CFTC staff provides self-executing CPO registration relief for certain directors, general partners and managing members of commodity pools delegating their CPO responsibilities.
On October 15, 2014, the staff of the Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity Futures Trading Commission (the “CFTC”) issued a letter (“Letter 14-126”) providing no-action relief to certain commodity pool operators (“CPOs”) from the requirement to register as a CPO with the CFTC.1 This registration relief is available to CPOs (the “Delegating CPOs”) that have delegated investment management authority as a CPO of a commodity pool to another CPO registered with the CFTC (the “Designated CPO”), subject to the conditions set forth in Letter 14-126.
Letter 14-126 replaces the Division’s May 2014 letter (“Letter 14-69”)2 that created a “streamlined” process through which Delegating CPOs could request registration no-action relief if they met certain specific criteria.3 This streamlined approach resulted in the Division receiving numerous requests for relief,4 but it also raised a number of questions and concerns about the practical scope and applicability of certain criteria for that relief. For example, the criteria appeared to exclude many common CPO structures from relief, including Delegating CPOs that were simultaneously pool directors and principals of the Designated CPO, or Delegating CPOs that bifurcated the delegation of their investment management authority between the Designated CPO and a third-party commodity trading advisor (“CTA”). Letter 14-126 replaces the streamlined no-action request process provided under Letter 14-69 with self-executing relief based on substantially the same eligibility criteria set forth in Letter 14-69, but with certain clarifications addressing some of those concerns.5
Delegating CPOs who have received no-action relief through the streamlined approach can continue to rely on that relief, but the CFTC will not accept further requests, or act on pending requests, submitted via the streamlined approach. Anyone with a streamlined relief request pending should assess whether they may be eligible for the relief provided by Letter 14-126.6
The CPO registration relief granted in Letter 14-126 is self-executing, meaning that neither Delegating CPOs nor Designated CPOs need to file any notice or claim, or make any form of certification, to take advantage of it. However, this relief is only available in certain limited circumstances, as described below.
Conditions of Letter 14-126
For a Delegating CPO to be eligible for relief from registration as a CPO with respect to a given commodity pool, the following requirements must be met (the “Criteria”):
- The Delegating CPO must have delegated all of its investment management authority over the commodity pool to a Designated CPO pursuant to a legally binding document.7
CFTC’s Clarification: The Delegating CPO or Designated CPO is permitted to separately appoint one or more third parties to serve as investment manager(s) of the commodity pool and still satisfy this criterion, if each such third-party investment manager is registered as a CTA or is exempt from such registration pursuant to the CEA or CFTC regulations.8
- The Delegating CPO must not participate in the solicitation of pool participants.
CFTC’s Clarification: The Delegating CPO is permitted to participate in the solicitation of pool participants and still satisfy this criterion, if it:
- is registered as an associated person (“AP”) of the Designated CPO or is exempt from such registration under the CEA or CFTC regulations; and
- participates in the solicitation of pool participants solely in its capacity as an AP of the Designated CPO.
- The Delegating CPO must not manage any property of the commodity pool.
CFTC’s Clarification: The Delegating CPO is permitted to manage commodity pool property9 and still satisfy this criterion, if it:
- is a principal or employee of the Designated CPO or of a CTA of the pool;
- has management responsibilities over pool property;
- exercises these management responsibilities solely in its capacity as a principal or employee of the Designated CPO or a CTA of the pool and not as the Delegating CPO of the pool; and
- is subject to supervision as a principal or employee in connection with these management responsibilities by the Designated CPO or a CTA of the pool under CFTC Rule 166.3.
- The Designated CPO must be registered as a CPO with the CFTC.
- The Delegating CPO must not be subject to a statutory disqualification under the CEA.10
- The business purpose for the Delegating CPO and the Designated CPO being separate entities must not be solely to avoid the Delegating CPO’s registration requirements.
- The Designated CPO must maintain the Delegating CPO’s books and records with respect to the underlying commodity pool.11
- If the Delegating CPO and Designated CPO are both non-natural persons, one must control, be controlled by, or be under common control with the other.
- If the Delegating CPO is a non-natural person, the Delegating CPO and Designated CPO each must undertake, pursuant to a legally binding document, to be jointly and severally liable for any violation of the CEA or CFTC rules by the other with respect to the operation of the commodity pool.
- If the Delegating CPO is a natural person and is a board member who is affiliated with the Designated CPO,12 the Delegating CPO and Designated CPO must have executed a legally binding document whereby each agrees to be jointly and severally liable for any violation of the CEA or CFTC rules by the other with respect to the operation of the commodity pool.13
- If the Delegating CPO is a natural person and is not a board member who is affiliated with the Designated CPO, the Delegating CPO must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.
The Criteria raise a number of interpretive questions and should be evaluated carefully against the relevant facts and circumstances before a Delegating CPO determines its eligibility for this no-action relief from CPO registration.
1 CFTC Letter No. 14-126 (October 15, 2014). Letter 14-126 is available here.
4 The substance of Letter 14-126 is largely based on the Managed Funds Association’s meetings and correspondence with the Division.
5 The Division staff notes that even though Letter 14-126 clarifies the criteria set forth in Letter 14-69, these clarifications do not “narrow the relief previously provided by the Division in its responses to requests for relief filed pursuant to Letter 14-69.” See Letter 14-126, pg. 2, ftn. 4.
6 Delegating CPOs that do not meet the criteria set forth in Letter 14-126 may nevertheless submit requests to the Division for bespoke no-action relief, which will be handled in the ordinary course.
7 This “legally binding document” might be, without limitation, a separate delegation agreement, the document establishing the pool or an investment management agreement between the Delegating CPO and the Designated CPO. Some Delegating CPOs may find that their existing agreements will need to be amended in order to qualify for this relief.
8 The purpose of this clarification is, in part, to address the common situation where a Delegating CPO bifurcates its delegation, delegating its investment management authority directly to an investment advisor or CTA (that is not a registered CPO) and the CPO function, separately, to a registered CPO.
9 Letter 14-126 further clarifies that “management of pool property” is not intended to include responsibilities that are only “administrative, clerical or ministerial.” See Letter 14-126, pg. 5.
10 Statutory disqualifications are set forth in Sections 8a(2) and 8a(3) of the CEA.
11 This criterion is an important change from the books and records criterion in Letter 14-69, in that it no longer expressly refers to maintaining records in accordance with CFTC Rule 1.31. As Rule 1.31 is out of step with current technology and standard recordkeeping procedures, the requirement to attest to compliance with Rule 1.31 had deterred some CPOs from using the streamlined relief.
12 A board member affiliated with the Designated CPO is a natural person who is a voting member of the board of directors or an equivalent governing body of the commodity pool and who: (i) is a member of the management or an employee of the Designated CPO or an affiliate thereof, (ii) is a substantial beneficial owner of the Designated CPO or any affiliate thereof or of any company holding more than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof, or (iii) has an interest or relationship that could interfere with his/her ability to act independently of management of the Designated CPO or any affiliate thereof or of any company holding more than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof.” See Letter 14-126, pg. 6. Footnote 11 to Letter 14-126 states that whether one has an interest or relationship under item (iii) above is a factual question and provides several examples of where such an interest could arise, including being a material service provider or employee of a material service provider for the Designated CPO. It is unclear from Letter 14-126 whether the Division would view a director provided by a fund’s administrator as an affiliated director.
13 We understand that in its routine audits of CPOs, the National Futures Association may review the legally binding document for compliance with the criteria of Letter 14-126, including the “jointly and severally” liable requirement.
If you have any questions regarding this update, please contact one of the following or the Sidley lawyer with whom you usually work.
|Nathan A. Howell
|Michael S. Sackheim
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