CFTC staff clarifies that a director, general partner or managing member of a commodity pool delegating its CPO responsibilities must seek registration relief and provides a streamlined process.
On May 12, 2014, the staff of the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Exchange Commission (the “CFTC”) issued a letter (“Letter 14-69”) providing a non-exclusive, “streamlined” process for commodity pool operators (“CPOs”) to seek CPO registration relief from the Division staff.1 This registration relief will be available to CPOs (the “Delegating CPOs”) that have delegated investment management authority as a CPO of a commodity pool to another CPO registered with the CFTC (the “Designated CPO”) and that submit the mandated form of no-action request letter, subject to the conditions set forth in Letter 14-69.
Letter 14-69, on its own, does not provide relief from CPO registration, but establishes a process for Delegating CPOs to seek registration relief. It also supplements the Division’s prior guidance from August 2012 regarding CPO delegation (the “CPO/CTA FAQ”).2 The issuance of Letter 14-69 is a clear indication that the Division now requires Delegating CPOs to submit no-action requests in order to secure registration relief.
Delegating CPOs that meet the criteria specified in Letter 14-69 may utilize the streamlined no-action process described therein, whereas Delegating CPOs that do not meet those criteria must submit no-action requests under the Division’s traditional approach.3 The Division has indicated that it will grant such bespoke no-action relief under appropriate circumstances although such requests would be handled in the ordinary course and not pursuant to the “streamlined” process contemplated in Letter 14-69.
Persons who meet the definition of “commodity pool operator” (“CPO”) under the Commodity Exchange Act (“CEA”) and operate within the jurisdiction of the CFTC are required to register as CPOs, subject to applicable exceptions and exemptions set forth in the CEA and CFTC rules. Accordingly, a private pool’s general partner, manager or directors, or any special purpose vehicle serving as the general partner or manager of the pool, would, in the CFTC’s view, be a presumptive CPO and each would have to register with the CFTC as a CPO of the pool, absent relief. Through a series of no-action letters dating back over 20 years, the staffs of the Division and its predecessors have provided relief from this registration requirement for persons that have delegated their pool operator responsibilities to a registered CPO, subject to additional conditions and requirements, as described in the applicable no-action letters.
In August 2012, the Division issued generalized CPO delegation guidance through the CPO/CTA FAQ, which appeared to extend the individualized relief provided by the prior no-action letters to qualifying CPOs who met the conditions articulated therein. The Division explained that a general partner, managing member or board of directors that would otherwise be required to register as a CPO may delegate its rights and obligations to a Designated CPO, and thereby avoid CPO registration with respect to the applicable commodity pool, as long as (1) the Designated CPO is qualified to serve as a CPO, (2) the Designated CPO is registered with the CFTC as a CPO, (3) the Designated CPO has agreed to assume the rights and obligations of a CPO—particularly with respect to compliance with the CEA and CFTC rules, and (4) the Delegating CPO agrees to be jointly and severally liable with respect to any violations of the CEA. As the CPO/CTA FAQ did not indicate that individual relief was necessary and the Division staff did not otherwise address whether registration relief under the CPO/CTA FAQ was self-executing, uncertainty existed as to whether registration relief applied automatically to CPOs whose situation satisfied the terms of the CPO/CTA FAQ or whether individualized no-action letter requests would still need to be filed with the Division.
By its terms, Letter 14-69 clarifies and supplements the CPO/CTA FAQ, although Letter 14-69 makes no reference to the CPO/CTA FAQ.4 Letter 14-69 requires that Delegating CPOs submit no-action requests to the Division in order to secure registration relief, streamlines the approach for requesting such no-action letters and suggests that CPOs must memorialize their delegation arrangements and joint and several liability agreements in written form.5
Conditions of Letter 14-69
In order to obtain relief from the Division pursuant to the process described in Letter 14-69, a Delegating CPO must satisfy the following requirements (the “Criteria”):
- The Delegating CPO must have delegated all of its investment management authority as a CPO over a commodity pool to a Designated CPO pursuant to a legally binding document.6
- The Delegating CPO must not participate in the solicitation of pool participants or manage any property of the commodity pool.7
- The Designated CPO must be registered as a CPO with the CFTC.
- The Delegating CPO must not be subject to a statutory disqualification under the CEA.8
- The business purpose for the Delegating CPO and the Designated CPO being separate entities must not be solely to avoid the Delegating CPO’s registration requirements.
- The Designated CPO must maintain the Delegating CPO’s books and records with respect to the underlying commodity pool pursuant to CFTC Rule 1.31.
- If the Delegating CPO and Designated CPO are both non-natural persons, one must control, be controlled by, or be under common control with the other.
- If the Delegating CPO is a non-natural person, the Delegating CPO and Designated CPO each must undertake, pursuant to a legally binding document, to be jointly and severally liable for any violation of the CEA or CFTC rules with respect to the operation of the commodity pool.
- If the Delegating CPO is a natural person and is a board member who is affiliated with the Designated CPO,9 the Delegating CPO and Designated CPO must have executed a legally binding document whereby each agrees to be jointly and severally liable for any violation of the CEA or CFTC rules with respect to the operation of the commodity pool.
- If the Delegating CPO is a natural person and is not a board member who is affiliated with the Designated CPO, the Delegating CPO must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.
The Criteria raise a number of difficult interpretive questions and should be evaluated carefully against the relevant facts and circumstances before a Delegating CPO seeks relief from the Division staff pursuant to the process described in Letter 14-69.
Form Request Letter for No-Action Relief
Letter 14-69 includes, as an attachment, a form no-action request letter (the “Relief Request Form”) that must be used by all Delegating CPOs seeking to take advantage of the streamlined process for requesting relief.10 The Relief Request Form requires that the Delegating CPO and Designated CPO certify the veracity of the material information set forth in the request, that the Designated CPO has been designated as the registered CPO of the particular commodity pool(s) in question, and that the Designated CPO meets the Criteria, among other information. The certifications necessary in the Relief Request Form may be signed by authorized representatives of the Delegating CPO and Designated CPO. Delegating CPOs may use a single Relief Request Form to seek registration relief with respect to multiple commodity pools. However, any no-action letter request, whether submitted on the Relief Request Form or as an individualized no-action request, only seeks relief for the particular CPO submitting the request.
Requesting No-Action Relief
Each Delegating CPO must submit, or be included in, a no-action request to the Division in order to obtain registration relief. Not every Delegating CPO, however, will be able to take advantage of the streamlined process. The Relief Request Form should only be used by CPOs whose delegation meets the Criteria. CPOs whose delegation situations do not satisfy the Criteria and do not fit an exemption such as Rule 4.13(a)(3) should instead submit an individualized no-action request for CPO registration relief. Given the uncertainty created by the CPO/CTA FAQ and the previous long-standing market practice of relying on no-action letters provided to other CPOs, rather than writing in for individual relief, there are likely a very large number of CPOs who need now to write in for relief under the streamlined process or otherwise submit bespoke requests. Such CPOs may also need to amend their delegation arrangements to add a joint and several liability component. The Division has noted that it is continuing to consider whether to extend the streamlined approach to additional delegation scenarios not covered by Letter 14-69, and thus, the Division may provide further relief in the future.