The importance of proper registration with the Commodity Futures Trading Commission (CFTC) as a Commodity Trading Advisor (CTA) is underscored by recent enforcement actions against individuals and firms deemed to be acting in the capacity of a CTA.

Recently, an individual by the name of Mark Hendershott was fined $75,000 for acting as an unregistered CTA while providing hedging advice to farmers, violating Section 4m(1) of the Commodity Exchange Act (CEA). Hendershott worked as a self-employed consultant for farmers. While most of his consulting services were focused on physical crop-related activities, he also offered hedging advice to his clients regarding their crop production through commodity futures. Hendershott provided personalized guidance on hedging strategies and advised clients on the suitability of using futures contracts to hedge their crops, including wheat, soybeans, oats, corn, and lean hogs. He built his client base by reaching out to potential clients, particularly within the farming community, and charged a flat fee for his consulting services. The order concludes that Hendershott was obligated to register as a CTA because, during the relevant period, he presented himself to clients and potential clients as a CTA. Additionally, in the previous 12 months, he provided commodity trading advice to more than 15 individuals, using email, telephone, and the Internet to conduct his CTA business.

For those who are already advising on physical crops and working with farmers in a somewhat similar capacity to Hendershott, it is easy to understand how the conversation can quickly turn to talking about hedge strategies which of course involve futures. It may be difficult to know where the line in the sand actually is which is why it is important to work with a reputable third-party such as Turnkey Trading Partners.

In 2022 Turnkey wrote about a similar but different case in which Powerline Petroleum, LLC was penalized to the tune of $875,000 for not registering as a CTA, despite already being registered as an introducing broker (IB). Registered introducing brokers are exempt from registering as commodity trading advisors if their trading advice is incidental to their business making the case decidedly questionable from the get-go.  This case created significant concern within the commodity interest industry due to its implications for firms traditionally relying on the Introducing Broker exemption from CTA registration. The decision was controversial enough that the Commissioner of the CFTC offered an official dissent to the ruling.

The dissent by CFTC Commissioner Summer K. Mersinger emphasized that Powerline, a small firm with a history of compliance as an IB, may have been unfairly required to register as a CTA, raising questions about regulatory consistency and fairness.

Many of Turnkey’s industry partners and clients have long relied on the IB exemption precedent. Now, they are asking, “Does the Powerline case require us to register as a CTA?” While the answer is still somewhat unclear, it’s advisable for IBs and FCMs to consult with compliance professionals or legal counsel to review the Powerline Order and Dissent. Conducting a thorough inventory of day-to-day practices is essential to determine whether CTA registration might be necessary. At a minimum, reconsidering fee disclosures, conflicts of interest, and documentation of customer relationships in light of Powerline is important. Regulators urgently need to clarify this issue, but in the meantime, it’s wise to take proactive steps.

Both of these cases highlight the critical need for firms and individuals to ensure they are appropriately registered to provide commodity trading advice, as failure to do so can lead to significant penalties, reputational damage, and regulatory scrutiny. If there is concern that your firm may not be properly registered, or if you are holding yourself out as a CTA without proper registration, contact us today.