May 26, 2020

CFTC (Commodity Futures Trading Commission) and NFA (National Futures Association) Regulatory Updates

Expedited No-Action Relief for CPO Delegation—Action Required for Certain CPOs

On May 12, 2014, the CFTC issued no-action letter 14-69 setting forth the criteria for seeking streamlined registration no-action relief for commodity pool operators (CPOs) that delegate their status and responsibility as a CPO to another party. As noted in the no-action letter, the CFTC has historically considered a fund's general partner, manager or board of directors to be the fund's CPO with the exception of investment advisers to registered investment companies (RICs) that are deemed to be the CPO of a RIC.

In a move to clear up industry confusion on whether no-action relief was required to perfect CPO delegation, the CFTC clarified that relief is required if a CPO seeks to delegate its responsibilities to another party. The no-action letter details the criteria that must be satisfied in order for a firm to claim the streamlined process for relief. Unfortunately, the relief is not self-executing. The process involves completing a form of request and filing such request with the CFTC. The CFTC will then review and grant such request on an expedited basis.

Criteria

Below are the criteria (excerpted from CFTC Staff Letter No. 14-69) that must be satisfied in order for a party to claim the streamlined relief.

  1. (a) Pursuant to a legally binding document, the Delegating CPO has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool; (b) the Delegating CPO does not participate in the solicitation of participants for the commodity pool; and (c) the Delegating CPO does not manage any property of the commodity pool.

  2. The Designated CPO is registered as a CPO.

  3. The Delegating CPO is not subject to a Statutory Disqualification.

  4. There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO that is not solely to avoid registration by the Delegating CPO under the [Commodity Exchange Act (CEA)] and the [CFTC's] regulations.

  5. The books and records of the Delegating CPO with respect to the commodity pool are maintained by the Designated CPO in accordance with Regulation 1.31.

  6. If the Delegating CPO and the Designated CPO are each a non-natural person, then one such CPO controls, is controlled by, or is under common control with the other CPO.

  7. If a Delegating CPO is a non-natural person, then such Delegating CPO 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 by the other in connection with the operation of the commodity pool.

  8. If a Delegating CPO is a natural person and is not an Unaffiliated Board Member, as defined below, then such Delegating CPO 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 by the other in connection with the operation of the commodity pool.

  9. If a Delegating CPO is an Unaffiliated Board Member, then such Delegating CPO must be subject to liability as a Board member in accordance with the laws under which the commodity pool is established.

Certain of the above criteria, including Items 1b and 1c, raise difficult factual questions that each Delegating CPO will need to evaluate. We note that the CFTC will require each director to seek individual relief (the relief request can be bundled with those of other directors). We also note the relief for directors will apply to each person individually. Accordingly, certain directors may be able to satisfy the criteria whereas others may not. As a result, your firm may want to reevaluate its current governance structures in light of the CFTC's recent guidance.

Who needs to take action?

Any person who seeks to delegate his or her status as a CPO to another party. This includes any general partner, manager or director of a commodity pool. We note action will likely be required for directors of a controlled foreign corporation subsidiary of a RIC. While the investment adviser of a RIC may be deemed to be a CPO and therefore delegation is not necessary, the same does not apply to a wholly owned subsidiary of the RIC if it is a commodity pool.

What if the person seeking delegation can't qualify for the relief?

If you are not able to claim the streamlined relief, the CFTC will continue to evaluate requests for CPO registration no-action relief. However, such relief request will not be on an expedited basis.

CFTC Delays Oral Recordkeeping Requirements for Certain CTAs

On April 25, 2014, the CFTC issued time-limited no-action relief delaying until December 31, 2014 application of the oral recordkeeping requirements set forth in CFTC Regulation 1.35(a) for commodity trading advisors (CTAs) that are members of swap execution facilities (SEFs) or designated contract markets (DCMs) in connection with the execution of swap transactions. The CFTC did not extend such relief to other industry participants or to the written recordkeeping requirements.

By way of brief background, the CFTC recently amended Regulation 1.35(a) to integrate it into the new swaps framework created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As amended, Regulation 1.35(a) requires that all members of a SEF or a DCM keep full written and oral records of their business dealings in commodity interests and related cash and forward transactions. Such records include communications occurring via telephone or voice mail. Although the regulation specifically excludes from the oral recordkeeping requirement CPOs and members of a SEF or a DCM that are not registered or required to be registered, it does not exclude similarly situated CTAs.

Affected CTAs were initially required to comply with the oral recordkeeping requirements on December 20, 2013, but the CFTC granted two time-limited no-action relief requests in relation to certain CTAs that were members of a SEF or a DCM. On April 3, 2014, the CFTC held a public roundtable in relevant part to address the expiration of these two no-action letters. In response to the public roundtable and industry comment letters, the CFTC issued the temporary relief described above. Although certain commentators had requested relief from the written and oral recordkeeping requirements of the regulation and to extend relief to other market participants, the CFTC only found it appropriate to address the oral recordkeeping requirements and to extend the relief to CTAs that are members of a SEF or a DCM in connection with the execution of swap transactions.

Large Traders: Revised and New Ownership and Control Reports

Effective August 15, 2014, the CFTC's final rules on Ownership and Control Reports and Forms 102, 40 and 71 are meant to provide the CFTC with enhanced visibility of large traders' positions and trading in futures and swaps markets. Subject firms must report required information via the new and amended forms, namely Form 102A (an updated form), Form 102B (a new form for "volume threshold accounts"), Form 102S (an updated form), Form 71 (a new form for "volume threshold accounts" that are omnibus accounts) and Form 40/40S (an updated form).

CPO/CTA Capital Requirements and Customer Protections

The period has now closed for comments to NFA's concept of imposing a capital requirement on CPO and CTA members, as well as several other customer protection measures. The concept contemplates holding independent third parties responsible for authorizing the disbursement of pooled funds and preparing or verifying members’ net asset values, monthly/quarterly reporting and performance results. It also calls for customer funds to be reported to NFA.

© 2020 Vedder Price

TRENDING LEGAL ANALYSIS


About this Author

Nicole M. Kuchera, Investment Services Attorney, Vedder Price law firm
Associate

Nicole M. Kuchera is an Associate at Vedder Price and a member of the Investment Services group in the firm’s Chicago office.

Ms. Kuchera counsels commodities, securities and derivatives professionals, such as hedge funds, investment advisers, commodity pool operators (CPOs), commodity trading advisors (CTAs), futures commission merchants (FCMs), retail foreign exchange dealers (RFEDs), introducing brokers (IBs), swap dealers (SDs), forex (FX) firms, proprietary trading firms, binary options trading firms and broker-dealers (BDs), in day-to-day legal matters. She also drafts private...

312-609-7763
Joseph Mannon, Investment Lawyer, Vedder Price Law Firm
Shareholder

Joseph M. Mannon is a member of Vedder Price P.C.’s Investment Services group.

Mr. Mannon focuses his practice on legal and compliance matters for investment advisers, mutual funds, closed-end funds and unregistered vehicles such as hedge funds, hedge fund of funds and other investment entities.  With regard to unregistered vehicles, he frequently counsels clients on fund formation and structuring matters for funds organized both in the United States and abroad.  He also counsels clients on issues relating to commodity trading advisers and commodity pool operators.  

312-609-7883