Private Funds Archives - BR Derivatives Report

This article is the second in a series on a recent rule proposal by the U.S. Commodity Futures Trading Commission (“CFTC”) to amend CFTC Regulation 4.7.

Introduction

As detailed in an October 9 article at The BR Derivatives Report, the CFTC recently proposed amendments to CFTC Regulation 4.7. If adopted, these amendments will substantially change the disclosure and compliance oversight obligations of many commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”).

This article supplements the earlier article by offering a more detailed overview of the disclosure obligations under the CFTC’s proposal to amend CFTC Regulation 4.7.

NFA Disclosure Document Guides for CPOs and CTAs: Understanding the Proposed 4.7 Disclosure Obligations by Considering Existing Disclosure Obligations for Non-QEPs

The recently proposed disclosure obligations under Regulation 4.7 are based upon existing requirements that apply to CPOs and CTAs offering services to prospective pool participants and clients that do not meet CFTC Regulation 4.7’s Qualified Eligible Person (“QEP”) requirements (such participants and clients, “Non-QEPs”).

To this end, it is useful to consider the disclosure document guides published by the National Futures Association (“NFA”) for CPOs (available here) and CTAs (available here) regarding the disclosure obligations that apply to Non-QEPs under CFTC regulations that are presently in effect.

In sum, understanding more about the existing disclosure requirements for CPOs and CTAs that offer pools and advisory services to Non-QEPs will aid in the understanding of the proposed amendments to CFTC Regulation 4.7.

The remainder of this article will focus on the disclosure obligations for CPOs and CTAs under the proposed rule amendments.

Andrew P. Cross —

This week’s BR Derivatives Report Regulatory Review focuses exclusively on a rule proposal issued by the U.S. Commodity Futures Trading Commission (“CFTC”) on October 2, 2023.

CFTC Rule Proposal to Amend Regulation 4.7

CFTC Press Release 8802-23

Type of Market Participant Involved

Registered Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”) relying on CFTC Regulation 4.7

Summary

The Commodity Exchange Act (“CEA”) regulates the entity or, in some cases, individuals responsible for the operation of an investment fund. In the language of the CEA, such an entity or individual is referred to as a “commodity pool operator” or CPO, while the investment fund itself is referred to as the “commodity pool.”

Similarly, the CEA regulates an investment adviser that provides advice for compensation or profit with respect to the purchase and sale of certain derivatives and other leveraged types of investments. Again, in the language of the CEA, such an adviser is a “commodity trading advisor” or CTA, while the derivatives and investments are called “commodity interests.”

The general regulatory architecture under the CEA involves the registration and substantive regulation of CPOs and CTAs through a myriad of disclosure, reporting, and recordkeeping obligations that apply to their investment and solicitation activities. Notably, the CFTC has issued its Regulation 4.7 to provide certain qualifying CPOs and CTAs relief from most of these obligations.