CFTC Adopts Final Rule Prohibiting Persons Subject to Statutory Disqualification from Claiming Rule 4.13 Exemptions

On June 4, 2020, the Commodity Futures Trading Commission (CFTC) adopted a final rule¹ (the Final Rule) prohibiting a commodity pool operator (CPO) that has, or whose principals have, a statutory disqualification listed in section 8a(2) of the Commodity Exchange Act (CEA) in their backgrounds (Disqualifying Conduct) from claiming an exemption from CPO registration under Rule 4.13.

Section 8a(2) of the CEA is broad—Disqualifying Conduct includes, among other things, prior registration suspensions, revocations and denials, financial crimes, and findings or settlements agreeing to findings that a person has violated a U.S. or non-U.S. investment-related statute or regulation. Section 8a(2) differs materially from the disqualification provisions applicable to registered investment advisers (RIAs) under Section 203(e) of the Investment Advisers Act of 1940. Accordingly, RIAs relying on a CPO exemption under Rule 4.13 should ensure that their screening procedures accommodate the provisions of both statutes.

The Final Rule does not apply to family offices that are exempt from registering under Rule 4.13(a)(6). Further, if the Disqualifying Conduct was already disclosed in a previous application for registration as a CPO and the application was approved, the conduct will not disqualify the person whose Disqualifying Conduct was disclosed from claiming an exemption or acting as a principal to a CPO that is claiming an exemption under Rule 4.13.

CPOs that have Disqualifying Conduct or have principals with Disqualifying Conduct in their backgrounds and that are registering as CPOs must disclose the Disqualifying Conduct in their registration applications filed with the National Futures Association (NFA). NFA may allow the CPO to register notwithstanding the existence of the Disqualifying Conduct. Exempt CPOs do not have this procedure available to them because they do not file registration applications with NFA. CPOs and their principals that have Disqualifying Conduct in their backgrounds and would otherwise be unable to seek an exemption under Rule 4.13 may, however, seek individual exemptive relief from the Division of Swap Dealer and Intermediary Oversight.

The Final Rule will be effective 60 days after it is published in the Federal Register, which has not occurred as of the date of this Sidley Update. The Final Rule will apply to any CPO claiming a Rule 4.13 exemption (other than Rule 4.13(a)(6)) for the first time on or after the effective date. CPOs that already rely on an exemption under Rule 4.13 as of that date will be required to comply with the Final Rule as of the date on which they must submit their annual affirmation to NFA—i.e., March 1, 2021. Going forward, exempt CPOs must reaffirm annually that they and their principals do not have any Disqualifying Conduct in their background. This will require exempt CPOs to conduct additional due diligence to confirm that their principals have no new Disqualifying Conduct.

¹ The voting draft of the final rule can be viewed here: https://www.cftc.gov/media/3961/votingdraft06042020/download. The Sidley Update on the proposed rules is available at: https://www.sidley.com/en/insights/newsupdates/2018/10/cftc-proposes-to-streamline-cpo-and-cta-regulations.