On September 12, 2024, the Commodity Futures Trading Commission (CFTC) published a final rule amending CFTC Regulation 4.7. In addition to technical revisions and updated citations, the amendment (1) doubles the dollar thresholds whereby certain persons may qualify as a “qualified eligible person” (QEP); and (2) allows commodity pool operators (CPOs) of 4.7 funds of funds to provide monthly account statements within 45 days of month-end instead of within 30 days of each quarter-end.
Increased Dollar Thresholds to Qualify as a Qualified Eligible Person for 4.7-Exempt Pools and Accounts
Significance of QEP status
For the CPO of a fund or the commodity trading advisor (CTA) of an account to rely on certain reporting, disclosure, and recordkeeping exemptions otherwise required by the Commodity Exchange Act, each investor must be a QEP. There are two types of QEPs – those that must satisfy a portfolio requirement and those that qualify without having to satisfy the portfolio requirement (for example, most non-U.S. persons and “qualified purchasers” within the meaning of the Investment Company Act).
The final rule increases the dollar thresholds necessary to satisfy the portfolio requirement to be considered a QEP but does not affect the categories of persons that are QEPs not subject to the portfolio requirement. Alternative investment funds operated by a CPO that rely on Section 3(c)(7) of the Investment Company Act – by offering interests only to qualified purchasers – will remain unaffected by these changes.
Increased dollar thresholds
The CFTC amended the definition of the portfolio requirement in Regulation 4.7 to increase the dollar thresholds that a person relying on the portfolio requirement must satisfy at the time of investment to be considered a QEP. Specifically, the two thresholds have been increased as follows:
- Owning securities of issuers not affiliated with the CPO or CTA and other investments with an aggregate market value of at least $4 million. This threshold was doubled from the previous $2 million requirement.
- Having on deposit with a futures commission merchant at least $400,000 in exchange-specified initial margin and option premiums, together with required minimum security deposits. This threshold was doubled from the previous $200,000 requirement.
A person may also satisfy the portfolio requirement by owning a portfolio that combines these requirements, e.g., a portfolio that has $2 million in securities (50% of the first threshold) and $200,000 in initial margin, option premiums, and minimum securities deposits (50% of the second threshold).
The CFTC expressed that the increased thresholds are meant to account for the effects of inflation since the rule’s initial adoption in 1992. According to the CFTC, commenters generally supported the proposed amendments, including the Managed Funds Association, which issued a statement supporting the final rule following its publication.
Effect on earlier participants and account holders that no longer satisfy the portfolio requirement
CPOs and CTAs are not required to redeem pool participations or otherwise end advisory relationships with existing QEP pool participants and advisory clients that no longer meet the updated portfolio requirement. CPOs and CTAs will only need to update their QEP evaluation process going forward.
Alternative Schedule for Periodic Reports for 4.7-Exempt CPOs of Funds of Funds
The CFTC has also amended Regulation 4.7 to provide CPOs of 4.7 funds of funds with additional time to provide account statements. CPOs of funds of funds now have the option to provide monthly account statements within 45 days of month-end instead of quarterly reports within 30 days of the end of the reporting period, as is currently provided for under Regulation 4.7(b)(3). This amendment codifies an exemption that the CFTC has routinely granted to CPOs of funds of funds, which have historically reported difficulty complying with the quarterly schedule. This amendment is consistent with the CFTC’s efforts to codify routinely granted exemptive relief.
CPOs must notify their 4.7 pool participants (investors) if they elect to take advantage of the monthly reporting schedule, either in the pool’s offering memorandum or on adoption of the reporting schedule.
Proposed Disclosure Requirements Not Adopted
One of the more significant aspects of the proposed rules from October 2023, which would have imposed substantial additional disclosure requirements for CPOs and CTAs of 4.7 pools and trading programs, was not adopted. We previously released a client alert on October 17, 2023, notifying clients of these proposals. The proposed amendments would have required substantial additional disclosures for managers of funds and accounts that rely on the CFTC’s 4.7 exemption, including break-even expense analysis and capsule performance disclosures in a prescribed format that are not traditionally produced by investment managers. Commenters were generally opposed to these proposals due to concerns about cost, purpose, practicality, and redundancy; the CFTC has yet to adopt these additional disclosure requirements.
What’s Next?
Increased QEP threshold
CPOs and CTAs have six months after the final rule is published in the Federal Register to comply with the increased thresholds.
For all pool participants and account holders that are QEPs in a 4.7-exempt pool or 4.7 managed account because they have satisfied the portfolio requirement, a manager must ascertain whether all participants and account holders would remain QEPs under the new portfolio requirement standards. If not, no additional subscriptions may be accepted and no additional exempt accounts may be opened for them.
Additionally, to prepare for implementation of this rule, all forms of QEP questionnaire or other analysis used to determine QEP status for those that must satisfy the portfolio requirement must be promptly updated.
Optional monthly reporting
The new monthly account statement reporting schedule will be available to CPOs 60 days after the final rule is published in the Federal Register.
Managers of 4.7-exempt funds of funds that wish to opt into this new reporting schedule must notify investors and update their disclosure documents accordingly.
Alston & Bird’s Investment Funds Group continues to monitor developments in the CFTC regulatory landscape and is prepared to assist investment managers with any updates required to their fund documents, advisory agreements, and compliance policies in connection with the adoption of the final rule.
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If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds Team.