On September 12, 2024, the Commodity Futures Trading Commission (“CFTC”) issued a final rule that amends CFTC Regulation 4.7 (“Regulation 4.7”). Regulation 4.7 provides certain exemptions from compliance requirements for (x) commodity pool operators (“CPOs”) offering commodity pools to qualified eligible persons (“QEPs”), and (y) commodity trading advisors (“CTAs”) managing trading programs for QEPs. The revisions are designed to simplify certain regulatory burdens and facilitate more efficient operations, while still ensuring adequate protections for investors.
The amendments encompass: (i) an increase in the monetary thresholds required for certain persons to be classified as QEPs, and (ii) the formal codification of routinely-issued exemptive letters. Importantly, the latter change allows funds-of-funds operating under Regulation 4.7 extended timeframes to deliver periodic account statements.
MONETARY THRESHOLDS INCREASE
The amended Regulation 4.7 increases the thresholds of financial requirements (the “Portfolio Requirement”) for certain potential investors to be treated as QEPs under Regulation 4.7. Specifically, the monetary thresholds that must be satisfied by potential investors at the time of investment have been doubled. As a result, in order for the Portfolio Requirement to be fulfilled, a prospective investor must meet at least one of the following criteria:
own securities (including pool participations) of unaffiliated issuers and other investments with an aggregate market value of at least $4,000,000 (increased from $2,000,000)—this is also known as the “Securities Portfolio Test”; and
have on deposit with a futures commission merchant (i.e., FCM) for its own account [1]at least $400,000 (an increase from $200,000) in exchange-specified initial margin and option premiums, together with any required minimum-security deposits for retail forex transactions, for commodity interests—this is known as the “Initial Margin and Premium Test;”OR
own a portfolio composed of a combination of the Securities Portfolio Test and Initial Margin and Premium Test – i.e., at least (x) $2,000,000 under the Securities Portfolio Test and (y) $200,000 under the Initial Margin and Premium Test.
It is worth highlighting that certain investors do not need to meet the Portfolio Requirement. Specifically, Qualified Purchasers and non-U.S. persons are exempt from the requirement to qualify as QEPs. Therefore, any commodity pool operating under Regulation 4.7 and utilizing the exemption provided by Section 3(c)(7) of the Investment Company Act of 1940, as amended, will not be impacted by the increased monetary thresholds.
GRANDFATHERING
Once the increased thresholds are in effect, CPOs will not have to compulsorily redeem pool participations with existing clients who previously qualified as QEPs under the lower thresholds but no longer meet the new criteria. However, existing investors will not be grandfathered under the new Portfolio Requirement, meaning they will need to meet the updated criteria to qualify as a QEP for any future or additional investments. In other words, while CPOs will not be permitted to sell any additional pool participations or open any additional exempt accounts for any person that does not meet the updated Portfolio Requirement, CPOs are not required to redeem such investors.
ADDITIONAL TIME GRANTED FOR FUND-OF-FUND REPORTING
The amended Regulation 4.7 also codifies the routinely-issued exempted letters allowing CPOs of funds-of-funds operating under Regulation 4.7 additional time to provide periodic account statements. Specifically, funds-of-funds will now have the option to prepare and distribute account statements within 45 days of month-end rather than quarterly account statements within 30 days of quarter-end. A CPO relying on this relief will be required to notify its pool participants immediately of its reliance on this alternate distribution schedule.
NEXT STEPS
Review and Update Current Documents: Ahead of the compliance dates, exempt CPOs under Regulation 4.7 should revise their Subscription Documents, and/or Investment Management Agreements to align with the new Portfolio Requirement, and should also consider the implications of the heightened standards for their investor base.
Communicate with Investors: CPOs relying on the monthly periodic statements should develop a communication strategy to inform current and prospective investors about their reliance on the alternate distribution schedule. Such account statements should meet the requirements of Regulation 4.7(b)(3), and CPOs should notify their pool participants of this alternate distribution schedule—either in the pool’s offering memorandum prior to initial investment, or upon its adoption of this alternate reporting schedule, for then-existing pool participants.
Update Marketing Materials: CPOs should update their marketing and promotional materials to reflect the new standards, as applicable.
Compliance Dates
CPOs and CTAs must comply with the increased Portfolio Requirement thresholds by March 26, 2025.
The monthly reporting schedule will be in effect for CPOs starting November 25, 2024.
[1] at any time during the six (6)-month period preceding either (x) the date of sale to such person of a pool participation in the exempt pool or (y) the date that such person opens an exempt account with the CTA
