Financial Services & Products ADVISORY

Transcription

1 Financial Services & Products ADVISORY February 23, 2012 CFTC Amends Registration and Compliance Obligations for CPOs and CTAs On February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted amendments to several of its rules affecting commodity pool operator (CPO) and commodity trading advisor (CTA) registration and compliance requirements. The adopted amendments are similar to the changes proposed by the CFTC in January 2011, with certain modifications. Importantly, the CFTC maintained the Regulation 4.13(a)(3) de minimus exemption, which was recommended for elimination in last year s proposal. The rule updates adopted by the CFTC: eliminate the exemption from CPO registration provided by CFTC Regulation 4.13(a)(4); revise CFTC Regulation 4.7 so that CPOs are no longer exempt from the requirement to include independently audited financial statements in annual reports, and to modify the qualified eligible person (QEP) qualification criteria; require CPOs and CTAs that claim relief under CFTC Regulations 4.13 and 4.14 to confirm their notice of claim of relief annually; adopt new reporting obligations for CPOs and CTAs who are registered solely with the CFTC, which requires the reporting of the amount of assets under management, the use of leverage, counterparty credit risk exposure and trading and investment positions for each fund; and amend the risk disclosure statements to require CPOs and CTAs to include a legend disclosure in regard to their swap transactions. Elimination of Exemption Under CFTC Regulation 4.13(a)(4) The CFTC voted to rescind CFTC Regulation 4.13(a)(4), which exempts CPOs to private funds from registration if all natural person participants are QEPs 1 and all non-natural person participants are either QEPs or certain accredited investors. The Regulation 4.13(a)(4) exemption is relied upon by many private fund advisors, and allows a CPO to trade an unlimited amount of commodity futures, provided investors meet the high suitability threshold. 1 The sponsor of a fund cannot claim exemption from registration as a CPO with respect to a fund that trades futures pursuant to CFTC Regulation 4.13(a)(4) if the fund includes investors who are natural persons who must rely on CFTC Regulation 4.7(a)(3) (the portfolio requirement) in order to be classified as QEPs. This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.

2 What does this mean if you operate a 3(c)(7) fund that invests in futures or swaps? With the 4.13(a)(4) exemption no longer available, the sponsor of a 3(c)(7) fund that invests more than a de minimus amount of assets in futures or swaps (more detail on CFTC Regulation 4.13(a) (3) below) will be required to register as a CPO with the CFTC. Since 3(c)(7) funds are only offered to investors that are qualified purchasers, the sponsor of a 3(c)(7) fund that invests in futures or swaps should be able to receive relief under CFTC Regulation 4.7. CPOs that are exempt pursuant to CFTC Regulation 4.7 are relieved from most disclosure, reporting and record-keeping requirements, although, as discussed below under CFTC Regulation 4.7, CPOs claiming relief under Regulation 4.7 will no longer be able to claim exemptive relief from the requirement to include independently audited financial statements in the fund s annual report. What does this mean if you operate a fund with nominal futures or swaps exposure? Importantly, the CFTC maintained the Regulation 4.13(a)(3) de minimus exemption, which was recommended for elimination in last year s proposal. CFTC Regulation 4.13(a)(3) provides CPOs relief from registration where all fund participants are accredited investors, QEPs or knowledgeable employees, and the private fund meets one of two de minimus trading tests (the aggregate initial margin and premiums does not exceed five percent of the liquidation value of the fund s portfolio, or the aggregate net notional value 2 of positions does not exceed 100 percent of the liquidation value of the fund s portfolio). CFTC Regulation 4.13(a)(3) is particularly important for sponsors to 3(c)(1) funds with nominal futures or swaps exposure because they are able to maintain the lower suitability threshold of only requiring investors to be accredited investors. In addition, the CFTC has revised Regulation 4.13(a)(3) to require that swaps be included in any calculation for the above trading thresholds. Sponsors must now be mindful that their swap trading activity will not prohibit them from relying upon this de minimus exemption. CFTC Regulation 4.7 CFTC Regulation 4.7 provides relief from certain reporting, disclosure and record-keeping requirements for sponsors of funds that offer interests solely to QEPs. The CFTC has adopted two changes that affect Regulation 4.7: Affirmative Audit Requirement The CFTC has removed relief from the audit requirement for sponsors of CFTC Regulation 4.7 funds. Previously, such sponsors were exempt from providing independently audited financial statements pursuant to CFTC Regulation 4.7(b)(3). Under this rulemaking, CFTC Regulation 4.7 sponsors will no longer be exempt from this requirement, and must deliver independently audited financial statements in the fund s annual reports. 2 Net notional value is calculated as described in CFTC Regulation 4.13(a)(ii)(B)(1) and 4.13(a)(ii)(B)(2). -2-

3 QEP Qualification Criteria The QEP qualification criteria have been modified to incorporate the U.S. Securities and Exchange Commission (SEC) definition of accredited investor by reference, rather than by direct inclusion. Incorporation by reference will allow the CFTC definition of QEP to be adjusted automatically in the event that the accredited investor standards are changed by the SEC, without requiring an additional amendment to CFTC Regulation 4.7. CFTC Regulation 4.14 and CTA Registration The rescission of CFTC Regulation 4.13(a)(4) may also affect CTA registration and compliance for certain fund advisers. Currently, advisers to a CPO who has claimed exemption under CFTC Regulation 4.13(a)(4) may, if they satisfy certain other conditions, 3 qualify for exemption from CTA registration under CFTC Regulation 4.14(a)(8). With the rescission of CFTC Regulation 4.13(a)(4), such advisers must either register as a CTA with the CFTC, or seek to rely on other exemptive relief. Annual Confirmation of Notice of Exclusion/Exemption Currently, anyone claiming exclusion/exemption under CFTC Regulations 4.13 or 4.14 may file a onetime notice filing in order to receive the appropriate exclusion or exemption. Under the adopted rules, however, all such persons claiming exemptive or exclusionary relief under these CFTC Regulations will have to confirm their claim of relief annually. New Reporting Requirements The CFTC has also adopted new reporting obligations for CPOs and CTAs who are registered solely with the CFTC, which will require them to file reports similar to those imposed by the SEC on previously adopted Form PF. The Forms CPO-PQR and CTA-PR must include a description of certain information, such as the amount of assets under management, the use of leverage, counterparty credit risk exposure and trading and investment positions for each fund. The CFTC has also amended the risk disclosure statements to require CPOs and CTAs to include a legend disclosure in regard to their swap transactions. When will you have to comply with the rule changes? CPO Registration: CPOs claiming exemption under CFTC Regulation 4.13(a)(4) must comply with the rescission of CFTC Regulation 4.13(a)(4) by December 31, 2012; compliance for all other CPOs will be required 60 days after the rules are published in the Federal Register. 3 The adviser is registered as an investment adviser under the Investment Advisers Act of 1940 or with the applicable securities regulatory agency of any state, or the adviser is exempt from such registration or is excluded from the definition of the term investment adviser pursuant to the provisions of Sections 202(a)(2) and 202(a)(11) of the Investment Advisers Act of

4 Affirmative Audit; QEP Qualification: Removal of relief from the affirmative audit requirement for CFTC Regulation 4.7 fund sponsors, and the modification of QEP qualification criteria, must be complied with by December 31, Annual Confirmation of Notices of Claim: All persons claiming exemptive or exclusionary relief under CFTC Regulations 4.13 or 4.14 will be required to file annual confirmations beginning December 31, Forms CPO-PQR and CTA-PR Reporting: The new CPO and CTA reporting requirements under Forms CPO-PQR and CTA-PR will become effective on July 2, The compliance dates for this reporting is as follows: 60 days after the end of CPOs first calendar quarter ending after July 2, 2012, for CPOs having at least $5 billion in assets under management; 60 days after the end of CPOs first calendar quarter ending after December 14, 2012, for all other large CPOs with assets of $1.5 billion; and 90 days after calendar year end 2012 for all other CPOs and CTAs. Swap Risk Disclosure: The additional risk disclosure statements with respect to swap transactions will be required for all new disclosure documents and all updates filed 60 days after the rules are published in the Federal Register. -4-

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