On November 30, 2012, the Commodity Futures Trading Commission ("CFTC") issued no-action relief for family offices within the meaning of the Investment Advisers Act of 1940, as amended (the "IA Act") from the registration requirement for commodity pool operators ("CPOs").
By way of background, when the CFTC amended Part 4 of it's regulations in February 2012 to, among other things, rescind CFTC Rule 4.13(a)(4), many family offices effectively lost their basis for claiming an exemption from the requirement to register as a CPO. A family office is, generally, an organization that is wholly-owned by clients in a family and is exclusively controlled by family members and/or entities, such as trusts, that are controlled by a family.
While CFTC Rule 4.13(a)(4) was in effect, it was commonly relied upon by family offices because it provided an exemption from CPO registration for operators of pools only offered to investors that met certain provisions of the "qualified eligible person" test under CFTC Rule 4.7 and it did not impose a limit on the amount of trading in commodity interests in which the operator may engage. Therefore, the rescission of CFTC Rule 4.13(a)(4) meant that many family offices would have had limited options for remaining in compliance with CFTC rules. Keeping in mind that the CFTC has taken the view that a single swap or other commodity interest can cause a pooled vehicle to constitute a commodity pool, a family office that owns a pooled fund that engages in a swap transaction may be a commodity pool and, to the extent that a family office sponsors the fund, the family office may be CPO required to register as such and comply with the regulatory requirements of the CFTC. Family offices were also not provided a specific exemption from the new Form CPO-PQR and Form CTA-PR reporting and data collection regime under CFTC Rule 4.27.
At the time it rescinded Rule 4.13(a)(4), the CFTC declined to provide a specific exemption from CPO registration for family offices, even though the CFTC has a history of granting no-action relief to family vehicles as not being commodity pools and such an exemption would have been in line with the efforts to harmonize the regulations of the Securities Exchange Commission ("SEC") and the CFTC.
The no-action relief issued last Friday provides such harmonization and gives family offices affirmative relief from the registration requirement so long as they meet the SEC's definition of a "family office" under Rule 202(a)(11)(G)-1 under the IA Act. In a nutshell, the SEC definition of a family office is a company that:
- has no clients other than family clients;
- is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and
- does not hold itself out to the public as an investment adviser (although not specified in the CFTC's no-action letter, presumably the family office also may not hold itself out to the public as a CPO).
In order to claim the no-action relief, a family office CPO must take the affirmative step to file a claim with the CFTC's Division of Swap Dealer and Intermediary Oversight ("DSIO"), and such a claim will be effective upon filing. The claim must: (a) state the name, main business address, and main business telephone number of the CPO claiming the relief; (b) state the capacity (i.e., CPO) and, where applicable, the name of the pool(s), for which the claim is being filed; (c) be electronically signed by the CPO; and (d) be filed with the DSIO using the email address firstname.lastname@example.org with the subject line of such email as "Family Office" prior to December 31, 2012 (for a family office in operation as of December 1, 2012) or, for a family office that begins to operate after December 1, 2012, within 30 days after it begins to operate as a family office. The family office no-action letter may be accessed here.
As for other recent developments, on November 29th the CFTC issued a time-limited no-action letter providing relief from the CPO registration requirement for operators of funds of funds. A fund of funds is a vehicle that holds an interest in a separately managed vehicle that incurs pass-though exposure to commodity interests held by that vehicle. Funds of funds have historically relied upon the de minimis trading thresholds provided in CFTC Regulation 4.5 or 4.13(a)(iii) for an exemption from the CPO registration requirement, along with the guidance provided in Appendix A to Part 4 of the CFTC's regulations on making the calculations with respect to the de minimis threshold. Since Appendix A was rescinded, the CFTC informally indicated that Appendix A may continue to be relied upon until revised guidance was issued. The no-action letter is the CFTC's formal indication that funds of funds may continue to rely on the guidance in the rescinded Appendix A until the later of June 30, 2013, or six months from the date the CFTC issues revised guidance on the methods for calculating the de minimis thresholds under CFTC Regulations 4.5 and 4.13(a)(3). Without this relief, fund of funds operators would have had to register with the CFTC by December 31, 2012. In order to claim this relief, a fund of funds must comply with the eligibility requirements stated in the no-action letter and must file a claim with the DSIO. The fund of funds no-action letter may be accessed here.
Finally, the U.S. Treasury Department issued a final determination, effective on November 20, 2012, that FX swaps and FX forwards are not regulated as swaps under the Commodity Exchange Act and are not subject to the clearing and exchange-trading requirements of the Dodd-Frank Act, although they do remain subject to the Dodd-Frank Act's reporting requirements. For more detail, please see our client briefing.