On December 4, 2012, the Commodity Futures Trading Commission’s (CFTC’s) Division of Swap Dealer and Intermediary Oversight (DSIO) issued no-action relief from commodity pool operator (CPO) registration requirements for advisers of business development companies (BDCs). Under the no-action relief, the DSIO will treat BDCs as investment companies registered under the Investment Company Act of 1940 (RICs) for purposes of the Regulation 4.5 exclusion from CPO registration requirements (the Rule 4.5 Exclusion). The Rule 4.5 Exclusion is an exclusion from the definition of CPO available to advisers of RICs that trade commodity interests subject to certain conditions, namely that the RICs meet certain de minimis commodity interest trading thresholds. The no-action relief afforded by the DSIO is not self-executing; rather, BDCs must submit a claim for relief to the DSIO. This Legal Alert describes the DSIO’s no-action letter and the relief it affords to BDCs.

I. Background

A. The Dodd-Frank Act and Commodity Pool Operator Requirements

The Dodd-Frank Act amended the definition of “commodity pool operator” in the Commodity Exchange Act (CEA) to include any person who solicits, accepts or receives property for the purpose of trading in commodity interests. The Dodd-Frank Act also added a definition of “commodity interests” to the CEA, which now includes futures, options and swaps. Before the Dodd-Frank Act, this term was only defined in the CFTC’s regulations, and it did not include swaps. As a result, swaps trading did not trigger CPO registration concerns, among other things. In connection with the aforementioned changes, however, an investment by a BDC in even one swap contract could “trigger” the CPO registration requirement for the BDC’s adviser, unless the adviser meets the criteria for a regulatory exclusion or exemption from CPO registration (e.g., the Rule 4.5 Exclusion).

The Rule 4.5 Exclusion is a regulatory exclusion from the definition of CPO available to advisers of RICs that engage in commodity interest trading. In order for such a RIC’s adviser to qualify for the Rule 4.5 Exclusion, the RIC’s commodity interest trading must fall below certain specified thresholds. As drafted, the Rule 4.5 Exclusion does not apply to BDCs. This is because, although BDCs are regulated under the Investment Company Act of 1940, they are not technically RICs. In its no-action letter, the DSIO concluded that a BDC that engages in commodity interest trading is technically a commodity pool. Therefore, absent no-action or other relief, such a BDC’s adviser would be required to register as a CPO.