The Commodity Futures Trading Commission (CFTC) recently adopted a final rule amending CFTC Rule 4.7. CFTC Rule 4.7 provides an exemption from certain disclosure, recordkeeping and reporting requirements for registered commodity pool operators (CPOs) and registered commodity trading advisers (CTAs) offering services to "qualified eligible persons" (QEPs). The final rule (i) increases the monetary thresholds to qualify as a QEP and (ii) codifies previously issued exemptive letters permitting CPOs of funds of funds operating under Rule 4.7 to distribute monthly account statements within 45 days of the end of the month, in addition to making other technical changes.
Qualified Eligible Persons
To be eligible for the reduced compliance requirements under CFTC
Rule 4.7, the commodity pool offering by a CPO or trading program
of a CTA must be offered only to QEPs. Certain categories of
investors must meet the "Portfolio Requirement" to
qualify as QEPs, which, prior to the effective date of the
amendments, required (i) owning securities of issuers not
affiliated with the investor and other investments with an
aggregate market value of at least $2 million; (ii) having at least
$200,000 on deposit with a futures commission merchant in
exchange-specified initial margin and option premiums, together
with required minimum security deposits for retail forex
transactions; or (iii) a combination of the two equaling at least
100% (such as $1 million in securities, which is 50% of (i), and
$100,000 on deposit, which is 50% of (ii)).
To account for inflation since the Rule was put in place in 1992, the final rule doubles the monetary thresholds for the Portfolio Requirement to $4 million in unaffiliated securities or $400,000 on deposit (a combination of the two revised thresholds totaling 100% will also work). CPOs and CTAs will have until March 26, 2025 to comply with the increased thresholds. Existing pool participants and clients that do not meet the updated requirements will not be required to be redeemed or have their accounts terminated, but will not be permitted to add to their investments, or open new accounts that are eligible for the reduced compliance standards of Rule 4.7, on or after the compliance date.
Certain investors, such as qualified purchasers (i.e., those eligible to invest in 3(c)(7) funds) and non-United States persons, are not required to satisfy the Portfolio Requirement to qualify as QEPs. Accordingly, for managers offering only 3(c)(7) vehicles the above change will have no impact. Managers operating 4.7 pools that are not 3(c)(7) funds should update their PPMs, investor questionnaires and subscription agreements prior to March 26, 2025 to account for the changes in the Portfolio Requirement.
Additional Reporting Time for Funds of
Funds
The final rule also permits CPOs of funds of funds that are
operating under CFTC Rule 4.7 to distribute monthly account
statements within 45 days of the end of the month, rather than
distributing quarterly account statements within 30 days of the end
of the quarter. This codifies the routinely issued exemptive
letters to CPOs of funds of funds.
No Additional Disclosure Requirements for CPOs and CTAs
under Rule 4.7
In the initial rule proposal by the CFTC in October 2023,
substantial additional disclosure requirements for CPOs and CTAs
operating under CFTC Rule 4.7 were proposed. The final rule omits
these additional disclosure requirements, and the CFTC noted that
given significant opposition to them, it will take additional time
to consider any such requirements.
CPOs and CTAs that have questions as to the impact of the final rule on their firms should contact their Foley Hoag Private Funds Group attorney.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
