alerts & publications
Fund of Funds Receive Temporary Relief from CPO RegistrationDecember 14, 2012
The Commodity Futures Trading Commission has granted certain operators of private equity funds temporary relief from Commodity Pool Operator (CPO) registration and related exemptive relief. In a recent no-action letter, the CFTC gave qualifying operators of funds of funds a reprieve from registration requirements that would have necessitated, at a minimum, regulatory filings by the end of 2012. The relief lasts until the later of June 30, 2013, or six months after the CFTC issues revised guidance regarding the de minimis exemption to CPO registration. The temporary relief is not self-executing, and an eligible operator must file a claim for relief with the CFTC by e-mail before December 31, 2012.
Under CFTC regulations and rules, funds of funds that indirectly obtain exposure to commodity interests by investing in commodity pools are themselves commodity pools. Accordingly, operators of such funds of funds are CPOs and are required to register unless they qualify for an exemption. Operators of funds of funds historically have avoided CPO registration under the so-called de minimis exemption. That exemption frees CPOs from registration if, among other things, their commodity interest trading is limited to certain de minimis levels, as specified in the CFTC’s rules. Because of opacity in an underlying fund’s (“investee fund”) activities, operators of funds of funds generally have had to rely on guidance in an appendix to the CPO registration rule—Appendix A—to determine whether they qualify for the exemption. In February 2012, the CFTC eliminated Appendix A, and funds of funds were left without guidance on the issue. Six months later, the CFTC clarified that CPOs of fund of funds may continue to rely on Appendix A until the CFTC issues further guidance regarding the de minimis exemption.
To date, the CFTC has not offered updated guidance. Uncertainty regarding possible changes to Appendix A guidance, and the possibility of having to rely on investee funds to determine commodity investment exposure on short notice, confused many operators of funds of funds. In the absence of guidance, many operators claimed the Rule 4.13(a)(3) de minimis exemption earlier this fall. Given the operational difficulties of determining investee-fund exposure and registering, or claiming an exemption from registration, with the CFTC by December 31, 2012, the recent no-action letter spares some CPOs of funds of funds significant effort and expense.
Steps to Obtain Relief
To qualify for relief, a CPO of a fund of funds must file a claim with the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) and remain in compliance with the following provisions:
- The CPO currently structures its operations in whole or in part as a CPO of one or more fund of funds.
- The amount of commodity interest positions in which the fund of funds directly engages must not exceed the de minimis levels specified in Rule 4.13(a)(3).
- The CPO does not know and could not have reasonably known that the fund of funds’ indirect exposure to commodity interests from investments in the investee funds exceeds the de minimis levels specified in Rule 4.13(a)(3), calculated directly or using Appendix A.
- The relevant commodity pool is compliant with the other provisions of Rule 4.13(a)(3).
A claim for relief will be effective upon filing so long as the claim:
- States the name, main business address, and main business telephone number of the CPO seeking relief;
- States the capacity (i.e., CPO) and the name of the commodity pools for which the claim is being filed;
- Is signed by the CPO; and
- Is filed with the DSIO before December 31, 2012. The claim must be filed using the e mail address email@example.com and include “Fund-of-Funds” in the message’s subject line.
If the operator of a fund of funds has already claimed a Rule 4.13(a)(3) exemption this year, no further action is required at this time.
If you have any questions about this matter or require further analysis, please contact any of your regular contacts at the Firm, or contact Heather Traeger, firstname.lastname@example.org, Tim Clark, email@example.com, Kris Easter, firstname.lastname@example.org, or Scott Schaeffer, email@example.com.
 Also known as a “manager,” a CPO is a person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The CPO either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so.
 CFTC Letter No. 12-38 (Nov. 29, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-38.pdf.
 CFTC Rule 4.13(a)(3). The de minimis exemption applies if a CPO satisfies one of two tests. The first requires that the aggregate initial margin and premium attributable to commodity interests (both hedging and speculative) do not exceed 5 percent of the liquidation value of the fund’s portfolio. The second requires that the net notional amount of the commodity interests do not exceed 100 percent of the liquidation value of the fund’s portfolio. In both instances, the interests must be offered and sold without marketing to the public, and must be exempt from registration under the Securities Act of 1933.
 Commodity interests include, for example, swaps, futures, and options on futures.
Appendix A identified situations in which operators of funds of funds could infer compliance with the de minimis levels of commodity interest trading. Such inferences were deemed necessary because many CPOs of funds of funds have only limited knowledge of the trading activities engaged in by their underlying investment funds. Appendix A is available at http://www.gpo.gov/fdsys/pkg/CFR-2012-title17-vol1/pdf/CFR-2012-title17-vol1-part4-appA.pdf.
 CFTC Responds to Frequently Asked Questions (Aug. 14, 2012), available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/faq_cpocta.pdf.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Heather Traeger, an O'Melveny partner licensed to practice law in the District of Columbia and Texas, Timothy Clark, an O'Melveny partner licensed to practice law in New York, Kris Easter, an O'Melveny counsel licensed to practice law in Texas, and Scott Schaeffer, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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