by Susan I. Gault-Brown, Cary J. Meer and Lawrence B. Patent
CFTC's proposed rule amendments would subject operators of private funds that trade futures contracts, commodity options, and swaps to commodity pool regulation and may subject private fund advisers to dual SEC/CFTC regulation.
On January 26, 2011, the Commodity Futures Trading Commission ("CFTC") proposed rescinding several exemptive rules (the "Private Fund Exemptive Rules"), adopted in 2003, that many operators (general partners/managing members) of private funds that directly or indirectly trade futures contracts and commodity options, and advisers to such funds, rely on to exempt themselves from registration as commodity pool operators ("CPOs") - Rules 4.13(a)(3) and 4.13(a)(4) - and from registration as commodity trading advisors ("CTAs") - Rule 4.14(a)(8)(i)(D).CFTC Rule 4.13(a)(3) currently provides an exemption from registration as a CPO for operators of certain private funds - particularly funds excluded from investment company regulation pursuant to Investment Company Act of 1940 ("ICA") Section 3(c)(1) ("Section 3(c)(1) Funds") - provided that the private funds limit their trading of futures contracts and commodity options. CFTC Rule 4.13(a)(4) currently provides a CPO registration exemption for operators of certain private funds - particularly funds excluded from investment company regulation pursuant to ICA Section 3(c)(7) ("Section 3(c)(7) Funds") - without limiting the funds' trading of futures contracts or commodity options, provided that the funds are offered only to certain highly sophisticated investors. CFTC Rule 4.14(a)(8)(i)(D) currently provides an exemption from registration as a CTA for certain advisers to these private funds, subject to certain other conditions.If adopted, the CFTC's proposal to rescind the Private Fund Exemptive Rules would require operators of private funds that wish to continue or begin trading futures contracts, commodity options, and - as of July 16, 2011 - swaps (together, "commodity interests"), to register as CPOs. Likewise, if adopted, the CFTC proposal would require certain advisers to private funds that continue or begin to trade commodity interests to register as CTAs. Importantly, as of July 21, 2011, many of these advisers will also be subject to investment adviser regulation by either the Securities and Exchange Commission ("SEC") or one or more states. As a result, if the CFTC's proposal is adopted, advisers to private funds that trade commodity interests likely will be subject to dual SEC/CFTC regulation.
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Susan I. Gault-Brown is a partner in K&L Gates' Washington, D.C. office and a member of the Investment Management practice group. She advises participants in the financial services industry, including investment advisers to hedge funds, private equity funds, and venture capital funds, registered open-end and closed-end funds, real estate funds, business development companies, investment banks, and broker-dealers, on regulatory, transactional and counseling matters involving the securities and commodities laws. She also regularly provides advice with respect to exemptions, no-action letters, and other forms of regulatory relief.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.Lawrence B. Patent is of counsel in the firm's Washington, D.C. office. His principal areas of concentration are investment management, commodity futures, financial services and derivatives matters.
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