The following comments regarding the above captioned Notice to Members are submitted by the National Introducing Brokers Association (NIBA). The NIBA, founded in 1991 is a membership association of Introducing Brokers (IBs), Commodity Trading Advisors (CTAs), Futures Commission Merchants FCMs) and other registered professionals who transact futures and options business primarily in, and for, the retail sector of the industry. These comments represent the opinion of our IB and CTA members only.
The NFA should not impose a minimum capital requirement on CTA members. By definition, a CTA holds no funds and cannot control funds. The CTA’s client funds are held on deposit with an FCM. Since many CTA customers have a primary relationship with either an IB or FCM, that IB or FCM is monitoring the trading of the accounts, and should recognize the warning signs of any increasing risk occurring at the CTA. Should a CTA find itself in the position of not being able to operate because of limited resources, it will stop trading, deregister and the customers will easily be able to contact another advisor.
In addition to the obvious reasons detailed above, we feel that the imposition of a capital obligation will certainly harm the emerging manager category. NIBA membership includes many CTAs who are part of this growth sector in our industry. The proposed capital obligation will increase the barrier to entry to the industry so there will be fewer registered CTAs from which customers can choose. Fewer choices most often result in increased costs for the participants -- in this case, the customers of CTAs.
Customer protection is a paramount concern for every industry professional. But does the imposition of a capital obligation on CTAs increase the level of protection in any meaningful way? If the requirement had been in place when the examples the NFA cites in its Notice took place, would that requirement have made any difference?
Please note that even Independent Introducing Broker (IIB) members of the NIBA who are subject to capital requirement for registration, concur in this opinion.
The NFA has asked us to suggest alternatives to this proposal.
A practice now in place for any firm with a net capital obligation that chooses not to file audited financial statements at registration, is that those firms must agree to an onsite NFA audit within a specific, limited time frame. That requirement could be imposed on any CTA who intends to perform in-house accounting with regard to its performance, or who uses a third-party provider who is not familiar with the NFA standards. Those entities would be required to provide NFA with documentation which demonstrates their computing and presentation methodologies, and assures NFA they understand how to properly complete their required reports. The documents required to be submitted, along with an enhanced audit cycle, will help the NFA detect any improper behavior at the CTA.
The NFA could also consider higher fines for misconduct of CTA members. A harsher punishment would serve as a deterrent to ‘bad apples’ while generating funds for the NFA.
NIBA counts among its members a few firms which the NFA has categorized as “inactive.” Many of those entities are individuals who are engaged in the futures and options business, but not making trading decisions or soliciting customer funds. Many speak at professional forums, author books about the industry and provide business consulting. They are subject to audits and pay membership fees. These entities certainly are not “inactive.” They keep their licenses open and remain subject to the oversight of the NFA because it is a measure of their professionalism.
This issue was dealt with effectively a few years ago, when the NFA added certain information to a firm’s BASIC website listing to explain that no accounts are currently being traded under that registration. Customer protection is achieved because the disclosed information is available to the public, and the NFA retains the ability to oversee the actions of the registrant. The membership fee for a CTA not trading accounts is the same amount as for a traditional CTA -- $850 annually. If even 200 of the “several hundred” members the NFA refers in its proposal no longer pay dues, the NFA will lose approximately $170,000 in revenue each year. That amount surely pays at least two NFA employees’ annual salary.
In summary: The NIBA does not believe that customer protection is enhanced by requiring Commodity Trading Advisors to meet a minimum capital requirement. We have suggested a few ways NFA could achieve this goal without crippling the growth of the CTA registration category, and we will participate in any additional discussions to formulate reasonable criteria for CTA regulation.
NIBA does not believe that expelling CTA members which the NFA labels as “inactive” will further the goals of customer protection. In fact, it may result in increasing customer risk because these entities would no longer be subject to the jurisdiction of the NFA.
NIBA congratulates the NFA for reaching out for public comment on this proposal. But, we believe there are better, less expensive and more effective alternatives which protect the customer’s interests within a robust regulatory environment, while encouraging new talent and growth within the industry.
Respectfully Submitted,
Melinda Schramm, Chairman
National Introducing Brokers Association
Download NIBA Comments to the NFA's Proposals for CTA/CPO Capital Requirements (PDF)
