Although PAMMs (Percentage Allocation Management Modules) aren’t quite as popular as the usage of NFA regulated brokers, money managers are growing in attractiveness, and the NFA has taken note, most recently in the form of new regulations to be imposed on these services. The NFA has expressed concern that money managers and PAMMs are pooling their clients’ funds or placing simultaneous trades, both of which are potentially problematic for clients wishing to withdraw their funds, only to find out that the funds are tied up in a group position. Likewise, during a recent investigation the NFA found, according to a letter written by Thomas Sexton, the Senior Vice President and General Counsel of the NFA, that “if an individual customer is removed from the PAMM module without their open percentage position being offset, then this customer account may not incur a profit or loss for this position and the original regularly offered and tradable lot sized position is simply subsequently reallocated to the remaining sub-accounts thereby immediately increasing the percentage of equity each individual account has in the regularly offered and tradable sized position established based on the Master Account’s equity.”
It is likely that the NFA will take steps to prevent this problem, by requiring money managers and PAMMS to change the way they do business so that client funds will remain available as necessary. For now, the NFA recommends that account managers use ‘bunch orders’ to circumvent this problem, such that “the sum of the quantity of regularly offered and tradable sized contracts that would be permitted based on the equity in each individual account, not the overall equity in the Master Account.” Clients must also be allowed to make adjustments to their accounts within a timely manner without affecting the positions of other clients of the group.
The suggestions made by the NFA are designed to protect investors, though they will certainly complicate matters for money managers and PAMMs that have operated this way in the past. And, based on the implications coming from the NFA, there will likely be additional regulations coming for money managers, as there have been for NFA regulated brokers in the past.