On May 12, 2014, the Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) issued a staff letter (the Staff Letter) that provides a streamlined approach for commodity pool operators (CPOs) to request no-action relief to delegate the CPO registration requirement to another person or entity (the Streamlined Delegation Approach). The Staff Letter (1) sets forth criteria that must be met for a CPO to delegate the CPO registration requirement and (2) provides a standard form that can be used to request relief to do so (the Form of Request). This Legal Alert provides an overview of the process and criteria for using the Streamlined Delegation Approach.
The Streamlined Delegation Approach is particularly relevant to hedge funds and private funds that, due to their organizational structures, may have more than one person who is required to register as a CPO absent obtaining relief. The Streamlined Delegation Approach is consistent with the policy the CFTC staff has adopted of providing targeted no-action relief to CPOs of hedge funds and private funds whose organizational structures do not necessarily lend themselves to the CPO regulatory regime. However, use of the Streamlined Delegation Approach is not the exclusive means by which an affected CPO may obtain relief from the CPO registration requirement. The Staff Letter makes clear that the DSIO plans to continue to review and respond to traditional requests for relief from CPO registration.
As market participants are aware, there were a number of significant changes to the regulatory regime for CPOs and commodity trading advisors in 2012. In February 2012, the CFTC adopted final rules that, among other things: (1) narrowed an exclusion available to advisers of registered investment companies (RICs), pursuant to CFTC Regulation 4.5, by imposing trading thresholds on those RICs seeking to qualify for the exclusion; and (2) rescinded an exemption from CPO registration previously available to operators of private funds with only sophisticated investors pursuant to CFTC Regulation 4.13(a)(4) (the Final Rules).1
The rescission of CFTC Regulation 4.13(a)(4) significantly affected hedge funds and private funds. Prior to the issuance of the Final Rules, many hedge funds and private funds relied on CFTC Regulation 4.13(a)(4) because it afforded a blanket exemption from CPO registration and related compliance obligations. The Final Rules, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s addition of swaps to the CPO regulatory regime, caused many hedge funds and private funds to be commodity pools that must register CPOs.2 This, in turn, resulted in an uptick in the number of requests for no-action relief from the CFTC’s CPO registration requirement.
Many of the requests for relief were submitted by hedge funds and private funds that have multiple persons who qualify as CPOs. For example, many funds have an affiliated investment manager and a general partner (GP), several GPs, or a board of directors. Under these structures, absent no-action relief, each entity or person with management authority over the hedge fund or private fund would be required to register as a CPO, notwithstanding that certain CPOs delegate authority over the commodity pool to an affiliated registered CPO, and thus are not acting in their capacity as CPOs.3 As a result of the increase in no-action requests with respect to the CPO registration requirement, DSIO developed the Streamlined Delegation Approach to more efficiently address the numerous no-action requests it has received.
The Streamlined Delegation Approach
Generally, the Streamlined Delegation Approach is available to CPOs that have delegated investment management authority as a CPO of a commodity pool to another CPO of such commodity pool that is registered as a CPO. Delegating CPOs that wish to use the Form of Request to submit to DSIO a request for relief from the CPO registration requirements must meet the following conditions:
1. Delegating CPO requirements:
a. Pursuant to a legally binding document,4 the Delegating CPO has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool;
b. The Delegating CPO does not participate in the solicitation of participants for the commodity pool; and
c. The Delegating CPO does not manage any property of the commodity pool.
2. The Designated CPO is registered as a CPO.
3. The Delegating CPO is not subject to a statutory disqualification.5
4. There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO that is not solely to avoid registration by the Delegating CPO under the Commodity Exchange Act (CEA) and the CFTC’s regulations.
5. The books and records of the Delegating CPO with respect to the commodity pool are maintained by the Designated CPO in accordance with CFTC Regulation 1.31.
6. If the Delegating CPO and the Designated CPO are each a non-natural person, then one such CPO controls, is controlled by, or is under common control with the other CPO.
7. If a Delegating CPO is a non-natural person, then such Delegating CPO and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations by the other in connection with the operation of the commodity pool.
8. If a Delegating CPO is a natural person and is not an unaffiliated board member,6 then such Delegating CPO and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations by the other in connection with the operation of the commodity pool.
9. If a Delegating CPO is an unaffiliated board member, then such Delegating CPO must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.
The Form of Request
To request no-action relief from the CPO registration requirement pursuant to the Streamlined Delegation Approach, a CPO must submit a request to DSIO using the Form of Request attached to the Staff Letter and pursuant to CFTC Regulation 140.99. The Form of Request requires the CPO to provide basic contact and identifying information about the Delegating CPO and the Designated CPO and the commodity pool associated with such CPOs. In addition, the Delegating CPO and the Designated CPO must represent that they meet the conditions of the Streamlined Delegation Approach and that all material facts and representations set forth in the Form of Request are true.
The CFTC will review and respond to each request for no-action relief submitted through the Streamlined Delegation Approach. To the extent that a CPO does not meet the conditions to apply for relief using the Streamlined Delegation Approach, such CPO may still request relief from the CPO registration requirement from DSIO using the formal no-action request process under CFTC Regulation 140.99.
1For additional information on the Final Rules and the CPO registration requirement, please see Sutherland’s February 29, 2012 Legal Alert, CFTC Issues Rules to Increase Oversight of Funds that Invest in Commodity Interests.
2Generally, a commodity pool is an investment vehicle that engages in futures, options or swaps trading. See Section 1a(10) of the Commodity Exchange Act.
3As an example, DSIO has reviewed several requests for relief from the CPO registration requirement from commodity pools organized as limited partnerships with two or more GPs. In this scenario, DSIO has granted relief such that only one GP was required to register as a CPO. DSIO has also granted no-action relief from the CPO registration requirement in various other scenarios described in the Staff Letter.
4The Staff Letter clarifies that “a legally binding document could include, but is not limited to, a separate delegation agreement, a document that establishes the pool, or an investment management agreement between the Delegating CPO and the Designated CPO.”
5Section 8a(3) of the Commodity Exchange Act provides a list of the applicable CPO registration disqualifications.
6The Staff Letter defines “unaffiliated board member” as:
[A] natural person who is a voting member of the board of directors or an equivalent governing body of the commodity pool who: (i) is not a member of the management or an employee of the Designated CPO or any affiliate thereof; (ii) is not a substantial beneficial owner of the Designated CPO or any affiliate thereof or of any company holding more than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof; and (iii) has no other interest or relationship that could interfere with his/her ability to act independently of management of the Designated CPO or any affiliate thereof or of any company holding more than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof.