VII. The second draft of the CTA/CPO Compliance Guide, incorporating suggestions from several NFA staff, has been completed and distributed for further comment. This month the department is in the process of making arrangements with the General Services Administration to distribute copies of "Before You Say Yes: 15 questions to turn off an investment swindler" through the Consumer Information Center in Pueblo, Colorado. A feature article on NFA was written and submitted to GENERAL COUNSEL As of February 28, 1985, NFA's Arbitration program has received 521 information requests, 417 Intents to arbitrate and 196 Demands for arbitration. Twenty-nine claims have been settled prior to hearing and 48 cases have gone to hearing and award. In accordance with NFA Compliance Rule 3-12, the The MRA against Opex, effective February 27, 1985, bars it from soliciting or accepting additional customer funds or futures or options orders except for liquidation purposes. The MRA was taken as a result of Opex's failure to demonstrate compliance with NFA Financial Requirements. The MRA against AIG, effective February 22, 1985, suspends its NFA membership due to its failure to demonstrate compliance with NFA Financial Requirements. An MRA taken against Great Lakes Commodities on February 1, 1985 was modified, effective February 14, 1985, allowing the firm to solicit and accept new customer accounts and to handle orders for customers provided that all customer accounts are carried on a fully disclosed basis with another FCM Member of NFA. This restriction will remain in effect until Great Lakes Commodities demonstrated compliance with all NFA Rules and Financial Requirements. On February 8, 1985 NFA's Western Regional Business Conduct Committee authorized the issuance of a Complaint against Kornreich Commodities, nc. alleging that it had failed to maintain minimum aujusted net capital in violation of NFA Financial Requirements Section 1, had failed to observe high standards of commercial honor and just and equitable principles of trade in violation of Compliance Rule 2-4, and that it had violated a Decision previously issued which required Kornreich Commodities to cease and desist from further violation of NFA Rules. On February 26, 1985 NFA's Eastern Regional Business Conduct Committee authorized the issuance of Complaints against three NFA Members. A Complaint issued against Index Services, Inc. (Index) alleged breach of fiduciary duty, use of deceptive sales practices and failure to cooperate with an NFA investigation. The Complaint also alleged that Thomas Galgano, the sole principal of Index, was the cause of these violations. Complaints were also issued against William M. Cadden & Co. for failure to file financial statements in a timely manner and Story and Company, Inc. for failure to satisfy NFA Financial Requirements, failure to file financial statements in a timely manner and failure to cooperate in an NFA investigation. The Eastern Regional Business Conduct Committee also issued two Decisions. Argyle Arbitrage, Ltd. was fined $2,000 for filing late financial statements and Lehman Special Services, Inc., which had submitted a settlement offer stating its intention to resign its NFA membership, was fined $1,000 for the same offense. A meeting of the CPO/CTA Advisory Committee was held on January 31, 1985 to discuss ways to improve presentation of the performance record required in the disclosure documents of CPOs and CTAs. Discussion was also held regarding disclosure of receipt of interest income by CPOS. A teleconference of the IB Advisory Committee was held on February 5, 1985 to discuss IB representation on NFA's Board of Directors. A teleconference of the FCM Advisory Committee was held on February 15, 1985 to further discuss and refine NFA's proposed Compliance Rule, "Communications with the Public and Promotional Material," and to authorize NFA TIMETABLE Mr. WHITTEN. What is the timetable and commitment for NFA taking over the rest of your regulatory functions? Ms. PHILLIPS. At this time, the only regulatory functions which NFA will be assuming are the Commission's registration and audit functions. NFA has begun to assume each of these functions, and it is anticipated that the transfer will be virtually complete by the end of fiscal year 1985. All other functions, such as market surveillance and enforcement, will be retained by the Commission. With respect to registration, the Commission issued an order, effective December 3, 1984, which authorizes NFA to perform the Commission's registration processing functions for FCMs, CTAS, CPOs and their APs. This supplements earlier Commission orders giving NFA comparable authority with respect to introducing brokers and their APs and authorizing NFA to issue temporary licenses to certain qualified associated persons. The Commission still has the exclusive responsibility and authority for the denial and withdrawal of registration although we anticipate allowing NFA to exercise those functions by the end of the fiscal year. More importantly, at least from the Commission's perspective, we have had to continue to operate a registration program for floor brokers and for leverage transaction merchants and their associated persons. Unfortunately, this is not one of the items for which NFA is expected to assume responsibility. By comparison, NFA began to assume some of the Commission's audit functions shortly after it began operations in October 1982. At that time, NFA began to audit those futures commission merchants which are not members of any of the Exchanges. In January 1983, NFA began to audit commodity pool operators and commodity trading advisors. At the present time, audit responsibility for CPOS is still shared with the Commission. By the end of fiscal year 1985, however, the Commission expects that NFA, in coordination with the designated futures exchanges, will assume direct audit responsibility for all registrants except leverage transaction merchants. The Commission, of course, will continue to have oversight responsibility for NFA's activities in these areas. Much of the audit work of NFA (in particular, as to IBs and branch offices) is with respect to new categories of registrants or is intended to provide a broader scope than could have been achieved with the Commission's small audit staff. USER FEE SYSTEM Mr. WHITTEN. Have you increased or in any way changed your user fee system from last year? What is your estimate for the total revenue for registration of fiscal years 1985 and 1986? Ms. PHILLIPS. No changes have been made to the fees implemented in FY 1983 and FY 1984. The Commission is in the process of reviewing many of its service fees. One new fee, a fee for conducting rule enforcement and financial reviews of exchanges, became effective in FY 1985. The total revenue from registration is expected to decline from $1,394,814 if FY 1984 to approximately $220,000 in FY 1985 and FY 1986 due to the transfer of registration to NFA in December 1984. These fees are deposited to the general fund of the Treasury. The estimates assume no increase in registration fees through FY 1986. AGRICULTURAL OPTIONS CURRENTLY TRADED Mr. WHITTEN. For the record, would you provide a list of all the agricultural contract options that are now traded. Ms. PHILLIPS. I will be happy to supply that information for the record. [The information follows:] Chicago Board of Trade soybean options. Kansas City Board of Trade wheat options. Coffee, Sugar and Cocoa Exchange sugar options. The sugar option traded on the Coffee, Sugar and Cocoa Exchange is for world sugar and since it was not one of the enumerated agricultural commodities, it was approved as part of the nonagricultural options pilot program. OPTIONS AND PRICE SUPPORTS Mr. WHITTEN. As you probably know, the Administration has proposed a farm bill that would eliminate many of the price supports. You are also probably aware that some people indicate that the farmer could reduce his risk, if there were no subsidies, by trading in agricultural options. Could you give us your best guess of what would happen if a million farmers decided to hedge their crops by buying options? What if all 5.8 million people who live on farms decided to buy options? Ms. PHILLIPS. If a million or 5.8 million individuals entered the options markets tomorrow and attempted to buy options, in all probability there would be insufficient capital available to enable all of these individuals to establish an options position at a reasonable economic cost. However, as with any new markets, these markets have the potential for growth over a number of years. Although no futures markets approach a million participants, those which do exist are able to accommodate directly or indirectly the hedging demand exhibited by the farm sector. MS. WHITTEN. What are the chances of finding equal numbers of offsetting speculators? Ms. PHILLIPS. Initially, it is not likely that a sudden influx of that number of hedgers could be met by equal speculative or opposite side hedge participation, either in terms of numbers of participants or numbers of contracts. However, development of the markets over a period of years may enable the markets to develop the balanced participation by commercial firms, speculators and floor traders necessary to the development of liquid markets capable of responding to the needs of large numbers of hedgers. Mr. WHITTEN. What would happen if the striking point of these options is far below the cost of production for farmers? **MS. PHILLIPS. Options present a mechanism whereby a farmer can shift the risk associated with the price variability. This varia |