CFTC Staff Letter 04-25: No-Action on IB and AP Registration for Consulting Firm

CFTC Letter 04-25
CFTC letter No. 04-25
September 7, 2004
Interpretation
Division of Clearing and Intermediary Oversight Re: Sections 4d and 4k(1) – Introducing Broker and Associated Person Registration Requirements Dear :
This is in response to your letter dated July 12, 2004 to the Division of Clearing and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “Commission”), as supplemented by telephone conversations with Division staff (collectively, the “correspondence”). By the correspondence, you sought guidance as to whether “X” or you are required to be registered as an introducing broker (“IB”) or associated person (“AP”), respectively. Based on the representations made in the correspondence, we understand the facts to be as follows. “X” has in the past provided various consulting services to a commodity pool operator (“CPO”) for an offshore fund (the “Fund”). “X’s” consulting services included providing advice as to both the Fund’s structure and the CPO’s registration obligations. In addition, “X” provided various reports to the CPO regarding risk control, changes in federal regulations relevant to the Fund’s operation, and general industry activities.[1] Although the Fund ceased operation in February 2004, you anticipate that the Fund may resume operations in the near future and that “X” will at that time resume its consulting services for the CPO. “X’s” compensation, going forward, will be on a flat-fee basis.[2] Pursuant to an arrangement between the CPO and the CPO’s futures commission merchant (“FCM”), “X’s” compensation will be paid by the FCM, either deducted from the CPO’s portion of commissions or deducted directly from the Fund’s account with the FCM.
Section 1a(14) of the Commodity Exchange Act[3] defines an IB as an entity “engaged in soliciting or in
accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility who does not accept any money, securities, or property . . . to margin, guarantee, or secure any trades or contracts that result or may result therefrom.” [4] Section 4d of the Act, in turn, requires that any person engaged in “soliciting orders or accepting orders” as an IB, be registered as such. Based on the representations made to us, it does not appear that “X” would be engaged in “soliciting or in accepting orders.” The Division’s opinion in this regard is based primarily on the following considerations: (1) “X” would be compensated for the consulting services described above and not for referring the CPO, or any other of its clients or potential clients, to any FCM; (2) “X” would not be in any way involved with order flow; and (3) “X” would not be compensated on a per-order basis or by a referral fee. Accordingly, the Division believes that “X’s” file:///H|/Desktop/04letters/tm04-25.htm (1 of 3) [5/6/2010 5:31:04 PM]