If you plan on becoming a commodity pool operator, you should be aware of the registration requirements as well as the qualifications to operate an exempt commodity pool. Exempt commodity pools are still required to follow the registration outlined in CFTC Regulations 4.5 or 4.13. Here is a brief summary of what may qualify you as Exempt from NFA registration and provide relief of some of the requirements.
Here is a list of some commonly used exemptions for commodity pools in the United States:
- Regulation 4.13(a)(1) Exemption: This exemption applies to pools offered only to qualified eligible persons (QEPs) and allows the commodity pool operator (CPO) to be exempt from certain registration and disclosure requirements. The person operates only one pool at any time, does not advertise, does not receive compensation, and is not otherwise required to be registered with the CFTC and is not a business affiliate of any person required to register with the CFTC.
- Regulation 4.13(a)(2) Exemption: This exemption applies to pools with limited trading activity, allowing the CPO to be exempt from certain registration and reporting requirements including no pools operating have more than 15 participants an any time, the total gross capital contributions it receives for units of participation in all of the pools it operates or that it intends to operate do not exceed $400,000.
- Regulation 4.5 Exemption: This exemption applies to registered investment companies, such as mutual funds, that engage in a limited amount of commodity trading. It exempts the CPO from certain registration and disclosure requirements. This exemption includes those that are already registered under the Investment Advisor Act of 1940, an insurance company subject to state regulations, a bank, trust, or any such financial depository subject to US regulation or a trustee of a named fiduciary or employer maintaining a pension plan that is subject to ERISA. In this case, derivatives trading will NOT exceed 5% of the liquidation value of the qualifying entity’s portfolio or where aggregate net notional values of the entity’s commodity positions do not exceed 100% of the liquidation of the pool’s portfolio. Those claiming this exemption cannot market to the public as a commodity pool.
- Regulation 4.7 Exemption: This exemption allows a CPO to provide a more streamlined disclosure document to qualified eligible participants (QEPs) and be exempt from certain reporting and recordkeeping requirements. Also available is 4.7(b)(5), a recordkeeping relief for CLPOs that operate 4.7 exempt pools. The details for the 4.7 exemption can be found here and 4.7(b)(5) can be found here.
- Regulation 4.12 Exemption: This exemption provides relief from certain disclosure, reporting, and recordkeeping requirements for CPOs operating small pools or limited partnerships with a limited number of participants. If futures investments are less than 10% of pool’s assets and futures training is incidental to securities trading, you may qualify for this relief.
- Regulation 4.13(a)(2) and 4.13(a)(3) Exemption: This exemption allows certain commodity pools to be exempt from registration with the NFA. It imposes restrictions on the number of participants and qualifying participants in the pool. Qualifications for these exemptions include the pool trading minimal amount of futures, participation is restricted to accredited investors, a pool has no more than 15 participants and total aggregate capital contributions not exceeding $400,000. Note, under these exemptions, the pool cannot accept compensation or other payment, directly or indirectly, for operating the pool, except reimbursement for the ordinary administrative expenses of operating the pool. Only one pool may be operated at any given time. More details of the 4.13 exemptions can be found here.
It’s important to note that each exemption has specific conditions and requirements that must be met in order to qualify. Additionally, the exemptions may have limitations on the type of trading activities, number of participants, or qualifications of participants. It’s advisable to consult with a legal professional who specializes in commodity pool regulations or contact the NFA or CFTC for accurate and up-to-date information on the specific requirements and limitations of each exemption.
These exemptions require annual affirmation in the NFA ORS System. Failure to do so results in loss of exemption and therefore, any relief the exemption provided. This would require full registration with NFA and the commodity pool would be subject to all of the rules and regulations required by CFTC.
If you are coming off an exemption and would like to become registered, please call our office at 630-351-4088 or email Kristine@cogcpa.com.
For a consultation, please schedule here.