On January 15th, the National Futures Association (“NFA”) issued its Notice to Members I-15-02 (the “NTM”).
The NTM will be of interest to NFA Members, such as futures commission merchants (“FCMs”) and introducing brokers (“IBs”), and any entity in a mutual or hedge fund complex that has not yet affirmed its status for calendar year 2015 as:
- an exempt commodity pool operator (“CPO”) under Commodity Futures Trading Commission (“CFTC”) Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), or 4.13(a)(5);
- an excluded CPO under CFTC Regulation 4.5; or
- an exempt commodity trading advisor (“CTA”) under CFTC Regulation 4.14(a)(8).
These annual affirmations are due by March 2, 2015.
The remainder of this posting is an overview of the NTM, which is available here.
A Reminder for Exempt or Excluded CPOs/CTAs to Affirm Their Status By March 2nd…
Several CFTC rules provide investment funds and their operators and advisers with a number of exemptions or exclusions from the requirement to register as a CPO or CTA, subject to the additional requirements that a person:
- File a notice of eligibility with the NFA to claim the exemption or exclusion; and
- Annually affirm its eligibility to claim such exemption or exclusion within sixty (60) days of each calendar year end.
The NTM addressed the particular situation in which a fund operator or adviser previously claimed:
- An exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), or 4.13(a)(5);
- An exclusion from CPO registration under CFTC Regulation 4.5; or
- An exemption from CTA registration under CFTC Regulation 4.14(a)(8);
but has not yet affirmed its eligibility to claim such exemption or exclusion for calendar year 2015, filed a notice of eligibility in respect of another available exemption or exclusion, or properly regsitered as an NFA member by December 31, 2014.
Exempt or excluded CPOs/CTAs have until March 2, 2015 to submit their annual affirmations in respect of calendar year 2015. Failure to do so by that date will result in such person being deemed to have requested a withdrawal of the exemption. As a result, that person may be required to be registered with the NFA as a CPO or a CTA, as applicable, or stop using CFTC- regulated investments in connection with the management of the relevant investment portfolio(s).
…Your FCM Will (Must) Be Watching
NFA Bylaw 1101 imposes strict liability on any NFA Member (such as an FCM or IB) that conducts customer business with a non-Member that is required to be registered as an NFA Member. A similar requirement is found in NFA Compliance Rule 2-36(d), which applies to certain activities in the foreign exchange (or forex) markets.
Consitent with these requirements, the NFA expressed its expectation that any FCM or other NFA Member that transacts customer business with a fund operator or adviser that has not yet affirmed its status as an exempt or excluded CPO/CTA “promptly contact the [fund operator or adviser] to determine whether it intends to file a notice affirming the exemption [or exclusion].”
- If the Member learns that the fund operator or adviser does not intend to file its affirmation (or such person does not file actually file its affirmation by the March 2nd deadline), then the Member must:
- promptly obtain a written representation as to why the person is not required to register or file a notice of eligibility in respect of the exemption or exclusion; and
- evaluate whether the representation appears to be adequate based upon the information that the Member knows about the person.
- If the Member ultimately determines that the person’s written representation is inadequate and the person is required to be registered, then the Member must put a plan in place (e.g., liquidation-only trades) to cease transacting customer business with the person or risk violating NFA Bylaw 1101 or Compliance Rule 2-36(d).
The NFA also expects its members to “use reasonable steps to identify those [exempt or excluded CPOs/CTAs] who currently claim an exemption [or exclusion] from CPO/CTA registration with whom the Member transacts customer business.” To that end, the NFA is providing its Members with access to a spreadsheet that lists all persons that have exemptions or exclusions from registration as a CPO/CTA on file with the NFA that must be affirmed on an annual basis. The spreadsheet will be updated nightly and include the following information:
- Each person claiming an exemption or exclusion from CPO registration;
- Each pool for which such operator claims an exemption or exclusion;
- Each person claiming an exemption from CTA registration;
- The partciular exemption on file with the NFA;
- The last date on which such exemption was affirmed by that person; and
- The most recent date on which the affirmation is due.
This information is intended to enable the Member to determine that an exemption or exclusion has not yet been affirmed in the manner required by the relevant CFTC Regulations.
If a Member acts in accordance with the guidance provided in the NTM, then the NFA will not charge that Member with violating NFA Bylaw 1101 or Compliance Rule 2-36(d).
Good day. Good affirmations. DR2