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December 19, 2012
Guidance on Obligations Under NFA Bylaw 1101 for Commodity Pool Operator Members Advising Pools that are Registered Investment Companies
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.
Effective December 31, 2012, a number of registered investment advisers (Advisers) that advise a registered investment company (Registered Fund) will be required to register as a CPO because the Registered Fund no longer qualifies from the exclusion from CPO registration under CFTC Regulation 4.5. As a result, these Advisers will become subject to the requirements of NFA Bylaw 1101. Generally, Bylaw 1101 requires CPO Members to determine if any participants in their pools are required to be registered. It has come to NFA staff's attention that the Adviser/CPO to these registered funds may not be able to comply fully with Bylaw 1101 because the CPO does not currently have access to information relating to the Registered Fund's underlying participants due to the distribution channels used with respect to these Registered Funds.
As a result, until further notice, CPO Members that advise a Registered Fund will be considered in compliance with Bylaw 1101 if the Adviser/CPO ensures that any FCM through which the Registered Fund transacts any commodity interest transactions and any sub-adviser that provides investment management services to the Registered Fund is properly registered in the appropriate capacity and a Member of NFA, or in the case of the sub-adviser, exempt from CTA registration. The CPO Member to a Registered Fund will not be required to conduct Bylaw 1101 due diligence on the Registered Fund's underlying participants.
NFA staff is developing additional guidance for Adviser/CPOs regarding their due diligence obligations under Bylaw 1101 with respect to a Registered Fund's underlying participants. The guidance in this notice will remain in effect until this additional guidance is issued.
If you have any questions on this Notice, please contact Carol Wooding, Associate General Counsel at 312-781-1409 or firstname.lastname@example.org.
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).