The staff of the Commodity Futures Trading Commission (CFTC) has granted a delayed compliance date for certain fund-of-funds managers in a no-action letter (the Letter) issued November, 29, 2012. The Letter provides relief for managers who may be required to register as commodity pool operators (CPOs) by December 31, 2012, but do not have the necessary information from their underlying funds to determine whether an exemption applies. The Letter delays the registration date for such managers until the later of June 30, 2013, or six months from the date the staff issues revised guidance (or a compliance date, if later) on the application of the de minimis thresholds in the exceptions from registration provided by Rules 4.5 and 4.13(a)(3). The relief is available to fund-of-funds operators who meet the following conditions:
- The manager operates one or more fund-of-funds;
- The commodity interest positions held directly by each fund-of-funds does not exceed the levels specified in CFTC Rules 4.5 or 4.13(a)(3);
- The manager does not know and could not reasonably have known that its fund-of-funds’ indirect exposure to commodity interests exceeds the trading thresholds, either calculated directly or through the use of Appendix A (discussed below); and
The fund-of-funds is either:
- an investment company registered under the Investment Company Act of 1940 (a RIC), or
compliant with the non-trading threshold provisions of Rule 4.13(a)(3):
- interests in the fund-of-funds are not registered under the Securities Act of 1933;
- the fund-of-funds is not advertised in the U.S.;
- each investor is an “accredited investor,” “knowledgeable employee” or “qualified eligible person”; and
- the fund-of-funds is not marketed as a commodity pool.
The Commodity Exchange Act (CEA) provides that a fund-of-funds manager meets the definition of a CPO if any of its underlying funds trades commodity interests. CEA Rules 4.5 and 4.13(a)(3) provide an exemption from registration for CPOs whose funds’ trading in commodity interests remains below certain de minimis thresholds. Fund-of-funds managers often have difficulty determining the precise amount of commodities trading at their underlying funds and therefore may not be able to determine whether their funds are below the de minimis thresholds.
Previously, the CFTC had issued guidance on making this determination under Rule 4.13(a)(3) in an appendix to the CFTC’s Part 4 Regulations (Appendix A). Appendix A provided a number of scenarios under which a fund-of-funds manager could claim the exemption under Rule 4.13(a)(3) without knowing the precise trading levels of each underlying fund. However, the fact patterns were often difficult to apply in practice as many fund-of-fund managers had difficulty getting information from their underlying funds and/or had facts that diverged from the six scenarios described in Appendix A.
Appendix A was rescinded in February 2012 when the CFTC issued its final rules regarding changes to the Part 4 regulations (the Final Rules). The Final Rules also eliminated the exemption from CPO registration under CFTC Rule 4.13(a)(4) and reinstated the de minimis thresholds under CFTC Rule 4.5 for RICs. When the CFTC issued the Final Rules it did not formally state if or when it intended to adopt a replacement for Appendix A, but it was expected guidance would be published before the end of the year. The Letter provides relief for those fund-of-funds managers left wondering how the de minimis thresholds in Rules 4.5 and 4.13(a)(3) apply to fund-of-funds until the CFTC issues guidance on the issue.
The Letter’s relief from registration is not self-executing. Eligible fund-of-funds managers must file a claim to perfect the relief. Specifically, the claim of no-action relief must:
- State the name, main business address, and main business telephone number of the manager;
- State the capacity (i.e., CPO) and the name(s) of fund(s)-of-funds for which the claim is being filed;
- Be signed by the manager; and
- Be filed prior December 31, 2012, via email, using the email address firstname.lastname@example.org with "Fund-of-Funds" in the subject line of the email.
A claim for relief will be effective upon filing, so long as it is materially complete.