Goodbye CFTC Exemptions – Hello Registration?

On February 9, 2012, the Commodity Futures Trading Commission (“CFTC“) rescinded certain exemptions from registration previously available to private funds and SEC-registered investment companies that trade in commodity interests.

Most importantly, the CFTC rescinded the exemption from “commodity pool operator (“CPO“) registration set forth in Rule 4.13(a)(4) under the Commodities Exchange Act (“CEA“), which was widely used by 3(c)(7) funds. The exemption allowed funds offered to “qualified eligible persons” (“QEPs“), which include “qualified purchasers”, and their CPOs (i.e. the general partners of the funds) to do unlimited trading in futures and options without registering with the CTFC.

The CFTC also rescinded the corollary exemption available to “commodity trading advisers (“CTAs“) who advised funds operated by CPOs exempt under 4.13(a)(4). This exemption was set forth in Rule 4.14(a)(8).

At the same time as these two widely used exemptions were rescinded, the CFTC expanded the definitions of “commodity pool”, “CPO” and “CTA” to include swaps (although the inclusion of swaps is presently ineffective pending further definition by the CFTC and the SEC).

Thus, general partners and investment advisers who were exempt under the rescinded exemptions now have three options:

  • Avoid trading in instruments that would make their funds qualify as commodity pools;[1]
  • Rely on an alternative available exemption; or
  • Register with the CFTC/NFA.

Important deadlines

CPOs and CTAs currently claiming exemptions under the rescinded rules have until December 31, 2012 to register or avail themselves of another exemption.

CPOs and CTAs not currently claiming exemptions have until April 24, 2012 to register, so the compliance time frame for those operators is significantly shorter.

It is thus critical that CPOs and CTAs of 3(c)(7) funds review their records to ensure that an exemption was properly filed on their behalf with the CTFC, and if not, file for such an exemption before April 24 so that they would not be required to register (or rely on another exemption) before December 31, 2012.

New funds launched after April 24, 2012 and their CPOs and CTAs have to comply with the new rules upon formation if they trade in futures and options on futures.

If the new funds trade in swaps only, they will have to register only after the new definition of “swap” is adopted and specifically 60 days after the effective date of the final CFTC rulemaking defining the term.

Alternative exemptions available to CPOs

There are alternative exemptions that 3(c)(7) funds and their CPOs will be able to rely on after the rescission of the previously used exemptions under 4.13(a)(4) and 4.14(a)(8).

The exemptions that are still available are mainly found in Rules 4.13(a)(1), 4.13(a)(2) and 4.13(a)(3) of the CEA. The most important one is the “de minimis exemption” under Rule 4.13(a)(3) available to CPOs who operate funds that do limited trading in derivatives.

The “de minimis exemption” was previously used by 3(c)(1) funds but will now be used by 3(c)(7) funds as well. Although the new rules retained the exemption, they modified it to add swaps. This exemption from registration is available if one of the two following conditions is met:

  • the aggregate initial margin and premiums required to establish a fund’s positions in such instruments will not exceed 5% of the liquidation value of the fund’s portfolio (5% Trading Test); or
  • the aggregate net notional value of such instruments, determined at the time of the most recent position established, does not exceed 100% of the liquidation value of the fund’s portfolio) (Net Notional Test).

In addition:

  • the fund is not marketed as a vehicle trading in commodity interests (Marketing Restriction); and
  • the fund is only offered to accredited investors, knowledgeable employees, or QEPs in a private placement.

Note than the addition of swaps in the commodity interests traded under the “de minimis exemption” will make it more difficult to stay within the parameters of the exemption. Also note that it is often particularly difficult for fund-of-funds to comply with the rule since their compliance depends on the trading activities of the underlying funds.

Other available exemptions are the “closed pool” exemption under Rule 4.13(a)(1) and the “small pool “exemption under Rule 4.13(a)(2). These exemptions are of limited use, but can be helpful in particular to certain family offices.

The “closed pool” exemption provides registration relief to CPOs that operate only one pool at a time, do not receive any type of compensation; do not advertise; and are not otherwise required to be registered with the CFTC.

The “small pool” exemption covers all CPOs who operate one or more small pools that have received less than $400,000 in aggregate capital contributions and that have no more than 15 participants in any one pool, excluding (from both the $400,000 and the 15 participants calculation) certain family members.[2]

Finally, there is an exemption, subject to certain conditions, in Rule 3(c)(10) for foreign operators whose pools are organized offshore as well as an exemption from CPO registration for a person acting as an independent director or trustee of a commodity exchange-traded fund.

Alternative exemptions available to CTAs

There are a number of exemptions available to CTAs, but the most important ones are:

“Advisers to De Minimis Pools” Exemption – Rule 4.14(a)(8)(i)(D)

Advisers to pools that operate under the de minimis exemption will be themselves exempt if they are SEC-registered (or exempt from registration or excluded from the definition of investment adviser) and do not hold themselves out as CTAs provided that their commodity interest trading advice to such pools is solely incidental to their business of providing securities advice.

“Fewer than 15 Clients” Exemption – CEA § 4m(1).

This provision exempts from registration advisers that have not provided commodity interest trading advice to more than 15 clients during the prior 12 months and who do not hold themselves out as CTAs. A fund counts as a single client. This exemption is the CFTC equivalent of the private fund adviser exemption that was recently repealed by the SEC. Unlike the SEC, the CFTC has retained the 15-client exemption.

“Not Engaged Primarily in Trading Commodity Interests ” Exemption – CEA § 4m(3).

Under this provision, SEC-registered investment advisers are exempt from parallel CFTC registration if their business does not consist of “acting primarily” as a CTA and if they do not advise a pool that is “engaged primarily”[3] in trading commodity interests.

What do CPOS and CTAs have to do in order to be able to rely on an exemption

The above exemptions (with the exception of the CTA exemptions based on CEA § 4m(1) and CEA § 4m(3)) are not self-executing. CPOs and CTAs have to notice file with the CFTC in order to be able to rely on these exemptions. Under the new rules, fund managers have to confirm their claim of exemption and re-file a notice on an annual basis, and in particular within 60 days from calendar year-end. The notice of exemption must be filed electronically through NFA’s Electronic Exemption Filing System.

Consequences of registration

If a CPO or CTA cannot rely on an alternative exemption, it has to register with the CFTC/NFA. This means that fund managers will have to comply with extensive disclosure, reporting and recordkeeping requirements, including among others, the annual, or in some cases quarterly, filing of two new forms: Form CPO-PQR (for CPOs) and Form CTA-PR (for CTAs). For SEC-registered advisers who submit Form PF, only certain sections of the new forms must be completed.

Section 4.7-Registration “Lite

CPOs that register under the new regime may, however, be eligible for the registration “lite” regime under Rule 4.7, which provides for relatively limited disclosure, reporting and record keeping requirements for funds offered exclusively to QEPs. 3(c)(7) funds may be able to avail themselves of Rule 4.7.

Please contact us if you have any questions regarding the registration process.


[1] “Commodity interests” that could make a private fund a “commodity pool” include:

  • Futures (or options thereon), including financial futures, broad-based stock index futures, currency futures and security futures;
  • Off-exchange futures in foreign currency between certain permissible counterparties and non-eligible contract participants (“retail forex” transactions); and
  • Swaps (added by Dodd-Frank) which include, but are not limited to, swaps on interest rates, currency, broad-based stock indexes and credit default indexes.

[2] Persons excluded from the 15 participants and the $400,000 calculation are the pool’s operator, the CTA, principals of the CPO and CTA and any of their children, siblings or parents and the spouses of these persons. Also excluded from the calculation are relatives of these persons (and their spouses) who live in the same principal residence.

[3] A commodity trading advisor or a commodity pool shall be considered to be ‘engaged primarily’ in the business of being a commodity trading advisor or commodity pool if it is or holds itself out to the public as being engaged primarily, or proposes to engage primarily, in the business of advising on commodity interests or investing, reinvesting, owning, holding, or trading in commodity interests. CEA § 4m(3)(B).