Based on the information and suggestions that the CFTC received as part of its Project KISS, the CFTC proposed simplifying regulatory obligations for CPOs and CTAs by codifying staff advisories and no-action letter relief in the CFTC Part 4 regulations.
The CFTC proposed: (i) registration exemptions for CPOs that solicit and/or accept funds from only non-U.S. persons for participation in offshore commodity pools, (ii) allowing the U.S.-based CPO of an offshore commodity pool with U.S. participants to maintain the commodity pool's original books and records in the offshore location of the pool, (iii) CPO and CTA registration exemptions for qualifying family offices, (iv) prohibiting persons statutorily disqualified from registration as CPOs from claiming or affirming CPO registration exemptions, (v) amendments permitting general solicitation by CPOs, (vi) providing exclusionary relief for business development companies and (vii) streamlining amendments as to Forms CPO-PQR and CTA-PR.
Commentary / Dorothy Mehta
All in all, this is a positive step forward by the CFTC. The unanimous adoption of the rule proposals reflects the strong groundwork previously laid down by CFTC Chair Giancarlo in Project KISS. The CPO/CTA proposals codify staff advisories and no-action letters and, thus, give certainty in areas that were potentially gray and left to judgment. Reporting obligations for certain CPOs and CTAs also are lessened. As proposed, the only potential areas of controversy are the annual affirmation processes for those not previously subject to this process and the prohibition on those statutorily disqualified from CPO registration claiming an exemption.
Commentary / Bob Zwirb
Nothing better illustrates the absurdity of applying the CFTC's commodity pool regulatory scheme to every collective investment vehicle that operates than does the application of Part 4 to Family Offices. A "Family Office" is simply an investment fund that is wholly owned and operated for the benefit of the members of a family. Such entities, as the CFTC notes, have been around for over 100 years and are formed to implement financial objectives such as "corporate succession, estate, gift, and income tax planning and charitable giving issues that are important to members of the family."
Treating such entities as commodity pools subject to Part 4 registration and regulatory requirements has never made sense. Yet, as the CFTC release illustrates, the CFTC's rescission in 2012 of former Rule 4.13(a)(4), which previously allowed such vehicles to legally operate without being registered, created an intolerable state of affairs for most such offices. That error was only compounded by the CFTC's refusal to grandfather such offices after 2012, and further exacerbated by its refusal to adopt the SEC's relief for Family Offices in 2012. As the release at page 26 dryly notes, following the rescission of § 4.13(a)(4), "many Family Offices were required to register with the Commission as CPOs, if they could not qualify for an alternative," and in the six years since then, the CFTC has received more than 500 claims for relief.
It is wonderful that as part of Project KISS, the CFTC is seeking to correct this mistaken policy. It is unfortunate that it took the commission six years of developing "additional familiarity with the Family Office industry" to realize, as the release notes, that "the familial relationships inherent in Family Offices provide a reasonable mechanism for protecting the interests of Family Clients and resolving disputes amongst them, and that . . . these characteristics are a reasonable substitute for the benefits and protections afforded by the Commission's regulatory regime for CPOs and CTAs." This illustrates the significant costs to the economy of a philosophy where it is the absence of regulation, rather than the imposition of regulation, that must be justified. Project KISS is at least a move in the right direction.
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