U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5430 

Facsimile: (202) 418-5547 

aradhakrishnan@cftc.gov

Division of Clearing and 

Intermediary Oversight

Ananda Radhakrishnan 

Director 

CFTC letter No. 05-22 

November 10, 2005 

Exemption 

Division of Clearing and Intermediary Oversight 

 Re: Section 4m(1) – Request for Relief From the Commodity Trading Advisor 

 Registration Requirement Where Third-Party System Developer and Registered 

 Introducing Broker Have Common Principals 

Dear : 

 This is in response to your letter dated March 1, 2005, to the Commodity Futures Trading 

Commission (the “Commission”), which has been referred to the Division of Clearing and 

Intermediary Oversight (the “Division”) for response. By your letter, subsequent emails, and 

telephone conversations with Division staff (collectively, the “correspondence”), you have 

requested that the Division not recommend that the Commission commence any enforcement 

action against “X” for failure to register as a commodity trading advisor (“CTA”) under Section 

4m(1) of the Commodity Exchange Act (the “Act”).1

 Based on the correspondence, we understand the facts to be as follows. You are the 

President of “X”, and you and your wife, “A”, are the sole owners of “X”. “X” has developed 

and sells various trading systems that are supported by a computerized software platform that 

generates trading signals. In connection with purchasing “X’s” trading systems, “X’s” clients 

execute a “letter of direction” authorizing “Y”, a registered introducing broker (“IB”), to trade 

their accounts in accordance with “X’s” trading signals. “X” markets this service on its website 

as the “Broker-Assisted Trading Program.”2

 You and “A” are also the sole principals, and 

registered associated persons (“APs”), of “Y”. All of “Y’s” customers have issued a letter of 

direction in favor of “Y” authorizing “Y” to place trades in accordance with “X’s” trading 

 

1

 7 U.S.C. 6m(1) (2000). The Act and the Commission’s regulations may be accessed at: 

http://www.access.gpo.gov/uscode/title7/chapter1_.html and http://www.gpoaccess.gov/ecfr/, 

respectively. 

2

 Although in the past “X” has solicited and sold its trading systems to clients whose 

accounts were self-directed, all of “X’s” new clients are required to participate in the BrokerAssisted Trading Program with “Y”. 
Page 2 

signals, and “Y” does not at this time provide services to its customers other than trading their 

accounts pursuant to “X’s” trading signals. 

 

 Preliminarily, the Division notes that, although you seek relief from the CTA registration 

requirement on behalf of “X”, because “Y” exercises discretionary authority over client accounts 

by trading those accounts using trading systems developed by you and “A” (albeit in your 

capacity as principals of “X”), “Y”, too, comes within the CTA definition. Rule 4.14(a)(6) 

governs the question of whether “Y”, as a registered IB, is exempt from the CTA registration 

requirement of Section 4m(1) of the Act. Rule 4.14(a)(6) exempts from the CTA registration 

requirement any registered IB whose commodity interest trading advice is provided solely in 

connection with its business as an IB. In considering whether commodity interest trading advice 

is provided solely in connection with IB activity, the Division has considered, among other 

things: (1) whether the advisory services originate with the IB or are supplied to the IB by a 

third-party, and the extent to which an IB modifies or deviates from the trading 

recommendations supplied by a third-party; (2) the proportion of the IB’s accounts to which it is 

providing advisory services; and (3) whether the IB exercises discretionary trading authority over 

a majority of the accounts it introduces.3

 As you and “A” are the sole owners of both “X” and “Y”, the trading systems “X” uses to 

trade its customers’ accounts are not supplied by an independent, unaffiliated third-party.4

 

Further, as all of “Y’s” customers have executed a letter of direction in favor of “Y” directing 

that their accounts be traded in accordance with “X’s” trading signals, “Y” exercises 

discretionary authority over all of the accounts it handles. It appears that “Y’s” sole purpose 

may be to facilitate the discretionary management of customer accounts based on trading signals 

developed by its sister company, “X”. As “Y’s” business is devoted exclusively to exercising 

 

3

 See CFTC Staff Letter No. 96-17, [1994-96 Transfer Binder], Comm. Fut. L. Rep. 

(CCH) ¶ 26,629 (February 9, 1996) (an IB may be required to register as a CTA if it uses another 

CTA’s trading system to solicit discretionary authority over or effectively guide certain 

accounts); CFTC Staff Letter No. 95-17, [1994-96 Transfer Binder], Comm. Fut. L. Rep. (CCH) 

¶ 26,344 (February 24, 1995) (IB required to register as a CTA where IB directs a high 

percentage of the accounts it introduces). 

 Other factors the Division may consider in determining the applicability of Rule 

4.14(a)(6) include (1) whether the IB markets its advisory services generally to the public or 

limits its availability to established customers, and (2) the manner in which the IB is 

compensated for the advisory services. See CFTC Staff Letter No. 96-17, supra. 

4

 See CFTC Staff Letter No. 93-6, [1992-94 Transfer Binder], Comm. Fut. L. Rep. (CCH) 

¶ 25,571 (January 27, 1993) (requiring an IB to register as a CTA where the IB directs trading in 

the majority of its customer accounts and the trading program offered by the IB had been 

developed by the IB’s sole proprietor). 
Page 3 

discretionary authority over customer accounts, the Division believes that “Y’s” commodity 

interest trading advice is not being provided solely in connection with its business as an IB.5 

Accordingly, “Y” does not qualify for the registration exemption in Rule 4.14(a)(6), and it must 

register as a CTA.6

 

 As a registered CTA, “Y” must provide a Disclosure Document to each of its customers 

that participate, or will participate, in “X’s” Broker-Assisted Trading Program. That Disclosure 

Document must include, among other information, past performance disclosures with respect to 

each of “X’s” trading systems. As a result of this disclosure obligation, the Division does not 

believe that requiring “X” to register as a CTA would provide any additional benefit to “X’s” 

clients.7

 Accordingly, based on the representations made in the correspondence, the Division will 

not recommend that the Commission commence any enforcement action against “X” for its 

failure to register as a CTA under Section 4m(1) of the Act. This relief is, however, applicable 

to “X” solely with respect to the Broker-Assisted Trading Program as currently implemented8

and is subject to the conditions that “Y”: (1) registers with the Commission as a CTA; and (2) 

 

5

 Cf. In the Matter of Armstrong, et al., [1992-1994 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶ 25,657 (CFTC Feb. 8, 1993) (finding that a publisher did not fall within the publisher 

exclusion of the CTA definition because its trading advice “far from being ‘solely incidental’ to 

its publishing business, was the very point of that business”). 

6

 Rule 4.14(a)(9) provides for a registration exemption for CTAs that (1) do not direct 

client accounts and (2) do not provide advice based on the circumstances or characteristics of 

particular clients. Inasmuch as “Y” is directing accounts, the Division believes that “Y” does not 

qualify for the exemption from CTA registration in Rule 4.14(a)(9). 

 Furthermore, because the Division has determined that “Y” is required to register as a 

CTA, the Division has not considered the extent to which “X” may be eligible to claim the 

registration exemption of Rule 4.14(a)(9). Accordingly, this letter should not be construed as 

suggesting that “X”, as a third-party trading system developer, either is or is not eligible to claim 

the registration exemption of that rule. 

7

 The Division notes in this regard that the principals of “X” (you and “A”) have already 

registered as APs, and are designated as the sole principals, of “Y” and thus have satisfied the 

proficiency, fitness, and registration standards established by both the Commission and the 

National Futures Association. 

8

 Thus, for example, in the event that “X’s” clients participate in the Broker-Assisted 

Trading Program by authorizing IBs other than “Y” to trade their accounts, the no-action 

position taken by this letter may no longer obtain. 
Page 4 

provides to each of “X’s” clients participating in the Broker-Assisted Trading Program a 

Disclosure Document as specified by Part 4 of the Commission’s regulations. 

 The relief issued by this letter does not excuse “X” from compliance with any otherwise 

applicable requirements contained in the Act or the Commission’s regulations issued thereunder. 

For example, “X” remains subject to all antifraud provisions of the Act and the regulations, the 

reporting requirements for traders set forth in Parts 15, 18, and 19 of the regulations, and to all 

other applicable provisions of Part 4 of the regulations. 

 The no-action position taken in this letter is based upon the representations you have 

made to the Division and is subject to compliance with the conditions set forth above. Any 

different, changed, or omitted facts or conditions might render this position void. Moreover, this 

letter represents the position of the Division only and does not necessarily reflect the views of the 

Commission or any other office or division of the Commission. If you have any questions 

concerning this correspondence, please contact R. Stephen Painter Jr., an attorney on my staff, at 

(202) 418-5416. 

 Very truly yours, 

Ananda Radhakrishnan 

Director