Commodity Pool Operator Registration for Hedge Fund Managers: Frequently Asked Questions

The following chart highlights the current exemptions from registration under the CEA: Rule 4.13(a)(1)

Provides relief from CPO registration if all of the following provisions are met:

1.  Manager operates only one pool at a time;
2. Manager does not receive any form of compensation;
3.  Manager does not advertise; and
4. Manager is not otherwise required to register with the NFA

 Rule 4.13(a)(2)

1. The manager does not operate any pools which have 15 or more investors (excluding the manager and certain related persons); and
2. The total gross capital contributions in all pools operated or intended to be operated by the manager do not in the aggregate exceed $400,000 (certain capital contributions, including those of the manager, will not be counted for the purposes of this rule)

 Rule 4.13(a)(3)

1. The commodity pool interests are exempt from registration under the Securities Act of 1933, and such interests are offered and sold without marketing to the public in the United States;

1. All of the investors in the pool must be an accredited investors (or similar qualification as specified in the rule);

and

One of the following tests is met:

1. The aggregate initial margin and premiums required to establish such positions, determined at the time the most recent position was established, will not exceed 5 percent of the liquidation value of the pool’s portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into; or
2. The aggregate net notional value of such positions, determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the pool’s portfolio, after taking into account unrealized profits and unrealized losses on any such positions it has entered into.

 Rule 4.5

Some  entities  already  registered  with  other  regulatory  bodies  such  as  managers  to  registered  mutual  funds, insurance companies, banks and ERISA fiduciaries need not register as CPOs.  A CPO claiming rule 4.5 exemption must file of notice of the exemption with the NFA and make certain disclosures to the investors in the pool.

 Rule 4.7

This  rule  applies  to  registered  CPOs  but  allows  such  managers  to  avoid  certain  disclosure  and  reporting requirements under Rule 4.21, Rule 4.22(a) and (b), Rule 4.24, Rule 4.25 and Rule 4.26 with respect to each exempt pool, although the new rules require that these CPOs file certified annual reports. To claim this exemption all of the investors in the commodity pool must be qualified eligible persons which generally will mean that they are qualified purchasers.  Notice of rule 4.7  exemption  must be  filed  with the NFA.

 Rule 4.12

While under 4.7 there is no limitation on the amount of commodities held by the pool, rule 4.12 limits the amount of commodities held to 10% of the pools assets and requires that all commodity trading be solely incidental to securities trading activity.  Also only applicable to registered CPO’s, the CPO must file a notice of exemption and adhere to certain disclosure regulations

What does Registration involve and what costs are associated with it?

 CPO/CTA Registration

A CPO/CTA is required to file the following:

• A completed online Form 7-R (includes NFA membership sections)
• A non-refundable application fee of $200.00
• CPO Membership Dues of $750.00

A CPO/CTA is required to file applications for its Principals and Associated Persons

• A completed online Form 8-R
• Fingerprint cards
• Proficiency Requirements
• A non refundable Principal Application Fee of $85.00*
• A non refundable Associated Person Application Fee of $85.00*

Additionally, all registered CPOs/CTAs engaged in retail off-exchange forex activities are required to:

• Apply to become a forex firm by completing online Form 7-R
• Have at least one principal that is also an approved Forex Associated Person
• Submit payment of CPO Forex Firm membership dues of $2,500 (or surcharge of $1,750 if applicant is already an NFA Member)

Additionally, all registered CPOs/CTAs engaged in swap transactions are required to:

• Apply to become a swap firm by completing online Form 7-R
• Have at least one principal that is also an approved Swap Associated Person

*An application fee is not required if the individual is currently registered with the CFTC in any capacity or is listed as a principal of a current CFTC registrant. In addition, only one application fee is required if filing as an application as both an Associated Person and Principal.

 Associated Person (AP) Registration

Registration is generally required unless:

• The individual is already registered as an FCM, IB or Floor Broker* or
• The individual is already registered as a CPO if you are to be associated with a CPO or
• The individual is already registered as a CTA if you are to be associated with a CTA or
• The individual is already registered with the Financial Industry Regulatory Authority (FINRA) as a registered representative and limits futures activity to the solicitation of participations in a commodity pool.

*Registered Floor Brokers who intend to solicit customer business should review their exchanges’ rules to determine if there are any additional exchange requirements or limitations on their activity. For more details on AP exemptions, please refer to CFTC Regulation 3.12(h).