On December 4, 2012, the Commodity Futures Trading Commission's (CFTC) Division of Swap Dealer and Intermediary Oversight ("the Division") issued a no-action letter to operators of business development companies ("BDCs"). The letter was in response to a request for clarification regarding CFTC Regulation 4.5 as applied to certain pooled investment vehicles organized as BDCs. The letter states that the Division will not recommend that the CFTC take enforcement action against the operators of BDCs for failure to register as commodity pool operators ("CPOs") under the Commodity Exchange Act and the CFTC's regulations, subject to certain conditions described in the letter.
The Division asserted that BDCs are properly considered commodity pools and, absent relief from the Division, a BDC's operator would be required to register as a CPO under the Dodd-Frank Act. The Dodd-Frank Act revised the definition of a CPO to include those accepting funds, securities, or property for the purpose of trading in commodity interests, which includes swaps. Based on these amendments, the CFTC determined that any swaps activities undertaken by a CPO would result in that entity being required to register—even one swap contract would trigger the registration requirement. However, in the letter and based upon specific representations made to the CFTC about BDCs, the Division stated that it will not recommend the CFTC take enforcement action against BDC operators for failure to register as a CPO if the following conditions are met:
- The BDC must have elected to be treated by the SEC as a BDC under Section 54 of the Investment Company Act of 1940, and continue to be regulated as such by the SEC;
- The BDC must not have been marketing or plan to market participations to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures, commodity options, or swaps markets; and
- The BDC must either: (1) use commodity futures or commodity options contracts, or swaps solely for bona fide hedging purposes (as defined in applicable CFTC regulations); provided that with respect to any positions in commodity futures, commodity option contracts or swaps which do not come within the meaning and intent of the CFTC's bona fide hedging provisions, the aggregate initial margin and premiums required to establish such positions do not exceed five percent of the liquidation value of the BDC's portfolio, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into; and, provided further, that in the case of an option that is in-the-money at the time of purchase, the in-the-money may be excluded in computing such five percent; or (2) the aggregate net notional value of commodity futures, commodity options contracts, or swaps positions not used solely for bona fide hedging purposes, determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the BDC's portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into.
The no-action relief described above is not self-executing. Eligible CPOs must file a claim to perfect use of the relief. The claim will be effective upon filing, so long as the claim is materially complete. The letter sets forth the information that such claim must include.