CFTC Staff Letter 96-70: Firm Providing Commodity Trading Advice via Seminars and Phone Service Must Register as CTA

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U.S. COMMODITY FUTURES TRADING COMMISSION DIVISION OF TRADING & MARKETS Three Lafayette Centre 1155 21st Street, NW, Washington, DC 20581 Telephone: (2C"') 418-5430 Facsimile: (202) 418-5536 September 18, 1996 Re: CTA Registration Requirements Dear This is in response to your letter dated August 5, 1996 to the Division of Trading and Markets ("Division") of the Commodity Futures Trading Commission ("Commission"), as supplemented by telephone conversations with Division staff. By your correspondence, you request our advice as to whether your firm, "X", would be required to register as a commodity trading advisor ("CTA") in connection with providing certain advisory services, as more fully described below. Based upon the representations made in your letter and in subsequent conversations with Division staff, we understand the pertinent facts to be as follows. "X" is in the process of being incorporated, and will have as its primary objectives the following: ( 1) to offer courses in financial engineering and designing of custom, non-standard derivative securities contracts to institutional investors; (2) to offer consulting services to end-users of derivative securities contracts, such as corporate treasurers and risk managers; (3) to host seminars for the general public on the use of options, including options on futures; (4) to demonstrate software designed by individuals at your firm to the general public, where such software entails quantifying and calculating certain risk parameters; and (5) to provide a dial-up phone service for individual and institutional investors on the risk parameters of a given option or security. We further understand that your firm will not be handling any client accounts, on a discretiona ry basis or otherwise .
Section
prohibits a
4m(1) of person~/ the Commodity Exchange Act (the "Act") 1./ from using the mails or any means or 1./ 7 u.s.c. §1 et s e g. ( ) 1994 . ~/ The Act defines a "person" to include, in the singular or plural form, individuals, associations, partnerships, corpora￾tions, and trusts.

instrumentality of interstate commerce in connection with his business as a CTA, unless registered as such under the Act. As defined in Section 1a(5) of the Act, aCTA is "any person who, for compensation or profit," advises others about trading in commodity futures or commodity option contracts "either directly or through publications, writings or electronic media" or who as a part of a regular business "issues or promulgates analyses or reports" concerning such transactions. An individual or firm may provide commodity trading advice by recommending specific transactions or trading methodologies or may simply advise generally about the value of trading in futures or commodity options, and in either case, be subject to registration as a CTA. Furthermore, a person may provide commodity trading advice even though he is "neither directly o r indirectly involved in the solicitation of funds or trades or the trading of accounts."~/ The statutory definition of a CTA explicitly refers to both direct and indirect forms of providing such advice. Thus, Commission staff in interpreting Section 1a(5) of the Act has found the CTA definition also applicable to persons distributing computer software progra~s that generated commodity trading rec ommendations or strategies~/ and those operatf'ng telephone hotlines that provided research and trade ideas.~ Persons who engage in these activities, or others of the nature set forth in the definition, must register as a CTA, absent an exclusion or exemption. Section 1a(5) excludes certain persons from the definition of aCTA if they have furnished advisory services in a manner solely incidental to the conduct of specifie d businesses or professions. In ~ddition,
Section 4m(1) of the Act and Commission Rule 4.14Q/ exempt
certain other persons from CTA registration. Copies of the sections and rules referred to herein as well the interpretative letters listed below have been enclosed for your reference. ~I See Division of Trading and Markets Interpretative Letter No. 96-56 [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) , 26,761 (July 8, 1996). ~I See CFTC Interpreta tive Letter No. 93-18, [1992 - 1994 Transf er Binder] Comm. Fut. L. Rep. (CCH) ~ 25,694 (February
1993) and CFTC Interpretative Letter No. 94-51, [1992-1994
Transfer Binder] Comm. Fut. L. Rep. , 26,115 (May 10, 1994). ~/ See CFTC Interpreta tive Letter No. 93-43, [1992 - 1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) , 25,734 (Ma y 19, 1993 ) . 23, Q/ Commission rules refer red to herein are found at 17 C.F.R. Ch . I ( 19 9 6 ) .

Based upon the representations you have made to us, we do not believe that an exclusion from the CTA definition or exemption from CTA registration is available to 11 X11 • Thus, 11 X11 would be required to be registered with the Commission as a CTA, and certain individuals of the firm listed as principals. Such individuals would include, but not be limited to, officers of 11 X11 or thQse who have contributed ten percent or more of its capital.21 The Commission has delegated the processing of registration applications to the National Futures Association ( 11 NFA11 ). You may contact NFA for further information and forms at the following address:
National Futures Association
200 West Madison Street, Suite 1600 Chicago, Illinois 60606 (312) 781-1300 From outside of Illinois: 1-800-621-3570. Based upon your representations, it does not appear that 11 X11 will have discretionary trading authority over client accounts. If that is the case, persons soliciting client s on its behalf will not be required to be registered as ~ssociated persons of 11 X11 or to take and pass the Series 3 exam . .a1 yurther, 11 X11 will not be required to become a member of the NFA~ , and persons soliciting clients on its behalf will not be required to become NFA associates based solely upon that activity. Finally, 11 X11 will not be required to 21 The term 11 principal 11 is defined in Rule 3.1, a copy of which is enclosed for your reference . .a/ Pr incipals must, however, submit fingerprints for clearanc e in connection with the registr ation application. ~/ The registration requir ements under the Act and t he requirements for membership in the NFA are not identical with respect to persons acting as CTAs. Commission Rule 170.15 requires all registered futures commission merchants ( 11 FCMs 11 ) to become and remain members of at least one futures association regist ered under Section 17 o f the Act . NFA is such a registe red futures association a nd NFA Bylaw 1 1 01 prohibits its membe rs f rom transacting any customer business with persons who are not NFA members. Because only registered FCMs may carry customer accounts, a CTA entering orders for clients pursuant to a power of attorney must have such trades executed through a r egistere d FCM. The combined eff ect o f Commission Rule 1 70.15 a nd NFA Bylaw 1101 is to r e quire CTAs managing client accoun ts to b e come NFA members. However, t o t he e x tent that a r e gistered CTA is not managing customer accounts, it would appear tha t NFA membership is not required. See 48 Fed. Reg . 26304, 26306 n.22 (June 7, 1983).

I provide a Disclosure Document to clients pursuant to Rule 4.31. This letter is based on the representations made in your letter, as supplemented. Any different, changed or omitted facts or circumstances might require us to reach a different conclusion. For example, in a telephone conversation with Division staff, you mentioned that your firm may set up a referral arrangement with various brokerage firms, whereby it may refer certain clients that attend its seminars to such firms for trading commodity interests, among other things. We note that such activity may bring your firm within the definition of an introducing broker ( 11 IB 11 ) , thus requiring an additional registration for 11 X11 as an IB. Therefore, please consult this office again should the operations or activities of 11 X 11 change in any way from those you have represented to us. If you have any questions concerning this correspondence, please contact me or Monica S. Amparo, an attorney on my staff, at (202) 418-5450. Very truly yours, Susan C. Ervin Chief Counsel