On September 9, 2014, the Commodity Futures Trading Commission (the “CFTC”) Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued exemptive relief allowing certain commodity pool operators (“CPOs”) to engage in general solicitation and general advertising. Prior to this exemptive relief, discrepancies existed between the CFTC’s Part 4 regulations and the Jumpstart Our Business Startups Act (the “JOBS Act”) amendments to Regulation D and Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), which removed the prohibition against general solicitation and general advertising under some scenarios. This exemptive letter eliminates the discrepancies and allows certain entities to engage in general solicitation and general advertising pursuant to Rule 506(c) under Regulation D while complying with the requirements under CFTC Rules 4.7 or 4.13(a)(3).
As discussed in our August 2013 client alert, among other requirements, the JOBS Act amended Rule 506 of Regulation D to allow entities to engage in general solicitation and general advertising as long as the purchasers are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. The JOBS Act also amended Rule 144A to allow offers of securities to persons other than qualified institutional buyers, including by engaging in general solicitation and general advertising, provided that the purchasers are qualified institutional buyers, or if the seller, or someone acting on behalf of the seller, reasonably believes that the purchasers are qualified institutional buyers.
Many registered CPOs rely on CFTC Rule 4.7 (“Rule 4.7”), which provides an exemption from certain disclosure, reporting and record-keeping provisions of the Commodity Exchange Act, as amended (the “CEA”). In addition, many issuers, including private investment funds, CLOs and CDOs, rely on CFTC Rule 4.13(a)(3) (“Rule 4.13(a)(3)”) for a “de minimis” exemption from CPO registration under the CEA. Prior to this relief, a pool with a CPO that relied on Rule 4.7 or 4.13(a)(3) was unable to engage in general solicitation or general advertising.
A CPO relying on Rule 4.7 may now engage in general solicitation and general advertising, subject to the restrictions of Rule 506(c) or Rule 144A of the Securities Act, if it meets all conditions of Rule 4.7 other than that the requirements that the offering be exempt pursuant to Section 4(a)(2).1 Similarly, a CPO relying on Rule 4.13(a)(3) may now engage in general solicitation and general advertising, subject to the restrictions of Rule 506(c) or Rule 144A of the Securities Act, if the CPO meets all conditions of Rule 4.13(a)(3), other than the prohibition against public marketing.
CPOs who wish to claim this exemptive relief must electronically file a notice with DSIO that sets forth certain basic information and representations regarding the ability to rely on this relief.
Other Recent CFTC Actions:
In addition to the September 9th exemptive relief, on September 8, 2014, the CFTC published additional relief as summarized below:
- The CFTC provided exemptive relief allowing the use of additional third-party recordkeepers to satisfy the recordkeeping requirements under CFTC Regulations 4.7(b)(4) and 4.23(c). Previously, the CFTC allowed books and records that are not kept at a CPO’s main business office to be kept at, and only at, the pool’s administrator, distributor or custodian, or a bank or registered broker or dealer acting in a similar capacity with respect to the pool. This exemptive letter expanded the list of permitted third-party recordkeepers to include any third-party recordkeeper as long as the CPO has timely access to such records and the CPO timely files complete statements required pursuant to the regulations.
- The CFTC provided relief with regards to filing CFTC Form CPO-PQR for registered CPOs that have no reporting obligations under Part 4 of CFTC’s regulations (for example, CPOs of pools that are exempt pursuant to Rule 4.13(a)(3)). If a registered CPO only operates pools pursuant to a claim of exemption from registration, or for which they maintain an exclusion from the definition of commodity pool, the CPO can claim relief under this letter.
- The CFTC provided no-action relief that allows the filing of consolidated financial statements and Form CPO-PQRs for certain CPOs with wholly owned trading subsidiaries. The relief provides that a parent commodity pool (“Parent Pool”) that is not registered as an investment company under the Investment Company Act of 1940 that uses a wholly-owned subsidiary (“Trading Subsidiary”) to trade in commodity interests can file: (1) one consolidated annual report for the Parent Pool that contains consolidated financial statements for both the Parent Pool and its Trading Subsidiary in lieu of separate reports for the two entities pursuant to Rule 4.7(b) or 4.22(c), as applicable; and (2) one consolidated Form CPO-PQR for the Parent Pool that contains consolidated data for both the Parent Pool and its Trading Subsidiary in lieu of separate forms pursuant to Rule 4.27(c). This no-action relief is not self-executing and the CPO claiming this relief must file a claim pursuant to specific procedures, which would be effective upon filing.
If you have any questions, please contact an attorney in the Investment Management Group at Seward & Kissel LLP.
1 A Rule 506(c) or Rule 144A pool relying on this relief may still only sell interests to qualified eligible persons, even though technically it may offer interests to potential investors who are not qualified eligible persons.