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What disclosures must be given to me before opening a futures account or entering into a commodity pool?
Because trading in futures and options can be "risky business" and is appropriate only for certain businesses and individuals, the CFTC requires that a broker provide you with a document which describes the risks involved in entering into futures and option contracts. The document provides you with an opportunity to carefully consider whether futures and options are appropriate for you in light of your experience, objectives, financial resources and other circumstances.
The broker must receive a signed and dated acknowledgment from you that you have received a disclosure document before he or she can accept any funds, securities, or property from you. Accounts opened through different types of commodity professionals require different types of risk disclosure documents.
Futures Commission Merchants and Introducing Brokers. A Futures Commission Merchant or Introducing Broker must provide you with a disclosure statement which informs you of the risks inherent in trading futures contracts and/or options on futures contracts, as well as the effect that leverage may have on potential losses or gains. The disclosure statement must also inform you that trading futures in foreign markets carries particular risks because of fluctuations in the currency exchange rate and differences in regulatory protection.
Commodity Pools. The disclosure document for a commodity pool must include more extensive information, including the following: principal risk factors; the extent of your potential liability; the percentage return necessary for you to break even; fees and expenses; material litigation during the last five years against the pool's operator, manager, trading advisors, principals, the pool's futures commission merchants and introducing brokers; actual or potential conflicts of interest of the pool's operator, manager or advisors; past performance information; information about the trader or company and its principals; the business background of the pool's operator, manager, and advisors; limits on your ability to withdraw funds; management, advisory, and brokerage fees; transferability and redemption.
Commodity Trading Advisor. Before a Commodity Trading Advisor can solicit you concerning the authority to direct or guide your trading, the Commodity Trading Advisor must provide you with a disclosure document containing similar information.
Commodity pool operators (CPOs) and commodity trading advisors (CTAs) may be exempt from certain disclosure requirements for their clients who are qualified eligible participants (QEPs) or qualified eligible clients (QECs). QEPs and QECs are generally investors will substantial assets, e.g., portfolios in excess of $2 million or more. The definition of a QEP and QEC can be found in CFTC Rule 4.7. Because of the presumed financial sophistication and assets of QEPs and QECs, CPOs and CTAs dealing with such person are typically granted relief from some of the disclosure obligations normally required of CPOs and CTAs. Please note, however, that CPOs or CTAs who deal exclusively with QEPs or QECs, respectively, are still required to be registered with the CFTC. Many persons confuse the relief from certain disclosure obligations with an exclusion from the requirement to register. |
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