Under Commodity Futures Trading Commission (CFTC) regulations, persons who have claimed an exemption or exception from commodity pool operator (CPO) or commodity trading advisor (CTA) status pursuant to Part 4 of the CFTC’s regulations must affirm their continued eligibility for the exemption annually within 60 days of the calendar year. This year, the deadline falls on March 1, 2025.
CFTC Regulation 4.5
Of the Part 4 regulations, CFTC regulation 4.5 is relevant to business development companies (BDCs).
Per the Commodity Exchange Act (CEA) and CFTC regulations, a collective investment vehicle that engages in commodity interest (i.e., futures, swaps or options) trading is a “commodity pool.” This definition technically captures BDCs. Persons who operate commodity pools (i.e., BDC managers) are CPOs under the CEA and CFTC regulations. CPOs are required to register with the CFTC via the National Futures Association (NFA) and registered CPOs are subject to myriad regulatory compliance obligations.
Among other things, CFTC regulation 4.5 affords an exclusion from the CPO definition for managers of BDCs and registered investment companies (RICs). Pursuant to CFTC regulation 4.5, a manager of a BDC or RIC does not need to register as a CPO so long as:
- The manager does not market the BDC or RIC to the public as an investment in a commodity pool or otherwise as an investment vehicle for the trading of commodity interests;
- The manager represents that it limits the use of commodity interests in the BDC or RIC consistent with a de minimis trading threshold under CFTC Regulation 4.5(c)(2)(iii)(A)-(B);1 and
- The manager claims the exception with the NFA.
In addition, disclosure about the BDC or RIC manager’s reliance on the CFTC regulation 4.5 exclusion with respect to the BDC or RIC must be made to investors in writing. This disclosure typically appears in the prospectus, the annual report on Form 10-K, or the quarterly report on Form 10-Q.
Claiming Relief with the NFA
The NFA’s exemptions filing system is available at https://www.nfa.futures.org/electronic-filing-systems/exemptions.html. A BDC or RIC manager will need to create an account to use the exemptions filing system and must have certain information about the RIC or BDC available, including its tax identification number. If any assistance is required, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.
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1 The de minimis threshold is an either/or test. It compares the notional amount of a BDC or RIC’s derivatives to the BDC or RIC’s NAV or the amount of margin/premium required for the BDC or RIC’s derivatives to the BDC or RIC’s NAV. The threshold must be satisfied each time a new derivative is entered into as well as when the CFTC regulation 4.5 exclusion is claimed and affirmed.
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