In May, the CFTC issued an Advisory, which set forth procedures to obtain No-Action Relief on an expedited basis for managers of commodity pools who may be deemed by the CFTC or NFA as CPOs based upon their positions and roles relative to the commodity pools, but may have otherwise delegated investment management authority to registered CPOs. Person who may be required to obtain No-Action Relief are referred to as “Delegating CPOs” in the Advisory and include directors of corporations, general partners of limited partnerships, managers of limited liability companies and any other person who may have inherent authority to act as a CPO on behalf of an entity due to their title or role.
In order to obtain No-Action Relief, a Delegating CPO must satisfy the criteria in the Advisory, which, among other requirements, includes the following:
- The Delegating CPO must delegate all investment management authority to a “Designated” CPO pursuant to a legally binding document;
- The Designated CPO must be registered and not subject to a statutory disqualification;
- The Delegating CPO must not participating in the solicitation of participants for the commodity pool;
- The Delegating CPO must not “manage” any property of the commodity pool;
- There is a business purpose for the Delegating CPO being a separate entity from the Delegating CPO that is not solely to avoid registration with the CFTC; and
- If the Delegating CPO and the Designated CPO are not natural persons, they must be under common control.
Additionally, where the Delegating CPO is an entity affiliated with the Designated CPO, the Delegating CPO must agree to be jointly and severally liable with the Designated CPO. In the case of individuals who are Delegating CPOs, such as directors of an offshore pool, the Advisory requires that such individuals agree to be jointly and severally liable with the Designated CPO. If the Delegating CPO is an individual unaffiliated with the Designated CPO, such as an independent director of an offshore pool, then the individual must be subject to liability as a board member in accordance with the laws of the jurisdiction where the pool is organized.
While its consequences may have been unintentional, two primary flaws with the Advisory’s requirements quickly became apparent, particularly in the case of individuals serving as directors of offshore pools. As background, in many cases, when a registered CPO forms an offshore pool, it will form the pool as an exempted company - the offshore equivalent of a corporation. While the offshore pool will have some independent individual directors, the board of directors will usually also include senior management who are listed principals and registered APs of the CPO. First, directors who are also APs should not be required to agree to be jointly and severally liable with the CPO as they are already subject to the CFTC’s jurisdiction. Second, directors who are registered as APs should obviously be able to participate in the solicitation of investors. Due to these presumably unintended consequences, we expect that the CFTC will issue an amended Advisory. However, due to its recent change in Commissioners and staff, and the CFTC’s ever-increasing docket, we do not know when the CFTC will have the opportunity to re-visit this issue.