New CTA Startup Question

[BGB]

I have potentially found a group of bond salesman that have their own firm and are interesting in backing me to leave my current firm and start a CTA as an offshoot of their current holding company. They would basically pay for my operational costs as well as a generous draw for a year or two so that I can live day to day without depending on trading profits.

I'm looking for input on several fronts:

1) If I register as a CTA and these guys are helping me raise money I'm assuming they must take the Series 3 and be AP's of the CTA. Is that correct and are there any other stipulations I'm not considering?

2) I see this as a great potential marriage b/c these people are selling bonds all over the country to high net worth individuals. Therefore, this can simply be another product which they can sell as a diversification tool. This allows me to build a strong individual customer base without the many headaches of the institutional client. Are there any restrictions that would apply to this type of setup that I may not be considering?

3) What type of fee arrangement is appropriate for all parties involved? The accounts will be charged 1-3% and 20% or so. I'm curious what the going rate is for money raisers and what would seem logical to pay the company that is backing my operation? I need to make sure that this is worth it for me as well as the backers. Also, is it too much of a conflict of interest to add an extra $5-10 per round turn to the commission that could act as payment to the money raiser or to the company backing me or both?

4) Does this idea make sense and seem logical to people other than myself?

Thanks for help with these questions and any other points you may think of.

 

[jgfutures]

Quote from BGB:

I have potentially found a group of bond salesman that have their own firm and are interesting in backing me to leave my current firm and start a CTA as an offshoot of their current holding company. They would basically pay for my operational costs as well as a generous draw for a year or two so that I can live day to day without depending on trading profits.

I'm looking for input on several fronts:

1) If I register as a CTA and these guys are helping me raise money I'm assuming they must take the Series 3 and be AP's of the CTA. Is that correct and are there any other stipulations I'm not considering?

2) I see this as a great potential marriage b/c these people are selling bonds all over the country to high net worth individuals. Therefore, this can simply be another product which they can sell as a diversification tool. This allows me to build a strong individual customer base without the many headaches of the institutional client. Are there any restrictions that would apply to this type of setup that I may not be considering?

3) What type of fee arrangement is appropriate for all parties involved? The accounts will be charged 1-3% and 20% or so. I'm curious what the going rate is for money raisers and what would seem logical to pay the company that is backing my operation? I need to make sure that this is worth it for me as well as the backers. Also, is it too much of a conflict of interest to add an extra $5-10 per round turn to the commission that could act as payment to the money raiser or to the company backing me or both?

4) Does this idea make sense and seem logical to people other than myself?

Thanks for help with these questions and any other points you may think of.

BGB,
This sounds like a great opportunity, just make sure you cover your ass. I would suggest hiring legal help familiar with CFTC/NFA guidelines.
As always, I would also suggest talking to the NFA directly. They have always been very courteous and knowledgable.

#3 regarding charging more than commission may be something you would work out with the FCM. I do not know if that is legal. Have you talked with any FCMs regarding bunched orders and discounts once you execute X roundtrips per month, etc??? Introducing broker fees??? Could the company act as an IB and collect a fee?? Good questions, sorry I don't have many answers.


Good luck.

 

[ellokn]

Quote from BGB:

......They would basically pay for my operational costs as well as a generous draw for a year or two so that I can live day to day without depending on trading profits.

I'm looking for input on several fronts:

1) If I register as a CTA and these guys are helping me raise money .....


2) ....... Are there any restrictions that would apply to this type of setup that I may not be considering?

3) ......Also, is it too much of a conflict of interest to add an extra $5-10 per round turn to the commission that could act as payment to the money raiser or to the company backing me or both?

4) Does this idea make sense and seem logical to people other than myself?

Thanks for help with these questions and any other points you may think of.

There are many issues here that would raise red flags if you want to operate as a CTA.

1.) If this group is financing you and actively raising capital for your trading program, they would have to be registered with the NFA. However, if you limit the number of investors and capital raised you might not have to register. (But I sence that is not your intention.)

2.) Yes it looks like this structure as you describe it will not fly.

3.) It depends. If it is fully disclosed it is not a conflict. Some investors do not like to see it, but if your trading strategy can perform under this without deterioration? This is a structure some funds use to pay marketers, etc. Some may feel it puts pressure to create activity when maybe the markets do not call for it. This is only something you can honestly answer when taking a close look at your trading program.

You can take the time to read the regulations of the NFA and figure this out (if you become a member you will get a book on the regulations and it is a good idea to read it at least once.) Or you can pay a lawyer thousands of dollars to write you letters and tell you. That is a personal decision as to where you want to put your time and money.