No-Action Relief: Alternative to Fingerprinting to Establish Fitness of Principals Residing Outside the United States
On December 11, 2012, the U.S. Commodity Futures Trading Commission's ("CFTC") Division of Swap Dealer and Intermediary Oversight (the "Division") issued a no-action letter (the "No-Action Letter")1 to providing no-action relief from the Fingerprinting Requirement (as defined below) for principals of a futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator, commodity trading advisor, swap dealer, major swap participant or leverage transaction merchant (each a "Market Participant") required to register with the CFTC under Section 3.10(a)(1) of the general regulations (the "CFTC Regulations") promulgated under the Commodity Exchange Act (the "CEA") where such principals have not resided in the United States since reaching 18 years of age ("Non-U.S. Principals").
Section 3.10(a)(2) of the CFTC Regulations requires that each Market Participant submit, along with their application for registration with the CFTC, a Form 8-R and fingerprint card provided by the National Futures Association (the "NFA") for each natural person that is a principal of such Market Participant (the "Fingerprinting Requirement") unless excepted under certain specific circumstances (for example, principals that are outside directors of the Market Participant are excepted from the Fingerprinting Requirement pursuant to Section 3.21(c) of the CFTC Regulations whereby the Market Participant may, in lieu of submitting a fingerprint card, submit a notice with the CFTC for each such outside director stating that such outside director meets certain specified requirements). The fingerprints of each principal are used by the CFTC and NFA for a background fitness check of each principal. The Division notes in the No-Action Letter, however, that the usefulness of the Fingerprinting Requirement for conducting a background fitness check is significantly diminished outside the United States given the varying capabilities and breadth of information available from non-U.S. law enforcement agencies. The Division also notes certain concerns regarding potential contravention of privacy laws in non-U.S. jurisdictions and the expansive scope of the definition of "principal" under Section 3.1 of the CFTC Regulations which may cover persons who have no (or only remote) contact, control or influence over the Market Participant's activities that are subject to regulation by the CFTC.
Accordingly, pursuant to the No-Action Letter, the Division will not recommend the CFTC commence any enforcement action against a Market Participant for failure to submit with its application for registration the Fingerprinting Requirement of each of its Non-U.S. Principals so long as such Market Participant:
(1) Lists each Non-U.S. Principal on its application for registration;
(2) Submits a Form 8-R for each Non-U.S. Principal with a certification (a "Certification"), signed by a person with authority to bind the Market Participant, certifying that (a) a reasonable criminal history background check of the Non-U.S. Principal, using a reputable commercial service, was conducted and (b) such criminal history background check did not reveal any matters that constitute a disqualification under Section 8a(2) or 8a(3) of the CEA other than those disclosed;
(3) Notifies the NFA within 30 days after the filing of the Form 8-R for each Non-U.S. Principal that the Market Participant has not submitted a fingerprint card for such Non-U.S. Principal; and
(4) Maintains, in accordance with Section 1.31 of the CFTC Regulations, a copy of each Certification together with all supporting documents including, but not limited to, records documenting that the criminal history background check was performed and the results thereof.
Finally, the Division notes that it will continue to explore alternatives for the Fingerprinting Requirement in the context of Non-U.S. Principals and that it may revisit the process set forth in the No-Action Letter (without prejudice to the Market Participants who may already have availed themselves of the relief provided therein).
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