Fund managers relying upon exemptions from registration as commodity pool operators (CPOs) pursuant to CFTC Rule 4.13(a)(1), 4.13(a)(2), 4.13(a)(3) or 4.13(a)(5) (or an exclusion in the case of CFTC Rule 4.5) must re-affirm their exemptions on file with NFA by March 2, 2015. While the re-affirmation filing is the responsibility of the CPO, introducing brokers (IBs) that do business with exempt CPOs need to ensure annually that CPOs that they do business with are properly exempt. Failure to do so could result in a violation of NFA Bylaw 1101, which provides that no NFA Member (including IBs and CPOs) shall do business with another person who is required to be registered with the CFTC, but is not.
The annual affirmation is required to be filed electronically with NFA through its electronic filing system. Evidence of the affirmation is available on NFA BASIC for purposes of ensuring NFA Members such as IBs are able to comply with NFA Bylaw 1101. Failure to affirm the exemption by March 2nd will result in the automatic withdrawal of the exemption and thus could create a registration requirement for the CPO.
Earlier this year, NFA released a Notice to Members addressing an NFA Member’s responsibility to verify whether a CPO is properly exempt. In the Notice to Members, NFA recognized that from January 1 to March 2 during the re-affirmation period, it may be difficult to determine whether a CPO that previously relied upon an exemption is still properly exempt from registration. Thus, during the re-affirmation period, NFA expects its Members to take reasonable steps to determine the registration and Membership status of previously exempt CPOs. According to the Notice to Members, reasonable steps would include asking the CPO whether it intends on re-affirming its exemption. If the CPO informs the NFA Member that it does not intend on re-affirming its exemption, the NFA Member must promptly obtain a written representation from the CPO as to why it is not required to register or file a notice of exemption. If the NFA Member determines that the written representation is inadequate, it must put a plan into place to cease doing business with the CPO or risk violating NFA Bylaw 1101.
Following the March 2nd re-affirmation deadline, all exempt CPOs relying upon CFTC Rule 4.13 (or excluded CPOs in the case of CFTC Rule 4.5) should have appropriately filed with their notices of exemption with NFA, or alternatively, become registered, or demonstrate why they are not required to be registered or file a notice of exemption. In this regard, NFA has made a spreadsheet available on its website that is updated daily and reflects exemption filings by CPOs. Notably, the Notice to Members recognizes that any NFA Member acting in accordance with the Notice to Members will not be charged with violating NFA Bylaw 1101.
NFA has not been shy about commencing enforcement actions in this area. Recently, in December of 2014, an IB, one of its principals and one of its associated persons were fined a total of $45,000 for, in part, violating NFA Bylaw 1101. Specifically, the firm was alleged to have failed to implement sufficient compliance procedures to determine if a person with whom the firm was doing business was properly registered, and the violation arose because the owner of one account was a commodity pool whose manager should have filed an exemption from CPO registration, but did not. While the re-affirmation duty ultimately lies with the exempt CPO, this case should serve as a reminder that NFA continues to take a Member’s NFA Bylaw 1101 responsibilities seriously.
Matthew Kluchenek is a Partner at Baker & McKenzie LLP and leads the firm’s Derivatives & Futures practice group. He can be reached at matt.kluchenek@bakermckenzie.com and (312) 861-8803. Michael Sefton is a Senior Associate at Baker & McKenzie LLP and can be reached at michael.sefton@bakermckenzie.com and (312) 861-2884.
