Proposal to Rescind 4.13(a)(3) & 4.13(a)(4) CPO Exemptions
Pursuant to rulemaking required under the Dodd-Frank Act, the CFTC is jointly proposing with the SEC that CPOs and CTAs which are dually registered (that is with the CFTC and as an investment adviser with the SEC) file certain information on a new Form PF. In addition, the CFTC is proposing to eliminate two widely used exemptions from CPO registration – the 4.13(a)(3) exemption (de minimis futures trading) and the 4.13(a)(4) exemption (the only investors are QEPs). Another exemption applicable to mutual funds – the 4.5 exemption – may also potentially be rescinded under the proposed rulemaking. The CFTC is proposing minor changes to regulations in addition to the more onerous registration and reporting requirements.
Rescinding CPO Registration Exemptions
We have discussed the requirements for these and other CFTC registration exemptions in a post on CPO registration. The CFTC is proposing to rescind the following exemptions:
Regulation 4.13(a)(3) – this exemption is normally utilized by managers who use just a small amount of futures. In the event that this exemption isrescinded, a large number of managers would be required to register. This also means that managers could not trade any futures contracts in a fund structure without being registered as a CPO. Obviously this will increase the regulatory burden for managers and will likely lead some managers to simply cease using futures.
Regulation 4.13(a)(4) – this exemption is normally utilized by those managers who only have investors who are qualified eligible persons.
Note: Rescinding both the (a)(3) and (a)(4) exemptions will likely mean the fund-of-fund managers will also be required to register as CPOs. Form more information please see our post on fund-of-fund CPO exemptions.
Regulation 4.5 – this exemption applies to mutual funds that have funds which invest in futures. In general, mutual fund managers who invest in futures do so indirectly and are able to escape registration as a commodity pool operator. This means that mutual funds, while they must be approved by the SEC, receive no regulatory scrutiny from the CFTC. Late last year, the NFA submitted a petition to the CFTC asking the CFTC to amend Regulation 4.5 to require those managers that indirectly invest in futures products to register as a CPO.
New Reporting Requirements
The CFTC is proposing that CPOs and CTAs face increased reporting requirements on new forms Form PF, Form CPO-PQR and Form CTA-PRQ. The increased reporting requirements will apply to two groups of CFTC registrants: (i) dual registrants and (ii) CFTC-only registered firms.
New Forms
Form PF – Form PF was designed to provide government agencies with information about the basic operations and structure of private funds. The creation of Form PF was required by Section 404 of the Dodd-Frank Act. The SEC and CFTC are working together to develop Form PF Sections 1 and 2 as those sections are relevant to firms registered with both agencies.
Form CPO-PQR and Form CTA-PQR – these forms will require firms to provide similar information as will be required in Form PF, with appropriate modifications made so that the information is relevant with respect to commodity futures managers.
In general, all forms will allow some information to be treated as confidential.
Dual registrant reporting
Dual registrants are firms which are registered with the SEC (as an IA) and with the CFTC (as a CPO or CTA). The following are the proposed filing requirements:
Dual registrants with less than $1 billion of AUM:
- Annual filing of Form PF
- Complete only Section 1 of Form PF
Dual registrations with less than $1 billion of AUM:
- Quarterly filing of Form PF
- Complete Sections 1 and 2 of Form PF
CFTC-Only Registrants
CFTC-only registrants are firms registered with only the CFTC
(as a CPO or CTA). The amount of information to be required on the new CFTC only forms, and the timing of filing, will depend on the registered firm’s size and AUM.
Forms CPO-PQR and CTA-PQR will be filed directly with the NFA.
Other Proposed Changes
The CFTC is also proposing some other changes:
- Managers using the Regulation 4.7 exemption will be required to have certified financial statements for any 4.7 exempt pool which they advise. [Note: currently there is no certification requirement.]
- Managers using any of the 4.5, 4.13 or 4.14 exemptions will need to annually certify the notice of exemption. [Note: currently there is no requirement to certify the exemption on an annual basis.]
- Risk disclosure language to be updated to include discussion of swaps, if appropriate for the manager.
- Certain changes to make the regulations internally consistent.
The CFTC overview can be found here: CFTC Rescinding Exemption Overview
The CFTC Q&A sheet can be found here: CFTC Rescinding Exemption Q&A
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Cole-Frieman & Mallon LLP provides comprehensive CFTC and NFA compliance and regulatory support for investment managers. Bart Mallon, Esq. can be reached directly at 415-868-5345.