NFA Issues Notice Regarding CPO/CTA Exemption from Registration
Commentary by Steven Lofchie
Members who take "reasonable steps" to determine the registration and member status of previously exempt customers with whom they do business between January 1 and March 31 of 2016 will not be in violation of NFA Bylaw 1101 or Compliance Rule 2-36(d). In a newly issued notice, the NFA stated that an exemption will apply only if such previously exempt persons fail to become registered NFA members, file a notice affirming their exemption from commodity pool operator ("CPO") and commodity trade advisor ("CTA") registration, or provide a written representation of why they are not required to register or file the notice affirming the exemption.
The NFA reminded its members that the CFTC requires any person who claims an exemption from CPO registration to affirm the applicable notice of exemption annually within 60 days of the calendar year end. Persons who fail to file the affirmation notice by February 29, 2016 will be deemed to have requested a withdrawal of the exemption and so may be required to be registered and to be NFA members.
"Reasonable steps" include contacting counterparties to determine their registration and membership status. In circumstances in which the basis for making such a determination is inadequate, members may be required to cease transacting customer business with such persons or risk violating NFA Bylaw 1101 or Compliance Rule 2-36(d).
Commentary
The Bylaw 1101 regime that requires every NFA member to police every other firm is wasteful, particularly since it must be repeated every year. The burden to comply with the law should be on each firm. The government should police that compliance. At a minimum, an NFA member should be considered to have satisfied its Bylaw 1101 compliance when it takes on a new customer. It should not have to conduct an annual update as well.