Forex & Commodity Trading
Commodities include bulk goods, such as foods, livestock, grains, metals, and even financial instruments such as currencies. Commodity trading involves the trading of contracts for a specific commodity, usually through a regulated exchange, whereby an investor agrees to buy or sell a specific quantity of a commodity at a specific price for delivery in the future. Commodity contracts are also known as futures contracts.
Commodity contracts and commodity options are specifically defined as securities under the Utah Uniform Securities Act .
The foreign exchange market (commonly referred to as “forex”) is a decentralized market wherein currencies are traded over the counter. Profits and losses are made as the exchange price of currencies increase or decrease. The market is very large and highly speculative, which makes the investment in forex very risky and not suitable for many investors.
Generally, larger institutions, such as banks, large corporations, and governments, are the major participants in forex trading, but individuals can participate as well.
The Division has seen a dramatic rise in the number of companies and individuals seeking to either: (1) manage other people’s forex accounts or (2) pool investor monies into an investment fund with which they will invest in forex. Both these activities require licensing as an investment adviser or broker-dealer and the creation of an investment fund which also requires that the fund meet certain registration requirements since that fund would be a security offering.
In short, if you want to invest in forex through some other person or company, they need to be licensed and their fund needs to be registered appropriately. You can call the Division's Licensing Section at (801) 530-6600 to help you research this information.
Commodity trading is regulated by the Commodity Futures Trading Commission (CFTC). The firms and individuals who trade commodities should be registered with the National Futures Association (NFA). You can verify whether a company or person is properly registered with the NFA through their Background Affiliation Status Information Center (BASIC).
If a company or person is not registered with the NFA, they most likely need to be licensed with the Utah Division of Securities as an investment adviser or broker-dealer. You can verify whether a company or person is appropriately licensed through the Division’s Online Database or FINRA's BrokerCheck tool.
Forex Investment Funds
The Division has seen a rise in the number of forex frauds over the past few years. Often these forex frauds involve the company or individual pooling investor dollars into an investment fund which the fund manager invests in forex.
In many instances, the fund manager has failed to:
- License the manager(s) with the National Futures Association (NFA), the Securities and Exchange Commission (SEC) or the Utah Division of Securities;
- Properly register the investment fund as a security with the SEC or the Utah Division of Securities; and/or
- Adequately disclose: the risks of the investment fund, the history of the manager(s), conflicts of interest, the investment strategy of the fund, the financials of the company, the full trading history, or the compensation arrangements for the manager(s) and solicitor(s).
In some cases, the funds are diverted to other investments, commingled with the manager’s personal funds, or stolen outright.
Securities fraud involves the misrepresentation of material facts to investors or the omission of material information from investors. Often fraudsters will misrepresent their trading history, their ability to earn profits in the forex market, and the returns investors will make. Fraudsters often omit the risks involved with their trading strategy and negative information in their past, such as criminal convictions, civil lawsuits, and past bankruptcies. Fraudsters have even created false account statements to hide losses or the theft of funds.
While the Division investigates and takes action against such fraudsters, the money is often gone by the time investors contact the Division. To avoid becoming a fraud victim, investors should use the Division’s online resources and consult with legal counsel about any private investment opportunities (such as forex trading and forex investment funds) before investing their money.
Investment Advisers Must Disclose Information
Whether the forex trader pools your money, manages it in your own account, or simply provides recommendations, the Division considers them an investment adviser unless they are properly licensed as a Commodity Trading Adviser (CTA) or Commodity Pool Operator (CPO) with the NFA.
An investment adviser is required to provide a disclosure brochure (often called Form ADV Part II) to all prospective investors. The disclosure brochure outlines all services provided, all fees charged, and any conflicts of interest for the adviser. Investors should request and review this document before investing with the investment adviser / forex manager.
Investment Funds Provide Disclosure Documents
If your money is pooled with the money of other investors, the forex manager is operating an investment fund. Your equity or debt interest in the investment fund is a security of its own and must be properly registered. By offering that security, the forex fund must provide all prospective investors with an extensive disclosure document.
Often called a Private Placement Memorandum (PPM) or Private Offering Memorandum (POM), the issuer of an investment fund should provide a disclosure document to all prospective investors that thoroughly explains all material information about the investment. This document is typically 30 to 60 pages and contains the following information:
- Detailed information about the investment strategy
- The risks associated with the investment strategy
- The use of investor funds
- Background information about the principals and managers of fund
- The compensation that will be paid to the principals, managers, and solicitors
- The fund’s business and operating history
- The fund’s track record and trading history
- Audited financials of the fund
Key Questions To Ask Before Investing
Investigate Before You Invest
Perform Your Own Due Diligence
- Get everything in writing from the person offering the investment.
- Verify the company and person is licensed with either the NFA’s BASIC system or the Division’s resource tools.
- Contact the Division of Securities to discuss the investment opportunity.
- Check SEC, CFTC, state securities regulators, and NFA to see if actions have previously been taken against trader/firm.
- Check with courts (federal and state) to see if the trader/firm has been involved in any legal proceedings.
- Seek advice from an attorney, accountant, investment adviser, or another independent third party.
- Simply performing an internet search on the fund manager or forex trader can be helpful in gathering information.
Common Red Flags of a Fraud
- The investment is offered by internet or telephone.
- The investment sounds too good to be true.
- Vague or unclear explanations of how the investment will earn money are given.
- The person selling the investment relies on your relationship or affiliations to build trust.
- Promises of high returns with little or no risk.
- A short disclosure document or no written disclosure document.
- Dismissal of the importance of a disclosure document.
- Unwillingness to put verbal statements or specific terms in writing.
- Unwillingness to provide background information on the investment or managers.
Other Things to Consider
- Remember the principle that higher returns entail higher risks.
- Do not invest more than you can bear to lose financially.
- Be wary of using retirement funds or home equity for speculative investments.
- Use common sense when considering the investment.
- There should not be any urgency or deadlines to invest. You should be afforded all the time you need to make an informed decision whether to invest.
Contact the Division with questions or concerns - 801-530-6600