CFTC Finalizes Rule Changes Affecting Fund Managers
On February 9, 2012, the Commodity Futures Trading Commission ("CFTC") issued a final rule that rescinds the exemption from CFTC registration for commodity pool operators ("CPOs"), which is currently provided in CFTC Rule 4.13(a)(4). The CFTC also rescinded the relief provided in CFTC Rule 4.7(b)(3) under which the annual reports of certain commodity pools were not required to be certified; instituted a new requirement that CPOs and commodity trading advisers ("CTA") annually file notices claiming an exemption from registration; and imposed additional risk disclosure requirements upon CPOs and CTAs that engage in swap transactions.
Rescission of CPO Registration Exemption
CFTC 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. The CFTC's rescission of the Rule will become effective 60 days after publication in the Federal Register. CPOs who have claimed the exemption (which includes the general partners of a large number of Section 3(c)(7) funds) and cannot avail themselves of any other exemption, must register with the CFTC by December 31, 2012. It should be noted that the CFTC proposed, during 2011, to amend the definition of "commodity interest" in CFTC Rule 1.3 to include swaps. If this proposal is adopted, CPOs of funds that engage in swaps activity also may be required to register with the CFTC unless another exemption applies.
Registration Lite for CPOs of 3(c)(7) Funds
CPOs of funds whose investors are all QEPs may be able to avail themselves of "registration lite" under CFTC Rule 4.7, which provides relief from certain disclosure and periodic reporting requirements applicable to registered CPOs. The CFTC is still considering possible exemptions from registration for family offices and foreign advisers that might be similar to the SEC registration exemptions for these types of advisers.
Continued Availability of "De Minimis" Exemption
The CFTC has not rescinded Rule 4.13(a)(3) which exempts from registration CPOs of funds that have "de minimis" futures activity (i.e., either: (1) the aggregate of the initial margin on futures positions and premiums on options on futures does not exceed five percent of the liquidation value of the fund's portfolio (including unrealized gains and losses); or (2) the aggregate notional value of such positions does not exceed 100 percent of the liquidation value of the fund's portfolio (including unrealized gains and losses)). Accordingly, general partners of funds that use futures, but only within the defined minimum amounts, can continue to use this exemption. General partners of funds that previously relied on 4.13(a)(4) who find that in practice their funds do not actually trade futures above the 4.13(a)(3) minimums could consider switching to the 4.13(a)(3) exemption. In its Adopting Release, the CFTC notes that swaps activity will count toward the de minimis thresholds for purposes of determining the applicability of this exemption.
For further information about this Alert, please contact Lance Friedler at 212.573.8030 or firstname.lastname@example.org.