On December 4, 2012, the Division of Swap Dealer and Intermediary Oversight (the "DSIO") of the Commodity Futures Trading Commission (the "CFTC") issued CFTC Letter No. 12-40 (the "No-Action Letter"). The No-Action Letter grants relief from the commodity pool operator ("CPO") registration requirements for advisers of business development companies ("BDCs") that file a claim with the DSIO requesting such relief by December 31, 2012. Relief is necessary after the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 revised the definitions of "commodity pool" and "commodity pool operator" under the Commodity Exchange Act to expand the meaning of “commodity interests” to include any swap. This has resulted in commodity pool status being conferred on funds and similar enterprises that engage in swap activities, even if such activity is limited to trading in only one swap contract. As a result, operators of funds falling within the definition of a "commodity pool" will have to register with the CFTC as a CPO by December 31, 2012, unless regulatory exclusion or no-action relief is available.
BDCs are entities created by, and subject to regulation under, the Investment Company Act of 1940 (the "ICA"). Although CFTC Regulation 4.5 provides an exclusion from the CPO definition for "an investment company registered as such under the Investment Company Act of 1940," a BDC is not technically a registered investment company because it is exempt from registration under the ICA by virtue of its BDC election. Therefore, since BDCs are not technically registered investment companies, CFTC Regulation 4.5 as drafted does not apply to BDCs. However, because of the similarities between registered investment companies and BDCs, the DSIO has decided not to recommend that the CFTC take enforcement action against the operator of a BDC provided that the BDC satisfies the following criteria:
- The BDC has elected to be treated as a BDC under Section 54 of the Investment Company Act of 1940 with the SEC, and continues to be regulated by the SEC as a BDC;
- 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
- The BDC uses commodity futures or commodity options contracts, or swaps solely for bona fide hedging purposes; provided, however, that in addition, with respect to positions in commodity futures or commodity option contracts, or swaps that are not used for hedging purposes, the aggregate initial margin and premiums required to establish such positions do not exceed 5 percent of the liquidation value of the BDC’s portfolio (after taking into account certain adjustments); or
- The aggregate net notional value of commodity futures, commodity options contracts, or swaps positions not used solely for bona fide hedging purposes, determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the BDC’s portfolio (after taking into account certain adjustments).
Importantly, the No-Action Letter is not self-executing. Therefore, any BDC that plans to take advantage of the no-action relief must file a claim for relief with the DSIO by December 31, 2012. A claim submitted by a CPO will be effective upon filing and is required to be signed by an authorized person and include only basic contact information.