With expanding areas of potential client pools and capital, commodity trading advisors (“CTA”) are often looking outside of their firms to tap into these untouched resources. To accomplish this, CTAs often contract with an introducing broker (“IB”) whose sole goal is to bring the CTA new clients. This article discusses the terms of the relationship and highlights some things all parties should be aware of.
In order to facilitate an efficient and beneficial relationship between a CTA and placement agent, it is highly recommended that the parameters of relationship are memorialized in writing via a “Placement Agent Agreement.” These agreements set out the general rights and obligations of either party, discuss the specific services to be rendered and the compensation for such services, and set forth the term of the relationship.
Specifics of Placement Agent Agreements: Things to Keep in Mind
While the specifics of each placement agent agreement will be negotiated between the CTA and the placement agent based on their particular circumstances, there are a number of things that we would like to highlight. Each is discussed in further detail below.
Exclusivity
In establishing the relationship between a placement agent and CTA, exclusivity of the relationship is often one of the contractual terms most often negotiated. Consequently, the exact boundaries of the relationship between a CTA and a placement agent should be laid out in the placement agent agreement. Ideally, an IB would like to be the CTA’s exclusive agent, and would want the CTA to agree that no other placement agent will be engaged to solicit clients for the CTA. On the reverse side, the CTA will want the flexibility to engage a number of different placement agents, each with their own particular client list or market.
Fees
While it might seem like common sense, placement agent agreements should contain an in depth discussion of fees to be paid to the agent. These clauses should not only discuss the structure of the fees and how they are calculated, but should also address when such fees are to be paid. The placement agent agreement should also address which, if any, expenses the placement agent will be reimbursed for.
Status as an Independent Contractor
Generally, a placement agent should be considered an independent contractor of the CTA. In this regard, the placement agent agreement should specifically state that the agent has no ability to bind the CTA or otherwise represent that it is an employee of the CTA. Not only is it recommended that a placement agent agreement contain a specific provision noting this, but it is also critically important that the CTA and placement agent treat their relationship as such. More often than not, courts (and the Internal Revenue Service) will look past the language of a placement agent agreement to the specifics of the relationship. Does the CTA control or have the right to control what the placement agent does and how they do it? Does the CTA provide for insurance, vacation pay, or a pension plan? These are all things considered by courts and regulators when they analyze the relationship between a CTA and a placement agent. We recommend not only discussing these issues in the placement agent agreement, but that the parties actually follow through on what they write.
Confidentiality
In nearly all instances, a CTA will provide its placement agent with confidential material vital to its success as a business. This information may include confidential private client lists and lead lists, confidential information about fee structure, confidential information regarding the CTA and its trading methodologies, and information relating to key employees of the CTA. All placement agent agreements should contain strict confidentiality clauses protecting such information, and in some instances, it might be prudent to have the placement agent execute a separate and comprehensive confidentiality and non-disclosure agreement. Additionally, the placement agent agreement should include provisions that discuss how to destroy or return any sensitive materials at the conclusion of the relationship. This may include how to delete emails, remove information from hard drives, return paper and electronic materials, etc.
Prohibition Against Doing Business With Non-NFA Members
NFA ByLaw 1101 prevents an NFA member from doing business with a non-Member who should be or have been registered. Consequently, it is imperative for a CTA to: (i) conduct due diligence with respect to the placement agent and its activities to ensure that it is either registered or validly excluded from registration; and (ii) request representations and warranties from the placement agent that it will maintain any registrations or conduct its activities in a manner that may permit it to avoid registration. This may mean that the placement agent represents and warrants in the agreement that it will maintain any NFA registrations and that it will promptly notify the CTA of any investigation or actions that might jeopardize these registrations, or that the placement agent will only solicit foreign clients or maintain offices in a foreign jurisdiction so as to properly avoid registration.
Indemnification
The placement agent agreement should contain indemnification provisions in the event of a party’s breach of the agreement. E.g., an IB should have some stated remedy in the event it suffers a legal claim that is clearly due to the misrepresentation or omission of a material fact by a CTA.
* This article was written by Mark Ruddy and Jack Delaney of the Ruddy Law Office, PLLC. Any inquiries may be sent to mruddy@ruddylaw.com.
