National Futures Association
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WATCH: Confirmations: NFA and CME’s Financial Match.com on MarketsWiki.tv (March 2013) |
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| National Futures Association (NFA) | |
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| Founded | 1982 |
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| Headquarters | Chicago |
| Key People | Daniel J. Roth, President, CEO Christopher Hehmeyer, Chairman |
| Products | Registration, Compliance, Enforcement, Trade Practice and Market Surveillance, Dispute Resolution, Education |
| Corporate Website | www.nfa.futures.org |
National Futures Association (NFA) is the industry-wide, self-regulatory organization for the U.S. futures industry. NFA's purpose is to safeguard market integrity, protect investors and help NFA members meet their regulatory responsibilities. Individuals and firms that engage in futures business with the public are required to be members of NFA.[1]
The NFA has more than 4,200 member firms and 55,000 NFA Associate Members.[2]
Contents |
What NFA Does
NFA provides self-regulatory programs in order to contribute to the integrity of the futures industry.
NFA advisory committees work with staff to craft NFA Sales practice rules that ensure members meet high ethical standards in their dealings with customers.
In January of 2012, it was announced that CME Group and the National Futures Association (NFA), in conjunction with the InterContinental Exchange (ICE), the Kansas City Board of Trade (KCBOT) and the Minneapolis Grain Exchange (MGEX) had formed a joint committee to review how self-regulatory organizations could strengthen current safeguards for customer segregated funds held at the firm level in light of the MF Global bankruptcy.[3]
On July 16, 2012, the NFA said it would conduct a review of its audit division as it sought to react to criticism that it missed two decades of fraud at failed Iowa brokerage Peregrine Financial Group. Hours after a former customer of Peregrine Financial called for a U.S. congressional investigation of the NFA, the industry group said it was retaining outside law firm Jenner and Block to review its general practices and their execution in the case of PFGBest, as Peregrine was widely known.[4]
On July 17, 2012, the NFA said in press release that a special committee of representatives from the futures industry's self-regulatory organizations had proposed additional requirements to SRO rules and regulatory practices designed to strengthen safeguards for customer segregated and secured funds held at the firm.
Managed Futures
In July of 2010, the NFA petitioned the CFTC to reclaim oversight of managed futures, an authority the NFA had until 2003. The proposal seeks to require futures-oriented mutual funds to provide more disclosure to investors. Retail investors have increased access to mutual funds that diversify with futures in a move meant to compete with typically higher-fee hedge funds. Mutual funds are already regulated by the SEC. AQR, the quantitative fund manager, and JPMorgan are among the companies whose mutual funds are targeted in the NFA proposal.[5]
- Tips for Using NFA's Electronic Disclosure Document Filing System[6]
History
The 1974 Commodity Futures Trading Commission Act, which established the Commodity Futures Trading Commission (CFTC), also contained a provision (Section 17) that gave the futures industry the opportunity to create a "futures association." The expectation was that such an organization would perform self-regulatory activities that would complement those of the newly created CFTC.
In 1976, a group of industry leaders, led by Leo Melamed, recognized the efficiencies that a national self-regulatory organization would bring to the futures industry and began the development process. This group, known as NFA's Organizing Committee, reflected a cross section of business activities and regional considerations. The committee members, many of whom became members of NFA's initial board of directors, included Melamed, John J. Conheeney, David T. Johnston, George D. F. Lamborn, Warren W. Lebeck, Leslie Rosenthal and Howard A. Stotler.
In 1982, Robert K. Wilmouth, then president of the Chicago Board of Trade, signed on as NFA's first president and chief executive officer.
Wilmouth retired as president in 2002. He was succeeded by Daniel J. Roth, who had served previously as NFA General Counsel.
Peregrine Financial Services Default and Aftermath
In July 2012, PFGBest, also known as Peregrine Financial Group, Inc. collapsed after its founder Russell Wasendorf Sr. was discovered to have fraudulently stolen $215 million in customer funds over a 20 year period. Wasendorf Sr. received a 50 year sentence for his crime on January 31, 2013. The case put NFA in the spotlight and its audit practices under intense scrutiny for not catching the fraud earlier.
On Nov. 26, 2012, it was announced that AlphaMetrix360, LLC had been selected to provide electronic data aggregation services for both the CME Group Inc. and NFA. As futures industry self-regulatory organizations, the initiative will allow CME and NFA to build a system to collect balances for all bank depositories holding customer segregated, secured amount and sequestered funds on behalf of futures commission merchants on a daily basis.[7]
On January 31, 2013, NFA announced that it had completed an independent review of its regulatory and auditing practices by Berkeley Research Group. The firm reviewed NFA's audits of Peregrine from 1995 through 2012, examining more than 190,000 NFA documents totaling more than 3 million pages, including more than 166,000 emails and related documents. The firm also interviewed more than 25 current and former NFA employees and five former PFG officials including Wasendorf Sr. Berkeley's analysis found that overall, "NFA audits were conducted in a competent fashion and the auditors dutifully implemented the appropriate modules that were required in the annual audits" following the standards set by the Joint Audit Committee. It also concluded that Wasendorf Sr. "was able to conceal his fraud meticulously by providing numerous convincingly forged documents to NFA and others."
Berkeley also submitted 21 recommendations to improve NFA audits including auditor hiring, training, supervision and continuing education, plus training and procedures to ensure more professional skepticism by its audit staff. It also recommended more testing of NFA member internal controls, qualifications of outside auditors and the sources of firm capital contributions.[8][9]
Full report and summary on MarketsReformWiki - Analysis of National Futures Association Audits of Peregrine Financial Group, January 29, 2013
Business Conduct Committee
NFA's Business Conduct Committee (BCC) is composed of nine individuals, three of whom must have no affiliation with any NFA member. These individuals are appointed by NFA's board to serve three-year terms.
The committee is responsible for reviewing audit and investigative reports prepared by NFA compliance staff. Typically, reports are reviewed by BCC panels, three-person subsets of the larger group.[10] If the reports allege violations of NFA rules, the BCC has the option of issuing either:
1) A Warning Letter to the firm that identifies remedial actions, or
2) A formal complaint that charges the Member with specific rule violations. When the BCC issues a Complaint, the Member has the right to respond to the allegations in the Complaint and request a hearing before the members of the NFA Hearing Committee.
Membership Committee
There are 11 individuals on NFA's Membership Committee. Five members are selected from the NFA's board. One of the board members is required to be a public director, and at least three of the non-board members must represent organizations that are not members of NFA. These individuals are appointed by NFA's board to serve two-year terms.
The committee reviews decisions NFA's president makes about whether applicants can either 1) become members of NFA or register as Associates, or 2) continue to be eligible for NFA membership or registration. The committee can designate a subcommittee to act on its behalf.
Registration
With some exceptions, anyone who does futures business with the public has to be registered. The primary purposes of registration are to screen an applicant's fitness to engage in business as a futures professional and to identify individuals and organizations that are subject to federal regulation. Registration categories are:
- Futures Commission Merchant
- Introducing Broker
- Commodity Pool Operator
- Commodity Trading Advisor
- Associated Person
- Principal
- Floor Broker
- Floor Trader
- Agricultural Trade Option Merchant
In addition to managing the registration system, NFA is responsible for denying, revoking, suspending, restricting or conditioning any firm's registration or membership. These decisions are made by the NFA membership committee, after a hearing.
Every registration applicant is subject to a fitness review, which includes a background check, and must meet proficiency testing requirements. Applicants use the Web-based NFA Online Registration System to complete the registration process.
Membership Details
All registered FCMs, IBs, CPOs and those registered CTAs who manage or exercise discretion over customer accounts must be members of the NFA in order to conduct futures business with the public.
Persons acting as Associated Persons of NFA Members must become NFA Associate Members.
NFA members have to meet rigorous registration requirements, including fitness screening and proficiency testing. Once they become members, they have to continue to follow NFA's standards because NFA has the authority to deny, revoke, suspend, restrict or condition any firm's or individual's registration.
Mandatory membership is the cornerstone of NFA's regulatory structure, and effective industry wide self regulation is not possible without it. NFA Bylaw 1101 very clearly prohibits the conduct of customer business with non-NFA Members.
Members have to be especially diligent not to violate Bylaw 1101. They must examine the relationships they have with other registrants, with customers, with third-party account controllers, with branch offices and so on, to determine that they are in compliance.
| Total Membership |
3,937 |
| Retail Foreign Exchange Dealers |
13 |
| Futures Commission Merchants |
101 |
| Introducing Brokers |
1261 |
| Commodity Pool Operators |
1544 |
| Commodity Trading Advisors |
1011 |
| Exchanges |
7 |
| Associates |
53,690 |
- NFA Members are listed by their highest class of membership. However, many NFA Members are registered in more than one membership category. For example, an FCM that manages or exercises discretion over customer accounts may also be registered as a CTA.
Enforcement
When rule violations occur, NFA is authorized to take disciplinary action. Sanctions range from warning letters for minor infractions to formal complaints in cases where violations warrant prosecution.
Penalties including expulsion, suspension for a fixed period, prohibition from future association with any NFA Member, censure, reprimand and fines of up to $250,000 per violation. These penalties are determined by a Business Conduct Committee composed of NFA Members.
Trade Practice And Market Surveillance
NFA performs regulatory services and programs for many of the newer electronic exchanges that help ensure orderly markets and make certain that customers of these exchanges receive the same protections as those of more traditional exchanges.
Dispute Resolution
NFA's online arbitration and mediation programs provide informal and inexpensive alternatives to litigation.
Arbitration cases are heard by a panel of arbitrators. Claims for smaller amounts can be resolved by a single arbitrator based solely on written submissions. Claimants may choose to be represented by counsel, or they can represent themselves. Arbitration awards are final and can't be appealed.
Mediation gives participants a chance to negotiate a mutually agreed upon settlement.
Educational Outreach
Helping investors make informed decisions about futures trading is one of NFA's core responsibilities. NFA publications discussing a variety of futures-related topics are available on the NFA Web site or can be requested from NFA's information center at (800) 621-3570. NFA publications for investors include:
- Annual Review[12]
- Background Affiliation Status Information Center (BASIC): An Information Resource for the Investing Public[13]
- Introduction to National Futures Association[14]
- NFA Arbitration: Resolving Customer Disputes[15]
- Scams and Swindles: An Educational Guide to Avoiding Investment Fraud[16]
- Security Futures: An Introduction to Their Uses and Risks[17]
- Trading in the Retail Off-Exchange Foreign Currency Market - What Investors Need to Know[18]
NFA also is a member of the Alliance for Investor Education.[19]
BASIC
NFA also operates the Background Affiliation Status Information Center, or BASIC database, which contains registration information for all current and former CFTC registrants, as well as information about disciplinary actions taken by NFA, the CFTC and the U.S. futures exchanges.
All of NFA's programs are financed by membership dues and assessment fees paid by users of the futures markets.
Podcasts
- Use and Supervision of Online Social Networking Communications
- Tips for Using NFA’s Electronic Disclosure Document Filing System
- Preparing for an NFA Audit
- Registration Issues: Principals, APs and Branch Offices
Who Makes Self-Regulation Work
NFA is a member-run organization. Policy direction is provided by a 25-member board. The NFA board of directors consists of 14 individuals from the FCM, IB, CPO and CTA communities. These directors are joined by six representatives from U.S. futures exchanges and five public representatives who have no association with the futures industry.
The board is responsible for managing NFA's property, business and affairs, and exercising any powers that are directed, required or permitted by law, or by NFA articles or bylaws.[20]
The board's annual meeting, at which officers are elected and committee appointments are made, is held in February. NFA's board typically meets on a quarterly basis. The 25-member board includes:
- 10 Futures Commission Merchant, Leverage Transaction Merchant and Introducing Broker representatives
- 6 Contract Market representatives
- 4 Commodity Pool Operator, Commodity Trading Advisor representatives
- 5 Public representatives
Members also make up NFA's Business Conduct Committee, Advisory Committees and several special committees.
Key People
Board of Directors
- Christopher K. Hehmeyer, Chairman
- Leo Melamed, Permanent Special Advisor
Leadership
- Daniel J. Roth, President, CEO
- Daniel A. Driscoll, Executive Vice-President, COO
- Kenneth F. Haase, Senior Vice-President, Information Systems
- Thomas W. Sexton III, Senior Vice-President, General Counsel and Secretary
- Mary McHenry, Director, Compliance
- Regina G. Thoele, Senior Vice-President, Compliance
- Karen K. Wuertz, Senior Vice-President, Strategic Planning and Communications
- Jane Croessmann, Director, Market Regulation
- Edward Dasso III, Vice-President, Market Regulation
- David L. Hawrysz, Vice-President, CFO and Treasurer
- Jamila Piracci, Vice-President, OTC Derivatives
- Gregory C. Prusik, Vice President, Registration
- Larry A. Dyekman, Director, Communications and Education
Resources
References
- ↑ Who has to register. National Futures Association.
- ↑ Directories. National Futures Association.
- ↑ Press Release. NFA.
- ↑ PFGBest regulator orders review of audit division. Yahoo! News/Reuters.
- ↑ NFA looks to regulate funds operating managed futures. Financial Times.
- ↑ Tips for Using NFA's Electronic Disclosure Document Filing System. National Futures Association.
- ↑ Press Release. National Futures Association.
- ↑ A letter from NFA's CEO and Chairman. National Futures Association.
- ↑ Peregrine fraud investigation finds shortcomings at futures regulator. Crains Chicago Business.
- ↑ NFA Manual: Compliance Rules: Part 3 – Compliance Procedures. National Futures Association.
- ↑ NFA Members and Dues. National Futures Association.
- ↑ NFA Annual Review. National Futures Association.
- ↑ Background Affiliation Status Information Center (BASIC) Guide. National Futures Association.
- ↑ Introduction to National Futures Association. National Futures Association.
- ↑ NFA Arbitration: Resolving Customer Disputes. National Futures Association.
- ↑ Scams and Swindles: An Educational Guide to Avoiding Investment Fraud. National Futures Association.
- ↑ Security Futures: An Introduction to Their Uses and Risks. National Futures Association.
- ↑ Trading in the Retail Off-Exchange Foreign Currency Market - What Investors Need to Know. National Futures Association.
- ↑ Members. Alliance for Investor Education.
- ↑ Articles of Incorporation. National Futures Association.
