The Commodity Futures Trading Commission has changed the rules for the managers of commodity pools. The new regulations, approved in November and published in the Federal Register for Dec. 10, take effect on Thursday, January 9, 2020.
Some key points about these changes:
- They have codified Family Office No-Action Letters, thus exempting such offices from CPO or CTA registration;
- They have allowed the general solicitation of pool investors as envisioned under the JOBS Act;
- They have also provided that non-US persons are eligible to invest in pools operated under Reg 4.13(a)(3), regarding de minimis commodity interests, regardless of those persons’ financial sophistication.
In finalizing its earlier (October 2018) proposal after consideration of the comments, the CFTC said that it “understands” that “Family Offices are not operations of the type or nature that warrant regulatory oversight by the [CFTC] because, by definition, a Family Office is not a vehicle in which non-family clients would be solicited or permitted to invest.”
In these deliberations, the question arose whether family offices should be required to file a notice to claim or renew eligibility for a proposed exemption from CPO regs. One commenter suggested a one-time initial notice without any need for annual renewals. Another stressed that should there be a notice requirement it should not involve the collection of information regarding the exempt pools. But the bulk of the comments contended that there should be no notice requirement at all, so the CFTC dropped the idea. It “intends the CPO registration relief … to be available on a self-executing basis for qualifying Family Offices.”
Superseding No-Action Letters
The final rule clarifies that, 30 days after its Federal Register publication, the earlier no-action letters will have been superseded. This means that offices qualifying for the exemption and relying on the letters should “create and maintain an internal record documenting the relevant exemption they wish to claim, as well as their qualifications for that exemption, similar to the requirements to claim other self-executing exemptions in 17 CFR part 4.”
With regard to the issue of solicitation in the wake of the JOBS Act, the final rule observes that harmonizing the impact of the Act on entities that are regulated by both the SEC and the CFTC will provide legal certainty regarding covered transactions, allowing those entities to benefit from the new offering process.
Regarding non-US persons, the CFTC observes that this change in approach arises through an amendment to 4.13(a)(3), which provides a CPO registration exemption to those who operate pools that trade a de minimis amount of commodity interests.
The term de minimis is from an old Latin maxim, “de minimis non curat lex,” which in turn arose from an even older maxim, “de minimis non curat praetor.” Neither the Praetor nor the Law itself is to concern itself with trifles. Likewise, a trifling participation in commodity interests will not activate the Praetors of the CFTC.
A Dissent
Commissioner Dan M. Berkovitz issues a vigorous dissenting statement to the CFTC vote approving these changes.
His dissent focuses mostly on the favorable treatment of family offices. Berkovitz’ remarks have a populist tone to them. He said, “These investment management strictures [known as family offices] typically manage hundreds of millions, if not billions, of dollars in private wealth. ...Today’s final rule provides a blanket exemption for the operators of commodity pools (CPOs) in family offices without … minimal checks and balances” such as a notice requirement would have offered.
Berkovitz agrees that the CFTC’s interest in protecting the investors in the pools is not as strong in the case of family offices as it is for other entities. But, he says, protecting the investors isn’t all the CFTC is there for. It is also interested in “how the activities of these pool operators may affect the commodity markets.” The CFTC, it says, has hastily washed its hands of that latter concern with this vote.
In a footnote to his statement posted on the CFTC cite, Berkovitz quotes from an Ernst & Young guide to family offices, which says that they: “have their roots in the sixth century, when a King’s steward was responsible for managing royal wealth. Later on the aristocracy also called on this service ...”.