CFTC Staff Responds to FAQs Regarding Rescission/Modification of CPO/CTA Registration Exemptions

by Lawrence B. Patent and Cary J. Meer

Excerpt:

The Division of Swap Dealer and Intermediary Oversight ("DSIO") of the Commodity Futures Trading Commission ("CFTC") issued responses on August 14, 2012 to frequently asked questions ("FAQs") submitted by several trade associations, the National Futures Association ("NFA") and law firms in the wake of the CFTC's amendments to its regulations governing commodity pool operators ("CPOs") and commodity trading advisors ("CTAs") adopted earlier this year. The FAQs address who must register as a CPO and an associated person ("AP") of such CPO, how to comply with the remaining CPO registration exemption under CFTC Regulation 4.13(a)(3), and various transition and compliance date issues.

The CFTC amendments rescinded the CPO registration exemption for operators of private funds who limit their investors to highly sophisticated persons (and rescinded the related exemption for advisers to private funds) and modified the exclusion relied on by operators of registered investment companies ("RICs") from registration as a CPO or CTA under CFTC Regulations 4.5, 4.13(a)(4) and 4.14(a)(8). When the amendments were adopted, the CFTC permitted CPOs and CTAs that filed exemption/exclusion notices in accordance with these regulations prior to the effective date of the rescission/modification, April 24, 2012, to continue to operate under the prior exemption/exclusion through December 31, 2012. For commodity pools created on or after April 24, 2012, however, the rescinded exemption and unmodified exclusion can no longer be claimed by operators or advisors of such pools. On July 13, 2012, DSIO issued a no-action letter that essentially extends the effective date of the exemption rescission and the modification of the exclusion for pools launched after the issuance of the letter until December 31, 2012. [footnotes omitted]

Who Must Register as a CPO?

Many RICs use a controlled foreign corporation ("CFC") to trade directly in the commodity interest markets, with the RIC only having exposure to the commodity interest markets through the CFC. When the CFTC adopted the amendments, it stated that the RIC's adviser may be considered the CPO of the RIC and register as such. DSIO stated that the RIC's CPO should also be the CPO for the CFC, to the extent that the RIC's CPO makes the determination regarding the engagement of CTAs and the allocation of CFC assets. DSIO also stated that any wholly-owned trading subsidiary of a commodity pool shall be deemed to be and regulated as a commodity pool. DSIO further stated that, even though a RIC's adviser may register as the CPO rather than the board of directors or trustees of the RIC itself, the board of directors or trustees are still subject to prohibitions under the CEA that are applicable to all market participants, including, but not limited to, the anti-fraud and anti-manipulation proscriptions, as well as the CEA's private right of action provisions.

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Lawrence B. Patent joined K&L Gates in 2008 after serving more than thirty years as an attorney with the CFTC, the last five as the Deputy Director of the Division of Clearing and Intermediary Oversight. Mr. Patent regularly counsels businesses with respect to commodity interest trading compliance and the legal requirements governing trading in over-the-counter derivatives and exchange-traded futures, including both international and U.S. markets. His clients include, among others, hedge funds, currency dealers, commodity pool operators, commodity trading advisors, futures commission merchants, and introducing brokers.

Cary J. Meer is a partner in K&L Gates' Washington, D.C. office and a member of the Investment Management practice group. She focuses her practice on private investment companies, including hedge and private equity funds, negotiated mergers and acquisitions of investment advisers and broker-dealers, derivatives and related areas.