It is that time of year again—time to affirm exemptions and exclusions from registration as a commodity pool operator (CPO) or commodity trading advisor (CTA) for 2018. The Commodity Exchange Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, (CEA) requires CPOs and CTAs to register with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), unless an exemption or exclusion from registration applies. CFTC regulations also require a person or entity claiming an exemption or exclusion from CPO or CTA registration under CFTC regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), or 4.14(a)(8) to file an annual affirmation of such exemption or exclusion with the NFA. The annual affirmation must be completed within 60 calendar days following the calendar year end (i.e., within 60 calendar days of December 31 of the prior year). Reed Smith discussed this obligation in detail in a previous client alert, which is available here.
NFA’s notice of the annual affirmation requirement
On December 1, 2017, the NFA issued a notice reminding its members that the annual affirmation requirement for persons or entities claiming an exemption or exclusion from registration as a CPO or CTA must be completed by March 1, 2018 for the present affirmation cycle. Persons or entities filing new exemptions or exclusions during the affirmation period (December 1, 2017 to March 1, 2018) do not need to reaffirm such exemptions or exclusions until next year’s deadline (i.e., 60 days after December 31, 2018).
The NFA’s notice warns members that a failure to affirm an active exemption or exclusion from CPO or CTA registration by March 1, 2018 will result in the automatic withdrawal of such exemption or exclusion on March 2, 2018. Also, for registered CPOs and CTAs, withdrawal of an active exemption or exclusion due to the failure to reaffirm in time will subject such CPOs or CTAs to CFTC Part 4 requirements,3 even if the CPO or CTA otherwise remains eligible for the exemption or exclusion. For non-registrants, withdrawal of an active exemption or exclusion may subject the person or entity to a CFTC or NFA enforcement action for non-compliance (i.e., failure to register in the absence of a valid exemption or an exclusion from registration).
The NFA will provide its members with another reminder of the annual affirmation requirement via email as the affirmation deadline nears. The NFA’s notice states that the NFA will send the email reminder to the email contact on file in the NFA’s Exemption System and to the Enforcement Compliance Contact. Firms’ active registration, or exemptive status, can be confirmed through the NFA’s BASIC system at nfa.futures.org/basicnet.
Procedure for making the annual NFA affirmation
The annual affirmation process must be completed online by using the NFA’s Exemption System. The NFA’s Exemption System is available in the Electronic Filings section of the NFA website. Once logged into the Exemption System, an Exemption Index will list all Firm Level (at the top) and Pool Level (at the bottom) exemptions and exclusions that are on file with the NFA. The exemptions or exclusions that require affirmation will be identified with an icon in the “Affirm” column. Clicking on the appropriate icon will prompt a pop-up box to appear requesting affirmation that the exemption or exclusion continues to be effective. By clicking “OK,” the current date will replace the “Affirm” icon and complete the affirmation requirement for the year. Note that this process must be completed for every exemption or exclusion that requires an affirmation.
Once the annual affirmation process is complete, the NFA’s BASIC System will reflect the affirmation date for each exemption or exclusion claimed for the year. If an exemption or exclusion is not affirmed by March 1, 2018, the NFA’s BASIC System will reflect a withdrawal date for the exemption on March 2, 2018.
Enforcement actions against CPOs and CTAs
In 2017, the CFTC and the NFA brought several enforcement actions against CPOs and CTAs for failing to comply with the CEA, CFTC regulations or NFA rules.4 The NFA rule violations in these actions included, but were not limited to, reporting and filing violations, failing to maintain adequate books and records, distributing misleading promotional materials, misappropriating investor funds, and providing false and misleading information to the NFA. In one notable case, the NFA fined a CPO/CTA $1 million for causing its pools to make prohibited loans and advances to entities affiliated with its CEO and, among other violations, for failing to timely file annual pool reports, a pool liquidation statement, and pool quarterly reports with the NFA.5 The NFA’s enforcement actions show that it is important for CPOs and CPAs to understand and timely satisfy their obligations under CFTC regulations and NFA rules.
Member obligations under NFA Bylaw 1101
NFA Bylaw 1101 prohibits NFA Members from doing business with most non-Members that are required to be registered with the CFTC as futures commission merchants, introducing brokers, CPOs or CTAs. While Bylaw 1101 imposes a strict liability standard on Members with respect to compliance with these requirements, NFA generally would consider a Member to be in violation if it knew or should have known of the violation.
NFA Notice I-18-01 reminds NFA Members that it “expects any Member transacting customer business with a person that previously claimed an exemption from CPO/CTA registration …, and that has not filed a notice in NFA’s Exemption System affirming the exemption, not filed a notice of exemption for another available exemption, or not properly registered and become an NFA Member by December 31, 2017, to promptly contact the person to determine whether the person intends to file a notice affirming the exemption.”
If the person informs the Member that they do not plan to file an affirmation notice by March 1, 2018, the Member must obtain a written representation from the person that explains why the person is not required to register or file a notice of exemption. If the Member determines that the representation does not sufficiently explain the failure to comply with CFTC and NFA rules, the Member must cease transacting customer business with the person. If the Member fails to do so, the Member might be in violation of NFA Bylaw 1101 and NFA Compliance Rule 2-36(d).
Additional virtual currency questions on the annual pool financial statement
On January 18, 2018, the NFA issued a notice informing CPOs that two additional “yes/no” questions regarding virtual currency activities have been added to the annual pool financial statement cover page.6 The questions ask (1) whether the pool has a direct investment in a virtual currency as of the financial statement date, and (2) whether the pool has a direct investment in virtual currency derivatives as of the financial statement date. The changes are effective for pool financial statements as of October 31, 2017 or later. The annual pool financial statement can be accessed through EasyFile (Annual Reports).
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See Notice I-17-24 (Dec. 1, 2017), available at nfa.futures.org.
- See Notice I-18-01 (Jan. 9, 2018), available at nfa.futures.org.
- Part 4 requirements are the rules and regulations set forth in Title 17, Chapter I, Part 4 of the U.S. Code of Federal Regulations applicable to CPOs and CTAs. See 17 C.F.R. sections 4.1—4.41.
- See, e.g., In the Matter of Oden Capital, CFTC Docket No. 17-10 (Feb. 9, 2017); CFTC v. Vance, Case No. 16-cv-7372 (S.D.N.Y. 2016).
- See In the Matter of Duet Asset Management Ltd., NFA Case No. 17-BCC-005 (May 3, 2017).
- See Notice I-18-03 (Jan. 18, 2018), available at nfa.futures.org.
Client Alert 2018-025
