|May 29, 2014|
Previously published on May 14, 2014
On May 12, 2014, the CFTC staff announced a new approach for seeking relief from the requirement to register as a commodity pool operator (“CPO”) under Section 4m(1) of the Commodity Exchange Act (“CEA”).1 This announcement squarely addresses an issue that has confounded the industry for some time — namely, how best to avoid CPO registration for directors, general partners, managing members, and other persons that have no meaningful, day-to-day role in operating a commodity pool but nonetheless fall within the CPO definition. It was also prompted by the large number of requests for relief on this issue currently pending with the staff.
Adopting a streamlined approach to requesting no-action relief strongly suggests the CFTC thinks that relief is in fact necessary in each case where one person seeks to delegate CPO responsibilities to another. This suggestion may well prompt industry participants to review their existing delegation arrangements. Participants may also choose to seek their own no-action relief in keeping with the staff’s letter, even if they may otherwise be able to conclude that their arrangements are consistent with earlier CFTC relief or other pronouncements on this subject.2
The letter explains the circumstances in which the staff will grant registration relief and the conditions to which a person must agree in seeking the relief. No-action relief must be requested through a simplified form of request, a template of which is attached to the staff’s letter.
In earlier no-action letters, the staff generally required the person delegating CPO responsibility (“Delegating Person”) and the registered CPO that accepts the responsibility (“Designated CPO”) to agree to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations committed in connection with operating the pool.3 The staff will not require joint and several liability as a condition of relief for a board member as a Delegating Person, if the board member is not affiliated with the Designated CPO (an “Unaffiliated Board Member”).
The staff further defines Unaffiliated Board Member as a natural person who is a voting member of the board of directors or an equivalent governing body of a commodity pool and who:
This relief is consistent with the CFTC’s decision not to require CPO registration for board members of commodity pools that are investment companies registered under the Investment Company Act of 1940.5
The new approach will apply to no-action relief requests where Delegating Persons and Designated CPOs meet the requirements described below. Despite having adopted a streamlined approach, the staff has stated that it will still consider no-action relief for firms with fact patterns that do not align with this latest guidance.
Criteria for Requesting No-Action Relief Under the Streamlined Approach:
1. Under a legally binding document, the Delegating Person has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool.
2. The Delegating Person does not participate in the solicitation of participants for the commodity pool.
3. The Delegating Person does not manage any property of the commodity pool.
4. The Designated CPO is registered as a CPO.
5. The Delegating Person is not subject to a statutory disqualification.6
6. There is a business purpose for the Designated CPO being a separate entity from the Delegating Person that is not solely to avoid CPO registration by the Delegating Person.
7. The books and records of the Delegating Person with respect to the commodity pool are maintained by the Designated CPO in accordance with Regulation 1.31.
8. If the Delegating Person and the Designated CPO are each a non-natural person, then one of them controls, is controlled by, or is under common control with the other.
9. If a Delegating Person is a non-natural person, then the Delegating Person and the Designated CPO have executed a legally binding document under which each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations in connection with the operation of the commodity pool.
10. If a Delegating Person is a natural person and is not an Unaffiliated Board Member, then the Delegating Person and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations in connection with the operation of the commodity pool.
11. If a Delegating Person is an Unaffiliated Board Member, then the Delegating Person must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.
1 CFTC Letter No. 14-69 (May 12, 2014).
2 As a technical matter, CFTC Regulation 140.99 makes clear that a no-action letter applies only to the person who has requested the relief.
3 A summary of the staff’s prior approach was described in a 2012 FAQ as follows:
Where the general partner, managing member or board of directors of a commodity pool is legally permitted to delegate its rights and responsibilities with respect to the operation of the commodity pool to one or more persons, the manager may delegate its rights and obligations as CPO to another person, provided that such person is qualified to serve as CPO and is registered as a CPO with the Commission, and subject to that person’s agreement to assume such rights and obligations, particularly with respect to compliance with the Commodity Exchange Act and the Commission’s regulations promulgated thereunder. Consistent with letters previously issued regarding such delegations, the delegating entity must agree to remain jointly and severally liable with respect to any violations of the Commodity Exchange Act.
4 Determination of beneficial ownership is described in 17 CFR 240.13D-3.
5 See 77 Fed. Reg. 11252, 11258 (Feb. 24, 2012) (“The Commission agrees [with commenters] that the investment adviser is the most logical entity to serve as the registered investment company’s CPO. To require a member or members of the registered investment company’s board of directors to register would raise operational concerns for the registered investment company as it would result in piercing the limitation on liability for actions undertaken in the capacity of director. Thus, the Commission concludes that the investment adviser for the registered investment company is the entity required to register as the CPO.”) (internal citations omitted).
6 Statutory disqualification means a person has committed an offense of the type specified in Section 8a(2)-(3) of the CEA and thus may be unable to register with the CFTC. See 7 U.S.C. § 12a(2)-(3).