For the past seven years, NIBA membership has been open to CTAs and CPOs. Nearly one-quarter of current members are registered as CTAs - - either as their primary registration or in addition to the IB registration. We count among them established CTAs, as well as emerging managers. During the past couple of weeks we have had numerous comments from members regarding the NFA proposal for capital requirements, and additional customer protection measures for CPOs and CTAs.
Virtually 100 percent of the comments we received to date oppose the minimum capital proposal for CTAs. Even IIBs who currently operate under a minimum capital requirement regulation, oppose the NFA’s proposal.
At this time, there are not enough comments/suggests regarding CPO capital requirements/alternative customer protection measures for NIBA to take an Association position.
The most frequently cited reasons for opposition to minimum capital requirements for CTAs are:
- CTAs hold no funds. CTAs cannot control funds which are held on deposit with an FCM.
- CTA customers most often have their primary relationship with an IB or FCM who is constantly monitoring the trading of the accounts, and should recognize the warning signs of increased risk occurring at the CTA.
- CTAs who find they can no longer operate because of limited resources, deregister and the customers can easily contact another advisor, or the IB or FCM will facilitate contact and move the account.
- There have been no studies cited which suggest establishing a minimum capital requirement will provide “customer protection” within the context of this proposal.
- IIBs already have a capital requirement, and are subject to numerous audits and documentation requirements. Have those requirements been proven to provide any additional safeguards for customers?
- No amount of “financial backstop” would be large enough to protect clients from someone who is not going to follow the rules.
- A capital requirement will certainly harm the emerging manager sector. New CTAs are faced with significant costs when starting up -- this would just add another barrier to entry into the industry.
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?
The NFA has asked us to suggest alternatives to this proposal. What do you think?
One practice now in place for any firm with a net capital requirement 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 audit condition could be imposed on any CTA who intends to perform in-house accounting with regard to performance. It could be imposed on any CTA who chooses to use a third-party provider who is not familiar with the NFA standards, or who is unknown to the NFA. These firms can then provide NFA with documentation which demonstrates their various computing and presentation methodologies. In turn, that documentation will ensure the NFA that CTAs understand how to properly compile their required reports, and conduct their business. This audit, early on in the life of the firm, along with the required documentation, should 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 industry “bad apples,” and generate additional funds for the NFA.
NIBA counts among its members a few entities which the NFA has categorized in this proposal as “inactive NFA members.” Members who commented on this part of the NFA proposal believe this issue was dealt with effectively when NFA added certain information to the BASIC listing on NFA’s website to explain that no accounts are currently being traded under that registration -- the entity is a “not-doing-business CTA.” Customer protection is achieved and the NFA retains the ability to enforce its rules on its registrants. “Not-doing-business” CTAs are subject to audits, and pay the same amount for registration and NFA membership as “doing business” CTAs. Many of the entities that fall into this category regularly interact with the public -- consulting, authoring books and studies, and teaching. NIBA member comments are opposed to forcing these CTAs to drop their registrations, and feel that the current methods for “not-doing-business” CTAs are sufficient.
NIBA has determined that it is in the interest of the Association to submit comment to The NFA proposal and Request for Comments - CPO/CTA Capital Requirements and Customer Protection Measures. We will file a full comment letter prior to the deadline of April 15, 2014. If you would like to add to the discussion, please send your suggestions no later than April 3 to Melinda Schramm, melinda@futuresrep.com. NIBA’s letter to the NFA will be published on our website and in next month’s newsletter.