The Commodity Futures Trading Commission (“CFTC”) adopted final regulations on February 8, 2012 that will have a substantial impact on private fund managers, including many managers that are now exempt from registration as commodity pool operators (“CPOs”) and commodity trading advisers (“CTAs”). As the CFTC aims for greater transparency and regulation over CPOs and CTAs, many private fund managers will now face new registration requirements and heightened compliance obligations. CFTC Rescinds Regulation 4.13(a)(4) Notably, the CFTC rescinded the exemption from CPO registration contained in Regulation 4.13(a)(4). Regulation 4.13(a)(4) previously allowed private fund managers and fund sponsors (for the purpose of this article, collectively referred to as “private fund managers”) to avoid CPO registration under the Commodity Exchange Act. Regulation 4.13(a)(4) exempted a private fund manager from CPO registration if all of the private fund’s natural person investors were “qualified purchasers” and all of the fund’s non-natural person investors were accredited investors. The CFTC’s rescission of Regulation 4.13(a)(4) is effective as of April 24, 2012. As a result, the exemption will not be available to a private fund manager of any fund formed on or after that date. Private fund managers already operating under Regulation 4.13(a)(4) can continue to rely upon the exemption until December 31, 2012. After December 31, 2012, managers seeking to avoid CPO registration must rely on another exemption from CPO registration, register with the CFTC, or cease futures and forex trading. Availability of CFTC Regulation 4.13(a)(3) Exemption Private fund managers can still take advantage of the exemption from CPO registration contained in CFTC Regulation 4.13(a)(3), known as the de minimis exemption. Although the CFTC originally proposed rescinding the rule, the Agency decided that regulating funds with very limited exposure to commodity interests was not in its best interests. While the CFTC provides additional exemptions from CPO registration, private fund managers will generally find compliance with exemptions other than Regulation 4.13(a)(3) more challenging. Under Regulation 4.13(a)(3), private fund managers are exempt from registration as a CPO if the following criteria are satisfied:

  • Each pool used to trade commodity interests is exempt from registration under the Securities Act of 1933 and is sold without marketing to the public in the United States
  • Each pool’s investors are accredited investors, trusts formed by an accredited investor for the benefit of a family member, “knowledgeable employees”, or “qualified eligible persons”
  • No pool is marketed as a vehicle for trading in the commodity futures or commodity options markets
  • Each pool’s commodity interest trading, including investments in forex contracts and security futures products, satisfies one of following tests:
  • The aggregate net notional value of the interests does not exceed the liquidation value of the pool’s portfolio, after taking into account unrealized profits and losses; or
  • The total amount committed as initial margin and premium to establish the positions does not exceed five percent of the liquidation value of the pool’s portfolio, after taking into account unrealized profits and losses.

The CFTC provides specific guidance for funds of funds looking to rely upon the exemption contained in Regulation 4.13(a)(3). Appendix A to Part 4 presents six scenarios relating to funds of funds and provides guidance on whether or not CPO registration would be required. Notably, scenario #5 provides that the manager of a fund of funds could rely upon the 4.13(a)(3) exemption when the fund of funds allocates no more than 50 percent of the its assets to investee funds that trade commodity interests (without regard to the level of commodity interest trading engaged in by those investee pools) and it does not allocate any of the fund of fund’s assets directly to commodity interest trading. Increased Reporting Requirements for Exempt CPOs and CTAs On February 8th, the CFTC also amended Regulations 4.5, 4.13, and 4.14 to require annual confirmation of a manager’s qualifications to claim exemptive relief under any of those rules. Now, a manager claiming a registration exemption under Regulations 4.5, 4.13, or 4.14 must file an annual notice with the National Futures Association claiming the relief sought. This annual notice must be filed within 60 days of the calendar year’s end. This alters the CFTC’s former requirement of notice filing only when the exemption is first claimed. Modified Reporting Requirements and Qualification Criteria under CFTC Regulation 4.7 The CFTC modified certain provisions of CFTC Regulation 4.7, which provides a partial exemption from some of the disclosure, reporting, and recordkeeping requirements that would otherwise apply to registered CPOs and CTAs. Regulation 4.7 is available to advisors and fund managers that provide commodity trading advice solely to qualified eligible persons (“QEPs”). Pools that operate under a Regulation 4.7 exemption will now be required to obtain an annual audit by an independent CPA firm. Previously, 4.7 pools were exempt from the CFTC’s annual audit requirement. However, the CFTC will still entertain individual requests for relief from exempt pools with limited numbers of QEPs. The CFTC might provide no-action relief to an exempt pool whose only investors are the principals, employees, and related persons of the CPO/CTA. The criteria to qualify for a Regulation 4.7 exemption were also modified to reflect the Security and Exchange Commission’s “accredited investor” standard as it may change in the future. The CFTC incorporated the new qualification standard by reference to Regulation D in order to maintain consistency between the regulatory provisions without the need for later conforming amendments. Sponsors of 4.7 exempt pools will need to arrange for an independent audit of the exempt pool’s financial statements for Fiscal Year 2012. These managers will also need to ensure that interests in 4.7 exempt pools are offered and sold only to persons that satisfy the new definition of QEP. CFTC Registration and NFA Membership As a result of the new regulations adopted on February 8, 2012, many private fund managers will have to register with the CFTC and become NFA members. As registered CPOs, private fund managers will be subject to CFTC and NFA regulation. As newly registered managers, these firms will need to establish comprehensive compliance programs to avoid costly regulatory intervention. In general, CPOs are subject to the following ongoing compliance obligations:

  • Annual and quarterly regulatory NFA filings;
  • Annual audits of pools and submission of the audits to the NFA;
  • Quarterly investor reporting;
  • Qualification and registration of certain employees, including proficiency examinations (unless waivers are granted) and fingerprinting;
  • Initial and periodic ethics training for associated persons;
  • Annual self-examinations;
  • Books and records maintenance;
  • Submission of registration and filing fees; and
  • Periodic regulatory examinations by NFA staff.

Closing of Commodity Interest Positions Private fund managers who are unable to locate an applicable registration exemption and are unwilling or unable to register as CPOs generally will be required to cease trading in commodity interests, including commodity futures and forex contracts. New Annual Reporting and Disclosure Requirements under CFTC Regulation 4.27 Regulation 4.27 will require additional reporting by registered CPOs and CTAs in order to allow the CFTC to provide systemic risk information to the Financial Stability Oversight Council and other regulators, and to conduct its own oversight. These new reporting requirements of Forms CPO-PQR and CTA-PR are similar to the Form PF reporting requirements recently adopted by the SEC. At minimum, Regulation 4.27 requires CPOs to make electronic filings with the NFA on Form CPO-PQR regarding their commodity pools, such as net asset value, returns, capital inflows and outflows, investment strategy, leverage, counterparty credit exposure, and trading and clearing mechanisms. Large (over $1.5 billion or more of assets under management) and mid-sized CPOs (between $150 million and $1.5 billion of assets under management) must provide additional information about their pools to the extent such information is not already included on their Form PF filed with the SEC. CTAs must disclose basic information about their business to the NFA, such as total assets directed by the CTA, on Form CTA-PR. Filings for small and mid-sized CPOs will be due within 90 days following the end of each calendar year, with the first such filing due within 90 days after December 31, 2012. Large CPOs are required to file on a quarterly basis. The first filing for CPOs with $5 billion or more of assets under management will be due within 60 days following the quarter ending September 30, 2012. All other large CPOs have their first Form CPO-PQR filings due within 60 days following the quarter ending December 31, 2012. CTAs must file Form CTA-PR annually within 45 days of their fiscal year end. CTA Registration Private fund managers that relied on the Regulation 4.13(a)(3) and 4.13(a)(4) exemptions from CPO registration generally took advantage of an exemption from CTA registration found in Regulation 4.14(a)(8)(i)(D). The Regulation 4.14(a)(8) exemption from CTA registration will no longer be available to CPOs that relied on the repealed 4.13(a)(4) exemption and do not qualify for the Regulation 4.13(a)(3) de minimis exemption. However, the Regulation 4.14(a)(10) and Regulation 4.14(a)(4) exemptions remain available. CPOs relying on the Regulation 4.13(a)(3) exemption may continue to avoid CTA registration. CPOs unable to locate an applicable exemption will likely have to register as CTAs. Compliance Dates CPOs and CTAs, as well as private fund managers exempt from such registration, should be aware of the following compliance dates:


Regulation Change

60 days after rules post to the Federal Register (April 24) CPOs may no longer rely on the Regulation 4.13(a)(4) exemption for newly created pools.
November 29, 2012 Large CPOs (with gross AUM of at least $5 billion) must file initial Form CPO-PQR.
December 31, 2012 Exempt CPOs relying on the Regulation 4.13(a)(4) exemption must file for another exemption for such pools or register with the CFTC.
February 14, 2013 CTAs must file initial Form CTA-PR.
March 1, 2013 Large CPOs (with gross AUM between $1.5 billion and $5 billion) must file initial Form CPO-PQR.
March 1, 2013 CPOs and CTAs relying on Regulation 4.13 and/or 4.14 exemptions must file annual recertifications of such exemptions.
March 31, 2013 4.7 exempt pools, whose fiscal year is the calendar year, must distribute audited financial statements for fiscal year 2012
March 31, 2013 Mid-Sized and small CPOs (with gross AUM under $1.5 billion) must file initial Form CTA-PQR.