§ 5.05 CFTC Regulation of Registered Commodity Pools, CPOs and CTAs
| Jurisdiction | United States |
| Publication year | 2022 |
§ 5.05 CFTC Regulation of Registered Commodity Pools, CPOs and CTAs
Registration with the CFTC and NFA membership will subject a CPO or CTA and the commodity pools that they operate or advise to disclosure and reporting obligations along with substantive prohibitions. The NFA also conducts periodic examinations of its members, which tend to be heavily focused on anti-fraud considerations (such as appropriate investor disclosures and segregation of client assets). This section will address the principal obligations and prohibitions applicable to registered CPOs and CTAs.
[1]—Disclosure Document
[a]—CPOs and CTAs Not Qualifying for 4.7 Registration Lite
Every registered CPO that does not qualify for registration lite under CFTC Rule 4.7 must deliver to each prospective participant in a commodity pool that it operates or intends to operate a "Disclosure Document" for the pool no later than the time when it delivers a subscription agreement.359 Likewise, every CTA that does not qualify for registration lite under 4.7 must deliver to each prospective client a Disclosure Document for the applicable trading program no later than the time the CTA delivers to the prospective client an advisory agreement.360 Where a hedge fund manager is dually registered as a CPO and CTA, it need only provide participants in the pool with the CPO Disclosure Document.
The CPO Disclosure Document must be prepared in accordance with CFTC Rules 4.24 and 4.25.361 Among the required disclosures are: the business background for the previous five years of certain key parties including the pool's CPO and major CTAs; a break-even analysis; a complete description of each fee, commission and other expense that the CPO knows or should know has been incurred by the pool for its preceding fiscal year and is expected to be incurred for its current fiscal year; any material administrative, civil or criminal litigation over the prior five years involving certain key parties, including the pool's CPO and CTA; whether the pool's principals intend to trade for their own accounts and if so, whether investors can inspect the records of such trades; and any conflicts of interest involving key parties including the CPO and major CTAs and their respective principals, as well as any related party transactions.362 The Disclosure Document must also present performance for the pool for five full years and year-to-date, as well as the worst "peak-to-valley" drawdown during those periods.363
CPOs of pools that engage in retail foreign currency transactions (as defined in the CEA and CFTC Rules) or swaps must include specific risk disclosure language prescribed by Rule 4.24.
One copy of the Disclosure Document, and any subsequent amendments, generally must be filed electronically with the NFA not less than twenty-one days prior to the date of first use.364 However, a registered CPO of a pool that is offered and sold solely to accredited investors in a Rule 506 offering under Regulation D is not required to pre-file with the NFA and can solicit and accept subscriptions from investors upon filing the Disclosure Document with the NFA and providing it to investors.365 Commodity pools that are also registered investment companies and therefore subject to the Investment Company Act are eligible for substituted compliance from many of these requirements.
Disclosures Documents are required to be updated and submitted to the NFA on an annual basis for review.366
[b]—CPOs and CTAs Qualifying for 4.7 Registration Lite
CPOs that claim relief pursuant to CFTC Rule 4.7 are exempt from the requirements of Rules 4.24 and 4.25 discussed above, provided that if they distribute an offering memorandum to prospective participants, it prominently discloses the following statement on the cover page:
PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS POOL.367
Similarly, CTAs that claim relief pursuant to CFTC Rule 4.7 are exempt from the disclosure document requirements but must also prominently display the following on the cover page of a brochure it provides to its clients:
PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES
TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT.368
If a CPO or CTA does not provide an offering memorandum or brochure, it can include the relevant language immediately above the signature line of the subscription documents, investment management agreement or other account agreement.369
In addition, a disclosure regarding the risks of trading foreign futures may also be applicable. There are no other specific disclosure requirements under Regulation 4.7, but all of the general prohibitions against false and misleading statements apply.370
[2]—Filing and Reporting Requirements
Registered CPOs are required to report to the NFA and the pool participants on a quarterly and annual basis. In addition, they are required to file Form CPO-PQR with the NFA and CFTC on either a quarterly or an annual basis depending upon the amount of assets that they have under management. Registered CTAs have a similar Form CTA-PR requirement on a quarterly or annual basis. The NFA also requires CTAs that place bunched orders to analyze its accounts (and document this analysis) at least quarterly, to ensure that the order allocation method has been fair and equitable.371
[a]—Quarterly Statements to Investors
A CPO must provide no less frequently than quarterly to investors (within thirty days of quarter end) a statement that provides: (1) NAV as of the end of the reporting period; (2) change in NAV over the reporting period; and (3) NAV per unit of participation. Additional NAV information is required if the fund is comprised of more than one ownership class or series. The statement requires an affirmation as to its accuracy by someone duly authorized to bind the CPO.372
[b]—Annual Reports to Investors and the NFA
Within ninety days after the end of the fiscal year (the fiscal year should be chosen by the pool at the outset), the CPO must electronically file with the NFA and distribute to each investor an annual report for each investor-facing fund,373 which contains: (1) a Statement of Financial Condition as of year-end; (2) a Statement of Income (loss) for the year; and (3) appropriate footnote disclosures. The financial statements are required to be independently audited. The report also must contain an affirmation as to its accuracy by someone duly authorized to bind the CPO.
The CFTC generally does not permit a fiscal year to be more than twelve months. Thus, except in limited circumstances, fund managers are generally not permitted to have an extended first or final fiscal year.
[c]—Forms CPO-PQR and CTA-PR
In late 2020374 , the CFTC significantly revised Form CPO-PQR. Under the new system, the previous filing thresholds and categories that resulted in CPOs of...
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