The Commodity Futures Trading Commission published in the Federal Register on December 10, 20191 amendments to five different aspects of the regulatory framework applicable to certain commodity pool operators (CPOs) and commodity trading advisors (CTAs) that the CFTC had proposed in October 2018. Part of this rulemaking effort will directly affect investment companies that have elected to be exempt from registration under the Investment Company Act of 1940 as a business development company (BDC). Specifically, the CFTC amended CFTC Rule 4.5(a)(1) and (b)(1) codify a CPO exclusion under CFTC No-Action Letter No. 12-40 (Letter 12-40)2 for investment advisers to BDCs that trade in commodity interests (BDC exclusion).
The term “commodity interest” includes all futures, options on futures, commodity options and swaps. BDCs generally do not trade more than a de minimis amount of commodity interests. However, the commodity interests that they do trade (typically interest rate and currency swaps) cause such BDCs to be deemed to be commodity pools pursuant to the CFTC’s regulations. Until the effective date of this rulemaking, investment advisers to BDCs that trade in commodity interests and that comply with the conditions of Letter 12-40 are excluded from the definition of CPO under Letter 12-40.
New Filing Requirement
The amendments to CFTC Rule 4.5 supersede Letter 12-40. As a result, investment advisers to BDCs that trade commodity interests must file an electronic notice of exclusion with the National Futures Association “as soon as practicable after these amendments go into effect” in order to claim the exclusion. The effective date for the amendments is January 9, 2020.
The BDC exclusion does not change the substance of the current exclusion under Letter 12-40. Accordingly, investment advisers to BDCs that trade commodity interests in accordance with the conditions to Letter 12-40 and file the required notice also will satisfy the conditions under the BDC exclusion.
New Annual Reaffirmation Requirement
After making the initial filing, investment advisers to BDCs will be required to reaffirm the electronic notice of exclusion with the NFA annually, within 60 days following each calendar year-end. This is a noteworthy change for BDCs, as the relief under Letter 12-40 did not require annual reaffirmation.
Historically, the NFA has sent email reminders regarding the reaffirmation process to entities relying on CPO or CTA registration exclusions and/or exemptions that are subject to reaffirmation. These reminders typically have been sent in early December of each year. When setting up a filing account with the NFA, investment advisers to BDCs may wish to provide a compliance group email address as part of the contact information in order to ensure that multiple individuals receive such reminders. Investment advisers to BDCs also may want to establish log-in credentials for several individuals for the filing account as a backup, in case the individual responsible for the process departs the firm or is otherwise unavailable during the reaffirmation period.
Reasons for the Rule Amendments
The CFTC’s rulemakings were intended to: (1) simplify the regulatory landscape for CPOs and CTAs without reducing the protections or benefits provided by those regulations; (2) increase public awareness about registration relief available by incorporating commonly relied upon CFTC staff relief into CFTC regulations; and (3) generally reduce the regulatory burden of CFTC regulations without sacrificing the CFTC’s customer protection and other regulatory interests.