CFTC Interprets Who Has to Register as Commodity Trading Advisor

The CFTC’s Division of Swap Dealer and Intermediary Oversight responded to a letter from the Futures Industry Association (FIA) requesting guidance for Commodity Trading Advisor (CTAs) registration requirements. The Division stated in a staff letter that commodity trading advice conducted “solely incidental” to a profession, or “solely in connection with” business is not subject to registration as a CTA.

On January 3rd, 2018, the Markets in Financial Instruments Directive II (MiFID II) will require EU Investment management firms to unbundle payments for investment research, which includes commodity trading advice. Allison Lurton, senior vice president and deputy general counsel of the FIA asked the CFTC Division for an interpretation of the Commodity Exchange Act regarding FIA members engaged in business with EU investment managers. FIA futures commission merchants (FCMs), swap dealers (SDs), and Introducing brokers (IBs) may offer offer commodity trading advise to EU investment managers which is “solely incidental” in conduct of their profession, according to Lurton. FIA’s worries that if their members receive separate payments from an investment manager for commodity trading advice that is “solely incidental” and/or “solely in connection with” their profession said members would be deemed as Commodity Trading Advisor by the CFTC.

After a revision of the of section 4 of the Commodity Exchange Act without any modification to the term “commodity trading advisor,” the Division found the FIA memebers circumstances within the exclusion from registering as a Commodity Trading Advisor.

“Based upon the foregoing, the Division does not believe that an FCM, SD, or IB would be in violation of section 4m(l) of the Act for failing to register as a CTA in connection with the provision of commodity trading advice for separate compensation so long as the providing of the commodity trading advice is “solely incidental” to the conduct of its business as an FCM or SD, or “solely in connection with” its business as an IB.”

The Division acknowledged the lack of guidance in the Commodity Exchange Act regarding the extent of commodity trading advice that excludes FCMs, SDs, and IBs from registering as a Commodity Trading Advisor. the Division offered a preamble discussing certain activities that would be beyond the scope of “solely incidental” providing limitations,

“[t]here are advisory activities that the Commission would consider to be beyond the scope of the “solely incidental” exclusion, and depending on the facts and circumstances could cause a swap dealer to be a CTA within the statutory definition. For example, a swap dealer that has general discretion to trade the account of, or otherwise act for or on behalf of, a counterparty would be engaging in activity that is not solely incidental to the business of a swap dealer. Limited discretion related to the execution of a particular counterparty order, however, would not cause a swap dealer to be a CTA. Also, the exclusion would not apply if a swap dealer received separate compensation for, or otherwise profited primarily from, advice provided to a counterparty. Furthermore, a swap dealer that enters into an agreement with its counterparty to provide advisory services or a swap dealer that otherwise holds itself out to the public as a CTA would also not be within the “solely incidental” exclusion. These examples are not exhaustive. There may be other circumstances in which a swap dealer’s activity would fall outside the available exclusion. A determination of whether activity is “solely incidental” would necessarily need to be viewed in context based on the particular facts and circumstances.”

They further stated that the analysis of whether the commodity trading advice provided by FCMs, SDs, or IBs is fact “solely incidental” is based upon the particular relationship between the parties. Receipt of a separate compensation in its own would not, in its own, subject the FCM, SD, or IB to register as a CTA.

As always, the Division stated that this interpretation is the position of the Division only and does not necessarily reflect the views of the CFTC or other division. They provided the interpretation in response to the above circumstances and might be void given different facts.

For the full press release and letter, please click here.

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