The NFA has received more than 100 comment letters over a request for comment on contentious capital adequacy rules for CPOs and CTAs.  NFA members and the wider public were invited in January to comment on the concepts of imposing a capital requirement on CPOs and CTAs as well as other customer protection measures.   NFA spokesman confirmed it received 115 comment letters, with the “overwhelming majority” coming from the CPO/CTA community.  The measures have provoked strong reaction from the industry and representatives for CTAs and CPOs to the NFA board of directors hosted a virtual town hall meeting to discuss them.  Typically, opinion is collated and submitted by trade bodies, who have also made their concerns clear.  

In a 16-page letter submitted by the MFA on the deadline day of 15 April general counsel Stuart Kaswell said the mooted measures would “operate simply as an unnecessary barrier to entry, and would not advance NFA’s objective of reducing fraud.”  The letter, echoing objections raised by managers, lawyers and other industry participants, detailed how they would burden CTAs and CPOs with extra costs and expand NFA’s oversight responsibilities.

It concluded that the benefits would be “insignificant and even incidental” compared to the direct and indirect costs, adding there were “more effective” existing regulatory methods for protecting investors.  The NFAs comment notice, citing 26 Member Responsibility Actions (MRAs), said that in light of cases of misuse of customer funds by CPOs and CTAs in recent years, including one CPO that “improperly used pool funds because it had insufficient assets to operate as a going concern”, the NFA was looking at ways to “strengthen” the regulatory structure governing CPO operations to provide greater investor protection.  Additionally it wanted to “ensure that CPOs and CTAs have sufficient assets to operate as a going concern”.  Investor protection measures suggested included requirements for independent third parties to review and authorise the disbursement of pool funds, prepare or verify account statements concerning the value of pools; and verify performance results.

Jiří Król, deputy CEO of the Alternative Investment Management Association, said in the hedge fund trade body’s 15 April response that the capital requirements and the other provisions suggested were “not likely” to enhance customer protection measures already in place.  “While we certainly agree that enforcement of the rules is vital, we disagree with the premise that because there have been enforcement actions brought revised or new rules are required,” he wrote.  An NFA spokesperson said the agency was in the process of reviewing all of the comment letters, adding no rule proposals have yet been written.    Rule proposals must first be approved by the NFA’s executive committee and board of directors before they are sent to the CFTC for final review.  The spokesman added that in this case, the NFA was likely to review any rule proposals with its CPO/CTA advisory committee before presenting them to the executive committee.  The NFA has roughly 2,700 CPO and CTA members.