NIBA Service Provider Member, Scott Diamond of Ballard Spahr provides insights on recent regulatory developments concerning introducing brokers.
Introducing Brokers, Commodity Trading Advisors and Commodity Pool Operators have long had a symbiotic relationship. Many account controllers understand that the services of a quality broker can be invaluable due to the ability to focus on the account controllers business in a way that wirehouse financial advisors and front end systems cannot. However, dealing with account controllers poses additional potential issues to the IB under the NFA bylaws.
NFA bylaw 1101 prohibits IB members from accepting orders from a person or entity that is not an NFA member but is required to be an NFA member. This includes accepting orders from unregistered commodity trading advisors and commodity pool operators who fail to annually renew their exemptions. Typically when IBs open an account for an account controller, they use the NFA’s BASIC system or the Annual Questionnaire list to determine whether the account controller is registered or exempted or is not required to be registered or exempted. Exemptions expire each calendar year unless the account controller files a notice affirming an exemption (an “Affirming Notice”) within 60 days of calendar year end. This means that there is a risk that on January 1, if the IB accepts an order from an account controller who was previously exempted, and that account controller improperly fails to file the Affirming Notice by March 1, the IB would violate Bylaw 1101 by taking an order. In order to address that liability, the NFA issued Notice 1-23-03 on January 23, 2023. Under that notice, if the IB does the following, they will not be charged with violating Bylaw 1101 when taking orders during the period of uncertainty (Jan 1 – March 1):
- On or about January 1, review the list of account controllers who rely on an exemption and identify those account controllers who were previously relying on an exemption, but are not listed as having filed an Affirming Notice.
- The IB should contact the account controllers who have not filed an Affirming Notice and ask for a written explanation of why they have not filed an Affirming Notice or accept liquidating only orders from them.
- If the account controller gives an adequate reason for not filing an Affirming Notice, the IB can accept that adequate reason and continue taking risk orders.
- If the adequate reason is that the account controller will file the Affirming Notice later, the IB should check again on or about March 2 to determine whether the Affirming Notice was filed.
- If the Affirming Notice was not filed, then the IB should only accept liquidating orders from the account controller.
Members can contact Scott at (917) 660-1340 if there are questions about NFA Bylaw 1101 or other NFA rules applicable to IBs.