Category Archives: Commodities and Futures

Hedge Fund Bits and Pieces for March 24, 2017

Happy Friday from rainy San Francisco. As a reminder, there is one week left for investment advisers to complete the annual ADV update.


Notes on cryptocurrency and blockchain – earlier this week Coinbase added a new margin product for leveraged trading in certain leading cryptocurrencies including Bitcoin. We believe that a product like this would be subject to CFTC jurisdiction and certain registration (or exemption) requirements. As we’ve had more discussions with groups in this space over the last couple of weeks we are seeing both the difficulties of running a fund strategy in this space (hard to find banks willing to support crypto managers; lack of audit firms able to audit these strategies) and the possibilities of blockchain technology (potentially uses for compliance in the hedge fund space).  These discussions have come in the wake of significant client interest in this are and our article on bitcoin hedge funds.

Cannabis Investment Management Conference – continuing on our earlier discussion of the rise of investment opportunities in the cannabis space, MedMen and IMN are putting on The Institutional Capital & Cannabis Conference next week in San Jose. The conference will take place on March 28-29 and will include a number of funds and allocators in the cannabis space.

Regulations and Tax – not as much news this week on the regulatory front applicable to hedge funds – we expect to begin hearing more next week (after the Health Care Bill vote) when/if the discussion of tax reform begins. If Trump keeps his word to eliminate the “carried interest loophole”, we may see more discussion of the issue like we did back in 2011 and 2009.

Other Items:

  • SEC Compliance Seminars – the SEC announced compliance seminars in a number of cities. Please see the release here.
  • Connecticut Reminder to Exempt IAs – the Connecticut Department of Banking sent out a regulatory reminder about managers who utilize the Connecticut IA registration exemption (more information in our post about the Connecticut ERA filing) in the state. The release can be found here.
  • SEC Adopts T+2 – the settlement cycle for securities transactions gets shorter by one day on September 5, 2017. We expect to hear more from the brokerage firms about this change in the next couple of months as systems become integrated with the new requirements. The announcement can be found here.


Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP and focuses his legal practice on the investment management industry. He can be reached directly at 415-868-5345.

CFTC Issues No-Action Letters for CPO Registration Relief

Hedge Fund General Partner CPO Registration Relief 

In a series of no-action letters issued in March, the CFTC has granted no-action relief from registration as a commodity pool operator (“CPO”) for a general partner of a fund (or a managing member, if the fund is an LLC) that delegates its entire management authority over the fund to another entity – typically an “investment manager” entity – that is under common control with the general partner. Under this relief, the investment manager is required to register as a CPO, but the general partner is relieved from the CPO registration requirement.

Background on CPO Registration

Based on the legal structure of a fund organized as a limited partnership or limited liability company, typically the general partner or managing member (respectively) has the operational authority over the fund that makes CPO registration process necessary. Under the Commodity Exchange Act of 1936 (the “Act”), an entity that engages in the following activities on behalf of a fund (a “pool” in CFTC parlance) is generally required to register as a CPO:

“any person engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests.”  See text here.

In some fund structures, however, the general partner may wish to delegate its CPO responsibilities to an investment manager. This is often (but not exclusively) done in the context where a fund’s performance allocation is paid to the general partner, in order to obtain favorable tax treatment, but the investment manager runs the fund on a day-to-day basis, often receiving management fees as compensation. In this situation, it would be costly and burdensome to register both the general partner and the investment manager as separate CPOs of the fund, so it may be worthwhile to request CFTC no-action relief.

Requirements for No-Action Relief

The CFTC issued four no-action letters outlining the general guidelines for how to take advantage of the CPO registration relief described in this article: CFTC Letter No. 13-17, CFTC Letter No. 13-18, CFTC Letter No. 13-19, and CFTC Letter No. 13-20. Although the facts of each no-action letter differ somewhat, the following basic requirements apply. The general partner and investment manager should be able to make representations to the CFTC with respect to each of the following:

Common Ownership and Control. The general partner entity and the investment manager entity should have the same owners and be subject to the control of the same persons.

Delegation Agreement – All Management Authority. The general partner and investment manager should enter into a “Delegation Agreement” whereby all of the CPO-related authority of the general partner is delegated to the investment manager.

Soliciting Clients and Managing Assets. The general partner must not engage in the solicitation of investors to the fund, and must not manage the property of the fund.

Books and Records. All books and records related to the CPO activities should be maintained at the offices of the investment manager.

CPO Registration. The investment manager must be registered or be in the process of registering as a CPO, and must maintain its registration on an ongoing basis.

Employees and Agents. The general partner must not have any employees or others acting on its behalf, and must not engage in any other activities that would subject it to the Act or the CFTC’s regulations.

Joint & Several Liability. The general partner and investment manager entities must agree to be jointly and severally liable for any violation of the Act or the CFTC’s regulations.

Statutory Disqualification. The general partner cannot be subject to statutory disqualification from CPO registration under section 8a(2) or 8a(3) of the Act.

How to Apply for No-Action Relief

If you wish to apply for the no-action relief described above, you will need to draft a letter to the CFTC to request the relief. This letter should comply with the requirements of CFTC Regulation 140.99. Please reach out to us if you would like any assistance with drafting such a letter.


Cole-Frieman & Mallon LLP acts as legal counsel to the investment management industry.  If you have questions on the above please contact us or call Bart Mallon directly at 415-868-5345.

NFA May Impose Capital Requirements, Other Restrictions on CPOs and CTAs

NFA Suggests New Rules, Solicits Comments from CPOs and CTAs

The NFA recently issued a Notice to Members that included a Request for Comments on a proposal to subject CPOs and CTAs to new rules. These rules, which include a minimum capital requirement for CPOs and CTAs, would be intended to protect customer funds and ensure that CPOs and CTAs have sufficient assets to operate as a going concern.

The NFA justified the need for these rules by citing 26 Member Responsibility Actions that were taken over the past 3 years, mostly against CPOs and CTAs for misuse of customer funds and/or misstatements of net asset values and performance information. Comments are due to the NFA by April 15, 2014.

Rules Under Consideration

The NFA did not propose any language for the rules in its Request for Comments, nor did the NFA suggest any details on how the rules might be drafted. Instead, the NFA implied what rules are under consideration by posing questions to CPOs and CTAs on the utility of certain rules, and on what standards should be applied to implement them.

CPOs and CTAs

• Capital Requirements. CPOs and CTAs may be required to maintain a minimum amount of capital, and to file periodic reports with the NFA to demonstrate compliance. However, the NFA’s Request for Comments indicates a degree of flexibility. For example, the NFA asked for members who oppose a capital requirement to suggest alternatives for ensuring that CPOs and CTAs have sufficient funds to operate as a going concern.

• Inactive NFA Members. NFA members that are not actively trading futures or commodity interests may have their NFA membership withdrawn, so that the NFA can stop expending regulatory resources on these firms.

CPOs Only

• Gatekeeper for Pool Disbursements. CPOs may need to retain an independent third party to approve pool disbursements (a “gatekeeper”).

• NAV Valuation and Reporting. An independent third party may be required to prepare or verify a CPO’s pool NAV valuations, and such valuations may need to be submitted periodically to the NFA.

• Performance Results. An independent third party may have to prepare or verify a CPO’s pool performance results.

• Verification of Pool Assets. CPOs and the entities actually holding pool assets may both be required to report pool asset amounts to the NFA, so that the NFA can cross-reference the reports for consistency. This could be similar to rules currently in place for futures commission merchants.


The new rules being considered are in the earliest stages of development, but it is clear that the NFA is concerned about the misuse of customer funds and the risks posed by undercapitalized CPOs and CTAs. Any CPOs or CTAs interested in commenting on the rules under consideration should submit their comments to the NFA via email to by April 15, 2014.


Cole-Frieman & Mallon LLP provides legal advice to the managed futures industry and works with FCMs, IBs, CPOs, and CTAs.  Bart Mallon can be reached directly at 415-868-5345.

Delegating CPO Recordkeeping Responsibilities

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).

The Rule

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.

Disclosure Document

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.


Cole-Frieman & Mallon LLP provides legal advice to CTAs and CPOs and other firms in the investment management space.  Please contact us directly or reach out to Bart Mallon at 415-868-5345.

Regulation S-ID Identity Theft Rules

Identity Theft Red Flag Rules Effective November 20, 2013

Pursuant to new SEC and CFTC rules, many registered managers, including private fund managers are now required to have identity theft programs in place.  Such managers will need to have robust policies in place in order to be compliant with the new rules.  Such policies will include: staff training for appearance of red flags, procedures for dealing with red flags, certification of procedures from administrators and/or custodians dealing with investor/customer accounts.

Below we have reprinted an article from the Compliance Focus blog maintained by Sansome Strategies LLC, a regulatory and compliance consulting company described in greater depth below.  The article reprinted below can be found here.


Identity Theft Issues for Investment Advisers and Futures Participants
Jennifer Dickinson, Sansome Strategies

A little-known provision of the Dodd-Frank Act shifted responsibility over existing identity theft rules from the Federal Trade Commission to the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). The rules became effective May 20, 2013 and certain entities regulated by the SEC and CFTC will need to comply by November 20, 2013.


SEC and CFTC registrants that are “financial institutions” or “creditors” and that offer or maintain “covered accounts” for their clients will need to comply with the identity theft rules:

  • Financial institution: a bank, credit union or other person who holds a transaction account belonging to a consumer (a transaction account is one that permits withdrawals, payment orders, transfers or similar means for making payments to third parties);
  • Creditor: any person that regularly extends, renews or continues credit to others.
  • Covered account: any account that a financial institution or creditor offers or maintains:
    1. Primarily for personal, family or household purposes that involves or is designed to permit multiple payments or transactions; and
    2. There is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation or litigation risks. Examples include: for the SEC, brokerage or mutual fund accounts that permit wire transfers or other payments to third parties; for the CFTC, margin accounts.

Who will be affected, and how?

On the SEC side, broker-dealers, investment companies and investment advisers are considered financial institutions. On the CFTC side, commodity pool operators and commodity trading advisers will be considered creditors if they:

  • Regularly extend, renew or continue credit or arrange for the extension, renewal or continuation of credit; or
  • Acting as an assignee of an original creditor, participate in the decision to extend, renew or continue credit.

Firms that meet these definitions are required to implement reasonable policies and procedures that:

  • Identify “red flags” to prevent identity theft in the covered accounts they manage, and document them in the compliance program. Red flags can exist in the types of accounts the firm manages, the manner in which accounts are opened or accessed, and the firm’s previous experiences (if any) with identity theft;
  • Provide for monitoring accounts on an ongoing basis to detect red flags;
  • Respond appropriately to red flags;
  • Is periodically updated to reflect any changes in risks; and
  • Describe the various appropriate responses to red flags.

Whether a firm will meet the definitions will depend significantly on its client base and account structures. Traditional RIAs and other firms that manage accounts for individuals or family offices should look closely at those accounts to determine the types of activities that will be processed in them. A firm that handles bills or other third-party payments on behalf of its clients will need to undertake the most review and implement the most rigorous compliance program contemplated by the rules.

At first blush, fund managers may assume that these rules will not apply to them; however, care should be taken to ensure that investors’ accounts are set up to receive and hold investment amounts, and the only transfers permitted will be for management fees, performance allocations to the manager/general partner as applicable, and withdrawals by (and most importantly, back to) the investor to minimize identity theft risks. Even so, additional procedures around investor intake and withdrawal may need to be implemented.

CPOs and CTAs may undertake a similar evaluation and should also look at their investment strategies to determine the extent to which they meet the creditor definition.

Finally, even if a firm is not registered with the SEC or CFTC, identity theft can be a significant reputational and litigation risk for if they handle third-party payments on behalf of clients or investors. Accordingly state registrants and exempt firms should consider implementation as a best practice.

Compliance Strategies

The rules identify five specific categories that every compliance program should address:

  • Alerts, notifications or other warnings received from consumer reporting agencies or other service providers;
  • Presentation of suspicious documents;
  • Presentation of suspicious personal information (e.g., an unexpected or unusual address change);
  • Unusual usage of a particular account; and
  • Notices from customers, victims of identity theft, law enforcement agencies or others regarding possible identity theft in an account.

Employees should be trained to identify the above and any other red flags that are specific to the firm’s business.

Appropriate responses to a red flag incident will vary significantly depending on the circumstances. The rules mention:

  • Monitoring an account for evidence of identity theft;
  • Contacting the customer;
  • Changing passwords, security codes or other devices that permit access to an account;
  • Reopening accounts with new numbers;
  • Refusing to open an account;
  • Closing an existing account;
  • Refraining from collection activities on an account;
  • Notifying law enforcement; and

Determining that a response is warranted in a particular instance.

Other, proactive safeguards can include standardizing the forms and processes used to effect transactions in client accounts, designating a person or team of people to handle those transactions under supervision (and training them to detect identity theft), preparing and reviewing a daily transaction blotter, requiring additional approvals and documentations for higher risk transactions and implementing PINs or security questions and client call-backs, to name a few.

To the extent that safeguards are client or investor-facing (such as call-backs, PINs or other identity verification tools), these should be standardized and clients/investors notified of the procedures so they know what to expect. Obtaining client’s acknowledgment of these processes via the investment advisory or subscription agreement is a good way to handle this clearly and consistently.

To ensure compliance by November 20, 2013, we encourage all firms to reach out to their compliance consultant or legal counsel as soon as possible. Rolling out the program early will afford plenty of time to refine it by the deadline.


About Cole-Frieman & Mallon LLP

Cole-Frieman & Mallon LLP provides legal services to the investment management community.  Please reach out to us through our contact form or call Bart Mallon directly at 415-868-5345 if you have questions on implementation. 

About Sansome Strategies LLC

Sansome Strategies is a compliance consulting firm specializing in high-touch, outsourced compliance services for businesses in the investment management industry. Clients include investment advisers, futures managers, broker-dealers, hedge funds, and private equity firms. Sansome Strategies provides tailored compliance management solutions to the unique needs of each client and is focused on helping clients build and enhance their business by simplifying the compliance and regulatory process.  Sansome Strategies is wholly owned by Karl Cole-Frieman and Bart Mallon.  For more information, please contact Sansome Strategies here.

NFA Guidance on CPO / CTA Yearly Exemption Affirmations

Yesterday the NFA issued a notice to persons that are currently relying on exemptions or exclusions from registration as a Commodity Pool Operator or Commodity Trading Advisor. The notice explains that certain exemptions and exclusions must be “affirmed” on an annual basis via the NFA’s online Exemption System. The first annual affirmation is due within the first 60 days after December 31, 2012. Exemptions that are not affirmed within this period will be automatically withdrawn. The NFA notice also contains a number of FAQs.

We have reprinted the notice below.


Notice to Members I-12-30

December 3, 2012

Guidance on the Annual Affirmation Requirement for those Entities that are currently operating under an exemption or exclusion from CPO or CTA registration

In February 2012, the CFTC issued final rules that now require any person that claims an exemption or exclusion from CPO registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or an exemption from CTA registration under 4.14(a)(8) to annually affirm the applicable notice of exemption or exclusion within 60 days of the calendar year end. The first notice affirming these exemptions is due for the calendar year ending December 31, 2012 and annually thereafter. Failure to affirm any of the above exemptions or exclusions will be deemed as a request to withdraw the exemption or exclusion and therefore, result in the automatic withdrawal of the exemption or exclusion once the 60 day period has elapsed.

How to complete the affirmation process

Starting on December 3, 2012, any person or entity that claims an exemption or exclusion under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or 4.14(a)(8) will be able to complete the affirmation process by accessing NFA’s Exemption System at

Once logged into the system, you will be directed to the Exemption Index, which lists all Firm Level (at the top) and Pool Level (at the bottom) exemptions on file with NFA. Exemptions requiring affirmation will be identified with an icon in the ‘Affirm’ column. After clicking

on the icon, a pop-up box will appear requesting affirmation that the exemption continues to be effective. By clicking ‘OK’, the current date will replace the ‘Affirm’ icon and effectively complete the affirmation requirement for the given exemption for the year. The same process must be completed for each and every exemption on file that requires affirmation.

Failure to affirm an active exemption or exclusion from CPO or CTA registration will result in the exemption/exclusion being withdrawn after the 60 day period has ended. For registered CPOs or CTAs, withdrawal of the exemption/exclusion will result in the firm being subject to Part 4 Requirements for that pool regardless of whether the firm otherwise remains eligible for the exemption/exclusion. For non-registrants, the withdrawal of the exemption may subject you to enforcement action by the CFTC.

Frequently Asked Questions for Exemptions

How often will I need to affirm my exemptions?

You will need to affirm each applicable exemption on an annual basis, within 60 days after December 31. NFA will provide an annual email reminder of the affirmation process. The email reminder will be sent to the email contact on file in NFA’s Exemption System. In order to ensure that your firm receives NFA’s annual reminder, you must ensure a current email address has been provided in NFA’s Exemption System. If the contact information changes during the year, firms are urged to promptly update this information.

What if NFA records reflect an exemption for a pool that is no longer active?

A registered CPO can update NFA’s records with the applicable information. The CPO must first withdraw the exemption by accessing NFA’s Electronic Exemption System at At the time you withdraw the exemption, you will be directed to the Annual Questionnaire to delete or cease the pool.

A non-registered entity must notify NFA with specific information about the pool by sending written notification to The written notification should include the full name of the entity and the pool.

If I can no longer qualify for an exemption or exclusion from CPO or CTA registration, what should I do?

If you do not affirm the applicable exemption or exclusion within the 60 day period, it will be automatically withdrawn. As a result, in order to continue to operate the pool, you may be required to be registered as a CPO and/or CTA and be an NFA Member. You can apply for registration and NFA membership in NFA’s Online Registration System (ORS), which is available on NFA’s website. For assistance in the process, NFA has a number of video tutorials available at

I currently operate pools exempt under 4.13(a)(3), but I will no longer meet the requirements of this exemption as of January 1, 2013. I understand that NFA currently offers certain entities the ability to pre-register as a CPO, which allows a firm to defer registration until that date. Is this available to entities that operate pools exempt under 4.13(a)(3)?

No, the pre-registration option is not available to entities operating 4.13(a)(3) pools. It is only available to entities operating pools that are exempt under 4.13(a)(4), 4.5, CPO 12-03 No-Action, or 4.13 No Action.

How will firms that I do business with know that I have completed the Affirmation Process?

Once an entity affirms the applicable exemptions, NFA’s BASIC System will reflect the affirmation date for each exemption held. Further, BASIC will also reflect a withdrawal date if the exemption is not affirmed in the required 60-day period.

If I currently conduct business with an exempt CPO or CTA, how do I ensure that these entities have properly affirmed their exemptions in order to satisfy my Bylaw 1101 requirements?

NFA’s BASIC System will reflect whether an exemption held by a particular CPO or CTA has been successfully affirmed by including an affirmation date. A withdrawal date will be reflected for any exemption that was not affirmed for a given CPO or CTA. NFA has also provided Members with access to a spreadsheet that includes a list of all entities that have exemptions on file with NFA that must be affirmed on an annual basis. This spreadsheet can be found in the Member’s Annual Questionnaire at Once logged in, you will see a link to a spreadsheet which is updated nightly. The spreadsheet will include all entities with an exemption(s) that requires affirmation, as well as the affirmation date, if applicable. If the spreadsheet does not reflect an affirmation date, the exemption has not been affirmed.

Any questions regarding these processes should be directed to:

Susan Koprowski, Manager, Compliance ( or 312-781-1288) or

Michael Mason, Manager, Compliance ( or 312-781-1447).

You are receiving this message because you are either a Member of National Futures Association (NFA) or you subscribed to the email subscription list on NFA’s Website. Additionally, you may be receiving this message because NFA records indicate you previously filed notice of exemption from CPO or CTA registration. To cancel or change your subscription at any time, visit the Email Subscriptions page on our Website at


Cole-Frieman & Mallon LLP provides legal services to CFTC registered firms and NFA member firms. Bart Mallon can be reached directly at 415-868-5345.

CPO Required Performance Information for Fund Offering Documents

NFA Requires Detailed Performance Information

In general, commodity pool operators (“CPO”) registered with the NFA must submit pool offering documents (also known as Disclosure Documents or “DDocs”), to the NFA for review before the documents can be used to solicit investors. The DDocs must comply with CFTC Part 4 Regulations, which require the documents to include certain risk disclosure statements, risk factors, business backgrounds of the CPO and its principals, a break-even analysis, past performance results, and other relevant information. This post provides an overview of what performance is required to be included in the DDocs.

Process and Exemptions

In general the review process for CPO DDocs can take anywhere from 4-12 weeks and will usually entail a number of comment letters from the NFA. Those CPOs that are CFTC registered but have filed a Rule 4.7 exemption with respect to a particular pool are exempt from certain disclosure requirements, including those discussed below, and are not required to have the NFA review the offering documents for that pool. Instead, the documents must not be misleading and must contain certain risk disclosure statements provided under Rule 4.7(b)(1). For more information on 4.7, please see the linked article above.

Overview of

All performance information presented in the DDoc must be current as of not more than 3 months of the date of the DDoc.

If the offered pool has at least 3 years of operating history, during which at least 75% of the contributions were made by investors unaffiliated with the CPO, the trading manager (if any), the pool’s CTA (if any), or the principals of each (collectively referred to as “outside investments”) then only the performance of the offered pool must be included (for the most recent 5 years or the life of the pool).

If the offered pool does not have at least 3 years of operating history then the following must be included for the most recent 5 years or the life of the pool (or account):

  • Offered Pool – the performance of the offered pool (discussed further below).

Note: If the offered pool has no operating history, then the following disclaimer must be included: THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.

  • The CPO and Trading Manager (if any) – the performance of each other pool operated or account traded by the CPO or trading manager (if any).

Note: Only the performance of other pools operated and accounts traded by the trading manager is required if (1) the trading manager has complete authority over the offered pool’s trading and (2) the trading manager’s performance is not materially different from that of the CPO.

  • Trading Principals – the performance of each other pool operated or account traded by a trading principal is required if the CPO or trading manager has not operated any pool for at least 3 years, during which at least 75% of the contributions are outside investments.

Note: Such performance is not required if the performance does not differ in any material respect from the performance of the offered pool, the CPO, and trading manager (if any).

Note: If neither the CPO, trading manager (if any), nor any trading principals has operated any other pools or traded any other accounts, then the following disclaimer must be included: NEITHER THIS POOL OPERATOR (TRADING MANAGER, IF APPLICABLE) NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS.

  • Major Commodity Trading Adviser (CTA) – the performance of any accounts (including pools) directed by a major CTA. A major CTA is any CTA that is currently or will be allocated 10% or more of the offered pool’s assets.

Note: If a major CTA has no trading history, then the following disclaimer must be included: (name of the major commodity trading advisor), A COMMODITY TRADING ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of the pool’s funds available for commodity interest trading allocated to that trading advisor) PERCENT OF THE POOL’S COMMODITY INTEREST TRADING HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.

Note: The DDoc must only include a summary of performance for non-major CTAs.

  • Major Investee Pool – the performance of any major investee pool. A major investee pool is any pool in which 10% or more of the offered pool’s net asset value is invested.

Note: If a major investee pool has no trading history, then the following disclaimer must be included: (name of the major investee pool), AN INVESTEE POOL THAT IS ALLOCATED (percentage of the pool assets allocated to that investee pool) PERCENT OF THE POOL’S ASSETS HAS NOT COMMENCED TRADING.

Note: The DDoc must only include a summary of performance for non-major investee pools.

Specific Information for the Offered Pool

The offered pool’s performance must be presented first. It must also include the following information:

  • name of the pool
  • type of pool (privately offered, a multi-advisor pool, or a principal protected pool)
  • date trading started
  • aggregate subscriptions (total amount of all additions to the pool over the entire operating history, not reduced by any withdrawals)
  • current net asset value
  • largest monthly draw-down during the most recent 5 years (must include the % and the month and year of the draw-down)
  • a definition of “draw-down”
  • worst peak-to-valley draw-down during the most recent 5 years (must include the % and the period the draw-down happened, including month and year of the peak and month and year of the valley)
  • monthly rates of return (RORs) for the most recent 5 years and year to date, presented in a table or bar graph
  • annual and year to date RORs for the most recent 5 years

Performance of Other Pools and Accounts

Any additional performance that is required to be included in the DDocs as discussed above (e.g. other pools operated and accounts traded by the CPO, trading manager, trading principals, major CTAs, and major investee pools) does not need to include monthly RORs. However, if presented, such performance must be presented as follows:

  • Same Type as the Offered Pool – performance for pools that are the same type as the offered pool (e.g. all privately offered) must be presented after the performance of the offered pool. They must be presented on a pool-by-pool basis.
  • Different Type Than the Offered Pool – performance for pools of a different type than the offered pool (e.g. single-advisor vs. multi-advisor) must be less prominent than the performance of the offered pool.
  • Composite Results – performance of multiple pools of the same type may be presented in composite form as long as their rates of return are not materially different and doing so would not be misleading. The DDoc must discuss how the composite was developed and any material differences between the pools.

Performance Not Required

The following is a brief summary of performance information that is not necessarily required to be included:

  • Proprietary Performance – proprietary performance is generally not required. A proprietary pool or account is one in which 50% or more of contributions are from:
    • the CPO, trading manager (if any), CTA or any principal of each;
    • an affiliate or family member of the CPO, trading manager (if any), or CTA; or
    • any person providing services to the pool.

If presented, they must be clearly labeled as such and must appear separately after all required and non-required disclosures in the DDoc. It must also include discussion of differences between the proprietary results and the offered pool (e.g. differences in leverage, trading methodology).

Pro forma adjustments must be made to the proprietary results if fees, commission, margin/equity ratios, or any other items are materially different from the offered pool. It should be clearly labeled “pro forma.”

In addition, if any proprietary futures accounts are included in the DDoc, all such accounts must be disclosed.

  • Hypothetical and Extracted Performance – the NFA generally discourages the use of hypothetical and extracted results. If included, the CPO should review the various disclaimers that must accompany these results.


NFA examiners will review DDocs thoroughly. When it comes to performance information, all required information (or the appropriate disclaimer if there is no performance) must be clearly presented. The CPO will also be required to disclose any other material information, even if it is not specifically required in the NFA or CFTC rules and regulations.


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a practice area focused on managed futures laws and regulations. Bart can be reached directly at 415-868-5345.

NFA Provides Guidance on Rule 4.13(a)(4) Recission

Managers Allowed to Pre-File New Exemption

In earlier posts, we briefly discusssed the Rule 4.13(a)(4) exemption recission (we also discussed the topic as part of an article on the managed futures industry post-MF Global bankruptcy). In essence the old 4.13(a)(4) exemption allowed certain fund managers to escape CPO and CTA registration if all of the investors in a fund were qualified eligible persons. While managers who were previously relying on the exemption can maintain their exempt status until December 31 of this year, new managers may not rely on the exemption. Additionally, previously exempt managers are going to need to register or find another CPO exemption that may be applicable.

Many managers are going to be able to seek an exemption under Rule 4.7, the so-called “lite-touch” regulatory regime. In order to facilitate a transition from a 4.13(a)(4) exemption to the 4.7 exemption, the NFA has modified its systems to allow managers to make the transition automatic as of December 31, 2012 through a pre-filing. Managers who pre-file, will not be subject to the regulatory requirements for the new exemption in 2012. Managers who withdraw the 4.13(a)(4) exemption without pre-filing may become subject to certain CFTC requirements. For more information, we have reprinted the NFA notice in full below.

If you have questions with respect to the exemption, please contact us.


Notice to Members I-12-09

June 22, 2012

Guidance to NFA Member CPOs and CTAs that Operate or Advise Pools Pursuant to an Exemption under CFTC Regulation 4.13(a)(4)

On February 24, 2012, the CFTC issued final rules amending CFTC Part 4 Regulations to rescind the exemption from registration available to CPOs offering certain qualifying pools under CFTC Regulation 4.13(a)(4). Although Member CPOs that currently operate a pool(s) pursuant to a 4.13(a)(4) exemption may continue to operate the pool pursuant to that exemption until December 31, 2012, those CPOs must determine whether the 4.13(a)(4) exempt pool qualifies for an exemption from registration under CFTC Regulation 4.13(a)(3) or whether the CPO will become subject to CFTC Part 4 reporting and disclosure requirements for that pool subsequent to December 31, 2012. Similarly, any CTA that advises a 4.13(a)(4) exempt pool pursuant to an exemption under CFTC Regulation 4.14(a)(8)(D) may only continue to advise that pool after December 31 if the CTA continues to be eligible for that exemption because the CPO has filed a 4.13(a)(3) exemption for that pool. Otherwise, the CTA must comply with the applicable Part 4 requirements with respect to that pool.

The final rules also amend a number of CFTC Regulations to require CPOs and CTAs that claim an exemption under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) and 4.14(a)(8) to annually reaffirm the applicable notice of exemption. CPOs and CTAs will have 60 days after the calendar year-end to reaffirm the notice of exemption through NFA’s Electronic Exemption System. The first notice reaffirming these exemptions is due for the calendar year ending December 31, 2012 and annually thereafter. Any CPO or CTA that fails to file a notice reaffirming the exemption will be deemed to have requested a withdrawal of the exemption. If the exemption is deemed withdrawn, the CPO or CTA would be required to comply with the applicable Part 4 Requirements with respect to that pool.

Member CPOs and CTAs are encouraged to review the status of their exempt pools in order to ensure that they are in compliance with the new regulatory requirements.

Other Available Exemptive Relief

A CPO that currently operates a pool(s) pursuant to 4.13(a)(4) that will not qualify for a exemption under 4.13(a)(3) after December 31, 2012 may be able to avail itself of relief from certain regulatory requirements for qualifying pools by filing an exemption under Regulations 4.7, 4.12 or CFTC Advisory 18-96. Similarly, a CTA may be eligible under Regulation 4.7 for certain relief with respect to accounts of qualified eligible persons (QEPs). To determine whether you qualify for any of these exemptions, please consult CFTC Regulations – Part 4. All exemptions other than an exemption under CFTC Advisory 18-96 must be filed through NFA Electronic Exemption System at An exemption under CFTC Advisory 18-96 must be filed in hard copy form with NFA’s Compliance Department.

To assist CPOs in the process of withdrawing a 4.13(a)(4) exemption and claiming another available exemption, NFA will modify the Electronic Exemption System to give CPOs that currently hold a 4.13(a)(4) exemption the ability to pre-file for an available exemption that would become effective on January 1, 2013. A CPO that elects to use the pre-filing option will not become subject to the additional reporting and disclosure requirements related to the newly claimed exemption until 2013. Please be aware that a CPO that elects not to use the pre-filing option and withdraws its 4.13(a)(4) exemption and files for another available exemption (other than a 4.13(a)(3) exemption) prior to December 31, 2012 will immediately become subject to the CFTC and NFA regulatory requirements related to the new exemption, including the requirement to file a certified annual report for 2012.

Withdrawing the 4.13(a)(4) Exemption

CPOs may withdraw an exemption by accessing NFA’s Electronic Exemption System at Any CPO that elects to withdraw a 4.13(a)(4) exemption prior to December 31, 2012 and does not file a 4.13(a)(3) exemption or other available exemption, will become subject to all reporting and disclosure requirements under CFTC regulations and NFA rules for that pool. CPOs that are not eligible to claim another exemption for a current 4.13(a)(4) pool are not required to affirmatively withdraw that exemption since NFA will automatically terminate 4.13(a)(4) exemptions for all pools on December 31, 2012.

Cessation of Pool

CPOs that filed a 4.13(a)(3) or 4.13(a)(4) exemption for a pool that never commenced operations or that has subsequently ceased operating should update NFA’s records with the applicable information. The CPO must first withdraw the exemption by accessing NFA’s Electronic Exemption System at At the time you withdraw the exemption, you will be directed to the Annual Questionnaire to delete or cease the pool.

Questions concerning these changes should be directed to Mary McHenry, Senior Manager, Compliance ( or 312-781-1420) or Tracey Hunt, Senior Manager, Compliance ( or 312-781-1284).


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a practice area focused on managed futures laws and regulations. Bart can be reached directly at 415-868-5345.

Major Futures Industry SROs Call for More FCM Reporting

The NFA released an announcement that the major SROs for the futures industry – the CME, NFA, ICE, KCBOT, and the Minneapolis Grain Exchange – have created a series of recommendations on ways to increase the security of customer deposits with FCMs. I

t is no surprise that the proposed safeguards all involve more oversight by the SROs.

The recommendations can be summed up as follows:

  1. Require FCMs to file daily segregation reports
  2. Require FCMs to file bimonthly reports detailing how segregated funds are invested and where those assets are custodialized
  3. Require more frequent unannounced audits/inspections of the FCM
  4. Require a principal of the FCM to approve a disbursement from the segregated accounts which is in excess of 25% of those accounts

As we discussed in a piece earlier about the changing managed futures regulations, there will be various proposals over the next several months detailing how the futures industry can be better regulated. Many of these proposals mean that FCMs will need to increase compliance and oversight. We believe that a number of the proposals below (and a number which have been suggested by other groups) are reasonable and would increase managed futures customer protection. The question, as with any increase in regulation, is whether the costs of implementing and maintaing these compliance programs outweigh any benefits to customers. We will certainly hear more on these issues in the near term…


Futures industry SRO committee announces initial recommendations to strengthen current safeguards for customer segregated funds

March 12, Chicago – A special committee composed of representatives from the futures industry’s self-regulatory organizations (SRO) has proposed a series of initial recommendations for changes to SRO rules and regulatory practices designed to strengthen current safeguards for customer segregated and secured funds held at the firm level in light of the MF Global bankruptcy.

The four recommendations include:

• Requiring all Futures Commission Merchants (FCM) to file daily segregation and secured reports. This will provide SROs with an additional means of monitoring firm compliance with segregation and secured requirements and a risk management tool to track trends or fluctuations in the amount of customer funds firms are holding and the amount of excess segregated and secured funds maintained by the firms.

• Requiring all FCMs to file Segregation Investment Detail Reports, reflecting how customer segregated and secured funds are invested and where those funds are held. These reports would be filed bimonthly and will enhance monitoring of how FCMs are investing customer segregated and secured funds.

• Performing more frequent periodic spot checks to monitor FCM compliance with segregation and secured requirements. FCMs are audited each year by both their DSRO and their outside accountant.

• Requiring a principal of the FCM to approve any disbursement of customer segregated and secured funds not made for the benefit of customers and that exceed 25% of the firm’s excess segregated or secured funds. The firm would also be required to provide immediate notice to its SROs.

Dan Roth, president of NFA, stated that “The committee believes that these recommendations will provide regulators with better tools to monitor firms for compliance with segregation and secured requirements and strengthen the industry’s customer protection regime. These are our initial recommendations. We will continue to work with the CFTC and the industry as we consider additional improvements.”

The special committee, formed in January 2012 in response to the MF Global bankruptcy, includes representatives from CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.


Cole-Frieman & Mallon LLP provides legal services to the managed futures industry. Bart Mallon can be reached directly at 415-868-5345.


MarketsWiki Interview on Managed Futures Mutual Funds and CFTC Rule 4.5

Bart Mallon discusses Managed Futures Mutual Funds

As we discussed earlier, the CFTC has rescinded the Section 4.13(a)(4) exemption from commodity pool operator (“CPO”) registration. The CFTC also proposed changes to CFTC Rule 4.5 which would essentially require those managers to managed futures mutual funds to register with the CFTC as CPOs. Below is our discussion with MarketsWiki about Rule 4.5 and other issues affecting the managed futures industry.

Please contact us if you have any questions on Rule 4.5.



Cole-Frieman & Mallon LLP provides managed futures legal services. Bart Mallon can be reached directly at 415-868-5345.