NFA Bylaw 1101 prohibits National Futures Association (“NFA”) Members from carrying an account, accepting an order or handling a transaction in commodity interests for or on behalf of any non-Member of the NFA (“non-Member”), or any suspended NFA Member, that is (i) required to be registered with the Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, Major Swap Participant, Futures Commission Merchant, Introducing Broker, Commodity Pool Operator or Commodity Trading Advisor, and (ii) acting in respect to the account, order or transaction for a customer, a commodity pool or participant therein, a client of a commodity trading advisor, or any other person, unless:
- such non-Member is able to rely upon an exemption from having to register with the CFTC;
- such non-Member is a member of another futures association registered with the CFTC under Section 17 of the Act, or is exempted from this prohibition;
- such non-Member is registered with the CFTC as an Futures Commission Merchant or Introducing Broker and the account, order, or transaction involves only security futures products; or
- such suspended NFA Member is exempted from this prohibition by the NFA Appeals Committee.
NFA Bylaw 1101 imposes strict liability on any NFA Member conducting customer business with a non-Member that is required to be registered. The rule does not require proof that the NFA Member firm was at fault or failed to exercise due diligence, simply that it transacted business with a non-Member that is required to be registered.
In practice, the NFA formally has stated that, generally, it will not impose the strict liability standard but instead will evaluate whether the NFA Member knew or should have known of the violation. Ultimately, the decision to prosecute rests with the NFA’s Business Conduct Committee.
Firms’ responsibilities under NFA Bylaw 1101
NFA Bylaw 1101 requires an NFA Member to determine whether it is doing business with an entity that is:
- required to be registered with the CFTC; and
- if so, a Member of the NFA.
To determine whether a person is a Member of the NFA, the firm can: check the NFA’s Background Affiliation Status Information Center (BASIC) system on NFA’s web site at http://www.nfa.futures.org/; send a request to the NFA through the “contact” feature of the website; or call the NFA’s Information Center (800) 621-3570 to receive current and accurate information concerning the membership status of any person.
For Members making a determination of whether an entity is required to be registered, the NFA would expect all NFA Member firms to undertake certain minimal steps including the following:
- NFA Members who are registered Futures Commission Merchants should ensure that all omnibus accounts they carry are held by registered Futures Commission Merchants who are NFA Members;
- Each NFA Member should review the list of CFTC registrants with which it does business to determine if they are NFA Members. An NFA Member can determine whether a particular entity is a CFTC registrant or exempt from CFTC registration by checking the BASIC system, sending a request to the NFA through the “contact” feature on the NFA web site, or calling NFA’s Information Center toll-free at (800) 621-3570;
- Each NFA Member should review its list of customers. If a customer’s name indicates that it may be engaged in the futures/swaps business, the NFA Member should inquire as to its registration and membership status;
- If any customer is operating a commodity pool but claims to be exempt from registration as a CPO, the NFA Member should verify that the customer has made the required filings with the NFA;
- NFA Members should ensure that their branch offices are not separately incorporated entities. The CFTC Division of Trading and Markets has issued an interpretive letter stating that branch offices which are separately incorporated entities are required to be registered as Introducing Brokers;
- An NFA Member who is a Futures Commission Merchant should determine whether non-Member foreign brokers for whom the NFA Member carries accounts solicit U.S. customers for transactions on U.S. exchanges;
- NFA Members should check whether their customers or counterparties are signed up to the ISDA Protocol and have completed an ISDA Protocol Survey; and
- NFA Members that purchase lead lists must check whether the lead provider is required to be registered as an Introducing Broker. If the provider is not a registered Introducing Broker and an NFA Member, the NFA Member purchasing the lists must find out where they originated.
The records of all due diligence conducted should be maintained on file for the life of the engagement plus an additional five years. If the NFA Member has any doubts after it has conducted its due diligence, it should seek confirmation from the party and ensure written evidence is maintained on file.
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