On June 29, 2010, the National Futures Association (“NFA”), a leading futures industry self-regulatory organization, submitted a petition to the Commodity Futures Trading Commission (the “CFTC”) to amend Rule 4.5, which provides an exclusion from the term “commodity pool operator” (“CPO”) for specified persons operating certain otherwise regulated, qualifying entities such as registered investment companies, bank commingled trust funds, insurance company separate accounts, and pension plans that trade futures contracts or options on futures contracts, provided that they meet the operating criteria set forth in the rule.1 Among other things, a qualifying entity seeking to rely on the exclusion in Rule 4.5 must file a notice of eligibility with NFA containing representations that the qualifying entity will be operated in accordance with those operating criteria. The underlying rationale for Rule 4.5 is that these entities are subject to oversight under another regulatory framework and therefore should not be subject to regulation under the CFTC’s rules for CPOs.
NFA is requesting that the CFTC amend Rule 4.5 to reimpose certain trading and marketing criteria that are generally similar to provisions which were in effect prior to 2003. Under NFA’s petition, a qualifying entity such as a mutual fund would need to make certain additional representations and be operated such that (i) its use of futures and options on futures contracts will be limited to bona fide hedging positions except as provided in (ii); (ii) initial margin and premiums for any nonhedging, i.e., speculative positions will not exceed 5% of the liquidation value of the qualifying entity’s portfolio and “may be held by [the] qualifying entity only”; and (iii) the entity will not be, and has not been, marketing participations to the public as or in a commodity pool or otherwise as or in a vehicle for trading in (or otherwise seeking investment exposure to) the futures or commodity options markets. Unlike the other language, the words “positions … that may be held by a qualifying entity only” did not appear in Rule 4.5 prior to 2003. This addition is apparently intended to preclude any entity except the regulated entity which files for the relief (e.g., a wholly-owned, unregulated subsidiary of the entity) from relying on it.
In response to NFA’s petition for rulemaking, the CFTC may determine to proceed with proposing amendments to Rule 4.5, which would be published in the Federal Register for public comment. We will continue to monitor and report on developments in this area.