CFTC Adopts Amendments to Regulation 4.7, Does Not Adopt Proposed Disclosure Requirements

The U.S. Commodity Futures Trading Commission (CFTC), on September 12, 2024, adopted a final rule amending CFTC Regulation 4.7 for the first time since its adoption in 1992.¹ The amendments include (i) increasing the monetary thresholds that certain persons must satisfy to qualify as “qualified eligible persons” (QEPs) and (ii) codifying routinely issued exemptive letters allowing funds of funds operated under Regulation 4.7 more time to provide periodic account statements. Notably, the CFTC chose not to adopt proposed amendments that would have created substantial new disclosure requirements for commodity pool operators (CPOs) and commodity trading advisors (CTA) relying on CFTC Regulation 4.7.

CFTC Regulation 4.7 is a compliance exemption on which a substantial number of U.S. and non-U.S. institutional investment managers rely. Regulation 4.7 exempts CPOs and CTAs from many disclosure, reporting, and recordkeeping requirements otherwise applicable to such firms, subject to certain conditions. All participants in commodity pools operated by a CPO under Regulation 4.7 must be QEPs, and all managed account clients of CTAs relying on Regulation 4.7 must be QEPs.

The final rule will go into effect 60 days after publication in the Federal Register. CPOs and CTAs will be required to implement the increased portfolio requirements for QEPs within six months of such publication, but CPOs will not be required to force existing pool participants to redeem, and CTAs will not be required to terminate existing advisory relationships.

Funds of Funds Account Statement Distribution

The final rule codifies routinely issued exemptive letters allowing CPOs of funds of funds operated pursuant to Regulation 4.7 to choose to distribute monthly 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 of its reliance on this alternate distribution schedule.

QEP Definition

The final rule increases the so-called Portfolio Requirement for certain persons to be treated as QEPs under Regulation 4.7. All participants in pools operated by a CPO under Regulation 4.7 must be QEPs, and all managed account clients for which a CTA relies on Regulation 4.7 must be QEPs. The Portfolio Requirement applies to a number of categories of investors, including, among others, most operating companies, nonprofit organizations, and natural persons.

The Portfolio Requirement requires a person to satisfy either of two tests, or a weighted aggregate of both tests:

• The person must own securities (including pool participations) of issuers not affiliated with the person and other investments with an aggregate market value of at least $2 million, or
• the person must have on deposit with a futures commission merchant at least $200,000 in exchange-specified initial margin and option premiums, and required minimum security deposit for retail forex transactions.

The person may also satisfy a fractional portion of each test as long as the percentage by which the person meets each test, when added together, equals or exceeds 100%. For example, a person could satisfy the test with a combination of $1 million under the first test and $100,000 under the second test.

The final rule doubles these monetary thresholds to $4 million and $400,000, respectively. These thresholds were originally set in 1992, and the CFTC has indicated that the increases are intended to account for the effects of inflation since then.

The increases in these monetary thresholds will have a substantial effect on certain firms and no effect at all on other firms, depending on the nature of their client base. For example, for an institutional hedge fund manager that exclusively operates funds pursuant to Section 3(c)(7) of the Investment Company Act, the increased thresholds will have no real-world effect because the categories of persons permitted to invest in 3(c)(7) funds include types of QEPs not subject to the Portfolio Requirement. By contrast, a CTA running a nonpool trading program limited to natural person QEPs will have its universe of eligible investors substantially diminished due to the increased thresholds.

CPOs and CTAs will have six months after the final rule is published in the Federal Register to comply with the increased Portfolio Requirements. The increase in the monetary thresholds for the Portfolio Requirement will be applied on a forward-looking basis only. The final rule does not require CPOs to force non-QEP pool participants to redeem or CTAs to terminate advisory relationships with non-QEP clients. However, existing pool participants or advisory clients that no longer meet the Portfolio Requirements will not be allowed to add to their investments after the six-month implementation period.

Disclosure Requirements

The CFTC originally proposed to create new minimum disclosure requirements for CPOs operating pools under CFTC Regulation 4.7 and CTAs advising clients under CFTC Regulation 4.7. A description of the proposed disclosure requirements was provided in our previous Sidley Update on this topic. The new disclosure requirements would have been a substantial burden for a number of CPOs and CTAs.

In the face of significant opposition from those who submitted comments on the proposal, the CFTC opted to “take additional time to consider the concerns articulated as well as the alternatives to the proposed QEP disclosure amendments put forward by commenters.”² The CFTC has not adopted the new disclosure requirements but has indicated that it will continue to “evaluate regulatory alternatives and may adopt further changes in the future.”³

¹Commodity Futures Trading Commission, CFTC Approves Final Rule Regarding Exemptions from Certain Compliance Requirements for Commodity Pool Operators, Commodity Trading Advisors, and Commodity Pools, Release No. 8965-24 (Sept. 12, 2024), available at https://www.cftc.gov/PressRoom/PressReleases/8965-24?utm_source=govdelivery.

²Commodity Futures Trading Commission, Final Rule, Commodity Pool Operators, Commodity Trading Advisors, and Commodity Pools Operated under Regulation 4.7: Updating the ‘Qualified Eligible Person’ Definition; Adding Minimum Disclosure Requirements for Pools and Trading Programs; Permitting Monthly Account Statements for Funds of Funds; Technical Amendments, RIN 3038-AF25 (Sept. 12, 2024), at 20, available at https://www.cftc.gov/media/11276/federalregister091224CPOCTA/download.

³Id.