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U.S. Commodity Futures Trading Commission (CFTC) registration and compliance requirements historically were designed to regulate positions in listed futures and commodity options contracts, but not swaps trading and hedging.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) mandated the inclusion of swaps trading within the scope of regulated commodity trading activities, and a recent CFTC rule amendment implementing the Dodd-Frank Act resulted in the repeal of a regulatory exemption widely used by investment advisers to avoid CTFC registration.
As a result, all advisers of clients that trade swaps, even if solely for hedging, and/or who previously relied on the repealed exemption must now consider whether to register with the CFTC as a Commodity Pool Operator (CPO) or a Commodities Trading Adviser (CTA).
Investment advisers required to register with the CFTC through the online registration system of the National Futures Association (NFA) will be subject to an enhanced compliance regime under the Commodity Exchange Act and related CFTC regulations including risk disclosure, financial reporting and recordkeeping obligations. However, advisers may be able to rely on one of the following available exemptions:
- The Deminimis Rule (CPO)
- The Small Pool Exemption (CPO)
- The Closely Held Pool Exemption (CPO)
- The CTA Exemption (CTA)
Advisers relying on these exemptions are not required to register with the CFTC but may be required to file electronic notifications with the NFA. Advisers that are required to register will have CFTC reporting obligations with the implementation of Form CPO-PQR and Form CTA-PR, although CPOs that are dually registered with the SEC and file Form PF may file Form PF with the SEC in lieu of completing Schedules B and/or C of Form CPO-PQR.
What You Will Need to Consider
If you are unable to take advantage of one of the CFTC exemptions, you will need to register with the CFTC. This will involve determining which entities need to register as a CPO or a CTA, identifying the “principals” and “associated persons” that need to be included in the application and whether these individuals will be required to pass the Series 3 National Commodity Futures Examination, and preparing and submitting the required registration forms and fingerprints. CFTC-registered advisers are required to complete an Annual NFA Questionnaire and the NFA requires firms to review their operations on at least an annual basis using the NFA’s Self-Examination Checklist. As part of its self-regulatory responsibilities, the NFA conducts on-site examinations of CPOs and CTAs.
NFA Registration Services
- Assist with the identification of associated persons, principals and/or branch offices
- Identify required proficiency examinations and assist with scheduling
- Identify available exemptions, if applicable, and seek/file relief with CFTC/NFA
- Draft company and individual registration applications
- Ensure individual registration requirements are met (fingerprints, fees, testing, etc.)
- Preparation of customized NFA compliance manual
- Assist in implementing all compliance policies and procedures
- Finalize compliance manual
- Review, edit and finalize registration applications and submit
- Answer any NFA related registration questions
- Train appropriate personnel on compliance procedures and using NFA platform
Ongoing Compliance Support Services
Kroll’s compliance advisory services are tailored specifically to your firm. We can provide comprehensive support to ensure that your firm remains in full compliance with ongoing reporting requirements and is prepared for a NFA on-site examination, including:
- Evaluating the availability of the CFTC exemptions
- Preparing and assisting with filing NFA registration Forms 7-R and 8-R and assisting with all NFA registration requirements
- Preparing and assisting with filing Form CPO-PQR and/or Form CTA-P
- Assisting with preparing the Annual NFA
- Questionnaire and the NFA’s Self-Examination Checklist
- Assisting with risk disclosure, financial reporting and recordkeeping obligations
- Conducting mock NFA examinations and providing on-site NFA examination support
- Preparing or updating the firm’s compliance manual(s) as appropriate