How to Form a Commodity Trading Business
The commodity markets offer enormous opportunity for skilled traders who excel at trading derivatives, but can be confusing for those who want to use their talent to manage money for investor. The SEC (Security & Exchange Commission) has strict guidelines for handling investors money and that can be an obstacle for those who don't know how to form a commodity trading business. Fortunately, by following a few key guidelines, you can begin trading commodities for investors without running afoul of the SEC.
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Instructions
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Setting Up Shop
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1
Contact the CFTC (Commodity Trading Futures Commission) to register as a CTA, or Commodity Trading Advisor. CTAs are registered with the CFTC and receive management and/or incentive fees based for their services as professional money managers that make up the managed futures industry.
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2
Apply and pass the the National Commodity Futures Examination (NCFE or Series 3) within the two years prior to your application. You will be asked a series of 120 questions and will need a passing score of 70 percent to qualify. You can get information on this certification by contacting the National Futures Association.
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List and show proven results of your annual performance as a commodity trader so that you can show a track record to potential investors. Make sure you detail your trading style, annual percentage gain, draw downs, and detail each trade, if possible, as well as the final result.
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4
Contact the NFA and CTFC after passing your Series 3 exam. Complete the required forms - Form 7-R and complete Form 8-R, fingerprint card and fee of $85 for each individual principal.
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5
Consult with a legal advisor on structuring a legal entity to manage investor's money, such as a Limited Liability Company, or LLC. A LLC serves as a 3rd party entity that serves as the vehicle out of which you will conduct the affairs of your commodity trading business. It also serves as a protective shell in that it helps limit your liability in the event of catastrophic loss or litigation.
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Solicit clients through advertisements or through stock brokerages. However, be sure to present a DDOC, or disclosure document, to give to prospective clients. The NFA and CFTC require that you draft a DDOC for all potential investors that details the fees, your trading results, losses, your business information, trading methods, and other relevant information so that investors can make a sound decision to invest with you.
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Tips & Warnings
At all levels of forming your commodity business, be sure to seek the advice of legal counsel that has experience in securities, so that you get the specialized help you need to avoid running into problems with the SEC.
Keep up with all the required filing for your CTA license, as well your commodity trading business. Again, having a good securities lawyer will help you keep up with all the required paperwork, so that you stay out of trouble with the SEC, CFTC, and NFA and you can focus on your trading business while being in compliance.
