Forex and foreign exchange information Scams
The Commodity Futures Trading Commission (CFTC) has witnessed increasing
numbers, and a growing complexity, of financial investment opportunities in
recent years, including a sharp rise in foreign currency (forex) trading scams.
Forex stands for "foreign exchange".
The Commodity Exchange Act (the Act) was recently
amended to make clear that it is unlawful to offer foreign currency futures and
option contracts to retail customers unless the offeror is a regulated financial
entity as enumerated in the Act,¹ including futures commission merchants (FCM)
and their affiliates. Off-exchange trading of foreign currency futures or
options with retail customers by counterparties that are not within one of the
enumerated categories is a violation of Section 4(a) of the Act.²
Thus, to the extent there was
confusion as to the applicability of the Act and the jurisdiction of the CFTC in
this area, Congress has made clear that the Act is applicable to, and the CFTC
has jurisdiction over, foreign currency futures and options trading involving
retail customers where the counterparty does not fall within one of the
enumerated categories.³ Trading of foreign currency futures and options on
organized exchanges continues to be permitted. Therefore, trading of foreign
currency futures contracts, or options thereon, is lawful if it occurs on
designated contract markets or derivatives transaction execution facilities.
Trading of options on foreign currency also is lawful if conducted on national
securities exchanges registered pursuant to Section 6(a) of the Securities
Exchange Act of 1934.
Generally, retail customers
are: (1) individuals with less than $10 million in total assets, or less than $5
million in total assets if entering into the transaction to manage risk, and who
are not registered as futures or securities professionals; (2) companies, other
than financial institutions and investment companies, with less than $10 million
in total assets, or a net worth less than $1 million if entering into the
transaction in connection with the conduct of their businesses; and (3)
commodity pools that have less than $5 million in total assets.4
The enumerated counterparties who may lawfully conduct off-exchange foreign
currency trading with retail customers are regulated financial entities. These
include, among others, FCMs and affiliates of FCMs.5 FCMs
and their affiliates that are not also regulated as one of the other enumerated
financial entities, remain subject to the Commission's anti-fraud jurisdiction
with respect to foreign currency transactions.
¹ 7 U.S.C. § 1 et seq. (1994), as
amended by the Commodity Futures Modernization Act of 2000 ("CFMA"),
Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (to be codified as amended in
scattered sections of 7 U.S. C.). Relevant portions of the CFMA are
attached.
² 7 U.S.C. § 6 (a).
³ As a result of this legislative clarification,
the issue of whether trading occurs on a "board of trade," as that term was used
in the former so-called "Treasury Amendment," no longer exists. See
CFTC v. Frankwell, Ltd., 99 F.3d 299 (9th Cir. 1996).
4 See Section 1a(12) of the
newly-amended Act (CFMA Section 101(3)) for the definition of "Eligible Contract
Participant." Any Person not falling within this definition is a retail
customer.
5 The other enumerated
counterparties are: (1) financial institutions; (2) registered broker-dealers;
(3) associated persons of registered broker-dealers; (4) insurance companies or
affiliates thereof; (5) financial holding companies; and (6) investment bank
holding companies. See section 2(c)(2)(B)(ii) of the newly-amended
Act (CFMA Section 102). Note that introducing brokers are not one of the
permitted counterparties and therefore cannot be lawfully involved in
off-exchange foreign currency transactions with retail customers.
Investors can obtain
information about any firm or individual registered with the CFTC, including any
actions taken against a registrant, through the National Futures Association (NFA)
Background Affiliation Status Information Center (BASIC), available on the NFA
website at:
www.nfa.futures.org/basicnet/. Similarly,
information on firms or individuals registered with the Securities and Exchange
Commission may be found through the National Association of Securities Dealers (NASD)
public disclosure program, available on the NASD regulation website at:
www.nasdr.com/2000.htm. Information on
affiliates of FCMs and BDs, however, is confidential under the respective risk
assessment provisions.6 As such, it will not be available
on the NFA or NASD websites. Potential customers that are approached by firms
claiming to be permitted counterparties as affiliates of an FCM or BD are
strongly advised to inquire about the name of the affiliated FCM or BD and to
obtain the name of a contact person at the FCM or BD who can verify the
affiliation.
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