CFTC Clarifies Relief for "Delegating CPOs" from Registration Requirements | Practical Law

CFTC Clarifies Relief for "Delegating CPOs" from Registration Requirements | Practical Law

The CFTC released No-action Letter 14-126, clarifying the conditions to relief from registration requirements for "delegating CPOs."

CFTC Clarifies Relief for "Delegating CPOs" from Registration Requirements

Practical Law Legal Update 2-585-1485 (Approx. 4 pages)

CFTC Clarifies Relief for "Delegating CPOs" from Registration Requirements

by Practical Law Finance
Published on 21 Oct 2014 • USA (National/Federal)
The CFTC released No-action Letter 14-126, clarifying the conditions to relief from registration requirements for "delegating CPOs."
On October 15, 2014, the CFTC released CFTC No-action Letter 14-126 (No-Action 14-126), providing relief from the requirement to register as a CPO under CEA section 4m(l) to CPOs that have delegated certain of their responsibilities as the CPO of a commodity pool (delegating CPOs) to a designated CPO that is a CFTC-registered CPO (designated CPO). The relief granted in No-action 14-126 will be self-executing and does not require a notice or claim to be filed in order to take advantage of the relief.
This relief updates the streamlined approach to relief introduced in CFTC No-action Letter 14-69 (No-action 14-69) (see Legal Update, CFTC Streamlines Requests for CPO Relief). The CFTC issued No-action 14-126 due to an abundance of requests for clarification of certain criteria necessary to obtain the streamlined relief for delegating CPOs specified in No-action 14-69. The conditions to relief set out in No-action 14-126 are largely identical to the criteria set out in No-action 14-69, with certain clarifications made by the CFTC.
No-action 14-126 provides that delegating CPOs are exempt from registration as a CPO if the following criteria are satisfied:
  • The delegating CPO has delegated to the designated CPO all of its investment management authority with respect to the commodity pool at issue pursuant to a legally binding document. No-action 14-126 clarifies that this criteria may still be satisfied if either the delegating or the designated CPO appoints one or more third parties to serve as an investment manager of the commodity pool as long as each such third-party investment manager is registered or exempt from registration as a commodity trading advisor (CTA).
  • The delegating CPO must not participate in the solicitation of participants for the pool unless the delegating CPO:
    • is registered or exempt from registration as an associated person (AP) of the designated CPO; and
    • participates in the solicitation of pool participants solely in its capacity as an AP of the designated CPO.
  • The delegating CPO does not manage any property of the pool. No-action 14-126 clarifies that satisfaction of this criteria is not precluded when the delegating CPO:
    • is a principal or employee of the designated CPO or of a CTA of the pool at issue;
    • has management responsibilities over pool property that are exercised by the delegating CPO solely in its capacity as a principal or employee of the designating CPO or as a CTA of the pool and not as the delegating CPO of the pool; and
    • the delegating CPO is subject to supervision as a principal or employee by either the designated CPO or the CTA of the pool in connection with exercising pool management responsibilities.
  • The designated CPO is registered as a CPO.
  • The delegating CPO is not subject to a statutory disqualification under CEA Sections 8a(2) and (3).
  • The designating CPO is a separate entity from the delegating CPO for a business purpose and is not separate solely for the purpose of avoiding registration of the delegating CPO.
  • The designated CPO must maintain the books and records of the delegating CPO with respect to the delegated commodity pools.
  • If the delegating and designated CPOs are each non-natural persons, one of them must control, be controlled by or be under common control with the other CPO.
  • If the delegating CPO is a non-natural person, then the delegating and designating CPO must execute a legally binding document agreeing to be jointly and severally liable for any violation of the CEA or of the CFTC's regulations in the operation of the commodity pool.
  • If the delegating CPO is a natural person who is not an unaffiliated board member of the commodity pool, then the delegating and designating CPOs must execute a legally binding agreement to be jointly and severally liable for any violation of the CEA or of the CFTC's regulations in connection to the operation of the commodity pool. An unaffiliated board member is a natural person who is a voting member of the board of directors, board of trustees, board of managers or an equivalent governing body of the commodity pool who:
    • is not a member of the management team of the designated CPO or an employee of the designated CPO or any affiliate thereof;
    • is not a substantial beneficial owner of the designated CPO or of an affiliate of the designated CPO, or of any company holding more than five percent of the designated CPO's beneficial ownership interests or any affiliate thereof; and
    • has no other interest or relationship that could interfere with the ability of the unaffiliated board member to act independently.
  • If the delegating CPO is an unaffiliated board member, the delegating CPO must remain fully responsible as a board member according to the laws under which the commodity pool is established.
The CFTC recognizes that there may be certain CPO delegation situations that warrant no-action relief from registration requirements that were not mentioned in this letter. To address those issues, the CFTC intends to continue to evaluate requests submitted under CFTC Regulation 140.99 for situations outside of the scope of No-action 14-126.
For more information on CPOs, see Practice Note, The Dodd-Frank Act: Expanded "Commodity Pool" Definition and CPO/CTA Rules.