CFTC Letter 04-01

CFTC letter No. 04-01

December 30, 2003

No-Action

Division of Clearing and Intermediary Oversight

Re: “Y”and “X”

Dear : 

This is in response to your letter dated December 24, 2003, 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. By your correspondence, you request, on 

behalf of “X” and “Y”, confirmation that “Y” is not required to register under Section 4d(a)(1) of the 

Commodity Exchange Act (the “CEAct”) as a futures commission merchant (“FCM”) notwithstanding 

that, for corporate organizational efficiencies, “Y” will be handling the payment of commissions and 

other compensation to certain registered associated persons (“APs”) of “X”, which is a registered FCM 

sister company of “Y”. 

You have described in your correspondence how, as part of the overall restructuring of the business of 

“Y’s” ultimate parent, “Z”, “Y” and “X” have been organized as separate, commonly-owned financial 

services entities because of regulatory capital efficiencies afforded by this arrangement.[1] “Y” is 

registered as a securities broker-dealer under Section 15(a)(1) of the Securities Exchange Act of 1934 

(the “Exchange Act”) and “X” is registered as an FCM under Section 4d(a)(1) of the CEAct.[2] Both 

companies share senior management, office space and support staff. The registered representatives of 

“Y” are also APs of “X” (although not all of “X’s” APs will also be registered representatives of “Y”). 

“Z” has determined that it would be more administratively efficient for all of the APs/registered 

representatives to be employed by a single entity, “Y”, and for “Y” to provide all employer-related 

administrative functions relative to them, including human resources functions. As such, “Y” would be 

in the position of paying futures-related commissions to APs of “X”. 

Although “X” will assign its commission income to “Y” so that “Y” may make payment of commissions 

to “X” APs, “Y” will essentially be serving as a conduit for these commission payments that were 

originally intended to be made by “X”.

[3] “Y” will not be soliciting or accepting customer orders for 

futures or commodity option contracts nor will it be handling customer funds related thereto. “Y” will 

have a limited role in handling commission income payments to “X” APs to achieve the administrative 

efficiencies referred to above. Accordingly, the Division believes that “Y’s” activities do not come 

within the definition of an FCM[4] and “Y” is not required to register as an FCM. “X”, of course, would 

remain obligated to reflect on its books and records all transactions and the full amount of commissions 

accrued and due to its APs as though actually being paid by “X” to its APs, as well as the inter-company 

transfer to “Y”. 

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CFTC Letter 04-01

This letter does not excuse “Y” or “X” from compliance with any other applicable requirements 

contained in the CEAct or in the Commission’s regulations issued thereunder. For example, they remain 

subject to relevant antifraud provisions of the CEAct[5] and the Commission’s regulations thereunder 

and the relevant reporting requirements under Parts 15, 17, 18, 19 and 21 of the Commission’s 

regulations. 

This letter is based upon the representations made to us. Any different, changed or omitted material facts 

or circumstances might render this interpretation void. Further, this letter represents the position of this 

Division only. It does not necessarily represent the position of the Commission or of any other office or 

division of the Commission. 

If you have any questions concerning this correspondence, please contact me, Deputy Director Lawrence 

B. Patent at (202) 418-5439 or Christopher W. Cummings, Special Counsel, at (202) 418-5445. 

Very truly yours, 

James Carley 

Director 

[1] “Y” and “X” are successors in interest to “W”. Both are wholly-owned by “V”, which is ultimately 

owned by “Z”. 

[2] “X” is also notice-registered as a securities broker-dealer under Section 15(a)(11) of the Exchange 

Act for the limited purpose of dealing in security futures products.

[3] You provided us with a copy of a letter dated August 4, 2003, to staff of the Securities and Exchange 

Commission (“SEC”) wherein counsel for “X” outlined the reverse arrangement, i.e., “X” would make a 

single payment to APs and registered representatives of both “X” and “Y”. Because the new 

organizational structure takes effect on January 1, 2004 and the SEC staff has yet to respond definitively 

to the request for no-action relief if “X” failed to register as a full securities broker-dealer under the 

scenario outlined in the August 4 letter, you decided to pursue a structure whereby “Y” would pay all 

APs and registered representatives.

[4] Section 1a(20) of the CEAct, 7 U.S.C. §1a(20) (2000).

[5] See, Section 4b of the CEAct, 7 U.S.C. §6b (2000). 

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