7 November 2012
On October 3, 2012, Mayer Brown issued a legal update advising about potential issues that could affect family investment funds as a result of recent regulatory changes caused by amendments to the Commodity Exchange Act of 1936 (CEA) by the Dodd-Frank Wall Street Accountability and Consumer Protection Act (Dodd-Frank Act). We noted that the Commodity Futures Trading Commission (CFTC), which regulates commodity pools,1 was considering whether to exempt family offices operating pooled investment vehicles that include commodity interests from the definition of commodity pool operator (CPO),2 but had not yet granted any such exemption. As such, any family office operating a pooled investment vehicle falling within the definition of a “commodity pool” needed to consider whether it would need to register, or to file a notice for exemption from registration, as a CPO by December 31, 2012.
Generally speaking, any pooled investment vehicle that invests directly or indirectly (e.g., when it invests in another pooled investment vehicle that is also a commodity pool) in commodity interests will be deemed a commodity pool. However, the CFTC staff has now issued an interpretive letter that specifically exempts family investment pools run by a family member from the definition of “commodity pool.”3
An interpretation was requested by or on behalf of a family-owned, Delaware limited liability company that was formed in 2006 for the sole purpose of making investments in futures and options on futures on behalf of the company’s managing director and a family member. Based on the requestor’s representations, the CFTC staff concluded that the company is not a commodity pool. However, the staff specifically noted that family offices investing in commodity interests “remain subject to all antifraud provisions of the Act and the Commission’s regulations, as well as the reporting requirements for traders in the Commission’s regulations.”4 Because this letter was issued as an interpretation, rather than as a no-action or exemptive letter, it can be relied upon by all similarly situated persons.5
In granting this relief, the CFTC staff cited as authority for this interpretation an earlier letter that exempted a family pool managed by a family member.6 However, the facts detailed in that letter indicate that the family member received no compensation for managing a family pool.7 Thus, neither of these interpretative positions may be safely relied upon by non-family investment professionals managing the assets of a family office investment fund particularly if a fee is paid.
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1 As a result of the Dodd-Frank Act, a “commodity pool” is now defined to include “any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any—(i) commodity for future delivery, security futures product, or swap.” CEA §1a(10)(A).
2 See Harmonization of Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators; Proposed Rules, 77 Fed. Reg. 11345 at 11348 (Feb. 24, 2012) (“the Commission is considering adopting a family offices exemption from CPO registration akin to the exemption adopted by the SEC”).
3 See CFTC Interpretation Letter No. 12-27, October 5, 2012, Division of Swap Dealer and Intermediary Oversight Re: “Regulation 4.10(d)(1) Request for interpretation that family investment entity is not a commodity pool.”
4 See id. at p. 2. In particular, the staff pointed out that operators of family office funds with commodity interests would be subject to CEA Sections 4b and 4o, 7 U.S.C §§ 6b and 6o, which respectively prohibit entering into any form of contract to defraud or deceive or using the mails or any means or instrumentality of interstate commerce, directly or indirectly, to defraud or deceive. Id. at n.4.
5 See 17 C.F.R. §140.99(a)(3) (“An interpretative letter may be relied upon by persons in addition to the Beneficiary”); compare with §140.99(a)(1) (“Only the Beneficiary may rely upon the exemptive letter”) and (a)(2) (“Only the Beneficiary may rely upon the no-action letter”).
6 See CFTC Letter 12-27, supra n. 3, at footnote 3, citing CFTC Staff Letter 10-25 (Jun. 25, 2010) (“Commission staff found that a two-member limited liability company whose members were an investment professional and a family trust was not a ‘pool’ ….”).
7 See CFTC Letter 10-25, supra n. 6 at 1.