Can a futures commission merchant (FCM) or other commodity
futures industry registrant pay trailing commissions to a former
associated person (AP) whose registration has been revoked? Or who
has retired and is no longer registered as an AP of the firm or of
any other firm? Or who has died, and trailing commissions are
sought by the decedent's estate?
Whether a former AP's registration is revoked, or he
retires, or dies, or simply changes careers, the former AP or his
estate want to reap benefits from accounts that were previously
serviced by the AP. Possibly the former AP sells his customer book
to another AP or firm. In those situations, the FCM (or IB or other
registrant) is asked to continue payment of trailing commissions to
the former AP, whether for a limited period of time or the life of
the accounts. Firms are generally reluctant to pay trailing
commissions to non-registrants for fear of violating applicable law
Read together, NFA Bylaws 301(b) and 1101 would seem to
prohibit the payment of commissions to non-registered persons in
all situations. Bylaw 301(b) provides in part that "No person
may be associated with a Member of NFA unless the person is
registered with NFA as an Associate or is an NFA Member." NFA
Bylaw 1101, in effect, generally prohibits NFA members from doing
business with anyone who is required to be registered but is not.
Thus, it would appear, at first glance, that there is no basis to
allow a non-registered person to participate in transactional
Surprisingly, however, trailing commissions may be paid provided
the former AP is no longer involved in servicing his former
accounts (or any other accounts) in any way, or in supervising
those who service the accounts. (This important proviso reconciles
the notion of paying trailing commissions to an expelled AP with NFA Compliance Rule 2-6 and Interpretative Notice 9056, which strictly
prohibit expelled and suspended APs from performing any activities
for their firm, even if the activities do not require
The U.S. Commodity Futures Trading Commission (CFTC) has stated
that simply receiving trailing commissions does not, by itself,
constitute the solicitation or acceptance of orders and therefore
does not require registration. In at least two prior instances, the
CFTC has permitted the payment of trailing commissions to former
registrants whose registrations had been revoked. They sold their
businesses in transactions contemplating payment of trailing
commissions going forward. The CFTC found no statutory barrier to
the payments so long as the AP exercised no control over the
solicitation and acceptance of orders (and did not supervise those
who did) and the AP's receipt of the commissions was entirely
passive. See In re GNP Commodities, Inc. [1990-1992
Transfer Binder] Comm. Fut. L. Rep (CCH) ¶25,375 at 39263
(CFTC Sept. 4, 1992); CFTC Interpretative Ltr. No. 93-110
[1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶25,927
(CFTC Mar. 23, 1993).
Documented and implemented correctly, there is a basis to pay
trailing commissions to former APs who are now out of the industry.
However, NFA member firms should carefully document any trailing
commission agreements and supervise their implementation to ensure
the former AP is not involved in any way with the former AP's
accounts or any other accounts. Moreover, where an AP has been
expelled or suspended, firms should be especially mindful that the
AP conducts no activities whatsoever (i.e., whether or not
requiring registration) other than the passive receipt of the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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