Proposed Interpretive Notice:
By letter dated July 20, 2018, the National Futures Association (“NFA”) submitted to the Commodity Futures Trading Commission (“CFTC”) a proposed interpretive notice entitled Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities (the “Interpretive Notice”). The Interpretive Notice would implement new disclosure requirements for NFA members engaging in activities involving virtual currency products, including specific disclosure requirements for any member commodity pool operator (“CPO”) or commodity trading advisor (“CTA”) with respect to a pool, whether or not exempt, or a managed account. Unless the CFTC notifies NFA that it has determined to review the proposed Interpretive Notice for approval, NFA is expected to make the Interpretive Notice effective sometime during the second half of September.
Overview of Requirements:
The section of the Interpretive Notice applicable to CPO and CTA members requires that they provide pool participants and managed account clients with disclosures related to (i) their activities in spot market virtual currencies, (ii) their activities in virtual currency derivatives, and (iii) NFA’s lack of regulatory oversight of the virtual currency spot market.
The proposed Interpretive Notice would also require any CPO or CTA member that operates a pool, exempt pool or trading program that trades spot market virtual currencies to include a standardized disclosure addressing the limits of NFA’s oversight and informing investors that, given certain characteristics of these products (e.g., lack of centralized pricing source and opaqueness of market), there currently is no sound or acceptable practice that NFA can use to verify the ownership and control of underlying/spot virtual currencies.
Notably, the Interpretive Notice states that failure to follow the disclosure guidelines set forth therein may be deemed conduct inconsistent with a member’s obligations under NFA Compliance Rule 2-4 to observe high standards of commercial honor and just and equitable principles of trade, as well as violations of NFA Compliance Rule 2-29 regarding communications with the public and promotional material. As a result, given that the Interpretive Notice will become effective shortly, to the extent that NFA member CPOs or CTAs engage in, or intend to engage in, virtual currency activities, they should review their disclosure documents, offering documents, advisory agreements, and promotional materials to ensure that they are compliant with these new guidelines.