The staff of the Commodity Futures Trading Commission (CFTC Staff) on October 15, 2014 simplified the process for a natural person or entity that the CFTC considers to be a commodity pool operator (CPO) to delegate its CPO functions to a registered CPO and avoid duplicative and burdensome registration and regulation (Current Process).1 In May 2014 (Prior Process),2 the CFTC Staff made available a “streamlined” approach to obtaining no-action relief where a registered CPO (Designated CPO) is delegated CPO functions from a director, trustee, general partner, manager, or similar person (Delegating CPO) of a commodity pool, depending on the form of the fund.3 Where Delegating CPOs and Designated CPOs met the criteria outlined in the Prior Process (Prior Criteria), they could have used a brief form letter to affirmatively request relief for each applicable commodity pool rather than submitting a formal, individualized request for relief.4 However, many registered CPOs, who likely had entered into delegation arrangements, found that they failed to satisfy the Prior Criteria in full, and still needed to request and obtain individualized relief. In addition, the CFTC Staff found that it faced “administrative burdens” with responding to the surprising large number of requests that it had received for relief under the streamlined Prior Process since that approach required an affirmative response granting the relief from the CFTC Staff.
The Current Process is instead self-executing where the Delegating CPOs and Designated CPOs satisfy the revised criteria (Revised Criteria), which is expansive enough to address factual situations that industry participants (including Dechert LLP) noted to the CFTC Staff were not covered in the Prior Criteria but were still in the spirit of the CFTC Staff’s relief. Self-execution will significantly help Designated CPOs with new commodity pool launches, as under the Prior Process CPO delegation no-action relief could only be obtained for existing funds, thus requiring a Designated CPO to seek and receive subsequent relief for any commodity pools launched at a later date. Waiting to receive such relief from the CFTC Staff could have created appreciable delays for such launches. The Current Process replaces and supersedes the Prior Process. The most significant changes included in the Current Process and Revised Criteria are as follows:
- Qualification for the delegation relief is not limited to instances where the Delegating CPO has delegated all of its investment management authority only to the Designated CPO with respect to the commodity pool. Revised Criterion 1(a) permits the Delegating CPO or Designated CPO to appoint one or more other third parties to serve as an investment manager of the pool so long as each such third party is registered as a commodity trading advisor (CTA) or is exempt from such registration.
- Qualification for the delegation relief is not limited to instances where the Delegating CPO does not participate at all in the solicitation of participants for the commodity pool. Revised Criterion 1(b) permits the Delegating CPO to participate in solicitation so long as the Delegating CPO is registered as an associated person (AP) of the Designated CPO or is exempt from such registration and participates in such solicitation solely as an AP of the Designated CPO. This addresses situations where employees of the CPO also serve as internal or affiliated directors/trustees/managers of the pool.
- Qualification for the delegation relief is not limited to instances where the Delegating CPO does not manage any of the property of the commodity pool. Revised Criterion 1(c) permits the Delegating CPO to manage pool property so long as the Delegating CPO: is a principal or employee of the Designated CPO or of a CTA of the pool; has management responsibilities over pool property and exercises such responsibilities solely as a principal or employee of the Designated CPO or as a CTA of the pool and not as the Delegating CPO; and such responsibilities are supervised by either the Designated CPO or a CTA of the pool. Management of pool property does not include responsibilities that are administrative, clerical, or ministerial in nature. As with the change in Revised Criterion 1(b), this change addresses situations where employees of the CPO or a CTA of the pool serve as internal or affiliated directors/trustees/managers of the pool.
- Delegating CPOs can include members of boards of trustees or boards of managers, not just boards of directors.
- Revised Criterion 5 provides that the Designated CPO’s maintenance of the books and records of the Delegating CPO with respect to the commodity pool no longer needs to be “in accordance with [CFTC] Regulation 1.31”. This change is helpful as many industry participants (including Dechert LLP) have brought to the CFTC Staff’s attention that compliance with certain aspects of Regulation 1.31 is impossible or impracticable in the modern technological era.5
Any Designated CPO that has previously applied for relief under the Prior Process but has not yet been granted relief will not receive a response from the CFTC Staff. The few Designated CPOs that have received written relief responses from the CFTC Staff on either an individualized or streamlined Prior Process no-action request can rely on that relief without further action.
The complete Current Process that includes all of the Revised Criteria is available on the CFTC's website.Affected CPOs should also review the entirety of the Revised Criteria, as Delegating CPOs and Designated CPOs must satisfy all of the Revised Criteria (as applicable) in order to qualify for the Current Process relief. Notwithstanding that a Delegating CPO and Designated CPO no longer need to seek and receive relief from the CFTC Staff, a Delegating CPO must have delegated its CPO functions in a legally binding document (e.g., a separate delegation agreement, an investment management agreement, or another governing investment) and such delegation should be reflected in disclosure documents, resolutions, reports, and questionnaires. The Current Process does not purport to address all fact patterns, and those unable to qualify for the relief under the Current Process and Revised Criteria may still apply for individualized relief.6