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In early September, the U.S. Commodity Futures Trading Commission (“CFTC”) adopted amendments to CFTC Regulation 4.7 (“Regulation 4.7”), which is a compliance exemption from certain disclosure, reporting and recordkeeping obligations otherwise applicable to CFTC-registered commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”). In order for a CPO or CTA to rely on Regulation 4.7, the participants in the relevant commodity pool operated by the CPO, and the accounts advised by the CTA, must meet the definition of qualified eligible person (“QEP”).

Updates to QEP Definition – Increased Portfolio Requirement

Under the QEP definition, certain categories of persons must satisfy a portfolio requirement (e.g., individuals that do not meet the definition of “qualified purchaser” under the Investment Company Act or charitable organizations).

Before the amendments, in order to meet the portfolio requirement a person had to:
(i) own securities and other investments of non-affiliated issuers with an aggregate market value of at least $2 million;
(ii) have on deposit with a futures commission merchant, for its own account, at least $200,000 in exchange-specific initial margin and option premiums at any time during the six-month period preceding either (A) the date of participation in an exempt pool or (B) the date of opening of an exempt managed account; or
(iii) own a portfolio comprised of a combination of securities/investments and margin/premiums that equaled 100% of the two thresholds (e.g., $1 million in securities and $100,000 in initial margin).

The amended Regulation 4.7 increases the above figures to $4 million and $400,000, respectively. The combined thresholds in (iii) must also take into account the updated figures. The CFTC reasoned that updated figures were necessary to account for inflation in the period since the regulation was first promulgated by the CFTC in 1992.

Fund of Funds Account Statement Distribution

The amendments also formally codified existing CFTC no-action letters which allowed the CPO of a fund of funds relying on Regulation 4.7 to elect to distribute monthly account statements within 45 days of month-end, rather than distributing quarterly account statements within 30 days of quarter-end. The CPO must disclose the alternative distribution schedule to participants in the fund of funds’ offering documents.

Takeaway

The increased QEP thresholds will go into effect on March 26, 2025 and the codification of the Fund of Funds Account Statement Distribution Relief will become effective on November 25, 2024.

For those CPOs and CTAs relying on Regulation 4.7, the increased portfolio requirement is prospective only, meaning that existing participants in a CPO’s commodity pools and existing clients of the CTA that do not meet the new increased portfolio requirements do not need to be compulsorily redeemed or have their advisory relationships terminated. However, in the amendment’s adopting release, the CFTC noted that existing pool participants and clients who do not meet the increased portfolio requirement cannot acquire additional interests in the exempt pool or open new exempt accounts. Relying CPOs and CTAs should be sure to update the representations they receive from new pool participants and clients, as well as existing participants and clients looking to acquire additional interests in the exempt pool or open new exempt accounts, to reflect the new QEP definition.

Notably, the CFTC elected not to adopt the other proposed changes to Regulation 4.7, which would have greatly increased the disclosure and recordkeeping obligations applicable to exempt CPOs and CTAs, noting the significant pushback received from market participants. The CFTC indicated it would therefore take additional time to consider the concerns and alternatives raised by such participants.

For more information on the topic discussed, contact:

• Haylie Gordon  |  gordon@thsh.com  |  212-508-6745
• Beth Smigel  |  smigel@thsh.com  |  212-702-3176