CFTC Sues Another “Trading Strategy and Systems” Scheme

CFTC Sues Another “Trading Strategy and Systems” Scheme

The Commodity Futures Trading Commission (CFTC) obtained a Consent Order against SchoolofTrade.com (SoT), in connection with the offer and sale of futures trading strategies and systems. The Defendants allegedly: 1) touted the profitability of SoT’s trading strategies and systems and claimed hundreds of thousands of trading profits earned every year when, in fact, none of Defendants’ accounts has ever been profitable; 2) falsely represented to customers and prospective customers that Dufresne was a successful professional trader with years of experience and numerous awards when, in fact, Dufresne has little experience, has never been professionally recognized, and has never been a profitable trader; and 3) purported to make profitable trades in live accounts in real time in SoT’s “Live Trade Room” when, in fact, none of the trades called or profits claimed to have been made in the “Live Trade Room” can be found in any of Defendants’ accounts. This is not the first trading strategy and system scheme the CFTC has sued. In fact, the CFTC has issued several customer protection Fraud Advisories that provide warning signs of fraud, including the Commodity Trading Systems Sold on the Internet Advisory, which helps customers identify this potential fraud.

But trading systems and strategies are not per se in violation of the Commodity Exchange Act.

The exemption to your current business model is Rule 4.14(a)(9), which exempts from registration from an individual if it does not engage in any of these activities: (1) Directing client accounts; or (2) Providing commodity trading advice based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of clients.

Below are specific situations that the CFTC discusses related to the exemptions, notably that A-F are exempt and G-I are not exempt:

A. An individual provides commodity trading advice only through newsletters, books and periodicals. The advice includes specific recommendations, such as recommendations to buy or sell specific futures contracts should a particular price level be reached. Recipients of publications all receive the same advice. Under Rule 4.14(a)(9), this individual is exempt from the Section 4m registration requirement.

B. An individual provides specific commodity trading advice through e-mails, facsimiles, an Internet web site, telephone calls and face-to-face meetings with customers. The advice is based on a computerized trading system, which also is available for purchase and use on a personal computer. Such advice is provided daily and is reactive to the latest market activity. The advice consists only of an instruction to buy or sell a futures contract and where, if at all, to place a stop order. The individual’s clients all receive the same advice. Under Rule 4.14(a)(9), this individual is exempt from the Section 4m registration requirement.

C. An individual provides commodity trading advice through an Internet web site. The web site requires the user to indicate whether he or she has a preference for trading agricultural futures contracts or financial futures contracts. Users who indicate that their preference is agricultural futures contracts receive different advice from those who indicate that financial futures contracts are their preference. The individual’s advice is not “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients,” within the meaning of Rule 4.14(a)(9)(ii). Rather, the individual is merely allowing its clients to select which advisory services they wish to purchase. Therefore, this individual is exempt from the Section 4m registration requirement under Rule 4.14(a)(9).

D. An individual conducts seminars at which it teaches attendees how to trade commodity futures contracts aided by a software program that the individual sells. After the seminar, the individual invites seminar attendees to participate in a question-and-answer session. In response to questions, the individual provides commodity trading advice without asking or receiving information about the personal characteristics of the attendees. Such advice is not “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients,” within the meaning of Rule 4.14(a)(9)(ii). Consequently, this individual is exempt from the Section 4m registration requirement.

E. An individual conducts seminars at which it teaches attendees how to trade commodity futures contracts aided by a software program that the individual sells. Before each seminar commences, the individual polls the attendees to discover their level of ability and knowledge. The individual presents a more advanced seminar for classes that have a higher degree of experience. Because such advice is not “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients,” within the meaning of Rule 4.14(a)(9)(ii), this individual is exempt from the Section 4m registration requirement.

F. An individual conducts a webinar to subscribers at which it displays a “screenshare” of a live chart on the individual’s computer. The individual annotates in real-time, while speaking to subscribers that are in attendance. Two portions of the webinar are recorded, summaries at the open and at the close, and links are published on the blog for subscribers that happened not to be in attendance. Because such advice is not “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients,” within the meaning of Rule 4.14(a)(9)(ii), this individual is exempt from the Section 4m registration requirement.

G. An individual provides commodity trading advice only through facsimile messages, without further discussion with its clients. Before advising any client, the individual gathers current information about the client, such as information about his or her net assets and liabilities, annual income, annual expenses, imminent large purchases, tolerance for risk, purposes for trading, investment goals and expectations, preferred contracts for trading, any existing futures positions, and other current investments. The individual’s advice is different for different clients, depending on their profile, but the individual sends similar advice to groups of clients with similar profiles. Under Rule 4.14(a)(9)(ii), this individual provides commodity trading advice “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients” and, consequently, is not exempt from the registration requirement.

H. An individual gives seminars on commodity interest trading. During the seminar, the individual takes questions from the attendees concerning the trades that the individual recommends for the upcoming week. Before responding to the question of an attendee, the individual asks the attendee for specific information about him or herself, such as the types of information listed in Example F. The individual provides different recommendations to different attendees, based on the information provided. Under Rule 4.14(a)(9)(ii), this individual provides commodity trading advice “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients” and therefore is not exempt from the registration requirement.

I. An individual monitors a client’s trading positions and amount of margin in the client’s account. Based on that information, along with general technical and fundamental market information, the individual gives the client commodity trading advice. Because he provides commodity trading advice “based on, or tailored to, the commodity interest or cash market positions or other circumstances or characteristics of particular clients,” this individual is not exempt from the registration requirement under Rule 4.14(a)(9)(ii).

Companies that wish to rely on these exemptions should consult an experienced CFTC  attorney.

About Kennyhertz Perry’s Commodities, Futures, and Derivatives Practice Group

Kennyhertz Perry advises clients on a wide range of commodities and derivatives regulatory matters.  Kennyhertz Perry has experience in all types of derivative transactions and design structures to meet clients’ specific trading, financial and/or credit needs.  The roots of the practice are in the commodities markets, where Kennyhertz Perry partner Braden Perry spent time as a Senior Trial Attorney with the Commodity Futures Trading Commission.  Our lawyers regularly advise our clients on compliance with the complex laws and regulations governing the securities and derivatives industries, including the Commodity Futures Modernization Act of 2000, the Commodity Exchange Act, the Gramm-Leach-Bliley Act, the Securities Acts of 1933 and 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the SEC and CFTC regulations, the rules of the various derivatives exchanges and clearinghouses and other industry self-regulatory organizations and the “Blue Sky” state securities laws. Keeping abreast of regulatory developments is imperative, and enables our lawyers to guide clients on comment-making about proposed legislation and regulation, provide ongoing operational and compliance counseling, and offer advice on appropriate modifications of transaction structure and documentation.

Clients also benefit from Kennyhertz Perry’s experience in related areas of law, such as litigation, banking, securities, insurance, and its regular practice before the Commodity Futures Trading Commission. Leaders in the financial industry choose Kennyhertz Perry because the firm’s lawyers tailor their advice to the unique issues presented by each matter they handle.

To learn more about Kennyhertz Perry, LLC, please visit kennyhertzperry.com.

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