Effective September 30, 2013, the Commodity Futures Trading Commission (the “CFTC”) issued a rule permitting commodity pool operators (“CPOs”) to allow certain third party service providers to maintain the CPO’s books and records. CPOs can take advantage of this relief by filing certain notices and representations with the NFA, and by obtaining representations from the third party service provider(s) and filing these with the NFA. This exemptive relief, and the requirements for claiming it, apply to all registered CPOs, including those relying on the relief provided under CFTC Regulation 4.7(b).
All CPOs are required to maintain certain books and records, as provided under either CFTC Regulation 4.23 (for non-exempt CPOs) or CFTC Regulation 4.7(b) (for 4.7 Exempt CPOs). Under the new rule, rather than maintain these books and records at the CPO’s main business office, a CPO may maintain them at one or more of the following: the pool’s administrator, distributor or custodian, or a bank or registered broker or dealer acting in a similar capacity with respect to the pool.
Notice Filing with NFA
If a CPO uses such third party service providers to maintain its books and records, it must file a notice of exemption with the NFA, via the NFA Exemption System. The CPO must make a separate notice filing for each of the following:
• The CPO, if any of the CPO’s books and records are maintained by third parties
• Each pool that has books and records maintained by third parties
Notice filings are made through the NFA Exemption System. Each filing must be accompanied by two statements containing certain representations:
1. Statement by CPO
In connection with each notice filing, the CPO will be required to upload via the NFA Exemption System a statement containing the following information and representations from the CPO:
• The name, main business address, and main business telephone number of the third party service provider, and the name and phone number of a contact person at such provider
• The books and records to be maintained by the third party service provider (by reference to the applicable CFTC Regulation sections requiring such books and records)
• A representation that the CPO will promptly amend the statement if the contact information or location of any of the books and records required to be kept changes
• A representation that the CPO remains responsible for ensuring that all required books and records are kept in accordance with CFTC Regulation 1.31
• A representation that, within 48 hours after a request by the CFTC (72 hours if the service provider is outside the U.S.), the CPO will obtain the original books and records from the location at which they are maintained, and provide them for inspection at the CPO’s main business office
• A representation that the CPO will disclose the location of its required books and records in the applicable pool’s disclosure document [note: the CFTC has not provided explicit guidance on how specific this disclosure must be. Please see below for a more detailed discussion.]
2. Statement by Third Party Record Keeper
In connection with each notice filing, the CPO will be required to upload via the NFA Exemption System a statement containing the following acknowledgments and representations from the third party service provider:
• An acknowledgment that the CPO intends for the service provider to keep and maintain the applicable books and records;
• A statement that the service provider agrees to keep and maintain such books and records in accordance with CFTC Regulation 1.31; and,
• A statement that the service provider agrees to keep such books and records open to inspection as required under CFTC regulations.
As described above, a CPO is required to represent that it will disclose in its pool’s disclosure document the location of its required books and records. The new rule does not specify the amount of detail that must be included in the disclosure document. In an informal phone conversation, a representative from the National Futures Association indicated that the disclosure must be sufficient to inform an investor where to go to obtain the books and records.
4.7 Exempt CPOs
Before this new rule was issued, CPOs relying on CFTC Regulation 4.7(b) were relieved from the specific disclosure requirements that applied to the disclosure documents of non-exempt CPOs, as long as their offering memorandum (if any) was not misleading and contained a disclosure statement on the cover page. Now, however, under the plain language of the new rule, even 4.7 exempt CPOs must disclose the location of the pool’s required books and records in a “disclosure document.”
Presumably this new rule was not intended to impose a new CFTC requirement that 4.7 exempt CPOs must have disclosure documents. And in practice, nearly every CPO that offers interests in a pool will have an offering memorandum for such pool, regardless of whether CFTC rules require this. The more relevant question for 4.7 exempt CPOs, then, will be the same as the question for non-exempt CPOs: how much detail must be included in the offering memorandum about the location of the pool’s books and records? We await further guidance from the CFTC to definitively answer this question.