CFTC Doubles the 4.7 Portfolio Requirement for CPOs and CTAs
On September 12, 2024, the Commodity Futures Trading Commission (CFTC) published a Final Rule amending the CFTC Regulation 4.7 requirements for commodity pool operators (CPOs) and commodity trading advisors (CTAs). Regulation 4.7 – colloquially referred to as “registration light” – affords reduced disclosure, reporting, and recordkeeping obligations for CFTC registered CTAs and CPOs that limit their sales activity to “qualified eligible persons” (QEPs).
Most significantly, the Final Rule will double the Portfolio Requirement required to qualify as a QEP for numerous categories of investors (such as natural persons who are accredited investors, non-profits, operating companies, etc.). This means that the universe of potential clients/investors will shrink for CTAs and CPOs relying on Regulation 4.7. Fortunately, however, the CFTC did not adopt the far more expansive regulatory burdens to Regulation 4.7 that it had proposed.
This article summarizes the revised rule, notes the effective date, and discusses practical implications for 4.7 CTAs, CPOs to 4.7 funds, and operators of non-4.7 funds (i.e., most hedge fund managers). It also discusses the Final Rule’s codification of the CFTC’s long-time allowance for CPOs to fund of funds to deliver monthly account statements within 45 days of month-end.
Doubling the Portfolio Requirement
The Final Rule’s primary change to Regulation 4.7 is to double the current QEP Portfolio Requirement (see below in bold underline). For instance, to be treated as a QEP under the amended Regulation 4.7, managed account clients and/or pool participants that do not fit into other enumerated QEP categories must satisfy the revised “Portfolio Requirement,” which requires an investor to meet either of the following two tests:
1• Own securities (including pooled investment vehicles) of unaffiliated issuers and other investments with an aggregate market value of at least $4,000,000 [currently $2,000,000 under the existing rule]; or
• Have on deposit with a futures commission merchant, at any time during the six months preceding the date of the investment, at least $400,000 [currently $200,000 under the existing rule] in exchange-specified initial margin and option premiums, and required minimum security deposit for retail forex transactions.
As before, an investor can also satisfy the Portfolio Requirement if the two tests, when added together, equal or exceed 100%. As an example, under the higher threshold outlined by the Final Rule, an investor could satisfy the Portfolio Requirement with a combination of $3 million under the first component (75%) and $100,000 (25%) under the second component.
Codification of Existing Fund of Funds Relief
The Final Rule also codifies prior CFTC no-action letters that allow CPOs of fund of funds – who often experience difficulty gathering the necessary information to prepare quarterly statements within 30 days of quarter-end – to deliver monthly account statements within 45 days of month end. A CPO relying on such relief must notify affected fund investors prior to its reliance on the relief, but no longer needs to request such relief from the CFTC.
Effective Date
The Final Rule is effective 60 days after publication in the Federal Register.
Compliance with the Portfolio Requirement will be effective 6 months after such publication and will be applied on a forward-looking basis. This means that existing investors not satisfying the increased Portfolio Requirement after the effective date will not be required to exit their investments. However, they will not be allowed to make follow-on investments until they are able to satisfy the increased Portfolio Requirement.
The fund of funds relief will be available 60 days after the Final Rule’s publication in the Federal Register.
Implications for 4.7 CTAs and CPOs to 4.7 Funds
Given that the Final Rule’s compliance effective date is expected to be mid-2025, 4.7 CTAs and CPOs to funds operating under Regulation 4.7 may wish to obtain as many new advisory clients/ fund investors prior to the Final Rule’s adoption as possible, since the universe of potential 2 ©2024 All Rights Reserved.clients/fund investors will be reduced following the Final Rule’s effective date. In addition, CTAs and CPOs will need to tee up the required edits to their respective compliance manuals and advisory agreements/fund subscription materials, etc.
However, it should be noted that satisfying the Portfolio Requirement is only one way to satisfy the QEP definition. Thus, clients/fund investors may still be able to slot into other QEP categories, regardless of the upcoming amendment to Regulation 4.7.
Implications for Operators of Non-4.7 Funds (i.e., Most Hedge Fund Managers)
Most hedge funds, private equity funds, real estate funds, and other private fund vehicles engage in only de minimis futures, commodity interest, and/or forex trading and thus operate under CFTC Rule 4.13(a)(3)(i.e., the de minimis trading exemption), as opposed to under Regulation 4.7. Thus, most such funds will not be affected by the revisions to Regulation 4.7.
About the authors:
Nicole Kalajian focuses her practice on investment management. Ms. Kalajian represents securities and commodities professionals in a variety of regulatory, compliance and corporate matters. She has extensive experience advising private fund clients, including hedge funds, commodity pools, cryptocurrency funds, fund of funds, socially responsible investment vehicles, venture capital funds, private equity funds and real estate funds. Ms. Kalajian also provides legal and structuring guidance concerning master-feeder structures, domestic and foreign funds, international offerings, separately managed accounts, and robo-adviser platforms. Read more about Nicole.
Mike Coglianese is the founder and principal of MICHAEL COGLIANESE CPA PC. A boutique CPA firm which has been providing the futures and hedge fund industry with audits, accounting, compliance, and tax preparation for 30 years. Prior to forming his CPA firm he worked at National Futures Association (NFA) in the compliance department. At NFA he was responsible for compliance and financial audits, investigations, and financial analysis. Read more about Mike.
This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates. Prior results referred to in these materials do not guarantee or suggest a similar result in other matters. 3