If you’re a commodity trading advisor (CTA) or commodity pool operator (CPO) you’ve probably heard that the CFTC recently proposed amendments to eliminate certain key CPO and CTA exemptions. A few weeks back we discussed many of the key money manager and fund exemptions available. If you did not have a chance to review this article please take a moment to do so. A brief summary of the CFTC’s proposed eliminations concerning CFTC Reg. §§ 4.5, 4.13(a)(3) and 4.13(a)(4), in particular, is provided below. Currently the CFTC is seeking comments on the proposed changes and we’d encourage you to voice your thoughts on the matter. All comments to the CFTC’s proposals must be in writing and received on or before 60 days after the date of publication in the Federal Register, namely on April 12th. The requirements for submitting comments are also provided below. If you or your firm would like assistance in drafting a set of comments, we recommend that you contact a competent industry professional or legal advisor to discuss an appropriate submission in light of your unique circumstances.
I. § 4.5: Reinstating Trading Criteria for Exclusion from CPO Definition
CFTC Regulation 4.5 was intended to allow registered investment companies (RICs), i.e. mutual funds, to trade futures and options using a portion of their assets without requiring the RIC to become registered as a CPO or comply with CFTC disclosure obligations. In the past year, certain RICs have marketed and promoted what amount to traditional commodity pools under this exclusion. In the NFA and CFTC’s opinion, this should no longer be permitted.
Reg. 4.5 currently requires any person desiring to claim the exclusion to file a notice of eligibility with NFA, which must simply identify the qualifying entity to be operated pursuant to the exclusion. Under the proposed amendment, such notice of eligibility must also include a representation that, in part, the RIC’s qualifying entity:
1. Will use commodity futures or commodity options contracts solely for bona fide hedging purposes; and
2. Will not be marketed to the public as a commodity pool or as a vehicle for investment in commodity futures or commodity options.
Essentially, this amendment would restore the rule’s operating restrictions that applied to RICs prior to 2003, when the CFTC amended the rule to its current form.
II. §§ 4.13(a)(3) and (a)(4): Rescission of CPO Exemptions from Registration
The CFTC proposes to rescind certain exemptions from registration provided in §§ 4.13(a)(3) and (a)(4) of the CFTC regulations. Section 4.13(a)(3) currently provides that a person is exempt from registration as a CPO if the interests in the pool are exempt from registration under the 1933 Act and offered only to qualified eligible persons (QEPs), accredited investors, or knowledgeable employees, and the pool’s aggregate initial margin and premiums attributable to commodity interests do not exceed 5% of the liquidation value of the pool’s portfolio. Section 4.13(a)(4) provides that a person is exempt from registration as a CPO if the interests in the pool are exempt from registration under the 1933 Act and the operator reasonably believes that the participants are all QEPs.
According to the CFTC, as a result of the creation of these two exemptions from registration, a large group of market participants have fallen outside of the oversight of the regulators (i.e. there is very little, if any, transparency or accountability over the activities of these participants). Therefore, the CFTC has concluded that continuing to grant an exemption from registration and reporting obligations for these market participants is outweighed by the CFTC’s concerns of regulatory arbitrage. In connection with its proposed elimination of the §§ 4.13(a)(3) and (a)(4) exemptions, the CFTC has requested comments from industry participants concerning the following questions:
1. How much time will be necessary for entities that have previously claimed an exemption under these sections to comply with the proposed changes?
2. How should the CFTC address entities whose activities do not require registration (i.e. should such entities be required to file notice with the CFTC to avoid registration)?
3. Should any entities that have previously claimed an exemption under these sections be exempted from compliance with the proposed revisions to these sections?
4. Should the CFTC consider an alternative de minimis exemption under § 4.13, and if so, what criteria should be required to claim such exemption?
III. §§ 4.5, 4.13 and 4.14: Annual Filings of Notices of Claims of Exemption
The CFTC proposes to require all persons claiming exemptive or exclusionary relief under §§ 4.5, 4.13 and 4.14 to confirm their notice of claim of exemption or exclusion on an annual basis. Failure to comply with the annual notice requirement would result in a withdrawal of the exemption or exclusion and, under the circumstances, could result in the initiation of an enforcement action. The CFTC requests detailed comments on the proposed annual filing requirement and asks for input on the following questions:
- Is 30 days adequate time to affirm the initial claim for relief?
- Does it make sense to require a filing within 30 days of the anniversary date of the initial filing, or within 30 days of the end of the calendar year?
Comments must be in writing and received by the CFTC on or before April 12, 2011. You may submit comments, identified by RIN number 3033-AD30, by any of the following methods:
- CFTC’s Website: http://comments.cftc.gov
- Mail: David A. Stawick, Secretary of the Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581
- Hand Delivery/Courier: Same as mail above
- Federal eRulemaking Portal: www.regulations.gov
Seek Guidance Now
As you can see from the descriptions above, determining whether you may be unreasonably affected or otherwise by the CFTC proposed amendments and crafting an appropriate response can be complex. In order to properly evaluate your options, it would be prudent to contact a regulatory professional like Turnkey Trading Partners (“TTP”) as soon as possible. TTP has the business acumen, as well as important relationships with legal professionals, such as Henderson & Lyman of Chicago, to assist you in presenting your views in the most effective manner.
-James Bibbings and Nicole Kuchera
Media Bio Inserts
James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations. Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements. He has also provided financial markets content for MSN, Yahoo, Financial Times, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, The Wall Street Journal’s Market Watch, Forex Journal, FX Street, Forex Factory, Commodity News Center and many other highly acclaimed investment publications. Two highly sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website. If you have any questions or comments for Bibbings he can be reached directly by email at email@example.com and would love to hear from you.
Nicole Kuchera, JD, LLM is an Associate in Henderson & Lyman’s Financial Services Practice Group. She concentrates her legal practice on transactional and litigation support for securities, futures and derivatives industry clients, such as Introducing Brokers, Commodity Trading Advisors, Commodity Pool Operators, Broker-Dealers, Investment Advisers, Futures Commission Merchants, and Forex Dealer Members. Ms. Kuchera counsels clients regarding a wide range of compliance and regulatory matters involving the rules and regulations of SEC and CFTC, as well as self-regulatory organizations and exchanges. She also represents financial services industry clients in a wide range of litigation matters in various forums, including state and federal courts and in industry arbitrations and mediations. Ms. Kuchera also represents clients in general corporate matters, such as business formation, licensing and industry registration.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.