At an open meeting, the Commissioners approved amendments to Rules 4.7, 4.13 and 4.14 ("Codification of Relief for Family Offices and Relief Related to the Jumpstart Our Business Startups Act") in a 4-1 vote. In addition, the Commissioners unanimously approved amendments to Rules 4.5 and 4.27 ("Updating Exclusions and Adding Reporting Relief").
As previously covered, the CFTC rule amendments include:
registration exemptions for CPOs that solicit and/or accept funds from only non-U.S. persons for participation in offshore commodity pools;
allowing the U.S.-based CPO of an offshore commodity pool with U.S. participants to maintain the commodity pool's original books and records in the offshore location of the pool;
CPO and CTA registration exemptions for qualifying family offices similar to the exemption from investment adviser registration provided by the SEC;
prohibiting persons that are statutorily disqualified from registration as CPOs from claiming any exemption from CPO registration;
amendments permitting general solicitation of offerings in private pools that are exempt from full CPO regulation by virtue of CFTC Rules 4.7 and 4.13;
providing exclusionary relief from CPO regulation for business development companies ("BDCs"); and
amendments to Forms CPO-PQR and CTA-PR that will, among other things, exclude certain CPOs and CTAs from the reporting requirements where those requirements "are duplicative of those of the SEC or otherwise of limited utility to the CFTC."
Dissent on Family Offices
CFTC Chair Heath P. Tarbert stated that "family offices" pose little risk to customers, and so there is not a meaningful benefit in requiring the operators of family offices to file an exemption from registration claims with the CFTC.
CFTC Commissioner Dan M. Berkovitz dissented from the grant of a "blanket exemption" for operators of family offices. Mr. Berkovitz stated that investor protection was not the only reason to require the operator of a family office to file an exemptive notice with the CFTC; rather, he argued that such notice provided valuable market information to the regulators, given the large size of certain family offices.
The CFTC is moving away from the philosophy of "if it moves, regulate it." That Dodd-Frank philosophy never made the markets safer. Soaking up regulatory resources on matters of no regulatory consequence, or where there is another regulator involved, merely distracts regulators from matters of importance.
The exemption of BDCs from CPO registration is an example of a good step forward given that BDCs are already comprehensively regulated by the SEC. Hopefully, the CFTC will restore its pre-Dodd-Frank exemption for all SEC-registered investment companies; double regulation is just not a good use of CFTC resources.
Commissioner Berkovitz's dissent as to the Family Office exemption rests on two assumptions: 1) that such entities "are very large enterprises," and 2) that the "significant interest" of the CFTC "in how the activities of these pool operators may affect the commodity markets" (emphasis added).
A Family Office is simply an investment fund that is wholly owned and operated for the benefit of the members of a family. In other words, it is a vehicle used for investing the assets of a wealthy family. The fact that the size of the assets of such entities is large, or that a particular family is extended, is beside the point, as no public investor protection concerns that historically give rise to commodity pool regulation are involved.
As for the purported "significant interest" of the Commission in such entities, that interest is no different from that towards any large private trader. If the size of a Family Office's derivatives position is such that the public interest is implicated, there are regulatory means of addressing the issue other than those recommended by Mr. Berkovitz; e.g., the large trader reporting system. Ditto for the conduct of the Family Office's investment manager, which can be addressed by the CFTC's Division of Enforcement if need be. Who manages the portfolios of such private investment vehicles - whether it be the family patriarch himself or herself or an investment manager hired for that purpose - should be of no concern to the CFTC.
The late T. Boone Pickens operated an energy-related hedge fund for two decades. Towards the end of his life, he closed that fund, converting it to a Family Office. The former vehicle would have legitimately raised the kind of concerns that Mr. Berkovitz's dissent addresses. The latter would not.