Recent Foreign Currency Case Involving Allegations of CFTC Registration Violations

What this means to you: The U.S. Commodity Futures Trading Commission (the "CFTC") has recently witnessed an increase in foreign exchange trading ("Forex") scams and has urged the public to contact the National Futures Association (the "NFA") regarding firms that offer Forex trading advice.  The NFA also encourages the public to visit the CFTC's Customer Fraud Awareness website before investing any monies into the Forex market or with individuals providing advice on the Forex markets[1].   Forex managers must register with the NFA as Commodity Trading Advisors ("CTAs") and/or Commodity Pool Operators ("CPOs"), absent a specific exemption.  Moreover,   entities that solicit or accept Forex trades must be registered as Introducing Brokers ("IBs").


On April 10, 2013, the CFTC issued an Order settling charges against the principals of Forex Global Solutions Inc. and Forex Global Solutions Ltd. (collectively "Forex Global") for fraudulently soliciting customers to trade Forex investments and violating CFTC registration requirements.  The CFTC found that Forex Global fraudulently solicited customers to open off-exchange Forex trading accounts and obtained discretionary trading authority over those accounts without complying with the required registration mandates.  The CFTC also alleged that Forex Global published false historical performance returns on its website and in its emails to prospective clients and failed to disclose that it calculated the performance returns inaccurately.  Forex Global was ordered to pay a $750,000 civil monetary penalty.


On October 18, 2012, the CFTC adopted the final regulations concerning off-exchange retail foreign currency transactions.  The rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Food, Conservation and Energy Act of 2008 (the "Acts").  Together, the Acts provide the CFTC with the authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail Forex transactions. [2]


Investment advisers implementing Forex trading strategies must be aware of the CFTC's regulatory requirements.  The final Forex rules put in place strict requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards.  The regulations require the registration of counterparties offering retail Forex contracts as either futures commission merchants ("FCMs") or retail Forex dealers ("RFEDs").  In general, persons who solicit orders, exercise discretionary trading authority or operate pools with respect to Forex investments are required to register, either as FCMs, RFEDs, IBs, CTAs, and/or CPOs or as associated persons of such entities.[3] ________________________________________ [1] [2] Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, FR/Vol. 75, No. 175 (Sept. 10, 2010). [3] CFTC PR5883-10 "CFTC Releases Final Rules Regarding Retail Forex Transactions" (Aug. 30, 2010).

Cheryl Spratt