NFA Issues Notice Reminding Members of Obligations Regarding CPOs/CTAs Exempt from Registration (NFA Notice I-15-02)

NFA issued a Notice reminding members that, pursuant to CFTC rules, persons that fail to file the annual affirmation notice for CPOs/CTAs exempt from registration under CFTC 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), or 4.13(a)(5), or an exclusion from CPO registration under Regulation 4.5, or an exemption from CTA registration under 4.14(a)(8) by March 2, 2015 will be deemed to have requested a withdrawal of exemption and may be required to be registered. The Notice also requires members to use reasonable steps to identify those persons who currently claim an exemption from CPO/CTA registration with whom the member transacts customer business so as not to come in violation of NFA Bylaw 1101 or Compliance Rule 2-36(d), which prohibit NFA members from doing business with non-members.

Zwirb Comment: This affirmation requirement puts a burden on everyone in the commodities industry because (i) all of the above exempt firms must file and (ii) anyone who does business with a firm that was exempt last year must confirm that such firm remains exempt. The second burden in particular may be problematic as it requires members to use "reasonable steps" to determine the registration and membership status of those persons with whom they are dealing with in order to confirm that they are appropriately registered or are exempt from registration, and that they are also NFA members.

Moreover, where a counterparty claims that it is exempt from registration or membership, the obligation extends to verifying whether such counterparty qualifies for an exemption. Thus, a member customer generally will not be able to open an account with a CFTC-registered FCM, or trade with a CFTC-registered swap dealer, unless it can demonstrate that it is an NFA Member. Conversely, a registered intermediary will not be able to do business with such a member customer who cannot make such a demonstration.

The affirmation requirements put a burden on the party doing the verification, and also places it at legal risk if its due diligence comes up short.

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See: NFA Notice I-15-02.