|September 25, 2012|
Previously published on Fall 2012
As discussed in our prior client alerts CFTC and SEC Adopt Final Rules Defining Swaps; CFTC Repeals 4.13(a)(4) Exemption Used by Many Private Fund Managers, many fund-of-funds managers, including potentially managers of funds-of-funds investing primarily in private equity and venture capital funds, need to take urgent action in order to make sure that such funds-of-funds qualify for an exemption from registration with the Commodities Futures Trading Commission (CFTC).
Any fund-of-funds that invests even a minimal amount in a fund that trades commodity interests is itself a commodity pool. Historically, many fund-of-funds managers and sponsors were not affected by CFTC rules due to the exemption under Rule 4.13(a)(4), and the fact that CFTC rules generally only applied to futures. However, Rule 4.13(a)(4) has been repealed effective as of the end of 2012. The recent expansion of CFTC rules to cover many types of swaps and other over-the-counter instruments (such as interest rate swaps and certain foreign currency swaps and forwards) means that any fund-of-funds that invests in another fund that trades even a minimal amount of swaps or futures is potentially subject to CFTC registration, or at least the obligation to file for an exemption from registration under CFTC Rule 4.13(a)(3). This is the case even if the fund-of-funds only invests in one underlying fund that trades futures or swaps subject to CFTC regulation, and even if that underlying fund only trades a minimal amount of swaps or futures, or only for hedging purposes.
A fund-of-funds sponsor or manager will need to review, and if necessary reach out to, all of the underlying funds in which it invests in order to determine whether those underlying funds either do not trade instruments subject to CFTC regulation or will qualify for the limited trading exemption under Rule 4.13(a)(3). Currently, a fund-of-funds relying on Rule 4.13(a)(3) must use one of the “look-through” approaches outlined in Appendix A previously adopted by the CFTC under Rule 4.13(a)(3), which illustrates the application of Rule 4.13(a)(3) in several hypothetical fund-of-funds situations. Appendix A is no longer available on the CFTC website, and will be replaced when new guidance is issued by the CFTC. However, the CFTC recently confirmed that fund managers can continue to rely on Appendix A until the CFTC has issued new guidance. A fund-of-funds that is relying on the exemption under Rule 4.13(a)(3) must file a simple claim for exemption with the CFTC.