Prediction Market Affiliates and Influencers: Who Must Register as an Introducing Broker?

Many exchanges and brokers that offer event contracts compensate third parties for bringing in retail customers. Under the CFTC’s long-standing view, compensated solicitation of that kind generally requires registration as an introducing broker. CFTC Staff Letter 26-25, issued in September, provides relief from that requirement for providers of qualifying trading software and their personnel. A qualifying provider and its personnel may solicit users for specific exchanges and brokers and promote particular contracts, including on social media. The provider may also receive a share of the exchange’s or broker’s revenue and charge users transaction-based fees. CFTC staff will not recommend enforcement action against the provider or its personnel for failing to register, provided the letter’s conditions are met. For marketers and influencers, that is a meaningful shift. The relief is available, however, only to those who provide qualifying software or promote it as the provider’s personnel. This article explains what the letter permits and what it leaves open. The open questions include who qualifies, which app features fall outside the letter, when trading advice raises commodity trading advisor issues, and which obligations remain with the registered firm.

An introducing broker, or IB, solicits or accepts orders for futures, swaps, commodity options and certain other products but does not accept customer money or property to margin, guarantee or secure trades.[1] Letter 26-25 is a no-action position of the CFTC’s Market Participants Division. It applies only if the provider stays within defined activities and satisfies ten conditions.[2] The firm’s September 17 article discusses the letter and its ten conditions in detail.

What Letter 26-25 Changes for Marketers and Influencers

Letter 26-25 itself notes that the CFTC “has long construed the terms ‘soliciting and accepting’ orders to cover a wide range of activities, not restricted to the literal solicitation or acceptance of customers’ orders.”[3] In a 1983 release, the CFTC addressed persons paid “on a per-trade basis or by a referral fee” for bringing customers to futures commission merchants (FCMs). It stated that those persons would be “within the definition of, and generally required to register as, an introducing broker.”[4]

Between 2006 and 2008, CFTC staff concluded in a series of letters that certain technology vendors were not IBs. Those letters relied on the vendor’s representations that it would not recommend any particular FCM or IB, would not solicit or accept orders, and would charge fees unrelated to execution fees. A developer that wanted to do more could not rely on those letters without registering as an IB.[5]

Under Letter 26-25, a qualifying provider, including its relevant personnel, may introduce users to specific exchanges and brokers and “solicit Users to engage with” them. Unlike under the earlier letters, the users need not have a pre-existing relationship with those firms. The provider may market its relationships with them, “including promoting the availability of particular derivatives contracts,” and its personnel may make “promotional statements on social media.” An exchange or broker may agree to “share a specified portion of their relevant revenues” with the provider, and the provider may charge users “a transaction-based fee.”[6]

To qualify, a business must be a passive software provider. That means it develops and distributes front-end software, such as a trading app or a wallet, that runs on the user’s own device. Users view market data and send their own orders through that software directly to a registered exchange, FCM or IB. The provider must remain passive. It may not take part in particular orders, give express buy or sell signals, exercise discretion over the routing or execution of orders, or hold user funds. Users open accounts directly with the exchange or broker, and the provider must file a notice with the Market Participants Division agreeing to the letter’s conditions.[7] The wallet software that was the subject of Letter 26-09, issued to Phantom Technologies in March, is the model the letter extends to other providers.[8]

A marketer can therefore use the letter in one of two ways. It can become a passive software provider itself. That would mean offering, for example, an app that displays a registered exchange’s markets and lets users send orders directly to that exchange, and filing the required notice. Or it can promote as personnel of a provider that does so, under that provider’s pre-approval and supervision. Either way, the marketer may solicit customers for particular exchanges and brokers without registering as an IB or AP, and the provider may be compensated based on those customers’ trading. Under the 1983 position, that combination of solicitation and transaction-based compensation would generally have required registration as an IB. The individuals soliciting customers would also have needed to register as associated persons, or APs.

As to compensation, the letter contemplates a share of the exchange’s or broker’s revenue, paid in exchange for providing the software to its users, and transaction-based fees charged to users.[9] A bounty paid for each new account is not among those arrangements and should not be assumed to be covered. Nor does the letter conclude that any of these activities fall outside the IB definition. It provides that CFTC staff will not recommend enforcement action for failure to register “solely as a result of” engaging in the covered activities.[10]

Influencers who do not build their own software fit within the letter only as a provider’s personnel. Social media promotion by a provider’s relevant personnel is covered if the provider pre-approves and supervises it.[11] The provider must also follow the rules on communications with the public and marketing as if it were a registered IB.[12] The letter does not define “relevant personnel,” and it does not say whether an independent creator under contract with the provider qualifies. Condition 1 extends the letter’s disqualification screen to “any individual engaged in soliciting Users as part of the Covered Activities.”[13] A provider that works with outside creators should pre-approve and supervise their content and screen them for statutory disqualification, as it would its own personnel.

Beyond the notice filing, the provider must ensure that neither it nor any individual soliciting users is subject to statutory disqualification. Each exchange or broker the provider works with must join an undertaking accepting joint and several liability for the provider’s violations. The position binds only the Division, which may modify, suspend or terminate it.[14]

An affiliate or influencer paid directly by an exchange, FCM or IB for each sign-up through its referral link or code receives no relief from the letter. Its registration analysis is unchanged. The same is true of a provider that cannot meet a condition or steps outside the covered activities. For those promoters, the general IB analysis applies.

Promoters Outside the Letter

For promoters outside Letter 26-25, the question returns to the statute, which asks whether a person is “engaged in soliciting or in accepting orders.”[15] The CFTC’s 1983 position reads that language broadly. The Eleventh Circuit has read it more narrowly.

In CFTC v. Mass Media Marketing, decided in 2002, the defendants produced commercials “designed to solicit members of the general public to invest in commodity options.” They sold IBs the names of the people who responded, and the IBs paid them “based on the number of names, or leads.” The CFTC interpreted the IB definition to reach customer solicitation “for compensated referral to other registrants.” The court agreed with the district court that this interpretation was impermissible. In the court’s view, the advertisers “were never involved in the making of an offer to enter into a commodity contract or assisting customers in carrying out such a transaction.”[16]

The opinion notes, in its statement of facts, that the advertisers were not paid on the number of callers who opened accounts. The court did not address whether compensation tied to accounts or trades would have changed the result. Its analysis rested on involvement in offers and transactions. The court reached that conclusion while applying the Chevron framework, under which courts deferred to reasonable agency interpretations of ambiguous statutes. Since Loper Bright, courts no longer defer to an agency’s reading of a statute.[17]

The CFTC’s 1983 position and the Eleventh Circuit’s decision therefore align only in part. A person who accepts customers’ orders, or helps customers carry out particular trades, is likely an IB under either view. The two diverge on paid referrals. The 1983 statement treats per-trade compensation and referral fees as generally sufficient, while the Eleventh Circuit held that referral by advertisers paid per lead was not.

Affiliates and Referral Partners

An affiliate paid a flat advertising fee, or a fee for each lead regardless of whether anyone opens an account, closely resembles the advertisers in Mass Media Marketing. Compensation for each funded account, each trade or a share of revenue is structured differently. It ties the affiliate’s pay to customer trading, which places the arrangement closer to the 1983 statement. Mass Media Marketing did not address that form of compensation, and the CFTC may view it differently.

The commercials in Mass Media Marketing urged the public to invest, and that alone did not make the advertisers IBs. What they lacked was any role in offers or transactions. An affiliate that takes orders from its followers, or guides them through a specific trade on a specific platform, supplies much of what was missing in that case.

An affiliate that wishes to be compensated based on trading has two options. It may register as an IB, including as a guaranteed IB, which satisfies its minimum financial and reporting requirements through a guarantee agreement with the FCM that carries its customers’ accounts.[18] Alternatively, if it provides qualifying passive software, it may operate within Letter 26-25 and accept the letter’s conditions. Individuals who solicit customers’ orders as employees or agents of a registered IB generally must register as APs of that firm.[19] Because the statute covers agents as well as employees, describing a promoter as a consultant or marketing partner does not, by itself, resolve the question.

The firms paying affiliates have their own exposure under NFA Bylaw 1101, which prohibits NFA members from doing business with most non-members that are required to be registered with the CFTC.[20] If an affiliate paid for each funded account should have registered, the FCM or IB paying it may face its own Bylaw 1101 issue.

Influencers Paid Directly by Exchanges and Brokers

Creator agreements with exchanges and brokers may provide for payment per sign-up or per funded account, or for a share of the revenue the creator’s audience generates. Each of these structures ties the creator’s compensation to customers opening and using accounts. A creator who shows followers how to place a particular trade on a particular platform is also doing more than the advertisers in Mass Media Marketing did.

The marketing side of paid creator programs, including NFA’s advertising rules and the FTC’s authority over undisclosed paid endorsements, is discussed in the firm’s July article on prediction market marketing. For registration purposes, the analysis is the same as for affiliates and turns on how the creator is compensated and what the creator does.

App Features and the Limits of Letter 26-25

The limits most relevant to product design concern orders and user assets. The provider’s role in order submission must be limited to software on the user’s device that allows the user to send orders directly to the registered firm. The provider may not have “any affirmative involvement with any particular orders.” Nor may it “generate express ‘buy’ or ‘sell’ signals” or “exercise discretion with respect to the routing or execution of User orders.” At no point may it hold or control user assets.[21]

Within those limits, routine design decisions can determine whether an app qualifies. A screen that lists the contracts available for trading is consistent with the passive role the letter describes. A push notification urging a user to buy “Yes” at a stated price is difficult to distinguish from an express buy signal.

The same concern arises with an AI assistant that recommends a side of a contract to a particular user. At that point, the provider comes close to generating the kind of signals that fall outside the letter.

With copy trading, orders are placed in a user’s account based on another trader’s activity or on rules the provider supplies. That is difficult to reconcile with having no affirmative involvement in particular orders.

Routing becomes an issue when an app connects to more than one exchange or broker. If the app’s code, rather than the user, determines where an order is sent, the provider may be exercising the routing discretion the letter excludes.

An app that holds user funds, even briefly, falls outside the letter. It may also fall outside the first part of the IB definition, which covers a person that “does not accept any money, securities, or property” to margin, guarantee or secure trades. Accepting money or property for that purpose is part of what defines a futures commission merchant.[22]

A provider that adds any of these features after filing its notice should confirm that it continues to qualify before the feature is released.

Trading Advice and CTA Registration

Letter 26-25 addresses only registration as an IB and as an associated person.[23] It does not address registration as a commodity trading advisor, or CTA, which can arise for any app, affiliate or influencer that advises users on what to trade. A CTA is a person who, for compensation or profit, engages in the business of advising others “as to the value of or the advisability of trading” futures, swaps or commodity options. The advice may be given directly or through publications, writings or electronic media.[24] The statute excludes news reporters and editors, as well as publishers of data “of general and regular dissemination,” but only where the advice is “solely incidental” to their business or profession.[25]

For content providers, the most relevant exemption is Rule 4.14(a)(9). It covers a person that does not direct client accounts and does not provide advice based on, or tailored to, a particular client’s positions or circumstances.[26] Two of the features discussed above fit poorly within that exemption. An AI assistant that generates suggestions from a user’s own positions or preferences is tailoring its advice to that user. Copy trading places trades in the user’s account, which comes close to directing it.

CFTC staff considered a similar arrangement in Letter 03-26. The clients in that matter signed letters of direction, and a registered IB traded their accounts according to a trading program’s signals. Staff concluded that Rule 4.14(a)(9) did not cover the arrangement and that CTA registration was required.[27] The exemption for advising 15 or fewer persons is unlikely to assist an app or influencer with a public audience. It is not available to anyone who holds itself out generally to the public as a CTA.[28]

The firm has previously analyzed when a cryptocurrency quote website must register as a CTA, and much of that analysis applies here.

Obligations That Stay With the Registered Firm

Under Condition 4 of Letter 26-25, users are onboarded as members of the exchange or as customers of the FCM or IB. They must also be able to access that firm directly, without the app.[29] The customer relationship therefore remains with the registered firm, as do the compliance obligations that accompany it.

For an FCM or IB, those obligations include its anti-money laundering program, its customer identification program and its duty to report suspicious activity.[30] Nothing in the letter shifts them to the software provider. The suspicious activity rules also restrict what the firm may share with its partner. An FCM or IB may not disclose a suspicious activity report, or information that would reveal one, except as the rule permits. None of the exceptions appears to cover an unaffiliated app provider.[31] Partnership agreements and escalation procedures should be drafted with that restriction in mind.

In February, the CFTC’s Division of Enforcement issued a prediction markets advisory following two disciplinary cases at Kalshi. In one, Kalshi found that the trader was an editor for a YouTube channel who likely knew the contents of the channel’s videos before they were publicly posted. The Division stated that the trader potentially violated the prohibition on misappropriating confidential information under Section 6(c)(1) of the Commodity Exchange Act and CFTC Rule 180.1. It also stated that exchanges have an independent duty under the core principles to conduct surveillance and enforce their rules.[32] The firm has since analyzed the CFTC’s case against a Google engineer and United States v. Van Dyke.

Cases of this kind often turn on who the trader is and what the trader could have known. Much of that information is gathered at account opening, when a firm identifies its customer and can ask about the customer’s occupation and employer. When customers arrive through an app, the registered firm should confirm that the app’s sign-up process collects everything the firm’s own process requires. Those accounts should also receive the same surveillance and escalation as any other account.

What This Means in Practice

Marketers and influencers who want to be paid based on trading now have two paths. They may register, as an IB or as APs of a registered firm. Or they may operate within Letter 26-25 as a qualifying software provider or as its personnel and accept the letter’s conditions. A promoter that does neither should review how it is paid and how close it comes to customers’ orders. Pay tied to accounts or trades can point toward registration, and helping customers place particular trades points there more strongly.

Developers relying on the letter should review any feature that recommends, copies or routes trades, or that touches customer funds, before it is released. They should also consider separately whether the app’s content amounts to trading advice. Exchanges, FCMs and IBs should confirm the terms on which they pay their partners and whether those partners must register. They should also onboard and monitor customers who arrive through an app in the same manner as any other customer.

This article is part of De Silva Law Offices’ ongoing event contracts series. For questions about introducing broker registration, CFTC regulatory matters, or prediction market law, contact the firm at 312-500-8424 or info@desilvalawoffices.com.