The Commodity Futures Trading Commission (“CFTC”) recently published a rule proposal that would amend CFTC Regulation 4.7. This regulation provides exemptions from certain disclosure and reporting requirements for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) that do business with qualified eligible participants (“QEPs”). Such proposed amendments would be the first modification to CFTC Regulation 4.7 in over 30 years.
The CFTC’s proposal would create three significant changes for 4.7 Exemptions:
1. increasing the Portfolio Requirement monetary thresholds of CFTC Regulation 4.7;
2. Implementing new minimum disclosure requirements for pools operated by CPOs and trading programs offered by CTAs; and
3. Codifying exemptive letters for CPOs that operate Funds of Funds operating under CFTC Regulation 4.7.
Salus GRC Takeaways:
Summary of the Proposed Rule:
As currently stated under CFTC Regulation 4.7, natural persons are required to meet the Portfolio Requirement to be considered a QEP. The CFTC’s proposal would increase the Securities Portfolio Test threshold for a QEP under CFTC Regulation 4.7(a)(1)(v)(A) from $2,000,000 to $4,000,000 and the Initial Margin and Premium Test in CFTC Regulation 4.7(a)(1)(v)(B) from $200,000 to $400,000. This would ultimately have no impact on the Fractional Percentage section of the test under CFTC Regulation 4.7(a)(1)(v)(C).
Under CFTC Regulation 4.7, CPOs that offer investments in commodity pools and CTAs offering trading programs did not have formal disclosure requirements. The proposed rule would require the following disclosures prior to accepting a new QEP pool participant or managed account client:
CFTC Regulation 4.7 currently allows for CPOs to offer pools without any formal offering memorandum. Under the proposed rule, the CPO would be required to disclose a description of the following information prior to accepting a participant into a pool:
1. Principal Risk Factors
2. Investment Program and Investment Proceeds
3. Fees and Expenses
4. Conflicts of interests
5. Certain Past Performance
Similar to the above, CTAs are not currently required to distribute disclosure documents to managed accounts that rely on CFTC Regulation 4.7. Under the new rule, CTAs would be required to disclose a description of the following before opening a managed account in accordance with a CFTC Regulation 4.7 trading program:
1. Key Persons to be Identified
2. Principal Risk Factors
3. Description of the Trading Program
5. Conflicts of Interest
6. Certain Past Performance
CPOs that operate funds-of-funds are currently required to distribute participant statements within 30 days of reporting period end, unless specific relief has been granted. The proposed rule would codify this often-granted relief and allow for CPOs of funds-of-funds to distribute such participant statements within 45 days of reporting period end.
Please contact Salus GRC with your questions and concerns related to this proposed rule, an active or potential NFA exam or the current governance, risk and compliance landscape for CPOs, CTAs, investment advisers, or other market participants.