Money Manager and Hedge Fund Regulatory Exemptions
If you're a commodity trading advisor (CTA) or commodity pool operator (CPO) you've probably heard that certain advisors are or can be exempt from registration with the Commodity Futures Trading Commission (CFTC). While the Commodity Exchange Act (CEA) generally requires CTA and CPO firms to register, there are some important exemptions from its registration provisions. This article will focus on these exemptions and some of the misconceptions surrounding them within the commodity futures and forex industry. Before continuing please note that the exemption descriptions provided below are not all-inclusive, do not constitute legal advice and are intended solely for educational or informational purposes. In addition, only the most commonly used exemptions have been cited in this article. Other exemptions not listed here be available based on your unique circumstances. If your firm intends to rely on any of the exemptions noted below, we recommend that you contact a competent industry professional or legal advisor to discuss the applicability of these exemptions in your unique circumstances.
CTA Exemptions
The following exemptions are self executing, meaning that they absolve persons/entities from CFTC registration all together. In particular, persons meeting the following requirements are exempt from the registration requirements of the CEA and need not apply for exemption relief.
- Less than 15 Persons - A person who, in the preceding twelve months, has not furnished commodity trading advice to more than 15 persons and who does not hold himself out generally to the public as a CTA. "Holding oneself out" briefly means that a person is not advertising to obtain clients or actively trying to get new accounts. See CEA § 4(m)(1).
- Investment Advisers - A person who is: (1) registered with the Securities and Exchange Commission (SEC) as an investment adviser; (2) whose business does not consist primarily of acting as a CTA; and (3) who does not act as a CTA to any investment trust, syndicate, or similar form of enterprise that is engaged primarily in trading in any commodity for future delivery on or subject to the rules of any contract market or registered derivatives transaction execution facility. See CEA § 4(m)(3).
- Solely in Connection - Under CFTC Regulation 4.14, an exemption applies if the commodity trading advice being provided is solely incidental to the company's main business activity or the person's commodity trading advice is issued solely in connection with its employment or business with a firm otherwise registered or exempt from registration.
The following exemption is NOT self executing and thus requires a notice of exemption to be filed with the CFTC through the National Futures Association (NFA). Firms claiming this exemption must still register with the CFTC and become members of the NFA.
- Qualified Eligible Persons - CFTC Reg. 4.7 makes available an exemption from certain CEA Part 4 requirements when investments are only made by qualified eligible persons (QEPs). Perhaps the most significant of these requirements is the need to provide program participants with a disclosure document. Briefly, QEPs include certain investment professionals, knowledgeable employees, qualified purchasers or participants (the very wealthy), non-United States persons, and other high net worth individuals or entities.
CPO Exemptions
4.13 Exemptions - CFTC Reg. 4.13 makes available certain exemptions which allow CPOs to forgo the formal CFTC registration process. These exemptions, however, are NOT self-executing. Rather, notice of relief under these exemptions must be filed with the CFTC through the NFA if they are to be relied upon.
- Closely Held Pools - CFTC Reg. 4.13(a)(1) makes available an exemption for operators of pools where no compensation is received for operating the pool. Operators under this exemption may only operate one pool at a time, may not advertise, and the operator must not otherwise be required to register for any other reason.
- Small Pools - CFTC Reg. 4.13(a)(2) makes available an exemption for operators of pools where none of the pools operated by such person have more than 15 non-excluded participants at any time. Total gross capital contributions in all pools operated or intended to be operated cannot in the aggregate exceed $400,000.
- De Minimus Rule - CFTC Reg. 4.13(a)(3) makes available an exemption for private placement pools exempt under the Securities Act of 1933 where the pool trades minimal amounts of futures and/or forex. The operator must also reasonably believe that its pool participants meet certain net worth qualifications.
- All QPs - CFTC Regulation 4.13(a)(4) makes available an exemption for private placement pools exempt under the Securities Act of 1933 where all individual participants in the pool are qualified persons (QPs), as defined in the Investment Company Act. Here, operators must be diligent to determine the suitability of all pool participants.
Note: On February 11, 2011, the CFTC published for comment a proposal to eliminate the "De Minimus Rule" and the "All QP" exemption. All comments with respect to this proposal must be received by the CFTC in writing on or before 60 days after publication in the Federal Register.
The following exemptions from certain CEA requirements are also NOT self executing and require a notice of exemption to be filed with the CFTC through the NFA. In addition, firms claiming these exemptions must still register with the CFTC and become members of the NFA.
- Qualified Eligible Persons - CFTC Reg. 4.7 makes available an exemption from certain CEA Part 4 requirements when investments are only made by qualified eligible persons (QEPs). Perhaps the most significant of these requirements is the need to provide program participants with a disclosure document. Briefly, QEPs include certain investment professionals, knowledgeable employees, qualified purchasers or participants (the very wealthy), non-United States persons, and other high net worth individuals or entities.
- Pool Meets Certain Trading Criteria - CFTC Reg. 4.12(b) provides an exemption from certain CEA Part 4 requirements for the operators of certain commodity pools. Among other things, the pools these CPOs operate cannot commit more than 10% of the fair market value of their assets to establish commodity interest trading positions and must trade commodity interests in a manner solely incidental to their securities trading activities.
- Offshore Commodity Pools - CFTC Advisory No. 18.96 also provides an exemption from certain CEA Part 4 requirements for certain registered CPOs from disclosure, reporting and certain record-keeping requirements in connection with the operation of offshore commodity pools.
Seek Guidance Now
As you can see from the descriptions above, determining whether your intended CTA or CPO may qualify for an exemption from CFTC registration or an exemption from certain Part 4 requirements can be complex. In order to properly evaluate your options, it would be prudent to contact a regulatory professional like Turnkey Trading Partners ("TTP") as soon as possible. TTP has the business acumen, as well as important relationships with legal professionals, such as Henderson & Lyman of Chicago, to provide you with the tools you need to get your fund or trading advisory business up and running.
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