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CFTC Adopts Amendments to CPO and CTA Registration and Reporting Requirements

mark.highman@cwt.com's picture
Commentary by Mark Highman

The CFTC adopted amendments (see here and here) that incorporate CFTC staff guidance regarding CPO and CTA registration and reporting requirements into Part 4 of the CFTC Rules. As previously covered, the CFTC approved the final rule amendments on November 25, 2019.

Specifically, the CFTC:

  • adopted CPO and CTA registration exemptions for qualifying family offices, in line with the SEC exclusion from investment adviser registration under the Investment Advisers Act of 1940;
  • adopted JOBS Act amendments permitting general solicitation of offerings in private pools that are operated under the "registration-lite" regime of CFTC Rule 4.7 and the limited derivatives trading exemption in CFTC Rule 4.13(a)(3);
  • clarified that the appropriate entity to claim an exclusion from CPO registration under CFTC Rule 4.5, with respect to an SEC-registered investment company (a "RIC"), is the RIC's investment adviser;
  • adopted an exclusion from CPO registration for investment advisers to business development companies ("BDCs") in CFTC Rule 4.5, subject to the same conditions as for investment advisers to RICs;

  • adopted an amendment to clarify that "non-United States persons," as defined in CFTC Rule 4.7, are eligible to invest in commodity pools operated under CFTC Rule 4.13(a)(3); and
  • adopted exemptions from reporting on Forms CPO-PQR and CTA-PR for CFTC-registered CPOs and CTAs that exclusively operate pools or advise accounts in accordance with an exemption from registration.

These amendments will become effective 30 days after publication in the Federal Register. With respect to RICs, if an entity other than the RIC’s investment adviser has currently filed a notice of eligibility to claim the exclusion from CPO registration under CFTC Rule 4.5, the RIC’s investment adviser must file the requisite notice by March 1, 2021 to claim the exclusion as the RIC’s designated CPO under the amended rule. Investment advisers to BDCs should, however, make the requisite Rule 4.5 filings "as soon as practicable" after the amendments go into effect (i.e., 30 days after publication in the Federal Register).

The CFTC decided not to adopt certain proposals set forth in its October 2018 Notice of Proposed Rulemaking (or the "Proposing Release"). Specifically, the CFTC decided not to adopt amendments to:

  • require firms claiming an exemption from CPO registration under CFTC Rule 4.13 to certify that neither they nor their principals are subject to a statutory disqualification under the Commodity Exchange Act;
  • provide a registration exemption for CPOs that solicit and/or accept funds from only non-U.S. persons for participation in offshore commodity pools; and
  • permit the U.S.-based CPO of an offshore commodity pool to maintain the commodity pool's original books and records at the offshore location of the pool.

Commentary

This is a measured rule release that incorporates existing CFTC staff no-action relief into Part 4 of the CFTC Rules. Just as significant as what the CFTC included in the rule release is what the CFTC chose to omit:

Cross-Border Regulation: The CFTC decided to defer consideration of certain proposals affecting CPOs engaged in cross-border activities in light of concerns that the proposals "could have a significant impact on the compliance burdens of CPOs operating outside of the United States." The CFTC did, however, codify existing guidance that "non-United States persons," as defined in CFTC Rule 4.7, are eligible to invest in commodity pools operated under CFTC Rule 4.13(a)(3). The Release noted that certain commenters had requested that firms be permitted to rely on the "non-U.S. person" definition in Regulation S under the Securities Act of 1933. However, in line with existing guidance, the CFTC maintained the requirement that to be eligible to invest in Rule 4.13(a)(3) pools, non-U.S. investors must fall within the definition of "non-United States person" in CFTC Rule 4.7. This means that firms conducting ("Reg. S") offerings of interests in pools operated under Rule 4.13(a)(3) (sometimes referred to as "Super Reg. S offerings") must continue to qualify investors as non-U.S. persons under both Reg. S and CFTC Rule 4.7.

Statutory Disqualification: The CFTC decided not to adopt a proposal to require CPOs claiming a registration exemption under CFTC Rule 4.13 to certify that neither they nor their principals are subject to a statutory disqualification. This proposal would have imposed considerable compliance burdens on exempt firms, and marked a radical departure from long-standing practice, which requires statutory disqualification screening only for firms registering with the CFTC, but not for those claiming an exemption from registration. CFTC Commissioner Dan Berkovitz dissented, arguing that "disqualified persons should be disqualified" regardless of whether they are registering with the CFTC or operating pursuant to an exemption from registration.

Family Offices: The CFTC did not adopt a proposal to require family offices to file notices claiming exemption from registration. The CFTC acknowledged privacy concerns for family offices making public filings, and the reduced investor protection concerns applicable to family offices, whose participants are family members, not public investors. Commissioner Berkovitz voted against this proposal, noting the need to identify family offices due to their potential to be a disruptive market force. Query if this objection is justified in light of information available about systemically important firms through the CFTC's large trader reporting system.

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