusive and does not constitute legal advice.

    What is PAMM?

    PAMM (Percentage Allocation Management Module or Percentage Allocation Money Management) allows FX firms, such as CTAs, to manage many individual customer trading accounts in a more efficient manner through bunched orders. The most common models for PAMM allocation software programs are the aggregator model and the FIFO and LIFO models. A description of each of these most common PAMM models follows.

    The Aggregator Model. Most forex CTAs that use PAMM implement the aggregator model. The aggregator model places a bunched order of trades on behalf of multiple individually traded forex accounts. It thereafter allocates the profits/losses from the resulting trades according to each customer's account equity as a percentage of the overall total equity of the bunched "master" account. The PAMM aggregator model makes trade reporting comparatively easy for the forex CTA and its accountants because all sub-account execution prices for the individually managed accounts are the same.

    The FIFO and LIFO Models. The FIFO and LIFO PAMM models enter trades for individual sub-accounts, as opposed to placing one aggregate trade on behalf of all of the individually managed forex accounts. FIFO and LIFO PAMM models are similar to standard FIFO (first-in-first-out) and LIFO (last-in-first-out) accounting. For the FIFO PAMM model, the first account to receive the trade will be the first one to exit the trade. For the LIFO PAMM model, the last account to receive the trade will be the first one to exit it. The FIFO and LIFO PAMM models have several advantages over the aggregator model, such as reduced slippage (since smaller orders are easier to fill than larger bunched orders) and increased anonymity in smaller trading. The main disadvantage of the FIFO and LIFO PAMM models, as opposed to the aggregator model, is mostly that of increased difficulty in trade reporting. The reporting requirements are increased for FIFO and LIFO PAMM models because trades are sent to different accounts at different times, which results in different execution prices and ultimately different profits/losses being achieved for similarly situated individual accounts managed by forex CTAs.

    Why Does NFA Disapprove of PAMM?

    In its proposed Interpretative Notice, NFA speaks out primarily against the aggregator PAMM model noted above. From NFA's perspective, the PAMM aggregator model has blurred the line between individually managed forex accounts and a pooled forex fund to such a degree it negates the purpose and structure of individually managed accounts. NFA believes that if a forex money manager intends to manage a commodity pool, then it should register as such - and not as a CTA using technology to create a synthetic fund product.

    According to NFA, below are a few highlighted reasons as to why PAMM models, most notably the aggregator model, do not always result in the "fair and non-preferential allocation" of regularly offered and tradable sized lots/contracts to each customer's individual forex account as required under NFA Compliance Rule 2-10:

    · Many CTAs are determining the quantity of lots/contracts for a bunched order based on the "master" account's equity, as opposed to the amount of lots/contracts that would be allowed based on the margin equity of an individual account. This is a problem in NFA's opinion because the available equity in some individual accounts might be too low to place a trade for a regularly offered lot/contract size.

    · The placement of trades based on the "master" account's equity, as opposed to individual account equity, arguably treats the individual customer accounts as if they were all part of a single pooled fund, while avoiding the required CPO registration.

    · Increased restrictions are imposed on individual account holders' ability to withdraw funds due to issues in offsetting large positions of the "master" account.

    What Changes is NFA Requesting of CTAs that Use PAMM?

    If NFA's proposed Interpretative Notice is approved by the CFTC, CTAs will no longer be able to use PAMM models without also abiding by the following new requirements. While bunching orders will still be permitted, the ability to bunch orders will entail, in part, the following new restrictions. These restrictions apply to all uses of PAMM, where applicable, and not just the PAMM aggregator model.

    · CTAs will not be permitted to exceed the quantity of regularly offered and tradable sized contracts that would be permitted based on the equity in each individual account, as opposed to the overall equity of the "master" account.

    · When placing a bunched order, the CTA will be required to inform the futures commission merchant (FCM) or retail foreign exchange dealer (RFED) of the number of regularly offered and tradable sized contracts each individual customer account will receive if the order is filled. The FCM and RFED will, in turn, be responsible for (among other things) ensuring that they receive from each account manager sufficient information to allow the FCM/RFED to perform its functions, such as gathering information regarding the number of contracts to be allocated to each account in a bunched order and information concerning the allocation of split and partial fills.

    · The CTA will be required to allocate regularly offered and tradable sized lots or contracts to each individual account using a "non-preferential predetermined allocation methodology."

    · CTAs must allow investors to make additions and withdrawals from their individual accounts in a "fair and timely manner," and in a manner not affecting other accounts traded by the CTA.

    · On a daily basis, the CTA must confirm that all of its forex managed accounts have the correct allocation of contracts.

    · On at least a quarterly basis, the CTA must analyze its allocation method to ensure that the customers in the same trading program achieve similar allocation results over time.

    Do Blue Sky Laws Also Apply to CTAs that Use PAMM?

    As mentioned previously, NFA is not the only regulator taking issue with the allocation methodology used by the PAMM models. State securities law regulators, such as the Pennsylvania Securities Commission, have taken up this issue as well under their blue sky laws. Blue sky laws are securities laws that are imposed at the individual state level. While individually managed forex and commodity accounts typically fall under the sole jurisdiction of the CFTC and NFA, states are able to regulate any transactions that involve "securities." Under many blue sky laws, such as those in Pennsylvania, when accounts are effectively pooled together in order to trade as one "master" account, then the individually traded accounts may potentially be deemed to have been converted into transactions in "securities," thus potentially falling under a state's regulatory power as well.

    In most states, the sale of or transactions in a "security" is a highly regulated activity. As a result, various securities registrations and/or exemptions must be satisfied in order to avoid potential regulatory action or rescissions of the transactions. In Pennsylvania, for example, the Pennsylvania Securities Commission permanently halted the alleged "unregistered activity" by a trading advisor using the PAMM model when trading individual retail forex accounts.

    While it is uncertain how many other states will take, or already have taken, a similar position as Pennsylvania with respect to the use of PAMM by forex firms, the seriousness of such an outcome should not be underestimated. It is also possible that the U.S. Securities and Exchange Commission (SEC) could likewise assert jurisdiction over trades entered and exited through a PAMM model, since the "pooling" of various accounts' funds may be deemed to occur under a PAMM arrangement.

    Further Guidance

    Firms that allocate trades using a PAMM methodology will need to keep themselves informed of developments in this area. It would be prudent to contact a regulatory professional like Turnkey Trading Partners (NYSE:TTP) to assist you in this effort. TTP has the business acumen, as well as relationships with law firms, such as Henderson & Lyman, to provide you with guidance regarding these proposed (and existing) forex allocation rules.

    -James Bibbings and Nicole Kuchera

    _____________________________

    James Bibbings is the President and CEO of Turnkey Trading Partners (TTP), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association ("NFA") as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations. Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements. He has also provided financial markets content for Financial Times, Bloomberg, MSN, Yahoo, FinAlternatives, The Wall Street Journal's Market Watch, Forex Journal, FX Street, and many other highly acclaimed investment publications. Two highly sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website. If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

    Nicole Kuchera, JD, LLM is an Associate in Henderson & Lyman's Financial Services Practice Group. She concentrates her legal practice on transactional and litigation support for securities, futures, forex and derivatives industry clients, such as Introducing Brokers, Commodity Trading Advisors, Commodity Pool Operators, Broker-Dealers, Investment Advisers, Futures Commission Merchants, Hedge Funds and Forex Dealer Members. Ms. Kuchera counsels clients regarding a wide range of compliance and regulatory matters involving the rules and regulations of the SEC and the CFTC, as well as self-regulatory organizations and exchanges. She also represents financial services industry clients in a wide range of litigation matters in various forums, including state and federal courts and in industry arbitrations and mediations. Ms. Kuchera also represents clients in general corporate matters, such as business formation, licensing and industry registration.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 03 12:49 PM | Link | 1 Comment
  • End of Commodity Fund and Advisor Exemptions?

    If you’re a commodity trading advisor (CTA) or commodity pool operator (CPO) you’ve probably heard that the CFTC recently proposed amendments to eliminate certain key CPO and CTA exemptions.  A few weeks back we discussed many of the key money manager and fund exemptions available.  If you did not have a chance to review this article please take a moment to do so.  A brief summary of the CFTC’s proposed eliminations concerning CFTC Reg. §§ 4.5, 4.13(a)(3) and 4.13(a)(4), in particular, is provided below.  Currently the CFTC is seeking comments on the proposed changes and we’d encourage you to voice your thoughts on the matter.  All comments to the CFTC’s proposals must be in writing and received on or before 60 days after the date of publication in the Federal Register, namely on April 12th.  The requirements for submitting comments are also provided below.  If you or your firm would like assistance in drafting a set of comments, we recommend that you contact a competent industry professional or legal advisor to discuss an appropriate submission in light of your unique circumstances.

    I. § 4.5:  Reinstating Trading Criteria for Exclusion from CPO Definition

    CFTC Regulation 4.5 was intended to allow registered investment companies (RICs), i.e. mutual funds, to trade futures and options using a portion of their assets without requiring the RIC to become registered as a CPO or comply with CFTC disclosure obligations.  In the past year, certain RICs have marketed and promoted what amount to traditional commodity pools under this exclusion.  In the NFA and CFTC’s opinion, this should no longer be permitted.

    Reg. 4.5 currently requires any person desiring to claim the exclusion to file a notice of eligibility with NFA, which must simply identify the qualifying entity to be operated pursuant to the exclusion.  Under the proposed amendment, such notice of eligibility must also include a representation that, in part, the RIC’s qualifying entity:

    1.      Will use commodity futures or commodity options contracts solely for bona fide hedging purposes; and

    2.      Will not be marketed to the public as a commodity pool or as a vehicle for investment in commodity futures or commodity options.

    Essentially, this amendment would restore the rule’s operating restrictions that applied to RICs prior to 2003, when the CFTC amended the rule to its current form.

    II. §§ 4.13(a)(3) and (a)(4): Rescission of CPO Exemptions from Registration

    The CFTC proposes to rescind certain exemptions from registration provided in §§ 4.13(a)(3) and (a)(4) of the CFTC regulations.  Section 4.13(a)(3) currently provides that a person is exempt from registration as a CPO if the interests in the pool are exempt from registration under the 1933 Act and offered only to qualified eligible persons (QEPs), accredited investors, or knowledgeable employees, and the pool’s aggregate initial margin and premiums attributable to commodity interests do not exceed 5% of the liquidation value of the pool’s portfolio.  Section 4.13(a)(4) provides that a person is exempt from registration as a CPO if the interests in the pool are exempt from registration under the 1933 Act and the operator reasonably believes that the participants are all QEPs.

    According to the CFTC, as a result of the creation of these two exemptions from registration, a large group of market participants have fallen outside of the oversight of the regulators (i.e. there is very little, if any, transparency or accountability over the activities of these participants).  Therefore, the CFTC has concluded that continuing to grant an exemption from registration and reporting obligations for these market participants is outweighed by the CFTC’s concerns of regulatory arbitrage.  In connection with its proposed elimination of the §§ 4.13(a)(3) and (a)(4) exemptions, the CFTC has requested comments from industry participants concerning the following questions:

    1.       How much time will be necessary for entities that have previously claimed an exemption under these sections to comply with the proposed changes?

    2.       How should the CFTC address entities whose activities do not require registration (i.e. should such entities be required to file notice with the CFTC to avoid registration)?

    3.       Should any entities that have previously claimed an exemption under these sections be exempted from compliance with the proposed revisions to these sections?

    4.       Should the CFTC consider an alternative de minimis exemption under § 4.13, and if so, what criteria should be required to claim such exemption?

    III. §§ 4.5, 4.13 and 4.14:  Annual Filings of Notices of Claims of Exemption

    The CFTC proposes to require all persons claiming exemptive or exclusionary relief under §§ 4.5, 4.13 and 4.14 to confirm their notice of claim of exemption or exclusion on an annual basis.  Failure to comply with the annual notice requirement would result in a withdrawal of the exemption or exclusion and, under the circumstances, could result in the initiation of an enforcement action.  The CFTC requests detailed comments on the proposed annual filing requirement and asks for input on the following questions:

    1. Is 30 days adequate time to affirm the initial claim for relief?
    2. Does it make sense to require a filing within 30 days of the anniversary date of the initial filing, or within 30 days of the end of the calendar year?

    Comments Information

    Comments must be in writing and received by the CFTC on or before April 12, 2011.  You may submit comments, identified by RIN number 3033-AD30, by any of the following methods:

    • CFTC’s Website: http://comments.cftc.gov
    • Mail: David A. Stawick, Secretary of the Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581
    • Hand Delivery/Courier: Same as mail above
    • Federal eRulemaking Portal: www.regulations.gov

    Seek Guidance Now

    As you can see from the descriptions above, determining whether you may be unreasonably affected or otherwise by the CFTC proposed amendments and crafting an appropriate response can be complex.  In order to properly evaluate your options, it would be prudent to contact a regulatory professional like Turnkey Trading Partners (“TTP”) as soon as possible.  TTP has the business acumen, as well as important relationships with legal professionals, such as Henderson & Lyman of Chicago, to assist you in presenting your views in the most effective manner.

    -James Bibbings and Nicole Kuchera

    _____________________________

    Media Bio Inserts

    James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements.  He has also provided financial markets content for MSN, Yahoo, Financial Times, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, The Wall Street Journal’s Market Watch, Forex Journal, FX Street, Forex Factory, Commodity News Center and many other highly acclaimed investment publications.  Two highly sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

    Nicole Kuchera, JD, LLM is an Associate in Henderson & Lyman’s Financial Services Practice Group. She concentrates her legal practice on transactional and litigation support for securities, futures and derivatives industry clients, such as Introducing Brokers, Commodity Trading Advisors, Commodity Pool Operators, Broker-Dealers, Investment Advisers, Futures Commission Merchants, and Forex Dealer Members.  Ms. Kuchera counsels clients regarding a wide range of compliance and regulatory matters involving the rules and regulations of SEC and CFTC, as well as self-regulatory organizations and exchanges.  She also represents financial services industry clients in a wide range of litigation matters in various forums, including state and federal courts and in industry arbitrations and mediations.  Ms. Kuchera also represents clients in general corporate matters, such as business formation, licensing and industry registration.

    Mar 30 1:05 PM | Link | Comment!
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