June 2014
Practice Group:
Investment
Management, Hedge
Funds and
Alternative
Investments
CFTC Provides a Streamlined No-Action Relief Filing
Procedure to Certain Commodity Pool Operators
Who Delegate Responsibilities to Registered
Commodity Pool Operators
By Carolyn A. Jayne, Cary J. Meer and Lawrence B. Patent
Introduction
The Division of Swap Dealer and Intermediary Oversight (the “Division”) of the Commodity
Futures Trading Commission (“CFTC” or the “Commission”) recently issued CFTC Letter No.
14-69 (May 12, 2014) (the “Letter”), which provides to certain commodity pool operators
(“CPOs”) who delegate their CPO responsibilities (the “Delegating CPO”) to registered CPOs
(the “Designated CPO”) a standardized, streamlined approach to apply for no-action relief
from the requirement to register as a CPO. The Division previously has granted no-action
relief to many Delegating CPOs on an individual basis.1 However, the Division recently has
seen a substantial increase in the number of no-action requests after the rescission of the
CPO exemption from registration in Regulation 4.13(a)(4)2 and the adoption of a broad
definition of the types of swaps subject to CFTC regulation.3 This streamlined approach will
eliminate the need for many, but not all, Delegating CPOs to apply for individualized noaction relief, a more labor-intensive and time-consuming endeavor. However, this approach
is available only under certain circumstances as described below, and not all Delegating
CPOs will qualify.
The Conditions
The following conditions (the“Criteria”) must be satisfied to request CPO registration noaction relief through this streamlined approach:
1.
1
a.
Pursuant to a legally binding document, the Delegating CPO must
delegate to the Designated CPO all of its investment management
authority with respect to the commodity pool;4
b.
The Delegating CPO cannot participate in the solicitation of
participants for the commodity pool; and
This letter states that any such existing letters will remain effective.
See Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 Fed. Reg. 11252 (Feb.
24, 2012), amended by Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 Fed.
Reg. 17328 (Mar. 26, 2012).
3
Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, 77 Fed. Reg. 48208 (Aug. 13, 2012).
4
The Division stated that the legally binding document could include, but is not limited to, a separate delegation
agreement, a document that establishes the pool, or an investment management agreement between the Delegating CPO
and the Designated CPO.
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CFTC Provides Streamlined No-Action Relief Filing
Procedure to Certain Commodity Pool Operators Who
Delegate Responsibilities to Registered Commodity Pool
Operator
c.
The Delegating CPO cannot manage any property of the commodity
pool.
2.
The Designated CPO must be registered as a CPO.
3.
The Delegating CPO must not be subject to a statutory disqualification under
Section 8a(2) or 8a(3) of the Commodity Exchange Act (the “CEA”).
4.
There must be 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 CEA and the Commission’s regulations.5
5.
The books and records of the Delegating CPO with respect to the commodity
pool must be maintained by the Designated CPO in accordance with
Regulation 1.31, the regulation setting forth general requirements for all
books and records required to be kept under the CEA and regulations
thereunder.
6.
If the Delegating CPO and the Designated CPO are each a non-natural
person, then one such CPO must control, be controlled by, or be under
common control with the other CPO.
7.
If a Delegating CPO is a non-natural person, then such Delegating CPO and
the Designated CPO must have executed a legally binding document
whereby each undertakes to be jointly and severally liable for any violation of
the CEA or the Commission’s regulations by the other in connection with the
operation of the commodity pool.
8.
If a Delegating CPO is a natural person and is not an Unaffiliated Board
Member, as defined below, then such Delegating CPO and Designated CPO
must have executed a legally binding document whereby each undertakes to
be jointly and severally liable for any violation of the CEA or the
Commission’s regulations by the other in connection with the operation of the
commodity pool.
9.
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.
Analysis and Limitations of this Relief
The Division intended this relief to apply to certain fact patterns that it encounters regularly in
no-action requests. For example, one condition to qualify to use this approach is that, if the
Delegating CPO and Designated CPO are each non-natural persons, then one such CPO
controls, is controlled by, or is under common control with the other CPO. Many pools utilize
separate but affiliated investment advisers and general partners or managing members and
5
Some reasons that the Division referred to in the Letter include for separate asset management purposes, tax-related
reasons, to account for different ownership and compensation arrangements, or to comply with licensing requirements in
other jurisdictions.
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CFTC Provides Streamlined No-Action Relief Filing
Procedure to Certain Commodity Pool Operators Who
Delegate Responsibilities to Registered Commodity Pool
Operator
will meet this condition.6 The Division also requires that these affiliated entities enter into a
legally binding document whereby each undertakes to be jointly and severally liable for any
violation of the CEA or the CFTC’s regulations thereunder by the other in connection with the
operation of such pool, which should be a fairly noncontroversial requirement for affiliated
entities.
The Division likewise intended this relief to apply to a natural-person Delegating CPO who is
an “Unaffiliated Board Member,” which the Division defined in the Letter as “a natural person
who is a voting member of the board of directors or an equivalent governing body of the
commodity pool who: (i) is not a member of the management or an employee of the
Designated CPO or any affiliate thereof; (ii) is not a substantial7 beneficial owner of the
Designated CPO or any affiliate thereof or of any company holding more than 5% of such
Designated CPO’s beneficial ownership interests or any affiliate thereof; and (iii) has no
other interest or relationship that could interfere with his/her ability to act independently of
management of the Designated CPO or any affiliate thereof or of any company holding more
than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof.”8
For Delegating CPOs who are Unaffiliated Board Members, the Division does not require the
Delegating CPO to be jointly and severally liable with the Designated CPO, although the
Delegating CPO will remain subject to liability as a board member in accordance with the
laws under which the pool is established. Given that certain facts relevant to the
independence analysis may not be readily determined, Delegating CPOs would be well
advised to request a certificate from the director confirming his or her independence.
Notably, natural person Delegating CPOs who are affiliated with the Designated CPO must
comply with certain restrictions on their activities in order to rely on the Letter.9 As a
condition to utilizing the streamlined approach, the Delegating CPO cannot participate in the
investment management or solicitation of participants for the pool, nor can the Delegating
CPO manage any property of the commodity pool, even if the Delegating CPO is engaging in
these activities as an associated person or employee of the Designated CPO.10 Many pools
appoint one or more affiliated persons to the board of directors of a pool domiciled outside of
the United States. Often these affiliated board members also serve as associated persons of
the registered CPO of the pool, which disqualifies them from utilizing the streamlined
6
The streamlined approach does not contemplate circumstances where an entity Delegating CPO is not affiliated with the
Designated CPO, such as corporate trustees of Delaware statutory trusts and Cayman Islands unit trusts.
7
The Division did not provide any guidance in the Letter as to what threshold would constitute “substantial” beneficial
ownership.
8
The Division provided the following guidance in the Letter with respect to this requirement:
[W]hether a director has an interest or relationship under clause (iii) will be based on the relevant facts and
circumstances. For example, interests or relationships that are indicative of an affiliation with the Designated
CPO that could trigger clause (iii) may include: the director being a material service provider or investment
counterparty to the Designated CPO or any of its affiliates, or is, or within the past three years was, employed
in an executive capacity by, or was a principal or employee of, a material service provider or investment
counterparty to, the Designated CPO or any of its affiliates.
Care must be taken to determine whether directors work for an entity that is a service provider to the Designated CPO or
one of its affiliates, or whether the director only works for an affiliated company of the service provider.
9
In addition, board members who (i) are not Unaffiliated Board Members (i.e., they are affiliated with the Designated
CPO) and (ii) do not engage in the prohibited activities described above, are required to enter into a legally binding
document with the Designated CPO whereby each undertakes to be jointly and severally liable for any violation of the
Commodity Exchange Act or the CFTC’s regulations thereunder by the other in connection with the operation of such
pool.
10
Many CPOs will have difficulties meeting this requirement under their existing arrangements. Along with other outside
counsel and trade associations, we are seeking further guidance from the Division on this issue.
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CFTC Provides Streamlined No-Action Relief Filing
Procedure to Certain Commodity Pool Operators Who
Delegate Responsibilities to Registered Commodity Pool
Operator
approach. The Division acknowledged that “the Commission’s view that the investment
adviser of a registered investment company is the entity that should register as the CPO for
the company, not the members of the company’s board.”11 However, the Division’s view in
the Letter appears to be that affiliated board members would be characterized as additional
CPOs to pools with existing registered CPOs, while their fellow non-affiliated board members
qualify for the streamlined approach to no-action relief. These affiliated board members
could apply for individualized no-action relief, but such relief, if granted, might take several
months to obtain. Otherwise, the board should be reconstituted with only members who
qualify for the streamlined no-action relief. This might require replacing certain affiliated
board members with persons associated with the investment manager who are not involved
with solicitation or portfolio management.12 We understand that the Division is considering
expanding the eligibility for streamlined no-action relief in the Letter to cover affiliated board
members who are involved in solicitation and/or investment management activities, subject
to conditions, but it unclear whether and when the eligibility for the no-action relief would be
expanded.
Claiming No-Action Relief
To request relief using this streamlined approach, the Delegating CPO must submit a noaction request in the form of the Attachment to Letter 14-69 containing the following
information:13
1.
The name, main business address, main business telephone number and
name of a contact person of each of the Delegating CPO(s) and the
Designated CPO;14
2.
The NFA ID Number of the Designated CPO;
3.
The name(s) of the commodity pool(s)15 with respect to which relief is being
sought;
4.
A representation that the applicable Criteria are met; and
5.
A statement from the Designated CPO acknowledging that it has been
designated as the registered CPO of the commodity pool(s) and that it
satisfies the applicable Criteria.
The Division stated in the Letter that it intends to issue responses to each request for noaction relief and in fact the first no-action letter was issued two days after the request letter.16
11
See footnote 12 of the Letter.
As a last resort, an individual affiliated board member theoretically could register individually as an additional CPO to
the pool, but the burden of registration as an individual may serve as a significant deterrent.
13
Notably, it appears that requests must be sent in hard copy to the Division. Unlike other recent no-action relief, no
reference is made to filing via e-mail.
14
If the request is made by a third party, the request must also contain the name, main business address and main
business telephone number of that third party.
15
A single request may be submitted by a Delegating CPO with respect to multiple commodity pools.
16
Under this new streamlined process, the Division issued Letter No. 14-71 on May 16, 2014, in response to a request
dated May 14, 2014.
12
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CFTC Provides Streamlined No-Action Relief Filing
Procedure to Certain Commodity Pool Operators Who
Delegate Responsibilities to Registered Commodity Pool
Operator
Conclusion
Although this streamlined approach to request no-action relief from the requirement to
register as a CPO will benefit certain Delegating CPOs, not all Delegating CPOs will qualify.
Reliance upon the Letter requires that the Delegating CPO and Designated CPO each meet
all of the applicable Criteria. In particular, affiliated board members who engage in solicitation
or portfolio management activities for a pool will not qualify to utilize the streamlined process
to seek no-action relief. Boards may be reconstituted as a result of this Letter to ensure that
none of the board members solicits or otherwise manages property of the pool. In any event,
non-qualifying Delegating CPOs instead will be able to seek individualized no-action relief
from the registration requirement, although there is no assurance that such individualized
relief will be granted.
Authors:
Carolyn A. Jayne
carolyn.jayne@klgates.com
+1.312.807.4299
Cary J. Meer
cary.meer@klgates.com
+1.212.788.9107
Lawrence B. Patent
lawrence.patent@klgates.com
+1.202.778.9219
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