Knowing the type of investment you enter tells you who governs the regulatory process. For example, the simple managed futures trading program would be between yourself, a broker, and someone doing the trading, which could also be the broker. No security is issued. Therefore, the primarily regulators would be the NFA and the CFTC. As we progress, the offerings become a security, perhaps exempt from SEC registration, but a security nonetheless. In these cases, the SEC, the NASD, and the state commissioner of securities are the primary regulators during the selling period. Once trading begins, it is under the jurisdiction of the NFA and CFTC. This is the general rule and is not a legal opinion of any sort.

As an investor, you have recourse to all of the following, depending on the type of investment you make:

• Securities and Exchange Commission (SEC)
• Commodity Futures Trading Commission (CFTC)
• National Association of Securities Dealers (NASD)
• National Future Association (NFA)
• State Security Commission
• State Courts
• Federal Courts

The route you take depends on how serious your complaint is and the advice you get from your attorney.

For simple disputes about trades or commissions, the futures industry regulators have well-established procedures. For example, if you had a unresolved problem in your futures account, you could call the NFA’s toll-free number for advice and information about specific regulation covering the situation. They’d offer to put you in touch with a trained mediator and send you a copy of their booklet A Guide to Arbitration of Customer Disputes. The mediator listens to your side of the story and contacts the brokers, CTA, or brokerage firm(s) involved for their input. An attempt would be made to resolve the issue to everyone’s satisfaction.

If the results of mediation are unsatisfactory, you can compel the broker and his or her firm to binding arbitration with the NFA. This would be before a panel and you could specify that some members be public, i.e., not affiliated with the futures industry. The objective of arbitration is to obtain swift, fair, and inexpensive resolution of a simple dispute. It is considered inexpensive because a lawyer is not required and the rules of evidence are not strict, as they would be at a trial. Additionally, arbitration can take place by phone, so travel costs are avoided. This can be important if you are not near a major financial center.

A second avenue of recourse with futures disputes is the CFTC. They also have a booklet on the subject, entitled Questions and Answers about How You Can Resolve a Commodity Market-Related Dispute. It explains the CFTC’s three reparation procedures.

• Voluntary
• Summary
• Formal

The voluntary procedure is used for claims under $10,000. It is administered by judgment officers appointed by the CFTC. Both parties have an opportunity to uncover facts (”discovery”) and present their arguments in writing. There is no oral hearing. Decisions are final, and no appeal is permitted. A nonrefundable $25 fee is required.

The summary procedure is similar to the voluntary, but it allows for both a limited oral presentation and a written presentation, which takes place in Washington, DC. Further, you can appeal the decision to the CFTC and to a court of law if you are still not satisfied. It handles complaints of $10,000 or less and requires a $50 nonrefundable filing fee.

The formal procedure is designed to handle major complaints— over $10,000. A courtlike hearing is conducted in one of 20 locations throughout the United States before an administrative judge. You can be represented by an attorney if you wish. Appeals to the CFTC and the courts are possible. A $200 nonrefundable fee is required to file.

Besides the NFA and the CFTC, you can take a complaint to the American Arbitration Association or file a civil suit. If you think your broker or his or her firm has committed a criminal offense, you can contact the Federal Bureau of Investigation (FBI) or, if the U.S. mail was involved, the Chief Postal Inspector of the United States Postal Service.

If you are invested in a limited partnership or a fund, you may be able to appeal to your local state attorney general or the Securities and Exchange Commission. Other places with which you may check are the Better Business Bureau and the Federal Trade Commission.

For help deciding your most effective alternative, you need to sit down and discuss it with your attorney. In our opinion, your most effective protection results from systematically conducting due diligence research when selecting a CTA, a trading program (LP, etc.), and a broker. Act with reason—don’t get caught up in an emotional response to the CTA’s track record.

The most beneficial negotiations are done, in our opinion, between customer and client. Once it goes beyond this stage, the costs and complications often outweigh the results. Our advice is to work hard at this level to keep the lines of communication open.

You may be wondering what can be considered as grounds for a legitimate complaint. Losing money? Bad advice? A trade gone sour? An honest error? None of the above. All these should be expected. Anyone who has ever traded will attest that losing money on some trades is part of the nature of the beast. Bad advice simply means your CTA, or his or her company’s research, cannot foretell the future accurately. Nobody can. This shouldn’t be a surprise either. The following are some of the grounds for a formal complaint:

• Being high-pressured into opening an account
• Receiving unreasonable promises, such as “This CTA is guaranteed to make you big bucks!”
• Any fraudulent or deceitful communications made to you by your CTA or his or her firm
• Excessive trading in your account
• Uncorrected errors in your account

If you have an account that a third party is trading, you can ask the FCM, via the broker, to send you duplicate statements. With pools, LPs, and funds, this is not possible. You have a syndicator that is responsible for checking everything. By monitoring the duplicate statements, you can catch most errors. You want to check to see:

• Are the commissions charged correct?
• Is the strategy agreed upon with the CTA or trader being followed?
• Are any markets you told the CTA to avoid being traded?

It doesn’t hurt once in a while to go over daily or monthly statement with your trader. Let him or her know you’re monitoring the trading closely. Most importantly, you have every right to do this because it’. your money at risk.

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