New CFTC Regulatory Regime for Private Fund Managers


[authors:  Edward G. Eisert; Evelyn S. Grant*]


On April 24, 2012, the U.S. Commodities Futures Trading Commission ("CFTC") repealed the exemption from registration under the U.S. Commodity Exchange Act ("CEA") for private investment funds provided by CFTC Rule 4.13(a)(4). This exemption, which did not restrict the amount of futures activity in which a fund could engage, has been available to funds that are excepted from the definition of "investment company" under Section 3(c)(7) of the Investment Company Act of 1940 (the "Company Act")1. Funds that have relied on Rule 4.13(a)(4) may continue to do so until December 31, 2012, but, effective January 1, 2013, must comply with another exemption or register with the CFTC.

This Client Alert provides an overview of the alternatives available to private fund managers.

Issues for Private Fund Managers

An investment fund that utilizes just one futures contract and, as of January 1, 20132just one swaps contract3, will be considered by the CFTC to be a "commodity pool" and the general partner or managing member of the fund to be a "commodity pool operator" ("CPO"). In addition, depending on the structure and operations of the fund, an investment manager of the fund might be deemed to be both a CPO and a "commodity trading advisor" ("CTA"), or only be a CTA. Consequently, prior to engaging in any trading in futures or swaps, each of the general partner/managing member and investment manager of a fund that contemplates utilizing futures contracts and, as of January 1, 2013, swaps in its investment program will be required to register as a CPO, CTA, or both, with the CFTC and join the National Futures Association ("NFA"), unless they can rely upon an available exemption and file required notices of exemption with the NFA.

These regulatory requirements are applicable to managers of funds of all types, including hedge funds, private equity funds, venture capital funds and real estate funds, if the managed fund holds even one swap, e.g., an interest rate swap. Separate issues are presented if the managed fund does not itself hold a swap, but a portfolio company does. In such case, it must be determined whether the fund manager provides advice to such company with regard to a commodity interest, such as a swap, in connection with its oversight of, or participation in, the management of a portfolio company.

These requirements also are applicable to non-U.S. domiciled fund managers insofar as they manage or advise funds or accounts, or provide services to persons, that are deemed to warrant the protections of the CEA, e.g., a U.S. domiciled fund4. 

A. The CFTC Rule 4.13(a)(3) Exemption for CPOs

A fund that engages in a small amount of futures and, as of January 1, 2013, swap activities may rely upon CFTC Rule 4.13(a)(3), which provides an exemption from registration for the CPO of a fund:

(i) whose interests are exempt from registration under the U.S. Securities Act of 1933 and are offered and sold without marketing to the public in the United States;

(ii) whose participants are limited to certain qualified investors (including "qualified purchasers" as defined by the Company Act);

and either:

(iii) the aggregate initial margin and premiums on "commodity interest" positions do not exceed five percent of the liquidation value of the fund’s portfolio (including unrealized gains and losses); or

(iv) the aggregate notional value of "commodity interest" positions does not exceed 100 percent of the liquidation value of the fund’s portfolio (including unrealized gains and losses).

Rule 4.13(a)(3) also requires that a CPO that intends to rely on the exemption file a notice of exemption electronically through the NFA’s website. Under paragraph (b) of Rule 4.13(a)(3), the notice must be filed "by no later than the time that the pool operator delivers a subscription agreement for the pool to a prospective participant in the pool." In addition, an annual notice claiming the Rule 4.13(a)(3) exemption must be filed within 60 days of calendar year end, beginning in 2013.

If the fund cannot rely on Rule 4.13(a)(3), the general partner/managing member (and possibly the investment manager) of the fund will be required to register as a CPO, but might be able to rely on the "registration light" provisions of CFTC Rule 4.7, which provides relief from certain onerous disclosure and other requirements for registered CPOs under certain conditions.

B. Exemptions Available to CTAs

An investment manager that is both a CTA and an exempt CPO may rely on the exemption from registration as a CTA under CFTC Rule 4.14(a)(5), provided the CTA only provides commodities trading advice to funds that are commodity pools, and not to individual clients. No notice is  required to claim this exemption, provided the CPO exemption notice has been filed.

An investment manager that is a CTA, but not also an exempt CPO, might be able to rely on an exclusion from the definition of CTA. For example, Section 4m1 of the CEA provides an exclusion for CTAs that have had 15 or fewer clients in the preceding 12 months and do not hold themselves out to the public as a CTA. An investment adviser that is registered under the U.S. Investment Advisers Act of 1940 (a "Registered Adviser") might also be able to rely on the exception provided by Section 4m3 of the CEA for CTAs that are not primarily engaged in providing advice regarding commodity interests.

In addition, a Registered Adviser that provides advice to certain types of clients5 may rely on the exemption provided by CFTC Rule 4.14(a)(8). The Registered Adviser claiming an exemption under Rule 4.14(a)(8) must provide commodity interest advice that is solely incidental to its business of providing securities or other investment advice to qualifying entities, collective investment vehicles and commodity pools, must not otherwise hold itself out as a CTA, and must file an initial notice of exemption and an annual affirmation of its exemption through the NFA.

C. Examination Requirements Applicable to Registered CPOs and CTAs

In the event a general partner/managing member or investment manager of a commodity pool is required to register as a CPO or CTA, certain firm personnel will also be required to register with the NFA as a "principal" or an "associated person" and to take and pass the Series 3 examination. Waivers from the examination requirement are available in very limited circumstances.

 *  *  *  *  *  *  *

The availability of the new and revised CFTC exemptions from registration to investment managers is highly fact sensitive. Please do not hesitate to contact Edward G. Eisert (212-506-3635) or 
Evelyn S. Grant (212-506-3703) with any questions that arise.

*Admitted only in New Jersey.

1 Section 3(c)(7) of the Company Act requires, among other things, that interests in a fund be owned exclusively by persons who are "qualified purchasers" (as defined therein) and the fund is not making or proposing to make a public offering of its securities.

2 In a joint rulemaking, published in the Federal Register on August 13, 2012, the CFTC and the U.S. Securities and Exchange Commission adopted definitions of terms, including "swap," on which the scope of the regulation of the swaps markets under Title VII of the Dodd-Frank Act is based. These definitions become effective on January 1, 2013.

3 The CFTC has proposed an amendment to the definition of "commodity interest" in Section 1.3(yy) of its regulations that will bring swaps into the Rule 4.13(a)(3) calculations set out in Subsections A(iii) and (iv), below. 

4 See
CFTC Proposed Interpretive Guidance and Policy Statement on Cross-Border Application of the CEA, 77 Fed. Reg. 41,214 (proposed July 12, 2012) (to be codified at 17 CFR pt. 1). 

 5 Clients of a Registered Adviser relying upon Rule 4.14(a)(8) can include investment companies registered under the Company Act, insurance company separate accounts and employee retirement plans that are subject to the Employee Retirement Income Security Act of 1974. 

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.

© Orrick, Herrington & Sutcliffe LLP | Attorney Advertising

Written by:


Orrick, Herrington & Sutcliffe LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.