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Notice I-12-35

December 19, 2012

Member Obligations Under NFA Bylaw 1101 and Compliance Rule 2-36(d) with Respect to CPOs/CTAs Exempt from Registration Prior to December 31, 2012

NFA Bylaw 1101 prohibits an NFA Member from carrying an account, accepting an order or handling a transaction in commodity futures contracts for or on behalf of any non-Member of NFA that is required to be registered with the Commodity Futures Trading Commission (CFTC) as an FCM, IB, CPO, CTA or LTM.1 Bylaw 1101 by its terms imposes strict liability on any Member conducting customer business with a non-Member that is required to be registered.

However, in applying Bylaw 1101, NFA has not relied on a strict liability standard but rather has focused on evidence indicating that the Member knew or should have known of the violation. Given the recent changes to Part 4 of the CFTC's Regulations, as described below, NFA intends to follow the same approach and will provide limited time relief from Bylaw 1101's prohibition for Members transacting customer business with unregistered persons that were exempt from CPO or CTA registration prior to December 31, 2012 provided the Member is taking reasonable steps to ensure it is in compliance.

The Rescission of CFTC Regulation 4.13(a)(4)

In February 2012, the CFTC issued final rules amending a number of CFTC Regulations related to exemptions from CPO/CTA registration, which have a compliance date of December 31, 2012. The final rules rescind the exemption from CPO registration available under CFTC Regulation 4.13(a)(4) for certain qualifying pools and, therefore, after December 31, 2012 all previous exemptions afforded under 4.13(a)(4) will be withdrawn. In most instances, any person who previously operated a Regulation 4.13(a)(4) exempt pool must either register as a CPO or qualify and file for another available exemption.

The CFTC's final rules also amended a number of CFTC Regulations to require any person that currently claims an exemption from CPO registration under CFTC 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), or 4.13(a)(5), an exclusion from CPO registration under Regulation 4.5, or an exemption from CTA registration under 4.14(a)(8) to annually affirm the applicable notice of exemption within 60 days of each calendar year end, commencing for the year ended December 31, 2012. Pursuant to the CFTC's rules, persons that fail to file the affirmation notice by March 1, 2013 will be deemed to have requested a withdrawal of the exemption and, therefore, may be required to be registered.

Since exempt CPOs/CTAs have until March 1, 2013 to complete the affirmation process, NFA recognizes that it may be 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.

Therefore, Members that take reasonable steps to determine the registration and Membership status of these previously exempt persons will not be in violation of NFA Bylaw 1101 if, between January 1 and March 31, 2013, they transact customer business with a previously exempt person that fails to either become registered and a Member of NFA, file a notice affirming its exemption from CPO registration or provide a written representation as to why the person is not required to register or file the notice affirming the exemption. For those persons who previously claimed an exemption from CPO registration under CFTC Regulation 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), or 4.13(a)(5), an exclusion from CPO registration under Regulation 4.5, or an exemption from CTA registration under 4.14(a)(8) who have not filed a notice reaffirming the exemption, a notice of exemption for another available exemption or properly registered and become an NFA Member by December 31, 2012, NFA expects any Member transacting customer business with that person to promptly contact the person to determine whether the person intends to file a notice affirming the exemption.

If the Member learns that the person does not intend to file a notice affirming the exemption or the person does not file a notice affirming the exemption by March 1, 2013, then the Member must promptly obtain a written representation as to why the person is not required to register or file a notice exemption, and evaluate whether the representation appears adequate based upon the information that the Member knows about the person. If the Member ultimately determines that the person's written representation is inadequate and the person is required to be registered, then the Member must put a plan in place (e.g. liquidation-only trades) to cease transacting customer business with the person or risk violating NFA Bylaw 1101.

NFA is also providing this limited time relief to Members that conduct customer business with persons who were previously exempt under Regulation 4.13(a)(4) to ensure that the Member has sufficient time to determine whether the person is required to be registered. For those persons that previously claimed an exemption under 4.13(a)(4) who have not filed a notice of exemption for another available exemption or properly registered and become an NFA Member by December 31, 2012, NFA expects any Member transacting customer business with the person to promptly obtain a written representation as to why the person is not required to register or file another exemption, and evaluate whether the representation appears adequate based upon the information that the Member knows about the person. If the Member ultimately determines that the person's written representation is inadequate and the person is required to be registered, then the Member must put a plan in place (e.g. liquidation-only trades) to cease transacting customer business with the person or risk violating NFA Bylaw 1101.

Information Available to Assist Members

NFA expects a Member prior to December 31, 2012 to commence reasonable steps to identify those persons who currently claim an exemption from CPO/CTA registration with whom the Member transacts customer business. Members should compare their list of exempt CPO/CTAs to the information NFA is making available to assist Members in determining whether an exempt CPO/CTA has affirmed its exemption(s). Members may review information on NFA's BASIC System, which will reflect an affirmation date if an exempt CPO/CTA has properly filed a notice affirming an exemption or a withdrawal date if the person has withdrawn the exemption. NFA is also providing Members with access to a spreadsheet, which is updated nightly, that includes a list of all persons that have exemptions on file with NFA that must be affirmed on an annual basis. The spreadsheet lists the operator of the pool and each pool for which it claims an exemption, as well as each person claiming exemption from CTA registration. This spreadsheet can be found in the Member's Annual Questionnaire at http://www.nfa.futures.org/NFA-electronic-filings/annual-questionnaire.HTML. The spreadsheet will include all persons with an exemption(s) that requires affirmation, as well as the affirmation date, if applicable. If the spreadsheet does not reflect an affirmation date, then the exemption has not been affirmed.

Members should be aware that prior to January 1, 2003, NFA was not the sole custodian of Notices of Exemption and, therefore, any notice filed before that date will not be noted in BASIC and may not appear on NFA's spreadsheet. Some of these exempt persons have contacted NFA and have been instructed to re-file the exemption. Those persons now appear on the spreadsheet showing an affirmation date as of the date of re-filing. Any Member transacting customer business with an unregistered person, and the Member has reason to believe that the person (who does not appear on NFA's spreadsheet) is required to be registered, should inquire with that person whether the exemption was filed prior to 2003 and, if so, advise that person to contact NFA and re-file the exemption through NFA's Electronic Exemption System. The Member will be able to confirm whether the exemption was re-filed by subsequently reviewing NFA's BASIC system or the spreadsheet.

Any Member that acts in accordance with the guidance provided in this Notice will not be charged with violating NFA Bylaw 1101. Members should be aware, however, that this Notice's guidance does not in any way relieve their regulatory obligations pursuant to the Commodity Exchange Act and the CFTC's Regulations.

If you have any questions on this Notice, please contact Carol Wooding, Associate General Counsel at cwooding@nfa.futures.org or 312-781-1409.


1 NFA Compliance Rule 2-36(d) contains a similar prohibition with respect to NFA Members engaging in forex transactions with non-Members of NFA required to be registered as a FCM, RFED, IB, CPO or CTA in connection with its forex activities. The relief discussed in this release applies to prohibition contained in NFA Compliance Rule 2-36(d).

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