CFTC Provides Relief from CPO Registration to Certain Family Offices

by K&L Gates LLP
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Introduction

The Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (“CFTC” or “Commission”) recently issued CFTC Letter No. 12-37 (November 29, 2012), which granted no-action relief from registration as a commodity pool operator (“CPO”) to certain family offices. Generally, these family offices had relied on the exemption from CPO registration in CFTC Regulation 4.13(a)(4) for their private pooled investment vehicles that trade commodity interests. This exemption required that the operators of such private funds offer interests in such funds only to highly sophisticated investors, but otherwise placed no limits upon the amount of commodity interest trading by such funds. However, the CFTC rescinded Regulation 4.13(a)(4), effective December 31, 2012, resulting in the need for many family offices either to register as a CPO for their private funds or to find another exemption from registration. The relief made newly available by the no-action letter will allow many family offices to continue their operations without expending significant time and cost to register as CPOs or potentially to restructure their private funds to rely upon another exemption. However, this relief is subject to certain conditions, and not all family offices will qualify without restructuring their operations.

Relief from CPO Registration

Generally, the term “family offices” refers to entities formed by high net worth families to provide a range of services to family members, including wealth and investment management, accounting, tax, estate planning, charitable giving and other services. A family office typically is wholly-owned and exclusively controlled (directly or indirectly) by one or more members of a family and/or entities controlled by a family. As noted in the CFTC letter, the close relationships between the clients and the adviser “greatly reduce the need for the customer protections available pursuant to Part 4 of the Commission’s Regulations,” in part because “any disputes . . . could be resolved within that family unit, or through state courts under laws designed to resolve such family disputes.” The Division also noted that the Securities and Exchange Commission (the “SEC”) “has devoted substantial time and resources to addressing this issue,” resulting in the SEC’s adoption of an exclusion from the definition of “investment adviser” for family offices that would otherwise be required to register as an adviser.

The Conditions

The Division stated that it will not recommend enforcement action for failure to register with the CFTC as a CPO against any CPO that is a “family office” as defined by the SEC, provided that such CPO (i) submits a claim of no-action relief, and (ii) remains in compliance with SEC Rule 202(a)(11)(G)-1 (the “SEC Rule”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), regardless of whether the CPO seeks to be excluded from the Advisers Act.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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