The Division of Swap Dealer and Intermediary Oversight (the “Division”) of the CFTC recently issued three no-action letters granting relief from the requirement to register as a CPO with the CFTC to certain family offices, operators of funds of funds and operators of business development companies, as further described below.

Family Offices

On November 29, 2012, the Division granted no-action relief from CPO registration to any “family office” within the meaning of Rule 202(a)(11)(G)-1 of the Advisers Act. In order for any such family office to rely on this relief, the family office must (i) file a claim by emailing the Division a statement, signed by the family office, that includes certain basic identification and contact information listed in the no-action letter and (ii) remain in compliance with Rule 202(a)(11)(G)-1 regardless of whether it seeks to be excluded from registration as an investment adviser under the Advisers Act. Claims for relief are effective upon filing so long as the claim is complete.

Any such family office that is operating as of December 1, 2012 must file the claim before December 31, 2012, and any such family office that begins operating after December 1, 2012 must file the claim within 30 days after it begins to operate as a family office. In addition, any such family office must confirm that it is a family office within the meaning of Rule 202(a)(11)(G)-1 before March 31, 2013 unless it begins to operate after such date, in which case it must make such confirmation within 30 days after it begins to operate as a family office.  

Funds of Funds

On November 29, 2012, the Division also granted no-action relief from CPO registration to operators of funds of funds until the later of June 30, 2013 or six months from the date that the Division issues revised guidance on the application of the de minimis thresholds under CFTC Rules 4.5 and 4.13(a)(3) to operators of funds of funds.

The no-action letter responds to concerns from operators of funds of funds that, absent relief, such persons could be required to register with the CFTC by December 31, 2012 as a result of a fund of funds indirect exposure to commodity interests. Appendix A to Part 4 of the CFTC regulations (“Appendix A”) provides a mechanism to apply the de minimis thresholds of CFTC Rule 4.13(a)(3) to a fund of funds’ operations. Although the CFTC rescinded Appendix A in February 2012, it indicated in August 2012 that operators of funds of funds could continue to rely on Appendix A until revised guidance was adopted, as discussed in the September 26, 2012 Investment Management Regulatory Update. Nevertheless, operators of funds of funds expressed concerns that future material changes to the Appendix A guidance may pose operational challenges due to the lack of visibility that a fund of funds may have into the positions of its underlying funds. The CFTC had also received requests that future guidance be broadened to address the application of the de minimis thresholds of CFTC Rule 4.5 to operators of funds of funds that are registered investment companies under the Investment Company Act. As a result of the foregoing, the CFTC determined that it was appropriate to provide a temporary delay in the registration requirement for operators of funds of funds.

In order for an operator of a fund of funds to rely on this temporary relief, the operator must (i) file a claim by emailing the Division a statement, signed by the operator, that includes certain basic identification and contact information listed in the no-action letter before December 31, 2012 and (ii) remain in compliance with the following criteria:  

  1. the person currently structures its operations in whole or in part as an operator of one or more funds of funds,
  2. the amount of commodity interest positions to which the fund of funds is directly exposed does not exceed the levels specified in CFTC Rule 4.5 or 4.13(a)(3)(ii) (as applicable),
  3. the person does not know or could not have reasonably known that the fund of funds’ indirect exposure to commodity interests derived from contributions to its underlying funds exceeds the levels specified in CFTC Rule 4.5 or 4.13(a)(3)(ii) (as applicable) (either calculated directly or through Appendix A), and
  4. the fund of funds is either (a) an investment company registered under the Investment Company Act or (b) compliant with the requirements set forth in CFTC Rules 4.13(a)(3)(i), (iii) and (iv).

Claims for relief are effective upon filing so long as the claim is materially complete.

For more information on CFTC Rules 4.5 and 4.13(a)(3), please see the February 23, 2012 Client Memorandum: CFTC Adopts Amendments to Registration Exemptions for CPOs and CTAs and Proposes Harmonization Rules for Registered Fund CPOs and the September 26, 2012 Investment Management Regulatory Update.  

  • See a copy of the CFTC’s no-action letter granting relief to operators of funds of funds  

Business Development Companies

On December 4, 2012, the Division granted no-action relief from CPO registration to an operator of any entity that has elected to be treated as a business development company (“BDC”). In order for any such operator of a BDC to rely on this relief, (i) the operator of the BDC must file a claim by emailing the Division a statement, signed by a person authorized to bind the BDC, that includes certain basic identification and contact information listed in the no-action letter and (ii) the BDC must satisfy the following criteria:

  1. the BDC has elected to be treated as a BDC under Section 54 of the Investment Company Act and continues to be regulated by the SEC as a BDC,
  2. the BDC will not be, and has not been, marketing 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  
  3. either (1) the BDC uses commodity futures, commodity options contracts or swaps solely for bona fide hedging purposes within the meaning and intent of CFTC Rules 1.3(z)(1) and 151.5, provided that with respect to any such instruments that do not come within the meaning and intent of such CFTC rules, the aggregate initial margin and premiums required to establish such positions do not exceed 5% of the liquidation value of the BDC’s portfolio (after taking into account unrealized profits and losses on any such instruments it has entered into) or (2) the aggregate net notional value of commodity futures, commodity options contracts or swaps positions not used solely for bona fide hedging purposes within the meaning and intent of CFTC Rules 1.3(z)(1) and 151.5, determined at the time the most recent position was established, does not exceed 100% of the liquidation value of the BDC’s portfolio (after taking into account unrealized profits and losses on any such positions it has entered into).

An operator of any such BDC that is operating as of December 1, 2012 must file the claim before December 31, 2012, and the operator of any such BDC that begins operating after December 1, 2012 must file the claim within 30 days after it begins to operate as a BDC. Claims for relief are effective upon filing so long as the claim is materially complete.