The CFTC has rescinded the exemption from registration that Rule 4.13(a)(4) provided to commodity pool operators (CPOs)and commodity trading advisors (CTAs) whose investors are qualified purchasers or accredited investors. As the exemption from registration was widely relied upon, the amendment imposes significant new compliance requirements for many funds.
These amendments were enacted in order to bring the activities of CPOs and CTAs under the regulatory oversight of the CFTC. As a result, fund managers also required to be registered as investment advisers with the SEC would face dual registration and compliance with both sets of rules.
Hedge funds that invest in commodities futures, whose operators are regulated by the CFTC as CPOs and advisors are regulated as CTAs, have long availed themselves of the exemption from registration with the CFTC under Rule 4.13(a)(4).
Once the final rule becomes effective, funds will be required to (i) cease all commodity trading activity that falls within the rubric of the amended rule; (ii) seek to qualify under Rule 4.13(a)(3)’s de minimis exemption by reducing trading volume and filing for an exemption with the National Futures Association; or (iii) comply with the amended rule and register the fund as a CPO or CTA.
Registration allows the CFTC to have greater access to information about commodities funds and their investment activities whereby allowing them to better monitor the systemic economic risks posed by the commodities markets.
Fortunately, the CFTC is maintaining a de minimis exemption to the new registration rules, allowing CPOs and CTAs who trade a de minimis amount of commodities to maintain and exemption from registration. The threshold set by the CFTC requires the fund to have: (i) no more than 5% of the fund’s portfolio in aggregate comprised of initial margin and premiums on commodity interest positions, or (ii) an aggregate net notional value of commodity interest positions not exceeding 100% of the liquidation value of the pool.
The amended rule includes enhanced reporting requirements and the creation of two new forms for CPOs and CTAs to use in reporting information to the CFTC. These newly required reports must include detailed descriptions of the CPO’s and CTA’s operations, including the amount of assets under management, leverage, exposure to credit risk, and trading and investment positions for each pool.
The revised reporting requirements will become effective on July 2, 2012. The compliance dates for CPOs and CTAs vary depending on the amount of assets held by each entity.
For CPOs having at least $5 billion in assets under management, compliance must begin 60 days after the end of the CPO’s first calendar quarter ending after July 2, 2012. For other large CPOs with assets of $1.5 billion - $5 billion, compliance must begin 60 days after the end of the CPO’s first calendar quarter ending after December 14, 2012. For all other CPOs and CTAs, compliance must begin 90 days after the end of the 2012 calendar year.
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