Sponsors and managers of private funds that trade securities futures and other commodity interests have regularly relied on the exemption provided by Commodity Futures Trading Commission (CFTC) Rule 4.13(a)(4) to avoid registration as a commodity pool operator (CPO) under the Commodity Exchange Act (the CEA).This rule allowed sponsors and managers to remain exempt from CPO registration so long as investors in the fund met certain qualifications as described below.

The CFTC has repealed this exemption effective April 24, 2012.As a result, the sponsor and/or manager of any such fund formed on or after that date must register as a CPO unless it qualifies for a different exemption from registration, while the sponsor and/or manager of any existing fund that has claimed exemption under Rule 4.13(a)(4) will have until December 31, 2012 to register as a CPO or so qualify.The repeal of Rule 4.13(a)(4) may also trigger a requirement for the funds manager to register as a commodity trading advisor (CTA).

Fund sponsors and managers should also keep in mind that the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) amended the statutory definition of the terms commodity pool operator and commodity trading advisor to include operators and advisors of funds that trade swaps.[2]Once the CFTC and the Securities and Exchange Commission (the SEC) complete their ongoing joint rulemaking with respect to swaps regulation, swaps that fall under the CFTCs regulatory purview may trigger CPO and CTA registration for fund sponsors and managers even if they do not otherwise trade a significant amount of securities futures or other commodity interests.

In conjunction with its repeal of Rule 4.13(a)(4), the CFTC also adopted certain rule amendments that require annual notice filings by CPOs and CTAs claiming exemption from registration, and implemented certain systemic risk reporting requirements for registered CPOs and CTAs, among other things.(The CFTC also narrowed the exclusion from the definition of CPO that is commonly relied upon by advisors to investment companies that are registered under the Investment Company Act of 1940 (the Investment Company Act), which is a topic not covered by this Alert).

The Dodd-Frank Act provided a mandate for the CFTC to reevaluate its regulation of participants in the commodity futures and derivatives market. One aspect of this review has been to reconsider the exemptions from CPO registration afforded by the CFTC Rules to certain market participants. Two particular CPO registration exemptions Rules 4.13(a)(3) (which permits a fund to engage in only ade minimisamount of futures and commodity trading as described below) and Rule 4.13(a)(4) received heavy fact, the rule amendments initially proposed by the CFTC would have eliminated both of these exemptions.However, after considering comments that it received on the proposed amendments, the CFTC decided to rescind the Rule 4.13(a)(4) exemption, but retained the Rule 4.13(a)(3) exemption, with certain minor modifications.

In repealing Rule 4.13(a)(4), the CFTC expressed concern that, unlike Rule 4.13(a)(3), this Rule set no limits on the amount of securities futures and commodities trading that an exempt fund could engage in, leaving open the possibility that, under this Rule, a fund could even be investedentirelyin futures and other commodities without CFTC supervision.Prior to its repeal, Rule 4.13(a)(4) exempted the operator of a private fund from CPO registration if each natural person participant in the fund was a qualified eligible person as defined in CFTC Rule 4.7(a)(2) (a QEP), and each non-natural person participant was either a QEP or an institutional accredited investor within the meaning of Regulation D under the Securities Act of 1933 (the Securities Act).Because investors that are qualified purchasers or knowledgeable employees for purposes of the Investment Company Act are automatically considered QEPs under the CFTC Rules, private funds relying on Section 3(c)(7) of the Investment Company Act (Section 3(c)(7) funds) have commonly relied on CFC Rule 4.13(a)(4) to avoid registration as CPOs, without regard to the amount of futures and commodity trading conducted by the fund.In fact, as noted by the CFTC, a Section 3(c)(7) fund could engage in unlimited trading of securities futures and commodities and not register as a CPO.

Going forward, the sponsor and/or manager of a private fund that has relied on Rule 4.13(a)(4) may continue to qualify for exemption from CPO registration if it is able to meet the requirements of Rule 4.13(a)(3), which is thede minimisexemption.In order to qualify for this exemption, the fund must not be marketed as a vehicle for trading in the commodity futures or commodity options market and must meet one of two tests at all times.Either (i) the aggregate initial margin and premiums required to establish all commodity interest positions (including positions in security futures products) determined at the time the most recent position was established must not exceed 5% of the liquidation value of the pools portfolio or (ii) the aggregate net notional amount of such positions, determined at the time the most recent position was established, does not exceed 100% of the liquidation value of the pools portfolio.For this purpose, liquidation value is calculated taking into account unrealized profits and losses (excluding the in-the-money amount of any option that is in-the-money at the time of purchase).[3]Additionally, fund investors must be accredited investors or satisfy certain other sophistication requirements.

Once the CFTC and SEC have finalized their joint rulemaking on swaps regulation, as noted above, CPOs will be required to count certain swaps against thede minimisthresholds of Rule 4.13(a)(3).The CFTC has stated, however, that CPOs will be able to continue to exclude swaps from the calculations described above until 60 days after the swaps rules become effective, in order to allow time to assess the impact of the rules on their portfolios and assess whether registration with the CFTC is required.

Advisors to private funds that trade in securities futures and other commodities have commonly relied on Rule 4.14(a)(8) or Rule 4.14(a)(10) in order to remain exempt from registration as CTAs.Prior to the repeal of Rule 4.13(a)(4), Rule 4.14(a)(8) exempted from CTA registration any advisor whose commodity interest advice was directed solely to one or more of certain categories of entities, including CPOs who claimed exemption from registration under Rule 4.13(a)(3) or Rule 4.13(a)(4). Rule 4.14(a)(10) exempts from registration any CTA which during the course of the preceding 12 months has not furnished commodity trading advice to more than 15 persons and does not hold itself out generally to the public as a commodity trading advisor.[4]

If a fund sponsor or advisor previously relied on Rule 4.13(a)(4) to remain exempt from registration as a CPO, and does not qualify under thede minimistrading exemption of Rule 4.13(a)(3) following repeal of Rule 4.13(a)(4), the funds advisor will no longer be entitled to claim exemption from CTA registration under Rule 4.14(a)(8), although the availability of the Rule 4.14(a)(10) exemption remains unaffected.Additionally, SEC-registered investment advisers should note that Section 4m(3) of the CEA (as amended by the Dodd-Frank Act) exempts any such adviser from registration as a CTA if its business does not consist primarily of acting as a CTA, and it does not act as a CTA to any pool engaged primarily in the trading of commodity interests.

The CFTC has implemented new annual notice filing requirements for any CPO or CTA that claims exemption from registration under Rule 4.13 or Rule 4.14, as applicable.Previously, CFTC Rules required only that an initial notice of exemption be filed when the exemption was first claimed.The new annual notice filing, which will be due within 60 days of each calendar year end, must either affirm the filed notice of exemption, withdraw the exemption due to the cessation of activities requiring registration or exemption, or withdraw the exemption and apply for registration.

The CFTC has adopted rule amendments that require additional reporting by registered CPOs (including registered CPOs relying on Rule 4.7, as described below) and CTAs with respect to certain large commodity pools.These new reports (on Forms CPO-PQR and CTA-PR, respectively) are analogous to the Form PF reporting requirements recently adopted by the SEC with respect to private funds managed by registered investment advisers.The reports, which for the most part are not considered public records under the CFTC Rules, require CPOs to provide a variety of information regarding their commodity pools, such as net asset value, returns, capital inflows and outflows, investment strategy, leverage, counterparty credit exposure, trading and clearing mechanisms and investment composition (with varying levels of detail), among other things.

All registered CPOs will be required to file a Form CPO-PQR with the National Futures Association (NFA) for each reporting period during which they satisfy the definition of commodity pool operator and operate at least one commodity pool.Form CPO-PQR is divided into three sections, comprised of Schedules A, B and C. Small CPOs (less than $150 million of assets under management) will be required to file Schedule A only on an annual basis.Mid-sized CPOs (between $150 million and $1.5 billion of assets under management) will be required to file Schedules A and B on an annual basis.These filings for small and mid-sized CPOs will be due within 90 days following the end of each calendar year, with the first such filing due within 90 days after December 31, rge CPOs (with $1.5 billion or more of assets under management) will be required to file Schedules A, B and C of Form CPO-PQR on a quarterly basis.In the case of CPOs with $5 billion or more of assets under management, the first filing will be due within 60 days following the quarter ending September 30, 2012, and in the case of all other large CPOs, within 60 days following the quarter ending December 31, 2012.A CPO that is an SEC-registered investment adviser will be permitted file Form PF, with certain additional information about the commodities pools it operates, with the SEC in lieu of filing Schedules B and C of Form CPO-PQR with the NFA.All CTAs will be required to file a Form CTA-PR with the NFA annually, within 45 days of each fiscal year end.

The CFTC also amended its disclosure rules to require registered CPOs (other than CPOs relying on Rule 4.7, as described below) and CTAs to include specified risk disclosure concerning swaps in the risk disclosure statement that is already mandated by CFTC Rules 4.24 and 4.34.This standardized disclosure must be included in all new disclosure statements and updates filed on or after April 24, 2012 for pools and programs that may engage in swaps trading.

If a fund sponsor or manager is currently relying on Rule 4.13(a)(4) for its private funds that trade securities futures and other commodity interests but is unable to rely on thede minimisexemption of Rule 4.13(a)(3) as described above, it is likely to be required to register as a CPO, which may take eight weeks or longer to complete.[5]

A sponsor or advisor that is required to register as a CPO may nevertheless claim relief under CFTC Rule 4.7 from certain of the substantive disclosure, periodic reporting and recordkeeping requirements of the CFTC Rules that are generally applicable to registered CPOs, so long as interests in the related pool are offered and sold solely to QEPs in an offering exempt from registration under the Securities Act.[6]Because qualified purchasers under the Investment Company Act are also QEPs under the CEA, Section 3(c)(7) funds should be able to qualify for the relief provided by Rule 4.7.Additionally, registered CPOs may claim relief under Rule 4.12 from certain requirements otherwise applicable under CFTC Rules, provided that the amount of commodities interests held does not exceed 10% of pool assets and all commodity trading is solely incidental to securities trading activity.

The CFTCs Final Rule Release and the full text of the amendments can be found at

For more information regarding this alert, please contact Neil Casey (212.631.4414;) in our New York office or Merritt Cole in our Philadelphia office (215.864.7018;).

[1]Rule 4.13(a)(4) was originally adopted by the CFTC under discretionary authority granted by the CEA to exclude or exempt persons from registration if, in the CFTCs opinion, no substantial public interest would be served by the registration.

[2]The CEA defines the term commodity pool as any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any commodity for future delivery, security futures product, or swap. . .The term commodity pool operator is defined as any person . . . engaged in a business that is of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests, including any. . . commodity for future delivery, security futures product, or swap.

[3]A fund is allowed to net futures contracts with the same underlying commodity across designated contract markets and foreign boards of trade.Swaps, however, may be netted only to the extent they are cleared on the same designated clearing organization.

[4]Rule 4.14(a)(10)(B)(1) provides that a corporation, general partnership, limited partnership, limited liability company, trust or other legal organization that receives commodity interest trading advice based on its investment objectives rather than the individual investment objectives of its shareholders, partners, limited partners, members, or beneficiaries may be counted as a single person for this purpose.

[5]Certain pool operators that engage in futures or other commodities trading may qualify for exemption under other CFTC Rules, which may depend on the domicile of the operator or advisor and the pools investors, as well as the nature of the pools trading activities, among other things.

[6]The substantive requirements otherwise applicable to registered CPOs include (i) making specific disclosures in its pool offering documents, (ii) observing certain rules related to advertising and promotional materials, (iii) providing periodic account statements and reports, as well as audited annual reports, to pool participants (iv) implementing certain policies and procedures and (v) maintaining certain books and records.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.