CFTC Grants Time Limited No-Action Letters for Operators of Certain Funds of Funds
On November 29, 2012, the CFTC issued a no-action letter providing time-limited relief to the operators of funds of funds facing the prospect of registration with the CFTC prior to December 31, 2012 as a result of the rescission earlier this year of Rule 4.13(a)(4) and amendments to Rule 4.5.1 The letter provides that the Division of Swap Dealer and Intermediary Oversight (the “Division”) will not recommend that the CFTC take enforcement action against the manager of a fund of funds for failure to register as a commodity pool operator (“CPO”) until the later of June 30, 2013, or six months after the effective date (or compliance date, if later) of any revised guidance that the Division issues on the application to fund of funds managers of the de minimis thresholds in CFTC Rule 4.5 and Rule 4.13(a)(3).2
The February 2012 amendments to Part 4 of the CFTC’s Rules resulted in the rescission of Appendix A of Part 4 (“Appendix A”). Appendix A, which was adopted in 2003, provided guidance on the application of Rule 4.13(a)(3) to entities that indirectly trade commodity interests as a result of their investments in other vehicles (i.e., funds of funds). Rule 4.13(a)(3) provides the so called “de minimis” exemption, which exempts a CPO from CFTC registration with respect to a commodity pool whose commodity interest trading is limited to the levels specified in the Rule (and meets other specified conditions). Appendix A addressed how to apply the de minimis thresholds of the Rule in light of possibly having only limited knowledge of the trading activities of the underlying funds in which a fund of funds invests.
After issuing the February 2012 amendments that rescinded Appendix A, the CFTC issued a set of FAQs that stated CPOs could continue to rely on Appendix A until the CFTC adopted revised guidance on the subject. On the basis of this guidance, fund of fund managers could, until the CFTC issued further relevant guidance, continue to rely on Appendix A for purposes of determining whether they met the de minimis levels of commodity interest trading permitted under Rule 4.13(a)(3). Nonetheless, the Division accepted that any material changes to the Appendix A guidance would pose significant operational challenges to fund of fund managers relying on Appendix A under the FAQs. In particular, Appendix A sets forth situations under which a fund of funds manager may infer compliance with the de minimis levels of commodity interest trading permitted under Rule 4.13(a)(3). If revised CFTC guidance withdraws or limits the ability of a fund of funds manager to make these inferences, it may take fund of fund managers some time to respond to the revised guidance either by registering with the CFTC or by adjusting the portfolios of their funds of funds so as to comply with the new guidance.
Investment advisers of mutual funds and other investment companies registered under the Investment Company Act of 1940 (the “1940 Act”) may not rely on Rule 4.13(a)(3). Instead, they may seek to rely on an exclusion in CFTC Rule 4.5 for certain investment companies registered under the 1940 Act (“Registered Funds”). As part of the February 2012 amendments, the CFTC amended Rule 4.5 to provide that investment advisers may rely on Rule 4.5 in relation to Registered Funds only if they comply with additional conditions. One of these conditions is to limit trading in commodity interests by those Registered Funds to de minimis levels very similar to those set forth in Rule 4.13(a)(3). However, Appendix A did not apply by its terms to Rule 4.5, and so there was no express guidance on how to apply these de minimis levels to a Registered Fund that invests in other funds that may trade in commodity interests. Thus, investment advisers to Registered Funds that invest in other funds were facing the same concern about CPO registration by December 31, 2012 but lacked specific guidance on assessing commodity interest trading by those underlying funds under Rule 4.5. (Of course, a reasonable inference could be made that Appendix A would apply to Registered Funds even in the absence of specific guidance, given the similar de minimis levels specified in Rule 4.13(a)(3) and Rule 4.5. Nonetheless, Appendix A would present many of the same concerns for Registered Funds as it did for managers of private funds of funds.)
The Division is providing relief for CPOs of funds of funds that may otherwise have to register by December 31, 2012 as a result of the funds’ indirect exposure to commodity interests, until such time as the Division issues revised guidance on the application to fund of funds managers of the de minimis thresholds in Rule 4.5 and Rule 4.13(a)(3). Accordingly, the Division will not recommend that the CFTC take enforcement action against the CPO of a fund of funds for failure to register with the CFTC as such until the later of June 30, 2013, or six months from the date that the Division issues revised guidance on the calculation of de minimis thresholds in CFTC Rule 4.5 and Rule 4.13(a)(3) in this context.
In order to claim this relief, a CPO must submit a claim of the relief and remain in compliance with the following criteria:
(1) The CPO currently structures its operations in whole or in part as a CPO of one or more fund of funds; and
(2) The amount of commodity interest positions to which the fund of funds is directly exposed does not exceed the de minimis levels specified in Rule 4.5 or Rule 4.13(a)(3); and
(3) The CPO does not know and could not have reasonably known that the fund of fund’s indirect exposure to commodity interests derived from contributions to underlying funds exceeds the de minimis levels specified in Rule 4.5 or Rule 4.13(a)(3), either calculated directly, or through the use of Appendix A; and
(4) The commodity pool for which the CPO seeks relief is either (i) a Registered Fund, or (ii) compliant in all other respects with CFTC Rule 4.13(a)(3).
Claim of No-Action Relief
The claim of no-action relief must: (i) state the name, main business address, and main business telephone number of the CPO claiming the relief, (ii) state the capacity (i.e., CPO) and the name of the pool(s), for which the claim is being filed, (iii) be signed by the CPO, and (iv) be filed with the Division prior to December 31, 2012. The claim may be filed with the Division using the email address firstname.lastname@example.org and including “Fund-of-Funds” in the message’s subject line.
Fund of funds operators that are already in the process of registering and implementing related changes to their systems and procedures may wish to consider whether to claim this no-action relief instead of registering with the CFTC. This will depend upon a number of factors, including, for example, the effort and expense already devoted to registering with the CFTC, the extent to which compliance procedures have already been modified to meet CFTC requirements, and the likelihood that CFTC registration will eventually be required.
CFTC Grants Relief to Family Offices from Commodity Pool Operator Rules
On November 29, 2012, the CFTC issued a separate no-action letter providing relief for certain family offices from registration with the CFTC under Part 4 of the CFTC’s regulations.3 Many family offices have been faced with the prospect of CFTC registration as a result of the rescission earlier this year of CFTC Rule 4.13(a)(4), which had exempted from CFTC registration managers who operated pooled investment funds and similar investment vehicles whose investors are “qualified eligible persons” (as defined under the CFTC Rules) or meet other suitability standards. Absent another exemption, many family offices would be required to register with the CFTC as CPOs prior to December 31, 2012.
No Action Relief
The CFTC no-action letter provides that the Division will not recommend that the CFTC take enforcement action against a “family office” for failure to register with the CFTC as a CPO provided specified conditions discussed below are met. The definition of “family office” for CFTC purposes is the same definition used by the SEC in its exclusion for family offices from the definition of “investment adviser” set forth in Rule 202(a)(11)(G)-1 (the “Family Office Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”). In its no-action letter, the CFTC noted that the SEC had already “devoted substantial time and resources” to considering the treatment of family offices for registration purposes under the Advisers Act, and observed that “the appropriate application of investor protection standards as required by each respective agency’s regulations is substantially similar.” This consistency in how family offices are defined for both CFTC and SEC purposes should promote ease of compliance for family offices in dealing with both regulators.
This no-action relief is subject to two requirements:
(1) The family office must submit a claim with the CFTC to take advantage of the relief, and
(2) The family office must remain in compliance with the Family Office Rule, regardless of whether the family office seeks to be excluded from the definition of “investment adviser” under the Advisers Act.
Claim of No-Action Relief
A claim of no-action relief must (i) state the name, main business address, and main business telephone number of the family office claiming the relief, (ii) state the capacity (i.e., CPO) and, where applicable, the name of the pool(s), for which the claim is being filed, (iii) be electronically signed by the family office, and (iv) be filed with the Division prior to December 31, 2012 (for a family office in operation as of December 1, 2012) or, for a family office that begins to operate after December 1, 2012, within 30 days after it begins to operate as a family office. The claim may be filed with the Division using the email address email@example.com and including “Family Office” in the message’s subject line.
In addition, prior to March 31, 2013 (or, for a family office that begins to operate after that date, within 30 days after it begins to operate as such), an eligible family office must confirm that it is a family office within the meaning and intent of the Family Office Rule, and that it will notify the Division if in the future it is no longer a “family office” as defined thereunder.
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1 See CFTC No-Action Letter No. 12-38 (Nov. 29, 2012).
2 See 77 Fed. Reg. 11252 (Feb. 24, 2012); correction Fed. Reg. 17328 (Mar. 26, 2012).
3 See CFTC No-Action Letter No. 12-37 (Nov. 29, 2012).