Failure to Comply with NFA Rules Could Result in NFA Membership Suspension or Expulsion and/or Fines
CTA Required to Withdraw From NFA Membership for Compliance Violations
On August 25, 2009, the National Futures Association’s (NFA) Business Conduct Committee (BCC) filed a complaint against Las Vegas commodity trading advisor (CTA) NetBlack Capital LLC and its principal/associated person (AP) John Francis Netto. NetBlack, an NFA Member CTA since November 2008, was charged with violating NFA Compliance Rule 2-6, which provides that:
no person who has been expelled or suspended or is subject to a similar sanction by NFA in a proceeding brought pursuant to Part 3 of NFA’s Compliance Rules that temporarily or permanently prohibits the person from NFA membership or affiliation in any capacity with an NFA member shall hold himself out as a Member in good standing of NFA, or as affiliated with a Member, as the case may be, during the period during which the sanction is in effect. No Member or Associate shall conduct commodity futures or forex business with such a person during the period the sanction is in effect unless authorized by the BCC, Hearing Committee or the Appeals Committee.
The BCC found that NetBlack’s website had listed a gentleman named Jes Black (a.k.a. Jason Black) as a “Strategic Advisor” and that on a second website for NetBlack, both Netto and Black, whose phone number was listed as a contact number, were listed as managers of NetBlack. The problem was that Black, former NFA Member commodity pool operator (CPO) of Black Flag in New York, had been previously named in an NFA action by the BCC for
[providing] false and misleading information to NFA; [failing] to provide an accurate and complete disclosure document; [failing] to prepare and maintain accurate books and records; [failure to cooperate with an NFA audit; and [failing] to supervise the firm’s [Black Flag] operations.
Thus, in accordance with Compliance Rule 2-6, Netto did not have the authority to conduct business with Black, resulting in a compliance action against Netto by the NFA.
Additionally, Netto was charged with violating NFA Compliance Rule 2-29(b)(5), which states that, “No Member or Associate shall use any promotional material which included any specific numerical or statistical information about the past performance of any actual accounts”.
In response to these allegations, Netto (on behalf of NetBlack) proposed to the NFA that it take the following actions against him to settle the charges, to which the NFA agreed:
1. NetBlack agreed to withdraw from NFA membership for 5 years and pay a fine of $15,000 upon reapplication;
2. Netto agreed that he would cease all business relations with Black, and Black would be prohibited from entering his offices;
3. Netto agreed to pay a fine of $15,000 to the NFA; and
4. Netto agreed that he would submit all promotional material in advance for NFA review and approval.
The lesson to take from the Netto case is that the NFA takes its compliance rules seriously and is constantly in the process of reviewing Member’s websites, promotional material, and business conduct. The new Commodity Futures Trading Commission (CFTC) off-exchange foreign currency rules that have been proposed emphasize these compliance rules and have been put in place to prevent fraud, protect consumers, and promote appropriate business practices. Netto may have been let off lightly (the NFA could have imposed a fine of $250,000 per violation), but with the new CFTC’s rules on the horizon, you should expect harsher penalties than Netto’s.
The full text of the NFA press release is reprinted below, and can also be found here.
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For Immediate Release
February 01, 2010
For more information contact:
Larry Dyekman (312) 781-1372, ldyekman@nfa.futures.org
Karen Wuertz (312) 781-1335, kwuertz@nfa.futures.org
NFA sanctions Las Vegas commodity trading advisor and its principal
February 1, Chicago - National Futures Association (NFA) has ordered NetBlack Capital LLC (NetBlack) to withdraw from NFA membership and not reapply for NFA membership for a period of five years. NetBlack is a commodity trading advisor located in Las Vegas, Nevada. The firm must also pay a fine of $15,000 in the event it reapplies for NFA membership after five years. NFA also levied a $15,000 fine against John F. Netto, a principal and sole associated person of NetBlack.
The Decision, issued by an NFA Hearing Panel, is based on an NFA Complaint filed in August 2009 and a settlement offer submitted by NetBlack and Netto.
The Panel found that NetBlack and Netto conducted business with Jason Black (aka Jes Black), who was suspended from NFA membership as a result of a prior NFA Business Conduct Committee disciplinary action issued in February 2008. The Panel also found that NetBlack and Netto failed to maintain support for its advertised monthly rates of return as reflected in NetBlack’s promotional material.
Along with the $15,000 fine, Netto is prohibited from doing business with Black for a period of thirty months for any and all firms for which Netto is principal. Additionally, for a period of twenty-four months, Netto agreed to submit all promotional material which contains performance information to NFA for review and approval prior to use.
The complete text of the Complaint and Decision can be found on NFA’s website (www.nfa.futures.org).
NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.
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Other related forex law articles include:
- Forex Dealer Member Barred From Industry
- NFA Interpretive Notice Re: Past or Projected Performance
- NFA Interpretive Notice Re: Deceptive Advertising II
- Retail Forex Registration Regulations Proposed
Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.
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