The Commodity Futures Trading Commission made self-executing and somewhat expanded previously granted relief from registration requirements to commodity pool operators who delegate certain activities in connection with private investment funds.
In May 2014, the CFTC provided a streamlined process for CPOs to request registration relief when they delegated all of their management authority to another registered CPO (the so-called designated CPO) related to a commodity pool. However, where the delegating CPO was a natural person of the designated CPO—for example, a director—the individual had to agree to joint and several liability with the designated CPO. Also, among other limitations, the delegating CPO could not engage in sales activities for the fund that he/she served as a director. (Click here for the article regarding this process in “CFTC Implements Streamlined Way for Certain CPOs to Apply for Registration Relief” in the May 13, 2014 edition of Between Bridges.)
Under the new requirements set forth by the Commission's Division of Swap Dealer and Intermediary Oversight, registration relief does not need to be requested if all enumerated conditions are met. Among these conditions are that:
- through a legally binding document, the delegating CPO delegated its investment management authority regarding the relevant commodity pool to the designated CPO (although the delegating or designated CPO may also appoint certain third parties to serve as investment managers of the pool—either registered commodity trading advisors or persons lawfully exempt from CTA registration);
- the delegating CPO is not involved in the solicitation of participants for the relevant commodity pool (although he/she may engage in solicitation activities solely in his/her role as an associated person of the designated CPO provided he/she is registered as an AP of the designated CPO or lawfully exempt from AP registration);
- the delegating CPO is not involved in the management of any property of the relevant pool (although he/she may have management responsibilities over pool property under limited, enumerated circumstances where he/she is a principal or employee of the designated CPO or of a CTA of the relevant pool);
- the designated CPO is a registered CPO;
- the delegating CPO is not subject to any statutory disqualification;
- there is a “business purpose” for the designated CPO to be a separate entity from the delegating CPO other than for the delegating CPO to avoid registration;
- the designated CPO maintains the books and records of the delegating CPO; and
- if the delegating CPO is a natural person and affiliated with the commodity pool, the delegating and designated CPO have signed a legally binding agreement to be jointly and severally liable for violations under applicable law or regulations by the other in connection with the operation of the pool.
In articulating its new requirements, Commission staff acknowledged that “there may be other CPO delegation situations involving circumstances in which CPO registration no-action relief may be warranted.” Staff indicated it would continue to evaluate such circumstances in response to requests submitted to it.
(Click here for more details on the CFTC’s new requirements in the article “CFTC Provides Additional Relief to Certain Delegating CPOs” in the October 17 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
My View: The CFTC’s new requirements related to the delegation of management authority by directors of private commodity funds to avoid registration requirements are a good first practical step to address a CFTC view that where a fund is structured as a limited partnership and has many general partners, each general partner may be a CPO and obligated to register as such, and where a fund is structured as a corporation, trust or limited liability company with a board of directors, each director may also be deemed a CPO and required to register accordingly too. The next step is to begin rule-making—as recommended in a July 30, 2014 letter from the Managed Futures Association to Chairman Timothy Massad (click here to access)—to make clear that such general partners and directors are not required to register as CPOs in the first instance, and if subject to conditions, that one is not exposing directors of private investment funds to potential liability for their ordinary conduct as directors when they have not engaged in any misconduct.