As part of the Dodd-Frank Act's sweeping changes in the U.S. regulatory regime governing the financial industry, a non-U.S. fund manager may need to register as a commodity pool operator (CPO) with the U.S. Commodity Futures Trading Commission (CFTC) and become a member of the National Futures Association (NFA).
What has happened?
Do any useful exemptions remain?
CFTC Rule 4.13(a)(3) exempts a hedge fund manager or adviser from registration as a CPO if the fund meets a de minimis test for its commodity interest trading. However, from 31 December 2012 onwards, certain swaps and non-deliverable forwards will be considered as commodity interests for the purposes of determining eligibility to rely on this exemption. The swap definitional rules were approved by the CFTC and the SEC on 10 July 2012 and will become effective on 12 October 2012.
The de minimis test in CFTC Rule 4.13(a)(3) covers managers of funds with commodity interest positions, including swaps, whether entered into for hedging purposes or otherwise, for which either (a) the aggregate initial margin and option premiums will not exceed 5% of the liquidation value (NAV) of the fund; or (b) the aggregate net notional value does not exceed 100% of the liquidation value (NAV) of the fund. The de minimis test is calculated separately for each fund managed by the manager or adviser.
Who needs to register?
The rules are being interpreted to apply to any manager of a non-U.S. private fund that has at least one U.S. investor. A manager of such a fund is required to register as a CPO unless one of the de minimis tests in Rule 4.13(a)(3) apply. To claim an exemption from CPO registration under Rule 4.13(a)(3), a manager must make a notice filing with the NFA.
What is the timing?
Managers of funds formed on or before 24 April 2012, including those managers formerly relying on the 4.13(a)(4) exemption must register as a CPO by 31 December 2012 or claim an exemption from registration under 4.13(a)(3) by meeting one of the de minimis tests. Managers of funds formed on or after 10 July 2012 that would have been able to rely on the exemption from CPO registration in Rule 4.13(a)(4) are eligible for no-action relief from the CFTC that would allow them until 31 December 2012 to register as a CPO or claim an exemption from registration. A manager of a fund launched after 24 April 2012 but on or before 10 July 2012 should have registered as a CPO unless they could claim an exemption from CPO registration under Rule 4.13(a)(3) by meeting one of the de minimis tests.
How difficult is it to register?
The registration process is reasonably straight-forward and only requires the filing of electronic forms containing certain information regarding the CPO and biographical information regarding the principals and associated persons (APs) of the CPO. Principals generally include persons that are executive officers or owners of the CPO. APs generally include persons that solicit investors or supervise the solicitation process. However, APs must be registered with the NFA and have passed a competency exam (FINRA Series 3). Portfolio managers generally do not need to be registered with the NFA unless they are principals or APs.
What are the implications of registration?
CPOs must comply with applicable U.S. commodity futures laws and regulations, will be subject to the jurisdiction of the NFA and CFTC, will be subject to occasional examination by the NFA, and must file periodic reports with the CFTC and NFA on form CPO-PQR. CPOs that operate pools that are not exempt under CFTC Rule 4.7 also will be subject to extensive disclosure, reporting and record-keeping requirements.