The National Futures Association (NFA) issued a notice on August 9, 2018, to its members announcing that new disclosures relating to virtual currencies and virtual currency derivatives will be required of NFA members that advise on or trade in virtual currency products. The disclosure requirements, which were contemplated by the NFA’s recently-adopted Interpretive Notice 9073, will be effective as of October 31, 2018. NFA members will need to include the virtual currency disclosures in the promotional materials, offering documents and other disclosure documents they provide to customers.
The new disclosure requirements are applicable to commodity pool operators (CPOs) and commodity trading advisors (CTAs) that are NFA members offering commodity pools, including exempt pools that operate pursuant to a Commodities Futures Trading Commission rule exemption (such as Rule 4.7 or Rule 4.13(a)(3)), or other trading programs, including managed accounts, that trade virtual currencies or virtual currency derivatives. The requirements also apply to CPOs and CTAs that advise on or trade virtual currencies in the spot market.
The NFA’s Interpretive Notice describes a variety of features and risks of virtual currencies that CPOs and CTAs should consider addressing in their disclosure documents and promotional material. The list of considerations includes, among other things: unique features of virtual currencies; cybersecurity and risks related to a nascent technology; price volatility and liquidity concerns; the opacity of the spot market; risks relating to virtual currency exchanges, intermediaries and custodians; transaction fees; and an uncertain regulatory landscape. CPOs and CTAs that advise on or trade in such products should review their disclosure and promotional materials and consider whether such materials need to be updated in light of the requirements and concerns set forth in the Interpretive Notice.
In addition to new disclosures relating to the considerations above, for CPOs and CTAs that advise on or trade in virtual currencies in the spot market for a pool, an exempt pool or a managed account program, the NFA is requiring that a standardized disclosure be prominently displayed in all disclosure documents and promotional materials at or before the time the CPO or CTA engages in such activities. The standardized disclosure language can be found in the Interpretive Notice and relates to the lack of regulatory oversight by the NFA in regards to underlying or spot virtual currency transactions, and the opaque nature of the market. There is a separate standardized disclosure required to be provided to customers or counterparties for CPOs and CTAs operating in spot market virtual currency activities outside of a pool, exempt pool or managed account program.
Any promotional materials that are used on or after October 31, 2018 relating to virtual currency activities must satisfy the disclosure requirements set forth in the Interpretive Notice. If disclosure documents or other offering documents used in connection with a pool, exempt pool or managed account program are not materially complete in light of the disclosure requirements in the Interpretive Notice, such documents must be updated and distributed to existing investors by November 21, 2018 (and provided to prospective investors in advance of any investment).