CFTC Staff No-Action Relief for Family Offices and Fund of Funds Operators

by Morgan Lewis
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[authors: Michael A. Piracci, Kaitlyn L. Piper, Zachary E. Vonnegut-Gabovitch, Michael M. Philipp, Dana D.C. Westfall]

Claims for relief from CPO registration by qualifying family offices and fund of funds operators must be filed by December 31.

On November 29, the Commodity Futures Trading Commission's (CFTC's) Division of Swap Dealer and Intermediary Oversight (DSIO) issued two no-action letters providing relief from Commodity Pool Operator (CPO) registration for (1) family offices (Family Office Letter)[1] and (2) fund of funds operators (Fund of Funds Letter).[2] The relief under these letters is not self-executing, and an eligible CPO must file a claim for relief with DSIO by email prior to December 31, 2012.

Relief for Family Offices

Prior CFTC staff interpretative letters provided that family offices meeting specific requirements are not commodity pools.[3] Many family offices, however, chose to seek relief from CPO registration pursuant to CFTC Rule 4.13(a)(4) because of uncertainty as to whether the specific circumstances of the family office were sufficiently similar to those addressed in the previously issued interpretative letters. In February 2012, the CFTC rescinded the exemption available under CFTC Rule 4.13(a)(4), and, as a result, family offices were required to rely on prior interpretative letters, claim an alternative exemption from CPO registration, or register as a CPO.[4] The Family Office Letter again provides family offices with the certainty of being exempt from CPO registration and regulation if the CPO is a "family office" as defined by the Securities and Exchange Commission (SEC).[5] Under the SEC definition, a "family office" is an entity providing investment advisory services that meets each of the following criteria:

  • Its only clients are "family clients" (i.e., family members and certain alter ego family entities formed for tax, charitable, or estate planning purposes).
  • It is wholly owned by family clients and exclusively controlled by "family members" or family entities.
  • It does not hold itself out to the public as an investment adviser.[6]

As with the SEC rule on family offices, the relief provided in the Family Office Letter does not extend to multifamily offices. Unlike the SEC rule, the CFTC relief is not self-executing.

Steps to Obtain Relief

A CPO wishing to claim the relief in the Family Office Letter must file a claim with DSIO to perfect the relief. The claim must be filed by December 31, 2012, for existing family offices, or within 30 days for a family office that began operating after December 1, 2012. The claim for relief will be effective upon filing and must do the following:

  • State the name, main business address, and main business telephone number of the CPO claiming the relief.
  • State the capacity (i.e., CPO) and, where applicable, the name of the pool(s) for which the claim is being filed.
  • Be signed electronically by the CPO.
  • Be filed with the DSIO through submission of an email to dsionoaction@cftc.gov with the subject line of "Family Office."

In addition to the above filing, 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) a CPO seeking the exemption must confirm to DSIO that it is a family office within the meaning and intent of the SEC's "family office" definition and that it will notify DSIO if it ceases to meet that definition.

Relief for Fund of Funds Operators

Previously, Appendix A of Part 4 of the CFTC's Rules provided guidance for operators of a fund of funds to determine whether the fund of funds' total commodity interest exposure would comply with the trading restrictions of CFTC Rule 4.13(a)(3) so as to be eligible to claim relief from CPO registration.[7] As part of the amendments to Part 4 in February 2012, the CFTC removed Appendix A. Although CFTC staff guidance clarified that operators could rely on the removed Appendix A until further guidance was provided, operators of funds of funds indicated that there were operational challenges arising from the uncertainty as to any changes to the guidance to Appendix A and the necessity of relying upon investee funds to determine the fund of funds' commodity interest exposure. In the Fund of Funds Letter, the CFTC staff provides no-action relief from registration for qualifying operators of funds of funds until the later of June 30, 2013, or six months from the issuance of revised guidance on the application of trading restrictions to funds of funds under CFTC Rules 4.5 and 4.13(a)(3).

Steps to Obtain Relief

In order to be eligible for the relief, a fund of funds operator must file a claim for relief with DSIO and remain in compliance with the following provisions:

  • The CPO currently structures its operations in whole or in part as a CPO of one or more funds of funds.
  • The amount of commodity interest positions that the investor fund is directly exposed to must not exceed the levels specified in Rule 4.5 or 4.13(a)(3).
  • The CPO does not know and could not have reasonably known that the investor fund's indirect exposure to commodity interests from investee funds exceeds the levels specified in Rule 4.5 or 4.13(a)(3)(ii)(A) or (B) (calculated either directly or using prior Appendix A).
  • The commodity pool is either of the following:
    • An investment company registered under the Investment Company Act of 1940
    • Compliant with CFTC Rule 4.13(a)(3)(i), (iii), and (iv)

The claim for relief will be effective upon filing and must do the following:

  • State the name, main business address, and main business telephone number of the CPO claiming the relief.
  • State the capacity (i.e., CPO) and the name of the pool(s) for which the claim is being filed.
  • Be signed electronically by the CPO.
  • Be filed with the DSIO by submission of an email to dsionoaction@cftc.gov with the subject line of "Fund-of-Funds."

Implications

The Family Office Letter provides for consistent treatment of family offices by the SEC and the CFTC, although the CFTC, unlike the SEC, requires a filing to claim the relief. Moreover, a family office that previously relied on Rule 4.13(a)(4) will now be able to obtain the certainty they desire by filing a claim for relief with DSIO.

The Fund of Funds Letter provides relief from registration as a CPO for fund of funds operators that are not able to determine—directly or in reliance on prior Appendix A—whether their indirect exposure to commodity interests is in excess of the de minimis thresholds; this relief will apply until such time as the CFTC staff provides additional guidance. Fund of funds operators that are able to determine their indirect commodity interest exposure are not permitted to rely on the Fund of Funds Letter and must file an exemption from registration as a CPO under Rule 4.5 or 4.13(a)(3) or must register as a CPO as appropriate.


[1]. View the Family Office Letter here.

[2]. View the Fund of Funds Letter here.

[3]. See e.g., CFTC Interpretative Letter No. 10-25, [2009-2011 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 31,585 (June 25, 2010); CFTC Interpretative Letter No. 00-100, [2000-2002 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 28,420 (Nov. 1, 2000); CFTC Interpretative Letter No. 97-29, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,039 (March 21, 1997); CFTC Interpretative Letter No. 96-24, [1994–1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,653 (March 4, 1996); CFTC Interpretative Letter No. 95-35, [1994–1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,376 (Nov. 23, 1994).

[4]. For more information regarding the CFTC rescission of Rule 4.13(a)(3), read our February 10, 2012, LawFlash, "Part I: Update on CFTC Rules 4.5 and 4.13 for Registered Investment Companies and Hedge Funds," available here.

[5]. For more information regarding the SEC's investment adviser registration and regulation exemption for family offices, read our June 28, 2011, LawFlash, "SEC Adopts Family Office Rule," available here.

[6]. Family Offices, 17 C.F.R. § 275.202(a)(11)(G)-1.

[7]. As part of the February 2012 amendments, the CFTC adopted similar trading restrictions for mutual funds under CFTC Rule 4.5.

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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