The Commodity Futures Trading Commission (the “CFTC”) issued a No-Action Letter today concerning the delegation of commodity pool operator (“CPO”) functions to a registered CPO.1 This No-Action Letter supplements CFTC Letter 14-69, issued on May 12, 2014, which provided streamlined relief from registration for a delegating CPO.2 This new No-Action Letter clarifies certain eligibility criteria for delegation and, unlike Letter 14-69, is self-executing. While this relief is self-executing, a delegating CPO and designated CPO should enter into a delegation agreement in order to meet the eligibility criteria.
To qualify for this relief, nine criteria must be met:
- a. 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; provided, however, that satisfaction of this criterion is not precluded where: (i) a delegating CPO or the designated CPO appoints one or more third parties to serve as investment manager(s) of the pool; and (ii) each such third party investment manager is registered as a commodity trading advisor (“CTA”) or is exempt from such registration;
b. The delegating CPO does not participate in the solicitation of participants for the commodity pool; provided, however, that satisfaction of this criterion is not precluded where the delegating CPO: (i) is registered as an associated person (“AP”) of the designated CPO or is exempt from registration as such; and (ii) participates in the solicitation of pool participants solely in its capacity as an AP of the designated CPO; and
c. The delegating CPO does not manage any property of the pool; provided, however, that satisfaction of this criterion is not precluded where the delegating CPO: (i) is a principal or employee of the designated CPO or of a CTA of the pool; and (ii) has management responsibilities over pool property; provided further, however, that such delegating CPO: (1) exercises these management responsibilities solely in the capacity of a principal or employee of the designated CPO or as a CTA of the pool and not as the delegating CPO of the pool; and (2) in connection with exercising these management responsibilities, is subject to supervision as a principal or an employee by either the designated CPO or a CTA of the pool. For purposes of this criterion, management of pool property does not include responsibilities with respect to pool property of an administrative, clerical or ministerial nature.
2. The designated CPO is registered as a CPO.
3. 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”).
4. 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.
5. The books and records of the delegating CPO with respect to the commodity pool are maintained by the designated CPO.
6. 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.
7. 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.
8. If a delegating CPO is a natural person and is not an Unaffiliated Board Member,3 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.
9. 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 self-executing relief. CPOs that do not qualify for this 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 Any person who received a no-action letter pursuant to Letter 14-69 may continue to rely thereon. The CFTC will no longer consider requests for no-action relief pursuant to Letter 14-69, including any requests previously submitted that are pending.
3 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.