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Client Alert / May 22, 2014 INVESTMENT MANAGEMENT CFTC FORMALIZES STREAMLINED CPO REGISTRATION RELIEF REQUEST PROCESS By: Scott H. Moss, Esq., Cole Beaubouef, Esq., Donald S. Chu, Esq., and Sarah Saladini, Esq.

The Division of Swap Dealer and After the rescission of the exemption commodity pool, must not manage Intermediary Oversight of the from registration as a CPO provided any property of the commodity pool, U.S. Commodity Futures Trading by old CFTC Rule 4.13(a)(4), August and must not be subject to a statutory Commission (the “CFTC”) recently 2012 CFTC guidance regarding CPO disqualification. The Designated CPO issued guidance with respect to a new delegation and a renewed focus by must also keep the books and records streamlined approach for requesting the staff of the National Futures of the Delegating CPO relating to the no-action relief from registration as a Association on CPO delegation and commodity pool in accordance with commodity pool operator (“CPO”) if no-action relief related thereto, CFTC Rule 1.31. certain delegation and other criteria the CFTC experienced an increased ii. Business Purpose and Common are met (the “Guidance”). number of no-action relief requests and an increased number of requests Control. There must be a legitimate for more certainty surrounding these business purpose for having the Previously, the CFTC received and matters, all of which prompted the Designated CPO be a separate considered letter requests that relief be CFTC to issue the Guidance. entity from the Delegating CPO. granted for a particular person or entity Additionally, if the Delegating CPO for failure to register as a CPO pursuant Market participants seeking relief and the Designated CPO are each a to Section 4m(1) of the Commodities pursuant to the Guidance must take non-natural person, then one such Exchange Act (the “Act”) where the CPO affirmative steps to request no- CPO must control, be controlled by, requesting relief (the “Delegating CPO”) action relief by, among other things, or be under common control with the has delegated the CPO role to another submitting a request directly to the other CPO. person that is registered as a CPO (the CFTC (pursuant to the steps outlined “Designated CPO”). In such instances below). iii. Joint and Several Liability where relief was provided, common Undertaking. If the Delegating CPO facts and circumstances generally The Criteria is a non-natural person, then such were present. In many instances, the In order to utilize the streamlined Delegating CPO and the Designated Delegating CPO was the general partner approach, the Guidance provides CPO must have executed a legally of a commodity pool organized as a that certain criteria must be met by binding document whereby each CPO limited partnership, the managing both the Delegating CPO and the undertakes to be jointly and severally member of a commodity pool organized Designated CPO. The criteria set forth liable for any violation of the Act or of as a limited liability company, or the in the Guidance are summarized the CFTC’s regulations by the other in board of directors of a commodity pool below. connection with the operation of the organized as a company in a non-U.S. commodity pool. jurisdiction. The Designated CPO was i. Contractual Authority; Registration; often the investment manager of the Disqualification and Records. There iv. Natural Persons. If the Delegating commodity pool and was often under must be a legally binding document CPO is a natural person and is not common control with the Delegating in which the Delegating CPO has an “Unaffiliated Board Member,”1 CPO. However, due in part to a lack delegated all of its investment then such Delegating CPO and the of definitive CFTC guidance, market management authority with Designated CPO must have executed participants faced uncertainty as to respect to the commodity pool to a legally binding document whereby whether individual no-action relief was the Designated CPO, which must each undertakes to be jointly and required where such common facts and be registered with the CFTC as a severally liable for any violation of the circumstances were present or whether CPO. Additionally, the Delegating Act or the Commission’s regulations such market participants could consider CPO must not participate in the by the other in connection with the relief to be self-executing. solicitation of participants for the operation of the commodity pool. If INVESTMENT MANAGEMENT

the Delegating CPO is an Unaffiliated where the investment manager a commodity pool where the sponsor Board Member, then such Delegating (as opposed to the general partner, relies on CFTC Rule 4.13(a)(3). CPO must be subject to liability as a manager, or board of directors) serves board member in accordance with the as the registered CPO to the private The text of the Guidance may be laws under which the commodity pool fund. Those participants that require, found here. is established. but have not received, no-action Lowenstein Sandler’s Investment relief in the past must determine Requesting Relief Management Group is available to whether they qualify for expedited assist our clients with determining In order to request relief under the relief under the criteria set forth in the whether they qualify for the streamlined approach, the Delegating Guidance. Market participants that streamlined approach set forth in the CPO(s) must submit a request for relief cannot satisfy the criteria set forth in Guidance, memorializing a delegation in the form provided by the CFTC in the Guidance must request relief by of CPO responsibilities for onshore the Guidance (the “Form Request”). separate no-action letter submissions and offshore commodity pools, and The Form Request includes the and other exemptions provided for requesting no-action relief. following items: under applicable CFTC regulations. A market participant seeking relief i. The name, main business address, pursuant to the Guidance must main business telephone, and name ensure that all criteria set forth in the of a contact person for each of Guidance are met prior to seeking the Delegating CPO(s) and the expedited relief. Depending on prior Designated CPO; action, a new or amended delegation agreement may be warranted. In ii. The NFA ID number of the addition, depending on the specific Designated CPO; facts and circumstances surrounding iii. The name(s) of the commodity the delegation, advice of counsel pool(s) with respect to which relief may be appropriate. For example, is being sought the criteria do not expressly address a situation in which Unaffiliated iv. A representation by the Delegating Board Members do not participate in CPO(s) that the applicable criteria set solicitation activities but an affiliated forth above are met; and board member, as an associated person of the Designated CPO, does v. A statement from the Designated participate in solicitation activities. CPO acknowledging that it has been designated as the registered CPO of the Additionally, although the Guidance commodity pool(s) and that it satisfies directly addresses situations in which the applicable criteria set forth above. the Designated CPO is registered as a CPO, even those market participants The Guidance indicates that the CFTC that rely on a viable exemption intends to issue a response to each from registration as a CPO (e.g., request for relief made pursuant to the the exemption provided by CFTC streamlined approach. Rule 4.13(a)(3)) may wish to follow certain steps set forth in the Guidance Next Steps to memorialize the delegation of Market participants should review commodity related responsibilities. their current pool structures and prior Specifically, market participants actions with respect to CPO delegation relying on CFTC Rule 4.13(a)(3) and no-action relief. The Guidance, may wish to enter into an express along with prior CFTC statements on delegation agreement with respect CPO delegation, makes clear that a to CFTC related responsibilities. delegation agreement and individual However, absent CFTC guidance to relief is necessary in a typical onshore the contrary, no-action relief does not and offshore private fund structure appear to be necessary with respect to INVESTMENT MANAGEMENT

Matthew A. Magidson contacts 646.414.6952 Please contact any of the [email protected] attorneys listed, or any other Richard Bernstein member of Lowenstein Sandler’s 646.414.6842 (NY), Investment Management Group, for 973.422.6714 (NJ) further information on the matters [email protected] discussed in this client alert. Edward S. Nadel 973.597.6258 Robert G. Minion [email protected] Chair 646.414.6930 Cole Beaubouef 973.597.2322 [email protected] [email protected] Allen B. Levithan Jane H. Broderick 973.597.2406 646.414.6921 [email protected] [email protected] Marie T. DeFalco Douglas N. Cohen 646.414.6945 (NY), 646.414.6972 973.597.6180 (NJ) [email protected] [email protected] Donald S. Chu Peter D. Greene 973.597.6370 646.414.6908 [email protected] [email protected] Sarah Saladini Elaine M. Hughes 973.422.6466 973.422.6502 [email protected] [email protected] Scott H. Moss 646.414.6874 [email protected] David L. Goret 646.414.6837 [email protected]

1The Guidance defines “Unaffiliated Board Member” as “a natural person who is a voting member of the board of directors or an equivalent governing body of the commodity pool who: (i) is not a member of the management or an employee of the Designated CPO or any affiliate thereof; (ii) is not a substantial beneficial owner of the Designated CPO or any affiliate thereof or of any company holding more than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof; and (iii) has no other interest or relationship that could interfere with his/her ability to act independently of management of the Designated CPO or any affiliate thereof or of any company holding more than 5% of such Designated CPO’s beneficial ownership interests or any affiliate thereof.” The Guidance also provides examples of affiliations that could trigger clause (iii) above, such as the director being a material service provider or investment counterparty to the Designated CPO or any of its affiliates, or within the prior three years the director having been employed by, or served as a principal of, a material service provider or investment counterparty to the Designated CPO or any of its affiliates.

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