CFTC Streamlines Process for CPO Delegation (CFTC Letter 14-69) (with Mehta Comment)

On May 12, 2014, the CFTC's Division of Swap Dealer and Intermediary Oversight ("DSIO") issued its long-awaited advisory (the "Advisory") as to its streamlined approach in requesting no-action relief for CPO delegation in the context of pools requiring a registered CPO (i.e., CFTC Rule 4.7 pools). With the rescission of CFTC Rule 4.13(a)(4), coupled with the inclusion of swaps in the definition of a commodity pool, there was an increase in the number of registered CPOs and, accordingly, in the number of requests for no-action relief for CPO delegation. The intent of the streamlined approach is to assist many industry participants in requesting no-action relief in the appropriate form and in a timely manner. CPOs that cannot satisfy the criteria set forth in the Advisory may continue to request relief by separate letter submissions.

In order to utilize the streamlined approach, the Advisory sets forth the criteria to be met by both the delegating CPO and the designated CPO and the process to request relief. The satisfying criteria include:

(1) Contractual Authority of Designated CPO and Restriction on Activities of Delegating CPO. The delegation of all investment management authority from the delegating CPO to the designated CPO with respect to the applicable pool must be pursuant to a legally binding document. In terms of its continued role, the delegating CPO does not participate in the solicitation of participants for the pool and does not manage any property of the commodity pool.

(2) CPO Is a Registered CPO. The designated CPO is a registered CPO.

(3) Statutory Disqualification. The delegating CPO is not subject to any statutory disqualification under CEA Sections 8(a)(2) and 8(a)(3).

(4) Business Purpose. There is a business purpose (i.e., tax reasons) for the designated CPO's being a separate entity from the delegated CPO that is not solely the avoidance of CPO registration.

(5) Books and Record Requirement. Books and records will be maintained by the designated CPO in accordance with CFTC Rule 1.31.

(6) Common Control for Entity CPO Delegations. If the delegating CPO and the designated CPO are each a non-natural person, then one such CPO controls, is controlled by, or is under common control with, the other CPO.

(7) Joint and Several Liability Undertaking for Entity CPO Delegations. If a delegating CPO is a non-natural person, then such delegating CPO and the designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC's regulations by the other in connection with the operation of the commodity pool.

(8) Joint and Several Liability Undertaking for Affiliated or Inside Director CPO Delegations. If a delegating CPO is a natural person and is not an "Unaffiliated Board Member," as defined in the Advisory, then such delegating CPO and designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or CFTC's regulations by the other in connection with the operation of the commodity pool.

(9) No Requirement for Joint and Several Liability Undertaking for Unaffiliated Board Member Delegations. If a delegating CPO is an Unaffiliated Board Member, then such delegating CPO must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.

In order to request relief, DSIO attached the form of the letter and certifications to the Advisory that should be submitted to the CFTC by the delegating CPO. Together with the request for relief, the designated CPO must acknowledge its role as registered CPO and that it satisfies all the requisite criteria set forth in the Advisory. To streamline the process further, a single letter may be submitted by a delegating CPO with respect to multiple commodity pools.

It appears that no-action relief requests are not effective upon submission to the CFTC. Instead, DSIO intends to issue responses to each no-action letter submitted in accordance with the Advisory.

Mehta Comment: DSIO issued its CPO delegation advisory at an appropriate time. With newly registered CPOs recently completing the first year of submission of audited annual financial statements for certain pools (i.e., 4.7 pools), the NFA has focused on confirming whether CPO delegation no-action letters were sought or given in any pool structure in which the technical CPO (i.e., the general partner of a limited partnership, managing member of a limited liability company or director of an offshore corporation) was not the registered CPO (i.e., the investment manager). Industry participants were not clear as to the obligation to file, which form to file or even who should file for the requested no-action relief.The Advisory adds some clarity as to the CFTC's expectations regarding the CPO delegation process. In submitting the no-action relief, CPOs (delegating and designated) should review current pool structures and focus on the criteria in qualifying for the CPO registration no-action relief, namely: (1) whether there is a "legally binding document" in place documenting the delegation and the joint and several liability undertaking in entity and inside director delegations (in which case pool constituent documents and/or investment management agreements may need to be amended or revised or CPO delegation agreements created); (2) the business purpose for any delegation other than avoiding registration; (3) for entity-to-entity delegations, whether there is a "common control" of the entities; and (4) the role of an inside director and whether an independent director of a pool managed by a board of directors (i.e., an offshore pool) meets the criteria of an "Unaffiliated Board Member" (which means that the independent director does not need to undertake joint and several liability with the designated CPO). In the advisory, CFTC also states that, if the qualifying criteria set forth in the letter cannot be met, a CPO may still approach the CFTC for specific no-action relief. See CPO Delegation: Form of CFTC No-Action Request Letter (with Lofchie Comment and YouTube Link) (from May 29, 2013).

See: CFTC Letter 14-69; CFTC Press Release.