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Are you ready? 2011 CFTC Regulatory Obligations

As a Commodity Futures Trading Commission (“CFTC”) Registered, National Futures Association (“NFA”) member commodity or forex firm the close of another year also triggers a variety of regulatory obligations.   At least one time annually (and in some instances more frequently) both CFTC regulations and NFA rules dictate that FCMs, IBs, CTAs, and CPOs adhere to a variety of ongoing annual policy review and operational testing requirements. These requirements, as well as how your firm intends to comply with them, should be detailed within company operational procedures. Does your company have a plan for adhering to these requirements? Better yet what requirements apply to your business as 2010 closes and 2011 begins?
Within the following paragraphs several of the most commonly missed annual requirements are discussed. Every FCM, IB, CTA, or CPO will have similar obligations; however that does not mean all review policies will be uniform. Each commodity or forex firm registered in the United States is required to maintain custom procedures which are tailored to their specific operations. Thus each of the following discussions is based on a generalization of what most firms should be doing at year end. This presentation is not inclusive or exhaustive of all firm requirements and thus should not be relied upon independently. For further details in this area interested persons should contact a competent consulting professional for assistance.
Annual NFA Requirements
Every 365 days (read not necessarily every December 31) NFA member firms must complete a variety of compliance related tasks. For starters all firms must complete NFA’s annual membership questionnaire. This document is intended to relay information about firm operations to NFA and is accessed online via NFA’s Online Registration System (“ORS”). Similarly at least once annually firms are required to update their registration information by filing an electronic annual registration update. This document again ensures all registration information on file with NFA is accurate.  Lastly, and it probably goes without saying though many firms forget, membership dues must be submitted no later than the anniversary date of your firm’s registration.   In summation at minimum firms must do the following at least one time annually:
- Complete NFA’s Annual Questionnaire
- File an electronic Annual Registration Update
- Pay NFA membership Dues
General Reviews and Tasks
Outside of interacting with NFA, firms of all registration types are required to complete a range of review and/or testing activities. Various internal policy checks, certain employee training, and several customer notifications must be completed. In this area one of the most frequently disregarded obligations facing firms is that they must send all of their clients a copy of the company privacy policy at least once annually. A record that this notice has been sent to all clients must be kept on file and will likely be requested during the firm’s next routine NFA examination.
As for internal training requirements, depending on company operations, certain employees may be required to take various annual training courses. All FCM’s and IB’s must maintain an adequate Anti-Money Laundering (“AML”) policy which includes a provision for annual AML training. This training must be provided (at a minimum) to employees who work in areas susceptible to possible money laundering. Also, depending on internal policies, several other training obligations may exist for employees. Prudent firms would be wise to review internal procedures or speak with a commodity compliance professional about their specific obligations. Such testing may include among other things ethics training, operational best practices training, or providing lessons about proper customer solicitations.
Lastly in this area firms are also required to review all company policies to ensure that there procedures are adequate for the then current operations. An example of such a policy review required annually would be the testing of the company business continuity disaster recovery (“BCDR”) plan. In this instance, applicable firm personnel are required to work step by step through the BCDR in order to expose potential weaknesses. This review should be documented in writing, weaknesses should be amended, and if any changes are made employees should be notified in a timely and reasonable manner. In this area, my firm offers a comprehensive mock examination service that could be used to assist your firm with many of these obligations. Some common things firms should be considering at year end include:
- Sending privacy notices to clients at least annually
- Notifying customers of any material business changes
- Ensuring applicable employees receive adequate training
- Testing various firm policies for reasonableness
- Visiting branch offices at least once annually
Financial Obligations
For CFTC registrants their financial reporting obligations are arguably the most important area in a complete compliance review. Here mistakes can lead to costly fines, disciplinary action, and in extreme cases quickly force a company out of business. Interestingly, even though this aspect of running a commodity or forex brokerage is immensely important, many people simply look past this area of their business. Instead of taking this position a great deal of time should be spent ensuring year end books and records have been prepared in a proper and accurate manner. This is especially true at firms who must file reports with the CFTC and NFA on a recurring basis.
FCMs, IBs, CTAs, and CPOs in general all have annual financial reporting obligations which must be adhered to. Although CTA’s are not required to file financial statements, they are required to maintain accurate books and records as well as a complete record of all client performance. Similarly, Futures Commission Merchants, Introducing Brokers, and Commodity Pool Operators are required to file specific financial information with the Commodity Futures Trading Commission. These filings must be submitted through the National Futures Association through the self-regulatory body’s various electronic submission channels. More specifically certain FCM’s and IB’s must file unaudited form 1-FR FCM or 1-FR IB/FOCUS reports. In addition to this they must also file audited and certified financial statements produced by a third party accounting firm. In the case of CPO’s they must file reports for each of their respective pools as appropriate based on their registration type.   In this area competent staff should review the firm’s general ledger to ensure all financial transactions have been recorded properly. After doing so all supporting information necessary to compile financial reports should be gathered for submission to the company’s third party certified accounting firm.
As a former NFA auditor and consulting veteran I have seen many examples of firms who have failed to comply with their annual requirements. Whether these firms were unaware of their requirements or simply forgetful matters not. Violations of CFTC regulations and NFA rules can have serious consequences and put a damper on an otherwise bright start to the new year. In order to more fully understand your obligations at year end you should contact a competent regulatory and operational consulting firm like Turnkey Trading Partners for assistance. For a free checklist of the yearend obligations your firm may be required to uphold feel free to contact us by visiting our website at and filing out the available contact form.

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 testified in Federal Court as an expert witness regarding over the counter commodity transactions. From time to time Bibbings also provides 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 among other highly acclaimed investment publications. A variety of resources authored by Bibbings are currently available for free upon request through his company website.  If you have any questions or comments for James he can be reached directly by email at and would love to hear from you.

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