CFTC Rule 1.71, applies to conflicts of interests within a brokerage operation, among other things. That is to say that the “research” department and the “trading” desks must independently coexist. The genesis of the rule really comes from the securities industry where research departments tout trade recommendations to the brokers who in turn interact with their clients and often suggest the trade. Admittedly, there is some overlap with the commodities world, but not as much as one may suppose, leading to a conclusion that trying to replicate this concept in our industry is like comparing apples and oranges.
This Rule was originally scheduled to be effective on June 4, 2012 but with the lobbying of the NIBA, FIA and others a 60 day extension was granted. Now it’s time to pay attention - August 3 the rule becomes effective.
FCMs appear to be ahead of the curve on this rule given their larger business presence. Many FCMs have issued guidance to their IBs, and NIBA highly recommends you discuss your compliance obligations with your FCM.
But, the buck stops with you, the Introducing Broker. If you are sending out trading recommendation materials the consensus at this juncture is to conspicuously label them as “solicitations” and perhaps even include a further statement that this is not trading research, that your firm does not conduct trading research but in the event it does engage in such activity in the future it shall certainly comply with applicable rules, including Rule 1.71.
We are still learning how this rule is going to be applied, but for the time being, and as events unfold, NIBA’s conversations with NFA and CFTC indicate that labeling trading advice as “solicitations” seems the agreed upon way to proceed. Notwithstanding that your IB may not be actually doing and submitting research and sharing it with your brokers to influence clients, the IB may still be required to maintain Record Keeping and Undue Influence Policies in their offices. While these policies are a far cry from full-fledged conflict of policy requirement, you need to look into your obligations in this regard too.
So WAKE UP! – don’t take this lightly. New CFTC Rule 1.71 will soon be in effect and you will be expected to comply. We can likely expect some flexibility from NFA in the initial audit stages of this Rule, and the NIBA will pass on updates to you with any further guidance we get from either the NFA or CFTC. But for now, it is best to call your attorney and/or consult with your FCM and get your affairs in order.
Steve Pherson
Schuyler Roche & Crisham, Chicago, IL
spherson@srcattorneys.com
