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Wilshire Consulting Group (‘WCG’) has been providing compliance services to Commodity Trading Advisor (“CTA”), Commodity Pool Operator (“CPO”) and hedge funds for over a decade. We have helped hundreds of applicants register and become NFA members since 2008.
Before discussing any action steps you will need to take to become a CTA, we should review what a CTA is. For the most formal definition refer to this description on the National Futures Association (NFA) website. A commodity trading advisor (CTA) is an individual or organization that, for compensation or profit, advises others, directly or indirectly, as to the value of or the advisability of trading futures contracts, options on futures, retail off-exchange forex contracts or swaps. All registered CTAs who manage or exercise discretion over customer accounts must be NFA Members.
Here we will discuss a brief overview on how to become a CTA.
Setting Up Your Business
Assuming you’ve got your trading strategy in place, the first basic moves you will make revolve around formally establishing your business. Before you can establish a business you have to come up with a company name. A common practice is to use your name or your name/initials in some fashion along with common words like “capital” or “asset management”. Many of our clients use “capital” in their name to make them stand out among their peers.
Next step is to establish the entity you will be using to conduct your business. If you are a client of WCG, we will handle setting up the entity for you. You can also set up the entity yourself using a common service. A simple google search will come up with thousands of firms in the industry specializing in setting up entities.
One of the reasons you need to do this first is because after this step is finalized you will be issued a Federal Tax ID Number and you will need this number for various documents throughout this process. The total cost to incorporate is roughly about $1,000. You will also be responsible for paying an annual State Franchise Tax Payment (~$800) and an annual Registered Agent Fee ($50).
Becoming Registered and Establishment of Business Procedures
In order to solicit for US-based commodity interest accounts you have to register with the Commodity Futures Trading Commission (CFTC) and become a member of the NFA. Upon registration there are a good deal of formal questions you will need to answer about your operation before approval is granted. Our advice to anyone reading this is that once you have established your business as described above, it is wise to spend the money and hire professionals that will help you navigate the remaining NFA and CFTC requirements. It is true you can try to do all of the things I’m about to describe on your own but I would suggest against it. Contact WCG to handle the registration for you.
We will help you with:
- Account Opening Procedures
- Business Continuity Disaster Recovery
- Promotional Procedures
- Supervisory Procedures
- Operational Procedures
- Ethics Procedures
- Ethics Training Policies
- Social Media/Public Communications Policy
- Order Handling Procedures
- Market Analyst Policy (if applicable)
- Identify Theft Policy (if applicable)
These procedures are required of all NFA members the day they become registered.
During the time you are getting the initial registration process completed you also need to start thinking about taking (and passing!) the Series 3 exam. In order to get set up for this you have to go to FINRA’s website and complete form U10. Once completed you will receive a notice of enrollment from FINRA that opens a 120 day window for you pass the exam. The Series 3 exam is not difficult but will probably still need to study for it even if you’ve been in the industry for a while given the amount of regulatory information you need to know. Other things, such as the fact that Z denotes the month of a December futures contract, is likely already second nature for you. There are dozens of study packages you can pick up on-line for this exam.
You also need to get your fingerprints taken somewhere. Usually you can go to your local state police barracks to get this done. I’d suggest doing it there because it will likely be an experience for you if it happens to be busy in the fingerprinting area the day you go like it was for me.
During this period you will also need to create a Disclosure Document (DDOC) and file it to the NFA for acceptance. The DDOC overlaps with a lot of the bullet points listed above along with more specific information about things like your background, trading strategy, use of broker/futures commission merchant (FCM)/introducing broker (IB), how you are compensated, your performance, and a long list of other things. If you don’t know how to answer these kinds of questions, this is also where a regulatory advisory firm can help you. Keep in mind that DDoc is also partly your promotional material, that’s why its so important to work with a professional firm. The DDoc can either help you or hurt you when meeting with new prospects. We highly recommend against copy pasting your DDoc from the internet.
Estimated costs associated with the process above include:
- NFA Registration $1,100
- Fingerprints: $10
- Series 3 Exam Fee: $120
- Series 3 Study Materials: $100-$300
- Hiring Regulatory Advisor: $5,000 – $15,000
- Regulatory Advisor: if you hire our firm, will also assist you with performance reporting and accounting services which will create ongoing monthly/quarterly costs for your CTA.
Once all these steps are completed and you have been given the approval by the NFA on your DDOC you are ready to officially launch your CTA. This entire process from start to finish is likely to take you anywhere from 4-9 months depending on your preparedness, response time to NFA DDOC commentary, ability to pass the series 3 exam, and any number of other issues that may or may not stand in your way. As one other simple example, if you start this process in the fourth quarter you are likely to extend your timeline to completion given the fact that you will experience holiday interruptions.
These are the very basic steps that allow you to establish a CTA but you probably realize that there is much more that still must be considered before you launch. For example, do you want to have a company website or logo designed? If so, unless you have these skills yourself, you are likely going to explore hiring a team to help you create such things along with other marketing items such as, tear sheets, business cards, and investor/prospect presentations.
The type of office space, if any, is also a big part of the overhead cost equation. When you then begin to look deeper at transaction costs you also need to consider if you want to work with an IB. While an IB may bring you business over time how much are you willing to pay today in additional commissions to have that potential and how do those higher trading costs impact your performance? Along these lines you also need to consider your costs to execute and your costs for data given the new CME professional data fee rules that go into effect today. If you use more than one platform for execution or if you trade a very wide variety of markets you need to consider these costs and how they integrate into your overall business expenses.
There are still many other issues that we did not get to discuss in this post. Please contact us for a free consultation and we will walk you through the process. Please also review this PDF for more information on CTA business.
Best of luck to you in your future endeavors. Wilshire Consulting Group.
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Located in Beverly Hills, California with over a decade of experience with regulatory and compliance requirements, Wilshire Consulting Group is boutique independent consulting firm that specializes in providing such services to firms within the financial service industry. Our goal is to take a load off of your shoulders so that you can concentrate on things no one else can do for you … TRADE.
Whether you are start-up or a up-and-running firm, Wilshire Consulting Group is dedicated in building, growing your business by taking over and managing the creation and upkeep of the complicated regulatory part of your firm. The service offerings range from Do-It-Yourself to Full-Service; you pick and choose. You and your staff (those that you approve) will be in constant communication with our staff and will have a username and password to your pending and completed documents at all times … all to ensure smooth sailing.