Will Private Fund Managers Have to Register Yet Again?

Currently, Rules 4.13(a)(3) and 4.13(a)(4), which were adopted by the Commodity Futures Trading Commission (“CFTC”), provide exemptions from registration as a Commodity Pool Operator (“CPO”) for managers of certain private funds provided that the private funds either: (i) limit their futures contracts and commodity options trading activities; or (ii) offer interests in the private fund only to certain highly sophisticated investors. The CFTC recently proposed rescinding those exemptions, which could mean that general partners or managing members of private funds that trade futures contracts and commodity options to register as CPOs. Because private fund advisers will also be subject to registration as an investment adviser with the SEC as of July 21, 2011, if the CFTC proposal is adopted, many private fund advisers that trade in commodity options or futures will be subject to dual regulation by the SEC and the CFTC.

Absent another available exemption from registration with the CFTC, private fund managers may be subject to several requirements imposed on CPOs, including: registration with the CFTC and membership in the National Futures Association (“NFA”); registration as associated persons for individuals who solicit investors for the private fund, including the requirement to pass a Series 3 exam; delivery of a disclosure document to prospective investors meeting the requirements of CFTC Rules 4.24 and 4.25 and has been approved by the NFA; delivery of periodic and annual account statements to all investors that have been prepared in accordance with generally accepted accounting principles; and the maintenance of certain books and records about the pool and the CPO.

Unless another exemption applies or relief from certain of these requirements is provided, these requirements would be in addition to the various requirements imposed on advisers to private funds by the SEC, and would significantly increase the compliance costs to private fund advisers that invest in commodity options or futures contracts.

Comments on the proposed changes are due by April 12, 2011 and may be submitted using the CFTC’s online comment submission process. For additional information on the proposed amendments or the implications of dual SEC/CFTC regulation, please contact us at (619) 278-0020.