Chapter 12: Regulation of Futures Trading

Firms and individuals that conduct futures trading business with the public are subject to regulation by the CFTC and by NFA. All U.S. futures exchanges are regulated by the CFTC. NFA is a congressionally authorized self-regula-tory organization subject to CFTC oversight. It exercises regulatory authority over Futures Commission Merchants, Introducing Brokers, Commodity Trading Advisors, Commodity Pool Operators and Associated Persons (salesper-sons) of all of the foregoing. NFA staff includes nearly 150 field auditors and investigators. In addition, NFA is responsibile for registering persons and firms required to be registered with the CFTC, including exchange floor bro-kers and traders.

Firms and individuals that violate NFA rules of professional ethics and conduct or that fail to comply with strictly enforced financial and record-keeping requirements can, if circum-stances warrant, be permanently barred from engaging in any futures-related business with the public. The enforcement powers of the CFTC are similar to those of other major fed-eral regulatory agencies, including the power to seek criminal prosecution by the Depart-ment of Justice where circumstances warrant such action.

Futures Commission Merchants which are members of an exchange are subject to not only CFTC and NFA regulation but to regula-tion by the exchanges of which they are members. Exchange regulatory staffs are re-sponsible, subject to CFTC oversight, for the business conduct and financial responsibility of their member firms. Violations of exchange rules can result in substantial fines, suspension or expulsion from exchange membership.

Words of Caution

It is generally against the law for any person or firm to offer futures contracts or options on futures contracts for purchase or sale unless those contracts are traded on a regulated fu-tures exchange and unless the person or firm is registered with the CFTC. Moreover, per-sons and firms conducting futures-related busi-ness with the public must be Members of NFA. Thus, be extremely cautious if ap-proached by someone attempting to sell you a commodity-related investment unless you are able to verify that these requirements are met.

Be at least equally cautious of anyone solicit-ing the retail public for investments in non-exchange traded, foreign exchange (Forex) contracts. If you invest without first carefully checking out the firm promoting them, you and your money could quickly become strang-ers! Contact the CFTC, NFA, the Securities and Exchange Commission (SEC), or the securities regulatory agency or attorney general in your state. If you wait until after your investment— and possibly the firm itself—are gone, there’s generally little anyone can do to help you re-cover it.
Other sales pitches that should raise warning flags include: Investments in illegal off-exchange futures contracts that may be called by different names such as "deferred delivery," "forward" or "partial payment" contracts in an attempt to avoid the strict laws applicable to regulated futures trading. Firms peddling these often operate out of telephone boiler rooms, employ high-pressure selling tactics, and may state that they are exempt from registration and regulatory requirements. That, in itself, should be reason enough to conduct a check before writing a check. You can quickly verify whether a particular firm or person is currently registered with CFTC and is an NFA Member by phoning NFA toll-free at (800) 621-3570 or checking NFA’s online BASIC system. You can also inquire as to whether a firm or person has been the sub-ject of disciplinary actions by the CFTC, NFA or an exchange.