On January 26, 2011, the CFTC proposed eliminating the exemptions from Commodity Pool Operator (CPO) registration contained in Rules 4.13(a)(3) and 4.13(a)(4), which are the principal exemptions relied on by hedge fund managers who trade futures. If adopted, these changes will require private fund advisers, sponsors, or other operators of funds that invest even occasionally in listed futures to register with the CFTC as a CPO.

CFTC Rule 4.13(a)(3) currently provides an exemption from CPO registration for persons that meet the following criteria: (i) they operate pools exempt from registration under the Securities Act of 1933; (ii) they offer those pools only to accredited investors, knowledgeable employees, or qualified eligible persons (QEPs) as defined under CFTC Rule 4.7; and (iii) the aggregate initial margin and/or premium attributable to commodity interests in each pool does not exceed 5% of the liquidation value of a pool’s portfolio, or the aggregate net notional value of commodity futures positions held by each pool does not exceed 100% of the net liquidation value of the pool. Rule 4.13(a)(4) provides a broader exemption from CPO registration for persons who operate private funds offered only to certain QEPs, regardless of the amount of commodity interests held by the pool.

If the CFTC adopts the proposed rules, operators of private funds that invest in any commodity futures and certain non-security-based swaps (as described below) will have to register as CPOs with the CFTC and become members of the National Futures Association (NFA).

On February 24, 2011, the CFTC proposed rules to treat non-security-based swaps the same as commodity futures for purposes of determining the need to register as a CPO. Non-security based swaps generally include agricultural and commodity swaps, metal and energy swaps, options, calls, floors and caps based on a rate such as an interest or currency rate, and certain credit default swaps and total return swaps that do not fall under the definition of security-based swap. The definition of security-based swap is expected to include most types of single name CDs based on an individual security or loan. If these changes are adopted, CPOs will not be able to avoid CFTC registration by using swaps instead of futures.

Registration as a CPO usually takes from six to eight weeks to complete. Registration involves submission of certain forms and fingerprints for each principal and associated person, as well as proof that each associated person has passed the national futures exam (Series 3). Generally, anyone who solicits for a fund is an associated person.