While it is no secret that most advisers to hedge funds and other private funds will be required to register with the SEC as investment advisers by March 30, 2012, less attention has been paid to the fact that some hedge fund managers may be subject to dual registration and regulation with the Commodity Futures Trading Commission (“CFTC”). In early 2011, the CFTC proposed to rescind several exemptive rules relied on by private fund managers to avoid registration with the CFTC as Commodity Pool Operators (“CPOs”), and the agency appears likely to finalize the proposal in early 2012.
Currently, CFTC Rule 4.13(a)(3) provides an exemption from registration as a CPO for operators of certain private funds relying on Section 3(c)(1) of the Investment Company Act so long as the fund limits its activities with respect to futures contracts and commodity options. CFTC Rule 4.13(a)(4) currently exempts operators of private funds relying on Section 3(c)(7) of the Investment Company Act without regard to the extent of the fund’s futures or commodity options activities, provided that interests are offered only to certain highly sophisticated investors. The elimination of these exemptions would mean that hedge fund managers that directly or indirectly trade futures contracts, commodity options, or swaps (which become subject to CFTC jurisdiction as a result of Dodd-Frank) may be required to become dually registered with the SEC and the CFTC, and face potentially duplicative regulatory burdens.
Unlike the elimination of the private adviser exemption under the Advisers Act, the CFTC was not required by Dodd-Frank to rescind these exemptive rules. The CFTC asserts that rescinding the exemptions is consistent with the purpose and intent of Dodd-Frank, although some believe that the CFTC is seeking to hold on to some regulatory jurisdiction over the hedge fund industry. For additional information, contact us at (619) 278-0020 to schedule a consultation.