Effective Oct. 31, National Futures Association (NFA) members engaging in virtual currency activities will be subject to new NFA disclosure requirements.1 These disclosure requirements are set forth in Interpretive Notice 9073 (Interpretive Notice), which NFA announced Aug. 9 in a notice to members. The new disclosure requirements are imposed on NFA member commodity pool operators (CPO), commodity trading advisers (CTA), futures commission merchants (FCM) and introducing brokers (IB) who engage in activities involving spot market virtual currencies or virtual currency derivatives. In announcing these requirements, NFA pointed to concerns about customer understanding of virtual currency, the substantial risk of loss prevalent in virtual currency trading and NFA’s limited authority to regulate spot market virtual currency transactions. NFA members engaged in any level of virtual currency activity (derivatives, i.e., futures, options and swaps, as well as spot transactions) will be subject to these new disclosure requirements.
New Disclosure Requirements
- NFA member CPOs and CTAs engaging in either spot market virtual currency or virtual currency derivatives transactions in a pool or managed account program will be required to include detailed disclosures in their disclosure documents, offering documents and promotional materials that explain the risks associated with their virtual currency activities. NFA does not prescribe specific language to be used in such risk disclosures. However, the Interpretive Notice sets forth a nonexhaustive list of disclosure items that must be addressed if applicable to the member’s activities, including (i) unique features of virtual currencies, (ii) price volatility, (iii) valuation and liquidity, (iv) cybersecurity, (v) the opaque nature of the spot market, (vi) virtual currency exchanges, intermediaries and custodians, (vii) the regulatory landscape, (viii) technology and (ix) transaction fees. NFA member CPOs and CTAs engaged in virtual currency derivatives transactions must also address certain additional disclosure items if applicable to the member’s activities, including initial margin levels, trading restrictions imposed by FCMs and trading restrictions imposed by designated contract markets.
- NFA member CPOs and CTAs engaging in spot market virtual currency or virtual currency derivatives transactions in a pool or managed account program will also be required to prominently display new standardized disclaimer language in their disclosure documents, offering documents and promotional materials. This standardized language, which the Interpretive Notice prescribes, warns investors of NFA’s lack of regulatory oversight with respect to virtual currency products, transactions, exchanges, custodians andmarkets.
- The NFA member CPO disclosure requirements are applicable to pools operated under Commodity Futures Trading Commission (CFTC) Rules 4.21 and 4.7 as well as to 4.13(a)(3) “exempt” pools operated by an NFA member CPO. However, these disclosure requirements would not apply to registered investment companies that qualify for an exclusion from being regulated as a commodity pool under CFTC Regulation 4.5 and for which the NFA member CPO has filed a notice of eligibility, even if such NFA member CPO operates additional pools that are subject to such disclosure requirements.
- NFA member FCMs and IBs will be required to provide a similar standardized disclaimer, in the manner prescribed in the Interpretive Notice, to all customers or counterparties with whom they engage in spot market virtual currency or virtual currency derivatives transactions. NFA member FCMs and IBs engaging in virtual currency derivatives transactions must also provide customers with certain NFA and CFTC advisories as set forth in the Interpretive Notice.
Important Timing Considerations
NFA members should be mindful of the following timing considerations associated with the new disclosure requirements:
- Promotional materials distributed or used on or after Oct. 31, 2018, must comply with the new disclosure requirements.
- Disclosure documents or offering documents that are materially incomplete in light of the new disclosure requirements must be updated by Nov. 21, 2018.
- If a disclosure document for a pool or managed account that has previously been filed with NFA (or is required to be filed with NFA) needs to be updated to make it materially complete in light of the requirements in the Interpretative Notice, the NFA member must file the updated disclosure document with NFA by Nov. 21, 2018. NFA must accept the updated disclosure document before it can be used. Expedited review is available for documents that have only been updated to include the standardized disclaimer language.
- NFA member CPOs and CTAs are expected to provide updated disclosure documents to existing investors by Nov. 21, 2018, and to solicited prospective investors prior to accepting investments from such investors.
1 Separately, on Dec. 14, 2017, NFA issued Notice 1-17-28, imposing new reporting requirements on CPOs and CTAs that trade any virtual currency products. Here is a link to the Sidley Update dated Jan. 8, 2018, that discusses the reporting requirements: https://www.sidley.com/-/media/update-pdfs/2018/01/20180105-derivatives-update.pdf.
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