By David Mainzer

April 2012

Managers of hedge funds and other private funds that buy and sell commodity futures and options on commodity futures are generally required to register as “commodity pool operators” (“CPOs”) with the National Futures Association (the “NFA”) unless they qualify for an exemption from this registration requirement.  

The Commodity Futures Trading Commission (the “CFTC”) currently provides an exemption from the requirement to register as a CPO under CFTC Rule 4.13(a)(4) (the “Sophisticated Investor Exemption”), for managers of hedge funds and other private funds where (a) each natural person investor in the fund is a “qualified eligible person” under CFTC Rule 4.7(a)(2) and (b) each non-natural person investor in the fund is either a qualified eligible person under CFTC Rule 4.7 or an “accredited investor” under Securities and Exchange Commission (“SEC”) Rule 501(a)(1), (2), (3), (7) or (8).  In order to claim the Sophisticated Investor Exemption, fund managers are required to file a “Notice of Exemption pursuant to Regulation 4.13(a)(4)” (an “Exemption Notice”) with the NFA.  

Effective on April 24, 2012, the CFTC has eliminated the Sophisticated Investor Exemption for fund managers that have not yet filed an Exemption Notice.  Fund managers that have filed an Exemption Notice prior to April 24, 2012 will be required to register as CPOs on or before December 31, 2012, unless they qualify for another exemption from the requirement to register.  For example, CFTC Rule 4.13(a)(3) (the “Limited Trading Exemption”) exempts managers of hedge funds that, among other things, either (a) limit the margin and premiums required to establish commodity futures, commodity option and swap positions to 5% or less of the fund’s net asset value or (b) limit the notional value of commodity futures, commodity option and swap positions to 100% or less of the fund’s net asset value.  The Limited Trading Exemption has not been affected by the recent CFTC rulemaking.

The Sophisticated Investor Exemption has been widely used by fund managers.  Accordingly, it is now anticipated that a significant number of private fund managers will soon be required either to register with the NFA as a CPO or else cease, or significantly reduce, their commodities trading activities.  


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