Executive Summary
On October 2, 2023, the U.S. Commodity Futures Trading Commission published a proposed rule that, if adopted as proposed, will: (i) update the portfolio requirements within the qualified eligible person (“QEP”) definition; (ii) requiring commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) operating pools and trading programs to provide certain minimum disclosures to prospective pool participants and advisory clients; (iii) revising exemptive letters that address the timing of certain pools’ periodic financial reporting; and (iv) making certain technical amendments. AIMA's response to the proposed rule can be accessed here.
In our response, we urge the Commission not to adopt the proposed changes to the 4.7 exemption framework because the new mandatory disclosures would be burdensome, costly and unnecessary for CPOs and CTAs that operate 4.7 pools or trading programs. We further highlight that the reasons the Commission relies upon to propose the changes are entirely insufficient for such a wholesale change to a framework that has operated well for three-plus decades. Instead of adopting the changes to 4.7 exemptions, we argue that the Commission should first consider and assess whether the changes to the QEP threshold address its perceived concerns before proposing changes to 4.7 disclosures.
The Proposed Rule
Specifically, the proposal would double the requirements in both the securities ownership test and initial margin and option premium test to determine QEP status to $4,000,000 and $400,000, respectively.
The proposal would also require CPOs and CTAs that operate 4.7 pools and trading programs to provide specific minimum disclosures to QEPs. CPOs will be required to provide to prospective QEP pool participants information on principal risk factors, the investment program, use of proceeds, custodians, fees and expenses, conflicts of interest and past performance of its 4.7 pools. CTAs will be required to provide information information on its principals, principal risk factors, a description of its 4.7 trading program, fees, conflicts of interest and past performance of its 4.7 trading programs.
If you would like to read more about the requirements under this proposed rule, you can access our October 11, 2023 summary here.
Please contact Daniel Austin with any questions regarding this rulemaking.
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Daniel Austin
Head of US Markets Policy and Regulation
Practical Implications
If these changes are adopted as proposed, registered CPOs will no longer be permitted to rely on the existing exemption from providing certain disclosures and instead will be required to provide new, enumerated disclosures to prospective QEPs in their 4.7 pools regarding the following: principal risk factors; the investment program; the use of proceeds; custodians; fees and expenses; conflicts of interest; and past performance of 4.7 pools
If these changes are adopted as proposed, registered CTAs will no longer be permitted to rely on the existing exemption from providing certain disclosures and instead will be required to provide new, enumerated disclosures to prospecptive QEPs in their 4.7 trading programs regarding the following: "persons to be identified"; principal risk factors; description of the 4.7 trading program; fees; conflicts of interest; and past performance of the 4.7 trading programs.
QEPs that must also meet the CFTC's Portfolio Requirement but do not meet the new, heightened thresholds will be permitted to remain a part of current 4.7 pools and trading programs. However, these QEPs will not be permitted to join new 4.7 pools or trading programs, unless the thresholds are met.
Timeline
AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-dark blue in the AIMA Regulatory Horizon Scan gantt chart.
Estimated Compliance Date3 | August 19, 2025 | |
Estimated Effective Date2 | August 19, 2024 | |
Estimated Publication Date1 | June 19, 2024 | |
AIMA comment submitted | December 11, 2023 | |
AIMA summary for members published | October 11, 2023 | |
Proposal published by CFTC | October 2, 2023 |
1 Subject to change. We have estimated a June 5, 2024 publication date based on the likely feedback the CFTC staff will receive from industry in response to the proposed rule and where the proposed rule ranks among priorities for the current Commission. Of course, this is only an estimate and may move forward or backward as actual matters develop and as the CFTC's priorities change. The estimate has been provided solely to allow people to visualize the potential overlaps in compliance burdens for multiple pending rules at the same time.
2 Subject to change. The effective date has been estimated as 60 days following publication, which, in this case, would fall on a Sunday, making the effective date Monday, August 5, 2024. Note that for this purpose we have assumed the CFTC's publication date and the Federal Register publication date are identical for ease of calculation. This will not be the case, but the actual time between (i) the CFTC approval and publication on the CFTC website and (ii) the official Federal Register publication is an unknowable period ranging from a few days to several weeks depending on multiple non-transparent variables. This means that in the end the actual effective date and therefore the actual compliance date will always be later than the estimate even if the CFTC approval date estimate is correct.
3 Subject to change. If the publication date is as estimated above, the compliance date has been estimated based on the a 12-month compliance period starting on the effective date (see note 2 above).