The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") published interpretative guidance to clarify commodity trading advisor ("CTA") registration requirements in light of the MiFID II research compensation provisions. The guidance provides that a futures commission merchant ("FCM"), swap dealer ("SD") or introducing broker ("IB") that gives commodity trading advice for a separate fee will not be required to register as a CTA, provided the advice is solely incidental to the firm's business as an FCM, SD or IB.
The guidance was issued in response to MiFID II, which, upon its implementation on January 3, 2018, will require investment managers that are directly or contractually subject to its research provisions ("MiFID Managers") to "unbundle," or make separate payments for, investment research and execution services. The CFTC Letter states that the relief is not limited to research payments received from MiFID Managers. Consequently, an FCM, SD or IB may receive separate payment for commodity research from any entity, provided the research is solely incidental to the firm's business as an FCM, SD or IB in light of all relevant facts and circumstances.
Commentary / Steven Lofchie
The CFTC Letter follows a recent SEC no-action letter permitting broker-dealers to receive cash payments for research services from MiFID Managers without being subject to regulation as "investment advisers" under the Investment Advisers Act of 1940. However, the CFTC Letter is broader than the SEC Letter in two important respects. First, unlike the SEC Letter, the CFTC Letter permits firms to enter into separate research payment arrangements with any client, not only MiFID Managers. This enables global managers that may have both MiFID and non-MiFID Managers to implement uniform payment arrangements across their operations without having to develop separate payment arrangements for MiFID and non-MiFID Managers. Second, while the SEC granted time-limited relief that expires in July 2020, the CFTC Letter has no time limit.
Notwithstanding these more liberal aspects of the CFTC approach, the CFTC Letter contains an important limitation in that the research services must be solely incidental to the firm's business as a FCM, SD or IB. This may impact firms that provide commodity research for a fee to clients that do not have a trading relationship with the firm.
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