CFTC Approves Proposed Rule Regarding Exemptions from Certain Compliance Requirements for Commodity Pool Operators, Commodity Trading Advisors, and Commodity Pools

The U.S. Commodity Futures Trading Commission, CFTC, recently announced an upcoming consultation on revisions to its Rule § 4.7 under 17 CFR Part 4 which specifies exemptions from regulatory requirements for commodity pool operators (CPOs) and for commodity trading advisors (CTAs) when offering services to or advising qualified eligible persons (QEPs). According to the rule as set out in the early 90’s, QEPs are deemed to have sufficient know-how to identify, obtain, and evaluate the information they deem necessary to make informed decisions about the investments offered to them and possess adequate financial resources to permit the exemption of CPOs and CTAs from otherwise applicable disclosure, reporting, recordkeeping, and use-and-filing requirements.
#### Specifically, the Commission proposes four key amendments to the rule, including the following:
(1) An increase in the portfolio requirement threshold: Currently, to qualify as a QEP, a person must meet one of three criteria:
– own assets worth $2,000,000,
– have $200,000 on deposit, e.g. in form of margins, with an FCM, or
– have a combination of above noted assets with its value at least being100% of the first two thresholds.
The Commission is proposing an increase in these thresholds to $4,000,000 (total assets) and $400,000 (deposits with FCMs), and maintaining the 100% portfolio value to account for inflation for the years since the onset of the rule in 1992.
(2) The introduction of new minimum disclosure requirements for CPOs and CTAs: Despite the key assumption that QEPs are highly knowledgable and possess the information needed to make well informed decisions, the CFTC proposes to require CPOs and CTAs dealing with QEPs to provide a minimum set of disclosures to QEPs. This move comes as a consequence to the increasing complexity of the derivatives market and the need to protect investors, even accredited ones.
Specifically, the CFTC would require general disclosures on products or services similar to the ones made to retail clients in the offering memorandum or other marketing material, including information on essential aspects of the investment, such as principal risk factors, details of the investment program, use of proceeds, information about custodians, a breakdown of fees and expenses, and any potential conflicts of interest.
Moreover, as performance disclosures are critical for understanding the historical performance of commodity pools and trading programs, the CFTC proposes to require CPOs and CTAs to provide performance metrics that are relevant to the investment, allowing QEPs to assess the past and current performance. These performance disclosures in Regulation 4.7 are expected to be consistent in form with the disclosures provided to non-QEP pool participants and advisory clients to allow for a more straightforward comparison of the performance metrics between different types of investors.
It shall be noted in this context, that the CFTC would maintain its current exemption from filing and pre-approval requirements of the offering memorandum and other marketing material.
(3) The codification of currently provided exemptive relief for CPOs of Funds of Funds: The CFTC proposes to allow CPOs of Funds of Funds operating under CFTC Regulation 4.7 to distribute the monthly account statements within 45 days after month-end (typically the rule requires the provision of account statements to investors within 30 days after month-end). This delay takes account of the fact that the CPO itself may not receive information of the investee fund performances until close to the 30 day period being over. However, CPOs would need to notify their pool participants about this change so that they know when to expect their account statements.
(4) Other technical changes: The CFTC also proposes various other technical, non-material changes to rule § 4.7 primarily to improve clarity such as the numbering of definition items or the updates of listed cross-references.
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The consultation – which was meanwhile published in the Federal Register – will remain open for public comment until December 11, 2023.