Apr 28, 2023 By: Turnkey Trading Partners Turnkey Trading Partners (“Turnkey”) regularly assists our clients through routine National Futures Association (“NFA”) examinations. Historically, NFA has always asked member firms during audits for their Member Bylaw 1101 procedures. In Turnkey’s experience most firms do not have such procedures in writing. Most firm’s don’t even know what NFA Bylaw 1101 is off hand. They do however typically know this membership rule from experience and best practice. All Associated Persons (“AP”) and their respective member firms need to be familiar with this bylaw. Please allow this article to serve as an educational tool or refresher. What is NFA Bylaw 1101? NFA Bylaw 1101 prohibits NFA members from doing business with non-members that are required to be registered with the CFTC as an FCM, IB, CPO or CTA. The rule specifically states: “No Member may carry an account, accept an order or handle a transaction in commodity interest contracts for or on behalf of any non-Member of NFA, or suspended Member, that is required to be registered with the Commission as an FCM, IB, CPO, CTA or LTM, and that is acting in respect to the account, order or transaction for a customer, a commodity pool or participant therein, a client of a commodity trading advisor, or any other person.” Each NFA member firm is required to have procedures in place that will allow them to meet and uphold this regulation. Who must be registered with the CFTC and become NFA members? NFA’s website has an entire section committed to explaining registration obligations which can be found here. In layman’s terms, and very broadly, CFTC registration and NFA membership is required of anyone that intends to profit by either brokering, trading, or soliciting commodity interest products for US persons. A resource that Turnkey often finds helpful for the Bylaw 1101 exercise is to review the following chart below. For those unfamiliar with this chart it can be found at NFA’s website here. The following table shows when an individual/entity is required to be registered as an FCM, RFED, IB, CPO, or CTA based on the locations of the entity, its customers, and the exchanges on which contracts will be traded. Exemptions may, of course, apply. Entity Location Customer Location Exchange Location Registration Required United States United States United States Yes United States United States Foreign Country Yes United States Foreign Country United States Yes United States Foreign Country Foreign Country No Foreign Country United States United States Yes Foreign Country United States Foreign Country * Foreign Country Foreign Country United States No** Foreign Country Foreign Country Foreign Country No NFA member firms should be familiar with all the various membership registration categories as well. These include Associated Persons (AP), Futures Commission Merchants (FCM), Retail Foreign Exchange Dealers (RFED), Introducing Brokers (IIB and GIB), Commodity Pool Operators (CPO), Commodity Trading Advisors (CTA), Floor Brokers (FB), and Principals. Policies and Procedures Obligations NFA members must have procedures in place to ensure staff meet and uphold the standards of Bylaw 1101. At a minimum procedures must include the following: Process whereby NFA BASIC is reviewed prior to opening any new accounts with an entity customer. Entities to be particularly concerned with would be those that appears to be financial in nature. Company names that include the words: fund, asset management, advisors, LP, pool, brokerage, trading, capital management or other common industry lingo should be scrutinized heavily. Customer accounts that intend to assign a power of attorney (POA) to a third-party should also be scrutinized more closely. Third party account controllers may need to be registered as commodity trading advisors if certain exemption criterion are not met. Members should check NFA Basic to ensure the account controller is properly registered or confirm registration is not required via valid exemption from registration. Lastly, when opening a customer account for a pooled investment vehicle each member must confirm the pool is properly registered with NFA. If the pool claims exemption from registration members are also responsible for making a reasonable attempt to confirm their claim is reasonable. Certain exemptions, when compared to knowledge NFA members may have about the customer, will not and do not make sense. Exemptions on file in the NFA BAISC system should be reasonable and in line with NFA and CFTC rules. An area of Bylaw 1101 not related to customer accounts is the proper registration of individuals being paid by member firms. All members must ensure any individual conducting sales activities on behalf of the firm are registered as APs. Members should have a process of review commission payout splits and third party payments for potential violations to this obligation. A process should be in place to verify that all third party payments go to only entities or persons who are properly registered. Similarly, any branch office a firm may have must not be a separate legal entity from the member firm. Payments to branch offices must be made directly to APs not an underlying legal entity. Conclusion NFA Bylaw 1101 is a hallmark of industry regulation. It is critical that firms properly implement policies and procedures to ensure it is complied with. During member reviews you can be sure that NFA staff will ask about this obligation and how it is being complied with. Please use the above to ensure your firm does not stumble when asked this question.