Fund of funds operators have been in a quandary as to whether they are required to register with the Commodity Futures Trading Commission (“CFTC”) as commodity pool operators (“CPO’s”).
The quandary resulted from the CFTC’s rescission of its Rule 4.13(a)(4) exemption from registration which most fund of fund managers had relied upon. This action left fund of fund managers scrambling to claim an alternate exemption. Rule 4.13(a)(3) with its de minimis commodity interest requirement (aggregate initial margin and premium relative to commodity interests (which now include swaps) do not exceed 5% of the liquidation value of the fund’s portfolio or aggregate net notional value of commodity interests do not exceed 100% of the fund’s liquidation value) seemed the most likely choice. However, operators of funds of funds have had difficulty in determining whether they meet the de minimis test because of inability to get requisite information from managers in their investee funds.
In a no-action letter dated November 29, 2012, the CFTC’s Division of Swap Dealer and Intermediary Oversight (“Division”) indicated that it would not recommend enforcement action against any operator of a fund of funds for failure to register as a CPO until the later of June 30, 2013 or six months from the date the Division issues guidance on the calculation of the de minimis threshholds of Section 4.13(a)(3), providing that the manager of the fund of funds meets the criteria contained in the no-action letter. Fund of funds operators must claim the relief provided in the no-action letter by electronic filing made no later than December 31, 2012.
