On March 28, 2016, the Commodity Futures Trading Commission (the “Commission” or “CFTC”) approved a final rule providing an alternative to fingerprinting for purposes of evaluating the fitness of natural persons who are required to submit fingerprints under applicable CFTC and National Futures Association (“NFA”) registration regulations and who have not resided in the United States since reaching 18 years of age (the “Final Rule”). 81 Fed. Reg. 18743 (Apr. 1, 2016). The CFTC adopted the Final Rule without modification from its original proposal (the “Proposal”) published on January 12, 2016. 81 Fed. Reg. 1359. The Final Rule will become effective on May 2, 2016.
Existing CFTC No-Action Relief
The Final Rule expands upon and supersedes existing CFTC staff no-action letters in which the CFTC staff responded to concerns raised by industry participants that the fingerprinting requirement is unduly burdensome for foreign natural persons.1 These letters provide an alternative to the fingerprinting requirement for natural person principals and associated persons (“APs”) of sponsoring firms who have not resided in the United States since reaching 18 years of age, subject to certain conditions. To rely on this relief, a sponsoring firm, such as a futures commission merchant, introducing broker, commodity pool operator, commodity trading advisor, or swap dealer, may submit a certification in lieu of a fingerprint card for a foreign natural person stating that: (i) a reasonable criminal history background check using a reputable commercial service has been conducted; (ii) the background check did not reveal any matters that constitute a statutory disqualification from registration under Sections 8a(2) or (3) of the Commodity Exchange Act (the “CEA”), other than those disclosed; and (iii) the sponsoring firm will maintain records documenting that the background check was performed and the results of such background check.
The Final Rule
The CFTC is adopting the Final Rule as it was initially proposed. In this regard, one commenter on the Proposal requested that the CFTC expand the alternative to fingerprinting to include all natural persons that are principals or associated persons of registrants subject to the fingerprinting requirement, including both U.S. and non-U.S. residents alike, but the CFTC declined to do so in the Final Rule. The CFTC noted that, while there are limitations on the usefulness of fingerprints of foreign nationals, fingerprinting is an expedient way to investigate whether someone has a criminal record in the United States.
To codify the DSIO No-Action Letters and clarify and expand the relief provided thereunder in certain respects, the Commission is adding a new sub-section (e) to the existing list of exemptions from the fingerprinting requirement in CFTC Rule 3.21. First, the Final Rule broadens the availability of the alternative to fingerprinting to include certain natural persons connected to floor brokers and floor traders, as well as all other requirements to provide a fingerprint card under Part 3 of the CFTC’s rules. Second, where the DSIO No-Action Letters required that a “reasonable” criminal history background check using a “reputable” commercial service be performed, the Final Rule does not use the terms “reasonable” or “reputable.” Instead, the Final Rule requires that the background check be of a type that would reveal all matters listed under Sections 8a(2)(D) or 8a(3)(D), (E), or (H) of the CEA (which generally relate to criminal convictions) with respect to the foreign natural person. The CFTC explained in the Proposal that this standard is designed to be more objective than the corresponding criterion in the DSIO No-Action Letters in the interest of promoting greater market certainty, but without jeopardizing the fitness of its registrants.
Third, the sponsoring firm must submit a certification with respect to the foreign natural person stating that the conditions of this exemption from fingerprinting have been satisfied, which must be signed by a duly authorized person. Note that the Final Rule requires that the background check be completed not more than one calendar year prior to the date that the sponsoring firm submits the certification to NFA. Fourth, the sponsoring firm must maintain records documenting that the background check was completed and the results thereof in accordance with CFTC Rule 1.31.
Finally, as previously noted, the Final Rule supersedes the DSIO No-Action Letters without prejudice to those who are relying on either of them and who have previously satisfied the requirements thereof prior to January 12, 2016, the date the Proposal was published in the Federal Register.