"CFTC Staff Extends Registration and Compliance Date For CPOs and CTAs Impacted By 4.13(a)(4) and 4.5 Amendments"

[authors: Heather Cruz, Anastasia T. Rockas, Mark D. Young, Maureen A. Donley, Geoff Bauer, Brian M. Duncan, Daniel S. Konar II]

On July 13, 2012, the Commodity Futures Trading Commission (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) issued temporary no-action relief (the No-Action Letter)1 for commodity pool operators (CPOs) and commodity trading advisors (CTAs) of certain privately offered pools or registered investment companies launched after July 13, 2012. The No-Action Letter is limited to CPOs and CTAs of pools that would have been exempt from CFTC registration and compliance obligations but for the rescission of CFTC Rule 4.13(a)(4) and the amendment of CFTC Rule 4.5 in February 2012.2 This temporary relief is available only until December 31, 2012, at which point such CPOs and CTAs must either (i) register and meet the CFTC’s compliance obligations for registered CPOs and CTAs or (ii) rely upon another exemption from registration and/or compliance. Eligible CPOs and CTAs must file a claim with DSIO via email in order to take advantage of the relief.

CPOs Eligible for No-Action Relief

Pursuant to the No-Action Letter, DSIO will not recommend that the CFTC take enforcement action against a CPO for pools launched after July 13, 2012 for failure to register as a CPO before December 31, 2012, provided that the CPO submits a claim to take advantage of the relief and each pool operated by the CPO remains in compliance with the criteria that previously would have qualified the CPO for an exemption under Rule 4.13(a)(4). Those criteria are:

(a) Interests in the pool are exempt from registration under the Securities Act of 1933, and such interests are offered and sold without marketing to the public of the United States;

(b) The CPO reasonably believes, at the time of investment, that:

(i) Each natural person participant (including such person’s self-directed employee benefit plan, if any) is a “qualified eligible person,” as defined in § 4.7(a)(2); and

(ii) Each non-natural person participant is a “qualified eligible person,” as defined in § 4.7, or an “accredited investor,” as defined in § 230.501(a)(1)-(3), (a)(7) and (a)(8) of Title 17 of the Code of Federal Regulations.

In addition, DSIO will grant no-action relief where each pool for which the CPO claims the relief is a registered investment company under the Investment Company Act of 1940.

CTAs Eligible for No-Action Relief

DSIO also took a no-action position for CTAs with respect to pools launched after July 13, 2012 for which CPOs are eligible for relief (as discussed above). DSIO states in the No-Action Letter that it will not recommend that the CFTC take an enforcement action against such a CTA for failure to register as a CTA until December 31, 2012, provided that the CTA submits a claim to take advantage of the relief and the CTA remains in compliance with the following criteria:

(a) The CTA’s commodity interest trading advice is directed solely to, and for the sole use of, the pools that it operates; or

(b) The CTA’s commodity interest trading advice is directly solely to, and for the sole use of, pools operated by CPOs who claim relief from CPO registration under §§ 4.13(a)(1), (a)(2), (a)(3), (a)(4) or 4.5 or under the No-Action Letter.

Procedure to Claim No-Action Relief

The relief is not self-executing. Eligible CPOs and CTAs seeking to rely on the relief are required to file a claim with DSIO via email. Such claim, as long as it is materially complete, will become effective upon filing. The claim must:

(a) State the name, main business address, and main business telephone number of the CPO or CTA claiming the relief;

(b) State the capacity (i.e., CPO, CTA or both) and, where applicable, the name of the pool(s), for which the claim is being filed;

(c) Be electronically signed by the CPO or CTA; and

(d) Be filed with DSIO via email at dsionoaction@cftc.gov prior to the date upon which the CPO or CTA first engages in business that would otherwise require registration as such.

DSIO noted in the No-Action Letter that the relief will not excuse the affected CPOs and CTAs from compliance with any other applicable requirements set forth in the Commodity Exchange Act (CEA) or in CFTC regulations (such as the antifraud provisions of the CEA).

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1 The no-action relief appears in a no-action letter issued in response to joint correspondence by the Managed Funds Association, the Investment Adviser Association, the Alternative Investment Management Association and the Investment Company Institute. See CFTC Letter No. 12-03, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-03.pdf.

2 Among other changes, these changes (i) eliminated the often-used exemption from CPO registration under Rule 4.13(a)(4) for operators of privately offered funds whose participants satisfied certain investor sophistication requirements and (ii) narrowed the Rule 4.5 exclusion from the definition of CPO for registered investment companies by adding a trading restriction and a marketing restriction. For a summary of these changes, see Skadden’s February 22, 2012 firm mailing, available at http://www.skadden.com/newsletters/CFTC_Curtails_CPO_and_CTA_Exemptions.pdf.

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