Given the recent volatility in the virtual currency market, the United States National Futures Association (NFA) reminds its members engaging in virtual currency activities that they must fulfill certain ongoing disclosure and reporting requirements.
NFA requires futures commission merchants (FCM), introducing brokers (IB), commodity pool operators (CPO) and commodity trading advisors (CTA) that engage in activities related to virtual currencies or virtual currency derivatives to comply with the customer disclosure requirements established in NFA’s Interpretive Notice entitled Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities.
FCM or IB members must provide the NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin and the CFTC Customer Advisory: Understand the Risk of Virtual Currency Trading to any customer that engages in a virtual currency derivative transaction with or through the FCM or IB Member. For introduced accounts the advisories may be provided by either the FCM or IB Member.
NFA is also aware that certain FCM and IB Members may seek to solicit or engage in transactions involving underlying or spot virtual currencies with customers or counterparties. NFA’s Board of Directors is concerned that market participants may not understand that NFA does not regulate in any manner an FCM or IB Member’s activities with customers or counterparties involving underlying or spot virtual currencies.
Moreover, NFA Compliance Rule 2-22 prohibits a Member from, among other things, stating or implying that it has been sponsored, recommended or approved by NFA. To provide clear disclosure about the lack of NFA’s regulatory oversight, any FCM or IB Member engaging in activities with customers or counterparties involving underlying or spot virtual currencies in any manner must provide the customer or counterparty with a specific warning.
NFA notes that merely having the advisories and disclosure language on a Member’s web site is not adequate for retail customers. Including the advisories and disclosure language in a risk disclosure booklet that is distributed to retail customers or sending retail customers an e-mail including links to the advisories and disclosure language and explaining what the links are would be sufficient provided the communication is reasonably designed to achieve customer awareness and the disclosure language is prominently displayed.
The advisories must be provided to a customer at or before the time the customer first engages in a virtual currency derivatives transaction with or through the FCM or IB Member. The disclosure language must be prominently displayed in any promotional materials related to underlying or spot virtual currencies and must be provided to any customer or counterparty at or before the time they engage in any underlying or spot virtual currency activities with or through the FCM or IB Member.
A few CPO and CTA Members are offering pools, exempt pools or trading programs that trade virtual currencies or virtual currency derivatives. NFA’s Board of Directors is concerned that these pools and trading programs may be attracting pool participants and managed account clients who do not fully understand the nature of these products or the substantial risk of loss that may arise from trading them.
CPO and CTA Members are advised to carefully consider the risks arising from their activities in virtual currencies and virtual currency derivatives and customize their disclosure documents, offering documents and promotional material to address the unique risks related to their specific activities.
NFA’s Board of Directors is also concerned that investors may not understand NFA’s role with respect to Member activities involving underlying or spot virtual currency products. Therefore, NFA is mandating a standardized disclosure that any CPO or CTA Member operating a pool (exempt or non-exempt) or managed account trading program that trades underlying or spot virtual currencies must display in its disclosure document, offering document and promotional material related to virtual currencies.
NFA is also requiring a separate standardized disclosure that must be provided to customers and displayed in any promotional materials related to virtual currencies if a CPO or CTA engages in any other virtual currency activities.
