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.