May 24, 2024 In January of 2014 NFA published a Notice to Members requesting comments on proposed changes to Commodity Pool Operator (“CPO”) and Commodity Trading Advisor (“CTA”) regulatory obligations. Those who have been in the industry since that time may recall this notice due to NFA’s effort to impose a capital requirement on CTAs and CPOs for the first time. The industry in general was opposed to this idea (Turnkey included) and the proposal was eventually killed. What many may not remember about this proposal from 2014 was a smaller provision in which NFA attempted to eliminate so called “Inactive Members”. At the time NFA wrote the following: Currently, NFA has several hundred inactive CPO/CTA Members-those that do not engage in any commodity interest trading. We are evaluating whether it is appropriate for inactive CPOs and CTAs to be NFA Members, which results in NFA expending certain regulatory resources on these firms. Therefore, we seek comments on the following: Should NFA permit inactive firms (i.e., those that do not engage in commodity interest trading) to remain NFA Members? Please explain your rationale? Is there any valid reason for CPOs and CTAs to become NFA Members and remain inactive? Assuming we adopt a requirement that withdraws a firm’s NFA membership if the firm is inactive, how should we define inactivity? Assuming we adopt a requirement that withdraws a firm’s NFA membership if the firm is inactive, should NFA allow some period of inactivity (e.g., a year) before the firm is withdrawn? NFA’s Inactive Member Solution On May 20, 2024, more than a decade later, NFA finally has come to a solution about how to better police inactive members. Notice to Members I-24-10 was recently published creating a new regulatory obligation for firms that are inactive. According to the notice NFA will be amending Compliance Rule 2-52, which has classically covered Member Questionnaire requirements, to consider inactive firms. According to the notice: “Compliance Rule 2-52 will require NFA Members to submit the Member Questionnaire at least annually and more frequently in certain instances as required by NFA. The related Interpretive Notice specifies that a Member not currently conducting commodity interest business will be subject to a new semi-annual filing requirement. Those Members who respond “no” to the applicable Member Questionnaire’s questions will be considered not currently conducting commodity interest business and inactive.” The new semi-annual filing requirement for inactive Members will first impact firms with a November 1, 2024 annual filing deadline, making the first semi-annual filing due date May 1, 2025. “Prompt” Updates Change As is often the case, NFA will also amend Rule 2-52 to require “Prompt” updates to Annual Member Questionnaire’s when material changes to business operations occur. While NFA has provided examples of what it believes to be material changes, what will be considered “Prompt” was left undefined at this time. Unless and until NFA better defines the term “prompt” – firms will be at the mercy of NFA staff and their determination of how timely updates to the Member Questionnaire will have been made. BASIC To Reflect Inactive Status Once implemented NFA’s BASIC system will display information about the status of active and inactive members. This is not unlike other notices which are displayed in BASIC today. It does however mean that firms should be diligent about ensuring their activity status is current. Inactive activity status information will be much more visible to the public in the future. Turnkey’s View NFA has had a desire to eliminate or monitor inactive firms for more than a decade. While there may be value to NFA in doing this there is limited upside to the industry overall. As has been the case with many other changes of this nature Turnkey can envision a great deal of “scope creep” in the future. For example, a firm’s “active” or “inactive” status will likely trigger increased NFA Bylaw 1101 scrutiny and enforcement behavior from NFA. More specifically, it is not a stretch that NFA will eventually expect members to police other members over a firm’s activity status in order to do business with them. Over time regulations change. Unfortunately, many times those changes increase the costs and complexities of operating with little to no benefit to Commodity Interest Customers. In this instance we applaud NFA for changing its position from a decade ago. Its clear NFA feels a need to monitor the activity status of member firms in order to better regulate the space. It should always be permissible for qualified individuals to register with the CFTC and to remain NFA members if they choose to do so and meet applicable industry obligations. In this regard NFA has taken a huge step forward.