12.ARE EXEMPT CTAS / CPOS STILL REGULATED? Yes. Individuals who qualify for one of the exemptions described above are still generally subject to the following requirements either under CFTC or Securities and Exchange Commission (SEC) rules: 12 Exempt parties must file a publicly available notice disclosing the funds existence and exempt status. • These notices are generally available for viewing electronically on a public website such as the CFTC or NFA website, or otherwise made available for public viewing. Exempt parties must provide investors with an offering memorandum containing information such as: • Fees, transferability of fund interests, conflicts of interest and other matters Exempt parties must provide investors with quarterly account statements disclosing: • The funds net asset value (NAV) at quarter end, • the change in NAV from the previous quarter end, • and the value of the investors interest at quarter end. Exempt parties must provide investors with a form of annual report. Exempt parties are subject to the anti-fraud provisions of the CEA. Exempt parties are subject to CFTC rules with respect to market manipulation. Exempt parties are subject to federal securities laws with respect to the offering of fund interests and investment activities involving securities. Exempt parties are subject to certain special call provisions, including the requirement to file special reports with the CFTC, used for market surveillance and in connection with investigations or litigation.
1. Managed Funds Association May 2014 COMMODITY TRADING ADVISOR & COMMODITY POOL OPERATOR 101 AN INTRODUCTION TO A VITAL PART OF THE FINANCIAL SERVICES INDUSTRY
13.INTERNATIONAL REGULATION OF CTAS / CPOS Within the European Union, regulation of CTAs and CPOs falls under the purview of prudential regulators from individual Member States, including the following: 13 United Kingdom The Financial Services Authority France Autorit des marchs financiers Germany Bundesanstalt fr Finanzdienstleistungsaufsicht Belgium Autoriteit voor Financiële Diensten en Markten Italy Commissione Nazionale per le Societ e la Borsa Sweden Finansinspektionen The Netherlands Autoriteit Financiële Markten
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9.CFTC EXEMPTIONS CFTC Regulation 4.5 offers an exclusion from the definition of the term commodity pool operator for certain regulated persons. Managers wishing to claim an exclusion must file a notice of eligibility with the NFA. Regulation 4.5 also offers automatic exclusion from the CPO definition to operators of certain employee benefit plans. CFTC Regulation 4.13 offers an exemption from CPO registration for operators of smaller pools and pools that trade at a de minimis level, as defined, of commodity interests in regulation. Any person claiming this exemption must also file a notice of eligibility with the NFA. Exclusion from CPO Definition Exemption from CPO Registration 9 The CFTC offers exemptions for CTAs and CPOs whose pools meet certain qualifications, including: Exemption from CTA Registration The Commodity Exchange Act provides certain exemptions from CTA registration for qualifying individuals. A list of the qualifications can be found here. Exempted parties must file with the NFA, however the relief is considered self-executing with the CFTC and does not require notification to the Commission. Other Exemptions CFTC Regulation 4.12(b) and CFTC Regulation 4.7 also provide exemptions to a registered CPO from certain requirements for funds with certain trading positions and to pools whose participants are limited to qualified eligible persons (sophisticated investors). Exempted parties must file notification with the NFA.
11.DODD-FRANK AND CTAS / CPOS The Dodd-Frank Act expanded the definition of CPO and CTA in the CEA to include entities operating pooled investment vehicles and managing commodity trading accounts that enter into swaps. The Act also amended the definition of commodity pool to include pooled investment vehicles that trade commodities – including pools that enter into non- security-based swaps. As a result of these changes, many funds and investment managers will now be required to register as CPOs or CTAs. On February 9, 2012, the CFTC issued final rules under the Dodd-Frank Act removing certain registration and compliance exemptions for CPOs and CTAs. The rules also adopt new data collection rules for CPOs and CTAs and include new risk disclosure requirements for CPO and CTA swap transactions. The purpose of the rules is to increase transparency in CPOs and CTAs that participate in the futures and swaps markets and enhance protections for their customers. Once finalized, these rules will impose Dodd-Frank swap-related obligations on many funds, fund managers and investment managers, regardless of whether or not their swap activities are for client accounts or for their own investment or risk- mitigation activities. 11 Changes under the Dodd-Frank Act:
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10.NFA REGISTRATION EXEMPTIONS CTAs are required to register with the NFA unless they meet certain criteria pertaining to the size and scope of services offered. All registered CTAs who manage customer accounts must be NFA members. A summary of the registration exemptions and membership requirements can be found here. CPOs are required to register with the NFA unless they meet one of the requirements for exemption outlined by the CFTC. All registered CPOs must be members of the NFA in order to conduct business with the public. A summary of the registration exemptions and requirements for membership can be found here. CTAs CPOs 10 As the SRO for the futures industry, all registered CTAs and CPOs are required to be members of the NFA. However, the NFA does provide certain exemptions to qualifying individuals based on certain criteria and in coordination with CFTC regulations: NFAs website also offers an Easy Reference Guide outlining registration exemptions.
Commodity Trading Advisors (CTA) and Commodity Pool Operators (CPO) have long been vital to the alternative investment industry. The presentation allows those new to the alternative investment industry to better understand how CTAs and CPOs function, how they are regulated, and how the Dodd-Frank legislation and recent CFTC rulemakings have affected these entities.
Commodity Trading Advisor & Commodity Pool Operator 101
8.HOW REGULATION WORKS The process by which the CFTC regulates CTAs and CPOs includes: • The applicants register with the CFTC. • The CFTC monitors the market for potential manipulation. • The agency also enforces market manipulation rules. 8*These requirements are in addition to federal and state securities law requirements that apply to the fund. The process by which the NFA regulates CTAs and CPOs includes: • All CTAs / CPOs must be registered members of the NFA. • NFA membership stipulates that associated persons of a CTA or CPO must satisfy proficiency requirements, including passage of the National Commodity Futures Examination (known as the Series 3) prior to engaging in commodities activities. • CTAs / CPOs must file disclosure documents with the NFA. Commodities regulations apply to the funds manager (CTA) or sponsor (CPO). Sometimes, the CPO and CTA are the same entity.
and government bond futures. • Collective investment vehicles that trade commodity interests (futures,the CFTC,click here.6.REGULATING CTAS AND CPOS – THE CFTC The Commodity Futures Trading Commission (CFTC): The Commodity Futures Trading Commission Act of 1974 created the CFTC as an independent agency responsible for administering the CEA by regulating the commodity futures and commodity options markets in the U.S. 6 • The CFTC consists of five Commissioners appointed by the President with the approval of the Senate,stock indexes,click here.transparent and efficient financial markets. CTAs and CPOs are regulated by government entities and an industry-wide self-regulatory organization (SRO). • The Commodity Futures Trading Commission (CFTC) is the government entity responsible for regulating commodity trading. • The National Futures Association is the SRO responsible for regulating futures markets. The CFTC and NFA help safeguard market integrity and protect investors through a series of regulatory requirements. 5 *Public pools are considered uncovered securities and are therefore regulated by individual state regulators,
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14.MANAGED FUNDS ASSOCIATION 14 For more information please contact: Steve Hinkson (202)730-2600 Or visit: Follow us on Twitter: @MFAUpdates