NFA Issues Notice Regarding CPO Delegation (Notice I-15-13)

The NFA issued a notice to members requiring CPOs to answer a question concerning the delegation of certain responsibilities to another registered CPO when they file a pool's annual financial statement in the NFA's EasyFile system. Due to the self-executing relief in CFTC No-Action Letters 14-69 and 14-126, a commodity pool operator ("CPO") does not notify the NFA when delegating certain responsibilities to another registered CPO. For that reason, the NFA is unable to provide this information on its BASIC system. The new requirement corrects that deficiency.

The new requirement will allow NFA Members conducting NFA Bylaw 1101 due diligence on a particular pool to be able to confirm through the NFA's BASIC system that the CPO of a particular pool is an NFA Member or exempt from such requirement.

In order to notify the NFA that investment management authority over a particular pool was delegated to a CPO, and to ensure that the NFA's systems reflect the delegation, CPOs are now required to answer a question concerning delegation when they file a pool's annual financial statement in the NFA's EasyFile system.

Zwirb Explanation: NFA Bylaw 1101 prohibits NFA members from conducting customer business with any entity that is not an NFA member unless that nonmember is exempt from CFTC registration requirements. See NFA Bylaw 1101 (stating that "[n]o Member may carry an account . . . for or on behalf of any non-Member of NFA . . . that is required to be registered with the Commission as an FCM, IB, CPO, CTA or LTM"). In general, a member is prohibited from accepting orders from another person (except a direct customer) unless that other person is a member of either the NFA or another registered futures association.

In order for members to satisfy this requirement, the NFA requires them to take "reasonable steps" to determine the registration and membership status of those persons with whom the members are dealing to confirm that such persons are appropriately registered or are exempt from registration, and whether each such person or entity is an NFA member. However, those steps can turn into an unreasonable burden quickly and, as this action demonstrates, morph into a multifaceted set of obligations. For example, where a counterparty claims that they are exempt from registration or membership, the obligation extends to verifying whether they qualify for an exemption. Accordingly, an NFA member may not open an account with a CFTC-registered futures commission merchant ("FCM") or trade with a CFTC-registered swap dealer unless the FCM or swap dealer can demonstrate that they are an NFA Member and vice versa.

Lofchie Comment: The requirements of NFA Bylaw 1101 are worth reconsidering. There may be no other regulatory certification that demands so much effort and work to be done and redone year after year. From a cost/benefit perspective, it is questionable whether these requirements represent a good use of a firm's compliance dollars. See earlier news and commentary on the subject.

See: NFA Notice I-15-13.