Recent CFTC and NFA Developments

February 27, 2020

This Memorandum summarizes recent developments from the U.S. Commodity Futures Trading Commission (the “CFTC”) and the National Futures Association (the “NFA”) that may be relevant to your business, including: (i) the availability of swap proficiency exam requirements; (ii) revisions to commodity trading advisor (“CTA”) performance reporting and disclosure requirements; (iii) NFA amendments and related interpretive notices regarding communications with the public and use of promotional material; (iv) CFTC proposal for new and amended regulations concerning speculative position limits; (v) codification of prior family office, JOBS Act and non-US investor relief; and (vi) CFTC approval of final amendments relating to the exclusion for registered investment companies (“RICs”) and business development companies (“BDCs”).

A CPO or CTA may need to take action as a result of certain of these changes.

I. Administrator Enrollment Now Available For NFA Swaps Proficiency Requirements

The NFA’s Swaps Proficiency Requirements, which were discussed in our April 5, 2019 memo, became available online on January 31, 2020. These requirements must be completed by all existing swaps associated persons (“APs”) by January 31, 2021. Each NFA Member with APs required to satisfy these requirements must designate at least one Swaps Proficiency Requirements Administrator (an “SPR Admin”) who will coordinate enrollment and track progress. An SPR Admin must also be an Online Registration System Security Manager. NFA Members may now designate an SPR Admin by completing the Swaps Proficiency Requirements Administrator Form on the NFA’s website. Instructions can be found here. If an NFA Member plans to have more than one SPR Admin, each must complete the form individually.

II. NFA Amends Requirements Related to CTA Performance Reporting and Disclosures

The NFA recently amended NFA Compliance Rule 2-34 (“Rule 2-34”) and a related interpretive notice (the “2-34 Interpretive Notice”) to clarify certain performance reporting and disclosure requirements for NFA Members that are CTAs. The amendments became effective February 1, 2020.
Pursuant to Rule 2-34, CTAs are required to make certain disclosures to clients that explain the effect of partially funding1 commodity trading accounts. In addition, the 2-34 Interpretive Notice offers guidance on performance reporting and disclosure requirements for accounts with actual funds2 that differ from the nominal account size.3

Prior to the NFA’s recent amendments, Rule 2-34 required CTAs to document the trading program and nominal account size only with respect to any client that partially funded its account (such documentation is referred to herein as a “confirmation”). The amendments expand the confirmation requirement to include clients that have actual funds that exceed the nominal account size. CTAs must now either receive a written confirmation from or provide a written confirmation to any client before the CTA may begin to trade for the client.

Furthermore, the amendments require that such confirmation contain an explanation of how cash additions, cash withdrawals and net performance will affect a client’s nominal account size. The 2-34 Interpretive Notice clarifies that such explanation may be included in the advisory agreement or delivered to the client in a separate document if the CTA is providing the written confirmation. Whereas Rule 2-34 previously required such explanation only in confirmations for clients who partially-funded their accounts and were not qualified eligible persons (“QEPs”), the amendments now require such explanation to be included in all confirmations, including those with respect to clients who are QEPs. In addition, the amended 2-34 Interpretive Notice requires written confirmations to be provided to or received from clients in the event of any change in the information provided in the initial confirmation before the CTA may place another trade for the client. CTAs are not required to obtain or provide amended written confirmations to existing QEP clients solely to provide information on how cash additions, cash withdrawals and net performance affect nominal account size, but must ensure such information is provided in any subsequent amended confirmation.

Rule 2-34 also requires that CTAs provide additional disclosures to clients with partially-funded accounts and who are not QEPs. These additional disclosures are intended to help clients understand the effects of partially funding their accounts on net performance, fees, margin and leverage.

III. NFA Amends Promotional Material Rules and Interpretive Notices

NFA Compliance Rule 2-29 (“Rule 2-29”) and related Interpretive Notices establish requirements for a Member’s communications with the public and use of promotional material. The NFA amended these requirements to clarify their applicability, better reflect current technology and business practices and address the use of hypothetical performance in promotional material by CPO and CTA Members operating pursuant to a CFTC Regulation 4.7 exemption. These amendments became effective January 1, 2020.

The NFA amendments to Rule 2-29 accomplish several goals. First, they clarify that Rule 2-29 is limited to futures commission merchant (“FCM”), introducing broker (“IB”), CPO and CTA Members. The amendments expand the scope of Rule 2-29 to specifically apply to all commodity interest (not just futures-related) activities and specify that promotional material includes communications disseminated through electronic communications. The amendments also require that a Member submit to the NFA for review and approval all forms of audio and video promotional material that make specific trade recommendations or discuss profits achieved in the past or that can be achieved in the future.

Rule 2-29 previously contained an exemption from its requirements related to hypothetical trading for material directed exclusively to QEPs. This exemption has been amended to require that such material contains either the applicable disclaimers set forth in Rule 2-29 or other language that appropriately describes the performance shown and the limitations of such performance.

IV. CFTC Proposed Position Limit Rulemaking

On January 30, 2020, the CFTC approved a proposed rule addressing position limits for derivatives (the “Position Limits Proposed Rule”). The Position Limits Proposed Rule would replace the CFTC’s previous proposals made over the past decade, which include the: (i) 2011 proposed and final rules, which were challenged by ISDA and SIFMA and eventually invalidated; (ii) 2013 proposed rules; (iii) June 2016 supplemental proposal; and (iv) December 2016 re-proposal. Of the various proposed rules, only the rules regarding aggregation of commodity positions for certain speculative position limits under Regulation 150.4 from 2016 have been finalized. The Position Limits Proposed Rule expands the scope of the 2016 final rule governing aggregation of positions for purposes of federal position limits. The Position Limits Proposed Rule would also: (i) prohibit a market participant from holding more than the specified federal position limit in a “referenced contract” (which are 25 “core referenced futures contracts”, futures and options directly or indirectly linked thereto and “economically equivalent swaps”) during the specified spot period for such contract; (ii) expand upon the list of federally recognized bona fide hedge exemptions; (iii) allow market participants to work with exchanges to obtain initial approval of such hedge exemptions (subject to the CFTC’s right of rejection); and (iv) require the CFTC to make a necessity finding before establishing new position limits for physical commodities.

The CFTC has established a 90-day comment period on the proposal ending April 29, 2020. It has also included 55 discrete questions for which it is seeking comment.

V. Codification of Prior Family Office, JOBS Act and Non-US Investor Relief

The CFTC adopted amendments to regulations regarding registration and compliance requirements applicable to CPOs and CTAs (the “Amendments”). These Amendments became effective January 9, 2020. The Amendments provide an exemption from registration as a CPO and CTA for family offices. The Amendments codify existing no action relief and incorporate by reference the definitions of “family office” and “family client” from SEC Rule 202(a)(11)(G)-1 into new CFTC Regulations 4.13(a)(6) and 4.14(a)(11). The CPO and CTA exemptions are both self-executing, with no initial or ongoing notice filings required to claim either exemption.
The Amendments also harmonize marketing and advertising restrictions with the SEC’s rules by codifying and superseding CFTC Staff Letter No. 14-116 (the JOBS Act Relief Letter). Qualifying pools under Regulations 4.7 and 4.13(a)(3) may now use general solicitation pursuant to SEC Rule 506(c).

Finally, the Amendments revise Regulation 4.13(a)(3) to clarify that QEPs, including non-U.S. persons regardless of financial sophistication, are permitted participants in pools exempt under such Regulation. The amendment to Regulation 4.13(a)(3) is consistent with existing CFTC guidance and is not intended to affect the substance of the exemption.

VI. Amended CFTC Regulation 4.5 Relating to Exclusion for RICs and BDCs

On November 25, 2019, the CFTC approved amendments to Regulation 4.5. The amendments clarify that the exclusion from the CPO definition currently provided for a RIC should be claimed by the RIC’s investment adviser registered under the Investment Advisers Act of 1940 (the “RIA”) because the RIA is most commonly understood to solicit for or operate the RIC. Any RIA to a RIC will need to file a new claim of exemption through the NFA’s filing system if the CPO exclusion provided by Regulation 4.5 is currently claimed by a person other than the RIA. This exclusion also applies to RIAs of BDCs. The Amendments became effective on January 9, 2020 and the compliance date for RIAs to existing RICs affected by these amendments is March 1, 2021. Because these amendments supersede prior related no-action relief, an RIA to a BDC that relied on such relief will need to make a claim for exemption as soon as practicable after the amendments’ effective date.


1 “Partially-funded account” means a client participation in the program of a CTA in which the amount of funds in the client’s commodity interest account over which such CTA has trading authority is less than the account size that establishes the client’s level of trading in a CTA’s program.
2 “Actual funds” means the equity in a commodity trading account over which a CTA has trading authority and funds that can be transferred to that account without the client’s consent to each transfer.
3 “Nominal account size” means the account size agreed to by the client that establishes the level of trading in the particular trading program.