CFTC Rescinds Commonly Used Exemption from CPO Registration

On February 8, 2012, the Commodity Futures Trading Commission (“CFTC”) issued final regulations that repeal the exemption from registration as a commodity pool operator (“CPO”) set forth in CFTC Regulation 4.13(a)(4), which is widely used by operators of private funds exempt from the definition of investment company by virtue of Section 3(c)(7) of the Investment Company Act (“Section 3(c)(7) Funds”). The CFTC also amended the exemption from registration as a Commodity Trading Advisor (“CTA”) to effectively require persons who provide advice to private funds relying on Regulation 4.13(a)(4). Operators of advisers to funds that have relied on that exemption (including many general partners of Section 3(c)(7) Funds) will be required to register with the CFTC as a CPO or CTA  by December 31, 2012, unless another exemption applies.

The CFTC had initially proposed to also rescind the exemption from CPO registration in Regulation 4.13(a)(3) for operators of private funds that trade only a de minimis amount of commodity interests, but voted to retain that exemption after concluding that “overseeing entities with less than five percent exposure to commodity interests is not the best use of the [CFTC’s] limited resources.” The de minimis exemption in Regulation 4.13(a)(3) is used primarily by operators of private funds exempt from the definition of investment company by virtue of Section 3(c)(1) of the Investment Company Act (“Section 3(c)(1) Funds”).

To qualify for the de minimis exemption, the fund’s commodity interest positions must be limited such that either: (i) the aggregate initial margin and premiums required to establish such positions will not exceed 5% of the liquidation value of the fund’s portfolio, after taking into account unrealized profits and losses; or (ii) the aggregate net notional value of such positions, determined at the time the most recent position was established, does not exceed 100% of the liquidation value of the fund’s portfolio, after taking into account unrealized profits and losses.

Accordingly, in order to avoid having to register as CPOs or CTAs, operators of Section 3(c)(7) Funds (as well as advisers to those funds) will be required to restrict commodity interest trading to qualify for the de minimis exemption. For additional information on the CFTC’s rescission of Regulation 4.13(a)(4), and the impact on your business, please contact Zac Rosenberg, Compliance Consultant by email at zachary.rosenberg@corecls.com or by phone at (619) 278-0020.