Oct 28, 2024 NFA Changes “BASIC” registration database to omit display of non-member exempt firms The National Futures Association (“NFA”) recently changed its BASIC registration database, removing information about non-member entities, such as exempt Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”) relying on exemptions under Commodity Futures Trading Commission(“CFTC”) rules 4.13, 4.14 and 4.5. This change, unannounced publicly, seems to be permanent. Although exemption filings are still required, NFA member managers now need to use the NFA’s Annual Questionnaire System to confirm exemptions for non-member entities, rather than the much easier to use and accessible NFA BASIC. NFA members are still expected to verify CFTC registration or exemption status of their commodity-related counterparties to comply with NFA Bylaw 1101. For NFA members, BASIC will still display exemptions if the filer is a member, but exemptions filed under a general partner’s name, rather than the investment manager’s, may no longer appear. Non-NFA member CPOs and CTAs might need to provide additional proof of their exemption status for due diligence, potentially by sharing exemption filing records directly. Turnkey understands the NFA’s intention behind the move, likely aimed at preventing firms from misleading investors by appearing regulated simply because they show up in search results. However, we argue this approach might inadvertently increase the risk of fraud. Instead, the NFA Basic system should flag unregistered firms and clearly warn investors with a message like, “This firm is not registered or associated with the NFA or CFTC,” rather than removing them from search results altogether. Turnkey would argue that this move is not only damaging, but provides little if no upside to NFA in meeting their mission which is to, “safeguard the integrity of the derivatives markets and protect investors.” “Safeguarding Integrity” A key aspect of this “mission” is achieved through member adherence to Bylaw 1101, which prohibits NFA members from conducting business with non-members. For a more in-depth discussion on Bylaw 1101, please refer to Turnkey’s earlier article on the subject. This rule is critical, as it helps prevent significant risks in the industry, such as money laundering through unregistered commodity pools. Another risk that Bylaw 1101 addresses is the possibility of unregistered CTAs misrepresenting themselves as registered commodity trading advisors, which poses a heightened risk of fraud and unregulated trading practices. Without accessible information on exemptions, customers have no way of knowing if a CTA claiming to operate under an exemption is truthful. From our perspective, this lack of transparency could lead to regulatory, fraud, and legal issues. One might expect the NFA to simplify access to registration and exemption data rather than restrict it. With more barriers to verifying both registered and exempt statuses, participation and compliance are likely to decline. For example, unregistered commodity pools may now claim an exemption to NFA members without easily verifiable proof. Verifying such claims has become more challenging and time-consuming, which may lead members to rely on these entities’ claims at face value. If an exemption claim proves inaccurate, the member could face disciplinary action, including fines or even loss of registration. This raises a fundamental question: how does this policy support NFA members in complying with Bylaw 1101? It does not. The NFA should focus on rules and policies that encourage compliance by its members, not hinder it. “Protecting Investors” CFTC Commissioner Kristin Johnson rightly states that “transparency is an integral component of the regulatory framework that ensures the safety and soundness and enduring preeminence of our financial markets.” It is an appealing principle; yet, we are seeing a regulatory approach seemingly intent on reducing transparency. What possible benefit is there in restricting public access to the status of exempt investment firms? Ironically, firms that take the steps to apply for and publicly declare an exemption are far more likely to be compliant. Shouldn’t the investing public have access to this valuable information? Yet, once again, the NFA seems to have lost sight of its core mission. Their duty is not to protect member firms, exchanges, or the CFTC—it is to safeguard the interests of the investing public. Until that again becomes the ethos of the regulators we are going to continue to see these failures. In summary, the recent changes to the NFA’s BASIC database undermine transparency and complicate compliance with essential regulatory standards. By limiting access to critical information about non-member exemptions, the NFA not only hinders its members’ ability to perform thorough due diligence but also increases the risk of regulatory non-compliance, potentially compromising the integrity of the industry. If the NFA is to truly fulfill its mission to “safeguard the integrity of the derivatives markets and protect investors,” it must prioritize transparency and accessibility over procedural barriers. Ensuring that investors and NFA members alike can verify exemptions without added difficulty is not only practical but essential to fostering a market that values integrity and accountability above all else. **NFA member firms should feel empowered to let the NFA know when they disagree with their decisions or feel that the regulations are actually more inefficient than helpful. If you would like to voice your concerns about this or any other ruling set forth by the NFA you can reach them directly by calling 312-781-1410 or by emailing information@nfa.futures.org.