On May 12, 2014, the CFTC staff announced a new approach for seeking relief from the requirement to register as a commodity pool operator (“CPO”) under Section 4m(1) of the Commodity Exchange Act (“CEA”).1 This announcement squarely addresses an issue that has confounded the industry for some time — namely, how best to avoid CPO registration for directors, general partners, managing members, and other persons that have no meaningful, day-to-day role in operating a commodity pool but nonetheless fall within the CPO definition. It was also prompted by the large number of requests for relief on this issue currently pending with the staff.
Adopting a streamlined approach to requesting no-action relief strongly suggests the CFTC thinks that relief is in fact necessary in each case where one person seeks to delegate CPO responsibilities to another. This suggestion may well prompt industry participants to review their existing delegation arrangements. Participants may also choose to seek their own no-action relief in keeping with the staff’s letter, even if they may otherwise be able to conclude that their arrangements are consistent with earlier CFTC relief or other pronouncements on this subject.2
The letter explains the circumstances in which the staff will grant registration relief and the conditions to which a person must agree in seeking the relief. No-action relief must be requested through a simplified form of request, a template of which is attached to the staff’s letter and is available here.
In earlier no-action letters, the staff generally required the person delegating CPO responsibility (“Delegating Person”) and the registered CPO that accepts the responsibility (“Designated CPO”) to agree to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations committed in connection with operating the pool.3 The staff will not require joint and several liability as a condition of relief for a board member as a Delegating Person, if the board member is not affiliated with the Designated CPO (an “Unaffiliated Board Member”).
The staff further defines Unaffiliated Board Member as a natural person who is a voting member of the board of directors or an equivalent governing body of a commodity pool and who:
- Is not a member of the management or an employee of the Designated CPO or any of its affiliates;
- Is not a substantial beneficial owner4 of the Designated CPO, any of the Designated CPO’s affiliates, or any company holding more than a five percent beneficial ownership interest in the Designated CPO or any affiliate of that company; and
- Has no other interest or relationship that could interfere with his or her ability to act independently of management of the Designated CPO, any of the Designated CPO’s affiliates, or any company holding more than a five percent beneficial ownership interest in the Designated CPO or any affiliate of that company.
This relief is consistent with the CFTC’s decision not to require CPO registration for board members of commodity pools that are investment companies registered under the Investment Company Act of 1940.5
The new approach will apply to no-action relief requests where Delegating Persons and Designated CPOs meet the requirements described below. Despite having adopted a streamlined approach, the staff has stated that it will still consider no-action relief for firms with fact patterns that do not align with this latest guidance.
Criteria for Requesting No-Action Relief Under the Streamlined Approach:
- Under a legally binding document, the Delegating Person has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool.
- The Delegating Person does not participate in the solicitation of participants for the commodity pool.
- The Delegating Person does not manage any property of the commodity pool.
- The Designated CPO is registered as a CPO.
- The Delegating Person is not subject to a statutory disqualification.6
- There is a business purpose for the Designated CPO being a separate entity from the Delegating Person that is not solely to avoid CPO registration by the Delegating Person.
- The books and records of the Delegating Person with respect to the commodity pool are maintained by the Designated CPO in accordance with Regulation 1.31.
- If the Delegating Person and the Designated CPO are each a non-natural person, then one of them controls, is controlled by, or is under common control with the other.
- If a Delegating Person is a non-natural person, then the Delegating Person and the Designated CPO have executed a legally binding document under which each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations in connection with the operation of the commodity pool.
- If a Delegating Person is a natural person and is not an Unaffiliated Board Member, then the Delegating Person and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations in connection with the operation of the commodity pool.
- If a Delegating Person is an Unaffiliated Board Member, then the Delegating Person must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.