Additional Guidance on Annual Exemption Recertification Requirements
[authors: Scott H. Moss, Cole Beaubouef, and Brianne Perlman]
The Commodity Futures Trading Commission's ("CFTC’s") Division of Swap Dealer and Intermediary Oversight (the “Division”) recently provided no-action relief to certain family offices and certain managers of funds-of-funds from registration as commodity pool operators (“CPOs”). Since the relief under these letters is not self-executing, an eligible pool operator must file a claim for relief with the Division by email prior to December 31, 2012. The Division did not, however, directly address relief with respect to any Commodity Trading Advisor ("CTA") registration requirements in these no-action letters.
The CFTC also recently provided additional guidance on the annual exemption recertification requirements and process under CFTC Rules 4.5, 4.13, and 4.14.
Funds-of-Funds
As discussed in previous client alerts,1 earlier this year, the CFTC repealed an exemption from registration as a CPO that had been relied on by many fund managers. In response to such rulemaking, pool operators must now register as CPOs or avail themselves of another available exemption, such as that provided by Regulation 4.13(a)(3). For managers of funds-of-funds, Appendix A to Regulation 4.13(a)(3) had previously served as some guidance to the applicability of Regulation 4.13(a)(3) in the fund-of-funds context. However, the CFTC removed Appendix A earlier this year and replaced it with Form CPO-PQR (a reporting form for registered CPOs). Since that removal, the CFTC has stated that the removed Appendix A may still be utilized by pool operators until updated by the CFTC.
Upon a written request from Managed Funds Association and Investment Adviser Association, the Division granted no-action relief to certain operators of funds-of-funds who may be required to register with the CFTC as CPOs by December 31, 2012, but lack adequate information from the funds in which they invest, which is necessary to determine whether registration is in fact required.2 The relief delays the registration date for eligible operators until the later of June 30, 2013, or six months from the date the Division issues revised guidance (or the compliance date, if later) on the application of the calculation of de minimis thresholds in the context of Regulations 4.5 and 4.13(a)(3).
In its response, the Division recognized that operators of funds-of-funds necessarily rely on investee fund operators to provide information about the composition of investee funds’ portfolio commodity exposures. Such information is needed for certain fund-of-funds managers to calculate their aggregate exposures to commodity interests. The Division also considered the operational challenges arising from the uncertainty as to any changes to the guidance to the removed Appendix A. As the removed Appendix A enumerated certain situations under which a commodity pool operator may infer its compliance with the de minimis trading thresholds of Regulation 4.13(a)(3), any changes that the Division makes to those situations may require the pool operator to register with the CFTC, even though its exposure to commodity interests remains unchanged.
Pursuant to the no-action relief, the Division will not recommend enforcement action against any operator of a fund-of-funds on condition that the operator (i) submits a claim to take advantage of the relief, and (ii) remains in compliance with the following criteria:
-
The commodity pool operator currently structures its operations in whole or in part as a CPO of one or more funds-of-funds;
-
Direct exposure of each fund-of-funds to commodity interests does not exceed the levels specified in Regulation 4.5 or 4.13(a)(3);
-
The commodity pool operator does not know and could not have reasonably known that the indirect exposure of the fund-of-funds to commodity interests derived from contributions to separately managed vehicles exceeds the levels specified in Commission Regulations 4.5 or 4.13(a)(3), either calculated directly or through the use of the removed Appendix A; and
-
The commodity pool for which the CPO seeks relief is either:
-
an investment company registered as such under the Investment Company Act of 1940; or
-
otherwise compliant with the provisions of CFTC Regulation 4.13(a)(3)(i), (iii), and (iv).
To avail itself of this no-action relief, an eligible pool operator must file a claim of no-action relief with the Division prior to December 31, 2012, which may be filed via email using the email address dsionoaction@cftc.gov and stating “Fund-of-Funds” in the subject line of such email. This email claim should include:
-
the name, main business address, and main business telephone number of the pool operator claiming the relief;
-
the capacity (i.e., CPO) and the name of the pool(s) for which the claim is being filed; and
-
the signature of the pool operator.
In granting pool operators the relief described in its no-action letter, the Division sought to strike the appropriate balance between the CFTC’s regulatory objectives and addressing the public concerns regarding the timing and content of revised guidance for fund-of-funds operators and operational adjustments in complying with the CFTC’s regulatory objectives.
Family Offices
In a separate no-action letter, the Division provided no-action relief to family offices3 that may be required to register with the CFTC as CPOs by December 31, 2012. The Division’s no-action relief provides that a family office that meets the definition of “family office” set forth in SEC Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 will be exempt from registering as a CPO, provided that the family office (i) submits a claim to take advantage of the relief, and (ii) remains in compliance with SEC Rule 202(a)(11)(G)-1, regardless of whether the CPO seeks to be excluded from regulation under the Investment Advisers Act.
To avail itself of this no-action relief, an eligible pool operator must file a claim of no-action relief with the Division prior to December 31, 2012, which may be filed via email using the email address dsionoaction@cftc.gov and stating “Family Office” in the subject line of such email. This email claim should include:
-
the name, main business address, and main business telephone number of the pool operator claiming the relief;
-
the capacity (i.e., CPO) and, where applicable, the name of the pool(s), for which the claim is being filed; and
-
the signature of the pool operator.
Prior to March 31, 2013 (or for a family office that begins to operate after that date, within 30 days after it begins to operate as a family office), the pool operator must confirm that the CPO is a “family office” within the meaning of SEC Rule 202(a)(11)(G)-1 and that the CPO will notify the Division if it is no longer a “family office” within the meaning of SEC Rule 202(a)(11)(G)-1.
In granting this no-action relief, the Division noted that the SEC has devoted substantial time and resources to addressing regulatory matters affecting family offices and that the Division believes that placing both the CFTC and the SEC on equal footing with respect to the application of certain regulations will facilitate compliance with the regulatory regimes of both agencies.
Recertification under CFTC Rules 4.5, 4.13 or 4.14
On December 3, 2012, in response to the final rules issued by the CFTC in February 2012, the National Futures Association (the "NFA") issued guidance on the annual affirmation requirement and process for commodity pool operators and commodity trading advisors that operate under an exemption or exclusion from CPO registration under CFTC Regulations 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or an exemption from CTA registration under 4.14(a)(8).4 Beginning with the calendar year ending December 31, 2012, each applicable exemption must be affirmed on an annual basis within 60 days after December 31, using the NFA’s Exemption System (the “System”), available here.
Once logged into the System, an index listing all the firm-level and pool-level exemptions on file with the NFA will appear. To complete the affirmation process:
-
Click on the icon in the “Affirm” column that identifies the exemptions requiring affirmation.
-
Click “OK” in the pop-up box to affirm that the exemption continues to be effective.
-
Repeat the same process for each and every exemption on file that requires affirmation.
By clicking “OK,” the current date will replace the “Affirm” icon and effectively complete the affirmation requirement for the given exemption for the year. The NFA’s BASIC System will then reflect the affirmation date for each exemption held.
Failure to affirm an active exemption from CPO or CTA registration will result in the exemption being withdrawn after the 60-day period has ended. For registered CPOs or CTAs, withdrawal of the exemption will result in the firm being subject to Part 4 Requirements for that pool regardless of whether the firm otherwise remains eligible for the exemption. For non-registrants, the withdrawal of the exemption may subject the entity to enforcement action by the CFTC.
In addition to describing the requirements and the process, the NFA also indicated that:
-
For registered CPOs, if the NFA records reflect an exemption for a pool that is no longer active, the operator must first withdraw the exemption using the System and then update the NFA's records with the applicable information.
-
For non-registered operators, if the NFA records reflect an exemption for a pool that is no longer active, the operator must notify the NFA with specific information about the pool by sending written notification to Exemptions@nfa.futures.org. The written notification should include the full name of the entity and the pool.
-
A pre-registration option is not available to operators of 4.13(a)(3) pools. It is only available to operators of pools that are exempt under 4.13(a)(4), 4.5, CPO 12-03 No-Action, or 4.13 No Action."
Next Steps
Since the no-action relief addressed in this alert is not self-executing, pool operators that believe they meet the eligibility requirements described in this alert should confirm now whether this no-action relief is in fact applicable. Moreover, to the extent that a pool operator will avail itself of this no-action relief, it should prepare the relief submission now, so that it may be submitted to the Division prior to the December 31 deadline.
Pool operators and commodity trading advisors relying on exclusions or exemptions from registration under CFTC Regulations 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), or 4.14(a)(8) should verify the email contact information in the NFA Exemption System and determine whether each pool and/or each firm remains eligible for the exemption/exclusion.
Lowenstein Sandler’s Investment Management Group is here to assist our clients with any questions or comments related to the information discussed in this alert.
