When the National Futures Association was created in 1982 as a self regulatory body by congressional passage of an amendment to the Commodity Exchange Act, the original purpose established in 1983 was to register introducing brokers, commodity pool operators and commodity trading advisors.
The introduction of many new financial instruments in the later 1970’s such as T-Bill Futures, Ginnie Mae Certificates, options on sugar and coffee and stock index futures in 1982 saw the need to register new brokers and salespeople to the futures industry. With the introduction of new financial instruments and the International Money Market that traded many of these new instruments, the NFA assisted the CFTC as a complement in their oversight functions of the futures industry.
Since 1982, the mandate of the NFA has expanded to compliance and the issuance of regulations, arbitration and mediation and an online registration system for brokers with the function that allows the public to check the registration status of their broker as well as a means to check the status and outcomes of dispute resolutions.
Earlier registrations began on a voluntary basis for brokers. With time and the passage of new laws to protect market integrity and eliminate fraud, registration became mandatory. Today mandatory registration of brokers and principles encompasses even broader categories to now include five new sections: supervision, ethics training, business continuity and disaster recovery, privacy rules and promotional materials.
Principles that have a 10 % or more ownership in a brokerage or who oversee client communications, sales processes or trading activity must register. The term broker is defined as an IB or introducing broker. These are firms that offer self trading accounts particularly to the general public. Supervisors or Associated Persons are employees that supervise communications, sales forces or trading activities and must obtain a series 3 license to maintain employment as well as register. Ethics training, business continuity and disaster recovery, privacy rules and promotional materials must be included in registration applications but fall more under the category of regulations yet all are focused on the total accountability of the industry and the NFA’S oversight function.
Today the NFA claims 3816 total firms registered with 1446 registered as Introducing Brokers, 975 CTA’S and 377 CPO’S. 52,941 Associated Persons are registered and all reported from 9 different exchanges in the United States. Annual dues can range from $750 for CTA’S and CPO’S to $125,000 for firms with $5 million and above in annual revenues. Registration fees can range from a $200 application fee for CPO’S and CTA’S along with a $750 membership fee reported on Form 7R to $85 for IB’s and AP’S and reported on Form 7R. Futures Commission Merchants pay a $500 application fee with membership fees ranging from $1500 to $5625 and reported on form 8R.
The CFTC Reauthorization Act of 2008 mandated forex solicitors, account managers, CTA’S and Pool Operators to register with the NFA as Introducing Brokers to allow more accountability of foreign exchange trading so reported membership figures will be much higher in the future.
Laws passed by Congress must be codified into a set of uniform regulations. Regulations issued by the NFA for 2008-2009 primarily addressed foreign exchange due to the many frauds and abuses reported over these years.
For example, the CFTC Re authorization Act increased net capital requirements for foreign exchange brokers from $10 million in 2008 to $20 million in 2009. Membership requires compliance.
For example, NFA Rule 41 states brokers must certify net capital requirements and report weekly account balances while CTA’S and CPO’S must maintain a $45,000 net capital requirement at all times as well as file disclosure documents. NFA Rule 2-36 issued in April 2009 addressed provisions of false reports, supervision of personnel and submission of promotional materials.
Regulations issued in June 2009 addressed written confirmations that must be issued one business day and monthly and quarterly statement submittal. The NFA not only issues uniform regulations but all regulations are monitored through a system of compliance to perform the function of oversight through surveillance. For example, violators can be censured, face expulsion or fined $250,000 for each violation depending on the severity and number of infractions.
Dispute resolution at the NFA began in 1983 with an arbitration program while mediation began in 1991. Parties that agree to mediation usually report claims less than $150,000. Cases that are arbitrated are filed either as customer to member, member to customer or member to member.
Historically the majority of claims filed have been customer to member. For example, 160 customer complaints were filed in 2009 with an average close of cases of about five months with 44 awards granted.
In 2008, 193 customer complaints were filed with an average of six months to close and 43 awards granted. Awards granted and arbitration decisions are final and cannot be filed in the court system. Awards are administered through the Restitution program.
What began as a system called DIAL or Disciplinary Information Access Line in 1991 to allow customers to check the registration status of their broker or salesperson by telephone soon became an online system called BASIC or Background Affiliation Status Information Center.
Basic allows online users to check the registration status of their broker and principles of the firm, commodity pool operators and CTA’S 24 hours a day. Basic also allows users to check a broker’s disciplinary actions, arbitration status and awards granted.
Since the creation of the NFA, many firms became members through a series of laws yet as the functions and duties of the NFA expanded, the number of claims filed has also decreased. One reason may be that the NFA offers investor alerts, education and an enhanced system to allow the markets to function properly.
January 2010 Brian Twomey
Brian Twomey is a currency trader and adjunct professor of Political Science at Gardner-Webb University