What Is an Associated Person?
In futures trading, the term "associated person" refers to particular people within the employ of a broker or dealer that perform the role of sales or supervision of sales. Clerical and administrative employees are not included.
An associated person is bound by certain regulatory standards based on their particular role and/or function.
Key Takeaways
- Associated persons are those in futures trading employed by broker/dealer firms involved in sales or supervision of sales.
- These individuals have a view of order flow that may not be public.
- They are required to register with regulatory agencies.
- They are required to act in such a way that they do not personally benefit from order-flow information.
Understanding Associated Persons
Associated persons are bound by the rules and regulations of different futures exchanges and regulatory bodies. These entities regulate people in certain roles to make sure that an uneven flow of information, even if naturally occurring, does not impede or defraud investors in their trading and research activities. Separate registration with the National Futures Association (NFA) is not required for persons already registered as the following:
- Futures Commission Merchant (FCM)
- Introducing Broker (IB)
- Floor Broker (FB)
- Commodity pool operator (CPO) or a person associated with one
- Commodity trading advisor (CTA) or a person associated with one
- Registered Representative with the Financial Industry Regulatory Authority (FINRA)
Why the Distinction?
Financial markets are regulated to make sure that they are fair for all participants, no matter their size, influence, or experience. This includes the flow of information, orders, and other factors that allow any qualified individual to participate in the markets.
By requiring individuals and firms dealing with client money to register with FINRA and/or the NFA as associated persons, if they are not already registered in other capacities, participants are subject to rules and regulations to facilitate fair markets.
In addition, the regulators have the authority to punish, fine, or expel participants if they do not follow these rules and regulations. Registration also sets up methods, including arbitration, to settle disputes among parties.
Therefore, clients have a layer of protection making sure their market access is fair and their funds will only be used for their benefit. The same protection applies to the information generated by the client's activities. For example, an associated person may not place personal orders ahead of clients' orders, and they cannot make information about their clients' orders available to other clients or outside parties. Associated persons also agree to allow their trades and account balances to be monitored.
Associated persons, including FCMs and IBs, must satisfy minimum standards for:
- Minimum net capital
- Customer funds (FCMs only; IBs do not hold customer funds)
- Disclosure and other requirements for customers
- Financial and other filings
This protects the client from market risk in trade execution as well as the risk that the firm goes out of business, possibly taking client funds with it. It also prevents conflicts of interest, although associated persons (and firms) are not necessarily fiduciaries. While they must exercise ethical business practices, they do not have to meet the higher fiduciary standards that investment advisors must meet.
