As your industry advocate, the NIBA provides many services which help your business stay in compliance with NFA regulations. "Ask the NFA," is the way you can ask questions about those regulations and compliance requirements without having to call NFA directly.
Just email us at nfacomments@theniba.com and we will get the answers for you. Please keep in mind the purpose of this contact is to keep the lines of communication between NFA and NIBA members open, not to fix any specific individual concerns.
This month's questions were selected from those submitted by NIBA members. The answers were supplied by NFA staff.
Question: May an NFA Member pay 3rd-party marketers or unregistered person for customer referrals?
Answer: In certain circumstances an NFA Member may be permitted to pay a 3rd-party marketer, unregistered entity or an unregistered person (collectively, "unregistered person") a one-time referral fee for customer referrals. However, the NFA Member should be aware that it may have a supervisory responsibility over the promotional material and sales practice tactics used by the unregistered person that led to the referral. The NFA Member may be held responsible for any misleading promotional materials utilized or sales practices performed by the unregistered person.
In addition, the NFA Member must consider its obligations under NFA Bylaw 1101 when conducting business with a 3rd-party marketer or other unregistered person. NFA Bylaw 1101 prohibits NFA Members from doing business with non-Members that are required to register with the CFTC. Members should carefully consider the extent in which the unregistered person is conducting commodities related activities. If the referred customer was obtained by means beyond what is considered incidental to the unregistered person's primary business, that unregistered person may be acting in a capacity that requires registration with the CFTC. In other words, if the solicitations by the unregistered person are such that CFTC registration and NFA Membership is required, the NFA Member paying the referral fee may have violated NFA Bylaw 1101.
Further, consideration must be given to the methodology in which the referral amount paid to the unregistered person is computed. In most circumstances it is a violation for an NFA Member to compensate an unregistered person on a per-trade basis (i.e. a trailing commission). Receiving compensation on a per-trade basis is generally indicative of Introducing Broker activities and would likely trigger registration requirements for the unregistered person. In turn, an NFA Member paying an unregistered person on a per-trade basis would likely cause NFA Bylaw 1101 violations.
Lastly, subsequent to the referral, the referring unregistered person should not be holding commodities-based communications with the customer at all after it becomes a customer. In short, service and contact by the unregistered person should be limited to the referral.
Question: When an AP or firm calls into NFA, are the calls logged in an internal system? Are the calls recorded?
Answer: Calls received by NFA's Information Center are logged in an internal system. Generally, these calls are not recorded. However, NFA Management will intermittently monitor and review calls for quality control purposes.