INVESTMENT ADVISER LAW BLOG

The Commodities Futures Trading Commission (CFTC) recently issued final rules that rescind one common exemption from registration as a commodity pool operator (CPO) and that modify the reporting requirements for others. Funds relying on the existing exemptions will need to qualify for alternative exemptions or determine whether CPO registration will be required.

De Minimus Exemption

Many private funds engage in only limited trading of commodity interests. These funds typically rely on the “de minimus” exemption of CFTC Rule 4.13(a)(3). Under this rule, no CPO registration is required where the fund’s commodity interest trading comes within either of the following limits:

• the aggregate initial margin and premiums in respect of futures and commodity options do not exceed 5% of the liquidation value of the fund’s portfolio; or
• the aggregate notional value of futures and commodity options do not exceed one hundred percent 100% of the fund’s liquidation value.

The CFTC proposed eliminating this exemption altogether. They relented after considering the comments submitted in opposition to repeal. Clarifying amendments to the rule do note that swaps must be included when determining “notional value” under the second option of the limitations.

Fund managers will now be required to notify the National Futures Association of their reliance on the de minimus exemption on an annual basis. Previously, the notice was a one-time filing.

The compliance date for the modified rule and notice provisions is December 31, 2012.

Qualified Eligible Participant Pools

CFTC Rule 4.13(a)(4) exempted from CPO registration private funds where investors were “qualified eligible person” or entities that were “accredited investors.” A qualified eligible person (QEP) includes, among others, individuals with investment portfolios of at least $5 million and entities meeting certain investment portfolio and asset threshholds. Under the exemption, managers of these “QEP pools” did not need to register as a CPO and the fund was exempt from disclosure, reporting and accounting requirements.

The CFTC has rescinded this exemption in its entirety. Funds currently relying on Rule 4.13(a)(4) will have until December 31, 2012 to comply with the CPO registration rules without reliance on 4.13(a)(4).

Private funds with QEP investors may qualify for less comprehensive relief under CFTC Rule 4.7(b). This rule does, however, require that the manager of the fund register with the NFA as a CPO. The fund must satisfy certain disclosure and audited financial statement and reporting requirements but will get relief from the full scope of CPO reporting and disclosure obligations.

Other Revisions

Certain other limited exemptions from CPO registration and reporting remain in place. Closely-held pools (single pool with no compensation to operator) and small pools (fewer than 15 investors and $400,000 gross capital) will continue to be exempt. As with the de minimus exemption, however, operators will now be required to file annual notice with the NFA to affirm their claims of exemption.

Sources:

• CFTC Press Release
• CFTC Final Rule Adopting Release

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Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.

 

Tagged: CFTC, CPO, Dodd-Frank, Hedge Fund, Regulatory

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