Primer on the Upcoming Registration Rules
Many investment managers who have been trading in the off-exchange
spot forex markets have enjoyed considerable success. These managers
also have not generally been subject to any registration or regulatory
regimes because the spot forex markets are relatively unregulated.
However, with the passage of the Farm Bill by Congress in 2008, off-
exchange forex registration will become regulated in 2009 forcing
forex managers to register with the CFTC.
CFTC and the NFA
The CFTC will be releasing proposed rules regarding the registration
requirements within the next couple of months. After that time there
will be a comment period where the rules can be reconsidered. After
the rules are approved registration will probably be required by the
end of 2009. The NFA will be in charge of many aspects of the
registration process and they have already released much information
on the registration process.
For example, the NFA has announced new registration categories which
apply only to forex managers. These new registration categories are as
follows: forex CPOs (firms or individuals who manage forex commodity
pools or forex hedge funds), forex CTAs (firms or individuals who
manage individual forex accounts), forex introducing brokers (firms or
individuals who introduce forex managers to forex dealer members), and
forex APs (associated persons - basically any employee of a forex firm
except for administrative persons).
Series 34 Exam
The NFA is making forex managers (and forex introducing brokers) take
the Series 34 exam which is a regulatory exam dealing with the off-
exchange foreign currency markets. The Series 34 exam will consist of
5 sections and will deal with a number of topics. The NFA has stated
that the exam will be one hour long. Like the other regulatory exams,
the Series 34 will be administered by the Financial Industry
Regulatory Agency (FINRA). The actual exam can be taken at testing
locations throughout the United States through Pearson and Prometric
testing centers.
Registration Process
Firms which are applying for any of the above designation categories
will likely need to go through the standard NFA registration
procedures. This will include submitting both a 7-R and an 8-R. Like
regular CPO, CTA and IB applications, these forex applications should
take around one month to be approved (assuming there are no issues
with the application such as disciplinary history). The forex managers
will then need to submit their disclosure documents to the NFA for
review. This review process can take as little as two weeks, but it is
likely to take much longer as the NFA staff becomes more comfortable
with the intricacies of the forex disclosure documents as compared to
normal disclosure documents.
Will registration be the end of the world?
First, forex registration is not the end of the world. In our
experience (with regard to CPOs and CTAs), the registration process is
relatively straightforward and can be completed relatively quickly.
Submitting the forex disclosure documents to the NFA and getting those
approved should also be a relatively painless experience. That is not
to say, however, that you should attempt registration by yourself. Law
firms and forex compliance firms will be able to help you through the
registration process and will be able to get your business up and
running fast. Ongoing compliance is relatively minimal - for most
managers an NFA audit will be unlikely and, in the event of an audit
there should not be a large impact on the business.
Conclusion
Forex registration will be here shortly. Many managers will actually
benefit from registration as it will give potential investors some
peace of mind that there is some oversight. We recommend that managers
begin the registration process right now so that they will be a step
ahead of other managers when the registration rules take effect. In
any event, we will continue to keep you updated on any developments.
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