CTA Disclosure Documents
In general, yes. Registered CTAs that are required to provide a disclosure document to clients must file the disclosure document with NFA.
However, a CTA that only directs or guides the account of Qualified Eligible Persons (as defined by Commodity Futures Trading Commission Regulation 4.7) and has filed the required exemption notice with NFA is not required to file a disclosure document with NFA.
If a disclosure document is required, it cannot be used until it is reviewed and accepted by NFA.
In general, yes. Registered CTAs that seek to guide clients' commodity interest trading by recommending specific transactions must provide the client with an NFA accepted disclosure document by no later than the time the CTA delivers to the prospective client an advisory agreement to guide the client's account.
However, a CTA that guides the account of Qualified Eligible Persons (QEP) as defined by Commodity Futures Trading Commission Regulation 4.7 and has filed the required exemption notice with NFA is not required to provide a disclosure document to its QEP clients.
If a disclosure document is required, it cannot be used until it is reviewed and accepted by NFA.
A qualified eligible person (QEP) is an investor who fits into one of two distinct groups:
(1) Investors who do not need to meet the portfolio requirement; and
(2) Investors who must meet the portfolio requirement.
The categories of persons who qualify as QEPs are listed in CFTC Regulation 4.7(a).
If the CTA is soliciting new clients or soliciting for a new program, its disclosure document(s) must be updated at least every 12 months. However, a CTA may be required to update its disclosure document(s) more often if ever it becomes materially inaccurate or incomplete. Updated disclosure documents must be filed with and accepted by NFA prior to use.
Review times vary depending on whether it is an initial or updated filing, the disclosure document size, and other factors. In general, NFA reviews most disclosure documents within 14 days of receipt.
The disclosure document must comply with the CFTC Part 4 Regulations. Review NFA's Disclosure Document Guide: A Guide for CTAs for an outline of the required information.
Certain disclosure documents may be eligible for instant filing treatment. A disclosure document that qualifies for instant filing treatment is generally reviewed within three business days. NFA staff will respond to a Member via email with either a comment letter or an acceptance letter.
Prior to using the disclosure document, the Member must receive an acceptance letter from NFA confirming that the disclosure document can be used to solicit clients.
A CTA disclosure document may be eligible for instant filing treatment if:
- A previously accepted disclosure document is on file with NFA;
- The disclosure document contains no material changes;
- All changes are red-lined; and
- The firm requests instant filing treatment
To qualify for instant filing relief, the CTA must check the appropriate response during the electronic filing process by requesting instant filing treatment of the disclosure document and representing that there are no material changes from a previous filing that NFA has accepted.
Although the Member is not required to include its disclosure document(s) on its website, disclosure document(s) do provide a potential client with a general overview of the firm's business and the risks involved with the CTA's trading program. Any disclosure documents included on a CTA's website must be accurate and complete and may not be more than 12 months old.
CFTC Part 4 Regulations requires that performance be calculated on an accrual basis of accounting in accordance with generally accepted accounting principles. Review NFA's Disclosure Document Guide: A Guide for CTAs for additional guidance.
An account is notionally funded when Actual Funds in the account (i.e., the equity in a commodity trading account over which a CTA has trading authority and funds that can be transferred to that account without the client's consent to each transfer) differs from the Nominal Account Size (i.e., the account size agreed to by the client that establishes the level of trading in the particular trading program). Notional funds represent the difference between nominal account size and actual funds in a client's account.
However, this does not mean that the account may trade undermargined. Notional funding is allowed as long as certain criteria are met, including having a written agreement in place between the firm and the client. Review NFA Compliance Rule 2-34 and NFA Interpretive Notice 9054 for more guidance.
Monthly rates of return must always be calculated by dividing Net Performance for the month by Beginning Nominal Account Size. As stated above, if an account is notionally funded, the CTA must maintain a written record of the Nominal Account Size. When calculating annual rates of return and peak-to-valley drawdown information, however, the method used to calculate such returns is dependent on whether or not the Nominal Account Size or level of trading each month is affected by the prior month's net performance or whether it remains unchanged. If the Nominal Account Size is affected by net performance, then the annual rate of return and draw-down information must be calculated on a compounded monthly basis. If the Nominal Account Size remains unchanged each month, despite net performance, the annual rates of return should be calculated by summing the monthly returns. Similarly, the worst peak-to-valley drawdown would be equal to the sum of the returns during the relevant time period.
Hypothetical performance information may be included in the disclosure document if certain conditions are met. However, Members cannot include hypothetical performance results if it has three months of actual trading results for the program. Review NFA's Disclosure Document Guide: A Guide for CTAs, NFA Compliance Rule 2-29(c), and NFA Interpretive Notice 9025 for specific guidance.
Yes, proprietary performance as defined by CFTC Regulation 4.35(a)(8) may be included in the CTA's disclosure document as long as such results are prominently labeled as proprietary and appear as the last disclosure in the disclosure document behind all required and non-required disclosures. Such results must be pro-forma adjusted for all fees and expenses that a client would incur. While such results are not required to be accompanied by the same capsule information required to accompany client results, proprietary performance results must be accompanied by certain information such as the inception of trading, the size of the account and the assumed commissions and fees. Draw-down information should also be included. Additionally, any differences between proprietary performance and the offered program must be clearly discussed including differences in leverage and trading.