CPOs, CTAs and the Series 3 Exam - Possible Alternatives for Associated Persons
Are you required to pass the Series 3 examination? Investment managers facing registration with the CFTC may be able to obtain limited relief from the Series 3 examination required of "associated persons" under certain circumstances. Summary
As many previously-exempted investment advisory firms face the prospect of forthcoming CFTC registration, "associated persons" of the CFTC registrants must satisfy certain regulatory proficiency requirements - generally, they must pass the National Commodity Futures Examination - the Series 3 examination. This can place a significant burden on a firm, but limited relief from the testing requirements may be available in certain circumstances, such as through applying for a waiver.
An associated person ("AP") is, in effect, anyone who is involved in a marketing capacity and is in contact with prospective investors or clients of a CPO or CTA, and any person above in the supervisory chain of command. Thus, APs may include an individual in marketing, and the supervisor, and the supervisor's supervisor, etc., potentially extending all the way to the CEO.
Proficiency Testing Requirements - The Series 3 Exam
Typically, an AP satisfies the proficiency testing requirements by passing the Series 3 exam. An AP must satisfy the proficiency testing requirements:
1) within two years prior to the date that the AP submits the registration application, or; 2) more than two years prior to the date that the AP files the registration application if there has not been a period of two consecutive years afterwards during which the AP was not registered as an AP or was not an NFA-approved principal of a CFTC-registered firm.
Generally, every AP must pass the Series 3 exam. As this can potentially involve many people due to the up-the-chain requirements, the burden is potentially significant. There are certain exemptions from registration, including one for APs who engage in de minimis commodity interest activity. The exemptions may be worth assessing as they could reduce the registration burden by reducing the number of APs who must register. However, since the exemptions often prove difficult to satisfy and because a registered CPO or CTA must have at least one registered AP, this Alert focuses on obtaining relief from the proficiency testing requirements rather than on avoiding registration.
Waivers and other Exemptions from Proficiency Testing Requirements
An AP can apply for a waiver of the testing requirements by providing a written description of the facts that qualify the AP for a waiver. This may prove effective especially for firms that primarily trade securities rather than commodity futures and options. The NFA (under NFA Registration Rule 402) can issue a waiver of the examination requirements for certain individuals who:
1) are associated with CPOs that are required to register solely because they operate commodity pools principally engaged in securities transactions, and/or; 2) are associated with CTAs that are required to register solely because their securities advisory services include advice on the use of futures and options for risk management purposes.
Although not typically granted, applications for a waiver of the testing requirements based upon other individual circumstances may also be submitted. These would, of course, be scrutinized on a case-by-case basis, but a waiver may be granted if the NFA is satisfied that the AP is sufficiently proficient and experienced. For example, a waiver might be requested by an AP who passed the Series 3 exam more than two years ago and was neither registered as an AP nor was an NFA-approved principal of a CFTC-registered firm in the interim, but who was working in a position involving commodities during this time; the NFA, depending upon the specific facts and circumstances, may determine that a waiver is warranted.
On September 28, 2012, the NFA approved an exemption from the Series 3 exam requirements regarding swaps. Essentially, if the only commodity interest activity the AP's CPO/CTA engages in is swaps (or if the CPO can satisfy the de minimis requirement of 4.13(a)(3) or amended Rule 4.5 if swaps are disregarded in the de minimis calculation), then the AP is exempt from the Series 3 exam.
There are several exemptions that can potentially allow an AP to register without having to pass the Series 3 exam, and the viability of these exemptions depends upon the qualifications of the AP; these include passing alternative exams to the Series 3 (e.g., the Series 31 or 32). Also, a registered FINRA General Securities Representative may be exempt under certain circumstances.