CFTC Staff Issues No-Action Letter on QEP Exemptions

In a no-action letter, the CFTC’s Market Participants Division ("MPD") said it will not recommend an enforcement action against a registered commodity pool operator ("CPO") for treating certain officers as within the definition of "Qualified Eligible Persons" ("QEP").

Under CFTC Rule 4.7 ("Exemption from certain part 4 requirements for commodity pool operators with respect to offerings to qualified eligible persons"), operators of commodity pools whose participants are limited to "qualified eligible persons" and advisers whose clients are qualified eligible persons, may claim limited exemption from most CEA requirements by prescribed procedures.

The CPO sought exemptive relief to allow certain senior employees, referred to as Modeling and Engineering Officers, who do not meet the existing QEP Tenure Conditions under CFTC Regulation 4.7(a)(2)(viii)(A)(4) (the "QEP Tenure Conditions"), to invest in employee securities companies; that would also benefit from CFTC Rule 4.7.

Under the QEP Tenure Conditions, qualified eligible persons with respect to an exempt pool may include:

• An employee . . . engaged to perform legal, accounting, auditing or other financial services for, the exempt pool or the commodity pool operator..

The MPD said that permitting a specific subset of two Modeling and Engineering Officers to be treated as QEPs appropriately recognizes their specific education and professional expertise, as well as their deep knowledge and involvement with respect to the CPO and the highly technical nature of its fund operations, as reasonably equivalent to the work experience otherwise required by the QEP Tenure Conditions. In reaching a conclusion, the MPD noted:

• the small number of individuals as to whom relief was sought;
• those individuals were limited to the CPO's Modeling and Engineering Officers who are also financially sophisticated Accredited Investors;
• the individuals possess actual knowledge, familiarity and significant involvement in the CPO’s trading and fund operations; and
• the individuals receive detailed disclosures, as well as periodic and annual reporting from the CPO.