Welcome to Capital Management Services Group

We would like to thank Hannah and the company for their invaluable help in forming our incubator hedge fund. They were extremely knowledgeable, efficient, and professional while working with us, and we are glad to have them as a vital resource as we grow our incubator hedge fund into a full-fledged one. Dale Angus, Golden Egg Capital Management LLC. March 28, 2012.

Forex Funds and Forex Advisory Services
If you operate a fund that trades forex or if you provide forex managed account services or trading advice to customers you are subject to a regulatory framework that puts you on equal footing with commodity trading advisors (CTA) that trade on-exchange commodity future and option contracts (commodities).  Learn More About CFTC Regulation   CFTC regulations require you to register with the NFA and meet the disclosure, record keeping, reporting, and other requirements applicable to CTAs trading commodities.  Even those trading in "foreign ordinaries" (i.e., equity securities exclusively traded overseas) may result in exposure to forex-related regulation (either now or in the near future) by the SEC, CFTC, NFA, or FINRA (see below).  Click Here to Learn More About NFA Registration

How do I Start a Forex Fund?
Generally, to start a forex fund, you must (1) pass the Series 3 Exam and Series 34 Exam; (2) join the National Futures Association (NFA) as a CTA; and (3) submit your Forex Disclosure Document  (offering documents) to the NFA for approval.  Click Here for a Forex Hedge Fund Checklist

 

Forex trading advisors should have been registered with the NFA by October 18, 2010.  If you are not NFA registered, you should not provide spot forex account management services to a fund until you are registered with the NFA.  Associated persons (AP) of an NFA registered firm can provide spot forex account management services only if they have passed the Series 34 Exam.  APs registered before May 22, 2008 do not have to take and pass the Series 34 Exam.  There are some exemptions from registration. Learn More About Exemptions from NFA Registration.

 

Disclosure Documents
Both forex CTAs and forex CPOs need to have their forex disclosure documents (offering documents) approved for use with customers by the NFA.  The disclosure document review and approval process takes a while.  The disclosure document review process can be straight-forward or painfully miserable, depending on how experienced the document examiner assigned to the review is.  The experience of the reviewer impacts on the time line leading to approval of the disclosure document for use with customers.  Inexperienced reviewers will increase your legal costs.  As our law firm completes many CTA and CPO registrations, we have observed this fact directly.  We have submitted virtually identical disclosure documents to the NFA at the same time and receive comment letters for each that are completely disparate.  This is due to the fact they were assigned to two different reviewers.  This is our repeated experience with the NFA. The NFA review process is labor intensive and how long it takes for your disclosure document to be approved depends on the luck of the draw!  "Disclosure Documents" is the NFA name for offering documents.  Click Here to Learn More About Offering Documents

 

What is the NFA Registration Process?
The Commodity Futures Trading Commission (CFTC) is the most prominent regulatory organization in spot forex and the National Futures Association (NFA) operates in association with the CFTC.  The CFTC registration and disclosure document review process is handled exclusively by the NFA.  While NFA registration can be completed quickly if a forex manager has completed the forex exams and the fingerprint requirement, the disclosure document (offering document) review process takes a little time as the NFA scrutinizes the documents.  The offering documents must disclose performance fees and a break-even calculation.

 

While forex disclosure documents are similar to futures/commodities disclosure documents, there are a few specific forex disclosures managers need to include in the forex disclosure documents.  Forex disclosure documents and forex managed account agreements are legal documents used with customers and should be drafted by an experienced attorney, such as Hannah Terhune.

Spot Forex Introducing Brokers (IB)
Persons who solicit or accept orders for Futures Commission Merchants (FCM) or Retail Foreign Exchange Dealer (RFED) for spot forex must register with the NFA as an Introducing Broker.  Forex IBs must either maintain the net capital requirements applicable to futures and commodity options IBs or to enter into guarantee agreements with the FCMs and RFEDs they deal with. To become an Introducing Broker you must (1) pass the Series 3 Exam (2) join the NFA as an Introducing Broker and (3) set up a clearing arrangement with a Futures Commission Merchant.

A forex IB can choose (1) to meet the minimum net capital requirements applicable to futures and commodity options IBs, or  (2) to enter into a guarantee agreement with an FCM or an RFED. The NFA requires an IB to have a net worth of $45,000. If you cannot meet this capital requirement you can establish a Guaranteed Introducing Broker where the clearing FCM provides the equity.  As a guaranteed IB, the IB can only clear through its guaranteeing FCM. As an IB cannot be a party to more than one guarantee agreement at a time, it effectively makes IBs that can't maintain the minimum net capital requirements exclusive sales agents for the FCM or RFED which they deal with.  An independent IB (one that meets the net worth requirement) can establish clearing relationships with multiple FCMs.

Our Customers
Hannah Terhune and her associates have provided legal advice and services to me for over a year.  She provided initial guidance to help determine the kind of fund most suitable for my goals, created the legal documents that are the framework for my hedge-fund, and assisted with ADV submissions to register my company as an Investment Advisor.  I continue to rely on her for ongoing compliance issues in this complex and dynamic industry.  I found Ms Terhune and her associates to be extremely knowledgeable and helpful in a very responsive way, with friendly and professional manners.  Overall a very good experience. Highly recommended. Marty Cawthon ChipChat Technology Group

Should I Set Up a Forex Managed Account Business or a Forex Pool?
It's not a tough decision!  It costs more money to set up a forex pool and the process takes a little longer.  If you have customers ready, willing and able to commit money now, start by setting up a forex managed account business and add a forex pool later.  With a forex managed account business, you do not have to hire an auditor and an administrator.  Your customers will open and fund forex trading accounts at the forex broker you direct them to and you will manage their accounts pursuant to the NFA approved Disclosure Document you ask them to read and sign before committing to you and your trading program.  Learn More About U.S. & Foreign Company Formation Services

How is a Forex Fund Structured?
An incubator fund is typically structured in the United States by forming two separate entities:  (1) a limited partnership (LP) or a limited liability company (LLC) which will serve as the fund; and (2) a limited liability company (LLC) which will serve as the investment manager / general partner of the fund (or managing member if the fund is an LLC).  Click Here to Learn More About Hedge Fund Formations and Incubator Funds.  

Our Customers
I would like to state unequivocally that I have had a completely positive experience in dealing with Capital Management Services Group. Truly, from the first phone call that I made to Capital Management, to the conference call that was arranged with Hannah Terhune, the time she took in answering all of my questions, and, finally, to the follow-up by Amy Hong.  My case involved the establishment of a Forex Incubator Fund, and was thoroughly handled. Hannah Terhune responded promptly to my subsequent phone calls and Amy Hong is absolutely 100% efficient. I, certainly, plan to enlist Capital Management's services for my legal needs in the future concerning fund management. I would rate my experience and results 5 out of 5 stars! Totally satisfied, Rxxxxxx Sxxxx, September 22, 2010

Forex Fund Incubation and Incubator Forex Hedge Funds
There is an alternative approach for those who want to test the waters before spending $10k or more to set up a hedge fund.  Setting up an incubator forex hedge fund allows you to develop a track record which will assist in attracting investors later in time. The incubator hedge fund is created by breaking down the fund development process into two stages. The first stage sets up the fund and investment management company.  Completion of the first stage allows you trade and develop a performance record using your own or other's money as seed capital.  In the second stage your offering documents are written and the fund's trading history is compiled. Learn More About Incubator Forex Funds

What are Accredited Investors?
Generally, accredited investors include individuals with a minimum annual income or $1 million in net worth and most institutions with $5 million in assets. Learn More About Accredited Investors

Should I Avoid Non-Accredited Investors?
No. If  you allow non-accredited investors to invest in the fund, you need to have an initial (low-cost) launch audit.  Make sure that your non-accredited investors are have sufficient knowledge and experience in financial matters in order to evaluate the merits and risks of investing in your hedge fund.  A U.S. forex fund may have up to 35 non-accredited investors.

Taxes on Forex Trading
Foreign currency gains and losses (including gains and losses on forward, future and option contracts) are taxed under Section 988. That means that forex trading gains are taxed at the short-term (ordinary) tax rates. 

 

There is an exception for what is called a "qualified fund" where an election can be made to treat profits from foreign currency trades under Section 1256 (mark-to-market and a blended rate of 60% long-term gain and 40% short-term gain (regardless of how long a position is held).  However, the fund must be meet a statutory definition of "qualified fund" which has its principal business the trading of forward, future and option contracts. There are also other tests to meet the definition of a qualified fund. In a qualified fund currency futures--otherwise known as regulated futures contracts--are taxed under Section 1256.  Forward contracts and over-the-counter options in other traded currencies for which there is also trading in regulated futures qualify as Section 1256 contracts (but after 2007, some doubt).  Gains in a qualified fund from futures trading are taxed at the 60/40 blended rate. Call the IRS first if you are tempted to take wild tax return positions based on you have read elsewhere on the Internet on this topic.   Click Here for More Information on Hedge Fund Taxes

Must I Register with the NFA I Trade of Foreign Ordinaries?
Yes.  Many broker-dealers offer the opportunity to buy and sell foreign ordinaries.  In order to settle these transactions, brokers must  convert customer monies into foreign currency and back again.  In the typical transaction, a broker forwards a customer order to a correspondent overseas who executes the transaction in the foreign market in the local currency.  On settlement date, the executing firm settles the transaction in the local currency, thereby necessitating another currency conversion.  Ultimately, the U.S. customer of the broker settles the trade in U.S. dollars without being involved in the actual currency conversion (similar to the way credit card companies settle foreign credit card purchases with their customers in U.S. dollars). 

 

Under Dodd-Frank, the issue is whether the purchase and sale of foreign ordinaries involves a retail forex transaction.  Spot forex transactions normally settle on the second day after trade date and are expressly excluded from Dodd-Frank.  However, securities transactions, including trades in foreign ordinaries settle on the third day after trade date.  As a result, trading of foreign ordinaries may involve broker-dealers in regulated retail forex transactions.

In recognition of this issue, on July 13, 2011, the SEC issued temporary final rules that operate to extend the effective date of forex regulation on broker-dealers for one year.  Notwithstanding this deferral, brokers are on notice that the regulators have not deferred the applicability of their regulations to retail forex transactions by broker-dealers.

Currently, various NFA rules applicable to its members apply with respect to a broker-dealer's retail forex activities, such as NFA Compliance Rule 2-29 on Communications with the Public and Promotional materials.  Broker-dealers not required to register as Forex Dealer Members are subject to a variety of NFA regulations.

 

In addition, in 2008, FINRA issued Notice 08-66 advising them that certain FINRA rules apply to members with respect to their retail forex transactions.  FINRA maintains that it will look to NFA rules and interpretations as the applicable standards under Rule 2110.

Given the universe of rules applicable to FINRA members involved in retail forex (directly or indirectly through trading in foreign ordinaries), those trading foreign ordinaries on behalf of third parties for a fee, whether in an "equity" hedge fund or managed accounts, it is better to assume that squaring up with the NFA is the better path.

 

Short for contracts for differences, CFDs allow speculation on the directional movement of numerous financial markets and instruments.  Unlike traditional trading, you don’t own the actual instruments traded on the market but derivative contracts whose underlying asset defines the price parameters.  Moreover, CFDs provide the opportunity to use leverage to trade large positions with a small amount of capital.  CFDs are available for equities, indices, commodities, bonds, interest rates, forex and inflation futures.

 

With binaries, traders try to successfully forecast the outcome of a particular event.  The event can be anything, such as the closing price of the UK100 or Gold futures.  When traders believe that a particular event will occur, they buy a binary quote in the hope of profiting from that event happening.  If they don’t think the event will happen, they will sell the quote.  Unlike other financial products, binaries have only two possible outcomes:  either the event happens by a certain time or it does not.  To gauge how likely an event will happen by the expiry, binaries are priced on a range from zero to 100.

 

With an FX option, a buyer and a seller enter a contract for the right to buy or sell an underlying currency pair at a specific price on a particular date.

 

Again, given the universe of rules applicable to FINRA members involved in retail forex (directly or indirectly through trading in foreign ordinaries), those trading foreign binaries involving commodities and forex, CFDs involving commodities and forex, and FX options on behalf of third parties for a fee, whether in an "equity" hedge fund or managed accounts, it is better to assume that squaring up with the NFA is the better path.

Background on Forex Regulation
In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Congress intends to close loopholes in the regulation of retail foreign exchange (forex) transactions. Prior to 2000, foreign currency trading by retail customers was largely unregulated. Congress attempted to address this situation in Commodity Futures Modernization Act of 2000. This law gave the CFTC the authority to regulate over-the-counter (OTC) futures transactions involving a retail customer on one side of the trade. The CFTC was not given jurisdiction to regulate OTC spot transactions, which normally settle in two days.

Acting on this authority, the CFTC brought an enforcement case against a foreign exchange dealer that was offering retail customers the opportunity to buy and sell foreign currency contracts that nominally settled in two days (the normal settlement cycle for foreign currency trades), but in reality were virtually always rolled over into a new contract without settlement actually taking place until the transaction was offset. The case was appealed to the Seventh Circuit Court of Appeals, which ruled in CFTC v. Zelener that rolling spot transactions were, in fact, spot transactions and, therefore, the CFTC had no jurisdiction to pursue its enforcement case.

Congress tried again in 2008 to address retail forex trading by amending the Commodities Exchange Act to regulate any OTC forex transaction involving a retail customer that did not, in fact, settle in two days by actual delivery of foreign currency.  However, the law contained various exceptions for entities that were regulated by other regulators, such as insurance regulators or the SEC. The law excluded "investment banking holding companies" which include all affiliates for a broker-dealer holding company. This allowed  enterprising entrepreneurs to avoid regulation  by affiliating with an excluded entity.

Congress has tried to get it right now by including expanded regulatory authority over retail forex transactions in Dodd-Frank. Congress has given regulatory jurisdiction to a number of federal regulators, hoping to close the loophole created in 2008.

Who regulates forex in the United States?
In the United States, regulatory oversight for financial and futures industry for U.S. clients or those looking to do business in the United States falls under the jurisdiction of the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), Commodity Futures & Trading Commission (CFTC) and/or the National Futures Association (NFA). The CFTC was begun in 1974 to protect investors in the futures and commodities trades. The CFTC determines the rules regulating the commodity brokerage industry, and its stated mission to investors, trader and the public from unethical practices in the commodity and financial futures and options markets. In addition, the CFTC is responsible with creating the regulatory environment that will foster a free market environment that fosters competition. The CFTC has the authority to close any unregulated entity in the retail forex industry. For 150 years prior to the development of the CFTC futures had been traded on the stock market under federal restrictions but those rulings only kept actual market stability fair without actually regulating how companies worked with clients. Futures trading have always been a primary interest for investors and pertain to the trade of future promised goods such as fruits, grains, and juices still un-harvested but with a 'future' date for market. The futures market also deals with currency trading and the ever fluctuating foreign currency values against the dollar. With the new public offerings of forex and massive influxes of individuals never before entering the finance world the need for protection from fraud and manipulation was heightened to new levels. The CFTC has undergone many changes and improvements, all with the focus on promoting open and competitive forex and commodities trading in a safe and secure environment.

In 2000, the U.S. Congress gave the CFTC basic levels of authority over forex dealers operating in the United States. The wording in that particular bill was pretty vague, and left a whole range of other players in the forex markets, such as introducing brokers, pretty much unregulated. A 2004 court case created the Zelner loophole (now closed in 2010) which allowed off-exchange spot forex market makers to duck CFTC authority. The NFA (National Futures Association) is an organization within the U.S futures market that was created in 1982. It is industry-wide and is self regulated. The NFA enforces adherence to certain capital requirements, and maintenance of a sound financial structure by its members. It also requires that member firms actively supervise their employees, agents and affiliates to prevent fraud and unlawful activities.

CFTC
The CFTC is authorized to adopt registration rules and other requirements for retail forex dealers subject to its exclusive jurisdiction or unregulated by another federal agency.  This would include FCMs that are registered with the CFTC but not subject to SEC or banking regulation, as well as dealers that are not regulated by any federal regulator (RFEDs).  The CFTC also is permitted to regulate any person soliciting retail forex transactions, including introducing brokers, as long as the person is not regulated by the SEC or a banking regulator.

SEC and Other Regulators
Under Dodd-Frank the SEC now has express authority to adopt rules regulating forex dealers that are broker-dealers.  The statutory provisions would prohibit a broker-dealer from acting as a forex dealer absent enabling SEC regulations.  On July 13, 2011, the SEC adopted rules that impose no new requirements for broker-dealers acting as forex dealers for one year in order for the SEC to study the impact of regulations in trading in foreign ordinaries among other issues.

Self-Regulatory Organizations
Applicable statutory provisions do not prohibit self-regulatory organizations from regulating the activities of their members even though the federal regulator itself is prohibited from regulating those subject to its jurisdiction.  As a result, both the NFA and FINRA have adopted rules governing retail forex activities of their members.

NFA
The NFA amended its rules to establish a new category of membership, a Forex Dealer Member.  As of October 1, 2011, this category includes any NFA member that acts as counter-party or offers to act as counterpart to a retail customer in a forex trade. Thus, any broker-dealer that is an NFA member and is acting as principal in retail forex trades would have to register as an NFA Forex Dealer Member and would be subject to a variety of NFA regulations.

Why Hire Us?
Advising individuals on hedge fund startups worldwide, we are experts on investment adviser laws, hedge fund laws and regulations, forex fund regulations, and managed futures regulations.Our expertise extends to a wide variety of services, including state investment adviser registratoins, SEC investment adviser registrations, U.S. hedge fund formations, foreign hedge fund formations, forex fund startups, and managed futures fund startups. Additionally, we handle commodity pool formations, NFA registrations, cross border business planning, and investment manager regsitration in numerous vountries.

More Reasons to Hire Us
When you engage us for hedge fund you get a unique combination of securities, tax, and international experience, focused on the trader niche. We have established a leadership position with traders. We are one destination for all your very special hedge fund and trader tax needs. We think we have the best set of offering documents based on the current and ever changing federal, state and offshore securities, commodities, and tax laws. We aim and deliver quick turnaround times, because we understand that our customers want to begin their money management business as soon as possible. We conceive, structure, and deploy the best tax saving strategies into your hedge fund vehicle (for the benefit of the manager and their investors) and your management company. Investors value tax-savings strategies and we utilize all our special knowledge and ideas in this area. Our customers value our one-stop relationship. We will help you start your business and continue to assist you. Our tax services division handles accounting, software, and tax compliance, including all tax matters (tax planning and tax returns). Only one thing counts with us and that's our customer relationships!