Regulatory: CFTC maintains limited trading exemptions

May require more advisers to investment funds to register as CPOs and CTAs

Collective investment vehicles investing in commodities are not directly regulated by the Commodity Futures Trading Commission (CFTC), but the individuals or organizations directing or advising such vehicles with regard to trading in commodities are required to register with the CFTC unless an exemption applies.

The Dodd-Frank Act of 2010[1] expanded the requirement of who must register as such by amending the definition of commodity pool operators (CPOs) and commodity trading advisors (CTAs)[2] to include persons that trade swaps or advise with respect to swaps. The CFTC recently issued a final rule (the CPO-CTA Rule)[3] amending several regulations applicable to CPOs and CTAs.

While this rule eliminates an exemption from CPO registration requirements for investment advisers who limit participation to certain highly sophisticated investors,  it maintains an exemption for investment advisers who limit their commodity interest trading to certain specified amounts.

Note that the CPO-CTA Rule also retains (but narrows) a previously existing exclusion from CPO registration for certain registered investment companies (Rule 4.5), which this article does not address. Given the implications of the revisions to Rule 4.5, however, it is likely that this amendment will be subject to litigation.

Persons that currently claim the sophisticated investor exemption and who must register as a result of that rule’s rescission will have until Dec. 31 to do so. Persons who qualify as a CPO and who form new commodity pools after April 24 (the effective date) will have to be registered at the time of such formation. It is expected that hundreds if not thousands of new entities will qualify as commodity pools and therefore those who manage these pools will qualify as CPOs.

Rescission of the sophisticated investor exemption. Previously, advisers of many investment funds that issued their interests pursuant to offerings that were exempt from registration under the Securities Act could qualify for an exemption from CPO registration requirements under Rule 4.13(a)(4), which only required that participation in the pool be limited to certain classes of sophisticated investors. The CPO-CTA Rule rescinds Rule 4.13(a)(4) outright, on the basis that the exemption theoretically permitted pools to engage in an unlimited amount of commodity trading. As a result, commodity pools operators may have to register as a CPO regardless of the sophistication of their investors.

CFTC Rule 4.14 exempts from CTA registration registered or exempt investment advisers whose commodity interest trading advice is directed solely to exempt CPOs. While the CPO-CTA Rule does not substantively amend this rule, to the extent that fewer persons can claim an exemption from the CPO registration requirement, fewer persons will be able to rely on Rule 4.14.

The limited trading exemption. The CPO-CTA Rule amends but retains the limited trading exemption in Rule 4.13(a)(3). That rule exempts persons who are advisers of investment funds for which:

  • Interests in the pool are exempt from registration under the Securities Act of 1933
  • The pool engages in a limited amount of commodity interest trading
  • Participation in the pool is limited to certain types of investors
  • The pool is not marketed as a vehicle for trading in commodity interests

While the CFTC originally proposed to eliminate this exemption, it ultimately opted against doing so in response to several public comments.

To qualify for the limited trading exemption, an otherwise-eligible fund must confirm that either the aggregate initial margin and premiums connected to the commodity interest positions is 5 percent or less of the liquidation value of the pool’s portfolio, or the aggregate net notional value[4] of regulated commodity contracts (i.e., futures and swaps) amounts to 100 percent or less of the liquidation value of the pool’s portfolio.

Importantly, all positions (or margins) in commodity interests—including those associated with bona fide hedging—must be included in calculating a pool’s commodity positions under this exemption. Additionally, the investment adviser of the pool also must have a reasonable basis to believe that the participants are one of the following:

  • Accredited investors (as defined by the SEC)
  • Knowledgeable employees (as defined by the SEC)
  • Qualified eligible persons (as defined in CFTC Rule 4.7(a)(2)(viii)(A))
  • Trusts formed by an accredited investor for the benefit of a family member

Inclusion of swaps. The trading thresholds under the limited trading exemption will include the amount of swaps in addition to the futures contracts in which an investment fund engages. This is a change from existing Rule 4.13(a)(3), which had excluded the value of swaps from the trading calculation.

Annual notification requirement. As in the past, any entity or person relying on the exemption provided for in Rule 4.13(a)(3) must notify the CFTC that it is claiming such exemption by filing a notice with the National Futures Association (NFA). However, the CPO-CTA Rule now requires this notification to be re-affirmed on an annual basis.

Implications of CPO or CTA registration. Registered CPOs and CTAs will have to comply with several disclosure and reporting requirements, many of which apply to registered CPOs and CTAs under current rules. Importantly, though, existing Rule 4.24(g) requires disclosure of the principal risk factors of participating in the offered pool. When applied to swaps, this provision may require pools to provide a detailed and individualized risk disclosure statement, similar to those required under the external business conduct standards applicable to swap dealers and major swap participants.[5]

Additionally, the directors, president, officers and managers of each CPO and CTA must register with the NFA as principals, and any individual who solicits orders, customers or customer funds on behalf of a CPO or CTA must register with the NFA as an associated person (AP). Under NFA rules, each CPO and CTA must have at least one registered AP, and all APs must pass a proficiency examination.


[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

[2] A CPO is an individual or organization which operates a commodity pool and solicits funds for that commodity pool. A CTA includes an individual or organization which advises persons regarding trading in commodity contracts and swaps. See 7 U.S.C. §§ 1a(11), (12).

[3] See Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 Fed. Reg. 11252 (Feb. 24, 2012); Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 Fed. Reg. 17328 (March 26, 2012).

[4] The rule sets forth separate formulae for determining net notional value for futures, options, retail foreign exchange transactions and swaps.

[5] See Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 Fed. Reg. 9734, 9824 (Feb. 17, 2012) (to be codified at 17 C.F.R. § 23.431).

Contributing Author

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Peter Malyshev

Peter Y. Malyshev, counsel, practices corporate law in the firm’s Washington, D.C. and New York offices and focuses his practice on regulatory, compliance...

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Contributing Author

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Jonathan Ammons

Jonathan T. Ammons is an associate at Latham & Watkins where he practices corporate law in the firm’s Washington, D.C. office. His practice focuses...

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