Securities Regulation Daily Commission floats simplification of CPO and CTA rules
Tuesday, October 9, 2018

Commission floats simplification of CPO and CTA rules

By Mark S. Nelson, J.D.

The CFTC proposed six sets of amendments to its rules for commodity pool advisers (CPOs) and commodity trading advisers (CTAs) contained in Part 4 of the Commission’s regulations. The changes would clarify certain exemptions from registration, bolster bad actor disqualifications, revise books and records requirements, and incorporate by reference certain securities regulations in order to further clarify the scope of some exemptions (Release No. RIN 3038-AE76, October 9, 2018).

CPO and CTA rules changes. The CFTC’s proposal would impact six sections within Part 4, including Sections 4.5, 4.7, 4.13, 4.14, 4.23, and 4.27. Among the highlights in the package of revisions are the following:

  • Commission Regulation 4.5(a)(1) would be amended to swap "investment adviser" for "investment company" regarding persons who are excluded from the definition of "commodity pool operator." Another provision would amend Commission Regulation 4.5(b)(1) to include business development companies in the definition of "qualifying entity."
  • The proposal would amend Commission Regulation 4.7(b) to include a new eligibility requirement for available relief such that a CPO would file a notice of claim for exemption and comply with any applicable conditions for exempt pools. The amendment would further clarify that a CPO who sells participations in offerings exempt under certain securities law provisions (e.g., the private offering exemption, Regulation D, and Rule 144A) only to qualified eligible persons could claim available relief. Likewise, a bank registered as a CPO could claim available relief regarding a pool that is a collective trust whose securities are exempt under the Securities Act.
  • Commission Regulation 4.13(a)(3)(i), regarding persons not required to register as a CPO, would replace language that requires certain interests not to be marketed to the public within the U.S. with language that says such marketing, if it occurs, must only be done in compliance with the SEC’s Regulation D or Rule 144A. The amendments also would allow a non-U.S. person to claim an exemption from registration for pools operated offshore. Persons exempt under Commission Regulation 4.13(a)(1) through (a)(5) must not be subject to statutory disqualifications and must furnish to prospective pool participants a statement explaining the exemption by the time it delivers a subscription agreement.
  • New Commission Regulation 4.13(a)(8) would allow an exemption if certain pool interests are offered and sold only to family clients, the pool is a family office, and the person, at the time of investment, reasonably believes each pool participant is a family client of a family office ("family office" and "family client" would have the definitions given by the SEC in the relevant Investment Advisers Act regulation). Moreover, new Commission Regulation 4.14(a)(11) would provide a similar exemption from registration as a CTA if a person’s commodity trading advice is directed to and for use only by family clients.
  • Commission Regulation 4.23 also would be amended to make changes to books and records requirements.
  • Commission Regulation 4.27 would be amended to clarify who is a "reporting person." Specifically, a new subsection would provide that the term does not include: (1) a registered CPO who operates only pools for which it is excluded from the definition of "CPO" and/or is exempt from registration as a CPO; (2) a registered CTA that does not direct trading in commodity interest accounts; (3) a registered CTA that directs only accounts of commodity pools for which it is a registered CPO and complies with specified portions of Commission Regulation 4.14; and (4) a registered CTA that directs only accounts of commodity pools for which it is exempt from registration as a CPO and complies with relevant requirements within Commission Regulation 4.14.

Modernization effort adheres to "KISS" principles. The unanimously approved proposal would further the Commission’s "KISS" initiative to streamline CFTC regulations, said a Commission press release. Chairman J. Christopher Giancarlo previously expounded on the principle of simplicity that underscores the KISS initiative. Here, the proposal would eliminate the need for regulated persons to reference older staff advisories.

"Specifically, today’s notice of proposed rulemaking would reduce burdens for CPOs that operate pools in multiple jurisdictions by permitting them to register with respect to the pools that solicit or accept U.S. domiciled participants. It would maintain an exemption with respect to those offshore activities whose only nexus to the U.S. is that the CPO also manages some U.S. derived assets," said Giancarlo. "It would also shore up our consumer protection provisions by prohibiting statutorily disqualified persons from operating exempt pools and soliciting and accepting funds, thereby giving such pool participants more confidence in their pool’s operator."

Giancarlo also observed that the CPO/CTA proposal was likely to be the first of more such proposals to streamline Commission regulations.

The release is No. RIN 3038-AE76.

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