CFTC Increases the Portfolio Requirement Applicable to Certain QEPs Under Regulation 4.7

Authors: William Breslin (Washington, DC), Dorothy Mehta (New York), David S. Mitchell (New York)

Summary

The Commodity Futures Trading Commission (the "Commission" or "CFTC") has adopted certain amendments to CFTC Regulation 4.7 ("Rule 4.7" or "4.7"), a rule that provides broad exemptive relief from the Part 4 disclosure, reporting, and recordkeeping requirements for registered commodity pool operators ("CPOs") and commodity trading advisors ("CTAs") in connection with pools and separate accounts which are offered exclusively to certain categories of "highly accredited" persons referred to as "Qualified Eligible Persons" ("QEPs"), as defined thereunder.[1] Of particular note, the CFTC determined not to adopt proposed minimum disclosure requirements which would have significantly altered the regulatory environment in which CPOs and CTAs that rely on Rule 4.7 operate, and effectively would have eliminated the longstanding disclosure exemptions provided by Rule 4.7, which have been in effect since 1992.[2]

The amendments are effective 60 days after publication in the Federal Register (i.e., November 25, 2024) and include the following changes to Rule 4.7:

• Increasing the Portfolio Requirement for Certain QEPs. To adjust for the effects of inflation, the amendments double the specified monetary thresholds (the "Portfolio Requirement"), which certain categories of pool participants or clients must meet in order to be treated as QEPs under the provisions of current Rule 4.7(a)(3). The monetary thresholds are (i) owning at least $4,000,000 of securities and other investments; (ii) having on deposit with a futures commission merchant at least $400,000 in initial margin and options premiums; or (iii) meeting a composite of (i) and (ii), such that the percentage of portfolio investments and initial margin or options premiums relative to their respective thresholds equals at least 100%. CPOs and CTAs that rely on Rule 4.7 must comply with the increased thresholds in the Portfolio Requirement by 6 months after publication in the Federal Register (i.e., March 26, 2025). The amendments, however, do not require existing participants in 4.7 pools or clients in 4.7 separate accounts to be redeemed or terminated, or to be re-qualified as QEPs, except in the event that they wish to make an additional investment in such vehicles.
• Of course, not all persons are required to meet the Portfolio Requirement to be treated as QEPs under Rule 4.7. Thus, those categories of persons listed under current Rule 4.7(a)(2) which include a "Qualified Purchaser" (as defined under the Investment Company Act of 1940) continue to be QEPs, without regard to the Portfolio Requirement.
• Codifying Monthly Account Statements for 4.7 Fund-of-Funds CPOs. The amendments also codify existing exemptive relief permitting CPOs of Rule 4.7 fund-of-funds to provide monthly account statements to pool participants within 45 days after month end, instead of the existing 4.7(b)(3) requirement to provide quarterly account statements within 30 days after quarter end. This relief is self-effectuating for CPOs of 4.7 fund-of-funds that choose to utilize it, but notice must be provided to participants of this reporting timeframe either in the pool's offering memorandum or upon adoption of this alternative reporting schedule. Compliance is required upon election of this alternative schedule by the CPO.[3]

Discussion/Analysis

CPOs and CTAs of Rule 4.7 pools and separate accounts should begin to review their offering memoranda, subscription documentation and related account agreements to ensure that the thresholds for the Portfolio Requirement are updated, if necessary. For many CPOs and CTAs, the increased Portfolio Requirement will not impact their investor base because, as noted above, a participant in a 4.7 pool or a 4.7 separate account client who is a "Qualified Purchaser" will continue to qualify as a QEP on that basis.

In not adopting minimum disclosure requirements at this time, the Commission was apparently persuaded by the views of commenters who strongly objected to this part of the original proposal and advocated that the Commission take additional time to evaluate various alternatives to the proposed disclosures. For example, commenters argued that raising the Portfolio Requirement may mitigate and address the concerns articulated by the Commission in connection with proposing minimum disclosure requirements. The Commission cautioned, however, that it may adopt further changes to Rule 4.7 in the future.

We will continue to monitor and report on developments in this area.

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