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Items you need to improve and protect your FCM or IB...

1.   Very important and useful forms and letters for different applications for the FCM and the Introducing Broker.  Visit our "forms" page.

SO YOU WANT TO BE A FUTURES INTRODUCING BROKER?...
...WATCH OUT!!

Nothing seems more exciting than making the decision to be your own boss, freeing you from the bonds of reporting to a superior, and finally keeping the full benefit of your hard work. The decision to take the leap and become an Introducing Broker ( IB") intrigues; but, do you know what is in store?

Sure, you have considered all of the issues that normally affect your business decisions. You put the pencil to paper, or, being in the Internet, the keyboard to the spreadsheet. You've crunched the numbers. You've checked with vendors, explored the rents, analyzed deals from FCMs, even considered starting a one-person shop at home. The numbers don't lie. You can do much better on your own --- or can you?:

Have you thought about compliance? Too many APs start in their own business without making any arrangements to meet the myriad of regulatory requirements that must concern every IB. Remember that NFA's and CFTC's requirements are the same, whether your are a one-person home office or a multi-broker operation. A couple of reasons explain the lack of knowledge APs have regarding these regulatory issues.

First, when an AP works for a firm, that firm supervises the AP's activities. Much of that supervision and compliance occurs behind the scenes. In many cases, due to the ignorance of the IB's principal, much of the required supervision never materializes. (This is one reason IBs go out of business after a couple of years --- the regulators catch up with the IB and force it to shut down because of regulatory incompetence.) In these cases, the ignorance of the principal is passed on, so to speak, to his employees.

Second, the compliance and supervisory requirements hide in complex regulation sections of the CFTC and the rules of the NFA. Much of the information is contained in interpretive notices" which appear as footnotes to rules but are actually more important than the rule itself. In most cases, the untrained AP does not even know that these interpretative notices exist, and if they did know, would have a difficult time interpreting their meaning.

Third and maybe worst of all, NFA, CFTC and their staffs interpret rules without the interpretation being found in any written form! Only compliance professionals familiar with the workings of NFA and CFTC know what the regulators expect of you. More often than not, principals will be taken totally by surprise after learning that the regulators have claimaed an apparent violation of a Rule without the rule apparently prohibiting the supposedly offensive activity.

How does NFA check up and assure that you are following their rules. NFA performs compliance audits. A compliance audit consists of at least two NFA employees appearing at your door, unannounced, of course, and methodically proceeding to examine every document and every person in your office. Audits can last a couple of days or a couple of weeks, depending on a variety of factors. Let me say that the length of time it takes to complete your audit is affected by the size of your office and the number of apparent violations" discovered by the auditors. Also, the types of products traded, the degree of mass marketing, especially radio and TV advertising and the size of the commissions charged are also factors. The fact is, that if you are not ready for any audit before it happens, no good will come of it. To be forewarned is to be forearmed and becoming an IB without the proper consultation in the compliance area can be a recipe for disaster. I urge every AP considering his own business to consult with a futures attorney or compliance professional before taking the giant step into the world of regulated self employment. 

Gary M. Sinclair has been involved in the futures industry for over twenty five years. His experience includes working on the floor of the Chicago Mercantile Exchange, acting as compliance officer and house counsel for a large clearing member at the Merc, trading and filling orders in the S&P pit at the Merc, teaching courses in futures and compliance, dealing with regulators on a variety of regulatory issues and acting as an expert witness for other attorneys in the area of futures and options. Currently, Mr. Sinclair has his own law firm in Chicago: Gary M. Sinclair, Attorney at Law.  His practice concentrates in the area of futures regulation and litigation. Call us to reach Gary.

NOTICE:  Investment Reference does not recommend or endorse any products, brokerage firms, CTAs, CPOs or representatives.  All material contained in any article is only the opinion of the person authoring the article.  Investment reference will publish any article submitted as a way of offering a public forum and a means of exchanges of views and ideas. Investment Reference also reserves the right to make the final decision on what to publish, and will not publish anything that it considers offensive, slanderous, or fraudulent.  Investment Reference cannot and will not be held responsible for any information or content in any articles except those which it authors itself.

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Last modified: April 05, 2008