On February 9, 2012, the Commodity Futures Trading Commission ("CFTC") adopted a new rule (RIN 3038-AD30) (the "Rule") affecting certain exemptions from the registration requirements for commodity pool operators ("CPOs") found in Part 4 of the CFTC regulations.
Rescission of CPO Registration Exemption
Most significantly, the CFTC rescinded the exemption from CPO registration under Rule 4.13(a)(4) commonly relied upon by certain private fund advisers, but retained the "de minimis" exemption under Rule 4.13(a)(3). Currently, Rule 4.13(a)(4) generally exempts from CFTC registration CPOs of funds whose natural person investors are "qualified eligible persons" ("QEPs") within the meaning of CFTC Rule 4.7(a)(2) – a category that includes "qualified purchaser" investors in funds offered pursuant to Section 3(c)(7) of the Investment Company Act of 1940, and whose non-natural person investors are either QEPs or "accredited investors" as defined under Regulation D of the Securities Act of 1933. For CPOs who have previously claimed the Rule 4.13(a)(4) exemption and cannot avail themselves of any other exemption, the rescission is effective December 31, 2012, and such CPOs must therefore register with the CFTC no later than that date. For others, the rescission of Rule 4.13(a)(4) is effective 60 days following the publication of the Rule in the Federal Register. Entities that are formed after the effective date of the rescission are expected to comply with the CFTC's regulations upon formation and commencement of operations.
Registration Lite for CPOs of 3(c)(7) Funds
In general, CFTC-registered CPOs must adhere to certain disclosure and periodic reporting requirements as specified in the Commodity Exchange Act and regulations thereunder. However, some CFTC-registered firms can operate under a "lite-touch" regulatory regime if the firm only provides investment management services to QEPs. The lite-touch regulatory regime is available under CFTC Rule 4.7 to CPOs who file the exemption with the National Futures Association.
Continued Availability of "De Minimis" Exemption
As originally proposed, the Rule would have rescinded Rule 4.13(a)(3), which exempted CPOs operating pools utilizing a "de minimis" level of futures trading (i.e., either: (1) aggregate initial margin on futures positions and premiums on options on futures does not exceed 5 percent of the liquidation value of the fund's portfolio (including unrealized gains and losses); or (2) aggregate notional value of such positions does not exceed 100 percent of the liquidation value of the pool's portfolio (including unrealized gains and losses)). The CFTC decided not to rescind Rule 4.13(a)(3); accordingly, general partners of funds that use futures, but only within the defined minimum amounts, can continue to rely on this exemption. In light of the foregoing, general partners of funds that previously relied on Rule 4.13(a)(4), and who find that in practice their funds do not actually trade futures above the Rule 4.13(a)(3) minimums, could consider switching to the Rule 4.13(a)(3) exemption. It is important to note that swaps activity is now included in the foregoing calculation and will count toward the "de minimis" thresholds for purposes of determining the applicability of the Rule 4.13(a)(3) exemption.
This article is presented for informational purposes only and is not intended to constitute legal advice.
