Vedder Thinking | Articles CFTC and NFA Regulatory Updates
Expedited No-Action Relief for CPO Delegation—Action Required for Certain CPOs
On May 12, 2014, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued staff letter 14-69 setting forth the criteria for seeking expedited no-action relief from registration for commodity pool operators (CPOs) that delegate their status and responsibility as a CPO to another party. As noted in the staff letter, the CFTC has historically considered the general partner, manager or board of directors of a commodity pool to be the CPO of the pool, with the exception of registered investment companies (RICs) where the investment adviser is deemed to be the CPO of a RIC. The staff has granted no-action relief from registration over the years in certain circumstances in which the CPO delegated its responsibility to another registered party. The purpose of the staff letter was to set forth the circumstances under which such relief will be reviewed on an expedited basis.
In a move to clear up industry confusion on whether no-action relief was required to perfect CPO delegation, the CFTC clarified that relief is required if a CPO seeks to delegate its responsibilities to another party. The staff letter details the criteria that must be satisfied in order for a firm to seek relief through the streamlined process set forth in the letter. The relief, however, is not self-executing. The process involves completing a form of request and filing such request with the CFTC. The CFTC will then review and grant such request on an expedited basis.
Below are the criteria that must be satisfied in order for a party to request expedited no-action relief. Defined terms can be found in the staff letter.
- (a) Pursuant to a legally binding document, the Delegating CPO has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool; (b) the Delegating CPO does not participate in the solicitation of participants for the commodity pool; and (c) the Delegating CPO does not manage any property of the commodity pool.
- The Designated CPO is registered as a CPO.
- The Delegating CPO is not subject to a Statutory Disqualification.
- There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO that is not solely to avoid registration by the Delegating CPO under the Commodity Exchange Act (CEA) and the CFTC's regulations.
- The books and records of the Delegating CPO with respect to the commodity pool are maintained by the Designated CPO in accordance with Regulation 1.31.
- If the Delegating CPO and the Designated CPO are each a non-natural person, then one such CPO controls, is controlled by, or is under common control with the other CPO.
- If a Delegating CPO is a non-natural person, then such Delegating CPO and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC's regulations by the other in connection with the operation of the commodity pool.
- If a Delegating CPO is a natural person and is not an Unaffiliated Board Member, then such Delegating CPO and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC's regulations by the other in connection with the operation of the commodity pool.
- If a Delegating CPO is an Unaffiliated Board Member, then such Delegating CPO must be subject to liability as a Board member in accordance with the laws under which the commodity pool is established.
Certain of the above criteria, including Items 1b and 1c, may raise difficult factual questions that each Delegating CPO will need to evaluate. We note that each director of a commodity pool (other than a RIC) must seek individual relief, the request for which can be bundled with the requests of other directors of the same pool. We also note the relief for directors will apply to each person individually. Accordingly, certain directors may be able to satisfy the criteria whereas others may not. As a result, your firm may want to reevaluate its current governance structures in light of the CFTC’s recent guidance.
Who needs to take action?
Any person who seeks to delegate his or her status as a CPO to another party. This includes any general partner, manager or director of a commodity pool. We note that action will likely be required for directors of a controlled foreign corporation subsidiary of a RIC. While the investment adviser of a RIC may be deemed to be a CPO and therefore delegation is not necessary, the same does not apply to a commodity pool that is a wholly owned subsidiary of the RIC.
What if the person seeking delegation can't qualify for the relief?
If you are not able to claim the streamlined relief, the CFTC will continue to evaluate requests for CPO registration no-action relief. However, such relief request will not be on an expedited basis.
CFTC Delays Oral Recordkeeping Requirements for Certain CTAs
On April 25, 2014, the CFTC issued time-limited no-action relief delaying until December 31, 2014 application of the oral recordkeeping requirements set forth in CFTC Regulation 1.35(a) for commodity trading advisors (CTAs) that are members of swap execution facilities (SEFs) or designated contract markets (DCMs) in connection with the execution of swap transactions. The CFTC did not extend such relief to other industry participants or to the written recordkeeping requirements.
By way of brief background, the CFTC recently amended Regulation 1.35(a) to integrate it into the new swaps framework created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As amended, Regulation 1.35(a) requires that all members of a SEF or a DCM keep full written and oral records of their business dealings in commodity interests and related cash and forward transactions. Such records include communications occurring via telephone or voice mail. Although the regulation specifically excludes from the oral recordkeeping requirement CPOs and members of a SEF or a DCM that are not registered or required to be registered, it does not exclude similarly situated CTAs.
Affected CTAs were initially required to comply with the oral recordkeeping requirements on December 20, 2013, but the CFTC granted two time-limited no-action relief requests in relation to certain CTAs that were members of a SEF or a DCM. On April 3, 2014, the CFTC held a public roundtable in relevant part to address the expiration of these two no-action letters. In response to the public roundtable and industry comment letters, the CFTC issued the temporary relief described above. Although certain commentators had requested relief from the written and oral recordkeeping requirements of the regulation and to extend relief to other market participants, the CFTC only found it appropriate to address the oral recordkeeping requirements and to extend the relief to CTAs that are members of a SEF or a DCM in connection with the execution of swap transactions.
Large Traders: Revised and New Ownership and Control Reports
Effective August 15, 2014, the CFTC's final rules on Ownership and Control Reports and Forms 102, 40 and 71 are meant to provide the CFTC with enhanced visibility of large traders' positions and trading in futures and swaps markets. Subject firms must report required information via the new and amended forms, namely Form 102A (an updated form), Form 102B (a new form for "volume threshold accounts"), Form 102S (an updated form), Form 71 (a new form for "volume threshold accounts" that are omnibus accounts) and Form 40/40S (an updated form).
CPO/CTA Capital Requirements and Customer Protections
The period has now closed for comments to NFA's concept of imposing a capital requirement on CPO and CTA members, as well as several other customer protection measures. The concept contemplates holding independent third parties responsible for authorizing the disbursement of pooled funds and preparing or verifying members’ net asset values, monthly/quarterly reporting and performance results. It also calls for customer funds to be reported to NFA.
Changes to Form PQR and Form PR for CPOs and CTAs
Based on comments from its members, NFA has revised the CPO Form PQR and CTA Form PR. Such revisions are to become effective for the quarter ending June 30, 2014. The changes are intended to simplify and make less burdensome questions relating to requests for information concerning any funds under management allocated to futures or swaps. The updated forms will be available via Easy File the first week of July 2014 with expanded help text. For CPO PQR XML filers, an updated schema is currently available via Easy File. However, XML filers will need to update the system used to generate XML documents because the box numbers have changed. A firm's technical staff should receive NFA's notice concerning this change if the XML feature is used. There are still no XML capabilities for CTA Form PR filers. For more information, read the summary of NFA's notice of changes to these forms.
If you have questions about these recent CFTC and NFA regulatory developments, please contact Joseph M. Mannon at +1 (312) 609 7883, Nicole M. Kuchera at +1 (312) 609 7763 or your Vedder Price attorney.