NFA Proposes Repeal of Interpretive Notice 9073 and Amendments to Compliance Rule 2-51

Authors: William Breslin (Washington, DC), David Mitchell (New York, NY), Priyanka Shivakumar (New York, NY)

The National Futures Association ("NFA"), the industry-wide self-regulatory organization for the derivatives industry, is proposing some important changes to its regulatory framework governing Members engaging in digital asset commodity activities. Specifically, NFA has submitted to the Commodity Futures Trading Commission ("CFTC") the proposed repeal of NFA Interpretive Notice 9073 entitled "Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities" ("Interpretive Notice 9073" or "Interpretive Notice") and also proposed amendments to NFA Compliance Rule 2-51 to clarify the scope of digital asset commodities covered by this rule. It is expected that, sometime after the reopening of the Federal government, the CFTC will notify NFA that they may make the repeal of the Interpretive Notice and the proposed amendments to Compliance Rule 2-51 effective and shortly thereafter NFA will notify Members of the effective date.

Background

Interpretive Notice 9073, which was adopted in 2018, establishes special disclosure requirements for NFA Members engaging in virtual currency activities (hereinafter, "digital asset commodity activities"), including commodity pool operators ("CPOs") and commodity trading advisors ("CTAs"). Pursuant to the Interpretive Notice, CPO and CTA Members must consider the risks arising from their digital asset commodity activities and provide appropriate risk disclosure in their disclosure documents and other materials which addresses these risks. In this regard, the Interpretive Notice incorporates an extensive list of potential risk factors and disclosures, including standardized disclaimers regarding the limits of NFA's jurisdiction.[1]

Compliance Rule 2-51

In 2023, NFA adopted Compliance Rule 2-51, which imposes anti-fraud, just and equitable principles of trade, and supervisory requirements on NFA Members, including CPOs and CTAs, and their Associates engaged in digital asset commodity activities, including in the cash and spot market. For this purpose, NFA limited the scope of Compliance Rule 2-51 to Bitcoin and Ether, which at the time were the only two digital asset commodities with a CFTC-listed contract.

Discussion

In proposing the repeal, NFA noted that Interpretive Notice 9073 has become outdated, the risks involved continue to evolve, and that the mandatory disclaimer language regarding NFA's limited jurisdiction is not technically accurate in view of Compliance Rule 2-51. However, NFA also stated that repealing the Interpretive Notice would not relieve CPOs and CTAs of their obligation to disclose the material risks of their offerings and that NFA would likely propose new disclosure requirements applicable to digital asset commodities in the future.

The proposed amendments to Compliance Rule 2-51 are designed to broaden the scope of the products covered by this provision to include any digital asset commodity with a CFTC-listed contract. According to NFA, this change is designed to provide Members with clarity on the products covered while obviating the necessity of amendments to identify a new digital asset commodity each time there is a new CFTC-listed contract. The proposed amendments also would make certain technical and conforming changes to Compliance Rule 2-51.

Conclusion

Member CPOs and CTAs may wish to begin to revisit their existing risk disclosures with respect to their digital asset commodity activities and related internal policies and procedures.

We will continue to monitor and report on developments in this area.

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