CFTC Staff Grants Registration Relief for Operators of QEP Pools
Commentary by Mark Highman
The CFTC’s Market Participants Division ("MPD") granted no-action relief that effectively reinstates the "QEP Exemption" under former CFTC Rule 4.13(a)(4) for certain private fund managers.
The relief permits eligible fund managers to withdraw from registration as Commodity Pool Operators ("CPOs") and Commodity Trading Advisors ("CTAs") pending CFTC rulemaking.
CFTC Letter No. 25-50 provides that a CPO deregistering in reliance on CFTC Letter 25-50 is not required to offer investors a right to redeem.
The relief is available to operators of QEP pools ("QEP Managers") who meet the following conditions:
- SEC Registration: The QEP Manager must be registered with the SEC as an investment adviser.
- Private Offering: Pool interests must be exempt from Securities Act registration and sold without marketing to the public in the United States (provided that the marketing prohibition does not apply to pool interests offered pursuant to Rule 506(c) ("Exemption for limited offers and sales without regard to dollar amount of offering") of SEC Regulation D.
- QEP Investors: Each pool participant must meet the "Qualified Eligible Person" ("QEP") definition under CFTC Rule 4.7(a)(6) ("Qualified eligible person").
- Reporting: The QEP Manager must file Form PF with respect to pools covered by the CFTC relief, which is received by the CFTC.
- Notice and Compliance: The QEP Manager must file a notice of reliance on CFTC Letter 25-50 via email to the MPD, which will be effective on filing.
- Ongoing Requirements: The QEP Manager must comply with applicable requirements of CFTC Rules 4.13(b) and (c) ("Exemption from registration as a commodity pool operator"), including (i) filing an annual affirmation notice of reliance on CFTC Letter 25-50, and (ii) maintaining records prepared in connection with its activities as a CPO for five years from the date of preparation.
Commentary
This letter is of particular relevance to private commodity pools offered to "qualified purchasers" in reliance on the exclusion from registration as an investment company under Section 3(c)(7) of the Investment Company Act. Unlike the de minimis exemption in CFTC Rule 4.13(a)(3), the relief for QEP Pools does not impose any limits on the volume of derivatives trading and is thus available to private funds pursuing speculative commodity derivatives trading strategies.
It is significant that the CPOs de-registering in reliance on the CFTC relief will not be required to offer investors a right to redeem. This addresses industry concerns that requiring CPOs to offer investors a right to redeem in connection with de-registering would be economically unfeasible for private funds holding illiquid assets and may be inconsistent with a fund’s governing documentation.
In addition to the CFTC filing requirement, firms intending to deregister in reliance on CFTC Letter 25-50 should consider notice requirements to investors under fund documents, updates to offering documents, and compliance with ongoing requirements as an exempt CPO, including annual affirmation of reliance on the CFTC relief and recordkeeping requirements.