CFTC Regulation

CFTC catches up with SEC Rule allowing General Solicitation

Commodity Futures Trading Commission - SEC Rule

October 9, 2014

By: Denise Alfieri, Senior Compliance Consultant

On September 9, 2014, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission (CFTC) issued an exemptive letter that allows private funds treated as commodity pools to use general solicitation for hedge fund and private equity fund interests (and other securities). The DSIO issued this relief to harmonize CFTC Regulations 4.7(b) and 4.13(a)(3) under the Commodity Exchange Act with the general solicitation and advertising rule adopted by the U.S Securities and Exchange Commission (SEC) pursuant to the Jumpstart Our Business Startups Act (JOBS Act).

Under Regulation 4.7(b), registered commodity pool operators (CPOs) are provided relief from certain disclosure, reporting, and recordkeeping requirements if interests in the commodity pools are offered to qualified eligible persons (QEPs).

Under Regulation 4.13(a)(3), CPOs are provided a de minimis exemption from registration, subject to certain restrictions, including a requirement in Regulation 4.13(a)(3)(i) that securities be “offered and sold without marketing to the public.”

In September of 2013, SEC Rule 506(c) went into effect which lifted the ban on general solicitation and advertising for private securities offerings when reasonable steps have been taken by issuers or sellers to verify that all purchasers of the securities meet the “accredited investor” or “qualified institutional buyer” standards. Similar relief was granted under Rule 144A. Managers of private funds that trade commodity interests have been hesitant to engage in general solicitation and advertising because CFTC regulations did not provide similar relief.

The DSIO’s exemptive letter provides conditions for relief from these provisions to address “the discrepancy between marketing restrictions in current [CFTC] regulations and Regulation D and Rule 144A, as amended pursuant to the JOBS Act.” The DSIO exemptive relief granted by the letter strictly limits the relief to those CPOs involved in 506(c) offerings or CPOs using 144A Resellers.

In addition, the DSIO noted that the relief is not self-executing. CPOs claiming the exemptive relief must file a notice with the Division. This notice must be filed with the Division via email using the email address and stating “JOBS Act Marketing Relief” in the subject line.

A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete and accurate.  The claim of exemptive relief must:

  • State the name, business address, and main business telephone number of the CPO claiming the relief;
  • State the name of the pool(s) for which the claim is being filed;
  • State whether the CPO claiming relief is a 506(c) Issuer or is using one or more 144A Resellers;
  • Specify whether the CPO intends to rely on the exemptive relief pursuant to Regulation 4.7(b) or 4.13(a)(3), with respect to the listed pool(s);
    • If relying on Regulation 4.7(b), represent that the CPO meets the conditions of the exemption, other than that provision’s requirements that the offering be exempt pursuant to section 4(a)(2) of the Securities Act of 1933 and be offered solely to qualified eligible persons, such that the CPO meets the remaining conditions and is still required to sell the participations of its pool(s) to QEPs;
    • If relying on Regulation 4.13(a)(3), represent that the CPO meets the conditions of the exemption, other than that provision’s prohibition against marketing to the public;
  • Be signed by the CPO; and
  • Be filed with the Division via email using the email address and stating “JOBS Act Marketing Relief” in the subject line of such

The exemptive relief did not contain any requirement for ongoing reporting or notice filings with the DSIO. CPOs claiming this relief should review any future regulatory updates from the CFTC  that may impact or render the exemptive relief void.