Bart Mallon, Esq. - Mallon P.C.
(www.forexregistration.com)

NFA Releases Notice Regarding Forex Registration

As we discussed in our post yesterday about outstanding issues with retail forex regulations, the NFA posted guidance regarding the final retail forex regulations passed by the CFTC earlier this week.  In general, the notice answers a few of the questions regarding implementation of the regulations, but many questions are left unanswered.

The central take-aways from the notice below include the following:

• NFA will begin taking registration applications from forex firms on September 2
• Retail forex firms not registered by October 18, 2010 must cease conducting retail forex business until registration is finalized
• Forex only FCMs will need to register as an RFED even though they are already registered as a FCM
• Forex APs will need to pass both the Series 3 and Series 34 exams (with certain exceptions)
• Forex IBs, if guaranteed, can only have a guarantee agreement with one FCM/RFED

The release below is silent on the following issues:

• Disclosure documents for Forex CTAs and CPOs - do these need to be reviewed and approved by the NFA prior to use by the registered forex firm?  If so, is the NFA providing expedited review for these forex applications?
• Currently registered CTAs and CPOs who conduct a small amount of retail forex transactions - do APs at these firms also need to take and pass the Series 34 exam?  Are there additional items in the NFA online registration system which need to be completed?
• Open positions on October 19, 2010 - what happens if a forex CTA or CPO is not registered by October 19, 2010?

Other questions deal with issues which we will seek clarification from the CFTC - the big open question is whether individuals will be able to open accounts at offshore forex firms.

It is also currently unknown what sort of paperwork or procedures the forex dealers will be requiring from the forex CTAs and CPOs in order to comply with the provisions of the CEA.

The following notice can be found here.

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Notice I-10-17

September 01, 2010

NFA to begin accepting registration applications from forex firms and individuals on September 2

The Commodity Futures Trading Commission has issued final forex rules which become effective on October 18, 2010. NFA will begin accepting registration applications from forex firms and individuals beginning Thursday, September 2.

Any retail forex entity that does not complete the registration process by October 18, 2010 will be unable to conduct retail forex business until registration and all necessary approvals and designations are granted.

As part of the reauthorization of the CFTC in May 2008, Congress amended the Commodity Exchange Act to require, with certain exceptions, including a Futures Commission Merchant (FCM) acting primarily or substantially as a traditional FCM, any firm acting as a counterparty to certain retail forex transactions to register as a Retail Foreign Exchange Dealer (RFED).

Consequently, any existing Forex Dealer Member of NFA that is currently registered as an FCM must register as an RFED unless the firm’s business is primarily or substantially that of a traditional FCM. Moreover, even if the firm’s business is primarily or substantially that of a traditional FCM, the firm must access NFA’s Online Registration System (ORS) and request approval as a Forex Firm and designation as a Forex Dealer Member.

The Commodity Exchange Act was also amended to require any individual acting as a forex solicitor, account manager or pool operator to register with the CFTC as Introducing Brokers (IBs), Commodity Trading Advisors (CTAs) or Commodity Pool Operators (CPOs) and become Members of NFA. Also, any Associated Person (AP) soliciting or supervising persons soliciting business on behalf of a forex firm must request approval as a Forex AP.

If you are not currently registered, you must comply with all registration and forex requirements.

If you are currently registered as an IB, CPO, CTA or AP that is conducting forex business, you must still apply for Forex Firm or Forex AP approval.

All individuals who solicit retail off-exchange forex business or who supervise that activity must take and pass two exams. One is the National Commodity Futures Examination (Series 3) and the other is the Retail Off-Exchange Forex Examination (Series 34), a new exam focusing exclusively on forex-related questions.

Individuals who were registered as APs, sole proprietors or floor brokers (FBs) on May 22, 2008 will not need to take the Series 34 exam unless there has been a two-year gap in their registration since that date.

Every approved Forex Firm (RFED, FCM, IB, CPO or CTA) must have at least one principal who is registered as an AP or FB and who is approved as a Forex AP.

In addition, any RFED branch office must have a branch office manager who has taken the Series 30 exam and is an approved Forex AP.

The Commission’s final forex rules do not require Forex Firm IBs to be guaranteed. However, if a Forex Firm IB is guaranteed, the IB can only have one guarantor. In other words, an IB cannot be guaranteed by an FCM for futures business and a different RFED for forex business.

NFA has prepared a “Registration Overview for Retail Foreign Exchange Dealers and Forex IB, CTA and CPO Applicants” that provides additional registration information. You can also find information and guidance on NFA’s website.

Additionally, NFA’s Information Center (800-621-3570) is available from 8:00 a.m. - 5:00 p.m. CT, Monday through Friday.

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Bart Mallon, Esq.
(www.forexregistration.com)

NFA to Issue Guidance on Regulations

Now that the CFTC has finalized the retail Forex regulations the Forex community will now set forth to figure out exactly what will be happening next.  Today I called the NFA to get clarification on a couple of items with respect to the new regulations and I was surprised to hear that the NFA is planning to release guidance on the new regulations tomorrow.  The representative that I spoke with did not know much about tomorrow’s release.  Below I discuss the issues which were the subject of the conversation as well as some general thoughts and questions that we will be working on over the next 6-8 weeks with respect to the new regulations.

Registration Required by October 18, 2010

The central question I had was whether managers (forex CTAs, CPOs) and introducing brokers would need to be actually registered (i.e. completes fingerprints and forex exams) by the time that the regulations are effective.  The NFA representative that I spoke with said that yes, forex managers would need to be registered by October 18, 2010.  This means that firms who provide investment advice with respect to retail forex will need to cease providing such advice unless the managers are registered with the NFA.  Even if a firm is registered, no APs of the firm may provide advice with respect to retail forex unless such APs have passed the Series 34 exam.  However, APs which were registered as such with the NFA on May 22, 2008 do not have to pass the Series 34.

Logistical Issues

If this is the case — and we will find out tomorrow — the requirement for forex managers and IBs to be registered by October 18 presents a number of logistical issues.

The first issue is that these managers will need to have passed both the Series 3 and Series 34 exams.  As many forex managers are not currently APs of a CFTC registered firm, they will generally not have the Series 3 exam.  The Series 3 exam has nothing to do with retail forex trading so persons without futures/commodities industry experience will need to take special care to prepare accordingly.  Managers will also need to have passed the Series 34 exam.  Studying for and passing both of these exams in the next 6 weeks or so is going to be very difficult.

The second issue will be whether the NFA staff can handle the increased amount of applications from forex managers.  The NFA has previously said that they specifically updated their systems to handle an increase in applications (because of forex registration requirements).  However, when I asked the NFA representative whether the NFA has hired additional staff to deal with the extra registrations, the NFA representative could not answer me - I suspect the answer is “no” the NFA has not hired additional examiners.

A second part of this issue involves the review and approval of disclosure documents.  Both forex CTAs and forex CPOs will need to have their disclosure documents reviewed by the NFA.  While registration can be completed fairly quickly if a manager has completed the forex exams and the fingerprint requirement, the disclosure document review process is not short.  Typically the review process will last anywhere from 4-8 weeks from the time that the disclosure documents are submitted to the NFA for review (which cannot be sooner than the date a firm is registered).  [Note: it is most common for the review process to take around 6-8 weeks depending on the nature of the forex firm.]  This means that even if a manager is able to complete the registration process by October 18, it is likely that the manager would not be able to conduct business if the disclosure documents were not approved, which could probably not happen by October 18 even if the manager completed registration tomorrow!  It is unclear whether the CFTC and NFA recognize this reality or whether they will grant an exception for managers who have made a good faith effort to comply with the registration requirements.

[Note: the NFA takes much longer to approve the applications for forex IBs - genrally it will take anywhere from 4-8 months for a forex IB to become registered.]

Other Issues

There are a number of other questions and issues which have arisen.  The following are some questions we are getting and our current responses:

How long will 100:1 leverage (majors) and 25:1 leverage (non-majors) be applicable? The NFA is now tasked with creating new leverage levels which cannot be exceed 50:1 (majors) or 20:1 (non-majors).  It would make sense if the current leverage levels remain in force until October 18, 2010.  The NFA is likely to propose rules with respect to leverage prior to October 18.

How will the Series 34 exam change? The current Series 34 exam is based on current NFA rules and bylaws which are currently in flux after the CFTC final forex regulations.  Test takers should note that certain questions may be asked on the exam which do not comport with current law and other rulemaking.  The NFA should be addressing this issue shortly.

Can managers manage accounts from the U.S. for only offshore investors at offshore forex dealers without registration? Probably not.  We are still trying to figure out how the final regulations deal with this issue.

Can traders move their forex trading to SEC registered broker dealers to get higher leverage? Probably not.  While the SEC will have jurisdiction over broker-dealers who want to offer retail forex, it is unlikely that the SEC will (under its own rulemaking) allow more leverage than the CFTC.  The SEC would likely defer to the CFTC with respect to the leverage requirements.  Also, FINRA recently proposed a leverage requirement for its member firms which was much lower than the current CFTC regulations.

Can individuals create accounts (either individually or through offshore companies) at offshore forex dealers in order to access higher leverage overseas? Probably not.  The major intent of Dodd-Frank and the final CFTC regulations was to keep U.S. citizens from trading with overseas brokers.  It is likely that the CFTC and NFA are going to take a hard stance on this issue.

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The CFTC just released a statement by Commissioner Chilton regarding the new retail Forex regulations.  The full statement is reprinted below and can also be found here.

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“Rules to Rein in a Racket”

Statement by Commissioner Bart Chilton on the Release of New Retail Forex Rules

In recent years, mini-Madoff ponzi scams have proliferated, targeting unsuspecting investors with good hearts and limited incomes. Many of these fraudulent schemes have involved “forex” trading, that is, derivatives trading foreign currency. Operating in the shadows of the legitimate forex market, regulators have focused on the types of illegal trading in this area that targets unsuspecting consumers, and bilks them out of millions of dollars annually. New rules will rein in this racket.

Toward that end, the CFTC has worked to craft rules that will protect American investors, and at the same time provide for the operation of legitimate business activity. With these new rules, the agency is ensuring that people investing in forex are protected from fraud and abuse. These rules put the sidelines on the field so that traders know the boundaries and investors can be more assured that their money is not being traded out of bounds.

Last Updated: August 31, 2010

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Mallon P.C. is a forex law firm and provides legal support and forex registration services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

In January 2010, the CFTC proposed rules regarding regulation of retail off-exchange foreign currency (forex) products.  It received over 9,000 comments relating to the forex rules and will start publishing final rules this fall. One component of the proposed rules requires all forex account managers and pool operators to register with the CFTC as forex CTAs and CPOs and to become NFA Members.  For those forex managers with criminal disclosures, a concern is how long it will take to get through the registration process and what registration will entail.

This article describes the registration process for forex managers with disciplinary disclosures and the issues they will likely face.

Anticipated Forex Registration Process

The forex registration procedures are likely going to be the same as those currently in place for regular CPOs and CTAs.  CPOs and CTAs must file the following:

• a completed online Form 7-R (including NFA membership sections)
• a non-refundable application fee
• CPO/CTA Membership Dues

Principals and Associated Persons of a CPO or CTA must also file the following:

• a completed online Form 8-R
• Fingerprint Cards
• Proficiency Requirements (e.g. Series 3)
• a non-refundable Principal Application Fee
• a non-refundable Associated Person Application Fee

In addition to providing the application materials discussed above, forex managers will likely have to meet regulatory exam requirements–the Series 34 and Series 3 exams.

Disciplinary Disclosures on Forms 7-R and 8-R

On Forms 7-R and 8-R, the manager must provide disciplinary information for the firm, the Principals, and the Associated Persons.  This includes criminal disclosures, regulatory disclosures, and financial disclosures.  The NFA has indicated that if any of the disciplinary information disclosed is a disqualification from registration under Sections 8a(2) or 8a(3) of the Commodity Exchange Act, the application will probably be reviewed by an internal NFA committee.

Disqualifications under Sections 8a(2) and (3) include, for example:

• suspension or revocation of prior NFA registration
• a permanent or temporary injunction from (i) acting as an FCM, IB, floor broker, floor trader, CTA, CPO, associated person, securities broker, etc.; or (ii) activity involving embezzlement, theft, extortion, fraud, misappropriation of funds, etc.
• a conviction within 10 years for a felony that (i) involves transactions or advice concerning futures contracts; (ii) arises out of the conduct of the business of an FCM, IB, floor broker, CTA, CPO, etc.; or (iii) involves embezzlement, theft, extortion, fraud, misappropriation of funds, securities or property, forgery, etc.
• a finding, by a federal or state regulatory body, that the manager has violated various securities and commodities laws

It is important to disclose all disciplinary matters.  Failure to disclose such matters could be an additional ground for disqualification from registration.  It is also important that if the forex manager answers “Yes” to any of the disciplinary information questions, he or she provides a written explanation detailing the events and conduct involved.  In addition to this explanation, other documents may also be required by the NFA (e.g. court records).  Failure to provide the additional documentation will inevitably delay the registration process.

Providing Additional Documents for Criminal Matters

If a criminal matter is disclosed, the NFA will want documents that reflect the following information:

• the complaint;
• the entry of a plea or plea agreement, or judgement/conviction;
• the sentence;
• proof that you completely satisfied your sentence; and
• the final outcome of the court’s action .

It is probably best to request your entire court file so that the documents are available for the NFA.

Review by an Internal NFA Committee or Scheduling a Hearing

Upon receiving the application materials listed above (and any required supplemental documents (e.g. court records)), the reviewer will forward the case on to the internal NFA committee.  We spoke informally to an NFA reviewer who stated that the committee hears cases once a week, on a first-in, first-out basis.  That committee will review the circumstances of each disqualification independently and decide whether to approve registration or to recommend a proceeding to deny registration.  The NFA reviewer we spoke to said that a decision by this committee is generally made within 24 hours.  Upon approval, the firm will appear on the NFA’s BASIC search engine.  If the application is denied, a denial letter is sent to the manager.  A hearing can then be scheduled with the legal department and additional information regarding the registration may be provided.

At the end of the hearing, the registration is essentially either denied, approved, or approved with conditions.  It is difficult to predict the amount of time it would take for a forex manager with a criminal record to get through the NFA registration process.  If supplemental documents (e.g. court records) are missing, the reviewer will have to send deficiency letters to the manager, which will delay the registration process.

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Mallon P.C. provides legal support and forex registration services to forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

NFA to Discuss Forex Registration in Vegas

The NFA announced a workshop to inform forex managers about the various registration and compliance matters that managers will need to be especially aware of during the registration process.  While we do not yet know what the final rules will look like, we do know a few things and believe that managers will need to focus on the following issues:

The full NFA announcement is reprinted below.

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Caesars Palace in Las Vegas
Saturday, September 25, 2010

In early 2010, the Commodity Futures Trading Commission (CFTC) published its proposed rules regarding the regulation of retail off-exchange foreign currency (forex) products. One component of the proposed rules requires all forex introducing brokers, account managers and pool operators to register with the CFTC as forex IBs, CTAs and CPOs and to become Members of National Futures Association (NFA).

In anticipation of the publication of the CFTC’s final rules, NFA will be offering registration/compliance workshops in conjunction with the upcoming Futures and Forex Expo to be held on September 23-25 at Caesars Palace in Las Vegas. These workshops will outline the registration process and discuss regulatory requirements for each registration category.

The schedule for the workshops is as follows:

All workshops will be held in the Tribune Room in the Convention Center at Caesar’s Palace.

Although there is no fee to attend the workshops, advanced registration is recommended.

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Mallon P.C. provides legal support, registration and compliance services to all types of forex managers.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon can be reached directly at 415-868-5345.