Effective October 31, 2018, the NFA is requiring new disclosures for CPOs and CTAs under NFA Compliance Rule 2-4 and Rule 2-29. The disclosures, outlined in NFA Interpretive Notice 9073, specifically relate to those CPOs and CTAs engaged in virtual currency activities. This comes on the heels of the new Memorandum of Understanding (MOU) between the SEC and CFTC in July, which solidifies information sharing between the agencies.
The new NFA guidance was issued to ensure that pool participants fully understand that investing in virtual currency products carries high volatility and risk. Specifically, the NFA wants to see disclosure documents, offering documents and promotional materials from its members that address the unique risks related to virtual currency transactions.
Specific disclosures are now mandated for those CPOs and CTAs trading underlying or spot virtual currencies. Disclosures must address the following areas, as applicable to the activity:
- Unique features of virtual currency
- Price volatility
- Valuation and liquidity
- Cybersecurity
- Asset verification challenges
- Unregulated Virtual Currency Exchanges/Intermediaries
- Technology risk
- Transaction fees
In addition, any CPO or CTA engaging in an underlying or spot virtual currency transaction in a commodity pool, exempt pool, or managed account program must prominently show NFA required standardized disclosure language in its disclosure document, offering documents and promotional material. The specific language that must be used under these circumstances is found in the Interpretive Notice. See Section II., Subsection A., “Virtual Currency Disclosure Requirements for Pools and Managed Account Programs” in NFA Interpretive Notice, 9073 – Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities.
Failure to provide these disclosures would be deemed a violation of Rule 2-4 and/or Rule 2-29.
CPOs and CTAs must now consider these additional disclosure requirements when contemplating entrance into the virtual currency markets.
