CFTC Staff Issues Temporary Relief from Notice Filing Requirement, Exemptive Relief from Audit Requirement

The U.S. Commodity Futures Trading Commission (CFTC) Division of Market Oversight (DMO) on February 6, 2017 issued time-limited no-action relief (DMO Letter) from a new requirement that market participants must file a notice with the CFTC in order to rely on certain exemptions from the CFTC’s amended position limits aggregation rule.¹ The notice filing requirement was to become effective on February 14, 2017, but the no-action relief provides a six-month grace period, so that the first filing is not due until August 14, 2017. However, market participants will nonetheless be required to comply with all other conditions for reliance on the applicable aggregation exemption as of February 14, 2017. 

As background, CFTC Regulation 150.4 requires that, for purposes of applying the position limits applicable to the nine enumerated futures and related options contracts,² market participants must aggregate all positions in accounts for which they directly or indirectly (1) control trading or (2) hold a 10 percent or greater ownership or equity interest. Historically, in certain circumstances market participants could disaggregate positions for purposes of compliance with CFTC and exchange-set position limits without providing notice to the CFTC regarding such disaggregation. The aggregation requirements will apply to any market participant trading one of the applicable contracts, whether or not a member of the National Futures Association (NFA) or registered with the CFTC in any capacity. 

Effective February 14, 2017, concurrent with the effective date for certain new exemptions from aggregation under Regulation 150.4, entities wishing to disaggregate positions in reliance on certain exemptions were to be required to file a notice with the CFTC under Regulation 150.4(c).³ The notice must include: 

• A description of the relevant circumstances that warrant disaggregation; and 
• A certification of a senior officer that the conditions set forth in the applicable exemption are satisfied. 

In anticipation of the upcoming effective date, the DMO received two letters from industry associations, requesting an extension of time for the notice filing requirement.⁴ The DMO Letter notes that the requests stated that relief was necessary because: (1) market participants relying on the applicable exemptions “must analyze and adapt to the amended aggregation requirements, and determine whether any new aggregation exemption is available;” and (2) institutions will have to determine whether outreach plans are necessary to make their clients aware of the new requirements. The request letters also cited concerns regarding the amount of time the notice filings would take to prepare, especially in light of the fact that a senior officer must certify that the requirements of each exemption relied upon by that entity have been met; in some cases, this would take a great amount of diligence on the part of the senior officer. 

In consideration of the concerns set forth in the request letters, the DMO Letter states that the DMO will not recommend enforcement action “against any person or entity that is eligible to rely on an exemption from aggregation” under Regulation 150.4(b) until August 14, 2017 for failing to comply with the notice filing requirements before the entity or person relies on such exemption. 

The DMO also noted that persons able to file a notice of exemption, and that are willing to do so, may file on their own accord prior to August 2017. It has been reported that the portal through which notices may be filed should be available on the CFTC website as of February 11, 2017. 

Exemptive Relief from CFTC Audit Requirement for Registered Investment Company Liquidation Statements 

The CFTC Division of Swap Dealer and Intermediary Oversight (DSIO) on January 26, 2017 issued an exemption (DSIO Letter) from the requirement that any registered commodity pool operator (CPO) of a liquidating series of an investment company registered under the Investment Company Act of 1940 (registered fund) provide investors in the series (participants) with final audited financial statements (liquidation statement), or obtain participants’ waivers of the CFTC audit requirement.⁵ Absent this relief, the liquidation statement must be audited unless the CPO obtains a waiver of the CFTC audit requirement from each participant in the pool. 

As background, CFTC Regulation 4.22(c)(7) requires that a registered CPO distribute a report containing a liquidation statement to each participant in any pool the registered CPO operates in such capacity, within 90 days of the permanent cessation of trading of the pool.⁶ The CPO also must file these reports with the NFA within the same time frame. In practice, the day all pool assets (including any reserves) are distributed to investors is considered the date of cessation of trading. Under Regulation 4.22(c)(7), liquidation statements are required to be audited by an independent public accountant unless the CPO obtains a written waiver of the CFTC audit requirement from each participant in the pool. From 2014 until August 2016, there had been an informal understanding in the industry that a registered CPO to a liquidating registered fund could obtain a waiver from these requirements by making a request to the NFA. As of August 2016, this waiver ceased to be available. The DSIO Letter acknowledges the difficulty that CPOs of liquidating registered funds face in obtaining audit waivers, due to the omnibus account structures used by many registered fund investors.

The DSIO Letter also acknowledges the existing Securities and Exchange Commission requirements to which registered funds are subject (particularly those providing transparency as to the registered fund’s performance). Based on these factors, the DSIO Letter states that the DSIO believes registered funds should be able to file liquidation statements under Rule 4.22(c) without obtaining the participant audit requirement waivers. Notably, however, a CPO relying on the DSIO Letter must still: produce an unaudited liquidation statement that otherwise meets the requirements of CFTC Regulation 4.22(c); file the liquidation statement with the NFA; and distribute the liquidation statement to any participants who are invested in the fund on the date the registered fund distributes the last of its assets. 

Footnotes 

_{1) CFTC Letter 17-06.
2) CBOT Corn, ICE U.S. Cotton No. 2, CBOT Oats, CBOT Soybeans, CBOT Soybean Meal, CBOT Soybean Oil, CBOT Wheat, MGE Hard Red Spring Wheat, and KCBOT Hard Winter Wheat. See CFTC Regulation 150.2.
3) Exemptions for which a notice must be filed include those for: (i) a limited partner, shareholder or other pool participant that is a principal or affiliate of the operator of the pooled account under CFTC Rule 150.4(b)(1)(ii) (but no notice is required for certain other types of pool participants); (ii) positions where there is ownership of greater than 10% in an owned entity under CFTC Rule 150.4(b)(2) (a new exemption, applicable as of February 14, 2017); (iii) accounts carried by an independent account controller under CFTC Rule 150.4(b)(4); and (iv) positions of an owned entity where sharing of information in connection with such aggregation creates a reasonable risk that either the owner or owned entity could violate applicable law or rules under CFTC Rule 150.4(b)(7).
4) The DMO Letter cites requests for no-action relief from the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA AMG) (Jan. 23, 2017) and the International Swaps and Derivatives Association (ISDA) (Jan. 27, 2017).
5) CFTC Letter 17-04, Exemptive Relief from the Requirement in Commission Regulation 4.22(c)(7) to Obtain Participant Waivers to Provide Unaudited Financial Statements when Liquidating a Series of a Registered Investment Company.
6) For a pool that is not liquidating, CFTC Regulation 4.22(c) requires a registered CPO to distribute to each participant, and file with the NFA, a report containing audited financial statements within 90 days of the pool’s fiscal year-end. The relief discussed herein does not extend to annual financial statements.}