On August 14, 2012, the Staff of U.S. Commodity Futures Trading Commission (“CFTC”) released guidance (“CPO/CTA FAQs”)1 on the registration and compliance obligations of commodity pool operators (“CPO”) and commodity trading advisors (“CTA”). Some key matters covered by the CPO/CTA FAQs include provision of temporary no action relief from registration for newly launched funds, guidance on compliance with the de minimis trading exemption under CFTC Rule 4.13(a)(3) and confirmation that fund-of-fund managers may continue to rely on the rescinded “Appendix A” guidance.
In light of the rescission of CFTC Rule 4.13(a)(4)2 and the inclusion of swaps3 within the meaning of “commodity pool” and “commodity interests,” fund managers operating private funds deemed to be commodity pools, or providing advice relating to commodity interests, must now assess the registration requirements for CPOs and/or CTAs, and any available exemptions from such registration.4 This Memorandum highlights the key responses in the CPO/CTA FAQs relevant to private fund managers.
TEMPORARY NO ACTION RELIEF AVAILABLE FOR NEWLY LAUNCHED FUNDS
The CFTC issued a no-action letter on July 10, 2012 (the “Letter”)5 providing, in part, relief for certain fund managers from compliance with registration as a CPO or as a CTA until December 31, 2012. Fund managers to private funds trading in commodity interests that are launched after July 10, 20126 will have until December 31, 2012 to assess their CPO/CTA registration obligations. The CPO/CTA FAQs confirm availability of this relief. The relief provided by the Letter is not self-executing. Eligible CPOs and CTAs must file a claim for the relief directly with the CFTC, which, if materially complete, will be effective upon filing.7
COMPLIANCE WITH CFTC RULE 4.13(a)(3)
The CPO/CTA FAQs provide some welcome guidance on compliance with the de minimis trading exemption under CFTC Rule 4.13(a)(3)8. The key items of guidance are as follows:
- A fund manager may rely on CFTC Rule 4.13(a)(3) with respect to a fund that will predominantly invest in non-derivatives even when the first position is a swap. The fund manager will have a “reasonable time” to comply with the trading limitations set forth in CFTC Rule 4.13(a)(3).
- Swaps will only be included in the calculation of “commodity interest” as of December 31, 2012. All swaps entered into prior to December 31, 2012 will be included in such calculation.
- Compliance with the trading limits of CFTC Rule 4.13(a)(3) is required only when each new position is established.
- The “liquidation value” of a fund includes all cash held by the fund, not only the aggregate liquidation value of the fund’s positions.
- Commodity options with the same underlying commodity may be netted across designated contract markets and foreign boards of trade.
- Notional value of a swap is the amount reported by the reporting counterparty as the notional amount under Part 45 of the CFTC rules.
TRANSITION FROM CFTC RULE 4.13(a)(4) TO CFTC RULE 4.13(a)(3)
With the rescission of the CFTC Rule 4.13(a)(4) exemption, many fund managers will need to transition from a CFTC Rule 4.13(a)(4) exemption to a CFTC Rule 4.13(a)(3) exemption. The CPO/CTA FAQs provide guidance on the mechanics of this transition. To make this transition, the fund manager must submit a written request to the U.S. National Futures Association (the “NFA”) to withdraw the manager’s CFTC Rule 4.13(a)(4) exemption with respect to each relying fund. The NFA will then contact the fund manager when the exemption has been withdrawn. After the withdrawal has been finalized, the fund manager may then file the new CFTC Rule 4.13(a)(3) exemption electronically for each fund.9 Notice of the change of the exemption must also be provided to investors of each fund.
FUND-OF-FUNDS ANALYSIS APPLICABLE TO THE DE MINIMIS TRADING EXEMPTION UNDER CFTC RULE 4.13(a)(3)
The CPO/CTA FAQs confirmed that fund-of-fund managers relying on CFTC Rule 4.13(a)(3) may continue to rely on Appendix A until the CFTC adopts revised guidance. Appendix A provided limited guidance to fund-of-fund managers relying on CFTC Rule 4.13(a)(3) by setting forth six hypothetical fact patterns which demonstrated when a fund-of-funds manager could rely on the de minimis exemption.10
TRANSITION FROM CFTC RULE 4.13(a)(4) TO CFTC RULE 4.7
In light of the rescission of the CFTC Rule 4.13(a)(4) exemption, managers of private funds that do not meet the requirements of the CFTC Rule 4.13(a)(3) exemption will need to register with the CFTC and, if eligible, transition to reliance of the CFTC Rule 4.7 exemption. To claim the CFTC Rule 4.7 exemption, the CPO/CTA FAQs provide that private fund managers of existing funds that operated pursuant to CFTC Rule 4.13(a)(4) will not be required to reaffirm that all investors in such existing fund continue to meet the qualified eligible person standard (the “QEP standard”). Nonetheless, new participants in the existing fund will need to meet the QEP standard at the time of investment in order for the fund to continue to meet the requirements of the CFTC Rule 4.7 exemption.11
CONSEQUENCES FOR MANAGERS OF FUNDS THAT TRADE IN COMMODITY INTERESTS
Managers12 of funds in which the commodity interest exposure is only to swaps, and which did not make any exemptive filings or do not qualify for the temporary no-action letter relief noted above, should assess their CPO/CTA status in the near future (and in no event later than October 12, 2012, when the definition of “swap” takes effect.13) As a first step, fund managers should gather a list of all derivative transactions engaged in by the fund (or with respect to which the fund managers are providing advice) in order to determine whether such transactions are CFTC-regulated swaps that would trigger the CPO/CTA analysis. Further guidance in respect of this evolving regulatory landscape will need to continue to be monitored.
For certain fund managers, the key compliance deadline for CPO/CTA registration is December 31, 2012:
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However, for managers that are currently not relying on CFTC Rule 4.13(a)(4), the deadline for CFTC Rule 4.13(a)(3) filing or registration, unless further guidance is issued by the CFTC, is October 12, 2012.