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CFTC Addresses Key CPO Issues
Practical Law Legal Update 4-580-9532 (Approx. 4 pages)
CFTC Addresses Key CPO Issues
by Practical Law Finance
| Published on 11 Sep 2014 • USA (National/Federal) |
A roundup of important recent CFTC activity impacting commodity pools and commodity pool operators (CPOs).
In addition to the important developments discussed in Legal Update, CFTC Allows Commodity Pools to Take Advantage of JOBS Act Private Offering Reform, the following is a roundup of recent CFTC regulatory activity impacting commodity pools and CPOs:
Relief for CPOs of Commodity Pools That Are Not SEC Registered Investment Companies with Wholly-owned Trading Subsidiaries
On September 8, 2014, the CFTC issued No-action Letter 14-112 (No-action 14-112) providing relief to commodity pool operators (CPOs) of certain commodity pools (referred to as "parent pools") that are not SEC registered investment companies (RICs) and which use wholly-owned trading subsidiaries to trade commodity interests.
Under No-action 14-112, these CPOs are no longer required to provide:
- A separate annual report for a parent pool’s trading subsidiary to the National Futures Association (NFA) as currently required under CFTC Regulation 4.7(b) or 4.22(c), as applicable.
- A separate Form CPO-PQR for a parent pool’s trading subsidiary to the NFA as currently required under CFTC Regulation 4.27(c).
In order to take advantage of this relief, the following conditions must apply:
- The CPO of the parent pool must be the CPO of the trading subsidiary.
- The exposure to the trading subsidiary by the participants in its parent pool must be shared pro rata.
- The CPO must consolidate reporting under CFTC Regulation 4.7(b) or 4.22(c), as applicable, and must consolidate reporting under CFTC Regulation 4.27(c) for the trading subsidiary with that of its parent pool.
- The CPO must file a claim to perfect the use of this relief by following the procedure detailed the no-action letter.
The CFTC had previously granted similar relief to CPOs of RICs that utilize controlled foreign corporations (CFCs), in CFTC No-action Letter 13-51 (see Legal Update, CFTC Issues No-action Relief from Certain CPO Reporting Obligations). No-action 14-112 further expands the class of commodity pools for which a CPO may consolidate annual reports and CPO-PQR reports.
CFTC Clarifies Definition of "Commodity Pool"
On September 8, 2014, the CFTC issued No-action Letter 14-113 in response to a request for an interpretation of the definition of “commodity pool” in Section 1a(10) of the Commodity Exchange Act (CEA) and CFTC Regulation 4.10(d).
The CFTC clarified that the definition of “commodity pool” does not include a "general account entity" (GAE) which is a type of entity that is formed by state-regulated life insurance company affiliates by combining their general account assets and which invests directly or indirectly in commodity interests. Therefore, life insurance companies forming a GAE are not required by CEA Section 4m(1) to register as CPOs under the current definition in Section 1a(11) of the CEA.
CFTC Permits Third-party Recordkeepers for CPOs
On September 8, 2014, in response to requests for clarification of the scope of the books and records exemption recently made available to all CPOs under the so-called "Harmonization Rule" (see Legal Update, Final Rules Amending CPO, CTA Registration and Compliance Obligations Issued by CFTC: Proposed Compliance Harmonization Rules for CPO Investment Companies), the CFTC issued No-action Letter 14-114. This letter provides exemptive relief from the main-business-office requirement of CFTC Regulations 4.7(b)(4) and 4.23 to allow a CPO to use any third-party recordkeeper to maintain its books and records, provided that the:
- CPO’s timely access to such records is maintained such that the CPO can satisfy the obligations of the applicable CFTC regulations, particularly with respect to providing such records to the CFTC for inspection upon request.
- CPO timely and completely files the statements required by CFTC Regulations 4.7(b)(5) or 4.23(c), as applicable.
The CFTC notes in the letter that the CPO remains responsible for producing such records upon request by the CFTC and would be liable for any failure to maintain the books and records in the manner prescribed by CFTC regulation.
CFTC Exempts Certain Registered CPOs from Filing Form CPO-PQR
On September 8, 2014, the CFTC issued No-action Letter 14-115 providing exemptive relief from requirements to file CFTC Form CPO-PQR to registered CPOs that have no reporting obligations under Part 4 of the CFTC's regulations. Relief was granted in response to requests for clarification regarding the application of CFTC Regulations 4.27(b) and (c) to these CPOs. The CFTC granted relief from requirements to file Commission Form CPO-PQR under Regulation 4.27 to CPOs that are registered but only operate pools either:
- Under a claim of exemption from registration.
- For which they maintain an exclusion from the definition of "commodity pool operator."