Exemptions Are Commonly Relied Upon By Investment Advisers to Hedge Funds and Other Private Funds Elimination of Exemptions

On January 26, 2011, the U.S. Commodity Futures Trading Commission (“CFTC”) proposed certain amendments to current CFTC rules, including the elimination of two widely used exemptions from commodity pool operator (“CPO”) registration. If adopted, the proposed amendments would have a significant impact on advisers to funds currently operated as “exempt commodity pools,” including many hedge funds.

The CFTC proposal seeks to eliminate Rule 4.13(a)(3) which currently exempts CPOs from registration if (i) the pool is engaged in a de minimus amount of commodity trading (no more than 5% of the liquidation value of the pool’s portfolio is used to establish commodity interest trading positions or the aggregate net notional value of such positions does not exceed 100% of the liquidation value of the pool’s portfolio), and (ii) the pool’s investors meet certain minimum qualification requirements. The proposed amendments also seek to eliminate Rule 4.13(a)(4), which exempts from registration CPOs where the only investors are (i) natural persons that are “qualified eligible persons” as defined under CFTC rules (these are generally natural persons that meet the qualified purchaser standard) and (ii) entities that are “qualified eligible persons” or accredited investors.