On August 14, 2012, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight issued responses to frequently asked questions on compliance obligations for Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”). The questions and responses address a number of issues, including the process of transitioning from an exemption from registration under recently rescinded Regulation 4.13(a)(4) to either registering as a CTA or CPO or claiming another exemption.
Key guidance provided by the CFTC Staff (the “Staff”) that is of particular importance to managers of private funds includes the following:
Exemption from CPO Registration for Certain Delegating Entities
A general partner, managing member or board of directors of a commodity pool that is permitted to delegate its rights and responsibilities may delegate its rights and obligations as a CPO to a registered CPO and avoid registration. The delegating entity will be required to agree to remain jointly and severally liable for any Commodity Exchange Act violations.
Continued Reliance on Appendix A for Fund-of-Fund CPOs
The Staff indicated that CPOs of fund-of-funds may continue to rely on the rescinded guidance previously contained in Appendix A to Rule 4.13(a)(3) until the CFTC adopts revised guidance.
Valuation of Swap Contracts under Regulation 4.13(a)(3)
The Staff indicated that the notional value for uncleared and cleared swaps for purposes of determining compliance with the trading thresholds under Regulation 4.13(a)(3) is the amount reported by the reporting counterparty as the notional amount of the swap under Part 45 of the CFTC’s regulations.
Compliance Obligations Related to “Commodity Interests” Under 4.13(a)(3)
The Staff indicated that under Regulation 4.13(a)(3), a CPO is only required to be in compliance with the trading thresholds at the time a position is established, and is not otherwise required to reconfigure its portfolio to comply with the limits. The Staff also confirmed that swaps will be included in the calculation of “commodity interest” exposure under Regulation 4.13(a)(3) by the later of December 31, 2012 or sixty days after the publication date of the final rulemaking further defining the term “swap.”
Transitioning from a 4.13(a)(4) Exemption to Registration or Other Exemptions
CPOs transitioning from an exemption under Regulation 4.13(a)(4) to an exemption under Regulation 4.13(a)(3) will need to submit a written request for withdrawal to the NFA and receive confirmation of the withdrawal before electronically filing a new exemption under 4.13(a)(3). Additionally, CPOs whose exemption under Regulation 4.13(a)(4) is withdrawn on January 1, 2013 and transition to an exemption under Regulation 4.7 will be subject to the accompanying reporting obligations. As such, it is important for these CPOs to ensure that their pool’s exemption under Regulation 4.7 does not become effective until January 1, 2013, in order to avoid having to file a 2012 annual report for the pool. Newly registered CPOs will be required to file their first annual report for fiscal year 2013. Furthermore, for CPOs managing pools currently exempt under Regulation 4.13(a)(4) switching to an exemption under Regulation 4.7, existing investors of such pools will be “grandfathered” and the CPOs will only need to obtain qualified eligible person representations for new investors of such pools.
If you have any questions regarding the CPO or CTA registration process, please contact an attorney in the Investment Management Group at Seward & Kissel.
