Background -

At the request of the Investment Adviser Association and the Managed Funds Association, the Division of Swap Dealer and Intermediary Oversight (“Division”) of the Commodity Futures Trading Commission (“CFTC”) published CFTC Letter 12-38 (November 29, 2012), which states that the Division will not recommend enforcement action against certain operators of a fund of funds if they do not register as commodity pool operators (“CPOs”) by December 31, 2012. This relief is subject to certain conditions, which are described in more detail below.

As a result of the rescission of CFTC Regulation 4.13(a)(4) and the amendment of CFTC Regulation 4.5 effective December 31, 2012, operators of private funds and of registered investment companies,[2] respectively, have had to consider whether they must register as CPOs or if they may rely on the exemption in CFTC Regulation 4.13(a)(3) (for private funds) or the amended exclusion in CFTC Regulation 4.5 (for registered investment companies). Both of those exemptions/exclusions require that the funds trade commodity interests only to a de minimis extent. For operators of funds of funds, it is difficult to determine compliance with trading restrictions because it requires, in most circumstances, that they determine the extent of commodity interest trading by the underlying funds and whether or not the underlying funds will be able themselves to rely on amended CFTC Regulations 4.13(a)(3) or 4.5 going forward. Funds of funds operators may not have real-time visibility into commodity interest trading by underlying fund managers, and those managers may still be determining whether or not they must register as CPOs. Investment in securitization vehicles and real estate investment trusts, and the addition of swaps to the list of commodity interests, further complicates this analysis at the fund of funds level.

In the Amendment Release, the CFTC also announced the repeal of the existing guidance regarding how operators of funds of funds can comply with these de minimis restrictions, which had been set forth in Appendix A to Part 4 of the CFTC’s regulations. However, the CFTC staff has indicated that operators can continue to rely on the standards in former Appendix A until new guidance is issued. We understand that the Division staff is working on new funds of funds guidance and that it is expected to be issued in the next month or so.