I. Introduction and Executive Summary

Effective Sept. 30, 2021, a new National Futures Association (“NFA”) Interpretive Notice (the “Notice”) will require all NFA Members, including commodity pool operator (“CPO”) and commodity trading advisor (“CTA”) Members, to adopt and implement a written supervisory framework (an “outsourcing framework” or “framework”) over their outsourcing of regulatory functions to third-party service providers or vendors, including affiliated entities (“Service Providers”).¹ The term “regulatory function” refers to functions that the Member itself would otherwise be required to undertake in order to comply with regulatory requirements imposed on the Member by NFA or the Commodity Futures Trading Commission (the “CFTC”). The outsourcing framework requirement is designed to mitigate the risks associated with outsourcing regulatory functions, and arises from NFA Compliance Rule 2-9, which places a continuing responsibility on Members to diligently supervise their employees and agents in all aspects of their commodity interest activities.

While NFA recognizes that Members need flexibility to design an outsourcing framework that is tailored to their specific needs and business, the Notice requires the framework to address, at a minimum, the following five areas:

• Initial risk assessment;
• Onboarding due diligence;
• Ongoing monitoring;
• Termination; and
• Recordkeeping.

The Notice provides guidance on the types of supervisory provisions that Members should include or consider in each of these areas. In order to further assist Members in drafting their outsourcing frameworks, NFA has published a detailed questionnaire specifically relating to the new outsourcing framework requirement and the guidance provided in the Notice, which is referenced in a new section about the use of Service Providers in the NFA self-examination questionnaire, and has included a segment on the Notice as part of its 2021 Virtual Member Regulatory Workshop (collectively, the “Additional Guidance”).²

The Notice will require NFA Members to review their existing outsourcing policies and procedures and, if appropriate, make adjustments in accordance with the requirements and guidance set forth in the Notice. While CPOs and CTAs, and in particular those subject to comprehensive regulation by the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940 (the “ICA”), the Investment Advisers Act of 1940 (the “Advisers Act”), and other federal securities laws (“dual registrants”), will already have substantial outsourcing policies and procedures in place, the guidance in the Notice describes a number of specific measures and considerations that may not necessarily be expressly included in a particular Member’s existing outsourcing practices. In addition, the Notice makes clear that Members will be expected to be able to demonstrate, through appropriate records and documentation, that they have addressed, at a minimum, the five required areas identified in the Notice.

This client alert describes the requirements and guidance set forth in the Notice, as well as the Additional Guidance, and suggests next steps for Member CPOs and CTAs to consider in order to have in place an outsourcing framework consistent with the Notice in time for the Sept. 30, 2021 effective date. To address the practical and interpretive issues that have arisen in the review and implementation process, we have used a “Frequently Asked Questions” (“FAQs”) format. Answers to the FAQs are set forth in Section II, below, and are divided into sections by subject matter that address: (1) the purpose and scope of the new requirements; (2) the specific guidance provided for each required section of the framework; and (3) next steps for designing a tailored outsourcing framework that complies with the Notice (including tools provided by NFA for this purpose). Read More...

¹ See NFA Interpretive Notice 9079, NFA Compliance Rules 2-9 and 2-36: Members’ Use of Third-Party Service Providers (effective Sept. 30, 2021), https://www.nfa.futures.org/rulebook/rules.aspx?Section=9&RuleID=9079. See also NFA Notice to Members I-21-13, Effective Date for Interpretive Notice regarding Members’ Use of Third-Party Service Providers (Mar. 24, 2021), https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5342; Rule Submission to the CFTC, Proposed Interpretive Notice entitled NFA Compliance Rules 2-9 and 2-36: Members' Use of Third-Party Service Providers (Feb. 26, 2021), https://www.nfa.futures.org/news/PDF/CFTC/022621-ProposedInterpNoticeCRs2-9and2-36-MembersUse3rdPartyServiceProviders.pdf (“Rule Submission”).

The Notice also applies to other NFA Member categories, i.e., futures commission merchants (“FCMs”), introducing broker (“IBs”), swap dealers (“SDs”), major swap participants (“MSPs”) and forex dealers. However, for purposes of this client alert, we have focused on application of the Notice to CPOs and CTAs.

² All of these materials are available on NFA’s website. See NFA Self-Examination Questionnaire – Use of Third-Party Service Providers, https://www.nfa.futures.org/members/member-resources/files/self-exam-files/self-exam-questionnaire.pdf; Appendix E - Use of Third-Party Service Providers Questionnaire, https://www.nfa.futures.org/members/member-resources/files/self-exam-files/self-exam-questionnaire-appendix-e.pdf; and NFA 2021 Virtual Member Regulatory Workshops, Segment: “Member Outsourcing to Third Parties,” https://www.nfa.futures.org/members/member-resources/files/2021-regulatory-workshop.html.