Series 3 — National Commodity Futures Exam — All Questions

Which entity is the federal agency that administers the Commodity Exchange Act and oversees the U.S. futures markets?

• a.The Securities and Exchange Commission (SEC)
• b.The Commodity Futures Trading Commission (CFTC)✓
• c.The National Futures Association (NFA)
• d.The Federal Reserve Board

The CFTC is the independent federal regulator that administers the Commodity Exchange Act and polices the futures markets for fraud and manipulation. The SEC regulates securities, and the NFA is the industry self-regulatory organization.

The National Futures Association (NFA) is best described as:

• a.The derivatives industry's self-regulatory organization✓
• b.A federal government agency created by Congress
• c.A clearinghouse that guarantees every futures trade
• d.A commodity exchange where contracts are listed

The NFA is the self-regulatory organization (SRO) whose members include FCMs, IBs, CPOs, CTAs, and their associated persons. It is not a government agency, a clearinghouse, or an exchange.

A firm that solicits and accepts customer orders and holds customer funds must register as a:

• a.Commodity Trading Advisor (CTA)
• b.Introducing Broker (IB)
• c.Futures Commission Merchant (FCM)✓
• d.Commodity Pool Operator (CPO)

An FCM carries customer accounts and holds customer money. An IB solicits business but does not hold funds, a CTA gives advice, and a CPO operates a pooled investment vehicle.

Speculative position limits set by the CFTC and exchanges are designed primarily to:

• a.Guarantee profits for bona fide hedgers
• b.Prevent excessive speculation and market manipulation✓
• c.Force all speculators to take physical delivery
• d.Eliminate basis risk for hedgers

Position limits cap the number of contracts a speculator may hold to curb excessive speculation and manipulation. Bona fide hedgers can apply for exemptions from these limits because they are offsetting real commercial risk.

Before a non-institutional customer may begin trading futures, the firm must ensure the customer has received:

• a.The standardized risk disclosure statement describing the risk of loss✓
• b.A guarantee that losses will not exceed the initial margin
• c.A prospectus filed with the SEC
• d.Written approval from the CFTC for that customer

Firms must deliver the standardized risk disclosure document, which explains that futures trading carries a substantial risk of loss, before opening the account. There is no guarantee against loss and no SEC prospectus for futures.

Under anti-money-laundering rules, a futures firm that detects a transaction with no apparent lawful purpose is generally required to file a:

• a.Form 8-K with the SEC
• b.Risk disclosure statement
• c.Registration statement with the NFA
• d.Suspicious Activity Report (SAR)✓

Under the Bank Secrecy Act and USA PATRIOT Act, firms must maintain an AML program and file Suspicious Activity Reports (SARs) for qualifying suspicious transactions, along with a customer identification program and ongoing monitoring.

A person passes the Series 3 but has not yet filed a registration application. May he begin soliciting customer futures orders?

• a.No, he must first be registered✓
• b.Yes, passing the exam is enough
• c.Yes, for up to 60 days
• d.Yes, if his firm is an NFA Member

NFA states that simply passing a futures exam does not allow an individual to act as a registered commodity broker; an application must be filed with NFA. The CEA makes it unlawful to solicit orders for an FCM or IB without AP registration.

What form does an individual use to apply for registration as an associated person?

• a.Form 40
• b.Form 7-R
• c.Form 8-R✓
• d.Form 1-FR-IB

Application for registration as an associated person must be on Form 8-R. Form 7-R is the firm application, and Form 40 is a trader's Statement of Reporting Trader.

Which registrants are generally required to be NFA Members in order to do business with other NFA Members on behalf of customers?

• a.Only CPOs and CTAs
• b.Floor traders only
• c.Only FCMs
• d.FCMs, IBs, CPOs, CTAs✓

NFA Bylaw 1101 bars Members from carrying accounts, accepting orders or handling transactions for a non-Member that is required to be registered as an FCM, IB, CPO, CTA or LTM and is acting for customers, pools or clients.

Which NFA rule requires Members to observe high standards of commercial honor and just and equitable principles of trade?

• a.Compliance Rule 2-29
• b.Compliance Rule 2-8
• c.Compliance Rule 2-30
• d.Compliance Rule 2-4✓

Rule 2-4 states that Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade. Rule 2-8 covers discretionary accounts, 2-29 promotional material, and 2-30 customer information and risk disclosure.

Under NFA Compliance Rule 2-30, who approves the opening of a new customer account?

• a.NFA's Member Oversight Department
• b.A supervisor such as an officer✓
• c.The AP who solicited the account
• d.The customer's bank

A Member may open, introduce or agree to direct trading in an account only upon the approval of a partner, officer, director, branch office manager or supervisory employee.

A customer grants her AP written trading authority. Each trade in the account is then presumed to have been made:

• a.Under that written authority✓
• b.On the customer's specific instructions
• c.Only after the customer's oral approval
• d.By the branch manager

Rule 2-8 provides that each trade in an account the Member or Associate has written authorization to trade is presumed made under that authorization unless otherwise indicated in writing at the time the trade was placed.

Which NFA rule requires FCMs and IBs to maintain a written anti-money laundering program?

• a.Compliance Rule 2-13
• b.Compliance Rule 2-9✓
• c.Compliance Rule 2-4
• d.Compliance Rule 2-29

Rule 2-9(c) requires each FCM and IB Member to develop and implement a written anti-money laundering program approved in writing by senior management. Rule 2-9 also contains the general duty to supervise diligently.

A trader's position reaches the CFTC reporting level. Which form does the FCM file to identify the newly reportable account?

• a.Form 8-R
• b.Form 1-FR-FCM
• c.Form 7-R
• d.Form 102✓

For each account that becomes reportable as a special account, the FCM submits a Form 102 no later than 9 a.m. on the next business day. Form 8-R is an individual's registration form.

Which positions are exempt from federal speculative position limits?

• a.All spread positions
• b.Positions of any NFA Member
• c.Qualifying bona fide hedging positions✓
• d.Positions under the reporting level

A person may exceed the federal speculative limits for positions that meet the bona fide hedging requirements of Part 150. The glossary likewise excludes persons eligible for a hedge exemption from speculative limits.

Who must be registered as a floor broker?

• a.Any person who trades futures for his own account
• b.Any customer who places a market order
• c.Any AP of an FCM
• d.A person who executes others' orders on an exchange✓

A floor broker executes orders for another person in a pit or other place provided by an exchange. Trading only for one's own account in the pit describes a floor trader.

How long must an FCM generally keep records required under CFTC Regulation 1.31?

• a.One year
• b.Three years
• c.Ten years
• d.Five years✓

A records entity must keep each regulatory record, other than certain swap records, for not less than five years from the date it was created.

What is the minimum adjusted net capital requirement for an FCM that is not a swap dealer?

• a.$1,000,000✓
• b.$45,000
• c.$20,000,000
• d.$250,000

The CFTC's minimum adjusted net capital for an FCM includes $1,000,000, or $20,000,000 if the FCM is also a swap dealer. $45,000 is the IB minimum.

An IB may not simultaneously be a party to more than how many guarantee agreements?

• a.Two
• b.One✓
• c.Three
• d.Any number, if each FCM agrees

An introducing broker may not simultaneously be a party to more than one guarantee agreement.

A customer's option order is received by an FCM. In addition to the time received, the order ticket must record:

• a.The customer's net worth
• b.Its transmission time✓
• c.The exchange margin level
• d.The AP's commission

For commodity option orders, the firm must record the time, to the nearest minute, the order is transmitted for execution, in addition to the date and time it is received.

Under NFA Compliance Rule 2-29, promotional material that mentions the possibility of profit must also include:

• a.A list of the firm's principals
• b.The firm's net capital
• c.An equally prominent risk warning✓
• d.A guarantee of performance

Promotional material may not mention the possibility of profit unless accompanied by an equally prominent discussion of the risk of loss.

Which statement may an FCM or IB make to a prospective customer?

• a."Futures trading is appropriate for everyone."
• b."Futures trading involves substantial risk of loss."✓
• c."We guarantee you cannot lose more than 10 percent."
• d."We will not call you for margin."

The CFTC's risk disclosure says the risk of loss in futures trading can be substantial. NFA's guide prohibits guaranteeing a customer against loss or claiming the firm will not collect margin, and Rule 2-29 prohibits stating that trading is appropriate for all persons.

A CPO must operate its pool as:

• a.A separate legal entity✓
• b.A joint account with the participants
• c.An account at the CPO's bank
• d.A division of the CPO

A CPO must operate its pool as an entity cognizable as a legal entity separate from that of the pool operator, and pool funds must be received in the pool's name.

A CTA may not use a Disclosure Document dated more than how many months before its use?

• a.12✓
• b.18
• c.9
• d.6

No CTA may use a Disclosure Document dated more than twelve months prior to the date of its use.

A pool's Disclosure Document must present performance for:

• a.The most recent year only
• b.The most recent three years
• c.Every year since the CPO began business
• d.Five years plus year-to-date✓

Required performance information must be presented for the most recent five calendar years and year-to-date, or the life of the pool or program if shorter.

Within how many days after the end of a reporting period must a CPO send participants an Account Statement?

• a.30 calendar days✓
• b.60 calendar days
• c.10 calendar days
• d.90 calendar days

A CPO must distribute each Account Statement within 30 calendar days after the last date of the reporting period. Ninety days is the deadline for the Annual Report.

Which forums may a customer use to resolve a futures dispute with a registrant?

• a.Only the exchange where the trade occurred
• b.Civil court, CFTC reparations or arbitration✓
• c.Civil court only
• d.NFA arbitration only

The CFTC's required cautionary language says three forums exist for the resolution of commodity disputes: civil court litigation, reparations at the CFTC, and arbitration conducted by a self-regulatory or other private organization.

What must NFA's Business Conduct Committee do if it finds reason to believe a Member violated NFA rules and the matter should be adjudicated?

• a.Refer the matter to arbitration
• b.Impose a fine immediately
• c.Close the matter with a warning letter
• d.Serve a written Complaint✓

The BCC shall serve a written and dated Complaint if it finds reason to believe an NFA requirement has been violated and the matter should be adjudicated. A warning letter accompanies closing a matter when prosecution is unwarranted.

Which NFA penalty prevents a person from being associated with any NFA Member?

• a.A warning letter
• b.Censure
• c.A bar✓
• d.A cease-and-desist order

Rule 3-14 lists a bar or suspension from association with a Member among the available penalties, along with expulsion, censure or reprimand, fines and cease-and-desist orders. A warning letter is not among the Rule 3-14 penalties; the BCC may issue one when it closes a matter without prosecution.