Rule 4.5 Amendment. On February 9, the Commodity Futures Trading Commission (CFTC) adopted final amendments to its Part 4 Rules, which set out the registration and compliance obligations for commodity pool operators (CPOs) and commodity trading advisors (CTAs). CFTC Rule 4.5 formerly provided a blanket exemption from CFTC registration and associated regulatory requirements for registered investment companies and their advisers. Amended Rule 4.5 is a step back to the rule as it existed before 2003, with certain modifications, where an adviser of a registered fund that trades over a de minimis amount of futures contracts, options on futures or swaps (Derivatives) or otherwise markets the fund as a commodity fund will be required to register as a CPO.

To qualify for the new Rule 4.5 CPO exception, an investment company’s adviser must represent to the CFTC that the fund will only use Derivatives solely for “bona fide hedging purposes.” That term is narrowly construed and does not include strategies that are commonly referred to as “risk management.” The adviser to a registered fund that cannot qualify for the bona fide hedging exemption will be subject to CPO registration requirements unless the fund otherwise uses Derivatives within either of the following thresholds...

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