September 2012 Private Equity Alert

Changes Who Is Affected? to CFTC As a result of recent changes made to the by the Dodd-Frank Wall Street Reform and Consumer Protection Regulations Act (the Dodd-Frank Act) and new Commodity Futures Trading Affecting Commission (the CFTC) rules, private fund sponsors investing in commodity interests need to examine their portfolios and determine Private Funds whether they are subject to registration with the National Futures By Richard Ellenbogen and Association (NFA) or, if available, claim an exemption from such Venera Ziegler registration.

What Is a Operator and a Commodity Trading Advisor? The CFTC considers private funds (including vehicles and parallel investment vehicles) that have the authority to invest in commodity interests to be commodity pools. The CFTC considers a foreign domiciled commodity pool to be subject to its jurisdiction as long as such pool has one or more US investors. Absent an applicable exemption, the investment adviser of a commodity pool is subject to registration with the NFA as a commodity trading advisor (CTA) and the operator of such commodity pool (i.e., the general partner or the managing member(s) of such commodity pool) is subject to registration with the NFA as a commodity pool operator (CPO). If the CPO and the CTA to a commodity pool are the same entity, then, according to the NFA, a registration only as a CPO would be sufficient.

What Are the Recent Changes to the CFTC’s Regulations? Historically, the general partners and advisers of a private fund investing in commodity interests that limited their investors to “qualified purchasers” and “knowledgeable employees” were eligible for an exemption from registration pursuant to Rule 4.13(a)(4), an exemption that was recently eliminated by the CFTC. In addition, the Dodd-Frank Act expanded the definition of commodity interest to include swaps. The CFTC rule defining a “” becomes effective on October 12, 2012.

How Is Swap Defined? The term “swap” is broadly defined to include, among other things, commodity swaps, foreign exchange forwards, interest rate swaps, total return swaps, currency swaps, credit default swaps on broad- based indices, foreign currency options, commodity options, cross currency swaps, forward rate agreements, options to enter into

Weil, Gotshal & Manges LLP Private Equity Alert

swaps, swaps on broad- established) does not exceed Weil News based indices and 100% of the liquidation value n Weil advised Thomas H. Lee swaps on two or more loans. of its portfolio (after taking Partners in connection with its Securities based swaps (e.g., a into account the unrealized acquisition of a majority stake credit default swap on a debt profits and losses on such in Party City Holdings Inc. in instrument) are excluded from positions). a recapitalization transaction the term “swap.” valued at $2.69 billion Most private equity funds using swaps to currency or n Weil advised Providence Equity Exemption from Registration interest rate risk should be able Partners in connection with Available for CPOs – CFTC to fall within this de minimis the C$1.1 billion acquisition of Rule 4.13(a)(3) – de minimis exemption. The CFTC stated that Canadian data center operator Q9 exemption a fund manager may rely on CFTC Networks Inc. by an investor group A CPO is not required to register Rule 4.13(a)(3) with respect to comprised of Providence, Ontario with respect to a commodity a fund that will predominantly Teachers’ Pension Plan, Madison pool that (i) issues interests that invest in non-derivatives even Dearborn Partners, and BCE are exempt from registration when its first position is a swap. n Weil advised Centerbridge under the Securities Act of 1933 The CFTC has acknowledged Partners in connection with (the Securities Act) and are that a fund manager should be its $1.1 billion take private offered without marketing to afforded a “reasonable time” to acquisition of P.F. Chang’s China the public in the United States Bistro Inc. and (ii) also meets one of the comply with the limitations set following two tests: forth in CFTC Rule 4.13(a)(3). n Weil advised AMC Entertainment The CFTC did not clarify what Holdings, Inc. (a portfolio company n 5% Test: the aggregate constitutes “reasonable time.”1 of Apollo Global Management, initial margin and premiums Bain Capital, the Carlyle Group, (including the required Exemptions Available CCMP Capital Advisors, and minimum security deposit for CTAs Spectrum Equity Investors) in for retail forex transactions) connection with its $2.6 billion required to establish its There are three exemptions sale to Dalian Wanda Group commodity interest positions which will most likely apply to private equity fund advisers that n Weil advised Lion Capital in its (determined at the time the £1.2 billion sale of a 60% interest most recent commodity are CTAs: in Weetabix Food Co. to China’s interest position was n Rule 4.14(a)(8) “de minimis Bright Food Group Ltd. established) does not exceed exemption” – A CTA whose 5% of the liquidation value of n Weil advised Thomas H. Lee CPO qualifies for the de Partners in connection with its portfolio (after taking into minimis exemption can be its acquisition of Fogo de Chao account the unrealized profits exempt from CTA registration Churrascaria Holdings and losses on such positions); if such CTA (i) is registered (or or exempt from registration) as n Weil advised Providence Equity Group in connection with its n 100% Test: the aggregate net an investment adviser with the strategic partnership with, and notional value of the fund’s SEC, (ii) provides commodity investment in, The Chernin Group commodity interest positions interest trading advice solely (determined at the time the incidentally to its business, most recent commodity and (iii) does not hold itself out interest position was as a CTA.

Weil, Gotshal & Manges LLP September 2012 2 Private Equity Alert

a claim for an exemption for must take and pass a proficiency n Rule 4.14(a)(10) “15 or less exemption” – A CTA that has each fund that is deemed to be a examination (the Series 3 or no more than 15 clients (with commodity pool. 31). Once registered, the CPO each fund typically counting may claim some reporting and as one client) during the prior Deadlines recordkeeping relief on a pool 12 months and does not hold by pool basis pursuant to Rule December 31, 2012: itself out to the public as a 4.7 if the interests in such pool CTA. A fund that receives n CPOs and CTAs that rely on are offered only to “qualified advice based on its own Rule 4.13(a)(4) can continue eligible persons” (i.e., qualified investment objectives and not relying on it until December purchasers, knowledgeable the objectives of individual 31, 2012. employees and accredited clients will count as one client. investors that meet additional A CTA whose principal place n Swaps are included in the portfolio standards). of business is outside of the threshold calculations for US need only count clients the CFTC Rule 4.13(a)(3) de Open Issues minimis exemption. that are US residents. Private funds managers n Section 4(m)(3) “Not October 12, 2012: intending to engage in general primarily exemption” – CTAs solicitation and general that are registered with the n For CPOs and CTAs that are advertising to raise capital after SEC as investment advisers currently not relying on CFTC the implementation of the newly are exempt from registration Rule 4.13(a)(4), the deadline proposed SEC’s amendments as CTAs if their business is for de minimis exemption filing to Rule 506 of the Securities not “acting primarily” as a or registration, unless further Act should note that CFTC Rule CTA and they do not advise guidance is issued by the 4.13(a)(3) includes a restriction a commodity pool “engaged CFTC, is October 12, 2012. against “marketing to the public.” primarily”2 in investing in In addition, in order to qualify commodity interests. Register as a CPO or a CTA / for the exemption under Rule Claim Rule 4.7 Relief3 4.7, the offering of the interests How to Claim an Exemption? A sponsor and an investment of the commodity pool would CPO and CTA exemption claims adviser that are required to have to be done in a manner (other than CTA exemptions register as a CPO and a CTA, consistent with the initial under Section 4m(3) and Rule respectively, must submit marketing limitations applicable 4.14(a)(10) which are self- Form 7-R and Form 8-R for to a private offering under executing, and for which no their principals and associated Section 4(a)(2) of the Securities further action is required) persons. Principals and Act. Therefore, it appears that, have to be filed with the NFA associated persons must also absent future guidance from electronically and need to be submit fingerprint cards (for the CFTC and the SEC to the updated annually within 60 days background checks by the FBI, contrary, private funds which of the end of each calendar year. and Interpol in the case of non- intend to claim a Rule 4.13(a)(3) There is no fee for filing for an US individuals) with Form 8-R, or Rule 4.7 exemption may not be exemption. A CPO needs to file and most associated persons able to use general solicitation

Weil, Gotshal & Manges LLP September 2012 3 Private Equity Alert

and general advertising pursuant commodity pool if, respectively it is to proposed Rule 506(c). or holds itself out to the public as being engaged primarily, or proposes to engage primarily, in the business 1 A copy of the CFTC’s guidance of advising on commodity interests or released on August 14, 2012 is investing, reinvesting, owning, holding, available at: http://www.cftc.gov/ or trading in commodity interests. ucm/groups/public/@newsroom/ CEA § 4m(3)(B). documents/file/faq_cpocta.pdf. 3 Exempt reporting advisers who are 2 A CTA or a commodity pool shall not currently required to file a Form be considered to be “engaged PF with the SEC but have to register primarily” in the business of being with the CFTC as CTAs have to file an a commodity trading advisor or equivalent to Form PF with the CFTC.

If you would like more information about the contents of this issue, or about Weil’s Private Equity practice, please speak to your regular contact at Weil or to the editors or authors. Richard Ellenbogen [email protected] +1 212 310 8925 Venera Ziegler [email protected] +1 212 310 8769

Private Equity Alert is published by the Private Equity Group of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, +1 212 310 8000, http://www.weil.com.

The Private Equity Group’s practice includes the formation of private equity funds and the execution of domestic and cross-border acquisition and investment transactions. Our fund formation practice includes the representation of private equity fund sponsors in organizing a wide variety of private equity funds, including buyout, venture capital, distressed debt and real estate opportunity funds, and the representation of large institutional investors making investments in those funds. Our transaction execution practice includes the representation of private equity fund sponsors and their portfolio companies in a broad range of transactions, including leveraged buyouts, merger and acquisition transactions, strategic investments, recapitalizations, minority equity investments, distressed investments, venture capital investments and restructurings.

Editors: Doug Warner (founding editor) [email protected] + 1 212 310 8751 Michael Weisser [email protected] + 1 212 310 8249

©2012. All rights reserved. Quotation with attribution is permitted. This publication provides general information and should not be used or taken as legal advice for specific situations which depend on the evaluation of precise factual circumstances. The views expressed in these articles reflect those of the authors and not necessarily the views of Weil, Gotshal & Manges LLP. If you would like to add a colleague to our mailing list or if you need to change or remove your name from our mailing list, please log on to www.weil.com/weil/subscribe.html, or send an email to [email protected].

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