In February 2012, the US Commodity Futures Trading Commission (CFTC) , which regulates commodity futures and option markets in the United States, rescinded certain exemptions from registration and amended some compliance and reporting requirements. The Irish Funds Industry Association (IFIA) Technical Committee has prepared a paper to assist industry in understanding these changes.

Background

In February 2012, the CFTC rescinded some exemptions from registration and amended compliance and reporting requirements. The amendments require private fund managers to register as Commodity Pool Operators (CPOs) and become members of the National Futures Association (NFA) or comply with de minimis rules for trading. The CFTC expanded the scope of instruments falling under the definition of commodity interest to include swaps (with the exception of security-based swaps and FX swaps) which significantly increases the number of funds that will be deemed commodity pools and impacts the ability of potential registrants to rely on the de minimis exemption. The security-based swaps mentioned above will be subject to regulation by the US Securities and Exchange Commission (SEC). The amendments to the exemptions create additional reporting and financial information disclosure requirements. Investment Managers who have previously claimed an exemption under Rules 4.5 or 4.13(a)(4) will be required to evaluate whether their pools can continue to rely on the CFTC’s amended exemptions and fully register with the NFA if an exemption is no longer available.

Key Date

The requirement is to register by 31 December 2012 (effective 1 January 2013).The first reporting due for large filers is 60 days after first calendar quarter-end (March 31st is first quarter for Jan 1 registrants).

Exemptions

  • De-minimis exemption Rule 4.13 (a) (3); Funds will be exempt if the fund investors are either non-US persons or meet the equivalent of an accredited investor standard and have limited trading of commodity interest positions. This exemption requires compliance monitoring procedures and controls to ensure a pool adheres to the trading limits and investor restrictions. Limited trading requires that the following 2 conditions are met (i) aggregate initial margin and commodity interests do not exceed 5% of the portfolio; (ii) the fund’s net notional commodity interests must be less than 100% of the NAV of the fund. For fund of funds that invest into commodity pools, they may be deemed to be a commodity pool.  
  • CFTC Release 18-96 and Rule 3.10(c)(3)exemption; This provides registration exemption to funds located outside the United States, which do not have U.S. investors. Funds that do meet the limited trading or investor restrictions may file for the 4.7 exemption.  
  • Rule 4.7 Private Fund Exemption; Private funds managers who were previously able to rely on Rule 4.13(a)(4) exemption for sophisticated investors must register with the CFTC and become a member of the NFA if they do not meet the de minimis exemption criteria. Rule 4.7 provides an exemption from certain recordkeeping and reporting requirements for private funds with sophisticated investors. Annual and quarterly reports must be sent to investors. Audited financial statements must be filed with the NFA within 90 days of year-end (180-days for fund of funds). Rule 4.7 provides relief from monthly reporting to investors, certain risk disclosure statements in fund documents and relief from certain financial statement disclosures.

The IFIA note sets out details of the above as well as details of the Annual Financial Statement Requirements for Rule 4.7 funds, the Quarterly Reporting to Fund Investors, the CPO PQR Quarterly Report, the CPO PQR filing process as well as some useful references.