Written by Mark Buckley-Jones
Director
The CFTC has adopted a final rule amending CFTC Regulation 4.7 for the first time since the rule was adopted in 1992. Regulation 4.7 is a provision allowing exemptions from certain compliance requirements for commodity pool operators (“CPOs”) regarding commodity pool offerings to qualified eligible persons (“QEPs”) and for commodity trading advisors (“CTAs”) regarding trading programs advising QEPs.
The adopted changes include:
- Increasing the monetary thresholds that investors must satisfy to qualify as QEPs; and
- Codifying routinely issued exemptive letters allowing funds of funds operated under Regulation 4.7 more time to distribute periodic account statements.
Notably, the CFTC did not adopt previously proposed amendments that would have created significant new disclosure requirements for CPOs and CTAs relying on CFTC Regulation 4.7. Instead, the CFTC opted to “take additional time to consider the concerns” of those who submitted comments.
QEP monetary thresholds
To be treated as a QEP under Regulation 4.7, pool participants and/or managed account clients must meet a so-called “Portfolio Requirement”, which requires an investor to meet either of two tests:
- Owning securities (including participations in pools) of unaffiliated issuers and other investments with an aggregate market value of at least $4,000,000 (was $2,000,000 under the old rule); or
- Having on deposit with a futures commission merchant, at any time during the six months preceding the date of investment, at least $400,000 (previously $200,000) in exchange-specified initial margin and option premiums, and required minimum security deposit for retail forex transactions.
An investor may also satisfy a portion of each test as long as the total percentage by which the investor meets each test, when added together, equals or exceeds 100%. As an example, an investor could satisfy the test with a combination of $1.5 million under the first test (75%) and $50,000 (25%) under the second.
Account Statement Distribution
The final rule codifies routinely issued exemptive letters allowing CPOs of funds of funds to choose to distribute monthly account statements within 45 days of month-end rather than quarterly account statements within 30 days of quarter-end.
Compliance Dates
CPOs and CTAs will have six months after the final rule is published in the Federal Register to comply with the increased Portfolio Requirements. The increase will be applied on a forward-looking basis only and does not require CPOs to force non-QEP pool participants to redeem or CTAs to terminate advisory relationships with non-QEP clients. However, they will not be permitted “to sell any additional pool participations or open any additional exempt accounts for any person that does not meet the updated Portfolio Requirement.”
Compliance with the new fund of funds distribution timeline will not be required until the CPO chooses to utilize the new reporting schedule.
