Transcript for:
Overview of Futures Regulations and Compliance

now let's take a look at regulations chapter 2 the first thing again to note is that you must pass regulations separately you will get 35 questions on regulations on your test these questions will be spread out amongst the exam but when the computer grades it it will grade regulations separately from General market knowledge and remember you need at least a 70% on each part so you do need to get at least a 70% on the 35 regulations questions the regulation questions will mostly be true and false questions so Choice a will just be true Choice B will be false and it will just come down to saying whether the statement is true or false this really comes down to memorizing your regulations so very important that you understand this chapter let's start with a quick overview who is the government agency that regulates Commodities and Futures it is the CF TC we'll see that they are the commodity Futures Trading commission they're the government agency that regulates Futures so for those of you who are more familiar with the Securities world the cftc is similar to the SEC so the SEC the Securities and Exchange Commission is the government agency that regulates Securities the cftc the commodity Futures Trading commission is the government agency that regulates futures now the cftc delegates a lot of its power to who well we have the National Futures Association or NFA we're going to see this is an SRO a self-regulatory organization that carries out a lot of the day-to-day regulation of the Futures industry again for those of you familiar with the Securities industry the NFA is very similar to finra on the Securities side then we have the future exchanges who carry out a lot of the regulatory functions for what happens on the exchanges so the Futures exchanges are also self-regulatory organizations so this structure of Regulation is very similar to what we have in the Securities world except on the security side it would be the SEC as the government agency finra as the SRO instead of the NFA and then the Securities exchanges instead of the Futures exchanges now the firms involved in the Futures industry become members of the NFA so they're NFA members these fourwh listing here are the firms that are regulated in the industry as NFA members we'll see there's Futures commission Merchants fcms introducing Brokers IBS commodity pool operators and commodity trading advisors and we'll get into all of this as we move along now what are you becoming you are becoming what's called an assoc Associated person so that this is the natural person who works for one of those four types of members so what you're becoming is an AP or an Associated person of perhaps an fcm or an introducing broker or a CPO or a CTA now APS we'll see can also be called registered commodity Representatives or rcrs registered commodity representatives and we will certainly focus on all these different types of members and Regulators as we go through this chapter let's start with the cftc the commodity Futures Trading commission they're the federal agency so they're the head honchos in the regulatory structure for futures they were created in 1975 which I do not believe they will test that date but to oversee the Futures industry they will prevent manipulation prohibit the spreading of false and misleading information establish ethical trading standards approve new Futures and option contract specifications so let me just explain that one second it's generally The Exchange that wants to start trading a new Futures Contract the cftc we'll see has oversight over the exchanges and the cftc will approve the new Futures that the exchange wants to trade they'll regulate the exchanges and floor members MERS they'll provide for settlement of customer claims and probably the most important bullet on the slide for Series 3 purposes is the last bullet know that cftc and NFA employees so the people who work for The Regulators of the industry cannot trade Futures they do not want The Regulators trading Futures now as we said the cftc delegate a lot of the regulatory oversight to who well to the NFA they are a self-regulatory organization that carries out a lot of the day-to-day regulation of the Futures industry your firm is a member of the NFA this self-regulatory agency the exchanges they'll regulate what's happening on the exchanges and again they're overseen Remember by the cftc who's the highest regulatory Authority in the Futures industry and the Clearing Houses which we briefly touched on each trade has to be cleared with the appropriate Clearing House each exchange is affiliated with a clearing house remember it's that clearing house that guarantees performance of the contract and eliminates that counterparty risk so basically the Clearing House becomes the buyer for each seller and the seller for each buyer so even though the clearing house is not on the exchange actually doing trades right the Clearing House itself isn't really buying or selling Futures okay but they get in the middle of every sort of settlement and they become the guarantor of the contracts and that's what eliminates the credit risk and when we look at margin we'll look at putting up Margin with the Clearing House and that's really what's guaranteeing performance from The Firm that's clearing the trade the cftc also maintains disciplinary jurisdiction notice they have disciplinary jurisdiction over floor Brokers Traders and exchanges so even though a Floor Trader might not technically be registered with the NFA notice that they still can be subject to disciplinary jurisdiction by the cftc and the cftc notice is empowered to go directly to courts to seek a restraining order to prevent somebody from doing something now the penalties and actions they can suspend or revoke your cftc registration the maximum civil penalty is the greater of a $194,700 per violation or three times the damages this is for non felonies now notice that number is a strange number because it's index to inflation so it does change periodically it was originally 140,000 but it is indexed to inflation they can suspend or revoke your trading Privileges and notice that settlements may be achieved without admitting or denying charges even though there's penalties that were applied and this is a common way you'll see cases settled with Regulators that someone agrees to maybe pay a fine or even be suspended but without ADM or denying the charges felony convictions for violations of the commodity exchange act subject you to suspension or expulsion and fines of up to $1 million and or 10 years imprisonment it's $500,000 for individuals now there are reporting levels and position limits these may be established by the cftc and enforce by the exchanges now for some Commodities the cftc might not have a position limit where the exchange might have a position limit the important thing is not really knowing who's establishing the levels and limits but a little bit about who they apply to so the reporting levels are levels when you reach the the level you have to report so the cftc requires daily reports of grows long or short positions in each commodity once it reaches a certain threshold level which depends on the commodity so you don't have to know the level what you do is when you hit that level you report that day you report each day where you're at that level and then you report one last time when you drop below below the level the important thing to know for the series 3 is this applies to both hedgers and speculators so hedgers also report when they hit a reporting level so this applies to everybody note the position limits these are limits that you can't go above so they don't want someone controlling too much of an interest in a commod it okay through Futures so what they do is they set position and trading limits and again it's not memorization of the numbers because that could vary by commodity what we want you to know is that Bonafide hedgers can get exemptions from the position limits so this applies to speculators but bonified hedgers can be exempt from the position limit so if they have an actual need to hedge they can go above the limits now a Bonafide hedger is generally a producer or a user and we'll look at hedging in a tremendous amount of detail later on but what you're doing when you're hedging is you're reducing risk and you're generally either a producer of that commodity or a user of that commodity and by bonafied hedger we mean they're a true hedger know that they generally present what's called a Heder letter a hedger letter that shows they're a Bonafide hedger but they don't have to submit particular financial statements so if they ask if they say they need they need specific financial statement requirements that would be really false what they do is they present a Heder letter that they're a Bonafide hedger so the 5-second recap reporting levels apply to who everybody body both hedgers and speculators Report when they hit the level they report each day they're at the level okay then one last report when they drop below the level now there's higher limits that you can't go above so the position limits by the way are higher numbers than the reporting levels so everybody reports when they hit the level but then there's a higher limit that you can't go above but that applies to speculators Bonafide hedgers can get an exemption now the market participants the fcms that is a Futures commission Merchant we're going to see that the fcms are generally the larger firms and we'll see that they could actually accept customer funds hold those customer funds they handle the customer accounts where the introducing Brokers will solicit customers and solicit orders but we're going to see they introduce the account generally to an fcm to a Futures commission Merchant and the introducing broker the IB does not accept funds in their name okay instead they're introducing the business to the fcm and certainly we're going to look at all of these in tremendous detail as we go along in this chapter commodity pool operators will pull investors monies together to trade Futures so the commodity pool operator operates and solicits funds for commodity pool now some people like to think of a commodity pool sort of like an investment company or a mutual fund you're pooling the money together which is a good way to think about it although I would probably equate a lot of them more to like a hedge fund again the money is being pulled together so we will look at commodity pool operators who pull investors monies together to trade Futures then we have commodity trading advisors who advise others on trading futures for a fee they advise others on trading futures for a fee now the CTA might be an independent CTA or sometimes they work for an IB or an fcm or a CPO now we'll see the CT can advise individual accounts or they may be advising pools but what a CTA is doing is advise advising others on trading futures for a fee if you're from the Securities World similar to an investment adviser on the security side now what are you becoming the natural person who's working for one of those firms is an Associated person so you might be becoming an AP of an fcm AP of a CPO this includes officers Partners employees solicitors supervisors generally anybody unless you're sort of purely clerical is quite often required to become an Associated person of one of these firms and you are becoming a member of the NFA well to get the registration you have to pass an exam that is why you are all listening to this on demand okay so the series three will allow you to solicit for all types of Commodities whether you're soliciting for an fcm an IB a CPO the money might be pulled together into a pool the series 3 is sort of the general commodity license there is a limited license called the series 30 1 Series 31 but it's a limited license this is only for Series 7 General Security registered reps where the only business they will do in Futures is for commodity pools solicit money for commodity pools so there is a limited Futures license called The Series 31 for series 7even reps who will only be working on behalf of a Comm pool if you get the series 3 there would be no reason for a Series 31 because the series 3 is the full Futures license okay it's the full Futures license where you can do everything now the series 30 is the branch manager is the manager's exam that's a series 30 and this is from managers of Futures and if it you ever need your Series 30 STC certainly also trains for the series 30 now some people see an interesting question can you an AP have multiple registrations and the right answer is yes with the approval of all firms involved with the approval of all firms involved now if I came to your firm as a customer I would be dealing with an AP with an Associated person of let's say the fcm or IB that I'm interested in opening up a Futures account with we'll see that you'll explain the risk involved in trading Futures you'll send me the proper documents that I'll have to sign to open up an account so the AP is the one who's actually working with the client that natural person who's working for the firm and again they might be called an RCR now let's break for quick activity here it's a matching game take a minute to complete this activity where you match up the particular type of firm or person with the best definition feel free to pause the video while you attempt okay let's take a look at how you did an fcm that is a Futures commission Merchant they can solicit customers but they can also accept funds in their name we'll see and we'll see all the rules about fcms in one minute where IBS are introducing Brokers they can solicit and accept orders but cannot accept customer funds they're going to introduce the account to an fcm who's actually going to hold the customers funds and Futures positions the ctas advise others on the purchase of sale of commodity futures or options for a fee where the CPO manages a pool of Investments with their pooling investors monies together to trade Futures and the associated person is the natural person that conducts the business of one of these four types of NFA member firms a little bit more detail on the NFA the NFA is the National Futures Association most of the questions that you will see on the regulatory section of this exam are actually NFA rule questions rather than commodity exchange act questions the NFA is the agency that puts together this exam and most of the regulatory rules that they're getting into are their own rules okay so most of the rules will be NFA rules they're responsible for enforcing ethical standards providing arbitration of disputes which we'll look at in more detail in a second ensuring minimum Financial standards which we'll talk more about in a second they screen regist ations they establish the training standards and proficiency testing again they're the ones who put together this series 3 exam okay now the next bullet might be a couple of questions on your test so this might be two or three questions in your bank on your exam the NFA will do audits of firms how often do do they do a full scope audit they generally attempt to do a full scope audit every 24 months so every 2 years but know that they could also do unannounced spot audits so they may come in unannounced and audit some partic we want to see your customer complaints because maybe they've been hearing some things and they're going to do this unannounced spot audits notice that they can do that now when they come to do the audit and they say we want to see your customer complaints does the firm have to show them those complaints or can they tell the NFA well if you want to see any of our documents you have to go and get a court subpoena for us to show you our documents notice this line here there's no need for court approval to subpoena documents so know that when you become an NFA member you're agreeing that they can audit you and know a lot of people see this true or false the NFA does not need Court approval to subpoena documents that is true they do not need Court approval to subpoena documents now the other couple of questions are around these audits okay but you have to be real careful here because NFA members are also required to audit their branches so this is your firm auditing its own branches how often do they have to do that at least annually so be careful right so the NFA does a full scope audit of the firm every two years The Firm audits its own branches how often every year now there's another question that's on the test with audits that I want to point out which we'll see coming up in a minute but it's nice to hear them all together firms must also fcms must also audit the IBS that they guarantee they're guaranteed IBS and we'll talk more about that in one second but the fcms must audit their guaranteed IBS the IBS they're guaranteeing know that that's also annually that's also annually so fcms audit their Gibs their Gibs they guaranteed IBS annually the firms audit their branches annually and the NFA does a full scope audit of the firms every two years but be careful what if we asked you a question that went like this fcms must audit their branches annually but their Gibs every two years true or false fcm must audit their branches annually but their Gibs every two years that would be false why because they have to audit both their branches and their guaranteed IBS every year the NFA also has an ethics training requirement firms must have a written policy where they can demonstrate compliance upon audit that they have trained their people on ethics that you have gone through some ethics training and by the way if you work in compliance and you want to know how you can maybe satisfy your ethics requirement STC does have a module for ethics training in the Futures industry so you could always give STC a call and ask us if we can help you abide by your ethics train now NFA registration generally all the market participants are required to register with the NFA are there any exemptions of course there are one thing we learn in the finance world is with every rule there's several exemptions generally and one thing about all the licensing exams that you may ever have to take is do they test exemptions you bet they they do okay they test exemptions so as we go along we'll look at several exemptions so we're not going to discuss them all here we'll see they come up in the proper places but you generally have to register unless you qualify for some exemption Floor Traders and Brokers generally don't register with the NFA but they are subject to The Exchange regulations so quite often the Floor Traders are not NFA members but they are members of The Exchange and subject to exchange rules and then again cftc oversight some ctas and cpos qualify for exemptions we will look very carefully at them when we get into ctas and cpos they love to test the CTA and CPO exemptions especially the CPO exemptions now exchange members who are registered with the cftc and not with the NFA are subject to fines by the cftc right so even though you might not be subject to NFA fines you're still under the exchange oversight and the cftc's oversight now one of the things that the NFA tells their members if for some reason you're going through something with the cftc the government agency you're required to notify the cftc we want to know about it so it must be reported to the NFA so if you have to notify the cftc on a matter then know that you also must tell your self-regulatory agency that you're you're going through this with the cftc now the way they force you to join the NFA is generally you can only conduct business on a sort of preferential basis with other NFA members non members are treated as a member of the public so you can't be splitting commissions and and things of that nature with a non-member it has to be another member so NFA members cannot conduct business on sort of a businesso business relationship with a non-member non-members are treated like members of the public now we're going to start looking at the different types of firms in a lot more detail starting with the fcm the Futures commission Merchant again an fcm is generally a larger firm I don't want to just start naming firms and name some peoples and not others but you can imagine well I will I'll throw out names right so if you are with Goldman Sachs or Morgan Stanley or JP Morgan or Bank of America right okay you are working for a Futures commission Merchant an fcm so these are the larger firms they can certainly solicit customers solicit orders but they could also accept customer funds in their name hold the customer funds now because they can do all this they have a minimum net capital requirement of at least a million dollar and certainly for the types of firms that I just mentioned it's much higher than that but this is a minimum net capital of $1 million now the fcm might be a clearing or a non-clearing firm some fcms might be clearing firms on some exchanges and non-clearing firms on others well every trade has to be cleared through the Clearing House and what happens is the firm collects margin from the customer and the clearing firm puts up Margin with the clearing house to sort of guarantee performance then the Clearing House becomes that ultimate guarantor so if the contract moves against you the Clearing House will call the firm for more margin and the firm will call the customer for more margin and collect the firm collects the margin from the customer the clearing firm puts up Margin with the clearing house and then the Clearing House becomes the ultimate guarantor well every trade has to be cleared so if you're a non-clearing firm what do you have to do you have to clear your trades through a clearing firm so clearing firms are members of the Clearing Corporation that process and clear their own trades which are executed on the exchange and they'll trade process and clear trades for non-clearing firms who are clearing through that clearing firm so here notice the non-clearing firm will process trades through a clearing firm now this relationship can either be on a fully disclosed basis or through an Omnibus account a fully disclosed basis or through an omnius account what is the difference let me start with the bottom one here fully disclosed if it's fully disclosed then the clearing firm knows who the individual clients are the individual customers are so fully disclosed means you're disclosing the client's information to the clearing firm this may allow the clearing firm to do more services for you for example the clearing firm might be sending the clients the confirmations and statements and things of that nature so if it's a fully disclosed basis what it means is that the client information is being disclosed to the clearing firm make sure you know the other type of account is what's called an omnius account make sure you know what this means it means that all the clearing firm knows is that all these trades belong to this non-clearing firm but the clearing firm does not know who the individual clients are the non-clearing firm is keeping that client information to themselves they are not disclosing that to the clearing firm so the clearing firm knows all these trades and positions belong to this non-clearing firm The noncing Firm knows exactly who the individual customers are who did these trades and have these positions so the relationship between the non-clearing fcm the relationship between the non-clearing fcm and the clearing fcm can be through either a fully disclosed basis or through an Omnibus account now an introducing broker always is disclosing to their fcm they introduce the business to who the customers are remember the introducing broker we're going to see in a second doesn't even accept the client funds in their own name okay the funds is dep are deposited with the fcm and we'll see that more in a second now let's look at introducing Brokers or IBS IBS can solicit customers they can solicit orders but they may not accept funds in the name of the IB instead what they're doing is they are introducing the business to an fcm so notice they are affiliated with an fcm it's actually the fcm who carries the customer account holds the customer's assets not the IB this introduction is always on a fully disclosed basis so the fcm knows the clients the fcm is actually carrying the client's account and holding the client's assets so on the left we could see essentially an IB is a firm that solicits or accepts orders to buy or sell Futures but doesn't accept funds doesn't hold those funds instead they're introducing the account to an fcm now the fcm sends the clients the statements the fcm must keep copies of those statements and we'll look at record retention rules later on but here we can see the IB is not required to keep those customer statements now it's also important to note the statements will show the name of the fcm and the IB the statements will show the name of the fcm and the IB now we could see there's two types of IBS there's independent IBS and guaranteed IBS an independent IB an independent IB has its own minimum net capital requirement why because they're not being guaranteed by any fcm so The Regulators require the independent IB to have a minimum net capital make sure you remember this number of $455,000 so minimum net capital for the fcm a million minimum net capital for an independent IB 45,000 those numbers are tested on the exam make sure you memorize them and which goes with which now the advantage of being an independent IB is that you can introduce business to more than one fcm we'll see that quite often when you're guaranteed the guarantee agreement might demand an exclusive relationship but the IB is technically allowed to introduce business to more than one fcm we'll see however guarantee agreements might demand exclusive relationship but the rules really do not so IBS can either be independent or guaranteed if you're independent you have your own minimum net capital requirement of 45,000 now guaranteed most IBS are guaranteed most are guaranteed what is that word guarantee mean it means that you have an fcm that's guaranteeing your performance this is a very important Slide by the way lot of questions in the bank make sure you know that that fcm becomes fully liable for the activities of their guaranteed IBS that fcm becomes fully liable for the activities of the guaranteed IBS know that this guarantee agreement must be in writing and it's terminated in writing so it's created in writing and it's terminated in writing this is a big deal that you're guaranteeing the IV because that fcm is becoming liable for the activities of that IB so notice here the agreement doesn't just automatically expire it's created in writing it terminates in writing the fcms as we said previously must audit we saw they had to audit their own branches at least annually well remember we also have to audit any IBS that we're guaranteeing annually and the test might abbreviate that as GI it stands for guaranteed IBS so know that fcms must audit their branches and their Gibs every year now since the IB is guaranteed by an fcm notice the guaranteed IB does not have a minimum net capital requirement so there's no minimum required net cap capital for a guaranteed IB now let me end by asking you two true and false questions two different true and false questions that you may see first one true or false an IB can only be guaranteed by one fcm an IB can only be guaranteed by one fcm answer that is true and that fcm becomes fully liable for the activities of that guaranteed IB you can only be guaranteed by 1 fcm second true or false question true or false an IB can only introduce business to one fcm an IB can only introduce business to one fcm make sure you know that statement is false you can introduce business to more than 1 fcm now a guarantee agreement might demand an exclusive relationship but that's not even a rule so know that you can introduce business to more than one fcm know you can only be guaranteed by one FCA the next of the four players was the commodity pool operator commodity pool operators pull investors monies together to trade Futures so it pulls funds of several investors to trade at sort of one account now the funds are accepted in the name of the pool that the money is being invested in here's a good thing to make sure you note for test purposes money to trade Futures can be accepted in one of two ways for test purposes one of two ways either the check is made payable to the fcm or in the name of the pool that the money is being invested in not the CPO it's really the name of the pool that the money is being invested in okay or the money is received in the name of the fcm not in the name of the IB not even in the name of the CPO and not in the name of the CTA now when you invest in this commodity pool you become a sort of part owner in this pool some people think of it like similar to you have an interest in this mutual fund if you invested in this mutual fund again some people equate it more to a hedge fund hedge funds are usually formed as limited Partnerships and you're becoming a part owner of that fund well here you're sort of a percentage owner of this pool know that the CPO must run each pool as a separate entity you're accepting the funds in the name of the pool each pool has a Disclosure document that you're using for that pool the CPO must maintain daily transaction records for the pool of all the activity of the pool all withdrawals from the commodity pool must be properly disclosed to all participants which we'll look at more in a minute now are there any exemptions from registering as a commodity pool operator well as we said yes there are and do you have to know them absolutely so a pool operator technically May solicit for one or more pools and they're generally required to register with the NFA what are a couple of exemptions to make sure you know well on the left the DI Minimus exception you could think of as for small commodity pool operators okay for small commodity pool operators you are exempt if total gross contributions to all pools that you operate is less than 400,000 and there are no more than 15 participants in any one pool and that excludes the CPO and his or her family members but interesting way The Regulators created this rule look at the first bullet the gross contributions to all pools that you operate is less than 400,000 look at the second bullet there's no more than 15 participants in any one pool so notice if we ran two pools if we ran two pools each one with $180,000 in contribution each one with 180,000 in contributions and each one with 14 participants each one with 14 participants that pool operator would be exempt why because 180,000 contributed to each pool is only a total of 360 so that's less than 400 and there's 14 participants in each pool so there's not more than 15 participants in any one pool now let me give you a second example what if we ran two pools each one with $350,000 in contributions each one with $350,000 in contributions we ran two pools each one with 350,000 in contributions we would not be exempt because the contributions is a total number to all the pools so you can't get around registering by just starting a new pool every $400,000 basically so that's total contributions the 15 participants is a per poool number now on the right hand side the exemption is more for sort of investment clubs if you will let's say that you and 20 of your friends each get together contribute $100,000 to pull together and invest in commodities and one of your friends is going to run with this thing right so well that person has 20 participants and you know 20 times 100,000 way more than $400,000 in contributions do they have to register as a CPO well maybe they qualify for an exemption under this second exemption if they operate only one pool at a time they receive no fee for running the pool and they don't hold themselves out advertise and hold themselves out as a commodity pool operator if you qualify under these three bullets you can get an exemption so your friend might qualify for an exemption because they run one pool they're not receiving a fee for running this pool and they're not advertising or holding themselves out as a commodity pool operator 20 of their friends just pull their money together each threw in a 100 Grand and they're running with this thing they'll maybe claim an ex extion under this second rule so notice on the right hand side you could have more than 15 participants you could have more than $400,000 in contributions and still be exempt if you meet those three bullets but notice on the left hand side the DI Minimus exception you can receive a fee for running the pool you could operate more than one pool and you could still get an exemption be just because you're a small pool operator with total contributions of less than 4 400,000 and no more than 15 participants in any one pool so you have to think of them as two totally separate exemptions the test will see if they can get you to mix up these two exemptions right so the left is totally a separate exemption from the right okay notice on the bottom an exempt commodity pool operator must file a statement with the NFA to indicate the reason for its exemption and a copy must be sent to All participants so if you're qualifying under one of these exemptions you still notify the NFA hey we are an exempt commodity pool operator even though we are pooling investors money together to trade Futures we're exempt under and you name the rule you're exempt under then you send a copy of that to your pool participants now the CPO must send account statements to their participants these statements show the income or loss for the period of time that the statement is required to cover how often do you have to send these statements is the question on the test well notice it depends on the size of the pool for small pools it's quarterly for larger pools it's monthly you have to remember the dollar amount that breaks them apart so if the pool has more than $500,000 of net assets at the beginning of it fiscal year then that year it will send monthly statements and the way this rule works is they go by the net assets you have in the pool at the beginning of your fiscal year if it's more than 500,000 it's a monthly statement of income or loss you're sending to the participants for small pools that are up to 500,000 then know that it's quarterly so notice this is another dollar amount so now we had the $400,000 exemption for C OS that we had to know and now we have this $500,000 break point between sending monthly and quarterly statements of income and loss make sure you don't mess up the dollar amounts they test these dollar amounts now know that the pool in doing the calculations must use generally accepted accounting principles which is quite often abbreviated as Gap gaap must be used in doing the calculations and it must show changes of the net asset value that reflect all fees so what we sometimes refer to as net of fees so they're sending either monthly or quarterly statements of income or loss now the commodity trading advisors advise others on trading commodities for a fee so a CTA engages in the business of advising others as to buying and selling commodity futures or options on Futures and they're providing this service for compensation or profit so some people when they think of advisors think of an eight what we used to what we sometimes call an ABC test they're giving advice as a business for compensation advice as a business for compensation see a normal registered rep isn't necessarily an advisor if my Reg rep advises me but only charges me a transaction fee if I do a trade then quite often they're not advisers they're just registered reps because the fee is for the transaction not the advice but whenever you get into like managed money where the client is being charged a fee maybe based on percentage of assets under management which is very common way for advisers to charge fees then they become advisers that have to register as advisers ctas cannot accept customer funds to trade Futures okay either the CTA is perhaps advising a pool and the funds are accepted in the name of the pool or if it's going to be an account the fcm accepts the funds the fcm is carrying the account so your the client's account to trade Futures is at the fcm the CTA might be advising and managing that account but the account is carried by the fcm the fcm is sending the client statements if a CTA handles managed accounts again that account is on a fully disclosed basis by the fcm that is being carried at the CTA isn't the fcm it's the fcm not the CTA who's sending the customers their account account statements well any exemptions from registering is a CTA yes there are okay probably not as heavily tested as the CPO exemptions but I would try to remember them you are required to register as a CTA with the NFA unless okay so first bullet it's a registered CPO and only advises its own pools hm so what are we saying there you are registered as a commodity pool operator you're registered as a commodity pool operator the only commodity trading advice work you're doing is advising your own pools you do not need to also register as a CTA you do not need to also register as a CTA so you're exempt from registering as a CTA but you are registered as a CPO now if you took on any other outside CTA business other than advising your own pools you would not qualify for this exemption so if it provides advice to other pools then it would also have to register as a CTA the second exemption you advise no more than 15 persons within a 12month period and you're not holding yourself out to the public as a CTA you qualify for this exemption so you're advising no more than 15 persons in a 12-month period and not publicly holding yourself out as a CTA if you publish a Bonafide magazine or newspaper the publisher of the Wall Street Journal you could theoretically say there's commodity advice in there and they're receiving a fee for the newspaper are they registered as a CTA and the answer would be no Publishers of magazines and news papers get what sometimes referred to as sort of a Publishers exemption I would know that this doesn't necessarily apply to like a newsletter writer a newsletter writer would not technically be exempt under sort of this Publishers exemption but a newspaper or magazine I would go with for test purposes is exempt na nonprofit voluntary membership organization sort of like an investment club or trade associ iation now let's take a look at the CTA CPO Disclosure document and you'll see this covers multiple slides and the disclosure document is very important that you know what's in it what type of performance they're disclosing and business background and things of that nature so the first thing I would no is star this information on the Disclosure document it's heavily tested on the exam so you could think of this if you're in the Securities world as similar to like the mutual fund perspectus if you will first thing is that they must file a copy with the NFA at least 21 days prior to its first use now they usually don't get into where things are in the Disclosure document because this can be a very lengthy document but they do want you to know they do want you to know a few things that are on the front cover of the document so when I pick up the document and look at the front cover I see what do I want to know is there one the effective date well notice the way we word the effective date here it cannot be earlier than 21 days after filing why because let's go back up to that line before a copy must be filed with the NFA at least 21 days prior to first use so the effective date cannot be earlier than 21 days after you filed it now the information within the document must be current so when we're talking about things like performance information the performance has to come up to well current what is current not more than 3 months old not more than 3 months old but that's from the date on the front cover that effective date okay that's from the effective date so the information within the document must be current and what that means is not more than 3 months old from that effective date but then how long can we use that Disclosure document we can use it for the next 12 months from that effective date so it has an effective date on the front it had to have been filed with the NFA at least three months before that effective date it has an effective date on the front the information must be current what does that mean not more than 3 months old then how long can we use that document we can use it for 12 months from that effective date so if you think about it by the time you're done using that document the information in it may be actually 15 months old because it could have been 3 months old when you started using it and then you can use it for 12 months so one thing that's on the front cover is the effective date second thing any upfront fees now upfront fees mean these are fees that you're paying when you invest into the pool we're going to see there's other fees that are charged that are disclosed within the document itself but on the front cover you need to know there needs to be The Upfront fees and the way they show this is they show a standardized investment amount let's say if you were to invest $1,000 and the fund had a 5% upfront fee then $50 goes to upfront fees and $950 actually is the net amount that goes into the pool for you because these upfront fees don't even go into the pool they are taken right out of the upfront amount so you invest a th000 5% upfront fee $50 goes to upfront fees 950 goes into the pool also on the front cover is the no approval Clause this is the statement from The Regulators that they don't pass a on the investment merits they're not approving of this investment so it's sometimes referred to as the cautionary statement that the cftc has neither passed on the merits of this investment nor has it passed upon the adequacy or accuracy of this Disclosure document make sure you know no fund no fcm no IB no pool operator no CTA could ever state that they've been approved by a regulator Regulators don't approve of you about the most you could ever say is you're registered okay so here we could see the no approval Clause that the cftc isn't passing upon the investment merits of this pool continuing with the risk Disclosure document there's a lot of other information in the document itself probably not that important to know where in the document it is as compared to knowing what's on the front cover but other things in the document some of these contained on the first page of the document would be the high use of Leverage that risk may be magnified okay things like volatility liquidity risk that they may be trading illiquid Futures that they may be taking positions that have counterparty credit risk also that it may be subject to substantial charges with details of these charges things like management fees broker fees which we'll talk about some of them in a second now other information within the document itself the types of Futures and options that can be traded this has to be disclosed so if you see a question that goes something like this let's say true or false the types of Futures and options that can be traded doesn't have to be disclosed in the Disclosure document because that decision may be made by the CTA rather than the CPO that would be false they must disclose what types of Futures and options they can trade they have to disclose the minimum size of the pool before they start trading if there is one and the maximum size where they'll close out the pool so for example some pools don't start trading until they've raised a certain amount of money if that is the case they have to disclose that if there's no minimum they must disclose that there's no minimum that they'll start trading as soon as they start raising money they also have to disclose if they're going to close out the pool to new money when it hits some particular size if there is no maximum size then that's what they disclose they must disclose all applicable fees we already looked at The Upfront fees they have to be disclosed on the cover page but all other fees fees must be disclosed within the document and by the way the way a lot of pools charge fees is they charge you a percentage of the assets under management and a percentage of the profits so if you're more familiar with hedge funds you might have heard things like two and 20 they charge you a 2% management fee 2% of the assets and 20% of the gains a lot of pools take fees similar to that fashion they must disclose how the fund will meet their margin calls now what some funds do is they might take the money use it to buy treasuries and deposit treasuries with the fcm to satisfy the margin requirements make sure you know if they do meet their margin requirements that way which quite quite a few pools do they must disclose that in the Disclosure document so they're disclosing how they'll meet their margin requirements perhaps by buying treasuries and depositing those treasuries they'll disclose a break even analysis which shows the return that would be required for the investor to break even net of all fees very important they will disclose the fiveyear business background of the commodity pool operator the commodity trading advisor and those are actually the firms and the trading principles who are involved with this particular pool so five years business background know that it's five years know that number they also disclose any civil and criminal actions in the past five years continuing with the risk Disclosure document they will disclose any actual or potential conflicts of interest for example is the CPO also Act is the CTA and then they're being compensated for being the CTA perfectly acceptable it's just a disclosure item whether the CPO or an affiliate receives a portion of the commissions that's generated by the pool for trading through a particular fcm that's quite common so this they're directing trading through a particular fcm the fcm is charging the pool commissions for that trading sometimes they get sort of a Reb on some of the commissions that they can then use to purchase things that help them manage money but if you think about it it's really the client's money paying these commissions that's being rebated back to the CPO or CTA that they're using to maybe buy analytical software to help them manage the money this is an acceptable practice but it know that it must be disclosed that is a potential conflict of interest they would have to disclose the name of the IB or fcm if the customer is required to open up an account at a particular IB or fcm for let's say the CTA to manage the money through so the CTA will manage the Investor's money but they may require you to have the account at XYZ fcm that's where you open up the account they'll manage your money at that fcm if they have a particular IB or fcm where you need to open up the account to trade through then that must be disclosed and know that whether the pool invest in foreign Futures only or not they still need to be registered here in the US okay if they're raising money and selling in the US then they need to be registered in the US the fact that they may only trade Futures in London or Australia okay is not meaningful when looking at whether they have to register here in the US continuing with the risk disclosure document the performance history very important that you know what they have to disclose as far as past performance goes so the performance history must be disclosed its monthly rates of return must be displayed in either tabular form or in bar graph the number of outstanding units must be incl included at the beginning and the end of the period for which the performance is included now how many years of performance are they disclosing in the disclosure document it depends on how long the pool has been in existence if the pool has a history of more than 5 years then they're disclosing the most recent five years so the last five years history must be shown in the Disclosure document if it has less than 5 years history then you disclose the history of the pool you're disclosing the performance for the entire history of the pool if less than 5 years so if it's four years the pool has been in operation disclose four years if it's two years disclose the two years so it's the last five years or the history if less than 5 years so notice if the history between 3 and 5 years you're disclosing the history of the pool but then there's a special rule if the history is less than 3 years then The Regulators say well the history of this pool maybe isn't enough to make an informed decision so what else can you be disclosing that would be helpful to potential investors well disclose the performance history of the other pools that you operate how many years for those other po pools whatever you would have disclosed and there disclose your document so if Less Than 3 years disclose the entire history of the pool and the lesser of the five years or the entire history of any other pools that are operated by the CPO or CTA now let's take a look at an activity determine the performance history disclosure requirement for each of the following pools Disclosure document so take a minute to complete this activity feel free to pause the video and then resume when you're finished okay let's take a look at how you did CPO managed one pool for the last six years so what are they disclosing they are disclosing the performance history for the last 5 years so we don't have to disclose more than that 5 years and it's the last 5 years what if number two the CPO manage one pool and it has four years history then what are we disclosing we're disclosing the history of the pool for the four years and what if they manage one pool and it's had a history of 2 years then you disclose the history for the life of the pool 2 years and you don't have any other pools to worry about but notice the bottom one we managed two pools one for the last year that's the new pool and the older pool we've been doing for 10 years so what are we disclosing in each of the disclosure documents well for the new pool we're disclosing the history of the pool for its life of the new pool and we're bringing over the old pool's performance well what performance the past 5 years in the Disclosure document for the old pool all we need to disclose is the last fiveyear history performance history of that old pool we don't have to include any other pools because it has more than three years of History remember the break point that determines whether you have to disclose the performance of the other pools that you operate remember is 3 years not 5 years years so if a pool has four years worth of History let's go back up to that second question if that CPO managed two pools and one had 10 years of history and one had four years of history for the one that had 10 years history you disclose the last five years for the one that has four years history you disclose just the history of that pool the last four years you don't have to disclose the 10year pool in the four 4 year Disclosure document why because it has more than 3 years if it has less than 3 years that's when you have to disclose the performance of the other pools that you also Operate Now some prominent rules of the NFA and here we're giving you a couple of rule numbers I don't think the point of the question on the test is to see if you memorize the rule number but I do hear that sometimes the rule number are thrown in the stem of the question so for example they say according to NFA rule 24 and then they say something I would not answer false just because I thought they had the wrong rule number unless I was very sure I don't think that it's a false statement because they give you the wrong rule number they're just throwing the rule number in the stem of the question for two reasons it makes the question more intimidating and two so you really can't argue the question that your firm is more strict than the rule is and therefore your answer was corrected your firm so they say hey according to the rule whatever NFA rule whatever which of the following is true or is this true or not they want you to know all they want you to do is answer based on the rule not maybe based on what your firm's policies and procedures are so again I don't think the point of the question is just to memorize the r rule number I think you just have to know these things are rules rule 24 members and Associates must observe high standards of commercial honor and just in Equitable principles of trade in the conduct of their Futures business just know that yes you must observe standards of commercial honor and just and Equitable principles of trade so if you saw that question members must observe just inequitable principles of trade that is a true statement okay that's all your really have to know that that is a true statement by the way some people call this like the nfa's catchall rule right that let's say that you're doing something that the NFA does not think is just inequitable but they can't put their finger on the exact other rule that you're violating they will say you're violating this rule so it's some people look at it as like a catchall rule for things that they do not consider just ande Equitable rule 238 of the NFA all members must establish and maintain a written business continuity and Disaster Recovery plan right and uh this was uh put in place um years ago when we did have you know uh disasters that sort of forced some firms to lose their building and what have you and what they said is we need a bit firms need a business continuity and Disaster Recovery plan which indicates the name and contact information for one or two depending on the size of the firm individuals who would it be reached by the NFA in case of an emergency it also stipulates things like how will you continue to do business and how will you continue to clear trades how will you continue to communicate with regulators and customers so you need a written business cont continuity and Disaster Recovery plan know that the NFA no approval clause and the cfdc no approval Clause exist the cftc and the NFA don't sponsor approve or recommend any AP or any firm or any investment for that matter right so know that they you can never use the word really that The Regulators have approved of anything now foreign brokers who work in the US branch office overseas still must be properly registered with the NFA the the point of this that we're trying to make here is it really you're not exempt just because of where you're sitting okay an AP is not exempt just because of where they are sitting if you're doing something that requires registration such as you are soliciting us investors right to buy and sell Futures then sitting outside the US doesn't necessarily exempt you okay sitting outside the US does not necessarily exempt you and that's the point they might make with this question now the NFA compliance and disciplinary actions so let's say say that you violate NFA rules what will happen to you and they love to test these things this is a very important slide this slide will probably be about four questions on your test infractions are reported to the regional NFA business conduct committee now know that the NFA compliance director can require statements under oath from members and again they can sort of subpoena documents without Court approval so when they come in and they say let we want to see your complaint file or we want to see your trading records for between these two dates we want to see all the trades you did for this account or that account you can't say well we're not going to let you see those records go out and get a subpoena okay um when you become a member you are agreeing to this now you will so if you see a question you know sort of they can subpoena documents without Court approval go with that as true they can subpoena documents without Court approval now while under investigation you they might ask you can you just resign and get out of the investigation so I am no longer a member of the NFA I resign and I'm out of the investigation the answer is no so say that you may not resign to escape an investigation now separate question they might ask while you're under investigation can you continue to do business can you continue to do business while you're under investigation the answer is absolutely yes people are under investigation all the time it doesn't mean you have to immediately cease doing business so if you see a question true or false uh you must immediately cease doing business when under investigation that would be false true or false while under investigation you may continue to do business that would be true now what if the NFA thought what you were doing was so dangerous to the markets that they wanted to force you to immediately cease doing business could they they might ask notice on the bottom of this Slide the answer is yes with the agreement of the NFA board the president of the NFA can initiate what's called a member responsibility action against someone okay now they call this a member responsibility action and that alerts you to this is the rule they're testing here the firm may be required to immediately cease doing business even before they've had the opportunity for a hearing so if you see a question true or false okay that the NFA could take a member responsibility action against you forcing you to immediately cease doing business even before you've had had the opportunity for a hearing that would be true they can do that through a member responsibility action but if you just see a question while under investigation you must immediately cease doing business that would be false while under investigation you do not have to immediately cease do business not unless they're taking this special action against you called a member responsibility action if the NFA is bringing you up on charges notice that original jurisdic to the disciplinary procedures is giving to the hearing panel now what can they do to you they can suspend or revoke your NFA membership they can bar you from association with an NFA member firm they can censor you or reprimand you it becomes public that you were charged with charging excessive fees or whatever the disciplinary action was they canine you up to 500,000 per violation they could issue a cease and desist order but notice what they may not do they cannot sentence you to prison for that it has to go through the court system now formal Rules of Evidence need not apply so what is admissible in a court of law is not necessarily the same exact thing as what's admissible at these hearings and can you appeal the decision of the hearing panel make sure you know the answer is yes it would get appealed first to an appeals Committee of the NFA then from there it might get appealed to the cftc which is the government agency and from there you could try to appeal it into the federal court system so here we see arbitration this is a means for settling disputes this can be disputes between member firms it might be between member firms and their employees or it might be between the firms and the customers but generally customers cannot be forced to go to arbitration generally customers cannot be forced to go to arbitration the way a lot of firms sort of get around that is in the new account form there might be an arbitration agreement that says I agree to submit any dispute that arises to arbitration and if they sign that arbitration agreement then they are agreeing to go to arbitration so many many customers do go to arbitration with their firms to handle disputes but technically you can't force a customer to go to arbitration however the new account form actually can have an arbitration agreement that becomes a sort of enforceable agreement if that's what they sign now you generally have a statute of limitations of 2 years from discovery of the action where you're taking someone to arbitration now the reason the industry uses arbitration if they ask is because it's a less expensive quicker way to resolve disputes than bringing every dispute into the court system arbitration should be a less expens ensive quicker way to resolve disputes than taking everything into the court system know that the ruling of the arbitration panel is binding the ruling of the arbitration panel is binding so there's no appeal process in arbitration there's no appeal process now how many arbitrators will there be it depends on the size of the dispute for disputes of up to $50,000 generally they assign one arbitrator now there is a rule that the defendant must respond within 20 days of the complaint okay but the biggest thing I think to know is it will be handled by one arbitrator if it's up to 50,000 if it's over 50,000 then they generally assign three arbitrators then they generally assign three arbitrators and they give the defendant 45 days to respond now know a couple of things about the judgments and awards the judgments must be rendered within 30 days of the closing of the records and the one we that quite often I would suspect that people get is the second bullet the award must be paid within 30 days of judgment or the respondent will be subject to suspension by the NFA so if you see a question that says true or false if a respondent does not pay an arbitration award within 30 days of judgment they're subject to suspension that is true that's the way they force you to pay the arbitration Awards Communications with the public the NFA has quite a few rules on Communications with the public this is written Communications with the public and all promotional material including the text of a standardized oral presentation so it might be a radio commercial for example now they require prior approval from a partner or officer of your friend firm they require prior approval copies of all promotional material along with their approvals must be maintained by The Firm for five years which is a general record with a general rule with records in the Futures industry maintained for five years the NFA prohibits false or misleading statements or omissions of material facts so false or mis leading statement is obvious to people you can't say things that are untrue but know that another way of being fraudulent is omitting material facts so know that that is also prohib prohibited you cannot emphasize profits without giving equal weight to the risk of loss so know that you can't mention profits without also mentioning risk giving equal weight to the risk okay make sure you know this next one if you site past profits or performance you must caution that they do not represent future results so past performance doesn't represent future results you see that all the time in promotional material when you're citing past performance you must indicate it does not indicate future results you may not use statistics which you cannot substantiate and you can't use hypothetical trading performance without providing a special disclosure statement of the inherent flaws in hypothetical performance so using hypothetical performance without these proper disclosures would be prohibited now another activity read each statement and fill in the blanks now for a couple of them there might be a couple of right answers okay or you could have thought of it a different way but this one might take you a couple of minutes to think through again feel free to pause the video think through these statements and then unpause the video and see how you did okay let's take a look at it blank is the maximum fine for violations of the commodity exchange act so this is for the commodity exchange act it would be a million fine the cftc can assess a civil penalty of blank per violation or blank times the damages so the cftc can assess a civil penalty of well right now it's 168,169 sometimes called treble damages three times or treble damages the NFA will provide blank arbitrators for disputes exceeding blank so what was that break point where they went to what number of arbitrators they will provide three arbitrators for disputes exceeding $50,000 what was the maximum fine that the NFA could Levy that was $500,000 violations of blank cannot be punished with a prison sentence well there could be right lots of right answers to that but we're talking about based on what we just learned violations of NFA rules cannot be punished with a prison sentence but notice the next question a criminal violation of the blank can result in a blank year prison sentence a criminal violation of the commodity exchange act that's the law can result in a 10-year prison sentence disputes of up to blank will be handled by blank arbitrators disputes of up to 50,000 will be handled by one arbitrator now let's look at opening customer accounts now in this area here a couple or few of these questions could actually fall into the General market knowledge section much of it is within the regulations Section it's safe to just think of it all within the regulation section because you do have to pass that 35 question regulation section by itself right so it's safe to think that any of these could fall in regulations but honestly a few of these question questions could also fall in the General market knowledge section where they talk a little bit about opening of accounts okay you fill out the commodity account agreement that must be signed by all parties before trading so in the Futures world you need that client's signature before trading commences they must read and sign the risk Disclosure document now who is responsible for getting this document signed and dated the associated person the AP who's handling the account would make sure that the customer has read and understands the risk disclosure and it states things like the risk of trading Futures could be substantial you should carefully consider whether it's suitable for you that you're not limited to losing just what you the margin money you initially put up you're responsible for for anything that happens to that position we'll see that placing stop orders when we do stop orders doesn't necessarily limit your loss to that intended amount so there's a lot of risk disclosures in this statement that are valuable for clients to understand know that a copy must be retained by the fcm and the IB if there's an IB involved so this risk Disclosure document that the customer signs must be kept by the fcm and the IB when we look at the customer statements later on when we look at the customer statements we'll see that just has to be retained by the fcm but this risk Disclosure document must be maintained by both the fcm and the IB what information is required under NFA rule 230 which is the know your customer rule well you should find out the client's name and address that they are of legal age the age of majority which is actually a state law not a federal law their principal occupation their estimated annual income and net worth their investment in Futures Trading experience let me give you something you do not have to try to find out about the client that is their educ ation level know that you do not need to find out someone's education level the account must be approved by a principal of the firm who's a manager now there's a lot of other questions they have here's the first one okay you're opening up an account for me I'm giving you this information I give you things like my income myet worth do you have to call my employer to make sure my income is roughly what I say it is do you have to call my bank to find out if my net worth is what I say it is make sure you know the answer is no you can take the customer as the sole source of the information so you can take the customer as the source of the information know that you do not need to verify with outside sources by the way NFA rules don't say you can't it just says you don't need to verify with independent sources you can take the customer as the source of that information next question what if I refuse to tell you my income and net worth I think that's more personal than you need to really know can you still open up the account we're going to see the answer is yes you can even if the customer refuses to disclose some requested information and the information they often refuse is income and net worth know that you may still open up the account we're going to see but you do need to know my actual name my actual address and that I am of legal age that you do need to know okay my income and net worth you can open even if I refuse now proper disclosure for some customers what the NFA says is you haven't made proper disclosure unless you've actually stated to them that in light of their situation trading Futures appears too risky for them okay so know that for certain clients if you see a true or false question go something like this let's say true or false for certain clients proper disclosure must include that in light of their situation trading Futures appears too risky for them that statement would be true for some clients the NFA might say you actually fell short of your requirement if you didn't disclose that to them now by the way if you disclose that to them you actually can still open up the account in the Futures world you could actually still open up the account but the proper disclosure must have included hey in light of your situation trading Futures appears too risky for you your firm may not want you to open up that account however so I'm not saying it's okay to open it your firm but according to the rule you could actually still open up the account okay but you must have made that disclosure now spread positions which we're going to look at in its own chapter we look at spreads spreads involve buying one Futures Contract and selling a different Futures Contract and here we're really talking about Futures spread not option spreads and I know for many of you if you haven't done spreads and options and this chapter comes before those so this is jumping the gun a little bit for some of you okay but you might just want to note that the spreads we're talking about are really future spreads where you're trading one future spread against another future spread know that they may not have less risk than a simple long or short position so they should not not be described as having less risk people see that know that spread positions should not be described as having less risk than a simple long or short you have spreads that can still have unlimited risk in the Futures markets okay and again a spread is where you are buying one Futures Contract and selling another Futures Contract now notice the additional risk disclosures the AP must determine whether any additional risk disclosure is warranted for example up on top again we said maybe the additional risk disclosure is something like hey in light of your situation trading Futures is too risky for you that could be an additional risk disclosure that's required there's also a separate options risk Disclosure document okay there's a separate options risk Disclosure document if the client is opening up an account that can also trade options on Futures in addition to Futures and by the way we are talking about options on Futures not options on stocks but options on Futures to have an options account you need a Futures account and we're talking options on Futures why because if the option is exercised you're either going to be buying or selling Futures that's what we'll see the option gives you the right or obligation to do it's the right or obligation to buy sell Futures so you can't have an options account without having a Futures account okay you can't have an options account without having a Futures account now one more thing with the option risk Disclosure document is it must contain a description of the elements that make up an options cost if it must contain a description of the elements that make up an options cost what we mean by that is the premium on an option might be made up of intrinsic value and time value and again I realize for some people who don't have options experience this might be jumping the gun a little bit but an option premium is made up of two types of value intrinsic value which you'll learn is the amount by which the option is in the money bu it has intrinsic value if it's in the money the premium in excess of the intrinsic value is what is sometimes referred to as time value so it's the cost of the option in excess of its intrinsic value these elements that make up an options premium are described within the options disclosure document now the customer account documentation if a customer refuses to disclose some information such as income and net worth for example the necessary steps are based on the type of customer if the customer is a US citizen you must note that the client refused to disclose the information and then you again may still open up the account if the customer is not a US citizen the Reg Regulators do not force you to record that refusal okay in the paperwork but if they're a US citizen you must make a record that the customer refused to disclose the information every account in Futures is a margin account we'll see this when we do margin as its own topic but for now everybody also must sign a margin agreement when you trade Futures you put up a small percentage of the total contract value we're going to see so you might be putting up around 5 to 10% of the total contract value so the whole contract might be worth $100,000 and the margin deposit might be $10,000 so you're controlling $100,000 worth of a commodity for a deposit of $10,000 that's that leverage I talk about okay that you're controlling a much larger contract for a much smaller deposit well all Futures accounts or margin accounts and there's a margin agreement then there might be a transfer agreement which is sometimes part of your firm's supplementary agreement that contains supplemental items such as the transfer agreement what does this allow well many clients May have a Futures account and a Securities account these are actually separate accounts the client's Futures account is separate from their Securities account well can you transfer money between the clients Securities and Futures accounts well if the client signed a transfer agreement it allows the fcm to transfer Monies to and from the client Securities account okay so between the Futures account and the Securities account for that client the question that I believe you'll see on the test is if the client did not sign the supplemental or transfer agreement then notice the second bullet on the bottom of this slide if no agreement was signed the fcm must obtain the client's specific written approval for each transfer so if no supplemental agreement was sign that includes this transfer agreement whichever they call it say that that's what it is this transfer agreement can also be called a supplementary agreement okay if they didn't sign that agreement then know that written approval is required from The Firm for each transfer between their Futures and securities accounts now there's different types of accounts an individual account is for one owner a joint account is from multiple owners first thing I would note is that you're supposed to get information on all participants in the account not just the older person or the wealthier person or what have you but all participants in the joint account then there's a difference between what happens if one dies between a joint tenants with right of survivorship and a tenant in common with right of survivorship if one person passes away their portion of the account goes to the Survivor notice it gives away in the name of it what happens the deceased portion goes to the Survivor this is very common for spouses when the first spouse goes everything just passes through to the second spouse the the surviving spouse and the advantage is it doesn't have to go through what we call Probate where it depends on the reading of the of the will and such so on and a person died without a will it depends on state law well the advantage here is by making it a right of survivorship account it avoids that probate it's going to go to the Survivor when one passes away what happens with tenants in common then the deceased portion goes to that person's estate the deceased estate so when one passes away it goes to their their estate so this might be more typical with say business partners okay if somebody passed away they don't want their share going to their business partner they want it going to their spouse and kids or whoever they're leaving their assets to so they make a tenants and common when the first one passes away their share goes to their estate for corporate accounts you need two things one you need to know that the corporation Charter permits them to trade Futures why because when you trade Futures you could lose much more than your initial margin deposit and you want to make sure that the corporate charter permits the trading of Futures so you get a copy of the corporate charter to show that their bylaws allow for future Futures Trading the second thing is you need to know who is going to call you up and enter orders right a corporation can't place an order who with the corporation can act on behalf of the corporation the best answer is who's ever authorized by the corporate resolution so the corporate resolution authorizes an individual or individuals to act on behalf of that Corporation for a partnership you need a partnership agreement which is their official document and for trust it's called a trust agreement now discretionary accounts first thing I would do is star this slide this is another slide probably multiple questions on this slide what if you are my AP and I want to give you discretion over my account know that this must be done in writing so it requires a written power of attorney now that third bullet very important for you to exercise discretion over my account you need two years continuous experience in the industry it's two years continuous experience in the industry now there is a way around that and that is by registering as a CTA then you don't technically need the twoe years but for like an AP of an IB or an AP of an fcm to exercise discretion without being a registered CTA they would need two years continuous experience all the trades must be reviewed by a principle within one business day you might want to note it does not have to be approved by a principal prior to entering the order you do not need to get every order approved by a principal prior to entering it you're really getting it approved promptly afterward which is no later than by one business day now the power of attorney will exist until it's revoked it does not need to be renewed every month or six months or year okay that power of attorney is inforced until it's revoked but know that another thing that voids the power of attorney is the client's death so death terminates power of attorneys now some people have heard of what's called durable power of attorneys and they think that that survives death and that's really not true a durable power of attorney survives someone being deemed incompetent okay so let's say Your Grandparent signs a gives you power of attorney and signs what's called durable power of attorney if your grand parent becomes okay incompetent okay um so maybe they they get Dementia or what have you adorable power of attorney would survive that incompetence but when the grandparent unfortunately passes away that power of attorney is voided so death cancels or voids the power of attorney now sometimes people want to give trading authorization to someone other than the their AP to give trading authorization to a third person okay it also has to be in writing from the customer okay so if I wanted to give someone else trading authorization over my account and you're my AP I I'm not giving it to you I'm giving it to a third party you still need written authorization from me that this person has trading authorization in my account and duplicate confirmations must be sent to the customer so that the customer knows what's going on in the account now one thing the principle should be making sure is not happening in this account is what's called churning know the churny is is excessive trading to generate commissions so one of the risk if I give you discretion over my account you're charging me commissions for each trade and you're deciding how often and I trade so what The Regulators prohibit is you from churning my account which would be excessive trading to generate commissions the tough part about churning is there's no set number of Trades that makes it churning right The Regulators Define it as excessive trading with a primary reason being to generate commissions now again let's pause a second to try an activity so take a a minute to complete this activity and then again feel free to unpause the video and see how you did so let's take a look at the question a discretionary account may be handled by a an Associated person who's registered with the NFA B an Associated person with one year's experience see an associate person who was previously registered for one year and 6 months and is been registered with your firm for 6 months or an Associated person with four years experience and our best answer here is D okay what experience did you need you need two years of continuous experience two years of continuous experience recordkeeping rules many records need to be kept by firms the customer account statements must be retained remember these are kept by the fcm if there's an IB involved they do not need to keep a copy of each client statement but the fcm must keep a copy of each client statement now for active accounts you are generally getting monthly statements now what active means in the Futures world is either a transaction or an open Futures position so this is different than Securities for those of you who might not be familiar with security laws and security rules this is different than security rules in Futures an open Futures position is considered an active account for generating a monthly statement for inactive accounts the firms can send quarterly statements customer confirmations for each trade a customer does they get a confirmation confirming the trade this must be sent by no later than the next business day customer complaints must be retained now you might see a question true or false customer complaints are public information which must be disclosed to the public that is false if I say to you hey I want to see you a complaint file and I'm just a the public you don't have to show me your complaint file that is not public record by the way if The Regulators come in and want to see your complaint file you would have to show The Regulators your complaint file but you don't need to show every customer every complaint now firms are required to maintain a copy of all written complaints it's really not a complaint until somebody puts it in writing if there is an oral option complaint is received the firm must request that it be made in writing then maintain a copy of that complaint by the way if The Regulators called if if a customer called up The Regulators to complain about a firm The Regulators would often ask the customer did you put it in writing with the firm and if they say no The Regulators often tell them well make sure you put it in writing that's what really makes it a complaint okay that's what really makes it a complaint when it's written by the way written is any form of written written includes emails and text messages those are included as written by Regulators settlements generally are public records know that they can be reached between firms and customers or firms and Regulators without the firm admitting or denying guilt member so things can be settled with possibly somebody The Firm agrees to make a payment either of a fine or you know to a customer they they agree without admitting or denying guilt now generally if we look on the left NFA members are generally required to maintain these records for how long okay for five years you are generally required to maintain the records continuing with recordkeeping necessary records if the customer is introduced by the IB to an fcm the account form is kept by who it must be kept on file by both the IB and the fcn what about the risk disclosure statement that the customer signs remember both the IB and the fcm keep a copy of the risk disclosure statement that was signed by the client the fcms customer statement must show the name of the IB but know that that remember customer statement only has to be kept by the fcm CTA records they keep all Powers of Attorney where the client is given them power of attorney to trade their account they have to keep records of a list of all positions copies of each confirmation and statement that they receive from the fcm all Communications with the public like advertising and sales literature cpos ctas and their principles must maintain detailed daily record of all personal transactions and all statements received from the F fcm about their personal accounts some people say why is this so what The Regulators want to be able to see is if you front run what you're doing for your clients see if you're going to take take a huge position for your clients it may be tempting to buy it for yourself first then execute for your clients because that might move the price and then you liquidate your position and benefit from you running the price up so they want to be able to see if you maybe front ran the order by trading for your own account before trading for the clients so they want you to maintain personal transactions also upon death of a customer again power of attorney is automatically cancelled but what else we do do we do and again for you Securities people this is different than Securities we cancel all open orders which would be true in securities also you cancel open orders but here's what's different in Futures you liquidate positions you liquidate positions in the Securities world you don't do that but in the Futures world you liquidate dat the open Futures positions the US Patriot Act might appear on the test okay although I do not think there'll be a lot of questions on this but a few different reports that appear on some Securities and Futures exams okay although we hear less of it on the Futures exams than we do on the Securities exams a CTR is a currency transaction report it's filed for currency transactions executed by a single customer during one business day that exceed $10,000 so if someone deposits more than $10,000 in currency currency as cash could also include though traveler checks okay it might include certain types of money orders okay could be could be considered sort of a cash equivalent but if the client is depositing more than 10,000 in a business day okay you must file a CTR that includes structured transactions which are multiple deposits totaling more than 10,000 so if a client deposits maybe you know 4,000 at 10 in the morning another 4,000 of cash at noon and another 4,000 of cash at 2 in the afternoon know that you do have to file a CTR now right below the CTR the s s is the other one that appears on many exams although we don't hear as much of it on the series 3 but I would certainly know the s in the CTR just in case the S is a suspicious activity report you file this if the transaction or group of transactions equals or exceeds $5,000 so a lower number threshold but you're also suspicious for some reason it seems like it may be being done to evade reporting requirements or maybe it seems to have no business purpose and you think they're money laundering they seem to be doing suspicious trades where they don't even care much about profits or losses so what do you file an S an S if you're suspicious and by the way if they're depositing more than 10,000 in cash and you're suspicious you might be filing both forms they're independent forms so the CTR is they deposited more than 10,000 if you're suspicious about something file an s now the S you may not inform the client that you're filing so if you feel there's a need to file an S you may not inform the client that you're filing that form it says it right on the form itself you may not inform in the client that you're filing this form now on the right hand side on the top we see a CM this is a currency and monetary instrument transaction report this is filed whenever someone physically transports or receives cash or equivalent exceeding $10,000 into or out of the country in the us we really don't hear this tested on any exams and then the penalties for violations of the Patriot Act 20 years in prison and the greater of $500,000 fine and that's per transaction or twice the amount of funds involved okay so it's the greater of 500,000 or twice the amount of funds involved end up to 20 years in prism and again we generally do not hear the penalties tested that concludes the regulations chapter again this is a very important chapter because you do have to pass regulations separately on the series 3 so if you're strong at the calculation questions and you do very well on General market knowledge that will not get you through the regulation section you must prove you know regulations by getting at least to 70% on the 35 regulations questions okay what I would do now is I would create a custom exam on this chapter regulations chapter okay and apply these rules that we just went over before proceeding to the next chapter what's up next the relationship between cash and Futures prices and we'll mention the difference between fundamental and technical analysis