The Commodity Futures Trading Commission (CFTC) recently issued a No-Action Letter that provides relief to advisers to funds-of-funds. This No-Action Letter, which was issued on November 29, 2012, gives comfort to an adviser to a "fund-of-funds" (that is, an investment fund that invests some or all of its assets in other investment funds) that otherwise may have needed to register as a commodity pool operator (CPO) with the CFTC and the National Futures Association (NFA) before December 31, 2012.
In this No-Action Letter, the CFTC's Division of Swap Dealer and Intermediary Oversight (the Division) states that it will not recommend enforcement action against advisers to funds-of-funds that fail to register as a CPO until the later of June 30, 2013, or six months following the effective date of any guidance issued regarding the de minimis thresholds in Rule 4.13(a)(3). Fund-of-funds advisers must submit a claim by December 31, 2012, with the CFTC in order to take advantage of the No-Action relief.
Rescission of Appendix A
The need for this No-Action relief results from the February 2012 rescission of Appendix A of Part 4 of the CFTC Rules (Appendix A). Appendix A provided guidance on the application of the CFTC Rule 4.13(a)(3) de minimis exemption for funds-of-funds that indirectly hold commodity interests by virtue of their pass-through exposure to commodity interests held by underlying investment funds. Without Appendix A, it was unclear how a fund-of-funds could avoid registering as a CPO.
Following the rescission of Appendix A, the Division released Questions and Answers Guidance (Q&A Guidance), which provided some guidance (in spite of the technical rescission of Appendix A) for fund-of-funds advisers on how to apply the de minimis thresholds and interpretations contained in Appendix A. However, advisers to funds-of-funds expressed concern about uncertainties created by the Q&A Guidance and the anticipation of further guidance the CFTC has indicated it would give to funds-of-funds regarding this issue. Accordingly, the Division deemed it appropriate to provide No-Action relief for advisers to funds-of-funds that may otherwise have been required to register as a CPO with the CFTC by December 31, 2012.
The No-Action Letter provides relief, but is not self-executing. In order for an adviser to a fund-of-funds that is not a registered mutual fund to avail itself of the No-Action relief provided by the Letter, the adviser must submit a claim and remain in compliance with the following criteria:
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