POSITION PAPER OF JAMES L. KOUTOULAS, ESQ. AND JOHN L. ROE
It is time for another NFA Board of Directors election. If it seems like we just asked you for your vote, it’s because we did as you elected us to two-year terms less than a year ago. However, due to changes to the Board’s composition, we currently find ourselves up for election yet again in the only two contested races on the whole Board. We know that the constant stream of elections may seem unimportant, but as someone who makes their living subject to ever-increasing regulation, taking the time to vote for effective Board representation directly benefits your business.
One of the unique things about NFA is that it is chartered as a democratic, Member-run self-regulatory organization. This carries with it substantial responsibilities for both Members and Management to balance maintaining the rights of Members with protecting customers and avoiding regulatory capture whereby the organization could be run for the benefit of a select few. For the organization to be successful, Members need to take an active role in its governance, by educating themselves on often complex regulatory issues, speaking out on proposed regulations, and electing Directors who put those goals above their own personal benefit. We think that we have done the latter to the best of our abilities and would be honored to continue serving you on the Board.
Representation for CTA/CPOs of All Sizes
The latest restructuring of the Board has left 90% of CTA/CPOs with no guaranteed representation on the Board, with two seats reserved for the top 10% largest Members. While those largest Members generally have a large legal and compliance staff and ready access to senior management at NFA, most of our Members do not. It is imperative to have representatives like us who are small business owners with direct compliance responsibilities. Unlike a Board Member who can easily delegate new compliance requirements to a large staff, we bear personal responsibility for our firms’ compliance obligations and can effectively gauge the resources required for marginal requirements.
Cost/Benefit Analysis for All Proposed NFA Regulations
Moreover, since NFA operates on authority delegated to it by the CFTC, we firmly believe that NFA should also have to comply with the CFTC’s requirement to do Cost/Benefit Analysis on any new regulations. Currently, we are unaware of any such analysis being done by NFA, and if it is being done, it is not shared with the Board. In the last five years, our industry has shrunk dramatically, in large part due to the ever-increasing cost of new regulations, many of which have provided minimal increases in customer protections. Given that we dedicated years of our lives representing about 20,000 MF Global and PFG victims pro bono, we value customer protections more than anyone. Thus, it’s vitally important that we pass only regulations that will help customers, not ones that add cost and complexity to small businesses for little or no benefit. We propose that NFA amends its bylaws to incorporate mandatory Cost/Benefit Analysis for any new regulations.
Public Comment Letter Repository
We have helped make NFA considerably more transparent than it was when you first elected us to the Board, but there is still a long way to go. Last year, we helped organize a campaign to defeat NFA Management’s proposal for Capital Requirements on CTAs and CPOs, and a big part of that campaign was the over 100 comment letters you submitted. This process revealed flaws in the NFA’s approach to adopting rules. Some proposals request comment letters while others, like the NFA’s newly adopted cybersecurity rules, do not. We propose that NFA amends its bylaws to mandate a rulemaking process similar to the CFTC’s, requiring a public comment period, a public comment repository and the review and consideration of these public comments before adopting final rules. As we have said repeatedly, sunlight is the best disinfect. An open and inclusive rulemaking process will give you the ability to better inform regulators as to the real world impact and usefulness of new rules.
Independent Corporate Governance
We can’t stress enough how important it is for a self-regulatory organization to have truly independent corporate governance. Self-regulation is rife for potential conflicts of interest and raises the natural question, “Who’s policing the police officers?” For the last three years, we have approached the Board with this in mind. On issues of executive compensation, corporate governance and NFA structure and operations, we have pushed for greater independence and stricter oversight. We have convinced the Board to finally adopt rules to provide for the Public Directors to be elected via secret ballot after about 30 years of them simply being elected by voice affirmation of the Board which they independently supervise. We hope this effort and others like it will strengthen independence and broaden industry participation in SRO governance.
Modernization of Liquid Alternatives
In many ways, liquid alternatives have been one of the brightest spots in our industry as the fastest growing segment of alternative investments. However, due to managers having to structure liquid alternatives under a 75-year-old law, they tend to be expensive and complex to setup and operate while having opaque disclosure to retail investors. We have been actively working directly with CFTC commissioners in an effort to create a more modern, cost-effective, and transparent structure and welcome any and all feedback on this issue.
CFTC Proposed New Algorithmic Trading Rules
The CFTC has proposed new rules aimed at governing a broad swath of market participants engaged in ‘Algorithmic Trading.’ If enacted as written, these new rules will give NFA a great deal of discretion in crafting AT compliance requirements, as well as to whom those rules will apply. While these rules are clearly intended to capture and regulate proprietary traders engaged in direct market access trading via exchanges, they will include all NFA registrants. CTAs and CPOs who engage in virtually any type of automated execution or order management will have a new and potentially costly compliance burden. It is critical that CTA and CPO members are adequately represented and can influence this process, regardless of the frequency of their automated trading or the amount of funds they manage. While protecting the markets is critical, imposing an expensive regulatory burden on market participants who pose little threat makes little sense.
Our guiding principal in representing you on the Board has always been to engage our fellow CTAs and CPOs, listen to them, and advocate passionately for their interests. It has been our great pleasure to serve. We ask for your support once again and thank you for everything you do to make our industry better.