The National Futures Association ("NFA") reminded members about certain obligations for commodity pool operators / commodity trading advisors ("CPOs/CTAs") who are exempt from CFTC registration.
In a notice to its members, the NFA reviewed the requirements of Bylaw 1101 and Compliance Rule 2-36(d). The NFA explained that exemption registrations under various rules ( CFTC Rules 4.13, 4.14 and 4.5) require the exempt CPO/CTA to file an annual affirmation of the applicable notice of exemption within 60 days of the calendar year end. Failing to file such a notice by March 1 is considered a request to withdraw the exemption (which may require the CPO/CTA to register and become an NFA member). The NFA reminded firms that conduct business with a previously exempt person who fails to affirm their exemption or become registered as an NFA member to "take reasonable steps" to ascertain the membership status of the previously exempt person.
The NFA explained that members can determine whether a CPO/CTA has affirmed its exemption through two methods: (i) viewing records on the NFA BASIC system and (ii) accessing a spreadsheet through the Annual Questionnaire. If a member determines that a previously exempted CPO/CTA has not met and does not intend to meet its affirmation obligation, the NFA requires the member to obtain a written explanation as to why the CPO/CTA is not required to register or file a notice of exemption. If it is determined that the CPO/CTA is required to be registered, then the member is required to implement a plan to cease conducting business with the CPO/CTA.
Commentary / Bob Zwirb
The wisdom of requiring NFA members to determine the registration and membership status of those they do business with is questionable. That point is underscored by NFA's recognition that "it may be difficult" for a Member to make such a determination prior to the deadline of March 1, 2018 for persons operating under an exemption from registration to file an annual affirmation of their exemptive status. To get around this conundrum, NFA suggests a number of "reasonable steps" that its members can take, including undertaking an evaluation of whether a counterparty's written representation regarding its status or intentions is "inadequate" (a measure that could be both time-consuming and completely subjective). Here's a suggestion. Instead of placing the burden of such an evaluation on its members along with the risk of getting it wrong, the CFTC and NFA should themselves take on this task, which they are far better positioned to carry out. Further, it would be far more economically efficient to have this task performed by a single regulator than by each financial intermediary, which could, in fact, reach different results on the same facts.
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