The Commodity Futures Trading Commission (the “CFTC”) issued guidance yesterday concerning the delegation of commodity pool operator (“CPO”) functions to a registered CPO.1 This guidance provides eligibility criteria for streamlined relief from registration for a delegating CPO and the process required to claim such relief.
To claim this relief, the delegating CPO must submit a letter to the CFTC in the form provided by the CFTC. This letter includes identifying information, a representation that the criteria set forth below are met and a statement from the designated CPO acknowledging that it has been designated as the registered CPO and that it satisfies the applicable criteria. The CFTC intends to respond to each request for relief.
To be eligible for this streamlined relief, nine criteria must be met:
- Pursuant to a legally binding document, the delegating CPO has delegated to the designated CPO all of its investment management authority with respect to the commodity pool; the delegating CPO does not participate in the solicitation of participants for the commodity pool; and the delegating CPO does not manage any property of the commodity pool.
- The designated CPO is registered as a CPO.
- The delegating CPO is not subject to a statutory disqualification set forth in Sections 8a(2) and 8a(3) of the Commodity Exchange Act (the “CEA”).
- There is a business purpose for the designated CPO being a separate entity from the delegating CPO that is not solely to avoid registration by the delegating CPO.
- The books and records of the delegating CPO with respect to the commodity pool are maintained by the designated CPO in accordance with CFTC Regulation 1.31.
- If the delegating CPO and the designated CPO are each a non-natural person, then one such CPO controls, is controlled by, or is under common control with the other CPO.
- If a delegating CPO is a non-natural person, then such delegating CPO and the designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations by the other in connection with the operation of the commodity pool.
- If a delegating CPO is a natural person and is not an Unaffiliated Board Member,2 then such delegating CPO and the designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC’s regulations by the other in connection with the operation of the commodity pool.
- If a delegating CPO is an Unaffiliated Board Member, then such delegating CPO must be subject to liability as a board member in accordance with the laws under which the commodity pool is established.
The CFTC acknowledged that certain situations may be appropriate for delegation but may not be eligible for this streamlined relief. CPOs that do not qualify for this streamlined relief are required to submit a request for no-action relief in order to delegate the CPO function.
If you have any questions concerning the foregoing, please contact your primary attorney in Seward & Kissel’s Investment Management Group.
1 The CFTC has previously stated that for a private fund organized as a limited partnership, the general partner is the CPO and for a private fund organized as a corporation, the directors are the CPOs.
2 The term “Unaffiliated Board Member” means a natural person who is a voting member of the board of directors or an equivalent governing body of the commodity pool who: (i) is not a member of the management or an employee of the designated CPO or any affiliate thereof; (ii) is not a substantial beneficial owner of the designated CPO or any affiliate thereof or of any company holding more than 5% of such designated CPO’s beneficial ownership interests or any affiliate thereof; and (iii) has no other interest or relationship that could interfere with his/her ability to act independently of management of the designated CPO or any affiliate thereof or of any company holding more than 5% of such designated CPO’s beneficial ownership interests or any affiliate thereof.