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NFA Relaxes Certain Member Policing Requirements – For Now

Posted in CFTC Compliance, Compliance and Supervision

The NFA recently announced that it would provide a limited time relief to Bylaw 1101’s prohibition for members transacting business with unregistered persons.  NFA Bylaw 1101 prohibits an NFA member from transacting business with or on behalf of a non-member that is required to be registered with the CFTC.  Although Bylaw 1101 imposes strict liability on any member in violation of the rule, the NFA has applied a “knew or should have known” standard to violations. 

As readers of this blog are aware, in February, the CFTC issued final rules amending CFTC regulations relating to exemptions, which have a compliance date of December 31, 2012.  The rules rescinded the 4.13(a)(4) exemption and require all CPOs that were exempt pursuant to 4.13(a)(4) to register after December 31, 2012.  The final rules also required most persons claiming an exemption to annually affirm the notice of exemption within 60 days of each calendar year end, starting on December 31, 2012.  Persons who fail to file the annual notice will be deemed to have withdrawn their request for an exemption.

In light of the new rules, the NFA realized that exempt CPOs/CTAs will have until March 1, 2013 to complete the affirmation process, which would make it difficult for a member to conclusively determine prior to March 1, 2013 if a previously exempt CPO/CTA continues to be eligible for a current exemption.  As a result, NFA announced that any member that conducts business with a previously exempt person will not be in violation of Bylaw 1101 if they take reasonable steps to determine the registration and membership status of the persons between January 1, 2013 and March 31, 2013. 

After March 31, 2013, if a member is transacting business with a previously exempt person that is not properly registered, NFA expects the member to contact the person and determine if the person intends to file a notice affirming exemption.  If the member believes that such person should be registered, then the member must put a plan in place to cease transacting customer business with the person.

Although the NFA is providing this limited relief from Bylaw 1101, members should remember that the NFA still expects members to act reasonable and make a good faith effort in determining if they are violating any NFA bylaws or CFTC regulations.