The National Futures Association (NFA) was created in 1982 as a self-regulatory body when Congress passed an amendment to the Commodity Exchange Act. The original purpose of the NFA was to register introducing brokers, commodity pool operators and commodity trading advisors. The organization also aims to safeguard the integrity of the derivatives market. The introduction of many new financial instruments such as T-bill futures, Ginnie Mae certificates, options on sugar and coffee, and stock index futures created the need to register new brokers and salespeople to the futures industry while ensuring proper ethical business practices.
Here we look at the National Futures Association in depth and how it has grown to protect investors.
Regulation of Brokers
With the introduction of new financial instruments and the divergence of international markets that traded many of these new instruments, the NFA assisted the Commodity Futures Trading Commission (CFTC) in its oversight functions. In more recent years, NFA's mandate has expanded to compliance and the issuance of regulations, arbitration and mediation. It has also created an online registration system for brokers that allows the public to check the registration status of specific brokers and the status and outcomes of dispute resolutions against them.
What began as a system called the Disciplinary Information Access Line (DIAL) in 1991 to allow customers to check the registration status of their broker or salesperson by telephone soon became an online system called Background Affiliation Status Information Center or BASIC. BASIC allows online users to check the registration status of brokers and principals, commodity pool operators and commodity trading advisors. BASIC also allows users to check if there are any disciplinary actions against a broker and the status of those actions.
Earlier NFA registrations began on a voluntary basis for brokers. With time and the passage of new laws to protect market integrity and eliminate securities fraud, registration became mandatory. Today, mandatory registration of brokers and principles encompasses even broader categories to now include five new sections: supervision, ethics training, business continuity and disaster recovery, privacy rules, and promotional materials. Nonetheless, the National Futures Association is heavily based on a system of self regulation.
The NFA claims over 4,200 total firms registered with approximately 1,450 registered as introducing brokers, 220 future commission brokers, 380 commodity pool operators and 55,000 associated persons. Annual dues can range from $750 for commodity trading advisors (CTAs) to $125,000 for forex dealer members with $5 million and above in annual revenues. Registration is required for all individuals and businesses that intend to work in the futures markets as per the Commodity Exchange Act. Since these markets can be very sensitive to speculation and manipulation, NFA members are required to uphold strict ethical standards.
Supervisors or associated persons are employees that supervise communications, sales forces or trading activities and must obtain the proper licenses to maintain employment as well as register. Interestingly, brokers often are not required to have a college degree but only need to pass the proper examinations. Ethics training, business continuity and disaster recovery, privacy rules and promotional materials must be included in registration applications but fall more under the category of regulations, although all are focused on the total accountability to the industry. (For more information about market regulation, see Free Markets: What's The Cost?)
Laws passed by Congress must be codified into a set of uniform regulations by the NFA. The NFA not only issues uniform regulations but all regulations are monitored through a system of compliance to perform the function of oversight through surveillance. For example, violators can be censured, face expulsion or fined for each violation depending on the severity and number of infractions.
Arbitration and Dispute Resolution
Dispute resolution at the NFA began in 1983 with an arbitration program while mediation began in 1991 and has seen over 1,300 cases. Cases that are arbitrated are filed either as customer to member, member to customer, or member to member. Historically, the majority of claims filed have been customer to member. For example, 160 customer complaints were filed in 2009 with an average close of cases of about five months with 44 awards granted. In 2008, 193 customer complaints were filed with an average of six months to close and 43 awards granted. Awards granted and arbitration decisions are final and cannot be filed in the court system. Awards are administered through the NFA's restitution program.
All players in the futures and options on futures market must register with the NFA. Since the creation of the NFA, the number of claims filed has also decreased. This is due to NFA operations which offer investor alerts, education and an enhanced system to allow the markets to function properly. (There's one simple hurdle in the transition from stock to futures options: learning about product specifications. For more information, read Options On Futures: A World Of Potential Profit.)
The Bottom Line
As the watchdog of the commodities and futures industry in the United States, the NFA helps to protect investors from fraudulent futures activities and resolve consumer complaints. Investor confidence is a key aspect of a successful futures market, and it is the NFA's job to uphold this.