Tag Archives: CPO

NFA sends request for financials to Commodity Hedge Funds

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Hedge fund managers which are licensed as commodity pool operators (CPOs) should have received an email from the NFA which requests certain financial information. While not disclosed on their website, the NFA sent a request on Friday to all of the CPO Members. Each member will need to make a filing which represents (i) the commodity pool has not suffered a drawdown of 25% or more since December 31, 2007 or (ii) the commodity pool’s actual drawdown numbers. CPOs will have until October 8 to make the filing. If you are a CPO and have not received this email request, you should contact the NFA immediately. If you did receive the request and have any questions, you should contact the NFA and/or your attorney immediately.

The NFA contact persons are:

Mary McHenry, Senior Manager, Compliance, ([email protected], or (312) 781-1420)

Tracey Hunt, Senior Manager, Compliance, ([email protected] or (312) 781-1284)

The request for information does not apply to pools which are exempt under CFTC Rule 4.13. For the whole email, please see below.

September 26, 2008

Important Request for CPOs

Due to current events in the global financial markets, NFA is requesting CPO Members to provide information by October 8, 2008 regarding the financial status of their pools. However, this request does not apply to any CFTC 4.13 exempt pools.

To see a list of the active pools NFA has on file for your firm, click on the following link and access the EasyFile system: https://www.nfa.futures.org/AppEntry/Redirect.aspx?app=EasyFilePool. (However, if you currently operate a pool that may be subject to this request, but it is not included in the EasyFile listing, you must notify one of the individuals listed at the end of this message.)

NFA is requesting certain financial information as of 9/30/2008 for each pool listed that has experienced a drawdown of 25% or more since December 31, 2007. For further instructions on completing the filing, see the information below regarding How to File.

For any pool that did not sustain such a drawdown, you must attest to this fact by deleting the filing request from the listing. For further instructions on deleting the request, see the information below under How to Delete a Request.

How to File: For each pool that has experienced a drawdown of 25% or more since December 31, 2007, you must use the EasyFile system to submit the pool’s key financial balances and Schedule of Investments, as well as a written representation on disclosure and withdrawal restrictions.

The key financial balances consist of the same summary categories you enter for year-end statements. The Schedule of Investments is an itemized listing of all investments that individually exceed 5% of NAV. NFA has created a standardized spreadsheet for this filing, which is available at https://www.nfa.futures.org/EASYFILE/Static/CPOSchedule.xls. Use this link to access the spreadsheet and then perform a “save as” to save the blank spreadsheet to your local computer. Once you complete the spreadsheet, upload it to NFA via the EasyFile system. Additionally, you must submit any written documentation your firm has provided to participants relating to any additional disclosure, including whether the firm has placed any restrictions on redemptions and, if so, a description of these restrictions. You should save this written documentation as a PDF file and then upload it to the EasyFile system as well.

How to Delete a Request: For any pool that does not meet the 25% threshold, you must delete the filing request in the EasyFile system. Detailed instructions on how to delete a filing request are included in the guide entitled “Help for Special 9/30/2008 Filing” on the initial Pool Index screen in the EasyFile system.
BY DELETING THE REQUEST, YOU ARE ATTESTING THAT THIS POOL DID NOT EXPERIENCE A DRAWDOWN OF 25% OR MORE SINCE DECEMBER 31, 2007. In addition, NFA will maintain a record of the deletion, as well as the user who performed it.

Thank you in advance for your cooperation. If you have any questions regarding this request, please contact one of the following individuals:

Mary McHenry, Senior Manager, Compliance, ([email protected], or (312) 781-1420) Tracey Hunt, Senior Manager, Compliance, ([email protected] or (312) 781-1284)

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Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include:

CFTC Fines Hedge Funds for Failure to File Annual Report with NFA

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Certain hedge funds which trade futures and/or commodities as part of their investment program are deemed to be commodity pools and the hedge fund management company must register with the NFA as a commodity pool operator (CPO).  Registered CPOs must file annual reports with the NFA and such reports must be sent to investors in the fund.  Generally this will need to be done within either 45 or 90 days after the end of the fund’s fiscal year.  If a CPO needs extra time to file the report, it can request an extension from the CFTC.

In the cases below, each of the CPOs had filed for and were granted extensions.  Even with these extensions, however, they were not able to file their reports.  The NFA evidently takes such an infraction very seriously as the fines were stiff – ranging from $75,000 to $135,000.  Such a potential monetary penalty should make CPOs especially eager to file the appropriate reports on time.

CFTC Rule 4.22 includes the following major provisions.

  • must distribute an Annual Report to each participant in each pool that it operates, and must electronically submit a copy of the Report and key financial balances from the Report to the National Futures Association pursuant to the electronic filing procedures of the National Futures Association
  • Annual Report must be sent to pool participants within 45 calendar days after the end of the fiscal year
  • financial statements in the Annual Report must be presented and computed in accordance with generally accepted accounting principles consistently applied and must be certified by an independent public accountant

If you are a hedge fund manager registered as a CPO you should make sure you understand this and other CFTC rules.  If you have any questions on the rules or other CPO requirements, including possible CPO exemptions, you should have a conversation with your attorney so that you know what needs to be filed and when so that you can avoid harsh fines like the ones below.

The CFTC release below can be found here.

Release: 5555-08
For Release: September 24, 2008

CFTC Sanctions Four Registered Commodity Pool Operators for Failing to File Timely Commodity Pool Reports with the National Futures Association

Mansur Capital Corp., Persistent Edge Management, LLC, Stillwater Capital Partners, Inc., and Stillwater Capital Partners, LLC Ordered to Pay a Total of $330,000 in Civil Monetary Penalties

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today simultaneously filed and settled charges against four registered commodity pool operators (CPOs), charging them with failing to distribute to investors and file with the National Futures Association (NFA) one or more of their respective commodity pools’ annual reports in a timely manner. Mansur Capital Corporation of Chicago, Persistent Edge Management, LLC of San Francisco, California, and Stillwater Capital Partners, Inc. and Stillwater Capital Partners, LLC, both of New York, were charged in the CFTC action.

The CFTC orders require the CPOs to pay civil monetary penalties in the following amounts: Mansur, $75,000; Persistent Edge, $120,000; and Stillwater I and Stillwater II to jointly and severally pay $135,000.

Under CFTC regulations, CPOs are required to file annual reports with the NFA and distribute them to each pool participant. This must be done within a prescribed period after the close of their pools’ fiscal years. An annual report is designed to “provide [pool] participants with the information necessary to assess the overall trading performance and financial condition of the pool.” (See Commodity Pool Operators and Commodity Trading Advisors, Final Rules, 44 Fed. Reg. 1918 [CFTC Jan. 8, 1979], re the adoption of Rule 4.22.) According to the CFTC orders, without timely reporting, the CFTC’s goal of providing pool participants with complete and necessary data is hampered.

The CFTC orders find that each of the four CPOs operated one or more commodity pools, including pools that operated as funds-of-funds. While each of the CPOs had obtained extensions of the prescribed deadlines for various pools and reporting years, each failed to timely comply with its obligations, in violation of CFTC regulations.

The following CFTC Division of Enforcement staff are responsible for this case: Camille M. Arnold, Alan I. Edelman, Ava M. Gould, Susan J. Gradman, James H. Holl, III, Diane M. Romaniuk, Scott R. Williamson, Rosemary Hollinger, Gretchen Lowe, and Richard B. Wagner.

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Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include:

How to register as a CPO or a CTA

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Many hedge fund managers choose to utilize futures and/or commodities in their trading purposes. Generally such managers will need to register as commodity pool operators (“CPO”) and as commodity trading advisors (“CTA”). The hedge fund itself will be deemed to be a commodity pool. For purposes of the Commodities Exchange Act (“CEA”), a future and commodity are functionally equal as it relates to hedge fund manager registration. Registration as a CPO or a CTA is an often overlooked part of the hedge fund formation process. Your attorney should discuss the requirements for registration and whether any exemptions from registration are available.

In addition to hedge fund managers, retail foreign exchange (“Forex”) managers may very soon be required to register because of the recently passed “Farm Bill.” The retail Forex markets have been very loosely regulated and the CFTC and NFA have been clamoring for authority to regulate this are of the markets. Accordingly, this article will give you the basics on how to register as a CPO and/or a CTA.

A very general outline of the CPO registration process is as follows:

Prerequisite – the Series 3 exam

Each CPO or CTA firm will need to have at least one Associated Person (AP). Generally an AP will be anyone in the firm who has contact with clients in something more than a purely administrative or clerical role. All managers and non-clerical employees will be APs. All APs must have passed the Series 3 exam. Information on the Series 3 exam:

  • Series 3 (National Commodity Futures Examination)
  • Cost: $95
  • Number of Questions: 120 True/False and Multiple Choice
  • Subject Matter: (part 1) Market knowledge and (part 2) U.S. regulations
  • Time: 2 hours 30 minutes
  • Passing Score: 70% for each part

Like the Series 65 exam, I highly recommend you spend plenty of time studying for the exam. If you would like some suggestions on various study guides, please let me know.

Filing the application forms with the NFA

During this process your compliance professional will: gain access to the NFA’s registration system on your behalf, input certain basic information on the Form 7-R (for your CPO/CTA firm) and Form 8-R (for the initial AP) – generally you will provide this information to your compliance professional prior to completing these forms, and submit the 7-R and 8-R on your firms behalf.

After the Form 7-R and 8-R have been submitted you will need to pay for registration ($200 registration fee for the CPO or CTA; $85 for each associated person or principal; $750 for NFA membership (this is an annual fee)). After payment has been submitted, the NFA will review your application. Typically registration should be complete within about 3-5 weeks. The next step will be to have your disclosure document approved by the NFA – your compliance professional can help you with this process.

You will be able to check on your registration through the NFA’s BASIC system.

Definitions

According to the CFTC website, the definition of CPO and CTA are as follows:

Commodity Pool Operator (CPO): A person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The commodity pool operator either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so.

Commodity Trading Advisor (CTA): A person who, for pay, regularly engages in the business of advising others as to the value of commodity futures or options or the advisability of trading in commodity futures or options, or issues analyses or reports concerning commodity futures or options.

Associated Person (AP): An individual who solicits or accepts (other than in a clerical capacity) orders, discretionary accounts, or participation in a commodity pool, or supervises any individual so engaged, on behalf of a futures commission merchant, an introducing broker, a commodity trading advisor, a commodity pool operator, or an agricultural trade option merchant.