On October 15, the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “CFTC”) issued CFTC Letter 14-126 (the “October Letter”) regarding the Division’s exemptive relief for the delegation of certain commodity pool operator (“CPO”) functions. The October Letter represents a “further progression” of the Division’s position in CFTC Letter No. 14-69 (the “May Letter”), which was issued on May 12, 2014. In both letters, the Division addressed the criteria necessary for exemptive relief when a CPO of a commodity pool (the “Delegating CPO”) delegates all of its investment management authority to another registered CPO (the “Designated CPO”). The new letter further streamlines the process set forth in the May Letter and provides that such relief will now be self-executing.
Prior to the CFTC’s May Letter, the broad definition of “CPO” meant that certain entities and persons affiliated with commodity pools technically met the definition of CPO and needed to either register or be exempted from registration with the CFTC. Because of this, the Division was receiving numerous requests for no-action relief for failure to register as a CPO from, for example, general partners and managing members affiliated with the commodity pool’s investment manager and boards of directors of non-U.S. pools. In such instances, these entities (the Delegating CPOs) had delegated investment management authority as a CPO to another person (e.g., the investment manager of the pool). The Division found that the numerous individual no-action requests it was receiving often covered situations, facts, and circumstances which the Division recognized as frequently overlapping.
The CFTC attempted to address and clarify this no- action relief process for Delegating CPOs through its May Letter. The May Letter provided streamlined, expedited no-action relief for Delegating CPOs to avoid registration with the CFTC. In the May Letter, the Division provided a form of request for no-action relief to be used by Delegating CPOs. The form request included the following information: the identities of the CPO parties, the commodity pool(s) at issue, and a representation that the necessary conditions (which were set forth in the May Letter) were satisfied. Submission of the request did not, by itself, provide relief to the CPO, but was generally considered a strong indication that relief would be granted as long as the conditions were met.
Following the May Letter, the Division (i) received numerous requests for relief and (ii) received a number of requests for clarification regarding the criteria necessary to be eligible for relief. There were concerns in the industry that certain criteria were either ambiguous, or if read literally, did not provide the relief that the Division intended to address.
To ease the administrative burden created by the influx of form requests for relief and to address the questions regarding the criteria for no-action relief, the Division issued the October Letter. The October Letter provides the following:
- An expedited process for Delegating CPOs by providing self-executing no-action relief.
- Clarification of certain criteria set forth in the May Letter:
- The May Letter seemed to prohibit a situation in which different entities served as a fund’s Designated CPO and investment manager. The October Letter clarified that separate entities can serve as the Designated CPO and the investment manager to the fund so long as the investment manager is registered or exempt from registration as a commodity trading advisor (“CTA”).
- The May letter seemed to prohibit a Delegating CPO from soliciting pool participants even when the Delegating CPO was an associated person of the Designated CPO and solicited pool participants solely in that capacity. Industry groups, in particular, expressed concern with this criteria and suggested to the CFTC that investors are: (i) benefitted by having the ability to interface with senior fund personnel and (ii) protected from illegal activity as associated persons of a registered CPO must comply with CFTC rules and regulations. The Division clarified in the October Letter that such activity is permitted, so long as such person is registered as an associated person of the Designated CPO (or is exempt from registration) and undertakes solicitation only in its capacity as an associated person of the Designated CPO.
- Similarly, the criteria in the May Letter seemed to prohibit a Delegating CPO from managing a fund’s assets even when the Delegating CPO also is a principal or employee of the Designated CPO or a CTA and such management activities are conducted solely in their capacity as an employee or principal of the Designated CPO or the fund’s CTA.
As noted above, the October Letter modified the criteria the CFTC previously put forward in its May Letter as necessary for no-action relief. The October Letter’s criteria for self-executing exemptive relief from CPO registration for Delegating CPOs include:
1a. The Delegating CPO has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool; provided, however, that a third party, who is registered as a CTA or is exempt from such registration, may be delegated to serve as investment manager of the pool;
1b. The Delegating CPO does not participate in the solicitation of participants for the pool; except, as noted above, such solicitation is allowed when conducted by a person that is registered as an associated person of the Designated CPO or is exempt from registration as such pursuant to the Commodity Exchange Act (the “CEA”) or the CFTC’s regulations and such solicitation is conducted by the associated person solely in its capacity as an associated person of the Designated CPO; and
1c. The Delegating CPO does not manage any property of the pool; provided, however, that a principal or employee of the Designated CPO or of a CTA of the pool may have management responsibilities so long as the responsibility is only exercised in such person’s capacity as a principal or employee of the Designated CPO or CTA and such activities are supervised.
- The Designated CPO is registered as a CPO.
- The Delegating CPO is not subject to a statutory disqualification.1
- There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO other than to avoid registration.
- The Designated CPO maintains the books and records of the Delegating CPO.
- If the Delegating CPO and the Designated CPO are both entities, then one CPO must control or be under common control with the other CPO.
- If a Delegating CPO is an entity (or a natural person who is not an Unaffiliated Board Member), then the Delegating CPO and Designated CPO have agreed to be jointly and severally liable for CEA and CFTC violations with regard to the pool.2
If a Delegating CPO is an Unaffiliated Board Member, then it remains fully responsible as a board member in accordance with the laws under which the commodity pool is established.3
Situations that do not fall within the self-executing approach may still be eligible for relief by submitting a no-action letter request to the Division; however, the Division will review such requests on a case-by-case basis.