On Oct. 15, 2014, the staff of the Commodity Futures Trading Commission issued a letter granting no-action relief to persons seeking to delegate their commodity pool operator authority to others.
The October letter expands upon the relief granted in an earlier (May 2014) letter in two respects:
- Unlike the May letter, the October guidance provides self-executing relief (i.e., no application need be made, and no notice is required to be filed with the CFTC); and
- The October letter also addresses some technical, but often problematic, impediments to accessing the relief granted through the May letter.
Conditions for Relief Historical Practice. The CFTC staff historically has considered the general partner or managing member of a commodity pool (such as a hedge fund) and each member of its board of directors to be a commodity pool operator (a “CPO”); however, it is generally the investment manager (which may also be an SEC-registered investment adviser) of a private fund that carries out all or substantially all of the responsibilities that the CFTC regulations ascribe to the CPO.
With these two letters, the CFTC staff now allows certain persons that it classifies as CPOs (“Delegating CPOs”) to delegate their CPO authority, without any additional notice or claim, to others (“Designated CPOs”), provided that the Delegating CPO and the Designated CPO satisfy certain conditions.
The May 2014 Relief. In the earlier May letter, the staff set forth several eligibility criteria for a delegation of CPO authority, including the following:
- The Delegating CPO must have delegated all investment management authority to the Designated CPO;
- The Delegating CPO may not manage any property of the commodity pools for which it has delegated its CPO authority;
- The Delegating CPO may not engage in any solicitation of participants for the commodity pools for which it has delegated its CPO authority;
- The Delegating CPO may not be subject to a statutory disqualification;
- There must be a business purpose for the Delegating CPO’s separate entity status (other than a desire to avoid registration);
- The Designated CPO must maintain its books and records in compliance with CFTC Regulation 1.31;
- Where both are non-natural persons, each of the Delegating CPO and the Designated CPO must control, be controlled by, or be under common control with the other; and
- The Delegating CPO and the Designated CPO must agree to continue to remain jointly and severally liable for violations of the Commodity Exchange Act (not required for “unaffiliated board members”).
The October 2014 Relief. Following the issuance of the May 2014 letter, the CFTC staff received “a large number of requests” under the May letter’s streamlined approach, which apparently surpassed their ability to process in a timely manner. In addition, many industry participants pointed out issues with certain substantive or procedural aspects of the May letter, which the staff found “sufficiently prevalent to warrant further clarification.”
The October letter provided additional relief by clarifying several of the May criteria:
Click here to view the table.
The rest of the criteria remain the same as in the previous guidance.
Conditions for Relief Delegating CPOs who meet the conditions of the most recent guidance (as well as CPOs who have previously received relief from CFTC staff) need to take no further steps with the CFTC. While this means that the CFTC staff will no longer be looking at relief requests submitted pursuant to CFTC Letter 14-69, CFTC staff will continue to evaluate new delegation relief requests from Delegating CPOs who fall outside the scope of this most recent guidance.