In the first significant change to CFTC Regulation 4.7 in over 30 years, the Commodity Futures Trading Commission (CFTC) has published a final rule amending it.

The Regulation lends compliance exemptions to registered commodity pool operators (CPOs) and commodity trading advisers (CTAs) for services and offerings provided to Qualified Eligible Persons (QEPs).  

Compliance exemptions

QEPS are individuals who meet certain threshold monetary portfolio requirements and are thus allowed to trade in complex assets like futures and hedge funds.

These investors are presumed to have sufficient knowledge of the commodities market such that CPOs and CTAs are exempt from disclosure, reporting, and recordkeeping requirements established by 17 CFR Part 4 when dealing with them.

These relaxed standards typically lead to faster and more streamlined transactions for sophisticated investors.

Rule changes

The amendment makes the following changes to Regulation 4.7.

• It doubles the QEP monetary thresholds to reflect rising inflation. Now QEPs must own at least $4m of securities and have a portfolio of at least $400,000 of initial margin and option premiums for commodity interest transactions. This is the first time the threshold has been raised since the rule was first promulgated in 1992.
• It codifies exemptive letters allowing CPOs of Funds of Funds operated under Regulation 4.7 increased time to provide regular account statements.
• Introduces technical amendments designed to improve efficiency and usefulness, and updates citations within 17 CFR Part 4 and the CFTC’s rulebook.

The final rule will be effective 60 days after its publication in the Federal Register.

Proposed minimum disclosure requirement removed

The original version of the rule proposal contained an additional minimum disclosure regime for interactions with QEPs, including elaborations of risk factors and past fund performance.

The CFTC claimed that the proposed requirements would help “QEPs protect themselves against excessive fees and self-dealing.”

This prompted objections from commissioner Summer Mersinger, who claimed the minimum disclosure requirements would unnecessarily burden interactions with QEPs.

Commenters agreed, and no letters of support of the disclosure requirements were submitted.

Mersinger has been a consistent opponent of what she considers unnecessary informational requirements. She recently dissented against a CFTC final rule that could open the door to the agency delaying registered entities’ self-certification process through additional requests for information.

But efforts to eliminate the disclosure requirements for Regulation 4.7 ultimately succeeded. This was sufficient to garner Mersinger’s support for the final iteration of the rule.

Commissioner Caroline Pham also wrote a statement in support of the final rule, thanking the agency for its sensibility in addressing commenters’ concerns.