On November 25, 2019, the Commodity Futures Trading Commission (CFTC) adopted several final regulations to codify existing exemptions from commodity pool operator (CPO) registration. Among them is an exemption that was issued for business development companies (BDCs) via a 2012 no-action letter (the BDC NAL). The final regulations were published in the Federal Register on December 10, 2019 and will become effective on January 9, 2020. The Federal Register release is available at https://us.eversheds-sutherland.com/portalresource/Rules_Regulations2019-26161.PDF.

The final regulations will not change the substantive criteria for relief afforded by the BDC NAL. However, the final regulations will impose a new compliance obligation on BDC managers who will be required, as soon as practicable after January 9, 2020, to claim relief from CPO status electronically with the National Futures Association (NFA). Those BDC managers who previously claimed the relief afforded by the BDC NAL directly with the CFTC staff are not grandfathered from this requirement and must make the new electronic filing with the NFA. Claims for relief made pursuant to the final regulations must be re-affirmed on an annual basis after the first year of filing.

The BDC NAL

Under the Commodity Exchange Act (CEA) and CFTC regulations, a collective investment vehicle that engages in commodity interest (i.e., futures, swaps or options) trading is a “commodity pool”. Persons who operate commodity pools are CPOs under the CEA and CFTC regulations. CPOs are required to register with the CFTC (via the NFA) and are subject to myriad compliance obligations.

CFTC regulations afford numerous exclusions from CPO status and exemptions from CPO registration, including an exception from registration for managers of registered investment companies (RICs). Unfortunately, the exclusion for RICs does not apply to BDCs, notwithstanding that BDCs are operated in a manner similar to RICs, and are subject to many of the same provisions of the Investment Company Act of 1940 (the “Investment Company Act”) as RICs.

Accordingly, the CFTC staff deemed it appropriate, via its publication of the BDC NAL, to afford managers of BDCs the ability to claim an exemption from the CPO registration and compliance obligations on the same basis that managers of RICs are excluded from CPO status pursuant to CFTC Regulation 4.5. Specifically, the BDC NAL provides that a manager of a BDC does not need to register as a CPO so long as:

1. The BDC elects to be treated as such under Section 54 of the Investment Company Act;;
2. The manager does not market the BDC to the public as an investment in a commodity pool or otherwise as an investment vehicle for the trading of commodity interests;
3. The manager represents that it limits the use of commodity interests in the BDC, consistent with a de minimis trading threshold imposed on RICs under CFTC Regulation 4.5(c)(2)(iii)(A)-(B); and
4. The manager submits a signed claim of exemption with CFTC staff.

What’s Changed?

In codifying the BDC NAL, the CFTC has not changed the substantive criteria that BDCs must satisfy to be exempt from CPO registration. Specifically, the marketing and commodity interest trading restrictions imposed by the BDC NAL will continue to apply. However, the manner in which BDCs can avail themselves of the relief from CPO registration will change upon the effectiveness of the final regulations. Whereas under the BDC NAL a BDC manager was required to make a one-time filing directly with the CFTC, pursuant to the final regulations, BDC managers will now be required to: (1) claim the new regulatory exception via an electronic filing system that is maintained by the NFA on or as soon as practicable after January 9, 2020; and (2) re-affirm the BDC manager’s eligibility for the exception, via the same NFA electronic filing system, on an annual basis.

Those BDC managers who previously claimed the relief afforded by the BDC NAL directly with the CFTC staff are not grandfathered from this requirement and must make the new electronic filing with the NFA.

Claiming Relief with the NFA

The NFA’s exemptions filing system is relatively simple to use and can be accessed at https://www.nfa.futures.org/electronic-filing-systems/exemptions.html. A BDC manager will need to create an account to use the exemptions filing system, and must have certain information about the BDC, including its tax identification number, available. The NFA has published a step-by-step guide for using the exemptions filing system, which is appears below as Appendix A and is available at https://us.eversheds-sutherland.com/portalresource/exemptionsystemguide2018.PDF.

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¹CFTC Letter No. 12-41 (Dec. 4, 2012), available at https://www.cftc.gov/csl/12-40/download.
²As part of the same rulemaking, the CFTC clarified that, insofar as registered investment companies and BDCs are concerned, the registered investment adviser of the RIC or BDC is the appropriate person to claim exemption from CPO registration.
³Per the CFTC, the final regulations will supersede the staff no-action relief provided by the BDC NAL. BDC managers should file a notice to claim the codified relief under CFTC Regulation 4.5 as soon as practicable after January 9, 2020, i.e., thirty-days from publication in the Federal Register of the adopting release for the final regulations.