September 25, 2018

September 25, 2018

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September 24, 2018

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CFTC Staff Issues Interpretive Guidance Clarifying Commodity Trading Advisor Registration Requirements Resulting from the European Union’s MiFID II Research Compensation Provisions for Investment Managers

On December 11, at the request of the Futures Industry Association (FIA), the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (Division) issued an interpretive letter regarding the “solely incidental” exclusion from registration as a commodity trading advisor (CTA). Under the relevant provisions of the Commodity Exchange Act and CFTC rules, a futures commission merchant (FCM), swap dealer (SD) or introducing broker (IB) that provides commodity trading advice is required to be registered separately as a CTA unless such advice is “solely incidental” to the conduct of such registrant’s business as an FCM or SD (or “solely in connection with” such registrant’s business as an IB).

As of January 3, 2018, the European Union’s (EU) Market in Financial Instruments Directive II (MiFID II) will require EU investment managers to unbundle payments for investment research (including commodity trading advice) from payments for execution services. FIA requested the Division to confirm that such separate payments would not affect the ability of FCMs, SDs and IBs to continue to rely on the “solely incidental” exclusion from registration as a CTA.

In its response, the Division stated that, although direct payment for commodity trading advice may be one factor in determining if a FCM, SD or IB would be required to register as a CTA, receipt of separate compensation would not be dispositive on its own. Instead, the analysis of whether the commodity trading advice is “solely incidental” to the FCM’s or SD’s conduct of its business, or “solely in connection with” the IB’s business must be based upon the particular facts and circumstances of the relationship between the parties. The Division further noted that, although the request for interpretation was made as a result of the requirements that EU investment managers unbundle payments for investment research from payments for execution services, the interpretation “is not limited to entities who are bound by the MiFID II directive.”

©2018 Katten Muchin Rosenman LLP

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About this Author

Kevin M. Foley, Finance Lawyer, Katten Llaw Firm
Partner

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

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312-902-5372
Timothy Nolan, Katten Law Firm, Chicago, Corporate Law Attorney
Associate

Timothy Nolan concentrates his practice on transactional, corporate and regulatory aspects of financial services matters. Timothy is able to provide legal services to a wide variety of clients, including proprietary trading firms, hedge funds, broker-dealers, registered investment advisers, commodity trading advisers, financial institutions and general corporate clients.

Prior to joining Katten, Timothy served as the CEO and the president of the board of directors of a small commercial real estate company and spent 10 years in the scrap recycling industry, including several years as general manager of a mid-sized company. In his time in the scrap recycling industry, Timothy worked with traders, brokers, importers and exporters, and other industry professionals around the world relating to ferrous, non-ferrous and precious metal recycling, together with paper and plastic recycling.

312-902-5447