Earlier this month, the Managed Funds Association asked the Markets Participants Division of the Commodity Futures Trading Commission to issue a no-action letter related to private fund managers and registration as Commodity Pool Operators and Commodity Trading Advisors. The MFA requested confirmation that MPD will not recommend the CFTC enforcement action against a private fund firm that (i) fails to register as a CPO or CTA, or (ii) that withdraws from CPO or CTA registration.
MPD is putting this no-action letter in place while the CFTC completes a formal rulemaking to reinstate the exemption from registration that used to be in the QEP regulation (Rule 4.13(a)(4)). In 2012, the CFTC rescinded the QEP exemption. That exemption from registration was for privately offered commodity pools whose investors were limited to Qualified Eligible Persons. QEPs include (i) “qualified purchasers,” as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended (the “1940 Act”), (ii) “knowledgeable employees” as defined in Rule 3c-5 under the 1940 Act, and (iii) certain other categories of investors.
The no-action relief is for any SEC-registered investment adviser that (i) is registered or would be required to register with the CFTC as a CPO or (ii) relies on an existing exemption from CPO registration pursuant to CFTC Rule 4.13, provided the commodity pool:
- ownership interests are exempt from registration under the Securities Act of 1933 and are sold without marketing to the public in the United States;
- has investors are limited to QEPs; and
- the fund manager files a Form PF.
The CFTC believes this aligns with the regulatory philosophy articulated in Executive Order 13777, which directed agencies to “identify regulations that eliminate jobs, or inhibit job creation; are outdated, unnecessary, or ineffective; impose costs that exceed benefits; or implement more stringent standards than required by law”. Reinstatement of the QEP Exemption was recommended in the Department of the Treasury’s 2017 report: A Financial System That Creates Economic Opportunities: Asset Management and Insurance. The report identified the rescission of the QEP Exemption as a regulatory action that had reduced investor choice and increased regulatory burdens without a commensurate benefit to investor protection, and recommended exemption from CPO and CTA registration for investment advisers registered with the SEC. (See page 47)
Sources:
- CFTC Staff Issues No-Action Letter Regarding CPO Registration for Certain SEC-Registered Investment Advisers
- CFTC Staff Letter No. 25-50
- Exec. Order No. 13777, Enforcing the Regulatory Reform Agenda, 82 FR 10285 (Feb. 24, 2017)
- A Financial System That Creates Economic Opportunities: Asset Management and Insurance