On September 12, 2024, the Commodity Futures Trading Commission (CFTC) finalized the first major changes to CFTC Regulation 4.7 (Rule 4.7) in over 30 years. Among other technical revisions, the amendments to Rule 4.7, generally double the monetary thresholds for certain investors, including natural persons, to be “Qualified Eligible Persons” (QEPs) under Rule 4.7 and allow commodity pool operators (CPOs) of funds of funds additional time to provide periodic account statements. The CFTC did not, however, pass the more onerous minimum disclosure requirements for CPOs and commodity trading advisors (CTAs) that rely on Rule 4.7 that it had initially proposed.
Additional Disclosure Requirements Not Finalized
The CFTC initially proposed in October 2023 to impose disclosure requirements for CPOs and CTAs operating pools and trading programs under Rule 4.7. Those disclosure requirements would have mandated that such CPOs and CTAs distribute a disclosure document to their pools/trading account participants, including descriptions of risk factors, investment/trading program, use of proceeds, various persons, fees and expenses, conflicts of interest and certain performance.
The CFTC noted that the comments it received were generally opposed to the proposed disclosure requirements, citing concerns relating to cost, purpose, practicality and redundancy. Thus, the CFTC “has determined it appropriate to take additional time to consider the concerns articulated as well as the alternatives to the proposed QEP disclosure amendments put forward by commenters.” Consequently, the final amendments to Rule 4.7 do not include the disclosure requirements, although the CFTC did note that it will continue to evaluate potential alternatives and may adopt further changes in the future.
Monetary Thresholds Increased
The CFTC has amended the definition of the “Portfolio Requirement” in Rule 4.7 to account for the effects of inflation over the 32 years since the Rule was initially adopted. Specifically, the CFTC has doubled the monetary thresholds that the person must satisfy at the time of investment, increasing the requirement for any person relying on the Portfolio Requirement to:
i. Own securities of issuers not affiliated with the CPO/CTA and other investments with an aggregate market value of at least $4,000,000 (increased from $2,000,000);
ii. Have on deposit with an FCM exchange-specified initial margin and option premiums, together with any required minimum security deposits, of at least $400,000 (increased from $200,000); or
iii. Own a portfolio composed of a combination of the foregoing – e.g., $2,000,000 in securities (50% of (i)) and $200,000 in initial margin, option premiums and minimum security deposits (50% of (ii)).
CPOs and CTAs must comply with the increased thresholds within six months after the amendments are published in the Federal Register. Once the increased thresholds are in effect, any CPOs or CTAs with existing pool participants or advisory clients that satisfied the previous lower thresholds but no longer satisfy the increased thresholds will not be required to redeem such person’s pool participations or terminate the advisory relationship with such person. The CPO/CTA would not be permitted to sell any additional pool participations or open any additional exempt accounts for any person that does not meet the updated Portfolio Requirement, however.
Note, however, that certain investors are not required to satisfy the Portfolio Requirement. For example, qualified purchasers and non-United States persons do not need to meet the Portfolio Requirement in order to qualify as QEPs. Thus, any commodity pool relying on Rule 4.7 and the exemption under Section 3(c)(7) of the Investment Company Act will be unaffected by the increased monetary thresholds.
Additional Time Granted for Fund of Fund Reporting
The amended Rule 4.7 also codifies the routinely issued exempted letters allowing CPOs of funds of funds operating under Rule 4.7 additional time to provide periodic account statements. Specifically, funds of funds have the option to prepare and distribute monthly statements in accordance with Regulation 4.22(h) within 45 days of month-end (i.e., 15 days more than the 30‑day requirement for non-funds of funds to distribute quarterly statements under Rule 4.7(b)(3)(i)).
The monthly reporting schedule will be available to CPOs as of 60 days after publication in the Federal Register.
