§ 5.04 Registration with the CFTC

• Jurisdiction: United States
• Publication year: 2022

§ 5.04 Registration with the CFTC

The regulatory jurisdiction of the Commodity Futures Trading Commission ("CFTC") extends to non-securities instruments, such as futures contracts, options on commodities, options on futures contracts, and retail foreign exchange ("forex") transactions and "swaps."²⁹⁵ Instruments regulated by the CFTC are collectively known as "commodity interests." Among the instruments that fall within the definition and are CFTC-regulated are interest rate swaps; certain types of credit default swaps ("CDS") and total return swaps ("TRS") that reference broad-based indices; contracts for difference ("CFDs") and other swaps that reference nine or fewer equities but also have a currency component; cryptocurrency derivatives; weather, energy and emissions swaps; treasury bill swaps, foreign currency options and certain types of foreign currency forwards (such as non-deliverable forwards) and swaps.²⁹⁶ Other swaps such as many single-name equity swaps and swaps on a narrow-based index of securities, are considered "security-based" swaps and are instead regulated by the Securities and Exchange Commission ("SEC").²⁹⁷

A hedge fund that trades in commodity interests is a "commodity pool" (each a "fund" or "pool"), which is defined as "any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests."²⁹⁸ The wholly owned trading subsidiaries of a commodity pool that trade commodity interests or feeders of a commodity pool are themselves also considered commodity pools.²⁹⁹ As is discussed below, the pool is not required to register with the CFTC; however, certain persons who either control the pool or provide advisory services to the pool, such as commodity pool operators ("CPOs") or commodity trading advisers ("CTAs"), respectively, and individuals associated with those entities, may be subject to CFTC registration.

[1]—Commodity Pool Operators

In the case of a fund that is a limited partnership or a limited liability company, typically the majority of domestic funds and the minority of offshore funds, it is the CFTC staff's view that the general partner or managing member will have the status of a CPO, defined as:

"Anyone engaged in a business that is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities or property . . . for the purpose of trading in any commodity for future delivery on or subject to the rules of any contract market. . . ."³⁰⁰

In the case of a private fund that is organized as a corporation or as a foreign company, i.e., most offshore funds, it is the CFTC staff's view that the fund's board of directors will have the status of CPO.³⁰¹

That being said, the CFTC staff has issued guidance allowing the general partner, managing member or a Board of Directors (or the trustee of a trust company) to delegate its duties as a CPO to a separate manager. As a condition of such delegation, unless the delegating CPO is an "unaffiliated board member," CFTC staff requires the delegating CPO to agree to remain jointly and severally liable for any violations of the CEA or CFTC regulations in connection with the operation of the commodity pool.³⁰² While this relief does not require a filing with the CFTC, registered CPOs are expected to verify that they have delegated in accordance with CFTC staff guidance as part of one of its annual filing requirements.

A CPO is required to register with the CFTC unless an exemption is available. Firms will generally have all persons delegate their CPO authority to the investment manager entity so that only a single entity will be required to register with the CFTC.

[2]—Commodity Trading Advisers

A CTA is defined as "any person who for compensation or profit, engages in the business of advising others . . . as to the value of or the advisability of trading in" futures, commodity options, the future markets or swaps.³⁰³ The adviser to a hedge fund that is a commodity pool is generally a CTA, which is required to register with the CFTC unless an exemption is available. The CFTC also takes the position that a sub-adviser, even without investment discretion, would be considered a CTA.³⁰⁴

[3]—Associated Person of a CPO or CTA

An "associated person" ("AP") of a CPO is defined as a "partner, officer, employee, consultant or agent [or any natural person occupying a similar status or performing similar functions], in any capacity which involves (1) the solicitation of funds, securities, or property for a participation in a commodity pool, or (2) the supervision of any person or persons so engaged."³⁰⁵ The definition of an associated person of a CTA includes the same types of persons who are involved in "(1) the solicitation of a client's or prospective client's discretionary account, or (2) the supervision of any person or persons so engaged."³⁰⁶ Accordingly, a firm's non-ministerial marketing personnel will typically be considered APs if the firm is a CPO or CTA to a commodity pool, as will be the supervisor(s) of such personnel, including the Director of Marketing. Associated persons of registered CPOs and CTAs are required to register with the CFTC via Form 8-R and generally to complete the Series 3 licensing test,³⁰⁷ an equivalent substitute licensing test or to have obtained a waiver.³⁰⁸ As of January 31, 2021, completion of a swaps proficiency course will also generally be required for APs of CPOs or CTAs that engage in swaps activity.³⁰⁹

In addition, any location other than the main business office at which a CPO or CTA employs persons engaged in activities requiring registration as an AP (even if it is only one individual), is considered a branch office.³¹⁰ Branch offices must be listed with the National Futures Association ("NFA") and require an individual at each branch officer to register as a branch office manager (which requires taking an additional exam).³¹¹ Each branch office must use the name of the firm of which it is a branch for all purposes, and must hold itself out to the public under such name.³¹²

[4]—Principal of a CPO or CTA

The term "principal" includes: (1) any general partner, managing member, president, CEO, CFO, CCO, COO, director or similar person or entity; (2) any person in charge of a principal business unit subject to CFTC regulation; (3) any owner of 10% or more outstanding shares of any class of the registrant's stock; (4) any person entitled to vote or has power to sell or direct sale of 10% of any class of the registrant's voting securities; (5) any person entitled to receive 10% or more of the registrant's net profits; (6) any person who has contributed 10% or more of a registrant's capital (with certain exceptions); or (7) anyone who has the power to exercise a controlling influence over activities subject to CFTC regulation.³¹³ Principals of registered CPOs or CTAs are required to file with the CFTC as such via a Form 8-R; however, they are not required to complete the Series 3 or equivalent licensing test (but note that every registered CPO must have one listed principal that is an Associated Person—this often is the Chief Marketing Officer).

[5]—Registration Process

The CFTC registration process is handled by the NFA, the U.S. self-regulatory organization for the futures industry. The process outlined in this subsection applies to CPOs and/or CTAs registering with the CFTC that intend to take advantage of CFTC Rule 4.7, or "registration lite."³¹⁴ In addition to registering with the CFTC, each CPO/CTA must also become a member of the NFA and each AP must become an associated member.

The application portion of registration entails the following steps: (1) establishing a security account on the NFA's Online Registration System (the "ORS"); (2) registering as a CPO and/or CTA with the CFTC by filing the online version of Form 7-R;³¹⁵ (3) registering each AP of the CPO or CTA with the CFTC by filing Form 8-R; and (4) filing a Form 8-R for each principal with the NFA.

[a]—Fingerprinting

Each AP and principal must submit fingerprint cards³¹⁶ for an FBI background check. The NFA encourages applicants to submit more than one set of fingerprints with their application to avoid delays in obtaining additional sets if necessary for processing. Fingerprint waivers are available for independent directors and persons who have not lived in the United States since the age of eighteen.³¹⁷

[b]—Proficiency Requirements for Associated Persons

All APs must take and pass the Series 3 exam (National Commodity Futures Exam). In addition, at least one principal must be an AP (thus, at least one principal would be required to take the Series 3 exam). The Series 3 examination is administered by FINRA and is intended as a proficiency exam concerning futures. Prior to registering for the exam, each test taker must file a Form U-10 with FINRA.³¹⁸ Once the Form U-10 is complete, the submitted form will be approved by NFA and the applicant will receive a Notice of Enrollment and can schedule an exam.

There are several waivers of the Series 3 available for individuals who have taken other industry tests or who will limit their solicitation activities:

• Series 7: Individuals who are already registered with FINRA as a General Securities Representative of an SEC-registered broker-dealer and are going to limit their futures activity on behalf of their sponsor to solicitation for participation in commodity pools or discretionary accounts, are eligible to take the Series 31, a shorter test than the Series 3 (as well as such individual's supervisors up the chain).³¹⁹

• Series 7 and Limited Solicitation: Individuals who are already registered with FINRA as a General Securities Representative of an SEC-registered broker-dealer and are going to limit their futures activity on behalf of their sponsor to referring clients to APs of the sponsor, when such referrals are solely incidental to

...