CFTC Staff Issues No-Action Relief For Certain Commodity Pool Operators

The Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “Commission” or “CFTC”) has recently issued a number of no-action letters granting commodity pool operator (“CPO”) registration and related relief, including one which is applicable to the operators of funds of funds and another which is applicable to family offices, in each case subject to certain terms and conditions.1 These letters are designed to address the effects of the imminent repeal of CFTC Rule 4.13(a)(4), which is scheduled to occur on December 31, 2012.

CFTC Letter No. 12-38

The Division recognizes that, in view of the repeal of Rule 4.13(a)(4), many operators of funds of funds are seeking to rely on the exemption in Rule 4.13(a)(3), which is available to CPOs of privately offered funds that engage in a de minimis level of commodity interest transactions, pursuant to the guidance in prior Appendix A of Part 4 of the Commission’s regulations, pending the issuance of subsequent guidance by the Commission.2 However, a CPO of a fund of funds may encounter difficulties in obtaining access to information from its underlying funds about their exposure to commodity interests that is necessary to determine whether it is able to rely on the exemption in Rule 4.13(a)(3). In addition, a similar issue exists with respect to the operator of a fund of funds which is a registered investment company seeking to rely on the exclusion in Rule 4.5 and the applicability of the de minimis commodity interest trading thresholds specified therein.

As a result, the Division will not recommend enforcement action against any operator of a fund of funds on condition that the operator submits a claim for relief and complies with the following criteria:

  • the CPO is a CPO of one or more funds of funds (each, an “Investor Fund”);
  • the amount of commodity interest positions to which the Investor Fund is directly exposed does not exceed the levels specified in Rule 4.5 or Rule 4.13(a)(3)(ii)(A) or (B);
  • the CPO does not know and could not reasonably have known that the Investor Fund’s indirect exposure to commodity interests derived from investments in underlying funds exceeds the levels specified in Rule 4.5 or 4.13(a)(3)(ii)(A) or (B), either calculated directly or through the use of Prior Appendix A; and
  • the commodity pool for which the CPO seeks relief is either (a) a registered investment company under the Investment Company Act of 1940 or (b) compliant with the provisions of Rule 4.13(a)(3)(i), (iii) and (iv) (i.e., privately offered, limited to eligible investors and not marketed as a vehicle for trading in the commodities markets.)

The claim for relief must be filed with the Division prior to December 31, 2012 via email and will be effective through the later of June 30, 2013 or six months after the effective date of revised guidance (or the compliance date, if later) regarding the application of the de minimis thresholds to funds of funds in the context of Rules 4.5 and 4.13(a)(3).

CFTC Letter No. 12-37

The Division is providing relief for certain family offices from Part 4 of the Commission’s regulations, particularly given that many family offices have been relying on the CPO exemption in Rule 4.13(a)(4) which, as noted, has been repealed effective December 31, 2012. In this regard, the Division notes that the Securities and Exchange Commission (the “SEC”) has provided an exclusion for family offices that would otherwise be required to register as an investment adviser pursuant to SEC Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”).

On this basis, the Division will not recommend enforcement action for failure to register as a CPO against any CPO that is a “family office” as defined by the SEC, provided that the CPO (i) submits a claim to take advantage of the relief and (ii) remains in compliance with SEC Rule 202(a)(11)(G)-1, as amended, regardless of whether the CPO seeks to be excluded from the Advisers Act. The CPO must file a claim for relief 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). Also, prior to March 31, 2012 (or, for a family office that begins to operate after that date, within 30 days after it begins to operate as a family office), it must confirm that the CPO is a family office within the meaning and intent of 17 CFR 275.202(a)(11)(G)-1, and that the CPO will notify the Division if it is no longer a family office within the meaning and intent of that rule.