CFTC Simplifies Rules for Asset Managers

Recently, the U.S. Commodity Futures Trading Commission (the “CFTC”) approved amendments to Regulations 4.5, 4.7, 4.13, 4.14, and 4.27 that will impact investment managers that are operating funds that fall within the definition of a commodity pool. These new regulations will take effect on January 9, 2020.[1]

Some key highlights of the amendments include:

• The codification of existing no-action registration relief for commodity pool operators (“CPO”) and commodity trading advisors (“CTA”) for “family offices”[2] (the “Family Office No-Action Letters”);
• Updates to Regulations 4.7 and 4.13(a)(3) to permit the general solicitation of pool investors as envisioned under the JOBS Act;
• The adoption of an amendment to clarify that non-United States persons[3] are eligible to invest in pools operated under Regulation 4.13(a)(3) regardless of such persons’ financial sophistication; and
• The adoption of exemptions from reporting on Forms CPO-PQR and CTA-PR for registered CPOs/CTAs that exclusively operate pools or advise accounts in accordance with an exemption from registration.

Family Office Rules

In 2012, the U.S. Securities and Exchange Commission (the “SEC”) adopted the term “family office” and excluded such entities from registration as an “investment adviser” under the Investment Advisers Act of 1940,as amended. Rather than take the same approach by adopting a regulatory exclusion, the CFTC provided relief from registration as a CPO or CTA on terms similar to the SEC’s “family office” exclusion through a series of no-action letters.

The CFTC’s current amendments codify the relief granted in the Family Office No-Action Letters. To further the harmonize CFTC and SEC rules, a CPO will be exempt if pool interests are exempt from registration under the Securities Act of 1933 (the “Securities Act”), such interests are sold only to “family clients”[4], the CPO qualifies as a “family office”, and the CPO reasonably believes, at the time of the investment (or at the time of conversion for an existing pool converting to a family office), that each participant in the pool is a “family client” of the “family office.”[5] Note that an exempt CPO will still be required to make and keep all books and records prepared in connection with its activities as the operator of the family office for a period of five years from the date of preparation.

Additionally, a person is exempt from registering as a CTA if the person directs commodity trading advice solely to, and for the sole use of, “family clients.”

An exempt CPO or CTA will not be required to file a notice of exemption with the National Futures Association or the CFTC to claim either of these family office exemptions.

The Family Office No-Action Letters will be superseded once the amended regulations go into effect on January 9, 2020. As a result, a CPO or CTA relying on the Family Office No-Action Letters should create and maintain an internal record documenting the relevant new exemption it wishes to claim, as well as its qualification for such exemption.

Further JOBS Act Harmonization

The CFTC adopted amendments to Regulations 4.7(b) and 4.13(a)(3) to permit CPOs to engage in general solicitation for pool interests in accordance with SEC Rule 506(c) or 144A without jeopardizing the availability of the Regulation 4.7 or 4.13(a)(3) exemption for such pools. These amendments largely codify existing CFTC no-action letter positions adopted in 2014 following the enactment of the JOBS Act.

CPO-PQR and CTA-PR Reporting

Regulation 4.27 requires a registered CPO or CTA that is a “Reporting Person” to file Forms CPO-PQR and CTA-PR, respectively. Under the amended regulations, the definition of “Reporting Person” will be changed (1) to exempt CPOs from filing Form CPO-PQR if they have claimed either an exclusion under Regulation 4.5 or an exemption from registration under Regulation 4.13 for all of the pools they operate, and (2) to exempt CFTC registered CTAs from filing Form CTA-PR if they do not direct the trading of any client accounts that trade commodity interests.

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[1] The final rule in the federal register can be found here.
[2] As defined under § 202(a)(11)(G)-1(b) of the Advisers Act of 1940, as amended.
[3] “Non-United States person” is defined in Regulation 4.7.
[4] As defined under § 202(a)(11)(G)-1(d)(4) of the Advisers Act of 1940, as amended.
[5] The description of the CPO no-action letter regime can be found here. The no-action letter for CTAs can be found here.