Tag Archives: Rule 4.13

Hedge Fund CPO Exemptions

[Editor’s note: this article will be updated shortly.  Please note that 4.13(a)(4) is no longer available for managers.  05-121-17]

As I’ve detailed before, under the Commodities Exchange Act (CEA), hedge funds which invest in commodities/ futures or in other hedge funds which invest in commodities/ futures are deemed to be commodity pools.  The managers of these commodity pools will need to be registered as commodity pool operators (CPOs) unless the manager fits within an exemption from the registration provisions. For more information on registration with the National Futures Association (NFA), please see article on how to register as a CPO.

There are a few rules under the CEA exemptions from the registration provisions which I have detailed below.  Many will not be applicable to the average hedge fund manager.  Generally hedge fund managers are going to rely on 4.13(a)(3) below, or if the fund is a 3(c)(7) hedge fund, then they may rely on 4.13(a)(4).  The CPO exemptions are:

Rule 4.13(a)(1) – closely held pool

This rule provides relief from CPO registration if all of the following provisions are met:

1.    Manager operates only one pool at a time;

2.    Manager does not receive any form of compensation;

3.    Manager does not advertise; and

4.    Manager is not otherwise required to register with the NFA

Please see Rule 4.13(a)(1).

Rule 4.13(a)(2) – small pool

This rule provides relief from CPO registration if the following provisions are met:

1.     The manager does not operate any pools which have 15 or more investors (excluding the manager and certain related persons); and

2.    The total gross capital contributions in all pools operated or intended to be operated by the manager do not in the aggregate exceed $400,000 (certain capital contributions, including those of the manager, will not be counted for the purposes of this rule)

Please see Rule 4.13(a)(2).

Rule 4.13(a)(3) – deminimus rule

This rule provides relief from CPO registration if the following provisions are met:

1.    The commodity pool interests are exempt from registration under the Securities Act of 1933, and such interests are offered and sold without marketing to the public in the United States;

2.    All of the investors in the pool must be an accredited investors (or similar qualification as specified in the rule); and

3.    One of the following tests is met:

a.    The aggregate initial margin and premiums required to establish such positions, determined at the time the most recent position was established, will not exceed 5 percent of the liquidation value of the pool’s portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into; or

b.    The aggregate net notional value of such positions, determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the pool’s portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into.

Please see Rule 4.13(a)(3).

Rule 4.13(a)(4) – all QEPs

NOTE: THIS EXEMPTION IS NO LONGER AVAILABLE FOR MANAGERS

This rule provides relief from CPO registration if the following provisions are met:

1.    The commodity pool interests are exempt from registration under the Securities Act of 1933, and such interests are offered and sold without marketing to the public in the United States; and

2.    Investors must generally be qualified purchasers.  (HFLB note: the definition makes reference to qualified eligible persons but in this case it will generally include only those investors who are qualified purchasers.)

Please see Rule 4.13(a)(4).

Rule 4.5 Exemption

Certain management entities which are already registered with other regulatory bodies do not need to also be registered as a CPO with the NFA.  Some of these entities include managers to registered mutual funds, insurance companies, banks and ERISA fiduciaries.  A CPO claiming rule 4.5 exemption must file of notice of the exemption with the NFA and make certain disclosures to the investors in the pool.

Please see Rule 4.5.

Rule 4.7 Exemption

Registered CPOs must adhere to certain disclosure and reporting requirements as specified in the rules under the CEA.  With regard to certain commodity pools which they manage, managers may want to consider running certain funds under the “lite-touch” rule 4.7 which allows CPOs to run their fund pursuant to lighter regulations.  Specifically, the CPO would be exempt from the specific requirements of Rule 4.21, Rule 4.22(a) and (b), Rule 4.24, Rule 4.25 and Rule 4.26 with respect to each exempt pool.  To claim this exemption all of the investors in the commodity pool must be qualified eligible persons which generally will mean that they are qualified purchasers.  CPOs claiming rule 4.5 exemption must still file of notice of the exemption with the NFA.

Please see Rule 4.7.

Rule 4.12 Exemption

Like the rule 4.7 exemption, the rule 4.12 exemption is for registered CPOs.  While under 4.7 there is no limitation to the amount of commodities held by the pool, rule 4.12 limits the amount of commodities held to 10% of the pools assets and requires that all commodity trading be solely incidental to securities trading activity.  Under this exemption the CPO will need to file a notice with the NFA and will need to adhere to certain disclosure regulations. Both the 4.7 and 4.12 exemptions are used less often than the 4.13 exemptions.

Please see Rule 4.12.

NFA sends request for financials to Commodity Hedge Funds

Hedge fund managers which are licensed as commodity pool operators (CPOs) should have received an email from the NFA which requests certain financial information. While not disclosed on their website, the NFA sent a request on Friday to all of the CPO Members. Each member will need to make a filing which represents (i) the commodity pool has not suffered a drawdown of 25% or more since December 31, 2007 or (ii) the commodity pool’s actual drawdown numbers. CPOs will have until October 8 to make the filing. If you are a CPO and have not received this email request, you should contact the NFA immediately. If you did receive the request and have any questions, you should contact the NFA and/or your attorney immediately.

The NFA contact persons are:

Mary McHenry, Senior Manager, Compliance, ([email protected], or (312) 781-1420)

Tracey Hunt, Senior Manager, Compliance, ([email protected] or (312) 781-1284)

The request for information does not apply to pools which are exempt under CFTC Rule 4.13. For the whole email, please see below.

September 26, 2008

Important Request for CPOs

Due to current events in the global financial markets, NFA is requesting CPO Members to provide information by October 8, 2008 regarding the financial status of their pools. However, this request does not apply to any CFTC 4.13 exempt pools.

To see a list of the active pools NFA has on file for your firm, click on the following link and access the EasyFile system: https://www.nfa.futures.org/AppEntry/Redirect.aspx?app=EasyFilePool. (However, if you currently operate a pool that may be subject to this request, but it is not included in the EasyFile listing, you must notify one of the individuals listed at the end of this message.)

NFA is requesting certain financial information as of 9/30/2008 for each pool listed that has experienced a drawdown of 25% or more since December 31, 2007. For further instructions on completing the filing, see the information below regarding How to File.

For any pool that did not sustain such a drawdown, you must attest to this fact by deleting the filing request from the listing. For further instructions on deleting the request, see the information below under How to Delete a Request.

How to File: For each pool that has experienced a drawdown of 25% or more since December 31, 2007, you must use the EasyFile system to submit the pool’s key financial balances and Schedule of Investments, as well as a written representation on disclosure and withdrawal restrictions.

The key financial balances consist of the same summary categories you enter for year-end statements. The Schedule of Investments is an itemized listing of all investments that individually exceed 5% of NAV. NFA has created a standardized spreadsheet for this filing, which is available at https://www.nfa.futures.org/EASYFILE/Static/CPOSchedule.xls. Use this link to access the spreadsheet and then perform a “save as” to save the blank spreadsheet to your local computer. Once you complete the spreadsheet, upload it to NFA via the EasyFile system. Additionally, you must submit any written documentation your firm has provided to participants relating to any additional disclosure, including whether the firm has placed any restrictions on redemptions and, if so, a description of these restrictions. You should save this written documentation as a PDF file and then upload it to the EasyFile system as well.

How to Delete a Request: For any pool that does not meet the 25% threshold, you must delete the filing request in the EasyFile system. Detailed instructions on how to delete a filing request are included in the guide entitled “Help for Special 9/30/2008 Filing” on the initial Pool Index screen in the EasyFile system.
BY DELETING THE REQUEST, YOU ARE ATTESTING THAT THIS POOL DID NOT EXPERIENCE A DRAWDOWN OF 25% OR MORE SINCE DECEMBER 31, 2007. In addition, NFA will maintain a record of the deletion, as well as the user who performed it.

Thank you in advance for your cooperation. If you have any questions regarding this request, please contact one of the following individuals:

Mary McHenry, Senior Manager, Compliance, ([email protected], or (312) 781-1420) Tracey Hunt, Senior Manager, Compliance, ([email protected] or (312) 781-1284)

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Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include: